Loan waivers by states likely to affect credit offtake in farm lending

For the last 2 years, credit growth in the agri sector has been lacklustre; in fact much lower than the previous years

Banks are bracing themselves for more stress in the agriculture sector in coming quarters on account of farm loan waivers by various state governments.

This might impact credit offtake in farm lending, which is witnessing a slowdown due to write-offs.

According to the Reserve Bank of India (RBI) data, for the last two years, credit growth in the agricultural sector has been lacklustre, and much lower than what it was in the previous years. Between April 2017 and now, various state governments have announced farm loan waivers, and after that agriculture credit growth nosedived, the data from the RBI shows.

“There might be some slowdown in agricultural lending, and banks are seeing much stress in the sector,” according to a senior official of a public sector bank.

Credit growth in agriculture and allied activities so far this financial year (from April 1 to October 26) has been a mere 2.9 per cent, and, on a year-on-year basis, around 8 per cent in October.

Last year in the same period, farm loan growth was negative at -1.1 per cent, and, on a year-on-year basis, merely 5.5 per cent in October.

Before states started announcing debt waivers, in April-October 2016, year-on-year agricultural credit growth was around 13 per cent, and from April 2016 to October 2016, growth was around 5.4 per cent.

According to a top executive of a public sector bank, while all non-performing assets (NPAs) in agriculture have not been recognised because they are frequently restructured, it is turning out to be one of the most stressed sectors in the economy, and in the next quarter, banks might have to increase provisioning to account for possible defaults owing to loan waivers.

Four states — Assam, Chhattisgarh, Madhya Pradesh and Rajasthan — have announced farm loan waivers.

“Farm loan waiver is detrimental to credit culture. The propensity to default is more than the tendency to pay. Instead, if there are schemes to subsidise loans for timely payment, that will keep credit culture healthy. I have asked my general managers to assess our exposure in states where farm loan waivers have been announced,” said Ashok Kumar Pradhan, managing director and chief executive officer of United Bank of India.

Mrutyunjay Mahapatra, managing director and chief executive officer of Syndicate Bank, said: “With one state after another announcing farm loan waivers, the general perception is that farmers will postpone repayments, leading to stress in the agriculture sector.”  Farm NPAs accounted for 16 per cent of the bank’s advances as of September 2018. The bank had made a provision of about Rs 13 billion in the last quarter on account of agricultural loans. 

Earlier, S S Mallikarjuna Rao, managing director and chief executive officer of Allahabad Bank, said, “Because of the debt waiver declared by various states and also because not everybody can be covered under debt waiver, there is impact on repayment culture. As a result, the bank had to make efforts in recovery.”

In April 2017, Uttar Pradesh gave a farm loan relief amounting to about Rs 364 billion. In May 2017, Maharashtra announced a farm loan waiver of Rs 305 billion. In June 2017, Karnataka announced a farm loan waiver of around Rs 82 billion. In October 2017, and Punjab’s farm loan waiver was about Rs 100 billion. Other states that have announced a farm loan waiver or relaxation include Tamil Nadu, Andhra Pradesh and Telangana.

Puducherry has also done so.

According to priority sector lending norms, scheduled commercial banks have to extend 40 per cent of their loans or adjusted net bank credit (ANBC) to identified priority sectors. Of this, 18 per cent is earmarked for the agricultural sector, within which a target of 8 per cent of ANBC is prescribed for small and marginal farmers. 

Banks that fail to meet the targets need to deploy amounts equal to the shortfall in the low-yielding Rural Infrastructure Development Fund.