Too early to say deficit monsoon to hit rural lending

A clear picture is likely to emerge only towards the end of June

Rural distress owing to heavy unseasonal rains in March and the prospects of less-than-normal monsoon have made bankers “a cautious lot” at the start of this financial year. However, it is too early to conclude that the impact of rains, or the lack of it, would be bad.

According to public sector bank executives, the assessment for borrowers due to excess rains is underway and planning for this financial year will factor in the effects of rainfall shortage. Banks can take a clear call on the impact of monsoon towards the end of June, when the spread of rains across country is visible.

Rupa Nisure Rege, group chief economist at L&T Finance Holdings, said monsoon forecasts are conflicting. While India Meteorological Department under the Union Ministry of Earth Sciences has forecast less than normal monsoon, private forecaster Skymet has indicated ‘above average rains’ during the monsoon months.

Things would be clearer in the later part of June, based on geographical and temporal distribution of the rainfall, said Rege.

The shortfall in rains in the western part of the country would have a pronounced effect since irrigation coverage is low. The situation is different in northern India, where a large part of farming land is under irrigation.

According to a public sector executive, the credit flow might show a steady pace, thanks to the push for Prime Minister’s Jan Dhan Yojana for financial inclusion. Those becoming eligible for overdraft facilities would be in a position take credit. That would come as a support to those in need.

Another aspect that could help soften the blow of deficient rainfall is the gradual diversification of income sources in rural areas. Programmes such as rural employment scheme have provided the option for income generation.

According to senior officials handling rural business at State Bank of India (SBI), over the years, rural income has gone through structural shifts. Now the share of non-farm has higher share than that from farming stream in the income of rural families. This has provided a cushion to face adverse times.

Agricultural loans grew 16 per cent in FY15 and have contributed 25 per cent to incremental credit growth since March 2014. This does not capture the entire picture on rural credit book of banks. Consumer credit and non-farm loans have substantial share in credit portfolio.

Under the circumstances, would banks announce a wavier of repayments? That, however, looks a remote possibility. It may be noted that the debt waiver schemes in the past (2007-08) had badly affected the repayment behaviour of borrowers.

Wise from the past experience, banks strongly opposed the demands for debt wavier in Telangana and Andhra Pradesh in 20014-15. (In a run-up formation of two states, political parties had given promises). The lenders, however, rescheduled loans, spaced repayments over longer period, to ease the burden on farmers.

While in the process of building a case for “only reschedulement and no wavier”, the Reserve Bank of India asked banks to establish that the farmers were actually in a position to repay their loans despite problems.

SBI did a study of those defaulting on loans. The finding was that those not paying loans were putting money in their savings accounts, which gave away their capacity to pay.

It was only after this presentation that the banking regulator supported the plea to only recast loans and not to waive them off altogether, said a senior SBI executive.