Debt relief scheme prompts robust farm loan recovery

An extension of the debt relief scheme, announced by Finance Minister Pranab Mukherjee during the Union Budget 2010-11, has resulted in robust recovery of agricultural loans by banks. As a consequence, agri non-performing assets (NPAs) is set to come down for most banks in the last quarter.

Mukherjee had extended the debt relief scheme of 2008 by six months to June 30, 2010, in view of the drought in some states and severe floods in some other parts of the country.

The country's largest lender State Bank of India expects its agricultural NPA to come down by 75 basis points in the last quarter, said a bank official. Agricultural loans account for nearly 10 per cent of the bank's loan book as on March 2010.

The SBI's gross NPA ratio as on March 31, 2010 declined to 3.05 per cent from 2.86 per cent last year because of fresh loans turning bad.

Bank of India, which had an outstanding loan of about Rs 388 crore under the debt relief scheme, expects 60 per cent recovery of the loan amount. "We deployed special officers for farm loan recovery under the debt waiver scheme. The harvest has also been much better," said M Narendra, executive director of Bank of India.

United Bank of India also expects more than 50 per cent recovery of farm dues in the last quarter. "There had been significant recovery under the debt relief scheme, as the recovery mechanism was intensified," said K R Kamath, chairman and managing director, Punjab National Bank.

Under the scheme, farmers having more than two hectares of land were given time up to December 31, 2009 to pay 75 per cent of their overdues. In addition, banks and lending institutions were allowed to receive less than 75 per cent of the debt amount under the one-time settlement (OTS) system, provided they bore the difference, as they would be compensated only for the 25 per cent of the amount under debt relief.

However, most banks had waived another 25 per cent of dues, that in effect made the borrower return only 50 per cent of the dues.

The government will not pay interest for the six-month extension while reimbursing the 25 per cent amount to lending institutions as per the delayed reimbursement scheme.

Due to factors like drought and an anticipation of further relief in farm loans, farm recovery had dropped drastically last year, and was about 50 per cent less compared to the previous year, said a bank executive.