Priority sector lending: Farms, education pose challenges

As on Aug 18, education loans outstanding were Rs 59,300 cr against Rs 61,500 cr as on Aug 19, 2016

Meeting priority sector lending targets could be challenging for banks this year as at least two sectors — agriculture and education — are topping the list of stressed assets on the retail side.

While growth in loans for agriculture and allied activates is at a five-year low, that for education has slipped into negative territory. 

Both education and agriculture lending are components of priority sector lending, and if banks fail to meet the targets they need to deploy amounts equal to the shortfall in the low-yielding Rural Infrastructure Development Fund (RIDF). Notably, banks are increasing restructuring in both the categories of loans.

According to data from the Reserve Bank of India released on October 10, education loans showed a year-on-year decline of 3.5% in terms of loans outstanding. 

As on August 18, education loans outstanding were Rs 59,300 crore against Rs 61,500 crore as on August 19, 2016. In the case of agriculture lending, growth has been muted, although banks are compelled to provide farm loans under priority sector lending. 

Loans to agriculture and allied activities posted a growth rate of 6.5% as on August 18, on a year-on-year basis, against around 13% last year. Also, in the period between March and August, loans to agriculture and allied activities fell by 1.6%, according to RBI data.

In June 2015, the RBI had said rescheduling of the payment period of an education loan due to the unemployment of borrower will not be treated as restructured accounts for computing non-performing assets. The directive is now being actively implemented as banks are stretching the repayment tenure to 10 years from seven years in general.

“We are liberally restructuring education loans and offering lots of concessions to students as the job market is not good.  We are also offering students a one-time settlement,” said a senior official of Indian Bank.

“Education loans are showing negative growth and defaults are on the rise. On average, NPAs in the segment are close to 10-15%.  The relaxation of norms by the RBI in 2015 is now being implemented,” said a senior official of the Kolkata-based United Bank of India.

According to a report by CRIF High Mark, around 10.2% NPAs were observed in the education loan portfolio as on March 31, 2017, a 21% year-on year increase over the last two years.

“There is a lot of stress in the education loan segment as several engineering colleges have shut down,” said an official of UCO Bank.

In the case of agriculture loans, after poor recovery of rabi crop loans, kharif crop loans are also showing stress. At the Kolkata-based United Bank of India, recovery of short-term rabi loans has been around 20% less. Against recovery of around Rs 700-800 crore, so far this year rabi crop loan recovery has been around Rs 550-650 crore. Debt waiver schemes of different state governments are impacting the repayment, said bankers.

“It would be challenging to meet the agriculture lending targets this year, as there is a lot of stress in the agriculture sector,” said a senior official of United Bank of India.

Earlier, HDFC Bank reported a 0.20% jump in gross NPAs for the June quarter, which it said was due to a spike in bad loans in the agriculture sector. The kharif loan recovery season is generally at its peak around November-December.

For most banks, NPAs in agriculture sector loans are around 5-6%, much lower than in corporate loans. However, in view of the high amount of restructuring, the NPAs are hardly reflected in the books.  

In June this year, the Maharashtra government announced a debt waiver of Rs 34,000 crore for nearly 8.9 million farmers. Earlier, the Uttar Pradesh government waived loans worth Rs 36,359 crore for about 21 million farmers. This apart, Andhra Pradesh waived loans of about Rs 20,000 crore, Punjab Rs 10,000 crore, Telangana Rs 15,000 crore and Karnataka Rs 8,000 crore.

According to priority sector norms, scheduled commercial banks have to direct 40% of their loans (measured in terms of adjusted net bank credit or ANBC) to the identified priority sectors. Within this, 18% is the target for agriculture. Within the 18% target for agriculture, a target of 8% of ANBC is prescribed for small and marginal farmers. Loans to individuals for educational purposes, including vocational courses, up to Rs 10 lakh are also counted as priority sector loans.