Stress in agriculture, MSME sector may impact banks' retail loan portfolios

Slowdown in the economy, particularly the rural sector, may cast a shadow on the retail loan portfolio of banks this quarter.

According to top executives of public sector banks, stress in the agriculture and micro, small and medium enterprises (MSME) sectors could lead to higher slippages in the retail loan segment in the present quarter.

“The stress in both agriculture and MSME sectors are quite visible now. In case of agriculture, the scope of additional financing is there. In case of MSMEs, we are more careful and the level of scanning is high,” said Ashok Kumar Pradhan, managing director and chief executive officer (MD and CEO) of United Bank of India.

Over the last few quarters, due to stress in the corporate loan sector, banks have been trying to focus on retail loans comprising segments like MSME, agriculture and personal loan.

“The slowdown in the economy is visible in retail lending as well now, particularly MSME and agriculture sectors. The repayment capacity is getting impacted across sectors, including retail,” said Charan Singh, executive director, UCO Bank.

Notably, after the debt waiver scheme announced by state governments around 2017, the agriculture sector had been seeing a persistent slowdown in terms of credit offtake.

“The stress in both agriculture and MSME sectors are quite visible now. In case of agriculture, the scope of additional financing is there. In case of MSMEs, we are more careful and the level of scanning is high,” Ashok Kumar Pradhan, MD

In April 2017, Uttar Pradesh gave a farm loan relief amounting to about Rs 36,400 crore and in May 2017, Maharashtra announced a farm loan waiver of Rs 30,500 crore. 

In June 2017, Karnataka came out with a farm loan waiver of around Rs 8,200 crore. In October 2017, Punjab’s farm loan waiver was about Rs 10,000 crore. Other states that have announced farm loan waiver or relaxation include Tamil Nadu, Andhra Pradesh, and Telangana.

“Certainly, there is stress in agriculture and MSME sectors. We are going to farmers for a concentrated drive to get back payments and recycle it,” said S Harisankar, MD and CEO of Punjab & Sindh Bank.

According to data from the RBI, credit growth for the agriculture and allied sector till May 2019 this financial year was -0.3 per cent. 

According to data from the Tractor and Mechanisation Association (TMA), tractor sales were down by 12 per cent for July 2019 compared to July 2018.

Already, banks had reported high slippages in the agriculture sector in the last quarter. For example, Allahabad Bank had recorded fresh slippages to the tune of Rs 2,986 crore in the last quarter. 

Agricultural NPAs accounted for a major chunk of around Rs 1,135 crore, of nearly 38 per cent of the total slippages.

MSMEs accounted for another 26 per cent.

“We are seeing some stress in the agriculture and MSME portfolios. The strain is likely to continue in Q2,” SS Mallikarjuna Rao, MD and CEO, Allahabad Bank, had said recently.

In the MSME sector, Pradhan Mantri Mudra Yojana (PMMY) loans have been a source of high NPAs for banks. 

According to a written reply in Rajya Sabha by former former minister of state for finance Shiv Pratap Shukla, as of March 31, 2018, the total value of NPAs held by public sector banks under Pradhan Mantri Mudra Yojana (PMMY) was close Rs 7,277.31 crore.