Unseasonal rains could hit banks' profitability by up to 10%

According to India Ratings, agricultural non-performing loans may double

Just as banks were looking for some stability on the asset quality front, unseasonal rains have put cold water on the lenders’ expectations. Farmers, who are burdened with severe crop damage, are unlikely to repay their loans on time. This could lead to a sharp rise in bad loans, hitting the profitability of banks, rating agency India Ratings said.

The non-performing loans ratio of the agri-loan portfolio could double for some banks, although the reduction of overall return on asset might be muted at between four basis points (bps) and six bps (about 10 per cent of the profitability of government banks).

India Rating estimates that system-wide agricultural non performing loans as a percentage of total agricultural advances will rise to 16.9% by FY16 from 13% in FY14 as a direct result of the unseasonal rains.

The unseasonal rains followed one of the weakest and most deficient (12%) monsoons that the country had experienced in FY15 which has heightened its impact.

Agricultural loans grew 16% in FY15 and have contributed 25% to incremental credit growth since March 2014.

With delinquencies in the farm portfolio likely to rise, they will add to the already stressed assets of banks (10.6% of loans on December 31, 2014). States highly impacted by these excess rains make up a significant portion (37%) of the overall agricultural credit extended by banks in FY14.

The gross NPA ratio (on total advances) for the banking system will increase by 40 basis points. This will translate into a profitability impact of 2bp-3bp on system-wide post tax return on assets, rating agency said.

The impact of the unseasonal rains will be felt with a lag, as NPA recognition policies for agricultural loans (one or two crop seasons past due) differ from those of corporate or retail loans (90 days past due).

It expects the profitability impact to be felt in second half of the current financial year (Fy16). Governmental support through subsidies may not significantly benefit banks as the amount of support (Rs 2,500/acre) to be provided is marginal compared with the extent of the losses (Rs 20,000/acre). Also, it is unlikely that the support money will be used by impacted farmers to repay bank loans, rating agency added.