The arrival monsoon, albeit late, has not only provided relief to farmers but also offered some breathing space to banks reeling under asset quality stress. Industry analysts and bankers expect late rains will ensure reasonable farm output and that coupled with price increases will restrict the deterioration of banks' agri loan books.
"Monsoon rainfall has improved significantly in recent weeks, which our fundamental analysts believe should limit the deterioration of banks' agri loan books. The cumulative season rainfall deficit is now only about 10%, down from 19% at end-July, supporting our economists' 2012-13 estimate of 0-1% agricultural output growth," Barclays said in a note to its clients.
While Barclays said the kharif or summer crop output will suffer because of low rains earlier this year, they expect the damage to be moderate. On the other hand, rabi or winter crop output is seen better to support overall growth.
Bankers echoed a similar view. "Agri loans are generally offered for two-crop seasons. With rainfall improving it will not be difficult to maintain the asset quality of agri loans. In case there is a temporary problem, we can extend the repayment time," M Narendra, chairman and managing director of Indian Overseas Bank, said.
Analysts said the announced interest subvention scheme also looks positive for the banking sector as it creates an incentive for timely repayment. The rate charged to the farmers paying on time has been reduced to 4% from 7%. This subvention is available to all farmers with small crop loans, which account for 20% of the total agriculture lending and constitute a higher risk category.
The price trends in kharif crops, both in terms of minimum support prices and wholesale prices, are showing an upward bias and are expected to provide support to the total income of farmers. "It will consequently limit the deterioration of the agri loan books of the banks," Barclays said.
While it expects farm loan restructuring activities to remain high in states that have already declared a drought, Barclays noted that the share of these states in the total agri output of the country is not high.
Typically, if a state has declared drought, banks are required to restructure the loans that they have offered to farmers there. Maharashtra, Gujarat, Karnataka and Rajasthan have declared drought so far. These states account for 25% of the agricultural output, Barclays said.
Since Bank of Baroda and Bank of India have the higher proportion of branches in these states, Barclays expect the impact will be more for these lenders than their rivals.
