The finance ministry is considering tweaking the norms banks follow while lending to the agricultural sector. The move is aimed at easing the mounting pressure from non-performing assets (NPAs).
In the case of loans to the farm sector, called demand loans, a borrower doesn’t have to pay any interest or principal till the time of harvest — around four to six months from the time a loan is taken. After the harvest, however, farmers have to repay the entire loan and principal amount as a one-time payment to close the account.
The finance ministry has proposed loans to farmers be treated as normal cash credit, in which a borrower needs to make a minimum regular payment and doesn’t need to repay the entire amount through a one-time payment. Thus, after the harvest, an agricultural borrower would not be forced to pay back the total due amount at one go. The borrower’s account would not be closed; it would be a ‘running’ account.
| ONE FOR THE FIELDS |
| * For cash credit, the due sum does not have to be paid at one go |
| * Some feel this may raise NPAs, as farmers’ incomes are not regular |
| * Agriculture accounted for 44% of banks’ incremental NPAs in FY11 |
According to bankers, the finance ministry has written to the Reserve Bank of India (RBI), seeking feedback.
“Since the farmer would not be pressurised to pay the entire amount, the move is aimed at reducing bad loans, which have been the highest from the farm sector in recent times,” said a banker.
Farm loan NPAs account for 19 per cent of State Bank of India (SBI)’s total bad loans. The country’s largest lender, which reported Rs 40,000 crore of bad loans in its books as on December 31, said the ratio of its gross NPAs in farm lending to gross advances stood at 9.45 per cent, while the overall gross NPA ratio stood at 4.61 per cent. Till December, in absolute terms, SBI classified loans worth more than Rs 7,500 crore as NPAs. The majority of SBI loans are crop loans.
According to RBI data, in 2010-11, the agricultural sector contributed 44 per cent to the total incremental NPAs of banks. High growth in credit to the agricultural sector (more than 20 per cent) during the last four years (2006-07 to 2009-10) may have contributed to the growth in agricultural NPAs in 2010-11, owing to the deterioration in credit quality, RBI had said.
Though the ministry thinks reclassification of farm loans would ease the pressure from NPAs, some bankers expressed doubt on whether the objective could be met.
“Agricultural borrowers may face difficulty in repaying regularly, even if it is a minimum amount. This is because they don’t have regular income generation, and depend on the sale of their harvest. Also, since they will not have the obligation to pay back the entire loan, it may turn out to be an NPA at a later date,” said a senior official of a public sector bank.
In recent times, the finance ministry has told banks agricultural lending was an issue to be taken seriously, and had come down heavily on banks that missed farm sector lending targets. The ministry also asked banks not to deploy resources in low-yielding assets, like the National Bank of Agricultural and Rural Development’s Rural Infrastructure Development Fund (RIDF). Banks are mandated to lend 18 per cent of their net bank credit to the agricultural sector (with a sub target of 13.5 per cent to direct agriculture). If a bank fails to meet the target, it invests in RIDF bonds.
Due to the rise in NPAs, lenders have been cautious in lending to the agricultural sector. The share of agricultural credit to the total outstanding non-food credit declined in 2010-11. According to RBI, as of March 31, 2011, the agricultural sector received only 13 per cent of the total non-food credit.
