Unseasonal rains may hurt banks' agri loan book; raise NPAs

Moneycontrol Bureau

Indian agriculture industry has been reeling under severe crop failure following hailstorms and unseasonal rain. To make matters worse, the Indian Meteorological Department Wednesday predicted a weak monsoon this year.

Crop damage could significantly impact the asset quality of India’s agricultural credit in March 2015. Agriculture and allied activities now have a higher share in gross domestic product (GDP) calculation and may therefore, affect the economic growth of the country. 

According to a report by India Ratings and Research (Ind-Ra), the non-performing loan ratio of the agri-loan portfolio could double for some banks, though the reduction of overall return on asset may be muted between 4bp-6bp (about 10 percent of the profitability of government banks). The unseasonal rains followed one of the weakest and most deficient (12 percent) monsoons that the country had experienced in FY15.

Also Read: Agri crisis: Maha gov pledges low-interest loans to farmers Agricultural loans grew 16 percent in FY15 and have contributed 25 percent to incremental credit growth since March 2014. With delinquencies in the agri-loan portfolio likely to rise, they will add to the already stressed assets of banks, the report highlighted.

States highly impacted by these excess rains make up to 37 percent of the overall agricultural credit extended by banks in FY14. Ind-Ra estimates that system-wide agricultural non-performing assets (NPAs) as a percentage of total agricultural advances will rise to 16.9 percent by FY16 from 13 percent in FY14 as a direct result of the unseasonal rains.

As a result, gross NPL ratio (on total advances) for the banking system will increase by 40bp. This will translate into a profitability impact of 2bp-3bp on system-wide post tax return on assets, according to Ind-Ra’s estimates.

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). Ind-Ra expects the profitability impact to be felt in 2HFY16.

Also Read: Only sound govt policy can boost farm output: Swaminathan

The report also mentioned that 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.

If monsoons disappoint, food inflation could soar, in turn limiting the RBI's freedom to cut interest rates.