Banks’ aggressive lending to farm sector under El Nino cloud; experts warn of rise in NPAs

Strawberry farm in Gasoo, Kashmir. (Photo by Irfan Amin Malik)

Experts have expressed concerns over banks' aggressive lending to the agriculture segment saying it could backfire if weather pattern El Nino risks materialise and monsoon fails.

Some private sector banks which have reported earnings in the April-June 2023 quarter so far have posted double-digit growth in their agriculture portfolios.

El Nino is a natural phenomenon where the surface temperature of ocean water becomes warmer than usual, which affects the pressure conditions over the Indian Ocean and leads to a weakening of trade winds blowing from east to west. This is accompanied by lower rainfall.

Jump in agri loans

HDFC Bank, the country’s largest private sector bank, reported a 29 percent increase in its agri lending portfolio for the April-June quarter to Rs 79,637 crore as against Rs 61,579 crore posted in the corresponding quarter last year.

Federal Bank reported a 26 percent year-on-year growth in the agri portfolio, compared to 19 percent growth in the previous year. The bank’s agri portfolio for the April-June quarter stood at Rs 25,112 crore, up from Rs 19,988 crore a year ago.

Whereas Bandhan Bank’s agri portfolio spiked to Rs 26,950 crore from Rs 24,620 crore on a year-on-year basis.

With aggressive lending, experts have warned that banks need to keep in mind the possibility of a rise in NPAs due to erratic monsoon and El Nino.

“Disturbance in monsoon patterns could lead to damage in the production of some crops. This can affect the recovery of the banks which have lent to the sector,” said Madan Sabnabvis, Chief Economist, Bank of Baroda.

Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank, on July 17 said that heavy rains have impacted agri output and there is a need to watch the impact of El Nino.

“We have to keep a watch on the impact of El Nino on agri output,” Vaidyanathan said in a post-Q1 results media call.

According to the Reserve Bank of India (RBI)’s sectoral deployment of credit data, the total exposure of Indian banks to agriculture grew by 13.8 percent to Rs 16.57 lakh crore in May 2023 from May 2022 to Rs 14.56 lakh crore in May 2022.

The central bank’s Financial Stability Report (FSR) data showed that as of March 2023, GNPAs in the agriculture sector stood at 7.7 percent compared to 9.7 percent in March 2022.

Monsoon and El Nino

India's weather office has forecast normal monsoon rainfall in 2023. However, a 90 percent likelihood of an El Nino weather pattern developing during the second half of 2023 raises the possibility of less than normal rains, according to World Meteorological Organisation.

Monsoon is vital for India, providing about 70 percent of annual rain and impacting key crops such as rice, wheat, sugarcane, soybean and peanuts. Its influence extends beyond agriculture, affecting the wider economy. Sufficient rains boost overall economic growth, helping control food price inflation, which has recently risen.

Also, agriculture contributes about 19 percent to India's $3 trillion economy and employs more than half of its 1.4 billion population.

India has experienced below-average rainfall during most El Nino years, sometimes leading to severe droughts that destroyed crops and forced authorities to limit the export of some food grains.

Experts highlighted that weather uncertainties have affected agri production which is directly linked to a jump in agri-NPAs.

Anand Duma, senior banking analyst, Emkay Global Financial Services, said, “When weather has changed or El Nino has affected farm production, there has been a rise in agri-NPA numbers."

Priority sector obligations

The RBI norms mandate that about 40 percent of banks’ advances go to categories that fall under the priority sector lending (PSL) list. Out of the PSL pie, the agriculture sector’s share is 18 percent. Banks in India have big exposure to agriculture through Kisan Credit Card (KCC) loans.

According to the latest RBI data, total outstanding loans through KCCs grew by about 20 percent to Rs 9.37 lakh crore in March 2022 from Rs 7.53 lakh crore in March 2021.

Here, the sensitive nature of agriculture, where any changes in the weather can disrupt the sector, is a recurring concern.

Sabanavis said that due to the mandatory lending to the agri sector by banks under PSL, there is always a chance for NPAs.

“Any uncertainty will not lead to an immediate rise in NPAs. But banks will see an increase after the completion of the agriculture season,” he said.