MC EXPLAINER How an agri-loans discrepancy has hurt India’s Top 3 private banks

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• RBI flags inconsistencies in agri-loan classification at some private banks
• Axis, HDFC, and ICICI Bank have taken corrective steps after RBI inspection
• Issue is about loan classification under PSL norms, not asset quality concerns

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The Reserve Bank of India’s annual supervisory inspection for FY25 has flagged inconsistencies in how a few private sector banks classified agriculture loans under priority sector lending (PSL), triggering provisions and reclassification of certain consumption-linked loans.

While the issue does not raise asset quality concerns, it has brought back focus on divergent interpretations of PSL norms and disclosure practices among banks.

Moneycontrol explains the issue, why it surfaced during the RBI’s annual inspection, and why it is a classification challenge rather than an asset quality concern.

So, what is the issue?

Agriculture loans, which form the chunk of priority sector lending (PSL), is extended based on the area of cultivable land available and a corresponding valuation attributed to it. Norms also permit banks to lend a certain value (up to 20 percent of total permissible limit) towards the consumption requirements of the borrower. A two-wheeler loan, for instance can be a consumption loan as helps improving the working conditions of the borrower.

However, the combined value of all loans should fall within the overall commercial valuation attributed to the land. For a few banks, this wasn’t the case, with the combined value exceeding the permissible loan amount which the borrower is entitled to. Excesses were largely found largely with respect to the consumption loans.

The banking regulator wants this anomaly corrected.

How did the problem surface?

The discrepancies were found in the process of annual inspection for FY25, which the Reserve Bank of India periodically conducts across regulated entities. Inspection revealed that agri-loans lent by a few banks were non-compliant with PSL norms as non-agro loan component exceeded the permissible loans amount of the borrowers. Hence as corrective step, these loans (loans given for consumption purpose) need to be reclassified as they don’t fall within the PSL limits.

Is this as asset quality concern?

The issue relates to asset classification rather than asset quality, according to sources. It is understood to be limited to a handful of private sector banks, with Axis Bank, HDFC Bank and ICICI Bank having already taken corrective steps. No such pattern has been observed among public sector banks.

Can it be reversed?

Yes. Any reversal, however, is expected to be gradual and unlikely before March 31, 2028. The first step would involve reclassifying these loans as non-agriculture advances, a process that would require banks to formally notify borrowers. Any regulatory dispensation or moratorium extended earlier would also need to be regularised, including interest rates, as several of these loans had benefited from interest subvention available to agriculture credit. As a result, borrowers could face higher lending rates post-reclassification, which may test their repayment capacity. While this risk has not been factored in so far, a deterioration in repayment ability could eventually have implications for asset quality.

How have banks approached the issue?

While the underlying issue is common across India’s top three private sector banks, their approaches to disclosure have varied significantly. A bank-by-bank look highlights these differences.

Axis Bank

Discrepancies in agri-loans portfolio was first brought to fore by Axis Bank in its September FY26 quarter results. The bank flagged off in its notes to accounts about a certain elevated provisioning it took in Q2FY26 pertaining to its agri-loan portfolio flagged off by the RBI’s annual inspection. “…we will not give you details around specific number of accounts. The bank had been offering one of the two product variants from 2015 and the other variant from 2021. These are farmer loans and these had been classified as PSL. The bank has discontinued these two product variants, i.e., we are not doing these specific variants currently. For the loans that we had in stock, the bank has taken a position that the customer terms should not be changed to the detriment of the customer have an issue,” the bank’s CFO, Puneet Sharma told in a post earnings call with investors. “We have declassified these loans from our PSL computation entirely and we purchased the PSLCs for which the cost I have explained. The Rs 1,231 crores translates roughly a 5 percent cover on the total outstanding pool as of the 30 September,” he replied to another question in the call. Terming the provision as ‘static’ on the call, he said the bank does not expect an increase in credit costs from previous years for these two (dis)continued loan product variants. Sharma also indicated that “when the Rs 24,000 crores (of loans) goes to zero, I will get the full credit back into my P&L on that date”, which is expected by March 2028.

HDFC Bank

HDFC Bank did not mention the agri-loans related issue in its notes to accounts or press releases. Had it not been for a question raised by Mahrukh Adajania, a senior equity researcher at Nuvama Institutional Equities, the Rs 500 crore of provisioning the bank took on these loans post the RBI annual inspection would have not been made public. “Our regulatory inspection is also complete, and whatever according to required -- according to the regulatory requirement, there was about Rs 5 billion (Rs 500 crore) or so thereabouts, which have been taken. In the overall context of our book and our results they have been absorbed within that. In future, we need to operate in a model that is acceptable with the regulatory, whatever is that is (and) that’s an ongoing process of what we do. Any one-time is already subsumed,” said Srinivasan Vaidyanathan, CFO, HDFC Bank. While in terms of quantum the provisioning is not material, that fact that India’s largest private bank had to wait for a question to be raised in its investor call to address an important point flagged off by the RBI in its annual supervision isn’t comforting. Ideally, the bank should reported the RBI observation voluntarily. When asked why the bank did not make a voluntary disclosure, its response was “Please note that this does not cross any regulatory threshold that warrants a disclosure in the Q3FY26 results. The Bank continues to have adequate provisions at the total level. On the Investor call, the answer provided was in response to a specific question from an Analyst. And both call details - Investor and Media calls - are in the public domain for transparency”.

ICICI Bank

While in terms of absolute value, ICICI Bank’s provisioning towards agri-loans portfolio was the highest at Rs 1,283 crore, the bank needs to be appreciated for its disclosure standards. It was voluntary and it revealed that it was done as per RBI’s supervision report. “….following the supervisory review, the regulator has directed us to make this provision of Rs 1,283 crore. The underlying portfolio that we need to work out and resolve in terms of ensuring conformity with the PSL guidelines would be between Rs 200 billion to Rs 250 billion or so (Rs 20,000 – 25,000 crore). We will be working on to bring this portfolio into conformity with the regulatory expectations, and thereby, minimise both the provisioning and the PSL impact,” said Anindya Banerjee, CFO, ICICI Bank adding that the bank has been originating this portfolio for some years.

Overall, the PSL-related issue evokes memories of the asset quality review phase of 2016–18—not in terms of the scale of stressed assets, but in the way similar exposures can be interpreted differently by banks. The key concern is the lack of uniformity in interpretation, even as the system remains far from a repeat of the bad-loan cycle. For now, the issue appears contained, though market participants will be watchful for any further developments.