Lenders now dread the Maharashtra government’s relent to the protest for a complete loan waiver will lead to more defaults.
The agriculture crisis in Maharashtra may see ripple effects in terms of further reduction in lending to the troubled farmer community.
While public sector banks have been lending to agriculture amid regulatory requirements, many sensitive crop loans not yielding revenues have not been getting the required financing.
Since the announcement of farm loan waivers in about five states, bankers have already reduced lending to the sector. They now dread the Maharashtra government’s relent to the protest for a complete loan waiver will lead to more defaults. This will make them cautious in lending to the agriculture sector.
As per the latest Reserve Bank of India (RBI) figures, as on January 19, 2018, the total loans to agriculture and allied activities stood at Rs 10,02,400 crore, up 9.3 percent over last year. This was higher than Rs 917,100 crore or 7.7 percent growth a year ago.
However, growth of these loans since the beginning of the year starting April 2017 till January, seems to have declined to 1.2 percent as against 3.9 percent a year ago.
Last week, over 35,000 farmers wearing red caps and carrying red flags marched from Nashik to Mumbai walking over 180 kms demanding among other things a complete loan waiver, implementation of the Swaminathan Commission’s recommendations and the Forest Rights Act and compensation for crop damage and fixed prices for agricultural produce.
Chief Minister Devendra Fadnavis, after a marathon round of negotiations with eight farmer representatives on Monday, agreed to all of their demands and has given them “an assurance in writing to resolve them in six months”.
While this may have brought some relief to the farmers, the banking sector, struggling with high bad loans on their balance sheets, dread another phase of bad loans in the farm sector.
Loan waivers - a moral hazard
A senior official with large public sector bank said, “We are ready to lend to agriculture and are also bound by the regulations but with farm loan waivers in many states, a lot of borrowers refuse to pay even if they are not eligible for the waivers. This means, we will see more NPAs and will not get the money from the government as those select loans do not come under the eligibility criteria.”
Aseem Dhru, Former Group Head of Rural Banking & Agriculture lending at HDFC Bank and now MD and CEO of SBFC Ltd, said, “It is unfortunate for the banking system as there is pressure from the bottom end because of their distress and the top end of the farmers refuse to pay...”
In a farm loan waiver, bankers get compensated from the government for the loans given, however, Dhru says people who usually have the wherewithal to pay and are not eligible for the waiver also default. “So this is a behavioural shift that takes place in the rural areas. So this is more of a moral hazard.”
RBI Governor Urjit Patel last year also called it a moral hazard saying, “Waivers undermine an honest credit culture... It leads to crowding-out of private borrowers as high government borrowing tend to (impose) an increasing cost of borrowing for others."
HDFC Bank, otherwise immune to the bad loan problem in the industry, also witnessed the perils of the waivers in the first quarter of 2017-18 from April to June.
The private lender’s gross NPA ratio rose to the highest in seven years as it climbed to 1.24 percent for the June quarter from 1.05 percent in the previous quarter and 1.04 percent in the corresponding quarter a year ago.
Agri credit and NPAs
This, even as unlike other sectors of trade, agriculture has a different set of standards for reporting of NPAs. For short duration crops like paddy and jowar, if the loan is unpaid for two crop seasons, it is termed as an NPA; and for long duration crops, NPA’s are classified from one crop season, if the loan remains unpaid.
Arvind Sonmale, Managing Director & CEO - Sustainable Agro-commercial Finance Ltd. (SAFL), which lends primarily to farmers, said, “Lending for the agriculture segment is target oriented because of the priority sector but for the rabi season, the off-take for crop loans has drastically reduced by over 50 percent.
Nevertheless, in March 2017, credit to agriculture increased slower by 12.4 percent at Rs 992,400 crore, as against 15.3 percent at Rs 882,900 crore a year agoDhru warns, “This (protests) is likely to be repeated in other states as well as they go to polls and also 2019 national elections…The only piece of solace left with banks will be retail and SME lending.”