El Nino could lead to rise in agri-loan NPAs, say experts

El Nino, a major cause of unduly warm weather, could pose a risk to the agricultural loan portfolio of Indian banks and NBFCs.

According to experts, El Nino (or little boy, in Spanish) could lead to an abnormally-low monsoon and erratic weather conditions, which could result in lower agricultural output and stress the agri-loan portfolio.

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.

Thus, the El Nino, which makes summers warmer and monsoons drier, may visit India in the coming months, the World Meteorological Organization (WMO) said on March 1.

Experts said this change in weather, which directly impacts agricultural production, could also affect the banking system.

Anand Duma, Senior Analyst, Emkay Global Financial Services, said agri production could go down due to the extreme warmth caused by El Nino, which in turn could affect the agri loan portfolio of banks and NBFCs.

“Generally, whenever El Nino has affected farm production in India, we’ve seen a rise in agri-NPA numbers,” Duma said.

Siddharta Sanyal, Economist, Bandhan Bank, said multiple factors will determine the impact of El Nino.

"However, the early warning from the weather office will likely help both lenders and borrowers turn cautious, potentially limiting some of the damage,” Sanyal said.

Banks have significant exposure to agriculture loans. Their total exposure to the agriculture sector stood at 14.4 percent of outstanding loans as of January 2023, compared with 10.4 percent in the year ago period.

For instance, the country’s largest lender, State Bank of India (SBI), recorded 12 percent growth in its agriculture loan portfolio in the October-December 2022 quarter. SBI’s non-performing assets (NPA) in this segment reduced 2 percent, from Rs 31,940 crore in 2021 to Rs 29,724 crore.

The other major public sector lender, Punjab National Bank (PNB), saw a marginal one percent year-on-year (YoY) growth in the agri-lending portfolio, while its NPAs rose by nearly 2 percent, from Rs 23,718 crore to Rs 26,644 crore.

The October-December 2022 results of Indian bank’s saw 15 percent growth in agri lending, while NPAs fell from Rs 9,146 crore to Rs 8,879 crore in the same period.

In its Financial Stability Report released in December 2022, the Reserve Bank of India (RBI) data demonstrated that agricultural loans comprised 8.6 percent of the total bad loans of banks. Although this is a slight improvement from 10 percent a year earlier, experts fear that major changes in the weather could lead to higher NPAs.

Emkay Global Financial Services, a research company, has said in a report that since 1994, India has encountered seven instances of El Nino, which have led to lower agri production and higher NPAs in the subsequent three-four quarters.

The report cited the example of the State Bank of India (SBI). The lender saw its agri NPAs shooting up from 11.6 percent (of the agri loan portfolio) in the fiscal year 2019, to 15.9 percent in 2020.

Agriculture is one of the largest employers in the economy and it remains vulnerable to seasonal shocks, as a large number of farmers still rely on the monsoons.

Banks typically disburse a significant chunk of agriculture loans through Kisan Credit Cards (KCC), which are used by farmers to draw money. The limit on such cards can be increased periodically based on the repayment record.

Over the years, KCCs have seen exponential growth. The total outstanding KCC loans grew 25 percent to Rs 9.4 lakh crore at the end of March 2022, from Rs 7.5 lakh crore a year ago. This can be a cause for concern, given the impending weather conditions.

Duma highlighted that the El Nino effect on banks is not new and taking a lesson from past experiences, banks have started to lend more via KCCs.

“KCCs help banks keep track of their lending portfolio with more granularity. They can check the borrower’s spending, and keep a track of his financials,” Duma said.