Experts urge caution as KCC loans outstanding rise 20% in FY22 to Rs 9.37 lakh crore

Experts urge caution as KCC loans outstanding rise 20% in FY22 to Rs 9.37 lakh crore

A steep rise in banks' loan outstanding to farmers by way of Kisan Credit Cards (KCC) may need closer scrutiny as this could emerge as a potential worry for banks, say experts.

According to the latest data available from the Reserve Bank of India (RBI), total outstanding loans through KCCs grew to Rs 9.37 lakh crore in March 2022 from Rs 7.53 lakh crore in March 2021, or by 20 percent.

The KCC scheme was introduced in 1998 so that farmers could use them to purchase agricultural inputs and draw cash for their production needs. Cardholders can use KCCs to buy allied and non-farm activity tools like vehicles for logistical support, etc.

The repayment cycle is such that farmers, at the end of the tenure, can repay some and not the entire amount of the loan. In other words, these loans are carried forward after the end of the initial tenure.

Industry experts highlighted that due to intense climatic conditions and the danger of the El Nino weather system which could lead to abnormally low monsoon rainfall and erratic weather conditions, there is a possibility of lower agricultural output, which would then put stress on the agri-loan portfolio of banks. This could lead to more non-performing assets (NPAs) from the segment, they said. A loan is declared an NPA if there is no payment of interest or principal for a period of 90 days.

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

The Kisan Credit Card scheme was introduced in 1998 for farmers to use when buying agriculture inputs and to draw cash for their production needs.

Anand Duma, a senior analyst at Emkay Global Financial Services, said that NPAs in the agri-loan portfolio of banks could rise worryingly due to extreme weather changes caused in large part by the El Nino effect.

“Whenever weather conditions brought by El Nino have damaged agri production in India, it is observed that NPA has increased in the agri-portfolio of banks,” Duma said.

Further, experts highlighted the need for reforms in the KCC scheme. The KCC lending model is fraught with risks as there is no close monitoring of the end use of these loans, they said. There are chances that a lender can use it to fulfil his or her consumption needs and not necessarily use the loan for productive investment, which was the original idea behind this kind of loan.

“There have been cases where loans through KCC are used for different purposes like buying a bike or something else. Close monitoring of the same is required as there are chances the same could lead to more NPAs for banks,” said a banker on condition of anonymity.

Earlier, in an exclusive interview with Moneycontrol, former State Bank of India (SBI) chairman Rajnish Kumar had called for reforms in the KCC loan scheme. “A relook at the Kisan Credit Card scheme is required. The scheme is old-fashioned and leads to high NPAs,” Kumar said.

Agriculture is one of the largest employers in India and it remains vulnerable to seasonal shocks, as a large number of farmers still rely on rainfall during the monsoon for good output. Emkay Global Financial Services, a research company, in a report, said that since 1994, India has faced seven instances of El Nino, which led to lower agri production and higher NPAs in the subsequent three-four quarters.

Data from the RBI showed that banks’ total loan outstanding to the agricultural sector stood at Rs 15.16 lakh crore in March 2022 compared to Rs 13.84 lakh crore in March 2021 and Rs 12.39 lakh crore in March 2020.

Also read: Exclusive | Former SBI chief Rajnish Kumar bats for reforms in Kisan Credit Cards

The report cited the example of SBI. The lender saw its agri NPAs shooting up from 11.6 percent (of the agri loan portfolio) in fiscal 2019 to 15.9 percent in FY20. On the other hand, the latest data from the RBI showed that the total outstanding loan through KCCs has grown to Rs 9.37 lakh crore in March 2022 from Rs 7.53 lakh crore in March 2021.

Considering the individual cases of major public and private sector banks, data shows that banks are witnessing a rise in agri-segment NPAs. For instance, Punjab National Bank (PNB) saw a marginal 1 percent year-on-year growth in the agri-lending portfolio for the quarter ended December 2022 but its NPAs rose by nearly 2 percent, from Rs 23,718 crore a year earlier to Rs 26,644 crore.

Among private sector banks, ICICI bank, in its results for the quarter ended March 31, 2023, showed that its NPA additions through KCC rose to Rs 672 crore from Rs 614 crore in March 2022.

In its Financial Stability report released in December 2022, the RBI noted 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 said the El Nino effect, which directly impacts agricultural production, could also affect the banking system.

Siddharta Sanyal, an economist at 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 added.

Another thing experts said that banks can do to lessen agri-NPAs is to keep a close eye on their KCC loans.

“Banks will have to closely monitor the developments in the agri sector. This can help them indicate the chances of a loan turning to a bad loan,” the banker quoted above said.