Gradually, but visibly, stress is mounting on the books of Indian banks from Kisan Credit Card (KCC) loans and this could emerge as a source of worry for them going ahead. In fact, KCC bad loans have already begun to reflect on banks’ books, even private sector banks that are traditionally risk averse, according to analysts. The latest available RBI numbers show that bank loan outstanding on KCCs surged to Rs 7.09 lakh crore until March 2019 from Rs 6.68 lakh crore a year ago. This figure must have grown even bigger since then.
One will get a sense of the problem when compared with the past data. The outstanding loans on KCC, an instrument conceived for Indian farmers to avail subsidised loans, have gone up at least four times between March 2011 and March 2019— from Rs 1.6 lakh crore to Rs 7.09 lakh crore till last year. Also, these loans have nearly doubled as a percentage of total farm loans.
Here are more numbers. As a percentage of gross bank credit, the KCC loans contributed merely 4.28 percent in March 2011 and, as a percentage of agricultural loans, it constituted 34.75 percent. In March 2019, the same percentage figures were 8.2 percent and 64 percent respectively. In other words, the KCC loans now constitute a majority of the agriculture loan portfolio. Total agricultural loans stand at Rs11.11 lakh crore till March 2019.
Look at individual banks, and the trend is visible across the board. For a sample, let’s take two industry leaders, SBI and ICICI Bank. Slippages from KCC loans on the book of ICICI Bank grew to Rs 312 crore in the third quarter compared with Rs 193 crore in the year-ago quarter. The quarterly figure may not be big but the trend is definitely indicative. What about SBI? SBI’s total agriculture bad loans are around 13.49 percent of the total book as at the end last year, which has shown a sharp uptrend over the years (6-8 percent a few years ago). Of this, a significant chunk of loans is through KCCs.
Why KCC is a worry?
KCC model is fraught with risks as there is no close monitoring of the end use of these loans. A farmer can use it to fulfill his consumption need and not necessarily for productive investment and asset creation, which is the original idea of this loan. The KCC scheme was originally introduced in 1998 so that farmers may use them to readily purchase agriculture inputs such as seeds, fertilisers, pesticides etc. and draw cash for their production needs.
The scheme was further extended for the investment credit requirement of farmers viz. allied and non-farm activities in the year 2004 and was modified in 2012 to enable the issue of electronic KCCs to farmers. Implementing banks will have the discretion to adopt the same to suit institution/location-specific requirements. This is where the problem lies. Under pressure to meet the agriculture credit targets, banks eventually stopped looking at who they lend to and what the money is being used for.
This defeated the real purpose and started digging a hole in the books of banks. Some 6.6 crore operative KCCs are in circulation today. After banks realised there is something wrong with the way KCC works, they have slowed the new issues from 6.9 crore cards a year ago.
By design, the farmer doesn’t need to pay back the entire amount. They can keep the loan standard by paying up some amount at the end of the cycle; in other words, evergreening of loans. Here, the actual NPAs will never be public on account of the constant rollover. Also, no collateral is stipulated on the large chunk of these loans up to a certain limit. Credit limits go up 10 percent in successive years. To add to the woes, in the last budget, the government said it will include all beneficiaries under the PM Kisan scheme under the KCC scheme.
The government pushing increased credit targets to farming every year keep the bank exposure increasing but doesn’t necessarily mean higher agri productivity and cash flows. As a percentage of the Gross Domestic Product (GDP), the share of agriculture has declined significantly over the years from around 50 percent at the time of Independence to 13-14 percent now. “One can't rule out the stress going ahead. The government intends to improve the income of farm income and hence it seems to have been giving higher importance to KCC,” said Siddharth Purohit, an analyst at SMC Global Securities Ltd.
To cut a long story short, KCC loans, unless looked at closely by the regulator, could create a major bubble for banks a few years later.