Rising farm loans, defaults another worry for banks

For most banks, 5-6% loans to agriculture sector are NPAs; way lower than mid, large corporate loans

At the Randangachi village in West Bengal, farmers routinely sell a part of their crop for less than half the market price to moneylenders at the end of the season to escape the burden of over debt.

One of them, landless vegetable farmer Mairel Mandal, has a total debt of Rs 40,000. He owes money to seed sellers, the water supplier, the landlord and the fertiliser shop.

At the end of the season (December-January), most wholesale vegetable buyers from Bihar and Odisha gave the village a miss. Most were reeling from liquidity shortage because of the demonetisation of old Rs 1,000 and Rs 500 notes, announced by Prime Minister Narendra Modi on November 8 last year. Over production also eroded prices further.

Now, Mandal anticipates a loss of about Rs 10,000 this year. He might have to borrow from moneylenders to pay back his debt.

He would have to sell about one-fifth of his produce to the moneylender at a loss and also pay a 30 per cent annual interest. Late payment would cost him an additional 10 per cent every month.

At this village, like many nearby, most farmers are landless; hence, they do not get bank loans. “Banks need land that can mortgaged,” said Mandal.

According to rules, though, agriculture loan till Rs 1 lakh needs no mortgage.

In contrast to Mandal, Subhash Das, who owns half an acre, has banks running after him.

He has been availing long-term loans from a public sector bank for the past 15 years. Each year, the bank increases his credit limit by 10-15 per cent. Over the last six months, it has been hard selling a Kisan Credit Card (KCC), with which he can avail a short-term loan at 4 per cent.

These two are representative of how banks have shut their doors to landless farmers, while chasing those who own land.

Rising debt

At the end of every financial year, banks are in a rush to meet their agriculture lending target — 18 per cent of total credit given by them.

“To meet this target, banks prefer giving high loans to rich farmers and going for indirect lending to intermediaries,” said a banker with a public sector bank.

About 8 per cent of agricultural credit has to be given to marginal farmers — but banks can choose to do it directly or indirectly. Banks usually prefer the indirect route, through microfinance institutions or non-government organizations, as this reduces the risk of default.

So, bank farming credit is on the rise, but so is the business of microfinance institutions and moneylenders. Result: Rising farmer indebtedness.

According to data from the National Sample Survey Office (NSSO) in the 10 years between 2003 and 2013, average indebtedness of an agriculture household increased almost four folds. The 70th round of NSSO (2013) revealed for a monthly average income of Rs 6,426, average debt was Rs 47,000. In 2003, the 59th round of the survey shad showed per-family outstand loan was Rs 12,585.

Despite deepening financial inclusion, moneylenders remain relevant in the sector, providing about 26 per cent of farm loans, according to the survey.

Rising NPAs, growing loans

KCC has been one of the fastest growing segments in banks.

The outstanding amount under Kisan Credit Card loan increased nearly five-times in the past six years, Rs 1.24 lakh crore at the end of March 2010 to about Rs 5.13 lakh crore at the end of March 2016.

For most banks, almost 5-6 per cent loans to the agriculture sector are non-performing assets (NPAs), much lower than mid and large corporate loans.

However, in the wake of high restructuring, non-repayment is hardly reflected in a bank’s books. For example, in case of natural calamities, all short-term loans, except those overdue at the time of occurrence of the calamity, are eligible for restructuring.

According to the Reserve Bank of India (RBI) guidelines, in all cases of restructuring, banks should consider a moratorium period of at least a year and not insist on additional collateral security for such restructured loans. Also, the principal amount of the short-term loan as well as interest due for repayment in the year of the occurrence of a natural calamity can be converted into a term loan.

Generally, the restructured period for repayment may be three to five years. However, where the damage arising out of the calamity is severe, banks may, at their discretion, extend the period of repayment up to seven years.

On several occasions, even without any natural calamity, banks restructure loans by adjusting the principal to the next crop cycle. This is commonly known as “evergreening” of loans.

For example, a borrower with a loan of about Rs 100 this season can pay a nominal interest rate of 7 per cent or Rs 7, and get the entire amount converted into another loan, although he doesn’t get any fresh money in hand, except to the extent of credit enhancement.

“Non-payment is a big problem in the agriculture sector, but banks often restructure the accounts. This is a social obligation. Also if these not restructured, NPAs would shoot up. Third, banks need to meet their agriculture lending targets. Rumours of debt waiver have further slowed down repayments,” said a banker on condition of anonymity.

Debt waiver rumor spark defaults

Debadul Mandal, a landless farmer at Randangachi does not own a mobile phone, but is aware that in Uttar Pradesh (UP), farm loan could be waived off. He is a bit remorseful for not being able to get a bank loan.

“We never had a bank loan. The waiver is for bank loans. Moneylenders will not let us live if we don’t repay,” said Mandal.

UP is yet to deliver on its farm loan waiver promise, but even rumours about it are enough to spark defaults in repayment.

At Kolkata-based United Bank of India (UBI), recovery of short-term rabi loans has been around 20 per cent less. Against a recovery of around Rs 700-800 crore last year, this year it is about Rs 550-650 crore.  

Banks unanimously agree a debt waiver scheme in any part of the country affects repayments elsewhere.

“Any farm loan waiver scheme will be detrimental for the banking sector as a whole,” said Pawan Kumar Bajaj, managing director and CEO, UBI. Earlier, State Bank of India Chairman Arundhati Bhattacharya, too, had voiced concerns about farm loan waiver.

“Credit discipline breaks when you waive off farm loans,” she had recently said.

In 2015, the World Bank, for the first time, came out with a study on the long-term impact of farm loan waivers, with the government’s Agri Debt Waiver Relief Scheme 2008 as the reference point. 

The study, called “The economic effects of India’s farm loan bailout: Business as usual?” by Xavier Gine,  co-authored by Martin Kanz, found while household debt was reduced and banks increased their overall lending, contrary to what bailout proponents claimed, there was no evidence of greater investment, consumption or increased wages as a result of the bailout. 

Loan defaults become significantly more sensitive to the electoral cycle after the programme, the study said.