Banks take the hint, to step up farm loans

Funding agriculture is profitable, feel bankers.

Are India's commercial banks getting politically savvy? The Manmohan Singh government is, after all, focused on agriculture. Several banks have lined up massive loans to the agriculture sector.

Bankers, however, hotly contest that they are trying to please the new Congress-led coalition. The agricultural sector's business model has changed, they explain. Funding agriculture is profitable, at a time when big companies are not resorting to banks for credit.

Whatever the case, there's no denying that big money will be put into agriculture. ICICI Bank plans to lend Rs 5,000 crore to the farm sector this year.

The bank has put in place a mechanism to ensure loan repayment by involving corporates in the game. Bank of India (BoI) proposes to lend over Rs 2,000 crore to farmers this year.

State Bank of India has gone a step ahead "" it plans on setting up a special agri-business cell within the bank, following the recommendations of a McKinsey & Co report. The bank's management believes that agriculture has the potential to be a big business.

Private banks are tying up with micro-financing entities as these give high returns and enable them to shore up their priority sector lending requirements.

IDBI Bank managing director GV Nageshwar Rao says the returns in this segment are in the region of 8 to 12 per cent.

Banks are now increasingly not averse to lending to farmers, thanks to corporate guarantees. The IDBI Bank has a memorandum of understanding (MoU) with Mahindra Shublab, a subsidiary of Mahindra & Mahindra, Tata Kisan Kendra, a division of Tata Chemicals, and Godrej Agroweights, which provides agri-extension services to farmers.

The bank has also tied up with self-help groups like Share Microfin, Asmitha Microfinance, Basix, Asha and Spandhan, which are active in southern India. In March 2004, the bank disbursed Rs 8 crore to Rs 10 crore in crop loans.

The Union Bank, UTI Bank, HDFC Bank and others have entered into similar corporate tie-ups. "We are looking at the farm sector in a new light. We are involving big corporates that buy the produce of farmers. There are tripartite agreements among banks, corporates and farmers to ensure repayment of loans," said the CEO of a big public sector bank.

In an additional effort to mitigate the risks of lending to the agricultural sector, banks are looking at "agri-risk funds", to which the Central and state governments as well as participating banks contribute equally, in case of a genuine default.