Dry spell for banks to continue as poor rains hit agri loans

Just when market were beginning to get comfortable with banks and analysts were beginning to come out with buy reports, the sector is now faced with a new problem.

A 14 per cent deficit in monsoon has started showing its effect on bank loans. Reports say that poor rainfall is making bankers nervous. Total exposure of banks to the sector have shot up to Rs 8,07,800 crore from Rs 7,20,400 crore in August last year. Bankers are being forced to restructure some of these loans in a bid to keep non-performing assets (NPA) in check.

 

Reports from various parts of the country highlight the trouble in the agriculture space. Delayed rains and poor quality of pesticides have resulted in nearly two-thirds of the cotton crop in Punjab being wiped out, according to a newspaper report. Estimated loss is in the range of Rs 4,200 crore. The state government has already declared a Rs 640 crore package which was rejected by the farmers. Politics is now being played under the garb of farmers plight, which might pressurise the government to announce a loan waiver scheme.

The problem is not restricted to cotton alone. Despite poor rains, acreage during the kharif season has increased by 1.3 per cent at 103.1 million hectares. This would mean more money from the financial sector has been ploughed in agriculture. Large parts of the sowing took place due to early rains, but since then monsoon slowed down causing low water levels in reservoirs. Water storage in the country’s 91 major reservoirs on Sep 30 was 23 per cent below last year’s level as well as the ten-year average.

The Soybean Processors Association of India (SOPA) has also hinted at lower production during the year at 8.6 mt, down 4 per cent YoY, despite higher acreages.
 

The Indian Sugar Mills Association (ISMA) trimmed its previous forecast of the country’s sugar production by around five per cent to 27 million tonnes in 2015-16 against previous year’s production of 25.2 million tonnes.

High acreage and low production is a clear sign of stress for the farmer, which in turn is passed on to the financial system. Spillover effect is also felt in supporting industries like tractors, tillers, construction equipment and those that depend on rural economy like two wheelers.

Reports say that the worst affected areas will be those where monsoon deficit has been over 20 per cent. Latest data shows that deficiency in east and west Uttar Pradesh stands at around 46 and 43 per cent, respectively. Konkan and Goa region face 31 per cent deficiency, central Maharashtra and Marathwada face a 32 per cent and 39 per cent deficit respectively.

Bankers’ are under additional stress as Prime Minister Narendra Modi announced a hike in compensation for farmers whose crops were damaged by un-seasonal rains in April and also asked banks to ease the criteria for them to get government support.

An India Ratings report indicates that though this is good for the farmers, the system-wide agricultural NPAs as a percentage of total agricultural advances will rise to 8.4 per cent by FY16 from 4.9 per cent in FY14. Gross NPAs for the banking system will increase by 30 basis points translating into a profitability impact of 2-3 basis points on system-wide post-tax return on assets on account of unseasonal rains, says the report. The impact of scanty rains will be more.

While private sector banks prefer to pay a penalty rather than lend money directly to farmers or the agriculture sector which comes under priority sector lending, public sector banks do not have the luxury to take the same recourse as they are expected to perform their social responsibility. Little wonder why investors flock to private sector banks.