The last month's unseasonal rains will lead to an increase in the gross non-performing assets (NPAs) of the banking system by up to 0.40 per cent due to a rise in the total agricultural advances, according to India Ratings.
"System-wide agricultural NPAs as a percentage of total agricultural advances will rise to 16.9 per cent by the end of the current financial year from 13 per cent in FY14 as a direct result of the unseasonal rains. As a result, gross NPA ratio on total advances for the system will increase by 0.40 per cent," the domestic ratings agency said.
The gross NPA of the system increased to 4.5 per cent over the six months to September 2014, the RBI had said in its financial stability report in December, estimating that it will improve to 4 per cent by March 2016.
In its note, the agency said agricultural loans grew 16 per cent last fiscal and contributed 25 per cent to the incremental credit in the fiscal.
The agency, however, did not comment on what could be impact on the NPAs if the monsoons fail.
Earlier this week, the Indian Meteorological Department had predicted that monsoon will be below average this year.
The growth in NPAs from the agri book as a result of the unseasonal rains will also have an impact on the bottomlines, it said, adding the post-tax return on assets will be impacted by up to 0.03 per cent. For some banks, the agri loan NPAs may double, the agency warned.
However, the impact of the unseasonal rains will be felt with a lag because of the NPA recognition policies, under which one or two crop seasons past due makes it a NPA.
The profitability impact for banks will be felt in the second half of the current fiscal, it said, adding that support from the government may not help banks much.
"Governmental support through subsidies may not significantly benefit banks as the amount of support (Rs 2,500 per acre) to be provided is marginal compared with the extent of the losses (Rs 20,000 per acre)," it said.
Also, the farmers are unlikely to use the money received as support from the government to repay the bank loans, it added.
The unseasonal rains followed one of the weakest and most deficient monsoons that the country had experienced in FY15 which has heightened its impact, it said, adding that the states impacted by this account for 37 per cent of the agri credit disbursements in FY14.
