Banks jittery as deficient monsoon puts ₹8 lakh cr of farm loans at risk

With rainfall below average across most parts of the country, the impact on the agriculture sector is making bankers nervous. The total exposure of banks to the sector has shot up to ₹8,07,800 crore from ₹7,20,400 crore in August last year.

With the India Meteorological Department pegging the monsoon deficit at 14 per cent below the long-period average, bankers are being forced to restructure some of these loans in a bid to keep non-performing assets (NPA) in check.

“There could be problems where the rain deficiency is over 20 per cent. It is also a State subject as to which region is declared drought zone and, accordingly, banks will have to provide for the restructuring,” said GK Kansal, Chief General Manager, State Bank of India.

Restructuring leads to renewal of loans by extending the tenure for the borrower, usually with a lower instalment amount. While this avoids immediate default of loans, lower returns hurt the lender.

The latest data show that some parts in northern and western India are reeling under an acute monsoon deficit. The deficiency in east and west Uttar Pradesh stands at around 46 and 43 per cent, respectively.

While the Konkan and Goa region face 31 per cent deficiency, central Maharashtra and Marathwada face a 32 per cent and 39 per cent deficit, respectively.

Abhishek Bhattacharya, Co-head - Banks and FI Ratings, India Ratings & Research, said that NPAs in the farm sector could go up, though the impact could be felt with a lag. “We could see more of an impact on derivatives such as tractor and construction equipment loans, or even rural housing to some extent, where the loans could see some slippages,” he said.

Adding to the bankers’ woes, in April, Prime Minister Narendra Modi announced a hike in compensation for farmers whose crop had been damaged by un-seasonal rains and also asked banks to ease the criteria for them to get government support.

Though this is good for the farmers, an India Ratings report estimates that 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 as a direct consequence of the un-seasonal rains.

“As a result, the gross NPA ratio (on total advances) for the banking system will increase by 30 basis points. This will translate into a profitability impact of 2-3 basis points on system-wide post-tax return on assets,” the report said.

But despite the challenges, bankers are putting up a brave face. “We are not expecting the NPAs to rise as farmers have also diversified in terms of their crops and they’re able to shift the risks to different crops,” said SBI’s Kansal.

An executive with another PSU bank said: “There will be a slight impact but we will be providing additional restructuring so we need not take a hit on our books.” The official said that Uttar Pradesh, Tamil Nadu, Karnataka and Maharashtra are somewhat affected and added that a report from the State Level Bankers’ Committee with recommendations on further action is expected in a month’s time.