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The asset quality of India’s agricultural credit could be significantly impacted by crop damage due to untimely hail and rain in March 2015, according to a report by India Ratings and Research.
“The NPL ratio of the agri-loan portfolio could double for some banks, though the reduction of overall return on asset may be muted at between 4-6 basis points (about 10 per cent of the profitability of Government banks). The unseasonal rains followed one of the weakest and most deficient (12 per cent) monsoons that the country had experienced in FY15 which has heightened its impact, the ratings agency said in a statement.
India Ratings expects the profitability impact to be felt in 2HFY16. The impact of the unseasonal rains will be felt with a lag, as NPA recognition policies for agricultural loans (one or two crop seasons past due) differ from those of corporate or retail loans (90 days past due).
Agricultural loans grew 16 per cent in FY15 and have contributed 25 per cent to incremental credit growth since March 2014.
“With delinquencies in the agri-loan portfolio likely to rise, they will add to the already stressed assets of banks (10.6 per cent of loans on December 31, 2014). States highly impacted by these excess rains make up a significant portion (37 per cent) of the overall agricultural credit extended by banks in FY14,” the report said.
India Ratings estimates that system-wide agricultural NPAs as a percentage of total agricultural advances will rise to 16.9 per cent by FY16 from 13 per cent in FY14 as a direct result of the unseasonal rains. As a result, the gross NPL ratio (on total advances) for the banking system will increase by 40bp. This will translate into a profitability impact of 2bp-3bp on system-wide post tax return on assets, according to Ind-Ra’s estimates.
“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 pre acre). Also, it is unlikely that the support money will be used by impacted farmers to repay bank loans,” the report added.
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