The country's largest bank, State Bank of India (SBI), has seen agriculture NPAs almost trebling over the last three years. The bank's agriculture portfolio, which is 10 per cent of total advances of Rs 20 lakh crore, has seen gross NPAs pole vaulting from 5 per cent in 2016-17 to almost 14 per cent in September 2019. Bank of India (BOI) tops the agriculture NPA list with 17 per cent of advances to the sector turning bad. IDBI Bank, where LIC has taken the majority stake, follows with 15 per cent gross NPAs in agriculture. The story is similar with other state-owned banks.
What explains the high level of bad loan in agriculture? A Reserve Bank of India (RBI) internal working group report to review agricultural credit probably has some clues to the sudden spurt in agriculture NPAs.
Call it a coincidence or actual reasons for high agriculture NPAs, the RBI data corroborates that NPA level has increased for all states that have announced farm loan waiver schemes in 2017-18 and 2018-19. Almost 10 states from Uttar Pradesh, Punjab to Rajasthan and Madhya Pradesh announced loan waivers. These waivers were promised just before state elections. "The waiver could be indicative of the presence of moral hazard, with borrowers defaulting strategically in anticipation of loan waiver," reasons RBI.
"This adversely affected the credit history of borrowers and future prospects of availing fresh loan for agricultural purposes," says the report while adding, "this lead to further deterioration of credit culture as evident from the high level of gross NPAs of 8.44 per cent as on March 2019 in the sector".
Loan waivers started in 1990 with the first major nationwide farm loan waiver costing the exchequer around Rs 10,000 crore. This was followed by another nationwide loan waiver of Rs 52,500 crore in 2008. The loan waivers were not rampant in the past.
Post 2014, states stepped in to offer loan waivers to farmers. About a dozen states from Andhra Pradesh, Maharashtra, Punjab, Uttar Pradesh, Madhya Pradesh came out with farm loan waivers aggregating Rs 2 lakh crore. That is equal to the size of the budget of Telengana. In fact, this amount is much higher than the two nationwide loan waivers announced earlier.
The RBI report also points out that states like Kerala, Tamil Nadu, Telengana and Karnataka are getting agriculture credit higher than their agriculture GDP indicating the possibility of diversion of credit for non agricultural purposes.
The report highlights while the risk to farmers income materialise from time to time causing distress to the agrarian community, loan waivers, which often happen around elections, are not the panacea to address underlying risks. It says loan waivers destroys the credit culture which may harm farmers interest in the medium to long term and also squeeze the fiscal space of governments to increase productive investments in agriculture infrastructure.
What should the government, RBI and banks do to reduce rising NPAs in agriculture?
Currently, crop loan accounts for over 90 per cent of agricultural credit whereas the rest goes to allied sector. Banks should explore lending to allied sector to reduce NPAs. "Government should also separate targets for working capital and term loans towards allied sector," suggests the report. The report recommends replacing interest subvention with direct benefit transfer (DBT) to targeted beneficiaries. Another solution is giving agriculture loans against gold as collateral, which would protect banks. The report points out that there is no guarantee scheme available to banks to cover default risk of borrowers.