Banks have witnessed a Rs 11,400-crore spike in bad loans of agriculture in fiscal 2017 to cross Rs 60,000 crore, with demonetisation and farm loan waivers adding to their woes. Data with the Reserve Bank of India, however, shows that farmers are still more disciplined borrowers with just six per cent of their total outstanding in the default list as against 20.83 per cent defaults by the non-priority sector, mainly corporates and infrastructure borrowers.
According to RBI data, agriculture NPAs rose over 23 per cent from Rs 48,800 crore in 2016 to Rs 60,200 crore in 2017. Bad loans in the agriculture sector have jumped 142.74 per cent from Rs 24,800 crore in fiscal 2012, indicating distress in the segment in the last five years. Significantly, while the four years — from 2012 to 2016 — showed defaults of Rs 24,000 crore, the maximum default took place in 2017.
Farm sector bad loans constitute 8.3 per cent of the total banking sector NPAs of Rs 728,500 crore as of March 2017. Farm credit, which forms part of priority sector lending, includes short-term crop loans and medium-term or long-term credit to farmers. Short-term crop loans are basically borrowings by farmers for six months or a maximum one year to help them raise money before and after harvest. So, banks disburse loans for a range of activities such as buying fertilisers, harvesting, spraying, sorting, grading and transportation of produce to the nearest market.
As much as 35.4 per cent of the priority sector NPAs of Rs 170,000 crore are now accounted by farm sector bad loans. Credit to agriculture and allied activities and personal loans saw deceleration in growth to 12.4 per cent (Rs 992,400 crore) in 2017 from 15.13 per cent (Rs 882,900 crore) the previous year, says the RBI’s Trends and Progress in Banking report.
The non-priority sector, largely the industry and infrastructure sectors, accounts for Rs 558,500 crore NPAs or 76.7 per cent of the system NPAs. However, even after loan waiver issues, farmers are still better when compared to corporates in repayment of loans. Of the total non-priority sector credit of Rs 26,80,000 crore, borrowers have defaulted 20.83 per cent of the credit. On the other hand, farmers have defaulted only 6 per cent of their total credit of Rs 992,400 crore.
“A major factor that could have contributed and still adding to the bad loans in the agri segment is farm loan waivers. Expectations of loan waiver prompt farmers to default on loans. We expect more defaults in the fiscal ending March 2018,” said an official of a nationalised bank. Many states including Maharashtra, Punjab and Tamil Nadu have already announced farm loan waivers.
Reserve Bank Governor Urjit Patel had cautioned against increasing farm loan waivers by state governments, stating that the impact of any loan waiver is on the balance sheet of lending institutions, finances of states and interest rates. “Beginning with Tamil Nadu in 2016, domino effects have spread in 2017 to several states and the total cost of loan waivers announced amounts to around Rs 130,000 crore (0.8 per cent of GDP),” Patel had said.
“There are several conceptual issues… I think it undermines an honest credit culture. It impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard,” Patel had said.
However, a former bank CEO questioned the RBI caution on farm loan waivers saying “corporates defaulted on repayments, destroyed credit discipline and culture. Why should farmers be blamed?”
Incidentally, bad loans of small and micro units jumped from Rs 70,800 crore in 2016 to Rs 82,500 crore during the year ended March 2017. Bad loans of small units were Rs 19,500 crore in 2012, RBI data shows.