Banks should not insist on credit score for loan disbursement to farmers, warns Fadnavis

The CIBIL score is a credit worthiness mechanism of the Credit Information Bureau (India) Limited, which is used by financial institutions to assess loan applications complete with individuals/ groups ability to repay the loans.

In June 2024, too, Fadnavis had warned nationalised banks of lodging FIRs against them if they make CIBIL score mandatory for the issuance of crop loans to farmers for kharif season. The warning came in the backdrop of instances of larger numbers of farmers being denied crop loans, despite being eligible, as national banks were demanding CIBIL scores.

Fadnavis stressed that the Reserve Bank of India (RBI) has already provided clarity on the issue and that this directive must be taken seriously. “The RBI has also given clear instructions on the matter. We have repeatedly warned the financial institutions against making CIBIL score mandatory for issuing loans to farmers.. If any bank is found violating the norms it will invite strong action,” he warned.

Stating that agriculture should not be seen only as a supportive or rehabilitative sector, the CM said banks must enhance credit to the sector. With good monsoon predicted, the area of kharif sowing will be enhanced and farmers’ rush for early loans should be addressed efficiently, he said.

Warning that complacency by some branches in responding to rural issues will not be tolerated, the CM said, “We have made it amply clear that banks should not insist CIBIL scores while processing farmers’ loan applications. It is not mandatory and if any farmer meets the overall criteria, banks have no right to reject the loan disbursement.”

The chief minister reiterated that Maharashtra has set the target of a one-trillion dollar economy and the role of banks is significant while it has already achieved half-a-trillion-dollar goal.

Farm loan criteria

As per process described by public sector banks, farmers should have clear ownership of agricultural land or possess leasehold rights for a minimum period specified by the lending institution. The land is often used as collateral for the loan. In case of unavailability of land ownership, it is preferred to lend in groups by forming JLGs and SHGs.

Most institutions require the farmer to be at least 18 years old to apply for an agriculture loan. Banks typically consider the credit history of the applicant to assess their credit worthiness. A good credit score enhances the chances of loan approval.

Banks may require farmers to have a minimum number of years of experience in agriculture to qualify for loans. Banks also check on the income generated from the proposed activity and the surplus income available in hand of borrower for checking the repayment anility.

For loans up to a certain limit – Rs 2 lakh — banks do not insist for any collateral security requirement. However, for loans higher than this amount, it is preferred to mortgage / create charge / lien the agricultural land on which the activity is proposed.

Default aftermath

After a loan default, banks make a multifaceted approach, including loan restructuring, one-time settlement (OTS) compromise settlements, asset reconstruction, lok adalats and legal avenues like Debt Recovery Tribunals (DRTs) for loan recovery from farmers. Bank of Maharashtra, for instance, emphasises timely repayments and financial planning for farmers to avoid penalties and maintain a good credit score.

Banks will attach the collateral, which will be in force till recovery happens. In most cases, banks offer OTS or approach the DRTs for a suitable settlement. In normal cases, a loan is treated as non-performing asset (NPA), if the principal or interest or both remain unpaid for more than 90 days.

A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season.