The Hindu Business Line : Private banks slip on farm loan target, face RIDF option

FACED with shortfalls in the mandated agriculture lending targets, some private sector banks are forced to park their funds in the Rural Infrastructure Development Fund (RIDF).

Banking sources said that some of the advances classified as farm lending by these private sector banks were disallowed by the Reserve Bank of India. Under the current priority sector norms, at least 18 per cent of net bank credit has to be for agriculture.

The sources said, faced with the shortfall, the private banks had initially approached the public sector banks to take out some of the excess agriculture portfolios at a premium to face value. But few of the public sector banks were prepared to offer the farm advance portfolios for securitisation.

One major reason for the public sector banks' reluctance to securitise farm loans was that these were lucrative credit portfolios. For most of them, farm loans earn interest income of between 9.5 and 10.5 per cent. Besides, these were portfolios with low delinquency history. If such advances were securitised, bankers said it would result in their foregoing future interest income streams, they added.

Moreover, such realisation would have to be parked in either high-risk portfolios or in Government securities. Few bankers were interested in escalating asset risks. This was partly because many already have a large exposure in retail lending. Besides, PSU banks have only recently managed to bring down their net non-performing asset ratios below 2 per cent by large provisioning.

As a result, most PSU banks preferred to lend to low-risk retail credit. This was particularly because such a lending strategy was likely to benefit them when the Basel - II comes into effect. In fact, most PSU banks preferred either farm or low-risk retail credit as an alternative to Government securities in view of the already high investment-deposit ratio of about 44 per cent.

For the private sector banks, parking the funds in the RIDF was a big blow. Funds parked in RIDF are locked for at least seven years. Unlike direct agriculture lending, parking funds in the RIDF generated an interest income of barely six per cent. Where the shortfalls in agri-lending was more than 9 per cent below net bank credit, the rate of interest for parking in RIDF would be 3 per cent lower than the Bank Rate.

For private sector banks with low slippages to agri-lending target - two per cent below net bank credit — RIDF interest payouts was a spread of barely 25 basis points over their weighted average cost of working funds. Bankers said that for a few private sector banks that have no rural networks, the shortfalls were large. Accordingly, their spread was likely to be lower than the weighted average cost of working funds.

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