The Hindu Business Line : Banks expanding farm loan portfolios

Good harvest
Net interest margins are with the government subvention.
Recoveries are about 95 per cent except when natural disasters strike.
Risk cover against natural calamities as part of social sector obligations of insurers.

Bangalore , Aug. 9

With assured minimum returns of 9 per cent, public sector banks (PSBs) are actively expanding their farm loan portfolios.

Bankers say that almost all PSBs are well ahead of their priority sector target of 18 per cent for farm advances. In fact, most of the PSBs were closer to 25 per cent in the farm advance portfolios. Outstanding farm advances so far during the current year are estimated at Rs 90,000 crore.

Bankers said the interest in farm advances was largely due to the fact that the net interest margins were protected. Under current government guidelines, banks are expected to make farm advances at 7 per cent. In addition, based on last year's average, banks receive a subvention of two per cent from the government, taking the gross yield to 9 per cent.

At these yields, the net interest margins on farm advances are well over 3.5 per cent. Bankers said this made farm loans more attractive than some of the corporate loans.

In addition, they say that following the spate of farmer suicides, some of the PSBs are also working on new loan products to refinance farmers' debts to unorganised moneylenders.

Syndicate Bank has already kicked off one such product. But this advance is priced 2 per cent higher than the current benchmark prime-lending rate.

Low delinquency rates

What makes farm advances even more attractive are the historically low delinquency rates. Farm loans, bankers said, have seldom turned into non-performing loans, except in times of drought or floods.

Farm loan recoveries are about 95 per cent, they said, much better than retail or corporate advances.

In addition, farm loans in recent times have been provided risk cover against natural calamities by the public and private sector general insurance companies as part of their social sector obligations.

For the banks, insurance cover meant that the loans were double collateralised. Besides, some of the insurance risk covers were still being finetuned. In fact, some banks have sought an increase in the threshold for risk coverage by the state governments and the Agricultural Insurance Corporation of India.

Interestingly, PSBs are more favourably positioned to ride the farm advances boom, compared to the private sector. Moreover, PSBs are loathe to sell their farm advances to private sector counterparts as this would entail a loss on interest incomes. The new private-sector banks, on the other hand, are at a disadvantage owing to their limited rural branch network. Consequently, some private sector banks, the bankers said, are attempting to tie up with the older generation banks for taking out farm advances.

This would also help them meet their priority sector targets along with the high spreads.

Banks defaulting on the priority sector targets are expected to park an equivalent amount with the Nabard, where the returns are barely 7 per cent, resulting in a spread less than 1 per cent over the weighted average cost of working funds.

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