The Hindu Business Line : How much of farm loans are NPAs, any guess?

Six per cent of agricultural outstandings were non-performing assets as of March 2005, as against 3.9 per cent for non-priority sectors. For priority sector SSI units, the figure was as high as 10.3 per cent. That is the good news.

The bad news for agricultural finance is that soon after the Finance Minister asked banks to double their disbursals to agriculture within three years, the RBI obligingly issued instructions that from September 2004 an agricultural loan was to be treated as an NPA only if interest or principal on short duration crops, remained outstanding for two crop seasons.

This meant that a May 2002 loan for, say, cotton cultivation, would be treated as an NPA only if it remained unpaid in April 2004.

The RBI did not specify whether, if a loan for a short duration crop (or the scheduled, harvest-season instalment of a term loan) remained unpaid a farmer would nevertheless be eligible for a fresh crop loan for the next season.

However, a Master Circular dated June 30, 2006 does state that banks should ensure that `repayment schedules are fixed (or revised?) realistically, on the basis of cash flows/fluidity with the borrowers.'

The point is an important one. Banks not only do not finance defaulters, but also prevent them from taking a loan from any other financial institution.

Were they to follow this rule, defaulting farmers would be driven to seek `other sources' of capital, the non-repayment of which might, in the short term, attract more dire consequences than the non-repayment of a bank loan.'

In the event of default due to natural calamities, banks could, according to the RBI circular, `decide on their own' to sanction fresh short term loans for agriculture, while converting earlier loans into a term loan or re-scheduling its repayment. In which case, of course, the farmer, now no longer a defaulter, would automatically become eligible for a fresh loan, with a consequent increase in the debt service ratio in subsequent years.

Given the two year repayment period allowed for a three to four month crop, under normal circumstances, the interest that would accumulate during the period, the fact that two years of working capital would have to be repaid from a single year's output, and the fact that 20 to 30 per cent of net sown area faces a minor or major natural calamity every year, according to the discretion of the state government, it is likely that agricultural NPAs exceed the figure shown in the accompanying table by a large margin. How large is anyone's guess.

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