Bring NPA norms for farm loans on par with others: SBI Research

As much as Rs 37,000 crore of agriculture loans can be saved from being classified as non-performing assets (NPAs) if the NPA classification norms for Kisan Credit Card and crop loans are aligned with other segments of cash credit business, according to a suggestion in State Bank of India’s research report ‘Ecowrap’.

This move would not only help the farmers but would also help the banks in saving capital on account of provisions made towards these otherwise avoidable NPAs, said the report.

With states such as Madhya Pradesh, Chhattisgarh, Rajasthan and Assam announcing agriculture loan waivers in the last few days, more states may announce the same in the run-up to general elections and assembly elections. Bankers worry that expectation of loan waivers could prompt people to default on their loans.

As per the existing norms of asset classification for agriculture advances, in case of an agriculture cash credit account a farmer has to repay the entire outstanding (principal along with interest) to seek fresh loans from the banks unlike other segments of cash credit business where if the borrower has cleared interest payments and ensured submission of periodic stock statements, he/she would be eligible for enhancement/ renewal eventually continuing as a performing cash credit account

The report recommended that it would be in the benefit of all, if the farmer is given renewal/ enhancement based on deposit of applicable interest to the bank and the submission of periodic stock statements (which may be linked to the yearly crop cycles) especially if the bank is satisfied with the farmer in terms of his/her land holding/paying capacity etc.

“There are 8 States where assembly election is scheduled for next year. Considering the competitive populism policy followed across States, few other States may now decide to go for a farm debt waiver scheme.

“Under such circumstances, the states have only two option to fund the debt waiver scheme: (i) borrow from market; (ii) reduce capital expenditure,” said the report.

Given the limited fiscal space available to states in terms of market borrowings as per the Fourteenth Finance Commission recommendations, states have to cut back significantly on capital expenditure, even after incrementally borrowing from the market.

The estimate of SBI’s economic research team shows that states like Madhya Pradesh, Rajasthan, Assam, Chhattisgarh and Karnataka will have to cumulatively cut Rs 78,453 crores in capital expenditures, if incremental revenue measures are not announced.

“The problem is that since such cut in capital expenditure cannot happen in a single year, it will be spread over a period of time and hence settlement will also be delayed.

“This will only imply stuttering of credit flow as the relevant account will not be eligible for new loans. This will also imply farmers accessing informal sector for loans and hence higher indebtedness and may be another round of loan waivers,” said the report.

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