Not all agri-loans are for agriculture, many are diverted

BL Research Bureau

The Centre has been raising the agriculture lending target year after year. But there are still several weak links to the sizeable flow of credit to agriculture. Diversion of agriculture loans for non-agriculture purposes is one such key issue that needs immediate attention. According to the RBI's recent report of the internal working group on agriculture credit, in some of the states, said that agri-credit is far higher than their agri-GDP, indicating the possibility of diversion of credit for non-agricultural purposes.

For instance, in states such as Tamil Nadu and Kerala, agri-credit outstanding is a high 170-180 per cent of the underlying agri-GDP. In Karnataka and Telangana too, the ratio of agri-credit to agri-GDP is over 100 per cent. On the other hand, north eastern states, West Bengal, Jharkhand, Madhya Pradesh, Odisha and others., have very low ratio, implying low credit demand and access in these states.

Another key metric that raises concerns over the diversion of agriculture loans, is the ratio of crop loan disbursed to input requirements. According to RBI data, some of the states are getting significantly high credit against their input cost requirement such as Andhra Pradesh (7.5 times), Kerala (6), Goa (5), Telangana, Tamil Nadu and Uttarakhand (4) and Punjab (3).

In some other states such as Jharkhand, NE states, West Bengal, Chhattisgarh, Bihar, Odisha, Maharashtra, Uttar Pradesh and Rajasthan data suggests that credit is not sufficient to meet their input requirements.

High indebtedness and NPAs

Diversion of agriculture loans in some of the states is a huge cause for concern, as it accentuates the problem of debt overhang. RBI data suggests that there is a high risk of indebtedness in some of the states. The ratio of crop loans to crop GVO (gross value output) shows that while the all-India average was 0.32, there were 11 states with higher loan/output ratio– Kerala being the highest at 0.90, and Tamil Nadu at about 0.65. The higher level of credit intensity in some of the states is a big cause for worry, in light of the rising NPAs within the sector.

Bankers say that most of the farmers have become overleveraged, over a period of time due to restructuring and doling out additional funding.

Over the years, GNPAs in agriculture loans have been rising sharply. From about 2.5 per cent some five years back, GNPAs have shot up to 8.44 per cent as on March 31, 2019 in the agriculture sector according to the RBI report.

The deterioration in credit culture has come on the back of loan waivers announced by state governments, which has led to many borrowers withholding repayment. In 2016-17 and 2017-18, NPA level increased sharply, indicating strategic default (in anticipation of a loan waiver) arising from the state-level loan waiver announcements. The incidence of NPAs has been higher in states such as Maharashtra, Karnataka, Uttar Pradesh, Punjab and Bihar.