Not much to bank on

BL Research Bureau

The change

Given that the Centre has done away with the suspense on recapitalisation, by making interim announcements through the year, there is not much that the sector was looking forward to, from the Budget announcement. Of course tax concessions on bad loan provisioning and digital transactions are evergreen wishlists that did not find any mention in the Budget. As expected of course, the focus of the Budget was on the farm sector, and the benefit of the interest subvention scheme has been extended to farmers pursuing the activities of animal husbandry and fisheries. Also, farmers can now avail the interest subvention benefit for the entire period of reschedulement of loans, where they have been impacted by natural calamities. Increasing the threshold limit for tax deduction at source (TDS) on bank deposits and post office deposits from Rs 10,000 to Rs 40,000 a year, should augur well for banks, as it would prevent flow of deposits outside the system into other financial instruments.

Background

Much of the credit flow into agriculture in the past has been propelled by policy thrust, particularly through priority sector lending (PSL) stipulations. The Centre has also extended the interest subvention scheme that has it has been running for a decade under which banks extend short term crop loans of up to Rs 3 lakh to farmers at a concessional rate of 7 per cent. Timely repayment is incentivised by an additional subvention of 3 per cent. The scheme also envisages other benefits including interest at concessional rate of 7 per cent for storage in ware houses accredited by Warehousing Development Regulatory Authority (WDRA) for upto 6 months post-harvest for avoiding distress sale.

In the event of natural calamities, loans are restructured. The interest subvention for such loans is available for a period of one year currently. This the Budget proposes to extend to the entire rescheduled period, offering additional respite to farmers.

The Verdict

Theoretically, the Budget measures offer notable relief to farmers, as it reduces the effective cost for borrowers. For banks too, extending interest subvention is better than farm loan waivers, as it incentivizes prompt payment.

But while outstanding bank advances to agriculture and allied activities have risen from about 13 per cent of agri GDP in 2000-01 to over 50 per cent in 2017-18, there are several weak links to the flow of credit to agriculture.

For one, the government’s interest subvention for short-term crop loans, hasn’t helped in prompt repayment. On the contrary, NPAs in agriculture loans have been rising sharply over the years. From about 2.5 per cent some five years back, is now a little over 8 per cent.

Bankers say that most of the farmers have become overleveraged, over a period of time due to restructuring and doling out additional funding. Notwithstanding this, the Centre has been doling out subsidy for such loans. In fact, the subsidy payout under the interest subvention scheme has gone up over 9 times since 2009-10. For FY20, the allocation has been set at Rs 18000 crore.

The other key issue is that despite the sharp growth in agri loans, only small portion of small and marginal farmers have access to institutional credit. According data put out by RBI (for 2011-12) ,only 32 per cent of banks’ direct finance goes to farmers with land holdings upto 2.5 acres.

None of these issues have been addressed by the Budget.

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