Agriculture lending will be a ‘challenge' for foreign banks

Notwithstanding the prospect of being accorded ‘national treatment' when it comes to opening branches, agriculture lending could prove a daunting task for foreign banks should the central bank ask them to have a presence in the country through the wholly-owned subsidiary route.

For foreign banks, the freedom to open branches (that is, national treatment on a par with domestic banks) under the subsidiary model is expected to come with the condition that they have to step up priority sector lending from 32 per cent to 40 per cent.

No previous exposure

Within the priority sector lending, meeting the target for agriculture advances is seen as a big challenge by these banks as they have not done agriculture lending before, say foreign bankers.

“The major concern is that there will be an increase in the priority sector lending target from 32 per cent to 40 per cent, within which 10 per cent will have to be agriculture. Well, we can build that up over five years. But for all foreign banks that will be a challenge because we haven't done agriculture lending before,” said Mr Stuart Davis, CEO-India, HSBC.

So, how banks get the expertise on agriculture lending is as important as how they get lending opportunities, he added.

For HSBC, at 10 per cent of its current loans (according to the HSBC Group's Half Yearly Results Jan-Jun 2011), this could mean $600 million of agriculture lending. And as it is also looking to grow its loan assets, that number will actually go up. So, actually finding that opportunity to lend to the agriculture is going to be a challenge, explained Mr Davis.

“Is it (agriculture lending) high-risk? Probably not. But all that depends on the ability to collect. And that will be a challenge for us as we don't have the distribution network. So, it's not just about lending to farmers; it's also about collecting from them. This is something that we will have to factor into our planning.” said the HSBC India chief.

The challenge before foreign banks will be how to lend cost effectively to farmers and maintain appropriate levels of asset quality.

Currently, within the priority sector advances category, the sub-targets for domestic banks are: total agricultural advances, 18 per cent of net bank credit (NBC); and advances to weaker sections, 10 per cent of NBC.

In the case of foreign banks, the sub-targets for priority sector lending are: micro and small enterprise advances, 10 per cent of NBC; and export credit, 12 per cent of NBC).

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