The asset quality of India’s agriculture credit could be significantly affected by the crop damage resulting from the untimely hail and rain of March 2015, according to an India Ratings and Research report.
“The NPA (non-performing assets) ratio of the agri-loan portfolio could double for some banks, though the reduction of overall return on assets may be muted at 3-5 basis points (about 10 per cent of the profitability of government banks).
“The unseasonal rains followed one of the weakest and most deficient (12 per cent) monsoons in FY15, which has heightened its impact,” the report said.
The rating agency added that the situation may worsen if monsoon in FY16 is below normal.
Agricultural loans grew 16 per cent in FY15 and have contributed 25 per cent to incremental credit growth since March 2014. With delinquencies in the agri-loan portfolio likely to rise, they will add to the already stressed assets of banks (10.6 per cent of loans on December 31, 2014).
India Ratings estimates that system-wide agricultural NPAs as a percentage of total agricultural advances will rise to 8.4 per cent by FY16 from 4.9 per cent in FY14 as the direct result of unseasonal rains.
As a result, the gross NPA ratio (on total advances) for the banking system will increase by 30 bps. This will translate into a profitability impact of two to three bps on system-wide post-tax return on assets, the report estimated.
The impact of the unseasonal rains will be felt with a lag, as NPA recognition policies for agricultural loans (one or two crop seasons past due) differ from those of corporate or retail loans (90 days past due).
India Ratings expects the profitability impact to be felt in the second half of FY16. Governmental support through subsidies may not significantly benefit banks as the amount of support (₹2,500/acre) to be provided is marginal compared with the extent of losses (₹20,000/acre).
Also, it is unlikely that the support money will be used by the affected farmers to repay bank loans. The overnment is also contemplating a loan restructuring package or interest subvention scheme for affected farmers, aimed at providing relief to farmers’ debt obligations.