Credit growth in the banking system continues to languish below the 10 per cent mark, far lower than the 14 per cent seen a year back. But there is one segment that has managed to grow faster than last year — loans to the agriculture sector. These grew 16.5 per cent in February 2015, higher than the 13 per cent in the same period last year.
Given that the agriculture sector is likely to face one of the most challenging times in 2015-16, banks lending aggressively to this sector may see their bad loans rise. According to the RBI’s December 2014 Financial Stability Report, the agriculture sector has the highest gross non-performing asset (GNPA) ratio, at 5.4 per cent of loans.
Public sector banks that are already weighed down by asset quality concerns have seen loans to the farm sector gallop in the December quarter. For instance, Indian Bank, Canara Bank, Central Bank, Allahabad Bank, Andhra Bank and Punjab National Bank have exposure of 17-19 per cent (of loans) to the agriculture sector. These banks have grown their agri loan portfolio by more than 20 per cent in the December quarter. Central Bank has seen a whopping 41 per cent growth in loans to this segment.
State-owned banks have the highest level of bad loans within this segment too. India’s largest lender, SBI, has about 10 per cent exposure to the agri sector; of which 10 per cent are bad loans. For IDBI Bank, about 14 per cent of its agri loans is non-performing. For most other public sector banks, NPAs within this sector are at 5-6 per cent.
The agri sector had a good run between 2007 and 2012, backed by rising demand and higher realisations.
But given the moderation in minimum support prices (MSP), a more measured allocation to rural schemes such as MGNREGA, and plunging global commodity prices, the agricultural economy is likely to face challenging times ahead. Add to these the dodgy and erratic monsoons and we have the perfect recipe for a sharp rise in bad loans.
Why the increase? Increased lending to the agri sector is the result of regulatory norms and lacklustre credit growth elsewhere. Under the priority sector lending (PSL) requirements, banks need to lend 18 per cent of ANBC (adjusted net bank credit) to the agriculture sector. If a bank fails to adhere to the PSL norms, then it has to invest in low-yielding assets such as Nabard’s Rural Infrastructure Development Fund (RIDF). The Budget has also increased the agriculture lending target to ₹8.5-lakh crore for 2015-16, up from the ₹8-lakh crore in the previous year.
Two, the slowdown in overall credit growth has primarily been driven by a fall in investment activity by corporates. The growth in this segment has slipped to 6 per cent from 13 per cent last year. With a number of large projects stalled, corporates are in no hurry to put up new capacities. With more than 40 per cent of bank lending skewed towards the corporate sector, slowdown in this segment has bumped up the loan growth in the agri segment; home loans and vehicle loans too have grown a tad lower than last year.
The PSL norms may soon be revised. Recently, an internal working group of the RBI formed to review PSL norms recommended addition of new sectors and sub-targets.
For the agri sector, the target of 18 per cent of ANBC is proposed to be retained. A sub-target of 8 per cent has been recommended for small and marginal farmers, which is to be achieved in a phased manner. More flexibility has been recommended for banks to lend the remaining 10 per cent of the overall agriculture loan target to other farmers and for agricultural infrastructure and ancillary activities.