Worrying credit pattern

The current season seems to have thrown up a harvest of ironies that would be entertaining were they not fraught with grave implications. The Prime Minister recently appeared defensive when he spoke of the likelihood of inflation dropping by March 2012. For a nation reeling under persistently high food prices that may seem like an infinitely long and painful wait for relief, especially since it has seen the outcome of last year's confident assertions of prices falling by December 2010. Food stocks appear to be overwhelming our warehouses, yet prices remain high. Clearly, the bountiful harvests are the outcome of good rains and bouncy farm output. Yet the record of credit to this sector does not appear to have moved in tandem with its promise.

Data released by RBI show that the farm sector has trailed the non-food sector in credit growth. That would not appear unusual since industry and services are the driving force of economic growth and banks would want to seek greener pastures. For all the talk of priority sector lending, the farm sector has been a poor country cousin. But the data to May 2011 show something more worrying — a decline in farm sector loans over a 12-month period. Last May recorded farm credit expansion of 21 per cent; this May it has almost halved to around 12 per cent. What is surprising is the loans for personal consumption have increased over the same period by 17.7 per cent, as against just 5.6 per cent in the corresponding 12-month period to May 2010.

The decline in productive loans, according to bank officials, is on account of the failure of those farmers eligible for the debt relief scheme to pay the stipulated amount — a fact that made them ineligible for further bank loans. Farmers who were not eligible for the waiver or the debt relief scheme, and who could not repay existing bank loans, were also not eligible for further credit. Given the extent of decline in farm credit, the number of farmers unable to repay any of their liabilities was not insignificant. Yet the extent of personal loans to farmers has increased sizeably, thereby increasing the exposure of banks to future defaults; it is hardly surprising that the non-performing assets (NPA) from the farm sector have recorded a rise in the fourth quarter of the last fiscal. That consumption loans are rising and productive loans are declining should be worrying portents for the farm sector. .

COMMENT NOW