Farm loan defaults rise as banks brace for big cancellations



Delinquency in agricultural loans is already on the rise, even as banks brace for major write-offs following the round of farm loan exemptions recently announced by several state governments. In the six months leading up to September 30, Indian banks saw doubtful debts 8.4% of their agricultural portfolio, up from 7% in March 2018, according to data from the Reserve Bank of India (RBI). The bad debt ratio has increased every year since 2011-12, as shown in the graph opposite.

This corresponds to growth distress from the farm, and as this Mint column noted on May 21, farm wage growth is at its lowest in three years. Add to that the collapse in food prices over the past year, and the plight of farm households is palpable. The stagnation of wages and the collapse of achievements linked to the sale of products are enough to disrupt farmers’ incomes and loan repayment schedules. Despite the rise in minimum support prices, anecdotal evidence suggests that farmers’ incomes are declining.

Therefore, the rise in delinquency rates should not be surprising. But what is to be noticed up close is that these rates have not risen sharply just over the past year, when the distress in agriculture appears to have increased. The rising bad debt trend has been around for over five years now. Another factor is that this increase comes even though the share of agricultural loans in total loans disbursed by banks has remained stagnant for many years. On an incremental basis, banks disbursed only 6.37% of the total credit they extended to agriculture in FY18, the lowest in a decade.

This shows that lenders are not only reluctant to provide agricultural loans, but are also unable to bring delinquencies under control. Much of this reluctance to lend and inability to collect could be attributed to concerns arising from potential waivers by governments. Analysts and policymakers have warned of the negative effects of farm loan waivers. The central bank has also warned at regular intervals that waivers are tainting the credit culture. After all, if farmers expect a waiver to be announced every few years, why would they bother to repay their loans?

Provisioning against bad debts is nothing new, especially in the wake of the big toxic assets in business loans. But loan waivers could mean further write-offs, which not only shrinks the loan portfolio, but also closes all potential avenues for future interest collection.

As national elections approach, eight states have already announced waivers of agricultural loans of various amounts, which is a huge ?? 1,900 billion, according to a report from the Mint on December 21. Such waivers will only make bankers more reluctant to lend to farmers than before.

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