A day after the country’s largest bank said it would halt loans for farm equipment for two months, tractor stocks fell.
Mahindra and Mahindra Ltd (M&M), the country’s largest tractor maker, led the decline with a 1.44% fall in its stock price to Rs652.65, while Escorts Ltd fell 0.7% to Rs106. Punjab Tractors Ltd, controlled by M&M, fell 1.29% to Rs233.50.
Tractor makers say more banks may follow State Bank of India (SBI) in freezing loans to the segment and this may lead to a dip of 75% in sales. “It’s going to kill the tractor industry,” said L.D. Mittal, president of the Tractor Manufacturers Association of India and chairman of unlisted International Tractors Ltd. “I think other banks may follow suit.”
On Monday, SBI said it intended to temporarily stop financing purchases of tractors and farm equipment citing high rates of defaults. According to tractor industry estimates, the bank has a market share of 30% in the tractor financing business.
India’s tractor market is estimated at 350,000 units a year and growth last fiscal didn’t take off as lending rates rose to a five-year high. Last year’s slump followed three years of about 25% growth.
Around 95 of every 100 tractors sold are bought on credit. The average cost of a tractor sold is around Rs3.5 lakh, almost 32 times the per capita income of an average rural Indian. A tractor buyer can get 90% financed by banks for a tenure of up to nine years. A Rs2.8 lakh loan for that period would need the buyer to make monthly payments of Rs3,980 which, in the rural pockets, is a hefty repayment schedule.
Tractors makers say the credit tightening will damp their business. “There has to be an impact,” said Rohtash Mal, executive director and chief executive (agri machinery group) of Escorts. “Effectively, it’s taken away credit facility, if for a while, during the oncoming sowing season. It’s going to cause anxiety all around.” He said his company would look at other banks for increased financing. The sowing season for the kharif crop, or the autumn harvest, typically happens during May-July.
“Outlook (for tractors) was positive because of the proactive steps taken by the government to boost agriculture sector,” said Piyush Parag, analyst with Religare Securities Ltd. “This (SBI’s decision) could have a negative impact and slow down growth.”
In the Union Budget, the government had announced a Rs60,000 crore loan waiver for small and marginal farmers in response to farmer suicides and to provide a boost to the farm sector in a move seen as populist. Now some of the effects may be seen as waning.
Mittal said the industry would approach the agriculture and finance ministries to help restore credit availability. “SBI is after all a government bank,” he said. “It’s very much against the government’s policy. On one side they are saying they are boosting the agriculture sector with Rs60,000 crore (loan waiver) and on the other, they are stopping farm mechanization.”