Mor panel proposals could ease banks’ agri loan burden
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Mumbai: Indian banks, burdened with a burgeoning portfolio of farm loans, may get some relief if the Reserve Bank of India (RBI) accepts the recommendations of an expert panel that has proposed major changes to the so-called priority sector lending norms applicable to commercial banks.
Priority sector refers to mandated bank lending to farmers, small companies and economically weaker sections of the society. The rules mandate that banks lend 40% of their loans to such groups. Of this, loans to agriculture and allied activities account for the biggest chunk.
Last week, an expert panel, headed by RBI’s central board member and former ICICI Bank Ltd deputy managing director, Nachiket Mor, proposed a slew of reforms in priority sector lending norms, as part of a broader road map towards greater financial inclusion in Asia’s third largest economy.
The recommendations include doing away with the interest rate subvention schemes and debt waiver programmes offered by the government on farm loans from time to time. Any government subventions on bad loans should be directly transferred to the beneficiaries and not through bank loans, the report said, adding banks must be required to freely price farm loans based on their risk models.
The panel also recommended that banks be given incentives to lend to difficult segments by assigning a higher weightage to such lending while computing the adjusted priority sector lending target of 50%, which will be done by assigning weights to sectors and districts based on the difficulty in lending.
Bankers said the measures, if implemented, could make it more lucrative for banks to lend to the agriculture segment.
“Higher weightages in specific segments will encourage banks,” said Arun Kaul, chairman and managing director of Kolkata-based Uco Bank. “If they (RBI) are rewarding you for going to rural centres, it will incentivize banks to go there and do it (priority sector lending).”
Banks have to mandatorily lend 18% of their total credit to the agriculture sector, of which 13.5% should be lent directly to farmers under existing norms. A significant part of such lending happens through the Kisan credit cards given to farmers. Experts say this often takes the form of evergreening of unviable loans since banks keep increasing the credit limit for farmers every year. Evergreening refers to the practice of giving new loans to a borrower to help him meet interest payments on an existing loan.
This large scale lending to agriculture has resulted in an expansion in the farm loan portfolios of state-run banks in the recent years, even though the contribution of agriculture in the country’s GDP has reduced from 50% at the time of independence to about 17% now.
As on 30 September, Indian banks had lent Rs.6.2 trillion to agriculture and allied activities compared with Rs.5.59 trillion a year earlier.
“The relevance of agriculture in the priority sector is itself under question, when agriculture as a percentage of GDP itself has come down drastically,” said Abizer Diwanji, partner and head of financial services, EY India.
More worrying is the fact that farm loans constitute a significant chunk of bad loans in the books of state-run banks. For instance, such loans constituted about 11.1% of the total gross non-performing assets (NPAs) of State Bank of India, the country’s largest lender, at the end of September compared with 9.39% in March.
Part of this has been blamed on programmes such as the Rs.60,000 crore farm loan waiver announced by the United Progressive Alliance government in 2008, which bankers said has distorted the credit culture in rural areas.
“The debt waiver has severely affected the credit culture of farmers. Even good borrowers are hesitating to pay back,” said the head of rural business at a large state-run bank requesting anonymity because of the sensitivity of the issue. The implementation of the Mor panel report could be challenging, the official said.
“Even now, there is quite a lot of uncertainty in what constitutes the priority sector lending and what does not. It will take a lot of time for the market to understand how the sectoral focus (on priority sector lending) will work. In fact, this adds to the uncertainty,” said the official.
Any bank that fails to meet the priority sector lending norms is required to keep money with the National Bank for Agriculture and Rural Development (Nabard) for rural infrastructure development, according to RBI rules. Earnings on this are much lower than what a bank will get from giving loans.
Rising bad loans affect the profitability of banks as they need to set aside more money in the form of provisions to cover such loans.
The Mor panel has also proposed to withdraw the permission to price farm loans below the base rate, or the minimum lending rate of banks. Currently, banks give farm loans at an interest rate of 7%, while the government provides a 2% subvention to banks. This rate is lower than the base rates, or minimum lending rates of banks, which is about 10% for most. Any subsidy to be provided to the farmers, can be done through the direct benefit transfer scheme, suggests the report.
“The recommendations are overall positive for banks as far as priority sector lending is concerned,” said Jayanta Sinha, who used to head the rural business of SBI. “This gives a larger framework to roll out the financial inclusion plan for the country.”
The RBI has given time till 24 January for the public to submit comments on the report.