Kisan Credit Cards: Bad loan bubble waiting to burst?

Subsidized loans given to farmers through KCCs could very well be the next big source of NPAs for banks
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First Published: Wed, Apr 03 2013. 11 44 PM IST
Bankers say farmers are using a big chunk of loans for consumption and not productive purposes as money comes cheap under the Kisan Credit Card scheme. Photo: Ramesh Pathania/Mint
Bankers say farmers are using a big chunk of loans for consumption and not productive purposes as money comes cheap under the Kisan Credit Card scheme. Photo: Ramesh Pathania/Mint
Updated: Thu, Apr 04 2013. 05 52 PM IST
Mumbai: A surge in exposure to farm debt through Kisan Credit Cards (KCCs) could emerge as a risk for India’s state-run banks, according to experts.
Subsidized loans are given to farmers through KCCs by state-owned banks. Until March 2012, the outstanding amount on such loans was Rs.1.6 trillion through 20.3 million cards, as per the latest Reserve Bank of India (RBI) data. This may have risen to around Rs.2 trillion, bankers said.
Bad loans may be piling up at banks, but they don’t reflect on the books as the credit limit on such cards keeps increasing. Even if a borrower fails to pay up and the banks add the unrealized interest to the exposure because of the rising credit limits—typically 10% every year—the so-called capitalization of interest does not affect the status of the loan account.
Bankers also said farmers are using a big chunk of such loans for consumption and not productive purposes as money comes cheap under the scheme. Commercial banks offer farm loans at 7% to borrowers and they get a 2% interest rate subvention from the government on such loans up to Rs.3 lakh.
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State Bank of India (SBI) has the largest exposure to KCC loans—about Rs.44,000 crore— and 5% of this has turned bad, the bank said; Central Bank of India’s exposure is Rs.8,428.05 crore and that of Bank of Maharashtra is Rs.2,045 crore.
According to bankers, monitoring of the end-use and recovery is difficult as there is no collateral requirement for such loans till a specific limit. Bankers are not aggressive on recovery from farmers as this is politically sensitive.
“The whole problem is lack of supervision at the branch level. Money intended for the poor farmer is being misused in many cases. Lending to the sector is growing, but not the sector,” said N.K. Thingalaya, former chairman and managing director of Syndicate Bank, and an expert on rural banking.
The credit culture in rural India deteriorated sharply after the government announced a Rs.70,000 crore debt waiver for farmers in the February 2008 budget. “After the waiver, repayments from farmers have slowed. Banks are under immense pressure from government to increase lending to the sector,” said a banker who declined to be named.
According to RBI data, banks had Rs.33,200 crore overdue in the direct agrifinance portfolio till 2011 June. The latest figures are not available.
The chairman of a large state-run bank, however, dismissed concerns on KCC exposure. “We increase the credit limit only when the farmer repays fully. There are no major concerns,” he said.
The farm loan waiver was one of the United Progressive Alliance government’s key programmes in its first tenure and at least partly responsible for its return to power in 2009.

Origin of KCC

Launched in 1998-99 by then finance minister Yashwant Sinha, KCC is meant to help farmers take decisions on how to use the cash for cultivation rather than banks funding suppliers, which was the case until then.
Issued to farmers based on their land holdings, KCC operates like a normal credit card. Farmers can use them for the purchase of seeds, fertilizers and pesticides, besides production needs, but in many cases, this doesn’t happen
and farmers use them for raising money to take care of family weddings and medical needs.
A loan granted for short duration crops is treated as an NPA (non-performing asset) if the instalment of principal or interest remains overdue for two crop seasons. Loans granted for long-duration crops turn NPAs if the instalment of principal or interest remains overdue for one crop season. It is not unusual at some banks that a new loan cycle begins even before the existing loans are repaid fully, bankers said.
There is evidence of rampant evergreening of loans drawn through KCCs in terms of loan amount and number of cards issued, analysts said, going by the growth of such exposure since 2010. Evergreening refers to the practice of giving fresh loans to a borrower to help him meet interest payments.
“Outstanding KCC loans have grown at around 33% in past two years while the number of credit cards has grown at around 13%,” said V. Sri Karthik, an analyst at Espirito Santo Securities India Pvt. Ltd. This shows farmers are taking fresh loans to repay old loans.
Gross NPAs at Indian banks swelled to Rs.1.79 trillion in December, up 43.1% from Rs.1.25 trillion in the year-ago period.
Evergreening of loans has been increasingly taking place in other segments as well. According to a 25 March Emkay Global Financial Services Ltd report, the effective loan growth for the week ended 8 March was 11-12% against the reported 15.3%.
“Despite a sharp slowdown in industrial growth, the credit growth has refused to taper off... In our view, resilience in credit growth could be resulting from evergreening of the loans if the circumstantial evidence is anything to go by,” Emkay Global analysts said in the report.
The share of agriculture, which once generated maximum jobs, has been shrinking as a percentage of national income in Asia’s third largest economy—from 35.75% in 1981 to 16.75% in 2012.
Indian banks’ exposure to agriculture and allied activities rose to Rs.5.6 trillion in January 2013 from Rs.4.3 trillion in January 2011. For fiscal year 2014, the government has proposed to increase the farm credit target to Rs.7 trillion.
Agriculture is one of the largest sources of bad loans for most banks. It is contributing 9.72% to the gross NPAs of SBI and 7% of Central Bank of India. The nation’s largest lender SBI has the largest gross NPAs —Rs.53,457.79 crore, or 5.3% of loans, followed by Punjab National Bank (Rs.13,997.82 crore, or 4.61% of loans), Central Bank of India (Rs.8,938.47 crore, or 5.64% of loans) and UCO Bank (Rs.6,711.29 crore, or 5.53% of loans).
A bad monsoon could mean a dramatic turn for the worse as the June-September rainy season constitutes India’s main source of irrigation.
“It’s a politically dynamic and sensitive situation,” said Ashvin Parekh, partner (banking and financial services) at Ernst and Young India. “In some cases, evergreening happens. Real issue here is that the actual capacity of the borrower to repay and the intention to repay are not known to the bank. We are sitting on a larger issue, which can only get aggravated if drought kind of situations happen.”
A senior banker, who headed the rural business of a large bank until recently, blamed the interest rate subsidies provided by the government for rampant misuse of farm loans drawn through KCCs.
“The interest subvention has distorted everything in this segment,” said the banker, who declined to be named. “The true purpose of this instrument was to make cheap credit available to the poor farmer. But many farmers draw such loans deliberately for consumption purposes. Banks, too, need to lend to this class of borrowers to meet the priority lending target.”
Banks need to make 40% of their loans to the so-called priority sector—agriculture, exports and economically weaker sections.
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First Published: Wed, Apr 03 2013. 11 44 PM IST
More Topics: kisan credit card | banks | rbi | agriculture |