Mumbai: Two days after it was reported that India’s largest lender, State Bank of India (SBI), had frozen farm equipment loans, the bank backtracked on the decision amid increasing concern that India’s weak farm sector would be further hit by the loan freeze.
“We regret that our circular dated 16th May 2008 concerning tractor loans has been misunderstood and has given rise to concern. The circular is withdrawn with immediate effect,” SBI chairman O.P. Bhatt said in a note. The bank did not release the details of that circular or explain why it was misunderstood.
PTI, the news agency which first reported the news, cited the circular as saying the “bank has put on hold financing new tractor and farm mechanization activities, which include power tiller and combine harvester, with immediate effect in view of very high overdues in this sub-segment of agri advances.”
Delinquencies in the farm equipment sector are rising, and are now at 17%, up from 10% a year ago for SBI. The bank’s exposure to farm equipment is about Rs7,000 crore, or 15% of its agriculture loan portfolio.
The plan to freeze farm equ-ipment loans was met with resistance from both manufactu-rers and political parties, whi-ch are priming for the general election next year. Politicians were quick to label the move as anti-farmer and threatened to make it a national issue. Tractor makers also opposed the move, saying it would dent an already tepid market because SBI is the largest financier of farm equipment.
According to a senior SBI official in the know of the matter, the freeze on loans was a temporary measure. “For us, it was a pure simple commercial business decision. The tractor traditionally is a high NPA (non-performing assets) area,” said the official, who didn’t want to be named as he isn’t authorized to speak to the media. “We thought if a particular segment has a high default rate, let us slow down a bit, focus on recovery, and let’s do it again. But, unfortunately, it was linked with debt relief, farmers’ debt trap, etc.”
Dogged by reports of unpaid and mounting loans leading to farmer suicides, the government, in its 2008 Budget, announced a Rs60,000 crore debt waiver package for small farmers. The banks are scheduled to get reimbursed for the loan waiver over a three-year period starting 30 June.
However, the SBI official ruled out that any kind of pressure led to the latest decision. According to this official, most of the bad debts in the farm equipment sector is “soft”, or just-turned NPAs. The banking staff have now been asked to recover the loans and reduce the NPA level by June so that the bad debt level is even lower or under control, he said.
SBI has a farm loan portfolio of Rs43,000 crore, the largest among all Indian lenders. Its gross bad loans were Rs12,837 crore at the end of March 2008, up from Rs10,641 crore at the end of December 2007.