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Banks surpass farm lending target for second consecutive year

Banks surpass farm lending target for second consecutive year
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First Published: Thu, Aug 16 2007. 12 21 AM IST

Updated: Thu, Aug 16 2007. 12 21 AM IST
Banks are no longer looking at lending to the agriculture sector as an obligation. They are seeing this as a big business opportunity.
The total flow to the agriculture sector in the year ended 31 March—by public and private sector banks, cooperative banks and regional rural banks—has exceeded the annual target by more than 16%. In absolute terms, the banking sector lent Rs2.03 trillion in fiscal year 2006-07, against a target of Rs1.75 trillion.
This is the second consecutive year that banks have exceeded the target for agriculture lending. In 2005-06, the industry had exceeded the target by an even wider margin: 28%, when it lent Rs1.8 trillion against a target of Rs1.41 trillion. Commercial banks in that year had exceeded the target by close to 44% by lending more than Rs1.25 trillion to this sector, while cooperative banks had exceeded their target by 3%, and regional rural banks just managed to fulfil their target.
The target has been revised upward to Rs2.25 trillion in 2007-2008. In the first two months of the fiscal year, banks have already achieved more than 7.5% of it.
Indian banks are required to lend at least 18% of their net credit to agriculture under the directed lending norms that stipulate that 40% of a bank’s advances should go to farmers, small industries and weaker segments of society.
Over the past few years, the finance ministry has been pushing them hard to lend to the farm sector. Finance minister P. Chidambaram had directed banks a few years ago to double their lending to the farm sector in three years.
“We are lending more than what we are required to lend. This is because lending to this segment makes business sense. We don’t need any push for that,” says one bank chairman who does not wish to be named. Banks lend to small farmers at 7% interest for loans up to Rs3 lakh. The government offers 2% subsidy on such loans through a budgetary provision. However, other farm loans are disbursed at a higher rate where banks keep a wide margin.
Even cooperative banks have completed over 12% of their annual target, while regional rural banks completed 13.25% of their annual target by the end of May.
Until recently, banks were facing difficulties in reaching out to the rural sector. Transaction cost was much higher in rural pockets as loans sizes are small. So, banks were focusing on their retail loan portfolio in urban India. “Despite having an extensive branch network, we did find it difficult in the initial years. Our employees were intimidated by money lenders who were the most popular source of informal credit,” says a priority sector general manager of a large public sector bank, headquartered in Mumbai.
Another contributing factor was banks’ aggressiveness in pushing retail credit. As a result of this, non-performing loans in the retail segment have been on the rise. With the urban pockets now reaching a near-saturation level, bankers have turned to the rural sector.
Analysts, however, offer a different perspective. Says Vishal Shah, banking analyst with domestic brokerage house IL&FS Investsmart: “With RBI imposing higher provisioning norms for the commercial sector, banks have little choice but to turn to agriculture sector lending.”
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First Published: Thu, Aug 16 2007. 12 21 AM IST