New Delhi: Surplus foodgrain production this year could threaten banks with ballooning bad debt as a drop in spot prices and higher input costs are likely to squeeze farm margins and may force farmers to default on loan repayments, experts said.
India’s just-concluded rabi harvest has thrown up record wheat production, estimated at 84.27 million tonnes (mt) and prices in several parts of Gujarat, Bihar and eastern Uttar Pradesh have fallen to as low as Rs 1,000-1,050 a quintal, less than the state-set minimum support price (MSP)Rs 1,170.
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There is an easing trend in prices of other essentials such as rice and pulses too.
“This sector is faced with a scenario of falling prices when costs are rising. The cost of labour has more than doubled in several states. In addition, prices of fertilizers, pesticides and fuel have been on the rise,” said Dhananjay Sinha, economist and strategist at Centrum Broking. “There is a significant risk of some serious rise in defaults on agriculture loans.”
Experts said Food Corp. of India’s inefficient foodgrain procurement and distribution, large existing stocks, and a decision to shun exports are responsible for the drop in prices. A normal monsoon forecast, which bodes well for the next crop, has also been bearish on prices.
“There is a problem of indebtedness with farmers with the cost of production going up,” said T.K. Bhaumik, economist and adviser at JK Group. “That problem could balloon into a debt crisis.”
Bhaumik and Sinha both said if the defaults spiralled out of control, chances of a loan waiver by the government could not be ruled out for the banking sector already bogged down by rising bad debts.
Data from the Reserve Bank of India shows credit to agriculture saw a 21% growth in 2009-10 to Rs 76,758 crore but net agriculture-related bad debt increased 46% to Rs 8,330 crore during the same period.
“The loan waiver scheme (2007-10) and the loan restructuring scheme (2004-05) may have weakened the repayment culture, resulting in wilful default,” said Sinha. “Hence, there is a strong likelihood of rising farm sector NPAs (non-performing assets) eventually triggering another loan waiver scheme in the coming years. Given the higher level of indebtedness, the next loan wavier amount could be much larger.”
Banks have traditionally been cautious lenders to the default-prone farm sector.
They have to lend 18% of adjusted net bank credit to agriculture sector according to the rules, but many of them have been unable to achieve the level, choosing to focus more on recovery than lending, experts said.
For their part, banks said they saw no immediate pressure on farm loans.
“It is difficult to predict the impact that the falling prices will have on asset quality,” said K.R. Kamath, chairman and managing director of Punjab National Bank. “It is not creating undue pressure on the agri loan book as of now.”
The government is encouraging a timely repayment culture among borrowers. For example, farmers get an additional 3% interest subvention if they repay loans on time, Kamath said.
“The fall in prices will reduce the revenue of farmers, but not to the extent that we have seen during a drought,” said Rupa Rege Nitsure, chief economist at Bank of Baroda. “During a bumper harvest, higher volumes ensure revenue doesn’t take a big hit.”
Nitsure said her bank has seen a fall in agriculture-related bad debt as recoveries have been good.
To prevent a food glut from damping prices, the government needs to liberalize the sector fully, allowing free pricing and exports with a small public distribution system to protect the poor, Bhaumik said.
Diversification by farmers into dairy farming, fisheries and horticulture could be encouraged, Sinha said.
Graphic by Sandeep Bhatnagar/Mint