Banks struggle with farm loan target due to waivers, may lean on PSL certs

With agriculture lending growth remaining muted, banks are struggling to meet year-end targets in this department. So far this year, growth of farm loans by banks has remained flat at 0.6 per cent, compared with 3.2 per cent last year. 

Banks are facing a peculiar sitution in which, on the one hand, the loan outstanding in their books has come down after a series of debt-waiver schemes, while on the other, fresh loan approval has been slow on the back of higher delinquencies. 

Under the latest debt-waiver scheme announced by Rajasthan chief minister Vasundhara Raje this month, the government has provided Rs 80 billion for one-time crop loan waiver of up to Rs 50,000 for small and marginal farmers, apart from land revenue exemption.

"Banks may have difficulty in meeting agriculture lending target, as the loan outstanding has come down on account of debt waiver. However, banks may achieve the overall priority sector lending target, as corporate loan growth has been very slow and banks are focusing on retail loans," said an official of a public sector bank. 

According to priority sector norms, scheduled commercial banks have to extend 40 per cent of their loans or Adjusted Net Bank Credit (ANBC) to identified priority sectors. Of this, 18 per cent is earmarked for the agriculture sector within which, a target of 8 per cent of ANBC is prescribed for small and marginal farmers. Banks that fail to meet the targets need to deploy amounts equal to the shortfall in the low-yielding Rural Infrastructure Development Fund (RIDF).

In April 2016, RBI had introduced Priority Sector Lending Certificates, which banks can trade too meet sub-targets.

"A lot of banks may have to rely on trading PSL certificates to meet the sub-targets, but much also depends on their availability in the market," said an official of a public sector bank. 

In June 2017, the Maharashtra government announced a debt waiver of Rs 340 billion for about 8.9 million farmers. Earlier, Uttar Pradesh waived loans worth Rs 363.6 billion for 21 million farmers. Other states that announced loan waivers include Andhra Pradesh (Rs 200 billion), Punjab (Rs 100 billion), Telangana (Rs 150 billion) and Karnataka (Rs 80 billion).

Notably, banks have long been relying on securitisation deals to meet their priority sector lending targets. However, with a substantial pool of earlier portfolios purchased by banks having gone bad, the lenders themselves are not keen to invest on them this year. This apart, the qualifying pool itself has shrunk as a number of MFIs have graduated into banks and they have to meet their own lending targets. 

"Banks have suffered losses on MFI portfolios sold earlier, and hence the price they are quoting for new deals is not commercially viable. Instead, MFIs are preferring on-lending. Further, with about seven to eight small finance banks operating in the market, the qualifying pool itself has come down," said Manoj Kumar Nambiar, Managing Director, Arohan Financial Services.