Unseasonal Rains: Non-performing ratio of the agri-loan portfolio could double for some banks

The Dollar Business Bureau The non-performing loan (NPL) ratio of the agri-loan portfolio could double for some banks due to unseasonal rains, said a report. Further, the unseasonal rains were followed by one of the weakest and most deficient (12%) monsoons that the country had experienced in FY15 heightening turning the situation from bad to worse. Agricultural loans grew 16% in FY15 and have contributed 25% to incremental credit growth since March 2014. With delinquencies in the agri-loan portfolio likely to rise, they will add to the already stressed assets of banks (10.6% of loans on 31 December 2014), the report said and added, States highly impacted by these excess rains make up a significant portion (37%) of the overall agricultural credit extended by banks in FY14. The report estimates that system-wide agricultural NPAs as a percentage of total agricultural advances will rise to 16.9% by FY16 from 13% in FY14 as a direct result of the unseasonal rains. As a result, gross NPL ratio (on total advances) for the banking system will increase by 40bp. This will translate into a profitability impact of 2bp-3bp on system-wide post tax return on assets. The impact of the unseasonal rains will be felt with a lag, as NPA recognition policies for agricultural loans (one or two crop seasons past due) differ from those of corporate or retail loans (90 days past due). The report expects the profitability impact to be felt in 2HFY16.Governmental support through subsidies  may not significantly benefit banks as the amount of support (INR 2,500/acre) to be provided is marginal compared with the extent of the losses (INR 20,000/acre). Also, it is unlikely that the support money will be used by impacted farmers to repay bank loans.    

This article was published on April 28, 2015 – 10:14 am IST