With the government issuing a drought alert, banks are worried that farm loan repayments could be hit, pushing up their non-performing assets (NPA) or bad loans. The Centre has set a Rs. 575,000-crore agriculture credit target for banks this fiscal year. About 40% of farm credit disbursed is for kharif crops.
Domestic banks are under the scanner of global rating agencies and several—including State Bank of India (SBI)—have been downgraded.While the government is worried about the health of its banking system, it has little room to manoeuvre in providing any financial assistance to banks as it did in 2008-09 in case of mass defaults in repayment. However, the Reserve Bank of India allows deferment in repayments in case of a drought so that loan accounts are not treated as bad assets after 90 days.
Home minister P Chidambaram, finance minister in 2008-09, announced a Rs. 60,000-crore relief package to wipe off NPAs.
“Non-repayment of farm loan accounts arising due to a drought does not become non-performing immediately,” said TM Bhasin, CMD, Indian Bank. “Banks can wait till the next crop session before showing those as bad assets, so there is no need to press the panic button.”
“Around 40% of agriculture credit flow goes to farmers with less than 2 hectares and any relief package by the government would widen fiscal deficit,” said Soumya Kanti Ghosh, director and head, Economics & Research, Federation of Indian Chambers of Commerce and Industry.