Poor monsoons to create farm loan bubble?

The role of monsoons in deciding the performance of agricultural sector in India can hardly be overstated. However, it is not just the farm sector that is a victim to the vagaries of the monsoons. As rainfall in India continues to disappoint, banking sector may bear the brunt. This is because the Government and RBI expect banks to make up for the deficient monsoons. What else could explain the volte face in RBI's policy with regards to priority sector lending norms?

As an article in Firstpost suggests, in April, the central bank had put an end to the distinction between direct and indirect lending targets for agriculture. The banks were supposed to lend 8% of their total credit to small and marginal farmers. However, as the fear of draught looms large, banks have raised the percentage to 13.5%. 

In the past also, not only have banks been forced to lend, but have also been made to waive off huge debts to the agricultural sector. One may argue that this is a holy sacrifice that banks need to make in the broader interests of the farmers. However, the counter argument is that it is not the lack of bank credit that mars the agriculture sector.

As the chart suggests, the exposure of banks to agriculture and allied activities remains significant. If banks fulfil the Union Budget annual farm credit target, farm sector will account for around 14% of bank loans. Over the years, while the share of farm output in GDP has come down by over one third, the exposure of banks to this sector has only been rising. This signals that the real issue for poor agriculture performance lies somewhere else. The key road blocks have been poor productivity, lack of technology and supply side issues. However, while little action is taken in this regard, it is the banks that are made to bear the burden. The banking sector is already reeling under the NPA crisis - thanks to the influence of politics on credit norms. If the Government continues to intervene in the lending policies, while it is unlikely that fortunes of farmers will improve, the fate of banking sector certainly seems in dark. 

                         Farm credit policies adding stress to banks' balance sheets