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Banks asked to roll out new farm loan products-Dinesh Unnikrishnan

The finance ministry has asked public sector banks to devise products for Indian farmers to ensure they get adequate funding in emergencies.

The government, the majority owner of such banks, wants them to roll out products such as emergency loans to farmers that will be linked to savings accounts, a weather index-based insurance product, and set up a credit guarantee fund that will aid farmers in the event of crop losses during droughts or natural calamities.

These products are intended to mitigate the risks faced by farmers, especially when hit by uncertainties.

The ministry will meet the top brass of at least six large state-run lenders, including State Bank of India (SBI), Canara Bank, Punjab National Bank and Bank of Baroda, besides Life Insurance Corporation of India this week, to give the final touches to the scheme, senior bankers said.

Traditionally, government-sponsored schemes through commercial banks and regional rural banks (RRBs) have been the major source of funding for farmers. Banks primarily lend to such borrowers under the so-called priority sector lending. Under this, banks need to allocate 40% of their loans to agriculture, exports and other weaker sections.

Recently, a Reserve Bank of India (RBI) committee under former Union Bank chairman M.V. Nair had proposed that half of all agricultural credit should go to small and marginal farmers. 

The discussion with bankers will be based on a report prepared by the National Bank for Agriculture and Rural Development (Nabard) and RBI’s College of Agricultural Banking. Nabard officials were not immediately available for comment.

Nabard and the RBI wing reviewed the existing credit delivery mechanism to farmers and suggested ways to improve the credit cover.

Once finalized, these products will be rolled out on a pilot basis by one of the state-run banks in the next few months, said the chief of one of the banks attending the meeting. He did not want to be named.

“The report has reviewed the lending to agriculture to seasonal operations and has asked the banks to sit together and devise products that will meet the additional requirements of the farmers,” the banker said. In fiscal 2009, the government waived loans worth Rs.76,000 crore given to farmers who found it difficult to repay bank money.

As of 24 February, banks had lent Rs.4.7 trillion to agriculture and allied activities, against Rs.4.38 trillion in February 2011. This is 11.3% of the gross credit in the banking system.

The report has proposed the emergency loan, the weather index-based insurance product and the credit guarantee fund. The final contours of these products are yet to be determined.

Currently, Nabard is the nodal agency of the government for rolling out agricultural credit to farmers. With a view to scaling up the credit flow to the sector, finance minister Pranab Mukherjee proposed to raise the target for agricultural credit in 2012-13 by Rs.1 trillion to Rs.5.75 trillion in the Union budget.

The budget also proposed to continue the interest subvention scheme to farmers at 7% interest per year and an additional subvention of 3% to reward farmers who repay loans promptly. The interest rate subvention is also available on post-harvest loans of up to six months against negotiable warehouse receipts to encourage farmers to keep their produce in warehouses.

The government has also proposed to set up a short-term RRB Credit Refinance Fund to enhance the capacity of RRBs that give short-term crop loans to small and marginal farmers. Besides, it is also modifying the Kisan Credit Card Scheme to convert such cards into smart cards that can be used at ATMs.

Rising exposure to the agriculture sector could pose higher risk to the banking sector as the chances of defaults are higher from such loans, analysts said. According to Vaibhav Agrawal, vice-president (research) at Angel Broking Ltd, 60% of the total bad loans at public sector banks are priority sector related. According to him, the country’s largest lender, SBI, has seen around 9.5% of its total agriculture loans turning bad.

“Exposure to (the) farm sector has always been an area of concern for PSBs (public sector banks). While the government wants PSBs to directly lend to the farming sector, that kind of lending will always have risks. This is already visible with some of the banks like SBI,” Agrawal said.

The proposed schemes are unlikely to add pressure to the asset quality of state-run banks, said Naresh Makhijani, partner (finance) at KPMG.

“If it is for small farmers, bad assets are unlikely to be a major issue as the poor have a better track record of prompt repayment,” he said. “The only concern is whether banks have the right mechanism to reach out to the right people.”