Will the bad debt bubble burst?


Subsidized loans are provided to farmers through KCCs by public banks. Until March 2012, the outstanding amount of these loans was ?? 1.6 trillion out of 20.3 million cards, according to the latest data from the Reserve Bank of India (RBI). This may have reached about ?? 2,000 billion, according to bankers.

Bad debts can build up in banks, but they are not reflected in the books as the bad credit loans"}” data-sheets-userformat=”{"2":513,"3":{"1":0},"12":0}”>bad credit loans limit on these cards keeps increasing. Even if a borrower does not repay and banks add unrealized interest to the exposure due to increasing credit limits – typically 10% each year – the so-called capitalization of interest does not affect status from the loan account.

Bankers also said that farmers use a large portion of these loans for consumption and not for productive purposes because the money is cheap under the program. Commercial banks offer 7% agricultural loans to borrowers and they receive a 2% government subsidy on these loans up to ?? 3 lakh.

According to bankers, controlling end use and collection is difficult as there is no collateral requirement for such loans up to a specific limit. Bankers are not aggressive towards farmers, as this is politically sensitive.

“The whole problem is the lack of supervision at the branch level. Money intended for the poor farmer is misused in many cases. Lending to the sector is growing, but not the sector, ”said NK Thingalaya, former Chairman and CEO of Union Bank, and an expert in rural banking.

The credit culture in rural India deteriorated sharply after the government announced a ?? Cancellation of the 70,000 crore debt to farmers in the February 2008 budget. “After the waiver, repayments to farmers slowed down. Banks are under immense pressure from the government to increase lending to the sector, “said a banker who wished to remain anonymous.

The chairman of a large state-owned bank, however, dismissed concerns about KCC’s exposure. “We only increase the credit limit when the farmer pays off in full. There are no major concerns, ”he said.

The farm loan waiver was one of the key programs of the United Progressive Alliance government during its first term and at least partly responsible for its return to power in 2009.

Launched in 1998-99 by the then Minister of Finance Yashwan Sinha, KCC is intended to help farmers make decisions about how to use the money for cultivation rather than banks funding suppliers, which was the case until then.

Issued to farmers based on their land holdings, the KCC works like a normal credit card. Farmers can use them for the purchase of seeds, fertilizers and pesticides, in addition to production needs, but in many cases this does not happen.
and farmers use them to raise funds to look after family marriages and medical needs.

A short-term crop loan is treated as an NPA (non-productive asset) if the principal or interest payment remains overdue for two crop years. Long-term crop loans become NPAs if principal or interest payments remain overdue for a crop year. It is not unusual for some banks for a new loan cycle to begin even before existing loans are fully repaid, the bankers said.

There is evidence of a widespread renewal of loans taken through KCCs in terms of loan amount and number of cards issued, analysts say, based on the growth in this exposure since 2010. Permanent renewal refers to the practice of granting new loans to a borrower to help him. meet interest payments.

“Outstanding KCC loans have increased by around 33% over the past two years while the number of credit cards has increased by around 13%,” said V. Sri Karthik, analyst at Espirito Santo Securities India Pvt. Ltd.. This shows that farmers are taking new loans to repay old loans.

Gross NPAs of Indian banks swelled to ?? 1.79 trillion in December, up 43.1% from ?? 1.25 trillion in the period of one year ago.

The permanent renewal of loans has also taken place more and more in other segments. According to a March 25 Emkay Global Financial Services Ltd report, actual loan growth for the week ended March 8 was 11-12 percent versus reported 15.3 percent.

“Despite a marked slowdown in industrial growth, credit growth has refused to slow down … In our opinion, the resilience of credit growth could result from the permanent renewal of loans if there is sufficient circumstantial evidence,” analysts at Emkay Global says in the report.

The share of agriculture, which once generated the most jobs, declined as a percentage of national income in Asia’s third-largest economy, from 35.75 percent in 1981 to 16.75 percent in 2012.

The exposure of Indian banks to agriculture and related activities increased to ?? 5.6 trillion in January 2013 of ?? 4.3 trillion in January 2011. For fiscal year 2014, the government proposed to increase the agricultural credit target to ?? 7,000 billion.

Agriculture is one of the main sources of bad debt for most banks. It contributes 9.72% to gross NPAs of SBI and 7% of Central Bank of India. The country’s largest lender, SBI, has the largest gross NPAs – ?? 53,457.79 crore, or 5.3% of loans, followed by National Bank of Punjab ( ?? 13,997.82 crore, or 4.61% of loans), Central Bank of India ( ?? 8,938.47 crore, or 5.64% of loans) and UCO Bank ( ?? 6,711.29 crore, or 5.53% of loans).

A bad monsoon could mean a dramatic turn for the worse as the rainy season from June to September is India’s main source of irrigation.

“This is a politically dynamic and sensitive situation,” said Ashvin Parekh, partner (banking and financial services) at Ernst and Young India. the intention to repay is not known to the bank. We are sitting on a larger problem, which can only get worse if drought situations occur. ”

A senior banker, who ran the rural affairs of a large bank until recently, blamed government interest subsidies for the widespread abuse of agricultural loans drawn through KCCs.

“The interest subsidy has twisted everything in this segment,” said the banker, who declined to be named. “The real purpose of this instrument was to make cheap credit available to the poor farmer. But many farmers deliberately take out such loans for consumption. Banks also need to lend to this category of borrowers to achieve lending. priority lending goal. ”

Banks must grant 40% of their loans to the so-called priority sector: agriculture, exports and the weakest economically sectors.

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