Priority sector lending faces farm, education challenge

After poor recovery of rabi crop loans, kharif crop loans are also showing stress. Debt waiver schemes of states are impacting repayments, say bankers

Meeting priority sector lending targets could be challenging for banks this year as at least two sectors — agriculture and education — are topping the list of stressed assets on the retail side. While growth in loans for agriculture and allied activites is at a five-year low, that for education has slipped into negative territory, writes NAMRATA ACHARYA

Meeting priority sector lending targets could be challenging for banks this year as at least two sectors — agriculture and education — are topping the list of stressed assets on the retail side.

While growth in loans for agriculture and allied activates is at a five-year low, that for education has slipped into negative territory.

Both education and agriculture lending are components of priority sector lending, and if banks fail to meet the targets they need to deploy amounts equal to the shortfall in the low-yielding Rural Infrastructure Development Fund (RIDF). Notably, banks are increasing restructuring in both the categories of loans.

According to data from the Reserve Bank of India released on October 10, education loans showed a year-on-year decline of 3.5 per cent in terms of loans outstanding.

As on August 18, education loans outstanding were ~59,300 crore against ~61,500 crore as on August 19, 2016. In the case of agriculture lending, growth has been muted, although banks are compelled to provide farm loans under priority sector lending.

Loans to agriculture and allied activities posted a growth rate of 6.5 per cent as on August 18, on a year-on-year basis, against around 13 per cent last year. Also, in the period between March and August, loans to agriculture and allied activities fell by 1.6 per cent, according to RBI data.

In June 2015, the RBI had said rescheduling of the payment period of an education loan due to the unemployment of borrower will not be treated as restructured accounts for computing non-performing assets. The directive is now being actively implemented as banks are stretching the repayment tenure to 10 years from seven years in general.

“We are liberally restructuring education loans and offering lots of concessions to students as the job market is not good. We are also offering students a one-time settlement,” said a senior official of Indian Bank.

“Education loans are showing negative growth and defaults are on the rise,” said a senior official of the Kolkatabased United Bank of India. “On average, NPAs in the segment are close to 10-15 per cent. The relaxation of norms by the RBI in 2015 is now being implemented.”

According to a report by CRIF High Mark, around 10.2 per cent NPAs were observed in the education loan portfolio as on March 31, 2017, a 21 per cent year-on year increase over the last two years.

“There is a lot of stress in the education loan segment as several engineering colleges have shut down,” said an official of UCO Bank.

In the case of agriculture loans, after poor recovery of rabi crop loans, kharif crop loans are also showing stress. At the Kolkata-based United Bank of India, recovery of short-term rabi loans has been around 20 per cent less. Against recovery of ~700-800 crore, so far this year rabi crop loan recovery has been ~550650 crore. Debt waiver schemes of state governments are impacting the repayment, said bankers.

“It would be challenging to meet the agriculture lending targets this year, as there is a lot of stress in the agriculture sector,” said a senior official of United Bank of India.

Earlier, HDFC Bank reported a 0.20 per cent jump in gross NPAs for the June quarter, which it said was due to a spike in bad loans in the agriculture sector. The kharif loan recovery season is generally at its peak around November-December. For most banks, NPAs in agriculture sector loans are around 5-6 per cent, much lower than in corporate loans. However, in view of the high amount of restructuring, the NPAs are hardly reflected in the books.

In June this year, the Maharashtra government announced a debt waiver of ~34,000 crore for nearly 8.9 million farmers. Earlier, the Uttar Pradesh government waived loans worth ~36,359 crore for about 21 million farmers. This apart, Andhra Pradesh waived loans of about ~20,000 crore, Punjab ~10,000 crore, Telangana ~15,000 crore and Karnataka ~8,000 crore.

According to priority sector norms, scheduled commercial banks have to direct 40 per cent of their loans to the identified priority sectors.