IMD's forecast: Poor rains could be another shocker to public sector banks

India’s Meteorological Department’s forecast of a below normal monsoon this year should worry everyone. This include the Narendra Modi government, which has its eyes on high GDP numbers, and industries craving for more rate cuts from the Reserve Bank of India (RBI). Two important factors that will get impacted are 1. Economic growth: This is because agriculture and allied activities now have a higher share in the new method of GDP calculation, based on gross value added (GVA) and market prices, instead of factor cost. Rating agency Crisil Wednesday has already warned that a deficient monsoon, if comes true can shave off 0.50 percent from GDP growth. [caption id=“attachment_2208936” align=“alignleft” width=“380”]  Reuters[/caption] Such a scenario can arise because a weak monsoon will decrease the efficacy of India’s irrigation ecosystem and hit the agricultural output and farmers adversely, Crisil said, adding that this is over and above the adverse impact of the unseasonal rains of last month which affected the crops. 2. Rate cuts: Since weak rains would mean poor farm output, translating into higher prices, thus pushing up inflationary pressure. If inflationary pressures revive, the RBI may hold back its rate easing plan. Poor rains can impact prices of food and vegetable items and have the potential to alter the course of the gliding path of inflation. But the ones, which should worry most are commercial banks, state-run banks in particular, which might see further pressure on their agriculture portfolio. Agriculture is already an area of stress for Indian banks, which have loan outstanding of Rs 7.5 lakh crore to farmers as on February 2015. In the 2015 union budget, finance minister, Arun Jaitley has targeted to increase this target to 8.5 lakh crore, which, if achieved, will constitute approximately 14 percent of the total ban loans. The recent unseasonal rains have already impacted farmers across the country. If rains play foul, public sector banks might see further stress escalating in their portfolios. Banks will then be in a difficult position since they still be forced to lend to farmers to meet the yearly targets. Remember, of the total bad loans in the banking system, over 90 per cent is on the books of public sector banks. State-run banks are already in stress due to the lack of availability of adequate capital from the government, which has sharply cut down fund infusion in these entities beginning fiscal year 2015. In the last seven years, banks have witnessed an increase in the stress ratios from their farm loan book. Besides the genuine reasons that might have caused delays or defaults in loan repayments, farm loan waivers announced by the governments too have resulted in large chunk of bad loans, after credit culture got impacted. This include the Rs 70,000 crore farm debt waiver announced by the UPA government in 2008 to the current rounds of debt waivers announced by Andhra Pradesh and Telangana governments. The deteriorating financial health of state-run banks is already visible in their earnings. If indeed the Met’s warning comes true, that will be yet another shocker for these entities.