The next round of the NPA shocker may be in the waiting for the Indian banks, especially the government-owned lenders, in the form of problematic loans drawn using the Kisan Credit Card loans (KCC). The outstanding loans on KCC, an instrument conceived for Indian farmers to avail subsidised loans, has gone up at least four times between March, 2011 and March, 2018 as per the latest available data — from Rs 1.6 lakh crore to Rs 6.7 lakh crore. Also, these loans have more than doubled as a percentage of the total bank credit and nearly doubled as a percentage of the farm loans.
As a percentage of gross bank credit, the KCC loans contributed merely 4.28 percent in March, 2011 and, as a percentage of agricultural loan, it constituted 34.75 percent. In March, 2018, the same percentage figures were 8.6 percent and 65 percent respectively. In other words, as a percentage of the total agriculture loans, the KCC loans have more than doubled in the last seven years or so and now, constitutes a lion's share of agriculture loan portfolio.
So what’s wrong if the KCC loans are growing rapidly? The problem with KCC loans, which is used to channel a good amount of agricultural loans to farmer, is that no collateral is stipulated on the large chunk of these loans. There is no real repayment happens because of the nature of the product.
Bankers and farmers operate in a mutual understanding wherein the farmer pays a minimal amount at the end of the due date to keep the loan standard. The ever-increasing credit limits make sure that these loans stay within the KCC borrowing limit.
The farmer is happy because he doesn’t have to repay and the bank is happy too since the loan is not a non-performing asset (NPA) on the books. There is a provision to keep increasing the credit limit by 10 percent every year. This helps the farmer borrow more and keep his account good. Often this money is used for consumption purposes such as purchasing a television set or meeting marriage expenses, and not necessarily for farming.
Since the actual state of NPAs will never be public on account of the constant roll over, these types of loans are even more problematic. As a percentage of the Gross Domestic Product (GDP), share of agriculture has declined significantly over the years from around 50 percent at the time of Independence to 13-14 percent now.
“The share of KCC as a percentage to both gross credit in the system as well as to agriculture loans has gone up significantly over the last 7 years. However, surprisingly, there has not been much of stress in the segment. But one can't rule out the stress going ahead. The government intends to improve the income of farm income and hence it seems to have been giving higher importance to KCC,” said Siddharth Purohit, analyst at SMC Global Securities Ltd.
How are these loans spread across the banking system? Commercial banks have issued (till March, 2018), 2.3 crore KCCs with total loan outstanding of Rs 4.3 lakh crore. When it comes to the cooperative banks, the total outstanding stood at Rs 1.2 lakh crore from 3.3 crore cards and for Regional Rural Banks (RRBs), the respective figure stood at Rs 1.1 lakh crore from 1.2 crore cards.
The absence of collateral requirement up to certain limit makes it nearly impossible for banks to recover the money even if they want to when the loan goes bad. The banks rarely give KCC-specific NPA data. According to the RBI guidelines, the amount(s) for crop production, repair and maintenance of the farm assets and consumption may be allowed to be drawn using the KCC as per the convenience of the farmer.
“In case the revision of scale of finance for any year by the district-level technical committee exceeds the notional hike of 10 percent contemplated while fixing the five-year limit, a revised drawable limit may be fixed in consultation with the farmer. In case such revisions require the card limit itself to be enhanced (4th or 5th year), the same may be done and the farmer be so advised,” the RBI rules say.
Also, for term loans, installments may be allowed to be withdrawn based on the nature of investment and repayment schedule drawn as per the economic life of the proposed investments. “It is to be ensured that at any point of time, the total liability should be within the drawing limit of the year concerned,” the RBI rules add.
This is where most of the manipulation happens and farmers keep getting their limits increased and the loan amount, in most cases, stays within the borrowing limit. There is no certain repayment period for the KCC loans and it is up to the bank to fix. The rate of interest on such loans is very less compared with normal loans. Typically, banks offer farm loans at 7 percent to borrowers and they get a 2 percent interest rate subvention from the government on such loans up to Rs 3 lakh.
Interestingly, one of the promises of Bharatiya Janata Party's (BJP) poll manifesto this time is to make KCC loans up to Rs 1 lakh totally interest-free. If that happens, these loans will become no-collateral, no-interest loans for the banks and a big drag on their books.
The KCC was launched in 1998-99 by then finance minister Yashwant Sinha to help farmers readily purchase seeds, fertilizers, pesticides etc., and draw cash for their production needs. The scheme was further extended for the investment credit requirement of farmers and non-farm activities in 2004. But, according to bankers, cheap money led to large-scale use of this facility for consumption-related activities instead of core agricultural activities.
The problem for banks from the KCC loans could arise sooner than later when the continuous rolling over of the loans comes to an end for some reason. Farm sector is already a big pain for the banking sector, mainly, the state-run banks on account of the high NPAs, politically sensitive nature of such lending and back-to- back farm loan waivers announced by political parties. If not checked, the KCC could prove to be the next big source of a major NPA shocker for the Indian banks.
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Updated Date: Apr 23, 2019 16:22:53 IST