By Swati Pandey and Rajendra Jadhav
SUPALI, India, June 1 (Reuters) – Two years ago, Vilas
Yelmar took out a 200,000 rupee ($3,610) bank loan to develop a
small grape orchard in a dusty hamlet southeast of Mumbai. The
bank has repeatedly asked for the loan to be repaid, but Yelmar,
whose annual income has risen to 2 million rupees, has spent the
money on a new sport utility vehicle and a lavish family
wedding.
He is one of an increasing number of ‘wilful’ defaulters in
Asia’s third-largest economy, where banks are under government
pressure to lend to farmers. Two-thirds of the population depend
on agriculture for their livelihood and, to boost productivity –
annual agricultural growth is just 3 percent – India has this
year raised the farm lending target for banks by a fifth to more
than $100 billion.
“My brother was the village head so it had to be a big
wedding. That’s where the money went,” said Yelmar, speaking the
local Marathi language, and proudly showing off his new SUV
which he uses to ferry barrels of diesel and fertilisers.
“Paying off the bank loan is not really my priority,” said
the 39-year-old, who lives in a simple, yet spacious, house next
to his 4-acre orchard near the main irrigation channel.
Banks and government officials do not have data on just how
many subprime farmers are abusing the cheap loan system, but
they are giving banks a multi-billion-dollar headache.
MORAL HAZARD
State Bank of India, which accounts for about a
quarter of India’s total loans, including the one to Yelmar,
said about $1.4 billion, or 9 percent of its farm loans, turned
bad in the year to end-March. Bankers bemoan the rise in
‘wilful’ defaults among those taking agricultural loans – and
using them to marry off their daughters, build extensions for
their farmhouses, or become lenders themselves.
Defaults also tend to increase when elections loom as
farmers hope the government, desperate for their votes, will
bail them out. The government bailed out farmers in 2008 with a
$12.5 billion loan waiver, but a struggling economy and swollen
fiscal deficit make another rescue unlikely.
“Agriculture loans are more retractable, depending on what
type of whispers go around. If the whispers are about elections
and debt waivers then interest payments drop,” said SBI Chairman
Pratip Chaudhuri, noting the rise in defaults is a big concern
for the bank.
Under the government’s targets, banks have to go out of
their way to lend to poor and marginal farmers who may not be
able to repay the loans. If banks fail to meet the targets, the
central bank locks up the shortfall for five years in a fund
that returns just 4-5 percent a year.
Bad farm loans contributed nearly 44 percent of new
non-performing loans (NPLs) in fiscal year 2011, and have jumped
150 percent in the past two years. In the year to March 2011,
sour agriculture loans almost doubled to 3.5 percent of total
loans by s tate-run banks, which account for about 70 percent of
India’s total loans and deposits.
“The pace at which agri-NPLs have increased has been
worrisome,” said Suresh Ganapathy, an analyst with Macquarie
Research. “The willingness to repay has been affected by debt
waivers … and that has created a moral hazard.”
Yelmar, who said he doesn’t want his children to have to
resort to farming, got a heavy interest rate discount of 3
percent on his SBI loan, thanks to government handouts, compared
to the 14-15 percent interest corporate borrowers are asked to
pay. Some lenders even offer zero interest on farm loans.
But, for the banks, getting any money back can be an issue.
“The cost of servicing an agriculture loan is very high.
During every harvest, you need an army of people to go out there
and collect dues from each farmer,” said Michael Andrade, senior
vice-president for agri-lending at HDFC Bank. “This
increases your costs, and hurts profitability, bottom lines.”
BRANDED DEFAULTERS
For years, unpredictable rainfall decided the pace of farm
loan defaults in India, where nearly half the arable land is
rain-fed. A drought triggers an increase in defaults.
“You can’t do anything if there’s a drought. It erases the
entire year’s returns,” says Babasaheb Mahadev Parekar, 29, a
sugarcane farmer from Korti village, 10 km (6 miles) from
Supali. Parekar’s extended family of 16 children lives in a
small house by a narrow canal that is used to water crops.
Parekar is struggling to repay a 275,000 rupee loan that he
and his brothers took out from SBI in mid-2009. With interest,
the loan has swelled to 416,000 rupees. The Parekars wanted to
use the money for land levelling, but the worst drought in
nearly four decades wiped out their crops. The following year, a
bumper cane yield could have helped them repay the loan, but
Parekar’s father had a heart attack, which ate into savings, and
last year the family spent the rest on a wedding, leaving SBI
waiting in vain to get its loan back.
“We desperately need more loans, but banks are not willing
to give as we have defaulted,” said Parekar who fell back on
farming when he failed to find a job after graduating.
Once branded as defaulters, other banks won’t lend them
money, so Parekar plans to borrow from money lenders to pay off
the SBI loan and then apply for new farm loans.
The head of farm loans at SBI’s Pandharpur branch, which
lent to both Parekar and Yelmar, said: “When it comes to
repayment, farmers give the least importance to the bank. We
need to constantly chase them.”
“It’s not like they say they won’t pay up. They keep
postponing. They keep saying: we don’t have money, when we do,
we’ll pay. So, all banks can do is wait,” he added.
NEED FOR REFORM
The pressure on banks to help farmers has been ratcheted up
by an increase in suicides in recent years, as cash-strapped
farmers turned to money lenders charging interest as high as 12
percent a month. Bank lending to small farmers more than doubled
over five years, but farm output growth averaged just 3 percent
over that period.
To also protect farmers from unscrupulous money lenders,
banks were told they could not attach farmland as collateral for
loans, making them unsecured and a bigger risk. In most
countries, farmland is used as collateral for such loans, though
in the United States, the Farm Credit System and private lenders
are increasingly accepting farm cashflow and assets such as
$200,000 combine harvesters to set against loans.
There is also no government incentive for banks to lend
towards irrigation or newer techniques to boost productivity and
prevent drought. Bankers complain that a large chunk of farm
loans goes only to buy seeds or fertilizers, rather than on
mechanisation. India is the world’s second-biggest producer of
rice, cotton, wheat and sugar, but its productivity is way below
the world average.
India’s banks now want policy reforms and regulatory
intervention to make the business of farm lending more viable.
“This is a policy issue,” SBI’s Chaudhuri said. “If there’s
an incentive for term loans, capital formation in agriculture
would increase.”
Others say more needs to be done to boost infrastructure
which, in turn, should help farmers become more productive.
“Flogging the banks alone is not going to work,” said
another senior SBI executive. “Government agencies have to
become active – they need to provide roads, Internet and the
infrastructure. How else do we reach the interiors?”
In the meantime, with increased pressure on their assets and
rising corporate defaults, banks are having to show some muscle
to get their money back – setting up recovery camps and
“boosting collections through persistence,” said N. Seshadri,
executive director at Bank of India.
SBI has started naming and shaming wilful defaulters by
putting their pictures in newspapers to get them to pay up.
($1 = 56.1250 Indian rupees)
(Editing by Ian Geoghegan)
