The PSB are considering a corpus of 70,000 cr for an agricultural fund
A group of public banks heavily exposed to the agricultural sector have started discussions with the government to set up a credit guarantee fund to cover defaults on payments by Farmers, making lending to the sector less risky, said two people directly familiar with the developments.
The banks have proposed to the government to provide a first corpus of ₹70,000 crore over three years for the fund, which will be structured on the model of the Micro and Small Business Credit Guarantee Trust Fund. The Small Business Credit Guarantee Fund compensates lenders for losses up to 85% of the outstanding amount in the event of default.
“The proposed fund, if approved by the government, will cover the entire Kisan credit card (KCC) exposure to bank loans and will solve a great concern for lenders, “said one of the two people cited above on condition of anonymity. And assuming that 10% of the total outstanding becomes stressed, it is estimated that a corpus of ₹60,000 to 70,000 crore will be needed to cover loan losses. “
At the end of March last year, KCC loans stood at ₹7.09 trillion, which represents about 40% of total agricultural loans granted by banks.
The government is currently providing a 2% interest subsidy and a 3% Rapid Repayment Initiative (PRI) on short-term crop loans up to ₹3 lakh. To mitigate the impact of the pandemic, the Reserve Bank of India has asked lenders to extend the PRI grant and incentives to short-term agricultural loans in an amount of up to ₹3 lakh, where installments are due between March 1 and May 31, 2020.
With the establishment of the fund, banks will be encouraged to lend to the sector. In 2019-2020, the basic credit flow to the agricultural sector reached ₹13.68 trillion, 8.8% more than the previous year, according to data from the National Bank for Agriculture and Rural Development (Nabard). Banks are also hoping it would eliminate the need for states to waive agricultural loans because they can participate in the fund, the banker said. RBI Governor Shaktikanta Das, in his speech at the Mint’s banking conclave last year, said that widespread loan forgiveness is negative for credit, undermining the credit culture in the system. He also added that the relief linked to agricultural loans should be targeted.
The agricultural sector accounts for the bulk of bad debts for most banks. Gross non-performing assets (APM) in agricultural loans accounted for 15.85% of total State Bank of India credit disbursements at end-March 2020, compared to 11.56% in March 2019. For fiscal year 2020- 21, agricultural MPAs were below 13.7% due to the moratorium on loan repayments.
According to the RBI Trends and Progress report, the total gross NPA in the agriculture sector was ₹1.26 trillion at the end of March 2020, or 15% of the total NPA. The report also showed that the NPA in the agricultural portfolio of public sector banks stood at 17.3% at the end of March 2020 compared to 13.1% at the end of March 2019, while private sector banks saw 7 , 9% of the total NPA in the agricultural portfolio at the end of March against 8.1% in March 2019.
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