Hike in collateral-free agriculture loan limit likely to aid banks in managing stress

Mumbai: The Reserve Financial institution of India’s (RBI) current choice to lift the restrict on collateral-free agriculture loans was seemingly taken to ease the stress being confronted by banks of their farm mortgage portfolios over the previous two quarters, and to nudge them to get their books so as.

The RBI on 6 December notified banks to waive collateral security and margin requirements for agriculture loans, together with loans for allied actions, as much as ₹2 lakh per borrower, from ₹1.6 lakh earlier. The RBI had final hiked the restrict from ₹1 lakh to ₹1.6 lakh per borrower in February 2019.

The rise within the restrict of collateral-free agriculture will enable farmers and small debtors to borrow more cash, and in addition unencumber a few of their collateral presently parked with banks, enhancing their compensation capacity at a time when banks’ small-ticket mortgage books are going through stress, in accordance with specialists.

Additionally learn | Budget 2025-26: Centre may give agriculture boost with loan reforms and credit limit hike

Whereas the explanation cited for the hike in collateral-free agriculture mortgage restrict was excessive total inflation and an increase in enter prices through the years, trade specialists imagine the choice was additionally seemingly pushed by rising asset high quality stress in each agriculture and agri-based gold mortgage (loans taken for agriculture by pawning gold) portfolios of banks. Banks have to implement the brand new mandate on farm mortgage restrict by 1 January 1, as per the RBI round.

“It was lengthy due, the place collateral-free agri loans had been stored on the similar threshold of ( ₹1.6 lakh), so it was warranted. However the timing can also be presumably because of the construct of some stress in banks’ books,” stated a senior government at a personal sector financial institution.

A number of banks had reported an increase of their agriculture mortgage and microfinance non-performing property (NPAs) within the first quarter of the present monetary 12 months, citing disruptions in collections because of the normal elections and heatwaves throughout the nation. Nevertheless, the stress continued within the September quarter as nicely, forcing lenders reminiscent of Axis Financial institution, IndusInd Financial institution, Kotak Mahindra Financial institution, HDFC Bank and AU Small Finance Financial institution to acknowledge the rise in unsecured delinquencies.

Financial institution credit score to agriculture and allied actions grew 15.5% as of 18 October 2024, in contrast with 17.4% within the year-ago interval, as per the newest RBI information. Agriculture and allied loans, labeled as precedence sector lending, too slowed down, rising 13.7% as of October, as towards 16.8% within the year-ago interval. Compared, financial institution credit score towards gold surged 56.2% as towards 13.1% within the earlier 12 months.

Additionally learn | Collateral deposits of ₹4.5 tn show inefficiencies in system: Sebi’s Narayan G

RBI crackdown

This rise in agri and microfinance establishment loans coincided with the RBI crackdown on gold financiers and their lending practices. The measures, which began with quickly banning IIFL Finance from giving gold loans in March 2024, had been later prolonged to different banks and non-banking monetary firms (NBFCs).

Whereas NBFCs reminiscent of Muthoot Finance and Shriram Finance had been requested to standardize their lending practices together with gold storage and public sale processes, a number of public sector banks had been pulled up for taking collateral reminiscent of gold towards collateral-free small-ticket agri loans. It led to a pointy surge in gold loans portfolios of banks, but additionally brought about the stress within the agri ebook to spillover into the gold mortgage portfolio, in accordance with specialists.

“Whole agri gold mortgage excellent is estimated at ₹10.0-10.5 trillion, of which ₹6.5 trillion is by PSU banks. These are alleged to be loans for planting crops, however this ₹7 trillion of loans are sufficient to plant crops on the whole globe, so clearly there’s some misuse of the class. Because of this RBI is apprehensive about NPAs of gold loans the place it’s rising within the guise of agri loans,” a senior government at an NBFC instructed Mint on the situation of anonymity.

That is additionally believed to have prompted the RBI to lift issues in regards to the classification of such loans in its FY24 inspection of PSU banks’ books, on condition that agriculture loans fall underneath banks’ precedence sector lending (PSL) targets. Nevertheless, with collateral, these loans usually are not completely eligible as PSL. If the RBI formally cracks down on these loans, banks should scramble to purchase PSL certificates or spend money on the Nationwide Financial institution for Agriculture and Rural Growth’s (Nabard) Rural Infrastructure Fund to make up for the shortfall on this entrance.

Additionally learn | Land reforms: Centre to digitize land records and maps to promote credit flow in agriculture

Whereas this can be a refined nudge for banks to get their agri portfolios so as by January, a pickup in agriculture sector development can also be anticipated to assist banks.

As per a report by India Scores this week, agriculture sector development in FY25 is predicted to speed up to three.8% from 1.7% in FY24 and be regular at round 3.4% for FY26. “The higher-than-normal 2024 rainfall has lifted the FY25 agriculture development prospects from 1.7% development in FY24. Since a portion of rabi manufacturing is harvested within the first quarter of subsequent monetary 12 months, the impression of better-than-normal rainfall in 2024 is enhancing the expansion prospects of the agricultural sector for FY25-FY26,” the report stated.