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Knowledge At MET

Knowledge At MET

Agricultural Advances and its Impact on NPAs of Public Sector Banks- A Case Study with Reference to State Bank of India, Mumbai Region.

As per the statement given by Mr. A. Krishna Kumar, Managing Director, State Bank of India on March 31, 2012, SBI's slippages were at Rs 26,976 crore, up from Rs 18,145 crore in FY11. The bank's gross NPAs rose to 4.44 per cent (3.28 per cent in FY11), while net NPA was 1.82 per cent in FY12 (1.63 per cent in FY11). We know that NPA can only be reduced but it cannot be avoided. Even if the banks don't want to sanction the loans they are obligated by the government as it leads to investment of money for development purposes. Especially in agriculture sector sanctioning of credit is of utmost importance as agriculture is the backbone of India and a lot of scope has been given to agricultural sector.

This assignment on the above topic makes an attempt to study the effect of different variables on the non performing farmers, as the main objective of our study is to know what are the difficulties faced by our Indian farmers in paying back the borrowed amount with regular payment of interest. We have used both the data collection methods and Telephonic interview method to collect sufficient information. After the study suggestions are given as to how the NPA's can be minimized by considering the main functions of Management.

The main business of a banking company is to receive deposits and lend money. Receiving deposit involves no risk, since it is the banker who owes a duty to repay the deposit, whenever it is demanded. On the other hand, lending always involves much risk because there is no certainty of repayment. A banker shall be very cautious in lending, because he is not lending money out of his own capital. A major portion of the money lent comes from the deposits received from the public. These deposits are mostly repayable on demand. Hence, while lending money, a banker should follow a very cautious policy. The risk involved in lending business makes it very important as it involves making prominent decisions. Therefore while sanctioning credit the banker should appraise the project reasonably or else it leads to the non-repayment of loans and advances. Most of the banks today in India are facing the default risk wherein some part of the profit is reserved for covering the non-performing assets.

Role of PSB

Public Sector Banks have been playing a vital role in the economic development of the nation. The flow of credit to agriculture and allied sectors during the 1st two decade of nationalization paved the way for industrial growth because of the robust growth in the rural economy. The contribution of credit to SMEs also heralded entry of Indian economy in the global scene. Never the less the Public Sector Banks have been subjected to continuous criticism by various Govt. agencies and entrepreneurs /borrowers alike in different forum and in different periods. From parliamentary committees to the block level review meetings, the Banks have been facing the flack for the slow and tardy growth of credit and being branded an institution insensitive to the credit needs of the clients. The gap between the expectation and delivery has never been appreciated leaving the Banks to take cover. Banks have been defending themselves quoting the ever-increasing NPA as the prime reason for strictness in credit disposition. This is despite a plethora of laws, like State Public Demand Recovery Act, Agriculture & Misc. Recovery Act, Debt Recovery Tribunal and the SARFESAI Act. These acts cover almost all types of defaulters i.e. from small farmers to top industrial/ business houses. Therefore, it is but natural that eyebrows are raised as to what prevent the Bank officials taking quick, prompt and pro- active decision! Why is that an applicant has to answer a heap of questions and has to run for days and months to get a credit limit sanctioned or even face silent rejection. And why is that Private Sector Banks en-cash this delay and dilemma of the Public Sector counterpart, by delivering a fast decision and thereby increasing their business Is it that Private Sector officials are better qualified and better trained or having better knowledge in comparison to Public Sector Officials.

Narasimham Committee's view

The Narasimham Committee on financial reform also says “there is indeed no such thing as riskless banking and there would be occasional losses which with benefit of hindsight, might appear to have been avoidable. Provided that the losses are bonafide business losses, they should be accepted as such. Mistakes will be made but an atmosphere of fear of being subjected at some later date, to investigation and unsavory publicity is not conducive to efficient and informed decision making”. The committee also mentions about the promises made by the authorities to the Public Sector Bank officials that mistakes arising out of bonafide decision would not be questioned. Sadly these officials know that these are only mere promises with little, if any, intention of implementing them. Cases are not rare where Central Vigilance Commission insists on issuing a warning to an official before retirement for some minor lapse. And the Bank duly administer the warning on the last day of the officials service asking him to be more careful in the discharge of his duty and it is immaterial that the official had only few hours service left in the Bank. Many Public Sector Banks officials would be able to recall some such instances that had hit their colleagues on the last day in service. Is it then a surprise if Public Sector Bank officials widely perceive the vigilance machinery as a persecuting mechanism from which one has to be lucky to escape?

Challenges of Agricultural lending

In any lender-borrower relationship, there is a general problem of moral hazard that is the result of specific personal characteristics and decisions of each individual borrower. In this regard, farmers do not differ from any other borrower group in terms of information, incentives, monitoring and enforcement problems associated with the lending process. Firstly, it is obvious that the lender does not have the same information as the borrower. The latter knows exactly what his/her own management capacity is and how the loan will be used. The lender does not know the potential borrower to such an extent. In rural financial markets, information about low income loan applicants is particularly difficult to obtain. Secondly, even if the loan applicant frankly shares all relevant information for the credit decision, his/her future actions cannot be fully predicted. Therefore, it is crucial for financial institutions to apply incentives so that borrowers behave in such a way that repayment is assured. Thirdly, the farmer may decide to change his/her economic behavior, invest the money elsewhere or simply move to another part of the country. Many subsidized agricultural credit programs tried to manage this risk by imposing very costly regular monitoring of the borrower. Finding cost efficient methods of monitoring borrowers is a particular challenge in agricultural lending. However, there are other risks beyond the general behavioral risks of a borrower. This second category of loan loss risks is associated with the agricultural sector or agricultural production. It refers to factors external to the farmer's repayment attitude.

Farming is a risky business

Crops may fail, weather influences the productivity and sale prices fluctuate and are difficult to predict when the crops are planted. If productivity is lower than expected, farmers may not be able to repay loans. These risks and many other aspects of agricultural risk will need to be identified, measured and actively managed in order to stop lending institutions turning away from this clientele. Let's look at the various external risk categories that need to be taken into account in agricultural lending.

Production and yield risk

Agricultural yields are generally uncertain, as natural hazards such as the weather, pests and diseases and other production calamities impact on farm output. Even slight changes in weather conditions - less rain than usual - can seriously impact on farm production. Pests and diseases may spread quickly, leading to a loss of part or all of the crop's produce. The soil quality of the plots as well as their location also significantly influence productivity and yield risk.


Non-Performing Asset means an asset or account of borrower, which has been categorized by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India.

Out of order

An account treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order'.


The methodology followed in this case study is Primary Data Collection method which involves both monitoring and communication method. In the communication study, the researcher questions the subjects and collects their responses by personal or impersonal means. The communication followed in the case study is Telephonic Interview wherein the farmers were interviewed through telephone in Hindi and Marathi as well as in person.

Reasons for non-performing loans in the case of agricultural Advances

As the scholar would like to study the reason for performing loans among farmers has selected a sample size of 100 farmers was chosen randomly from select 5 branches of State Bank Of India, covering different regions namely, Thane, Kalyan, Bhiwandi, Kurla and Muland. Among these 100 farmers 50 are creditworthy borrowers who pay their interest properly and the other 50 farmers are nonperforming farmers who do not make any attempt to pay their interest on loan thereby contributing to generation of non-performing assets which will in turn reduce the profitability of the bank.

A set of 10 variables like age, caste, religion, education etc. have been considered which contributes to the non- creditworthiness of the farmers. Even though there are other factors which will contribute to the non-repayment of interest and loans, the following variables have a major share. Let us see the impact of these variables on the Normal as well as the nonperforming farmers and what factors differentiates the two classes of farmers.

  1. Effect of age
  2. Table 1: Effect of age Chart




    Number of Performing Farmers


    Number of Non- Performing Farmers

    >25 yrs















    1: Effect of age

    The above result clearly indicates that the age has its impact on the performance of farmers.
  3. Sexual status
  4. Table 2: Effect of sexual status



    Number of

    Performing Farmers

    Number of Non- performing farmers







    Chart 2: Effect of sexual status
  5. Educational status

  6. Therefore the performance of farmer and his/her educational status are dependent. Thus we conclude the educational status and the farmer performance are dependent.
  7. Effect of marital status

  8. This shows that performance of farmer and marital status is dependent.
  9. Family size

  10. Hence farmer performance depends on family size.

  11. Effect of Wealth status

  12. This shows that wealth status and performance of a farmer are dependent

  13. Effect of religion

  14. This shows that we cannot conclude whether farmer performance and religions are dependent or independent

  15. Effect of caste

  16. The performance of farmer is dependent on caste

  17. Effect of money lenders
  18. Apart from the bank and other financial institutions there are private money lenders who will lend money to the farmers on the basis of mortgage provided by the farmer.

    This shows that the presence of money lender is dependent on the performance on a farmer.
  19. Effect of guarantor
  20. Table 11: Type of correlation of variables

    From the table we can conclude that we have got a positive result as 16 of our variables considered had their impact on the performance of the farmers. These significant differences are the one which will decide the creditworthiness of a borrower. A banker should consider these variables while sanctioning credit to the farmers in order to reduce NPAs. Data Collected from the telephonic interview Reasons Contributing to creditworthiness of the borrowers according to the Ranking Scale:
    1. The farmers used the entire credit amount for the purpose to which the credit has been There is no diversification of credit amount for other personal uses.
    2. Using advanced type of farming in agriculture like tractors, tillers
    3. In addition to agriculture the farmers are involved in other allied activities which will contribute to their
    4. Bank personnel will educate the farmers about the benefits of timely repayment of loan and also about the consequences of This will create awareness in the minds of the customers.
    5. The type of crop matches very well with the cultivation
    6. Availability of adequate irrigation
    7. Highly fertile land will also contribute to the increased
    8. Use of good quality of seeds and also the bio-fertilizers which are eco-friendly.

    The Following table represents some of the prominent reasons provided by the creditworthy farmers for the proper repayment of loans and advances along with interest:

    Table 12: Reasons provided by creditworthy farmers

    Reasons contributing to the timely non-repayment of loans:

    1. Farmers face difficulty in the repayment of loan due to crop Indian farmers are mainly dependent on monsoon. Therefore the major cause of crop failure is the natural calamities.
    2. Majority of the farmers still follow the traditional method of farming even though the technology is This will also contribute to reduction in the crop output.
    3. Lack of labors at the right time to carry out the required operation will lead to delay in the harvesting of crops which in turn contributes to the crop
    4. Lack of inputs like the seeds quality, availability and bio-fertilizers will also contribute to reduction in
    5. To get a very high yield it is necessary to sow the crop that is suitable to the Mismatch between the crop and the cultivating land will also lead to crop failure.
    6. Some of the crops need an adequate supply of water for their In these cases lack of irrigation facility will also lead to crop failure.
    7. Pests and diseases to the crops will lead to crop
    8. One more reason contributing to reduced profitability is the decrease in the marketability of the product due to i) low quality product or ii) bulk
    9. Apart from inbound problems the personal obligation of the farmer and also the family commitments will also lead to the non-repayment/delayed payment of For ex: Marriage, Funeral etc.

    Table 13: Reasons contributing to the timely non-repayment of loans

    Results of the Case Study

    The young farmers have very less chance of defaulting the loan than the old aged farmers. From this we can predict that the age will contribute to the creditworthiness of farmers as the young farmers will work hard in the agricultural field rather than the old aged persons.

    This theory can be justified by considering the following reasons:

    1. Young farmers follow the advanced type of agricultural practices thereby getting better
    2. Young farmers readily adapt and implement innovative ideas as well as the agricultural methods which will help them to get a good crop yeild

    The percentage of women defaulting is rare because they are usually financed in groups called as the self-help groups wherein each group has a leader and that leader will take the responsibility of the entire repayment of the loan amount.

    From the study, it is clear that the most of the non performing farmers are illiterates. It means that the educational status will definitely have an impact on the performance of a farmer.

    There are 2 reasons which contribute to this interpretation:

    1. It is very difficult to change the mindset of the illiterate farmers as they take considerably long duration of time to accept the change.
    2. They are deprived of the information provided by newspapers and other articles published in magazines which give updated knowledge about the advanced agricultural techniques

    Unmarried farmers are efficient in repaying the loan than the married persons. Since unmarried farmers are single they don't have any family related responsibilities. Therefore they can concentrate on agriculture. This shows that the married persons have family problems which will contribute to their non-creditworthiness.

    Farmers having more family members face difficulty in repayment of loan as they have to fulfill the needs of all the members in a family. This is where the utilization of the sanctioned credit amount for the purpose to which it has been taken comes into picture. Most of our farmers are not utilizing the credit amount in agriculture instead they use for the purpose of marriage, construction of new house and also buying some physical assets like gold and vehicles. This will create a threat in the non-repayment of interest as these investments don't fetch any profit to the farmer. Therefore while sanctioning the loan the banker will not sanction it at a time but it will be in the form of installments. They will also conduct post sanction survey to check whether the loan amount has been properly utilized or not.

    BPL farmers will have more chances of default as they are in poverty. Poverty is a major problem in India, on which most of our politicians are working till today, to bring up the below poverty line people.

    Religion does not have any impact on the repayment of loan as it is only concerned with the personal identity of a person.

    When it comes to caste the people falling under the general category will face difficulty in repayment of loan as they did not receive any subsidy or other assistance from the government whereas the people belonging to backward community will receive certain privileges in the form of subsidies sanctioned by the government which will make them creditworthy.

    According to our study the creditworthy farmers did not take any loan from outside because they have to pay back the money at later stage. But in case of nonperforming farmers they take loan from wherever the money is made available as their job is to default.

    A creditworthy borrower will maintain his goodwill and a disciplined code of conduct with the other persons in the society. As a result we find that the creditworthy borrowers have guarantors than the non-creditworthy borrowers.

    Creditworthy farmers will pay back the loan amount with interest properly.

    The chances of defaulting are more in case of the farmers who have than 5 acres of land. This makes sense because the profit obtained by these farmers is not sufficient to meet both their family requirement as well as their repayment of loan. Experience counts a lot, not only in agriculture but in other occupations also. The farmers having more years of experience know the pros and cons of adapting a new technique in agriculture. This helps them to play safe in the cultivation activity. As a result their profitability increases.

    Before cultivation the farmers have to decide on the crop that has to be grown in their area. If the proposed crop suits the land the quantity of crop increases. If a farmer commits any mistake in decision making then he will end up in loss. This clearly shows that decision making not only plays a vital role in management but also in agriculture.

    Farmers following the advanced type of farming are more efficient in paying the interest than the farmers following old and traditional methods of cultivation.

    According to our study the farmers having well irrigated land have higher yield which will contribute to their creditworthiness. For this reason only the bank sanctions separate loan to the irrigation purpose. Farmers having other source of income other than agriculture will utilize this income to pay their interest. Therefore they have less chances of defaulting.


    Agri loan NPAs on the rise

    Even though the government provides subsidy to both normal as well as non performing farmers the non performing farmers will wait for the subsidies. This will create delay on the part of the farmer in payment of interest. Within five years of the announcement of the government's debt relief package for farmers, distress in the agricultural loan segment is building up once again with non-performing assets (NPA) seeing a sharp uptrend. Gross NPAs in the agriculture loan segment are inching up towards 5% compared with close to 3% for non-agriculture loans.

    Bankers feel the NPA situation could worsen if the monsoons are weak leading to lower crop yields and agricultural incomes. The Reserve Bank of India governor D Subbarao said at a recent Nabard conference that there had been a 47% growth in Agri NPAs in 2011-12.

    The country's largest lender State Bank of India (SBI) saw a 72% year-on-year (yoy) jump in farm loan NPAs to Rs. 7,778 crore in 2011-12. In percentage terms the NPAs rose from 6.7% of agri advances to 8.9%. Union Bank also saw a sharp rise in its agri loan NPAs from 4.1% to 9.6% during the same period. Other large public sector lenders like Bank of Baroda (BoB) and Punjab National Bank (PNB) have also seen a rise in their agri sector NPA levels to 5% and 4% respectively, up from 3.6% and 3.5%.

    Private sector banks have managed to keep their agri NPAs under check. HDFC Bank saw a small rise in NPA levels from 0.4% in 2010-11 to 0.9% in 2011-12 and ICICI Bank saw NPA levels fall from 7.6% to 4.8% and Axis Bank from 2.6% to 2.3%.

    According to Nitesh Ranjan, economist at the Union Bank, public sector banks have seen a much larger rise in agri sector NPAs because they now recognize system-based NPAs. "Under the manual recognition of NPAs, most PSU lenders did not recognize several agri and small sized accounts as NPAs. But now all accounts that have not seen interest payments for over 90 days and over are classified as NPAs," said Ranjan.

    Finally, we can conclude that the bankers can avoid sanctioning loans to the non-creditworthy borrowers by adopting certain measures. They must be careful and appraise the project which involves checking the economic viability of the project. A banker must consider the return on investment on a proposed project. If the calculated return is sufficiently higher than the credit amount he can sanction the loan.

    Secondly, he can constantly monitor the borrower in order to ensure that the amount sanctioned is utilized properly for the purpose to which it has been sanctioned. This involves the post sanction inspection by the banker.

    Thirdly, the banker should get both the formal and informal reports about the goodwill of the customer. If he had already proven as a defaulter then there is no question of sanctioning loan to him.

    Fourthly, the banker should motivate the farmer to pay the interest properly and in a timely manner.

    Fifthly, the banker also has to educate the farmer regarding the effects and consequences of defaulting. By considering all the above factors the banker can reduce the nonperforming assets in a bank.


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Authored by
Prof. B.D. Dhongade
Visiting Faculty at MET - IOM, Mumbai

Tags: MET Institute of Management