While the climate effect could leave farmers with less money to repay their loans, any promise of loan waivers by political parties could be a sentiment dampener, as there would be uncertainties while governments evolve mechanisms to pay lenders back.
“El Nino could lead to stress in the agriculture portfolio of banks, mainly Kisan Credit Card (KCC) loans,” said Anand Dama, an analyst with brokerage house Emkay Global. “We believe farm stress in the run-up to the general elections may lead to calls for farm-loan waivers and so pose a risk to asset quality for banks, mainly KCC-heavy banks like SBI and HDFC Bank,” he said, adding that microfinance players, with higher portfolio share in rural areas, too will need to keep a close watch on asset quality.
While the economy grapples with high food inflation, potentially adverse climate conditions are posing a fresh threat to India’s agriculture output. Heat stresses are building up again like last year, putting pressure on the production of rabi crops like wheat, oilseeds and pulses. On top of this, the growing possibility of an El Nino condition could spoil the monsoon season ahead, Emkay said in a report.
El Nino refers to the abnormal warming of surface waters in the eastern tropical Pacific Ocean, often associated with droughts in India, resulting in low agricultural output mainly for rain-dependent areas. The US National Oceanic and Atmospheric Administration has predicted the possibility of El Nino conditions this year.
Since 1994, India has encountered seven instances of El Nino, hurting farm production and hence resulting in higher non-performing assets for banks in the related subsequent three-four quarters. The latest instance was in 2019, after which agricultural NPAs for the State Bank of India shot up, from 11.6% in the fiscal year 2019 to 15.9% in the fiscal year 2020.
At the end of September 2022, agriculture bad loans totalled 8.6% of the credit disbursed to this sector, Reserve Bank of India data showed.El Nino resulted in 14% lower rainfall and a 2-3% lower kharif cereal production during 2015.
“It’s a wait-and-watch situation, we are keeping a close watch on the performance of our agriculture portfolio but honestly the vagaries of nature is not in our hands so we will have to deal with it if El Nino happens,” said the agriculture head of a PSU bank who did not wish to be named. “Though as bankers we really hope that governments would deter from announcing farm loan waivers as it leads to bad credit discipline.”
The asset quality situation of banks has been on a steady mend. The sector’s impaired-loan ratio declined to 4.5% in the first nine months of the financial year ending March 2023 from 6% in FY22.