Kisan Credit Card buoys rural demand

Notwithstanding the plethora of efforts made by the banking sector, the Kisan Credit Card (KCC) has not reached the complete mass of farmers. Still, given its limitations, KCC has contributed in its own way for continued buoyancy in rural consumption and also for inflation in food items.

Agreed that KCC was meant to meet short-term credit needs of farmers towards cultivation, consumption and some component for miscellaneous requirements. However, bankers maintain that farmers are more often than not found using a big chunk of such loans for consumption and not productive purposes as money comes cheap under the scheme. After all, commercial banks offer farm loans at 7 per cent to borrowers and also, they get interest rate subvention at 2 per cent from the government on such loans up to Rs 3 lakh. In contrast, the regular credit card issued to urban consumers by banks charge interest any where between 24 and 36 per cent.

The country’s premier lender State Bank of India (SBI) has the largest exposure to KCC loans — over Rs 44,000 crore of which about 5 per cent have turned bad, while another PSU lender Central Bank of India’s exposure is Rs 8,428.05 crore and that of Bank of Maharashtra is Rs 2,045 crore.

Bankers aver that monitoring the end-use and recovery of KCC loans is difficult as there is no collateral requirement for such loans till a specific limit. Needless to say, bankers too are not aggressive on recovery from farmers as this is a politically sensitive matter.

“The whole problem is lack of supervision at the branch level. Money intended for the poor farmer is being misused in many cases. Lending to the sector is growing, but not the sector,” says N K Thingalaya, former CMD of Syndicate Bank, who is also an expert on rural banking.

The credit culture in rural India deteriorated sharply after the government announced a Rs 70,000 crore debt waiver for farmers in the February 2008 budget. “After the waiver, repayments from farmers have slowed as banks are under immense pressure from the government to increase lending to the sector which is bracketed under priority sector lending stipulated by the government,” said a banker who declined to be named.

As per the available RBI data, banks had Rs 33,200 crore overdue in the direct agrifinance portfolio till 2011 June, while the latest figures are not available.

The chairman of a large state-run bank, however, dismissed concerns on KCC exposure. “We increase the credit limit only when the farmer repays fully. There are no major concerns,” he said.

In fact, the farm loan waiver was one of the United Progressive Alliance-led (UPA) government’s key programmes in its first tenure and at least partly responsible for its return to power in 2009.

Origin of KCC

Launched in 1998-99 by the then BJP-led NDA Finance Minister Jaswant Singh, KCC is meant to help farmers take decisions on how to use the cash for cultivation rather than banks funding suppliers, which was the case until then.

Issued to farmers based on their land holdings, KCC operates like a normal credit card. Farmers can use them for the purchase of seeds, fertilisers and pesticides, besides production needs, but in many cases, this doesn’t happen and farmers use them for raising money to take care of family weddings and medical needs.

A loan granted for short duration crops is treated as an NPA (non-performing asset) if the instalment of principal or interest remains overdue for two crop seasons. Loans granted for long-duration crops turn NPAs if the instalment of principal or interest remains overdue for one crop season. It is not unusual at some banks that a new loan cycle begins even before the existing loans are repaid fully, bankers said.

There is evidence of rampant ever-greening of loans drawn through KCCs in terms of loan amount and number of cards issued, analysts said, going by the growth of such exposure since 2010. Ever-greening refers to the practice of giving fresh loans to a borrower to help him meet interest payments. “Outstanding KCC loans have grown at around 33 per cent in the past two years, while the number of credit cards has grown at around 13 per cent,” said V S Karthik, an analyst at Espirito Santo Securities India, which shows farmers are taking fresh loans to repay old loans.

Gross NPAs at Indian banks swelled to Rs 1.79 trillion in December 2012, up 43.1 per cent from Rs 1.25 trillion in the year-ago period.

Ever-greening of loans has been increasingly taking place in other segments as well.

According to a report of the Emkay Global Financial Services, dated March 25, the effective loan growth for the week ended March 8, was 11-12 per cent against the reported 15.3 per cent. “Despite a sharp slowdown in industrial growth, the credit growth has refused to taper off... In our view, resilience in credit growth could be resulting from ever-greening of the loans if the circumstantial evidence is anything to go by,” said the report.

State of agriculture

The share of agriculture, which once generated maximum jobs, has been shrinking as a percentage of national income in Asia’s third largest economy — from 35.75 per cent in 1981 to 16.75 per cent in 2012. Domestic banks’ exposure to agriculture and allied activities rose to Rs 5.6 trillion in January 2013 from Rs 4.3 trillion in January 2011. For fiscal year 2014, the government has proposed to increase the farm credit target to Rs 7 trillion.

Agriculture is one of the largest sources of bad loans for most banks. It is contributing 9.72 per cent to the gross NPAs of SBI and 7 per cent of Central Bank of India. The country’s premier lender SBI has the largest gross NPAs — Rs 53,457.79 crore or 5.3 per cent of loans, followed by Punjab National Bank (Rs 13,997.82 crore or 4.61 per cent of loans) and Central Bank of India (Rs 8,938.47 crore or 5.64 per cent of loans). Also, a bad monsoon could mean a dramatic turn for the worse as the June-September rainy season being India’s main source of irrigation.

Moot cause for concern is that most banks do not have the tools to monitor the end use of farm loans. Even if they do, banks are reluctant to seek recovery from farmers due to the (political) sensitivity of the issue. Above all, as this is a mandated lending, the flow of money does not stop. It is immune to monetary tightening by RBI. Also, bankers cite many instances of ever-greening of such loans, as the farmer merely has to repay the loan for a day for the credit limit to be reinstated.

In the two years to March 2012, the number of KCCs grew by 28 per cent, while the outstanding amount grew by 76 per cent, implying that much of the money has gone to existing cardholders and not fresh borrowers. As per the latest data from NPCI, total number of RuPay Kisan Cards issued by 19 commercial banks and five regional rural banks (RRBs) as of March 31, 2013 stands at 911,068.

Interestingly, total credit growth to agriculture and allied activities as on February 22, 2013 was up 18.4 per cent from a year ago, which is much higher than the 14.4 per cent growth in overall non-food credit.

Bad loan bubble

One school of thought is that the way KCC scheme ran till now and the consequent exposure of banks may lead to a bad loan bubble waiting to burst if left unchecked.

Another school thinks just the contrary. “I don’t really think so,” says National Payment Corporation of India (NPCI) Chief A P Botha, adding, “KCC exposure is no different than the exposure by banks in other sectors like SME or other industries. The system can handle as they are in manageable level.”

It is quite a reassurance coming from Botha, who is the CMD of NPCI, which designed the RuPay Kisan Card to be adopted by all banks with their branding. NPCI has been set up by banks under Indian Banks Association (IBA) with active guidance from RBI which envisaged it as the umbrella organisation for all the Retail Payment Systems in the country way back in 2005. It comprises 15 directors, with 10 from banks who contributed Rs 10 crore each to the paid-up capital of the entity, with N R Narayana Murthy of Infosys as Chairman of the Board, two independent directors and one nominee from RBI, other than Hota as MD and CEO of NPCI.

Further, NPCI’s Hota pointed out that a working group headed by T M Bhasin, CMD of Indian Bank, has suggested changes to be made in the KCC scheme to make it a “smart card” which is accepted in some centres, apparently for use in cultivation activities, and this will help check undue consumption by farmers.