Farmers in India find it easier to default than to pay back bank loans

By Swati Pandey and Rajendra Jadhav ,Reuters

SUPALI, India — Two years ago, Vilas Yelmar took out a 200,000-rupee (US$3,610) bank loan to develop a small grape orchard in a dusty hamlet southeast of Mumbai. The bank has repeatedly asked for the loan to be repaid, but Yelmar, whose annual income has risen to 2 million rupees, has spent the money on a new sport utility vehicle and a lavish family wedding. He is one of an increasing number of “wilful” defaulters in Asia’s third-largest economy, where banks are under government pressure to lend to farmers. Two-thirds of the population depend on agriculture for their livelihood and, to boost productivity — annual agricultural growth is just 3 percent — India has this year raised the farm lending target for banks by a fifth to more than US$100 billion. “My brother was the village head so it had to be a big wedding. That’s where the money went,” said Yelmar, speaking the local Marathi language, and proudly showing off his new SUV which he uses to ferry barrels of diesel and fertiliser. “Paying off the bank loan is not really my priority,” said the 39-year-old, who lives in a simple, yet spacious, house next to his 4-acre orchard near the main irrigation channel. Banks and government officials do not have data on just how many subprime farmers are abusing the cheap loan system, but they are giving banks a multi-billion-dollar headache.

Moral Hazard State Bank of India, which accounts for about a quarter of India’s total loans, including the one to Yelmar, said about US$1.4 billion, or 9 percent of its farm loans, turned bad in the year to end-March. Bankers bemoan the rise in “wilful” defaults among those taking agricultural loans — and using them to marry off their daughters, build extensions for their farmhouses, or become lenders themselves. Defaults also tend to increase when elections loom as farmers hope the government, desperate for their votes, will bail them out. The government bailed out farmers in 2008 with a US$12.5 billion loan waiver, but a struggling economy and swollen fiscal deficit make another rescue unlikely. “Agriculture loans are more retractable, depending on what type of whispers go around. If the whispers are about elections and debt waivers then interest payments drop,” said SBI Chairman Pratip Chaudhuri, noting the rise in defaults is a big concern for the bank. Under the government’s targets, banks have to go out of their way to lend to poor and marginal farmers who may not be able to repay the loans. If banks fail to meet the targets, the central bank locks up the shortfall for five years in a fund that returns just 4-5 percent a year. Bad farm loans contributed nearly 44 percent of new non-performing loans (NPLs) in fiscal year 2011, and have jumped 150 percent in the past two years. In the year to March 2011, sour agriculture loans almost doubled to 3.5 percent of total loans by state-run banks, which account for about 70 percent of India’s total loans and deposits.