Agricultural Lending Target Might Be Hiked In The Upcoming Budget

According to one of the leading financial dailies, the government may increase the target of banks lending to the agriculture sector by 22% to Rs 7 lakh crore, in the upcoming budget 2013-14. It is also expected to retain its interest subvention scheme of 3% to the farmers who pay their dues regularly. The move will result into better financial inclusion, with more farmers enabled access to banking services in the country.

As per the current Reserve Bank of India (RBI) guidelines, domestic banks need to lend 40% of their total advances towards Priority sector lending. Agriculture is a part of priority sector lending and approximately 13.5% of the total advances need to be allocated directly to the agriculture sector and an aggregate of 18% of total advances towards agriculture and its allied activities.

We believe that if the government increases the growth target for the agricultural lending than the overall lending to the sector may also witness a rise in FY14. The growth in the agricultural lending of around 22% may exceed the RBI projection of the advances growth for the banking sector for FY14. 

Banks usually lend to other NBFC and small financial firms which further lend to farmers and provide agriculture loans. This is qualified as the agricultural lending and hence many banks adopt this strategy. The other way round could be that banks directly take up a part of small businesses (purchase loans) of the company which are into agriculture and allied activity lending. These practices are common as banks still do not have sufficient access to rural India. Also, if they set up a branch in the rural space, the break-even of the same may take 36-48 months compared to around 20-24 months for the branch setup in the Tier 1 and Tier 2 cities.

Even in early 2012, RBI committee, under the Chairmanship of M.V. Nair, had proposed to raise the priority sector lending target for the foreign banks to 40% of the total advances. However no concrete decision has been witnessed after that and the foreign banks continue to lend around 32% of the total advances.

We believe that one has to closely watch out for RBI moves and guidance along with the union budget announcement next month which will give some clarity on the matter. Nevertheless, as and when required, we will be updating on the same. The following is the monthly chart of the bank credit of Indian banks, extracted from the RBI’s website: