SUPALI: Two years ago, Vilas Yelmar took out
a 200,000 rupee ($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 per cent - India has this year raised the farm lending target for banks by a fifth to more than $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 fertilisers.
"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 $1.4 billion, or 9 per cent 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 $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 per cent a year.
Bad farm loans contributed nearly 44 per cent of new non-performing loans (NPLs) in fiscal year 2011, and have jumped 150 per cent in the past two years. In the year to March 2011, sour agriculture loans almost doubled to 3.5 per cent of total loans by s tate-run banks, which account for about 70 per cent of India's total loans and deposits.
"The pace at which agri-NPLs have increased has been worrisome," said Suresh Ganapathy, an analyst with Macquarie Research. "The willingness to repay has been affected by debt waivers ... and that has created a moral hazard."
Yelmar, who said he doesn't want his children to have to resort to farming, got a heavy interest rate discount of 3 per cent on his SBI loan, thanks to government handouts, compared to the 14-15 per cent interest corporate borrowers are asked to pay. Some lenders even offer zero interest on farm loans.
But, for the banks, getting any money back can be an issue. "The cost of servicing an agriculture loan is very high. During every harvest, you need an army of people to go out there and collect dues from each farmer," said Michael Andrade, senior vice-president for agri-lending at HDFC Bank. "This increases your costs, and hurts profitability, bottom lines."
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 per cent - India has this year raised the farm lending target for banks by a fifth to more than $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 fertilisers.
"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 $1.4 billion, or 9 per cent 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 $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 per cent a year.
Bad farm loans contributed nearly 44 per cent of new non-performing loans (NPLs) in fiscal year 2011, and have jumped 150 per cent in the past two years. In the year to March 2011, sour agriculture loans almost doubled to 3.5 per cent of total loans by s tate-run banks, which account for about 70 per cent of India's total loans and deposits.
"The pace at which agri-NPLs have increased has been worrisome," said Suresh Ganapathy, an analyst with Macquarie Research. "The willingness to repay has been affected by debt waivers ... and that has created a moral hazard."
Yelmar, who said he doesn't want his children to have to resort to farming, got a heavy interest rate discount of 3 per cent on his SBI loan, thanks to government handouts, compared to the 14-15 per cent interest corporate borrowers are asked to pay. Some lenders even offer zero interest on farm loans.
But, for the banks, getting any money back can be an issue. "The cost of servicing an agriculture loan is very high. During every harvest, you need an army of people to go out there and collect dues from each farmer," said Michael Andrade, senior vice-president for agri-lending at HDFC Bank. "This increases your costs, and hurts profitability, bottom lines."
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