SBI switches to farm lending backed by gold

With borrowers delaying repayments on agri loans and delinquencies on the rise, State Bank of India (SBI) has been moving to limit losses in the agri segment by making loans backed by gold. Delinquencies follow announcements of farm-loan waivers by several states and resultant pressure on repayments. At the end of the September quarter, a fourth of the bank’s agri-loan book was backed by gold.

“We have been reducing our exposure to agriculture anyway. For the last two-three years, we have been offering this product, where gold is taken as collateral. About 25% of the agri book is now made of such loans,” said a senior executive at the bank.

Between September 2017 and September 2018, SBI’s agri-loan portfolio shrunk 0.3% to Rs 1.9 lakh crore even as all other segments of domestic advances saw a positive growth.

The bank sees itself having a competitive edge over non-banking financial companies (NBFCs) in the gold loan business as it can offer interest rates much finer than its non-bank counterparts. While a gold loan from an NBFC can cost a farmer anything between 13% and 14%, SBI’s crop loans with gold as collateral can be availed of at anything between 9.25% and 10% per annum. Short-term crop loans of this nature are charged a fixed rate of 7% per annum, as per the government’s directive.

Since 2016, a number of large states – Karnataka, Maharashtra, Punjab and Uttar Pradesh among them – have announced farm-loan waivers. At least one more state, Madhya Pradesh, is likely to be added to this list if a new government in the state keeps a key electoral promise it made to farmers.

The phenomenon began to tell on banks’ agri-loan portfolios in FY18 and continued to weigh till the first half of FY19. At SBI, the gross non-performing asset (NPA) ratio for its agri loan book shot up to 11.43% at the September-end this year from 9.93% on September 30, 2017; slippages or accretion of fresh bad loans were Rs 2,700 crore.

The largest private bank by assets, HDFC Bank, too, admitted to facing repayment pressure in agri loans, even as it didn’t disclose the quantum of slippages. Paresh Sukthankar, deputy MD, had told analysts after the June quarter results, the value of agri NPAs had moved up by about 40% year-on-year to Rs 2,100 crore. Over the same period, the bank’s Kisan gold card portfolio had expanded by about 20% to `38,458 crore.

State Bank of India