As the threat of El Nino effect looms large, financial institutions and farmers in India are increasingly concerned about its potential consequences on agricultural loans. According to a recent report by CLXNS, a digital-first debt resolution company, cited by CNBC, banks with significant exposure to the agricultural sector face growing vulnerability as they prepare for a potential rise in loan defaults. With historical data indicating the adverse impact of El Nino on crop production, the report urges proactive measures to mitigate the risks and protect the stability of the agricultural sector.
Rising Vulnerability and El Nino’s Historical Impact
The report highlights a concerning trend in banks’ agricultural sector exposure. As of January 2023, their total exposure to agriculture loans stood at 14.4 per cent of outstanding loans, representing a significant increase from the previous year’s 10.4 per cent. This surge raises urgent questions about the sector’s ability to withstand the impending El Nino impact.
Past instances of El Nino and its associated droughts have severely affected crop production in India. Data from 2001 to 2020 cited by CNBC shows that the country experienced seven El Nino years, four of which resulted in droughts. These drought years — 2003, 2005, 2009-10, and 2015-16 — witnessed kharif or summer-sown farm output declines, leading to inflationary pressures and threatening nearly half of the country’s annual food supply.
Concerns of Financial Institutions
The Reserve Bank of India (RBI) has also expressed concerns about the potential consequences of an El Nino event adversely affecting the southwest monsoon. The RBI’s recent bulletin predicts inflation to range tightly between 5.0 and 5.6 per cent over 2023-24, citing global uncertainties.
While there was a 15 per cent growth in agricultural lending from October to December 2022, accompanied by a decline in non-performing assets (NPAs), the report by CLXNS warns of the reverse effect that El Nino could have on these numbers. The impending El Nino could lead to an increase in NPAs, warranting cautious attention from financial institutions.
Additionally, the exponential growth of Kisan Credit Cards (KCCs) poses a significant concern. Outstanding KCC loans witnessed a remarkable 25 per cent increase, raising worries about potential loan defaults among farmers and the associated risks for financial institutions.
Recognizing the potential risks, the CLXNS report emphasizes the importance of implementing proactive measures to alleviate the financial burden on farmers and safeguard the stability of the agricultural sector. It suggests support measures like loan restructuring, interest rate relief, and extended repayment schedules to mitigate the impacts of El Nino, ensuring farmers’ continued livelihood and the agricultural sector’s sustainability.
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