As the Indian banking industry eagerly waits for recovery after almost a year of economic slow down, a severe drought scenario and its impacts on fiscal deficit, inflation, rates and defaults in agriculture loans have put spanners in the revival of banking business plans.

According to reports, rainfall in the country between June 1 and August 12 has been 29% below normal and 209 of 593 districts have already been declared drought affected.

Deficient rainfall has led to a reduction in Kharif crop sowing, fueling fears of high food prices and rising defaults in the agricultural loans in the coming months, say bankers. Economist and experts have already slashed country?s growth outlook for the current fiscal to 5.8% from its earlier projection of 6.5% owing to the deficient monsoon.

According to a Moody?s report, a delayed and insufficient monsoon is taking its toll on India?s economy. Farmers are struggling and putting pressure on the government to extend financial assistance. A fall in investor confidence has triggered capital outflows from the stock market and despite relatively high interest rates in India the rupee has slipped against the dollar.

Approximately 25% of the country is affected by drought and agricultural output is set to plummet this year. Lower income for rural workers will in turn be a huge drag on private consumption, an important driver of India?s economic expansion.

Policymakers are under pressure to assist struggling farm households. However, recent measures such as diesel subsidies for farmers will widen this year?s fiscal deficit. Meanwhile, the threat of inflation looms large with food prices likely to soar in the next few months. Drought has certainly made it tough for the government to revive the economy.

?Kharif crop sowing is picking up but is likely to be lower than last year. (We) see agricultural output falling by 3% in 2009-10 against previous forecast of growth,? said an HDFC Bank research report. Reports of expected reduction in kharif output of up to 10% have prompted us to revise our agricultural growth forecast, said the bank.

Planning Commission deputy chairman Montek Singh Ahluwalia said that poor monsoon would affect farm production and trim economic growth. ?The existence of drought by itself can lead to some shaving down of the growth projections,? he said. The impact, however, will not be much on gross domestic product (GDP) as agriculture production constitutes less than 20% of the economy.

On the impact of decline in farm output on economic growth he said, ?If farm production declines, one fifth of that percentage would be knocked off from the projected GDP growth rate. There would be some effect but not very large.? Though only some parts of the country would be affected by drought, farm output will fall and there will be some distress, he added.

RBI deputy governor KC Chakarbarty says erratic monsoon would impact the prices of essential commodities. ?The expectation is that the erratic monsoon may put pressure on inflation,? he said. When asked whether farm loans would be rescheduled because of the uncertain monsoon this year, he said it was an issue for the next year.

Higher food prices are likely to result in year-end inflation at 6% as compared with 4% earlier. Also, there might be a 125bps cumulative policy tightening in 2010 compared with 75bps earlier said a Citi bank report. The 10-year bond yields are likely to shoot up to 7.5%, it added.

Taking special measures on behalf of the banking industry Bank of Maharashtra chairman and managing director Allen CA Pareira said the bank is working on rescheduling agricultural loans for the affected farmers by converting the short-term loans to long-term ones. Normally the bank provides crop loans with the repayment period of a year only. However, we are trying to reschedule those loans so that farmers can repay them over a period of 3-5 years, he added.

In absence of any fresh guidelines from the RBI, the bank is going by the old guidelines of the apex bank, issued in 1995, which talked of treating farm loans as standard assets in case of a calamity like drought, he said.

Moreover, the bank is advising farmers to leverage their Kisan credit cards that work on cash credit system and which allow the farmers to use the limit throughout the year.

?I believe that interest rates may increase by 25-50 basis points after September. Our focus at the moment is to help farmers without tweaking the rates. We have projected a target to bring our gross NPAs in the farm credit to 2.5% level by December this year,?? he said.

The bank is organising credit camps in various areas to educate farmers on how to harvest rainwater and utilise it to the maximum. As of now, the bank?s agricultural loan portfolio comprises of Rs 4,000 crore. Against the target of Rs 6,000 crore for the farm loans for the current fiscal, the bank has already disbursed loans worth Rs 800 crore.

Bank of India executive director M Narendra said keeping the current scenario in view, the bank is working on alternative ways by shifting its focus to allied activities. ?We are running 11 rural development training institutes throughout the country. Youths are being imparted training for allied activities other than farming at these centres. Also, these centres help increase their linkage to urban employment. Apart from it, there are 5,000 farming clubs in our fold which act as a link between small and marginal farmers and banks,?? he said.

The bank has projected a target of disbursement of farm loans worth Rs 20,300 crore by the end of the current fiscal as against Rs 16,500 crore during the year 2008-09. ?I hope that the interest rate will remain stable for some more time now as there is enough liquidity into the system. This is more because of the promise made by the RBI and the government that huge government borrowing programmes will be a hassle-free phenomenon. Until the inflation figure crosses the mark of 5%, it was not likely to impact the interest rates significantly,?? he said.

The bank has NPA in the agricultural loan at a level of 2.5% which is valued at Rs 280 crore as of now which was not too high. Moreover, RBI is also thinking of extending the repayment period of agricultural loans, he said.

Union Bank of India general manager & head priority sector lending LNV Rao said the bank?s NPA level in the agriculture segment is hovering at 2.8 and 3% as of now.