The Maharashtra government’s threat to banks that they would face strict action — even face First Information Reports (FIRs) — if they asked farmers for credit scores smacks of high-handedness. At a state-level bankers’ committee meeting on Monday, Chief Minister Devendra Fadnavis asked banks to not insist on credit scores — or CIBIL scores — while sanctioning crop loans to farmers. Apart from the fact that such threats are totally uncalled for, and do not befit the status of the chief minister of a large state like Maharashtra, they are also outside the remit of the powers of politicians. Framing the lending process — including the necessary checks and balances — is the prerogative of lenders. At the end of the day, banks are working with public funds and they alone are responsible for their safety; they must ensure that the money generates adequate returns so that depositors can be paid the promised rate of interest. As such, outsiders, who do not shoulder this responsibility, cannot be dictating terms to lenders.
Admittedly, a credit history for most farmers will take time to be built as they typically borrow money from the local moneylenders and even relatives. And none of these people report to credit bureaus for obvious reasons. Also, these are still early days for farmers getting into the formal financial ecosystem through schemes like Jan Dhan Yojana. This creates a catch-22 situation for banks who tend to avoid lending to small and marginal farmers due to the risk perception. But threat to file FIRs is not the solution. Lending to the agriculture sector is not the easiest of businesses; it is not simply about assessing the creditworthiness of farmers but also taking into account other factors including the weather. It is no surprise that banks have run up very high levels of agriculture non-performing assets (NPAs).
In March 2022, it was as high as 9% but has since come down. At the end of September 2024, agri-NPAs stood at 6.25%, compared with 2.9% for industry, and 2.5% for services. Nonetheless, the farm sector has seen good credit flows with the Reserve Bank of India mandating that banks lend 18% of their adjusted net bank credit to the agriculture sector. Within this target, 14% had been set for non-corporate farmers, of which a target of 10% is prescribed for small and marginal farmers. Total lending to the agriculture and allied activities grew by 10.4% in FY25, which is more or less in sync with the total non-food credit growth of 11%. In the previous year, agri-credit grew 19.3%, again in line with the total lending of 20%.
One reason for the elevated agri-NPAs has been the loan waivers by state governments — typically at the time of going to the polls. While the quantum of loans waived is repaid to the banks by the state government concerned, such announcements vitiate the loan culture. Borrowers believe they can get away by not paying up. A similar situation has been seen in the microfinance sector. Interventions by state governments — most recently Karnataka and Tamil Nadu — asked lenders not to cause borrowers “undue hardship” while recovering their loans. State governments are welcome to support farmers by disbursing a part of the loan or providing free crop insurance but they simply cannot direct banks to go easy on proper homework.