The asset quality of India’s agricultural credit could be significantly impacted by crop damage due to untimely hail and rain in March 2015, says India Ratings and Research (Ind-Ra). The NPL ratio of the agri-loan portfolio could double for some banks, though the reduction of overall return on asset may be muted at between 4bp-6bp (about 10% of the profitability of government banks). The unseasonal rains followed one of the weakest and most deficient (12%) monsoons that the country had experienced in FY15 which has heightened its impact.

Agricultural loans grew 16% in FY15 and have contributed 25% to incremental credit growth since March 2014. With delinquencies in the agri-loan portfolio likely to rise, they will add to the already stressed assets of banks (10.6% of loans on Dec.31, 2014). States highly impacted by these excess rains make up a significant portion (37%) of the overall agricultural credit extended by banks in FY14. Ind-Ra estimates that system-wide agricultural NPAs as a percentage of total agricultural advances will rise to 16.9% by FY16 from 13% in FY14 as a direct result of the unseasonal rains.

As a result, gross NPL ratio (on total advances) for the banking system will increase by 40bp. This will translate into a profitability impact of 2bp-3bp on system-wide post tax return on assets, according to Ind-Ra’s estimates.

The impact of the unseasonal rains will be felt with a lag, as NPA recognition policies for agricultural loans (one or two crop seasons past due) differ from those of corporate or retail loans (90 days past due).

Ind-Ra expects the profitability impact to be felt in 2HFY16. Governmental support through subsidies may not significantly benefit banks as the amount of support (Rs 2,500/acre) to be provided is marginal compared with the extent of the losses (INR20,000/acre). Also, it is unlikely that the support money will be used by impacted farmers to repay bank loans.