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Agri Loan Limit Hike
Context:
The Reserve Bank of India (RBI) has raised the limit for collateral-free agriculture loans from ₹1.6 lakh to ₹2 lakh per borrower, effective January 1, 2024.
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- This decision is aimed at addressing rising stress in banks’ farm loan portfolios and encouraging them to improve asset quality.
- The RBI last increased the collateral-free loan cap in February 2019, from ₹1 lakh to ₹1.6 lakh.
- By further raising the threshold, the central bank seeks to provide farmers and small borrowers with more access to credit while easing their collateral burdens.
- This move is expected to enhance borrowers’ repayment capacity, particularly as small-ticket loan portfolios face mounting stress.
Reasons Behind the Hike
- While the RBI cited high inflation and increased agricultural input costs as reasons for the hike, experts believe the decision was also influenced by rising asset quality concerns in agriculture and agri-based gold loan portfolios.
- Banks have witnessed growing non-performing assets (NPAs) in agriculture loans and microfinance sectors over the past two quarters.
- Private sector banks, including Axis Bank, IndusInd Bank, Kotak Mahindra Bank, HDFC Bank, and AU Small Finance Bank, reported an uptick in unsecured loan delinquencies during the first half of the current financial year.
- This was attributed to disruptions caused by the general elections and extreme weather events like heatwaves.
Sectoral Trends and Lending Data
- According to RBI data, credit to agriculture and allied activities grew by 15.5% as of October 18, 2024, slightly lower than the 17.4% growth recorded during the same period last year.
- Priority sector loans in agriculture grew by 13.7%, down from 16.8% a year earlier.
- In contrast, credit against gold surged by 56.2%, a sharp increase from the 13.1% growth seen the previous year.
- This surge in gold-backed loans aligns with the RBI’s intensified scrutiny of gold financiers and their practices.
- The crackdown began in March 2024, with the temporary ban on IIFL Finance’s gold loan operations, and later extended to other banks and non-banking financial companies (NBFCs).
- Institutions such as Muthoot Finance and Shriram Finance were required to standardise lending practices, including gold storage and auction protocols.
Impact on the Banking Sector
- The revised collateral-free loan limit aims to alleviate stress caused by unsecured loans and improve lending practices across the banking sector.
- Public sector banks were also flagged for using gold as collateral for small-ticket agriculture loans, which are supposed to be collateral-free under existing guidelines.
