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Monday, May 04, 2015

Ind-Ra: Unseasonal Rains Could Impact Banks' Profitability by Up to 10%; Agri NPLs May Double

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 31 December 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 (INR2,500/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. 
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