Dnyaneshwar Siddhanth, a farmer from India’s western state of Maharashtra, was in desperate need of money last month to buy seed and fertiliser as the monsoon sowing season approached.
But after being rejected by his bank for a loan despite several attempts, Siddhanth finally borrowed 150,000 Indian rupees ($2,021) from a moneylender at a rate of 60 percent annually.
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Amid India’s worst economic slowdown in decades due to the coronavirus pandemic, millions of farmers like Siddhanth are being shunned by banks as lenders turn cautious due to rising bad loans.
That is forcing farmers to turn to illegal moneylenders who are charging increasingly exorbitant rates, according to more than a dozen farmers and bankers that the Reuters news agency spoke to.
Agriculture accounts for almost 15 percent of India’s $2.8 trillion economy and is a source of livelihood for more than half of its 1.3 billion people.
Higher interest rates will reduce farm earnings, hurting rural incomes which are key to reviving the economy.
“Most of the profit goes to paying interest to a private money lender,” Siddhanth said.
“Everything now depends on monsoon rains. If the crops fail, then I will have to sell land to repay the loan.”
Until last year, private money lenders were charging 24-36 percent interest, but are now asking for 48-60 percent as more farmers seek loans, said Prashant Kathe, another farmer who has borrowed 300,000 rupees ($4,043) at a 60 percent interest rate.
Commercial banks typically charge between 4-10 percent for crop-related loans.
Prime Minister Narendra Modi’s government has been instructing banks to increase lending, but bankers say they are choosing to be cautious.
Economists forecast India’s economy to shrink by 5.1 percent in the current fiscal year, the weakest performance since 1979.
Lenders also complain they are caught up in farm loan waiver schemes announced by several state governments to win over farmers ahead of elections.
“Even though some of the states announced the scheme years ago, the money has still not reached the bank so technically the farmer’s account is a non-performing asset for us and we can’t give more loans till the outstanding is cleared,” said the head of agriculture lending at a large state-owned bank.
Last year, the government in India’s richest state, Maharashtra, had announced that banks will write off loans of up to 200,000 rupees ($2,695) to distressed farmers.
Siddhanth, who already owed a bank 178,000 rupees ($2,399) from a previous loan, was covered under the scheme. However, the state government is yet to provide funds to repay it, and nearly one-third of the loan remains outstanding.
As of October 2019, 10 states that had announced farm loan waivers since 2014-2015 had yet to complete the promised write-offs, according to local media reports.
“Only about 30-35 percent of the promised amount by the various state governments has been sanctioned to the bank,” said a senior banker who did not want to be identified.
The high level of bad loans in the agriculture sector is another deterrent to more lending.
The share of soured loans in the segment has risen from 8.4 percent in September 2018 to 10.1 percent as of March 2020, at a time when the overall share of bad loans in the banking sector has been going down.
“There is reluctance to lend in the agri segment due to poor asset quality, as a result banks are more keen to lend if there is gold as collateral, but otherwise fresh lending in the segment has been tepid,” said Anil Gupta, analyst at credit rating agency ICRA.
Between March and June this year, lending to the agriculture sector contracted by 1.8 percent, according to the Reserve Bank of India, the country’s central bank.