Patchy rains may hit rural lending, banks stay cautious

Kolkata | Mumbai: India's rural-focused bankers are tracking the monsoons with knitted brows, trying to gauge whether patchy rains would force them to moderate small-ticket credit flows.

Uneven rainfall in parts of the country, particularly the agrarian belts of east-northeast and north-central India, is stoking inflation risks for summer-sown (Kharif) crops, threatening both rural incomes and asset quality for lenders.

However, a strong harvest of the Rabi-or winter-sown-crop has lent some cushion to bankers offering credit to those relying largely on farm-gate incomes.

"There has been some de-escalation in the personal loan book. But we are very mindful of the fact that we need to also protect asset quality," said Bank of India managing director Rajneesh Karnatak. "And with this present crisis in West Asia and also the problem with the monsoons, we believe it is better to be very watchful and monitor the situation."

Early stress is already visible in the micro-enterprise business loan and personal loan segments, reflected in a rise in special mention accounts (SMA-1) due for 31-60 days. Further, patchy rains could potentially slow credit delivery to small-ticket loan segments as lenders adopt a risk-off strategy, people aware said.

Beginning to pinch

Small-ticket personal loans below ₹50,000 continue to face asset quality pressures, especially among fintechs, which comprise 57% of the segment's loan book, 360 One Asset Management Company said, referring to the SMA-1 data across the lending industry.

Bandhan Bank, which is aiming to expand its emerging entrepreneur business loans 5-10% in the next few quarters, said it would peg growth at the lower end if the situation remained vulnerable.

The monsoon rainfall deficit narrowed to 16% below the long period average as of July 27, following a renewed pickup in intensity. Kharif sowing continues at a robust pace, but the gap with last year's sown area is likely to persist, said Aastha Gudwani, India chief economist, Barclays.

Bankers are tracking the progress of the monsoons with a degree of granularity nearly matching the assiduity of the weathermen.

"We are tracking this closely. We track data of weather systems, sowing data, IMD forecast and drought patterns, state-wise and district-wise monsoon data, map it to our portfolio and so on," said V Vaidyanathan, managing director, IDFC First Bank. "As of now, the data is comfortable, and the portfolio is comfortable, but we will see it closer to Q3 or Q4. Fortunately, we have kept aside adequate provisions for any untoward situation."

Kharif sowing until the first half of July has generally trailed historical averages on acreage across all major crops, potentially hurting output volumes and rural incomes.

Money worries

"Below-normal rains and El Nino are expected to weigh on rural demand amid likely lower real income growth this year. Sowing is catching up, but is still down year-on-year, constraining the outlook for the harvest," Barclays' Gudwani said.

Her report pointed out that nominal non-farm wage growth has declined as evidenced in slower wage growth under the national rural employment guarantee programme, while food and fuel inflation are beginning to rise. Nevertheless, data on consumption of two wheelers, tractors and durables do not show a correspondingly sharp pullback.

A Reserve Bank of India (RBI) consumer survey in May shows sentiment had worsened even before the monsoon forecasts were known. Rural consumers showed negative sentiment on their current perception of employment and price levels, which deteriorated when compared with March.

In this backdrop, the RBI is expected to hold the policy rate early next month, pending clarity on the monsoon and the West Asia conflict.