Agri loans emerge as biggest asset quality risk for Indian banks

Mumbai: Agricultural loans have emerged as the biggest asset-quality risk for Indian banks, with the segment's bad-loan ratio far exceeding those of industry, services and retail despite a broader improvement in loan books.

The gross non-performing asset ratio for agricultural loans stood at 5.1% in the second quarter of 2026, compared with 1.5% each for industry and services and 1% for retail loans, according to BMI Research, an arm of Fitch Group. The system-wide gross NPA ratio declined to 1.8%, making farm credit the clearest stress point in an otherwise healthier banking system, BMI said.

Agricultural bad loans have declined from more than 10% during 2020-21, but the segment remains a clear outlier. The vulnerability has increased after India's southwest monsoon ended 12.6% below its long-period average, marking the weakest rainfall since 2015.


At Bank of Baroda, agricultural NPAs rose 11.6% year on year to ₹9,128 crore and accounted for 34% of total slippages during the quarter. However, MD and CEO Debadatta Chand told analysts that the bank had not seen any signs of stress so far.

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Canara Bank reported agricultural loan slippages of ₹687 crore, accounting for nearly 37% of the total of ₹1,844 crore in second-quarter slippages. Its exposure to drought-prone areas stood at about ₹13,900 crore, MD and CEO Brijesh Kumar told analysts.

Kumar said the entire exposure was unlikely to come under stress as the State Level Bankers' Committees could offer relief to affected agricultural borrowers through measures such as restructuring or a moratorium. "Some kind of dispensation comes every time," he said.

Punjab National Bank said agricultural loans classified as Special Mention Account-2, or SMA-2, declined to ₹89 crore from ₹314 crore a year ago. SMA-2 accounts are those in which repayments are overdue by more than 60 days and up to 90 days.

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MD and CEO Ashok Chandra said PNB had not seen stress but remained "mindful" of the drought situation. The bank has put in place a large-scale programme to connect with farmers and monitor conditions on the ground, he said.

"Things are fully under control. There is no alarm button to be pushed now," Chandra said.

Lower farm incomes could weaken borrowers' repayment capacity and add to agricultural loan arrears, particularly as the segment already carries relatively high credit risk. However, the stress may take time to appear in banks' reported numbers because the classification of agricultural loans as non-performing is linked to crop seasons, the BMI report said.

BMI, however, does not expect the weak monsoon to cause a material deterioration in system-wide asset quality.

The principal kharif crop has already been harvested, while the rabi crop is less dependent on southwest monsoon rainfall. Greater irrigation coverage, government food buffers and more diversified rural incomes should also limit the transmission of deficient rainfall into borrower stress, the report said.

Differs from 2015

Agricultural gross NPAs stood at 4.6% in the first quarter of 2015 before rising gradually and eventually exceeding 10% during 2019-21. But BMI said similarly weak monsoons in 2015 and 2026 should not be taken to imply a comparable increase in system-wide bad loans.

The previous deterioration was driven primarily by a corporate bad-loan cycle rather than agricultural stress. The gross NPA ratio for industry loans rose from 6.2% in the first quarter of 2015 to 22.5% in the first quarter of 2018, sharply worsening asset quality across the banking system.

Banks are also entering the current period with stronger capital and earnings buffers. The banking sector's total capital ratio stood at 18% in the first quarter of 2026, while its common equity tier-1 ratio was 15.1% and return on assets reached 2%.