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Business News/ Industry / Andhra Bank readies to take hit as farmers stop repaying loans
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Andhra Bank readies to take hit as farmers stop repaying loans

Ninety per cent of the bank's farm loan book is made up of loans to farmers in Andhra Pradesh and Telangana

Andhra Bank accounted 14% of total agricultural advances in Andhra Pradesh before its division and the grant of statehood to Telangana. Photo: Pradeep Gaur/MintPremium
Andhra Bank accounted 14% of total agricultural advances in Andhra Pradesh before its division and the grant of statehood to Telangana. Photo: Pradeep Gaur/Mint

Hyderabad: State-run Andhra Bank is bracing for a hit after farmers in Andhra Pradesh and Telangana stopped repaying agricultural loans even before the new governments of the two states release money to follow up on loan waivers promised in their budgets for the year to 31 March.

Ninety per cent of Andhra Bank’s agricultural loan book of 21,215 crore is made up of loans to the two southern states that are its home market, making it highly vulnerable to defaults by farmers. Farm loans accounted for 19% of the lender’s total advances of 1.14 trillion as of 30 June.

“Neither the farmer is paying nor is the government paying," said C.V. Rajendran, chairman and managing director of Andhra Bank, in a recent interview. “It’s a challenging phase."

Promises of farm loan waivers in their election campaigns helped the Telugu Desam Party (TDP) come to power in Andhra Pradesh and the Telangana Rashtra Samithi (TRS) form a government in Telangana, which became India’s 29th state in June after the division of the former.

Andhra Pradesh has promised to waive farm loans worth up to 1.5 lakh in addition to a loan of up to 1 lakh advanced to self-help groups (SHGs or savings and credit groups); together the waivers would cost the state 43,000 crore. Telangana promised a loan waiver of not less than 1 lakh to farmers. The cost is estimated at between 17,000 crore and 20,000 crore.

Andhra Bank accounted 14% of total agricultural advances in Andhra Pradesh before its division and the grant of statehood to Telangana. The total farm advances in united Andhra Pradesh of all banks put together on 31 March was 1.37 trillion, of which Telangana made up 40%.

Andhra Bank classified agriculture loans worth 1,076 crore as non-performing assets (NPAs) in the fiscal first quarter and expects another 1,000 crore to turn bad in the July-September period if the issue of the loan waiver scheme is not resolved.

Farm NPAs, which typically made up around 2.5% of total NPAs at Andhra Bank, rose around three times in the first quarter, Rajendran said.

Farm loans are classified as NPAs if the loan repayment is delayed over two agricultural seasons.

The bank said it has exposure of 13,000 crore in terms of agricultural loans and 4,400 crore worth of SHG loans in Andhra Pradesh. In Telangana, the bank has an exposure of 7,000 crore to agriculture.

Andhra Pradesh is struggling for funds in the face of a revenue deficit of 6,064 crore in the year to next March and a fiscal deficit of 12,064 crore in the previous fiscal year. The state government made a provision of 5,000 crore in the state budget towards the farm loan waiver, which covers only 12% of total loan waivers. The state government is exploring options, including bond sales, to raise money to repay banks. Telangana is relatively comfortable because the state has a revenue surplus of 3,555 crore .

Andhra Bank is seeking to de-risk its business model by focusing on retail loans and expanding aggressively beyond its home base, which accounts for 60% of its total business. Rajendran said the bank is focusing on reducing the “concentration risk by expanding aggressively" outside of Andhra Pradesh and Telangana and seeking to build a pan-India presence.

“Though we continue to expand in Andhra Pradesh and Telangana, we want to bring the overall exposure down to 35% from current levels of 60% and double the size of our pan-India portfolio," Rajendran said.

The bank has opened nine new zonal offices, of which eight are outside of its home base—in Ahmedabad, Bhopal, Coimbatore, Jaipur, Kochi, Ludhiana, Patna and Pune.

“Our plan is to open at least 30-40 branches under each zonal office," Rajendran said, adding that the bank would open 60 branches in the next 18 months.

The farm loan waivers have come in for criticism.

“Farm loan waiver is the worst form of populism to win votes," said Rajesh Chakrabarti, executive director at the Bharti Institute of Public Policy at the Indian School of Business. “It completely destroys credit culture because it creates an environment where farmers become more prone to taking loans and assuming that government will come and bail them out."

Andhra Bank’s gross NPAs stood at 5.98%, or 6,827 crore in the quarter ended June, higher than the average gross NPA of the banking industry, which stood at 3.9%. Around 11% of total advances are being recast.

“The agricultural NPAs have spoiled the asset quality of Andhra Bank, which was otherwise on a steady path of recovery with most asset quality concerns seemed to be factored in," said Mona Khetan, banking analyst at Mumbai-based Elara Securities (India) Pvt. Ltd. “Concentration risk in Andhra Pradesh and Telangana is a concern, but that was Andhra Bank’s strength so far because they understand this region well," Khetan added.

Andhra Bank said it needs a capital infusion of 800 crore this year. “We are expecting around 200-300 crore from the Union government; the rest we are planning to raise in form of selling shares to institutional investors, on which the board has to take a decision," Rajendran said.

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Published: 02 Sep 2014, 12:38 AM IST
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