RBI ex-dy governor dubs farm loan as bubble, slams govt for setting targets

MUMBAI: Amid reverses faced by banks on farm loans, RBI’s former deputy governor HR Khan has come out strongly against the practice of agri credit targets set by the government every year for lenders and termed them as a “perpetual bubble”.

Mumbai, August 22

Amid reverses faced by banks on farm loans, RBI’s former deputy governor HR Khan has come out strongly against the practice of agri credit targets set by the government every year for lenders and termed them as a “perpetual bubble”.

“The banking system has just been reactive to the targets given by government, he said, speaking at an industry awards event organised by consultancy D&B here on Monday night.

Noting that every year the government keeps on setting new credit disbursal target in the trillions in budget, and the banks exceed it, Khan said most of these are short-term crop loans.

The need is to support long-term needs of the farm sector through capital investments, he said, adding that the proportion of capital investments in total farm credit had fallen to 20 per cent from 35 per cent level five years ago.

He said that in the last 10 years, while credit to the farm sector had grown at 18 per cent, the production rose only 12 per cent and farmer incomes continued to be depressed due to a variety of reasons, including lower prices for their produce rise in wages and input costs.

Investments need to be done in aspects like warehouses, supply chains and other infrastructure-related aspects, he said.

Khan, who retired from the RBI last year, termed agriculture loans as a “perpetual bubble” which the public policy has not been able to solve.

Many a time, the short-term farm loans are taken for consumption purposes and claimed that a fourth of the money raised through it goes for buying gold, he said.

The former carrier central banker, however, did not make any mention to the rash of farm loan waivers which has affected credit behaviour and increased NPAs for the banks as farmers stop servicing their loans once such announcements are made.

He said these are challenging times for the banking sector because of the twin problem of NPAs and pressure on capital levels.

On the insolvency and bankruptcy code, Khan said, “We should be realistic and cautiously optimistic as our experience says that no system has been really effective.” PTI