Farm Loan

Farm Loan Trouble: Many Farmers Unable to Repay Bank Loans | 29 July

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India’s agriculture sector, long considered the backbone of the economy, is once again under financial stress — this time due to rising defaults in the farm loan segment. Several public sector banks (PSBs) have reported a sharp rise in non-performing assets (NPAs) related to agriculture during the first quarter (April–June) of the financial year 2025–26 (FY26).

According to internal bank reports, many state-owned banks have seen their farm loan NPAs exceed 5%, with some institutions inching close to double-digit levels. In simple terms, this means that out of every ₹100 lent to farmers, at least ₹5 or more is at risk of not being paid back. This is a worrying sign, not just for banks, but for the rural economy and India’s larger financial system.

What Is Causing This Spike in Farm Loan NPAs?

There are multiple factors behind this rise in defaults. One of the biggest reasons is loan saturation. Banks, especially public-sector ones, are under pressure to meet priority sector lending (PSL) targets. Under PSL rules issued by the Reserve Bank of India (RBI), a certain percentage of total loans must go to sectors like agriculture, micro and small enterprises, and weaker sections of society.

To meet these norms, banks often disburse farm loans aggressively, especially to small and marginal farmers. However, in many cases, these loans are issued without thorough risk assessment. This leads to over-borrowing by farmers — some of whom already have two or three existing loans from other banks or cooperatives.

Unfortunately, most small farmers depend heavily on crop yields and market prices, which are unpredictable due to weather risks, pest attacks, irrigation issues, and fluctuating commodity prices. A single failed crop season can push a farmer into a debt trap.

Over time, farmers find themselves unable to repay even the interest on their farm loans, and this leads to more and more loans turning into non-performing assets.

How Are Banks Reacting?

The rising stress in the farm loan portfolio has made many public sector banks more cautious. Some banks have now started reporting low single-digit year-on-year (YoY) growth in agricultural credit. That means even though demand for credit remains high in rural areas, banks are now being more selective about whom they lend to.

A senior bank official, who did not wish to be named, explained:

“The farm loan portfolio has become a serious risk zone. We are seeing more slippages, especially in regions where farmers are already over-leveraged. Unless we become stricter with credit assessments, the NPA levels will only increase.”

This cautious approach, while understandable, may also limit the availability of credit to genuinely deserving farmers — especially those who need money for seeds, fertilizers, or irrigation before the next cropping cycle.

The Growing Risk of Loan Saturation in Rural India

Loan saturation is when a borrower has too many loans from different sources and no realistic ability to repay them. In rural India, this problem is growing fast.

Many small and marginal farmers now have:

  • Kisan Credit Cards (KCC) loans from cooperative banks

  • Personal or gold loans from private lenders

  • Agriculture term loans from public-sector banks

  • Microfinance loans from NBFCs or SHGs

Without proper coordination among lenders and a centralised database, it is easy for borrowers to get multiple loans across institutions. Eventually, when their income does not increase at the same rate, defaults are inevitable.

How Farm Loan Defaults Affect the Economy

Rising NPAs in the farm loan segment can have serious consequences:

  1. Financial Loss to Banks: Every unpaid loan eats into a bank’s profitability. Higher NPAs mean banks must make more provisions (reserves), leaving them with less money to lend.

  2. Reduced Credit Flow to Rural Areas: When defaults increase, banks tighten their lending rules. This leads to credit drying up in rural areas, especially for first-time or small borrowers.

  3. Rise in Informal Lending: If farmers can’t get formal loans, they turn to moneylenders who charge very high interest. This worsens rural debt cycles.

  4. Pressure on Government for Loan Waivers: Rising farm distress often leads to political pressure for farm loan waivers, which puts a massive burden on state finances.

  5. Negative Impact on Rural Development: Credit is essential for farm mechanization, irrigation projects, and agribusiness. Without loans, rural infrastructure growth slows down.

Possible Solutions to the Farm Loan Crisis

The problem of rising farm loan NPAs is complex, but experts suggest a few targeted solutions:

  • Better Credit Assessment: Banks need improved tools to evaluate a farmer’s repayment capacity based on landholding, cropping pattern, income history, and other factors.

  • Use of Technology: Satellite data, soil quality reports, and weather forecasts can help banks make smarter lending decisions. Crop monitoring apps can track real-time farm conditions.

  • Centralised Credit History for Farmers: Just like credit bureaus for salaried people, farmers need a transparent credit history accessible to all lenders.

  • Encouraging Insurance and Subsidy Schemes: Wider adoption of schemes like PMFBY (crop insurance) and MSP (Minimum Support Price) ensures that farmers have minimum assured income.

  • Financial Literacy Programs: Many farmers are not aware of interest rates, EMI schedules, or repayment plans. Education campaigns can help reduce misuse of credit.

What Should Policymakers Do?

If the current trend continues, there is a risk of a rural credit crisis. To avoid that, the government must:

  • Review existing priority sector lending norms, so they do not encourage over-lending without accountability.

  • Monitor NPA levels across districts and set early-warning systems for banks in high-risk regions.

  • Promote agriculture value chains that allow farmers to earn better income, reducing their dependence on loans.

Final Thoughts

The farm loan crisis is not just a banking problem — it is a reflection of deep structural challenges in rural India. While credit access remains essential for agricultural growth, it must be accompanied by better risk management, stronger support systems, and smarter lending strategies.

Banks, farmers, policymakers, and financial institutions must work together to create a balanced and sustainable farm loan ecosystem. Otherwise, bad loans will continue to rise, affecting millions of rural households and putting India’s food security at risk.

Summary and Key Points

  • Farm loan NPAs are rising, crossing 5% for several public-sector banks in Q1 of FY26.

  • Loan saturation, poor risk checks, and unpredictable farm incomes are major causes.

  • Banks are becoming more cautious, leading to slower farm loan growth.

  • A mix of policy change, tech adoption, and farmer education is urgently needed.

  • Without reforms, the rural economy and India’s banking sector may face deeper trouble.

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