As corporate lending is not picking up, commercial banks are looking for greener pastures, literally.
They have hit upon a unique strategy to raise credit offtake and at the same time fulfill their agriculture sector lending targets.
Interest rates in contract farming have been going down rapidly, from 14 per cent last year to around 9 per cent now.
Banks are entering into tie ups with companies manufacturing farm inputs in order to offer crop finance schemes to farmers who undertake contract farming for the latter.
The move was started by ICICI Bank in the private sector. Now other private banks as well as state-owned banks have climbed the bandwagon.
In the public sector, Union Bank of India and State Bank of India are aggressively pushing farm credit. HDFC Bank has a contract farming portfolio of around Rs 50 crore (Rs 500 million), while UTI Bank is also looking at getting into contract farming in a big way to increase its direct agriculture lending portfolio.
ICICI Bank is focusing on contract farming and is tying up with several companies. Last year ICICI Bank financed 55,000 farmers. The target for this year is 100,000.
Barring one bank, the entire banking industry has reported shortfalls in meeting the agriculture lending target of 18 per cent of net bank credit.
Hitherto, this shortfall was made good by parking funds in the National Bank of Agriculture and Rural Development's Rural Infrastructure Development Fund.
In a change of strategy, banks are now aggressively lending to the agriculture sector. They are also under pressure from the finance ministry to extend farm loans as the general elections are round the corner.
Union Bank of India has tied up with Jain Irrigation Systems to offer crop finance schemes to farmers who undertake contract farming for JISL.
This offer is open to farmers in the Jalgaon, Dhule, Nandurbar districts of Maharashtra.
This is the second crop finance initiative taken by the bank. Earlier this year, the bank tied up a similar initiative with Mahindra Shubhlabh, a subsidiary of Mahindra & Mahindra.
Under this scheme, farmers can avail of short and medium term loans from the bank, depending on their holding and requirements.
The loans will help farmers purchase better quality seeds, fertilisers, irrigation equipment and so on from companies. The bank is in talks with Punjab Agro to experiment with similar schemes in Punjab.
The State Bank of India has tied up with Rallis India, in an effort to boost its agriculture sector lending.
Sources, however, pointed out that even as banks have tied up end-to-end financing, some of the banks have been hit by delinquencies in the last crop cycle.
"The cash flow is protected only if the farmer has a good quality crop and the final produce is supplied to the company which has tied up with the bank. Only nationalised banks have the reach and can monitor these loans very closely," said a senior private sector banker.
UTI Bank is looking at contract farming in a big way to double its portfolio of direct agriculture lending - from Rs 300 crore (Rs 3 billion) to Rs 600 crore (Rs 6 billion) by the end of March 2004.
Last week, it signed an agreement with Enterplan Ltd of the United Kingdom to support a project to fund eucalyptus plantation farming near Bhadrachalam in Andhra Pradesh.
