India's Agri Sector Faces Mounting Debt Crisis: NPAs Set to Surge by FY26

Alarm bells are ringing across India's financial landscape as experts predict a significant uptick in Non-Performing Assets (NPAs) within the vital agriculture sector. A recent assessment by CRISIL Ratings projects that agricultural NPAs could climb to 10-10.5% by March 2026, a notable increase from the 8.5% recorded in March 2024.

This looming surge signals a potential strain on financial institutions and poses a substantial challenge to the stability of the rural economy, which forms the backbone of the nation.

The current agricultural credit outstanding stands at an impressive Rs 23.5 lakh crore as of March 2024. However, beneath this growth lies a complex interplay of factors contributing to the anticipated rise in defaults.

Analysts point to a fundamental shift in lending patterns, moving away from traditional direct agricultural credit towards more indirect financing. This structural change, coupled with the increasing penetration of Small Finance Banks (SFBs) and Non-Banking Financial Companies (NBFCs) into rural areas, is identified as a primary driver of the expected NPA surge.

SFBs and NBFCs, while expanding access to credit for previously underserved segments, inherently cater to a higher-risk borrower profile.

Their growth in agricultural lending means that a larger proportion of the sector's credit is now exposed to less conventional underwriting practices and potentially more vulnerable borrowers. Unlike larger Public Sector Banks (PSBs) with extensive branch networks and recovery mechanisms, many SFBs and NBFCs still have limited infrastructure for effective debt recovery in remote rural settings, exacerbating the risk.

Beyond institutional shifts, the agricultural sector continues to grapple with perennial challenges that directly impact farmers' repayment capacities.

The sub-par monsoon in 2023, characterized by uneven rainfall distribution, severely affected crop yields in many regions. This climatic variability, combined with persistently high input costs for fertilizers, seeds, and labor, has squeezed farmers' profit margins. Consequently, lower market realizations for their produce further reduce their ability to service loans, particularly for segments like crop loans and those with ticket sizes up to Rs 2 lakh.

The government's laudable efforts to boost agricultural output and ensure food security through various incentives, including interest subvention schemes, have also indirectly contributed to the NPA challenge.

While encouraging banks to increase agri-lending, this push can sometimes lead to relaxed underwriting standards, particularly among newer entrants or those under pressure to meet targets. Such practices, while expanding credit access, can inadvertently sow the seeds for future defaults.

Experts suggest that without concerted efforts to address these multifaceted issues, agricultural NPAs could revert to pre-pandemic levels.

The potential for loan waivers, often a political tool during times of distress, further complicates the repayment culture and can disincentivize timely loan servicing. The financial health of India's farmers is intrinsically linked to the nation's economic stability, making the rising NPA trend a critical area of concern that demands urgent and strategic intervention from policymakers and financial institutions alike.