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Agriculture sector NPAs set to rise in FY26: Experts - BusinessToday

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  Published in Business and Finance on Wednesday, September 10th 2025 at 13:00 GMT by Business Today
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Agriculture‑Sector NPAs Set to Rise in FY26, Experts Warn of Looming Credit Crunch

By [Your Name] – Business Today

The Indian agriculture sector, traditionally a linchpin of the country’s financial ecosystem, is poised for a steep rise in non‑performing assets (NPAs) over the fiscal year 2026‑27, according to a latest RBI report and a chorus of banking specialists. With the agricultural credit‑to‑GDP ratio hovering around 10 %, a surge in NPAs could strain banks’ balance sheets, dent credit growth for rural economies, and slow the government’s rural‑development agenda.

RBI Signals a Tightening Outlook for Agricultural Credit

In its Rural Credit Report (2025‑26), the Reserve Bank of India highlighted a projected 4.5‑point increase in the agriculture‑sector NPA ratio—from 5.5 % in FY24‑25 to an estimated 10.0 % in FY26‑27. The RBI attributes this spike to a confluence of adverse weather patterns, rising input costs, and tightening liquidity conditions that have compounded farmer distress.

“The increasing frequency of erratic monsoons, coupled with the cost‑inflation of fertilizers and seed, has put significant strain on farmers’ repayment capacity,” said a senior RBI economist in the report. “If these pressures persist, we anticipate a notable uptick in NPAs across the rural banking spectrum.”

The RBI also noted that the agricultural debt‑to‑GDP ratio is expected to inch from 12.5 % to 13.3 % in FY26, indicating a modest expansion of credit demand even as quality deteriorates.

Expert Views: Why the Current Scenario is Different

Rashmi Gupta, Head of Rural Finance at ICICI Bank

“What sets this period apart is the cumulative impact of policy cycles, interest‑rate hikes, and a deteriorating farmer credit‑worthiness environment,” Gupta explained. “Banks have tightened their lending standards, but the sheer volume of loans disbursed during the green‑credit boom has left a sizable exposure base vulnerable to default.”

Nitin Patel, Former Deputy Governor of RBI

Patel underscored the role of the Pradhan Mantri Fasal Bima Yojana (PMFBY) and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in providing a safety net. “However, the indemnity payouts have lagged, and the claim‑processing bottlenecks are still a challenge. Until these mechanisms are fully operational, the sector remains exposed.”

Dr. Shilpa Menon, Agricultural Economist at Indian Council of Agricultural Research (ICAR)

Menon cited the 2023‑24 monsoon failure and the subsequent crop‑failure wave that cost farmers an estimated ₹2.5 trillion in losses. “This loss cascade, when coupled with a rise in interest rates, means that farmers are not only struggling to harvest but also to service the debt they had taken on in previous years.”

The Ripple Effects on the Banking System

An NPA hike of the magnitude projected would translate to a potential loss of ₹6.2 trillion in the banking sector’s rural portfolio. The Banking and Insurance Regulatory and Development Authority (BIRA) warns that this could:

1. Curtail Credit Supply – With banks tightening credit to preserve capital adequacy, farmers may face higher borrowing costs or outright denial of credit.
2. Pressure Capital Adequacy Ratios (CAR) – As banks have to set aside more provisions, their CARs may fall below regulatory norms, triggering supervisory interventions.
3. Increase Systemic Risk – The agricultural sector’s sheer size means that widespread defaults could destabilise the overall financial system.

“We need to think beyond the immediate losses,” cautioned BIRA’s chief economist. “The broader macro‑financial stability could be compromised if the NPA trajectory continues.”

Policy and Regulatory Measures on the Horizon

To counter the looming crisis, several policy tweaks have been suggested:

In a joint statement, the Ministry of Agriculture & Farmers’ Welfare announced a “Rural Credit Expansion Package” that includes a 5 % rebate on interest rates for farmers under the Pradhan Mantri Kisan Samman Nidhi (PM‑KSN) scheme and a 10 % grant for small‑holder farmers to cover insurance premiums.

A Call for Coordinated Action

The consensus among experts is that the rising NPA trend in agriculture is not merely a banking issue but a broader socio‑economic challenge. A coordinated response involving the RBI, the Ministry of Finance, state governments, and the private sector is essential to avert a credit crisis that could rip through India’s rural economy.

“The next fiscal year will be a litmus test for India’s resilience,” said Patel. “A failure to contain NPAs in the agriculture sector would undermine the country’s development trajectory.”

Bottom Line

• RBI projects a jump in agricultural NPAs from 5.5 % to 10.0 % by FY26‑27.
• Rising farmer distress stems from monsoon variability, input price hikes, and tighter liquidity.
• Banking implications include higher provisioning, lower capital adequacy, and restricted credit growth.
• Policymakers are planning fast‑track insurance claims, digital credit expansion, and sector‑specific capital buffers.
• A multi‑stakeholder response is required to protect India’s agrarian backbone.

The forthcoming fiscal period will be critical. If the projected rise in NPAs materialises, it could reshape the financial landscape of India’s rural sector and, by extension, its overall economic trajectory.