Banks plan to divert farm loans to investments in real estate

The State Level Bankers Committee in Kerala plans to press the Reserve Bank of India to treat loans for purchase of estates as agriculture finance.  If approved, the proposal is sure to create serious problems in the State.

Banks are already reluctant to give loans to genuine farmers. Even now, agricultural loans go to money lenders who, in turn, lend to the farmers. This arrangement suited the banks and their managers because of supposedly higher assurance of repayments. Besides, bank managers, who are corrupt, stood to gain from such lendings.

This situation was one of the causes behind the recent farmers’ suicides in Wayanad district. It was difficult for even landed farmers to get loans from scheduled banks not to speak of those living on contract farming. The money lenders provided them funds which, in turn, came from the banking system.

The latest proposal of the SLBC is actually aimed at classifying lending to the real estate and tourism sectors as agriculture finance, and helping the banks to show that their targets in sanctioning agricultural loans have been achieved. For investment in estates is not really investment in agriculture. Every school girl knows that there no sufficient profits in plantation sector, except in the case of rubber and occasionally cardamom, to justify large investments.  Those investing in estates are actually investing for capital appreciation and also to use estate land for non-agricultural purposes.

The real estate prices are already on the high side in Kerala, and with the banks pumping in money, it is bound to go up further.  The common man is already not in a position to buy land even for housing not to speak of farming. With real estate becoming the prime investment attraction in the State, land is likely to be concentrated in the hands of the rich. This is already happening despite the ceilings under the Land Reforms Act. Plantation is exempted from land ceilings, and lucre now is UDF government’s policy in favour of allowing certain portions of plantations for tourism purposes.  The current trends are likely to defeat the purpose of land reforms and invite fresh clamour of ceilings. Kerala may soon have only real estate in the hands of the moneyed and hardly any farm lands as we knew it in the past.

On the long term, banks may also be risking their money. The real estate boom can collapse if tourism is hit by economic recession elsewhere or degradation of the environment. Any disruption in flow of money from the Gulf countries or weakening of the information technology sector can also hit the real estate prices.

Agriculture will never pay enough to repay large loans given for investment in estates. It is also notable that if the banks are genuinely interested in lending to agriculture, it can and do lend for planting operations.  However, the history of lending to plantation sector in the State is replete with examples of banks giving loans without ensuring proper collateral.  Several estate owners don’t have proper title over much of their land.  If the RBI gives the green signal for sanctioning loans for purchase of estates, the banks may now lend for ‘buying’ leased, environmentally fragile  and excess lands.