The 37 banks in the Farm Credit System lost $522.5 million in the third quarter with more losses to come as financial strains mount on the nation's farms, the FCS announced yesterday.

The troubled banks, whose $70.7 billion in outstanding loans make them the sixth largest financial institution in the country, now have $3.5 billion worth of loans on which payments have stopped. That total will rise to "more than $10 billion over the next several years," the system report said.

Despite the looming losses, several members of a House Banking subcommittee said yesterday they are skeptical that Congress will go along with the FCS's request for a $10 billion long-term, interest-free federal loan to bail out the system.

Subcommittee Chairman Rep. John J. LaFalce (D-N.Y.) wanted to know why -- if FCS gets a federal bailout -- similar aid should not be given to other agricultural lenders, teetering savings and loan associations and financial institutions with bad loans to energy companies, Third World nations and other borrowers unable to repay?

Rep. Jim Leach (R-Iowa) told an FCS representative that Congress might have agreed to a "modest" proposal for help, but not a big one. "It's your bad luck to have to come before the Congress at a time of great budgetary restraint," he said.

Falling crop prices and a 50 percent drop in the value of farm land in some parts of the country have left farmers with more debt than they can handle, said George D. Irwin, chief economist of FCS. "As many as 35 to 45 percent of the commercial farming operations will require major restructuring of their debt and an additional 10 to 15 percent will not be able to continue farming," he estimated.

Another witness, John M. Urbanchuk, an agricultural specialist with Wharton Econometric Forecasting Associates, said the "most likely scenario" for the farm sector would involve defaults on about $20 billion worth of loans over the next three years.

In addition to the more than half-a-billion dollar loss by the 37 banks in FCS in the third quarter, other units of the system were also incurring losses for which no third-quarter figures are yet available. The report said that the system's roughly 350 production credit associations, which borrow money from 12 Federal Intermediate Credit Banks to relend to farmers, anticipate total losses of $500 million this year.

There was no estimate of how much the 37 FCS banks, which also include 12 Federal Land Banks and 13 Banks for Cooperatives, will lose this quarter. The third quarter results were so bad that an estimate of system losses for the year made in early September has already been exceeded, the report said.

The system is a cooperative owned by the farmers and others who borrow from it. Usually a borrower must buy stock in the system equal to 5 percent of his loan.

The FCS plight is being complicated by the fact that some borrowers with alternative sources of credit are paying off their loans and redeeming their stock, which they fear might be used to offset some of the system's losses. In the last three months, the banks' loans fell from $74 billion to $70.3 billion, a 4.4 percent drop, as some were paid off and others written off as losses.

As of Sept. 30, the 37 banks had $4.9 billion in capital stock and $3.6 billion in earned surplus, a decline of $651 million over the quarter. It had available another $1.1 billion in loan loss reserves, for a total of $9.6 billion, the report said.

Nevertheless, analysts said, the large third-quarter loss was further evidence of the rapid deterioration of FCS. A recent report by the General Accounting Office concluded that if FCS set aside as much money to cover bad loans as would an average commercial bank, it would have loan losses of about $7.9 billion in the year ending next June 30.

The system, which is entirely privately owned, issued securities to private investors to raise money to lend to farmers. The securities are not guaranteed by the federal government but have long carried interest rates similar to those paid on government agency securities that do have a guarantee.

Recently, investors have demanded higher rates on FCS securities. As a result, the market value of the $68.3 billion face amount of securities outstanding fell by about 8 percent or more. That represented roughly a $6 billion loss in market value for investors.

In his testimony, FCS' Irwin said that this year's bumper crops will mean that farm prices will be depressed by large surpluses at least for the next two or three years -- and so will farmers' ability to keep current on their debts.

"We have concluded that while the [Farm Credit] System retains substantial gross earnings capacity and capital assets, it does not have the internal resources necessary to absorb expected losses in the next 24 months," Irwin said. "The federal government will need to provide mechanisms for sharing these losses with farmers and their lenders if the system is to survive and serve farmers of the future."

In the short run, he warned, investors might lose confidence in FCS to the point that it would be unable to sell new securities to investors, adding, "[If] the marketability of its securities were impaired and not quickly restored, the system would be forced either to liquidate a large part of its portfolio [of farm loans] or default on its obligations to investors."