Institutional credit is considered as one of the most crucial factors for addressing farmer distress in India. It is a widely held view that removal of credit constraints is necessary to improve farmer welfare and support agricultural growth. Every year, the centre’s allocation for agriculture increases. From ` 9 lakh crore in 2016–17, it increased to ` 11 lakh crore in 2018–19. Despite this improvement in lending to the agricultural sector in the past 30 years, nearly 60 per cent of India’s small and marginal farmers (SMFs) still do not have access to institutional credit from scheduled commercial banks (SCBs). As per NABARD, in 2018–19, banks lent ` 6.26 lakh crore to SMFs. However, only 40 per cent of SMFs, who comprise a significant proportion of the total number of cultivators in the country, get only 50 per cent of the total credit.
Despite initiating various schemes to promote financial inclusion, only 40.90 per cent of SMFs could be covered by the SCBs.
The situation is that in some large agri-states like Bihar, Chhattisgarh, Jharkhand, and West Bengal, penetration of institutional credit is quite low, while in states, such as Kerala, Tamil Nadu, Telangana, and Karnataka, agri-credit is more than agri-GDP, i.e., average for 2015, 2016, and 2017, as per the Handbook of Statistics on Indian States. This indicates that farm loans are being directed to uses other than agriculture. And so this is a major concern. Moreover, the frequent recourse to loan waivers by different political parties, on the eve of elections, has only added to the woes, leading to grossy non-performing assets (NPAs) at a high 8.44 per cent (as on March 31, 2019).
RBI Internal Working Group
In this regard, the internal Working Group (IWG) of the Reserve Bank of India (RBI) prepared a report on agriculture credit, headed by its Deputy General M.K. Jain. The group released its report in September 2019. The report acknowledges that a very large number of SMFs are yet to be covered by the banking system. As per the priority sector lending (PSL) returns 2015–16 of the banks, the number of accounts under the small and marginal category is 5.138 crore and the total number of SMFs in the country as per Agriculture census, 2015–16 was 12.563 crore. Thus, more than seven crore SMFs constituting 86.21 per cent of the total operated holding and having 47.34 per cent share in the operated area are not covered by the banking system. Therefore, the coverage of SMFs must be increased by banks so that a large number of SMFs in a state lead to proportionate number of loan accounts. The above scenario shows the extent of financial exclusion of SMFs in agricultural sector.
Reasons for Exclusion
As per the RBI panel, the probable reasons behind the exclusion of 30 per cent of SMFs from the coverage of institutional credit could be—(i) their credit demand is for consumption purposes; (ii) they could be tenant farmers, sharecroppers, and landless labourers who are not in a condition to offer collateral security in lieu of institutional credit, or they are involved in unviable subsistence agriculture; and (iii) banks do not find them credit- worthy. Due to these factors, the farmers may find it easier to get credit from non-institutional sources.
The report also found that there existed regional disparity in agricultural credit. Some of the states get a much higher share—as high as 10 per cent of total agricultural credit—while others get a meagre 0.5 per cent. It was noted that in some states like Bihar, Chhattisgarh, Jharkhand, and West Bengal, bank credit was not proportionate to their share in agricultural output.
There is a need to address the issue of sanctioning loans against gold as collateral, said the RBI working group. Currently, such loans are not separately flagged in core banking solution (CBS) platform. So, banks should develop a management information system to flag such goals to segregate them for effectively monitoring where the funds (that are lent) are ultimately used.
One positive finding of the report was related to the achievement of the overall priority sector lending (PSL) target of 40 per cent by banks at the aggregate level. However, they have not been able to achieve the agriculture target of 18 per cent at system-wide level. However, it should be mentioned that public sector banks have achieved 18.12 per cent as against private sector banks’ achievement of 16.30 per cent in 2018–19.
Institutional Finance
Provision of institutional finance at competitive rates with a comfortable pay bank period is of utmost importance to farmers for financing various agricultural tasks, such as buying seeds, fertilizers, and pesticides.
As per the report, agri-credit has been skewed a lot in favour of crop loans at the cost of the allied agri-activities. The allied sector had a share of 38–42 per cent of the agricultural output during 2014–2016, though its share was just 6–7 per cent in total agri-credit during the same period. The reason behind credit flow towards crop loans is the considerable amount of interest subsidy given to a crop as opposed to loans for allied agri-activities.
Suggestions from the RBI
The RBI working group has called for aggressive efforts to improve institutional credit delivery through technology driven solutions to address the issue of financial exclusion of agricultural households. It has given some suggestions to improve the situation of institutional credit in the agricultural sector.
- The RBI has suggested digitisation of land records so as to make it convenient for banks to electronically access and create charge online. The computerisation of land records started in 1988–89 by the centre, but there are many states that are yet to fully shift towards digitisation. This will make clear details of land titles. So, it becomes easier to lend to small farmers. updation of digital titles will also lead to transparent land transactions.
- A legal framework should be built for farm leasing so as to enable tenant farmers also to get benefit from institutional credit.
- For enhancing financial inclusion, the panel recommended that the bank credit sub-target for small and marginal farmers (SMFs) be increased from the existing 8 per cent of adjusted net bank credit (ANBC) to 10 per cent, with a 2-year roadmap. This can make more funds available to SMF who account for over half of the total agricultural production in the country and have a major share in the high value crop production.
- The panel further suggested that in order to make it easier for banks to give credit for allied activities, the priority sector lending guidelines should provide separate definition for SMFs who want to borrow ` 2 lakh for allied activities. This can benefit them, if it ensures flow of funds to allied activities such as fishing, dairying, and reducing the dependence on agriculture for a living. The panel recommended lending up to ` 1 lakh to the SMFs for consumption needs to save the farmer from falling into the debt trap.
- Replace interest subvention scheme with Direct Benefit Transfer (DBT) to target beneficiaries: SMF, tenant farmers, share croppers, oral lessees, and landless labourers as individual borrowers or as borrowers through self-help groups (SHGs) or joint liability group, with an overall limit amounting to ` 3 lakh for each farmer.
Crop loans should be given through the medium of kisan credit card (KCC) so as to encourage and improve the reach of institutional credit. In order to curb the misutilisation of interest subsidy, banks should provide crop loans, eligible for interest subvention only through KCC mode.
- Loan waivers should be avoided as they have a very negative effect on credit culture.
- A federal institution on the principle of cooperative federalism with the involvement of both the centre and states to suggest and implement agri-reforms, on the lines of the goods and services tax (GST) council, should be set up.
Moreover, the Central and State governments need to have a wholesome review of the agricultural policies and their implementation, and are also required to evaluate the effectiveness of current subsidy policy in relation to agri-inputs and credit so as to chance the overall viability of agriculture in a sustainable manner.
- A centralised database should be developed by the central government with the help of states. Such a centralised database would have details regarding crops cultivated, cropping pattern, output, sown/irrigated area, health of soil, natural calamity, etc. It should also have details about farmers like their identity, land records, loan availed by them, subsidy provided to them, details of crops cultivated, etc. At present, there is no database of the agricultural sector as a result of which planning and policy formulation lack effectiveness. Besides, the central and state governments should also set up a credit guarantee fund for the sector, similar to credit guarantee schemes implemented in the MSME sector.
This report is seen as a step in agricultural reform for simplifying and rationalising credit delivery for farmers. It may give the necessary impulse to schemes for allied-agri activities and help in increasing farmers’ incomes in the long run.
These recommendations seek to make formal banking more inclusive in rural India. Focussing on the credit requirements of small farmers is of prime importance to tackle the problem of rural distress and migration. Equally important is the need to address the increasing use of credit for short-term rather than investment purposes. Meticulously framed investment plans with a long-term vision are a vital aspect of policy framework aimed at reviving agriculture sector and mitigating its crisis.
Other important factors include fragmentation of land holding and tenancy conditions by promoting consolidation of land holding. But such issues cannot be viewed in isolation as these are linked to social relations in rural India. similarly, issue of credit delivery cannot be separated from political economy considerations.
Only 50 per cent of the total agricultural credit from banks goes to SMFs. However, they comprise a significant proportion of the total number of cultivators in the country. Importantly, the issue of agricultural credit to SMFs cannot be seen in isolation but is a part of severe distress in the sector, especially where they are concerned. Low agriculture prices, much lower than the MSP as well, despite production rising (the farm sector growth rate being much lower now than in earlier periods), declining size of land holdings (average size from 2 to 1 hectare over time), low capital formation in agriculture, stagnation in public investment in agriculture as a percentage of GDP, and drought have all resulted in low incomes for farmers and severe distress.
Agricultural Credit and GDP Growth
It is held that agricultural credit improves farmer welfare and supports agricultural growth. Therefore, credit constraints need to be removed on farmers. So, successive governments enforced agricultural policies which increased institutional lending to agriculture over time—from about ` 1,053 billion in 2004–5 to ` 7,301 billion in 2013–14 and ` 10,911 billion in 2017–18. but is such a large institutional credit to the agriculture sector commensurate to agricultural growth?
Credit intensity of agriculture has risen rapidly over the years as the striking increase, on an average, in the agricultural credit to gross value added (GVA) ratio shows. This means that more credit is required to achieve the same unit of agricultural GVA over time. Or, agricultural credit has been over all less efficient in bringing about agricultural growth (only in 5 out of the last 12 years, agricultural credit and agricultural GVA have been on par). Earlier, a study by the RBI on the period 1988–89 to 2010–11 had declared that there was no significant causal relationship between agricultural credit cycles and agricultural growth, as shown by statistics. Another study went on to underline the importance of credit for purchase of agricultural inputs but also emphasised that its effects on agricultural GDP was little. Factors like sectoral composition, output prices, irrigated area, and public expenditure determine the agricultural GDP.
So, instead of focussing on agricultural credit, it is necessary to strengthen on other capabilities—non-credit growth ingredients like increasing productivity, higher public expenditure on agriculture and allied activities, strengthening infrastructure, ensuring effective agricultural extension services, and export competitiveness of goods—to increase farm growth. Agricultural credit, however, needs to be targeted well so that it can spur agricultural growth.
A few years ago, the RBI dwelt on the need of strict monitoring of agricultural credit utilisation at the ground level so as to ensure that it is not diverted to non-agricultural purposes like investing the borrowed money in fixed deposits, deploying tractors bought on farm land for construction activity; or using it to repay the loans from money lenders and to pay consumption expenditure. The RBI also investigated the practice of diversion of farm loans for non-agriculture uses. In this regard, a notification issued by the RBI to public sector banks advised the banks to see to it that all farm loans are utilised for the purpose for which they are issued. The criteria included limiting the disbursement of farm loans only to an agriculturalist, ensuring that the loan is used for the stated purpose, and verifying the disbursal and recovery of farm loans follow seasonality pattern. By including the use of technology, these tasks could be carried out easily. Towards this end, the Core Banking Solution system offers an analytic software to realise the targets.