Farming is an age-old means of livelihood for millions of Indians. Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry and logging accounted for 16. 6% of the GDP in 2007 employed 52% of the total workforce and despite a steady decline of its share in the GDP, still plays a significant role in the overall socio-economic development of India.
Bank credit is available to the farmers in the form of short-term credit for financing crop production programmes and in the form of medium-term/long–term credit for financing capital investment in agriculture and allied activities like land development including purchase of land, minor irrigation, farm mechanisation, dairy development, poultry, animal husbandry, fisheries, plantation, and horticulture. Loans are also available for storage, processing and marketing of agricultural produce.
The Agricultural Credit Policy essentially lays emphasis on augmenting credit flow at the ground level through credit planning, adoption of region-specific strategies, rationalisation of lending policies and procedures and bringing down the cost of borrowing. The analysis reveals that the credit delivery to the agriculture sector continues to be inadequate. It appears that the banking system is still hesitant on various grounds to purvey credit to small and marginal farmers.
The situation calls for rigorous efforts to boost the flow of credit to agriculture, together with exploring new innovations in product design and methods of delivery, through better use of technology and related processes. Facilitating credit through processors, input dealers, NGOs, etc. , that are vertically integrated with the farmers, including through contract farming, for providing them critical inputs or processing their produce, could increase the credit flow to agriculture significantly. Introduction Farming is an age-old means of livelihood for millions of Indians.
Agriculture plays a crucial role in the development of the Indian economy. It accounts for about 19 per cent of GDP and about two thirds of the population is dependent on the sector. The importance of farm credit as a critical input to agriculture is reinforced by the unique role of Indian agriculture in the macroeconomic framework and its role in poverty alleviation. Recognising the importance of agriculture sector in India’s development, the Government and the Reserve Bank of India (RBI) have played a vital role in creating a broad-based institutional framework for catering to the increasing credit requirements of the sector.
Agricultural policies in India have been reviewed from time to time to maintain pace with the changing requirements of the agriculture sector, which forms an important segment of the priority sector lending of scheduled commercial banks (SCBs) and target of 18 per cent of net bank credit has been stipulated for the sector. The Approach Paper to the Eleventh Five Year Plan has set a target of 4 per cent for the agriculture sector within the overall GDP growth target of 9 per cent.
In this context, the need for affordable, sufficient and timely supply of institutional credit to agriculture has assumed critical importance. Problems Slow agricultural growth is a concern for policymakers as some two-thirds of India’s people depend on rural employment for a living. Current agricultural practices are neither economically nor environmentally sustainable and India’s yields for many agricultural commodities are low. Poorly maintained irrigation systems and almost universal lack of good extension services are among the factors responsible.
Farmers’ access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation. —World Bank: “India Country Overview 2008” Agricultural credit Agricultural credit enhances productivity and promotes standard of living by breaking vicious cycle of poverty of small scale farmers. The Agricultural Credit Policy essentially lays emphasis on augmenting credit flow at the ground level through credit planning, adoption of region-specific strategies, rationalisation of lending policies and procedures and bringing down the cost of borrowing.
Bank credit is available to the farmers in the form of short-term credit for financing crop production programmes and in the form of medium-term/long–term credit for financing capital investment in agriculture and allied activities like land development including purchase of land, minor irrigation, farm mechanisation, dairy development, poultry, animal husbandry, fisheries, plantation, and horticulture. Loans are also available for storage, processing and marketing of agricultural produce.
Institutional Arrangements Agricultural credit is disbursed through a multiagency network consisting of Commercial Banks (CBs), Regional Rural Banks (RRBs) and Cooperatives. There are approximately 100,000 village-level Primary Agricultural Credit Societies (PACS), 368 District Central Cooperative Banks (DCCBs) with 12,858 branches and 30 State Cooperative Banks (SCBs) with 953 branches providing primarily short- and medium-term agricultural credit in India.
The long-term cooperative structure consists of 19 State Cooperative Agricultural and Rural Development Banks (SCARDBs), with 2609 operational units as on 31 March 2005 comprising 788 branches and 772 Primary Agricultural and Rural Development Banks (PA&RDBs) with 1049 branches. Flow of Credit: A comprehensive credit policy was announced by the Government of India on 18 June 2004, containing measures for doubling agriculture credit flow in the next three years and providing debt relief to farmers affected by natural calamities.
The following are the highlights of this announcement:
- Credit flow to agriculture sector to increase at the rate of 30 per cent per year.
- Debt restructuring in respect of farmers in distress and farmers in arrears providing for rescheduling of outstanding loans over a period of five years including moratorium of two years, thereby making all farmers eligible for fresh credit.
- Special One-Time Settlement scheme for old and chronic loan accounts of small and marginal farmers.
- Banks allowed extending financial assistance for redeeming the loans taken by farmers from private moneylenders. Commercial Banks (CBs) to finance at the rate of 100 farmers/ branch; 50 lakh new farmers to be financed by the banks in a year.
- New investments in agriculture and allied activities at the rate of two to three projects per branch.
- Refinements in Kisan Credit Cards (KCCs) and fixation of scale of finance.
Credit Flow-Achievements During the current year (as on 31 December 2006), the achievements with regard to credit flow are as follows:
- The target of agriculture credit flow for the year 2006-07 was fixed at Rs 175000. 0 crore and the achievement as on 31 December 2006 was Rs 149343. 16 crore, constituting 85. 34 per cent of the target.
- During the first nine months of 2006-07, 34. 92 lakh new farmers were financed by public sector CBs and 4. 23 lakh new farmers by private sector CBs. Further, RRBs have financed 14. 22 lakh new farmers during the year. Thus, the total number of new farmers financed by CBs and RRBs together aggregated to 53. 37 lakh, which exceeds the target of 50 lakh farmers for the year.
- In addition to this, cooperative banks financed 9. 6 lakh new farmers during the year, taking the total number of new farmers financed by the banking system to 63. 03 lakh.
- An amount of Rs 4158. 30 crore has been provided as debt relief to farmers in distress, farmers in arrears and under the one-time settlement scheme up to 31st December 2006.
- Public sector CBs provided Rs 36. 25 crore as advances to 8722 farmers to enable them to redeem their debts from moneylenders. The corresponding figures for cooperative banks and RRBs are Rs 10. 76 crore (7311 loan accounts) and Rs 17. 06 crore (3548 loan accounts) respectively.
Credit Card Scheme The KCC was introduced in August 1998 for short- and medium-term loans to provide adequate and timely credit support from the banking system in a flexible and cost-effective manner, covers 644. 65 lakh farmers throughout India as on 30 December 2006. The scheme has been extended with effect from 31 October 2006 for all kinds of loan requirements of borrowers of the SCARDBs under the KCC, viz, short-, medium- and long-term and a reasonable component of consumption credit within the overall limit sanctioned to the borrowers.
Rate of Interest on Agricultural Loan: In the Union Budget for the year 2006- 07, it was announced that effective from Kharif 2006-07, farmers would receive crop loans up to a principal amount of Rs 3. 00 lakh at 7 per cent rate of interest and that the Government of India would provide the necessary interest subvention to NABARD for this purpose. Rehabilitation Package for Distressed Farmers: The Government of India has approved a rehabilitation package of Rs 16978. 69 crore for 31 suicide-prone districts in the states of Andhra Pradesh, Maharashtra, Karnataka, and Kerala.
The rehabilitation package aims at establishing a sustainable and viable farming and livelihood support system through debt relief to farmers, improved supply of institutional credit, a crop-centric approach to agriculture, assured irrigation facilities, watershed management, better extension and farming support services, and subsidiary income opportunities through horticulture, livestock, dairying, fisheries, etc. RBI initiative The Reserve Bank has undertaken several policy initiatives in pursuance of the objective set in the Union Budget 2004-05 to achieve a doubling of flow of credit to agriculture.
On the issue of farmers’ suicide in the country, the Government has realised that indebtedness is one of the major reasons for suicide by farmers in the country. To prevent and save the farmers from the clutches of private money lenders, several measures were taken. Banks were advised in particular:
- To increase the agricultural credit flow at the rate of 30 per cent per year.
- To restructure the outstanding debt of the farmers under the following heads in accordance with the guidelines issued by RBI/ NABARD
To grant a one-time settlement (OTS) including partial waiver of interest or loan to the small and marginal farmers who have been declared as defaulters and have become ineligible for fresh credit. Banks have also been advised to review cases where credit has been denied on the sole ground that a loan account was settled through compromise or write offs.
In some parts of the country, farmers face acute distress because of the heavy burden of debt from non-institutional lenders (e. g. , moneylenders). Banks have been permitted to advance loans to such farmers to provide them relief from indebtedness. All the Public Sector banks have been advised to reduce their lending rate for agriculture to a single digit rate of not more than 9 per cent per annum on crop loans up to a ceiling of Rs. 50, 000. This rate will benefit most of the crop loan account holders and will cover almost all the small and marginal farmers.
To waive margin/security requirements for agricultural loans up to Rs. 50, 000 and agri-business and agri-clinics up to Rs. 5 lakhs. With a view to further increasing the flow of credit to agriculture, several measures were announced by RBI in its Annual Policy Statement 2005-06.
These include
- setting up of an Expert Group to formulate strategy for increasing investment in agriculture,
- conducting a survey with the help of an outside agency to make an assessment of customer satisfaction on credit delivery in rural areas by banks,
- to increase limit on loans to farmers through the produce marketing scheme from Rs.
5 lakh to Rs. 10 lakh under priority sector lending. Issues and Concern Despite the significant strides achieved in terms of spread, network and outreach of rural financial institutions, the quantum of flow of financial resources to agriculture continues to be inadequate.
Farmers seem to borrow more short-term credit in order to meet input needs to maintain continuity in agricultural operations without much worrying about long-term capital formation in the face of agricultural bountiness The flow of investment credit to agriculture is constrained by host of factors such as high transaction costs, structural deficiencies in the rural credit delivery system, issues relating to credit worthiness, lack of collaterals in view of low asset base of farmers, low volume of loans with associated higher risks, high man power requirements, etc.
The large proportion of population in the ower strata, which is having major share in the land holdings, receives much less credit than its requirements. The growing disparities between marginal, small and large farmers continue to be a cause for concern. Notwithstanding the rapid spread of micro-finance programme, the distribution of SHGs is skewed across the States. More than 50 per cent of the total SHG credit linkages in the country are concentrated in the Southern States. In the States, which have a larger share of the poor, the coverage is comparatively low. The tragic incidents of farmers’ suicides in some of the States have been a matter of serious concern.
A study was conducted in some regions of Andhra Pradesh to go into the causes of such tragedies and to suggest short and long term measures to prevent such unfortunate incidents. The study has identified crop losses, consecutive failure of monsoon, recurrent droughts, mounting debts, mono-cropping, and land tenancy, as some of the main causes which led many distressed farmers to commit suicide. Of the total number of suicide cases reported, 76 per cent of the victims were dependent on rain-fed agriculture and 78 per cent were small and marginal farmers.
An important finding of the study was that 76 to 82 per cent of the victim households had borrowed from non-institutional sources and the interest rates charged on such debts ranged from 24 to 36 per cent. The study has recommended several measures to tackle the situation. These include improvement irrigation coverage; crop diversification; promotion of animal husbandry as an alternate source of income; better accessibility to institutional credit and overall improvement of the marketing infrastructure Concluding observation
The co-operative credit structure needs revamping to improve the efficiency of the credit delivery system in rural areas. In case of co-operatives, the Vaidyanathan Committee concluded that having regard to its outreach and potential, recapitalisation could be undertaken so that the credit channels for agricultural credit which are presently choked could be declogged. It may be suggested that the State Governments’ performance in bringing about the reforms in co-operative banks should form one of the yardsticks for sanctioning assistance/grants by the Central Government.
The competition and search for higher returns has made commercial banks to explore profitable avenues and activities for lending such as financing of contract farming (Contract farming is defined as a system for the production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers.
The essence of such an arrangement is the commitment of the producer/ seller to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer. , extending credit to the value chain, financing traders and other intermediaries, which needs to be encouraged. While the institutional systems and products such as futures markets, and weather insurance have great potential to minimise the risk of lending, the process of their development needs to be carried forward. The experience of micro finance proved that the “poor are bankable” and they can and do save in a variety of ways and the creative harnessing of such savings is a key success factor.
State Governments have to make critical assessment of the manpower and skill sets available with them for forming, and nurturing groups and handholding and maintaining them over time. There is a need to study the best practices in the area and evolve a policy by learning from them. Since, the access of small and marginal farmers to credit has been constrained by their inability to offer the collaterals, micro finance, which works on social collaterals, can go a long way in catering to their requirements. Hence, there is need to promote micro finance more vigorously on a widespread basis.
Conclusion
To conclude, an assessment of agriculture credit situation brings out the fact that the credit delivery to the agriculture sector continues to be inadequate. It appears that the banking system is still hesitant on various grounds to purvey credit to small and marginal farmers. The situation calls for concerted efforts to augment the flow of credit to agriculture, alongside exploring new innovations in product design and methods of delivery, through better use of technology and related processes.
