Ramesh Golait*

This paper attempts to analyse the issues in agricultural credit in India. 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 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. 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.

JEL Classification : F 361, 362, Q14
Keywords         : Agriculture, Credit, Rural

Introduction

     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. The evolution of institutional credit to agriculture could be broadly classified into four distinct phases - 1904-1969 (predominance of co-operatives and setting up of RBI), 1969-1975 [nationalisation of commercial banks and setting up of Regional Rural Banks (RRBs)], 1975-1990(setting up of NABARD) and from 1991 onwards (financial sector reforms).

The genesis of institutional involvement in the sphere of agricultural credit could be traced back to the enactment of the Cooperative Societies Act in 1904. The establishment of the RBI in 1935 reinforced the process of institutional development for agricultural credit. The RBI is perhaps the first central bank in the world to have taken interest in the matters related to agriculture and agricultural credit, and it continues to do so (Reddy, 2001).

The demand for agricultural credit arises due to i) lack of simultaneity between the realisation of income and act of expenditure; ii) lumpiness of investment in fixed capital formation; and iii) stochastic surges in capital needs and saving that accompany technological innovations. Credit, as one of the critical non-land inputs, has two-dimensions from the viewpoint of its contribution to the augmentation of agricultural growth viz., availability of credit (the quantum) and the distribution of credit. In this paper, the trends in agricultural credit are analysed in Section I; Section II covers State-wise distribution of institutional credit; Section III deals with recent policy initiatives; issues and concerns are dealt with in Section IV; Section V draws implications for the future followed by the concluding observations in Section VI.

Section I

Agricultural Credit: Discernible Trends

growth (from around 13 per cent to about 21 per cent), while cooperative banks registered a fall (over 14 per cent to over 10 per cent) during the above period (Table 2).

Section II

State-wise Distribution of Institutional Credit

There are wide variations in the availability of institutional credit per hectare of gross cropped area in different States. It was as high as Rs.9,403 in Tamil Nadu, Rs.7,666 in Kerala, Rs.5,352 in Punjab and Rs.4,604 in Andhra Pradesh, while it was as low as Rs.311 in Assam, Rs.667 in Rajsthan and Rs.698 in Madhya Pradesh during 2001-02 (Table 4).

The accessibility to institutional credit is higher in the Southern region where the level of agricultural development is also higher. Similar results were reported in the studies conducted earlier during the 1980s (Rao, 1994). It is kind of vicious cycle operating in less developed States. Less availability of credit influences adversely the adoption of modern technology and private capital investments, which in turn lowers the productive capacity of the agricultural sector and results in lower productivity and production, and also pushes the farmers to borrow from non-institutional sources. Consequently, the demand for agricultural credit for short and long-term purposes is dampened.

The extent of deployment of credit out of deposits in a given State could be measured by Credit-Deposit Ratio (CDR). The proportion of districts having CDR less than 40 is higher (66 per cent) in less developed States as compared to the developed States (32 per cent) indicating growing migration and wide disparities in the deployment of credit in major States (Table 5).

During Tenth Five Year Plan, the total credit flow to agriculture and allied activities was projected at Rs.7,36,570 crore. Accordingly, the ground level credit flow to agriculture has grown to reach over Rs.2,60,540 crore (36 per cent of the projected level) during the first three year period (2002-03 to 2004-05) of Tenth Plan, indicating a wide gap in supply of credit, requiring a large increase in credit, particularly in investment credit to achieve the desired growth level.

Section III Recent Policy Initiatives

The Finance Minister in his Union Budget 1995-96 speech stated that,  “Inadequacy of public investment in agriculture is today a matter of general concern. This is an area which is the responsibility of States. But many States have neglected investment in infrastructure for agriculture. There are many rural infrastructure projects which have been started but are lying incomplete for want of resources. They represent a major loss of potential income and employment to rural population.”

Rural Infrastructure Development Fund (RIDF) was set up in NABARD2. Since then, 11 tranches of allocations have been made towards the Fund. Commercial banks make contributions towards the Fund on account of the shortfalls in their priority/agriculture sector lending. The scope of RIDF has been widened to enable utilisation of loan by Panchayati Raj Institutions (PRIs), Self-Help Groups (SHGs), Non-Government Organisations (NGOs), etc., since 1999-2000.

The Fund has continued with additional corpus being announced every year in the Union Budget. The RIDF XI was announced in the Union Budget for 2005-06 with an allocation of Rs.8,000 crore making a total corpus of Rs.50,000 crore.  RIDF XI accorded special emphasis for setting up of Village Knowledge Centres by providing Rs.100 crore out of the corpus of Rs.8,000 crore (Table 6).

Two innovations, viz., micro-finance and Kisan Credit Card Scheme (KCCS) have emerged as the major policy developments in addressing the infirmities associated with the distributional aspects of credit in the recent years. The KCCS has emerged as the most effective mode of credit delivery to agriculture in terms of the timeliness, hassle-free operations as also adequacy of credit with minimum of transaction costs and documentation.

Around 59.09 million KCCs were issued till end-March 2006. The cooperative banks (51.5 per cent) had a major share followed by commercial banks (36.9 per cent) and RRBs (11.6 per cent) (Table 7).

The micro credit programme, which was formally heralded in 1992 with a modest pilot project of linking around 500 SHGs has made rapid strides in India exhibiting considerable democratic functioning and group dynamism. The programme has now assumed the form of a micro finance movement in many parts of the country.

There was a massive expansion during 2004-05 with the banking system establishing credit linkage with 539 thousands new SHGs, taking the cumulative number of such SHGs to 2.9 million at end-March 2007. Banks extended loans aggregating Rs.18,041 crore at end-March 2007 registering a growth of 58.3 per cent over the previous year (Table 8).

Several Committees were set up from time to time to look into the various issues relating to credit delivery for agriculture, the recent one being Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System (Chairman: Prof. V.S. Vyas, June, 2004)3.

The Government has since approved rehabilitation package for the identified districts in the States of Andhra Pradesh, Karnataka, Kerala, and Maharashtra.  Altogether, the rehabilitation package for the four States involves a total amount of Rs.16,978 crore consisting of Rs.10,579 crore as subsidy/grants and Rs.6,399 crore as loan.
In order to give further fillip to micro-finance movement, the RBI has enabled Non-Governmental Organisations (NGOs) engaged in micro-finance activities to access external commercial borrowings (ECBs) up to US $ 5 million during a financial year for permitted end-use, under automatic route, as an additional channel of resource mobilisation. Besides, as a follow-up of the Union Budget proposals, modalities for allowing banks to adopt the agency model4 for providing credit support to rural and farm sectors and appointment of micro-finance institutions (MFIs) as banking correspondents are also worked out.
The Government of India announced a host of measures in June 2004 to double the flow of agricultural credit during the period 2004-05 to 2006-07 by all the financial institutions. Towards this end, it was proposed to increase the agricultural credit by 30 per cent to about Rs.1.05 lakh crore in 2004-05. While the target set for 2004-05 was achieved, the Union Budget for 2005-06 proposed to increase the credit flow to agriculture by another 30 per cent by all the institutions concerned.
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 :

i) To increase the agricultural credit flow at the rate of 30 per cent per year.

ii) To restructure the outstanding debt of the farmers under the following heads in accordance with the guidelines issued by RBI/ NABARD:

• Farmers in distress – Rescheduling/restructuring of the outstanding loan of the farmers as on March 31, 2004 in the districts declared as calamity – affected by the State Government. Rescheduled loan shall be repayable over a period of five years, at current interest rates, including an initial moratorium of two years.
  
  
• Farmers in arrears - Loans in default of farmers who have become ineligible for fresh credit as their earlier debts have been categorised as sub-standard or doubtful shall be rescheduled as per the guidelines so that such farmers become eligible for fresh credit.

iii) 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.

iv) 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.

v) 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 upto 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.

vi) 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 i) setting up of an Expert Group to formulate strategy for increasing investment in agriculture, ii) 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, iii) to increase the limit on loans to farmers through the produce marketing scheme from Rs.5 lakh to Rs.10 lakh under priority sector lending.

Special Rehabilitation Package for the Districts Severely Affected by Farmers’ Suicide

The incidents of suicide by farmers have been mainly reported from the States of Andhra Pradesh, Karnataka, Maharashtra, and Kerala. Such incidents have also been reported from the States of Orissa, Gujarat, and Punjab. To mitigate the distress of farmers, the Government of India decided to launch a special rehabilitation package in 31 Districts in the States of Maharashtra, Andhra Pradesh, Karnataka, and Kerala. The 31 Districts5 were identified based on the severity and magnitude of the incidence of farmers’ suicide, as reported by the State Governments. The intent is to initially solve the problem and correct the situation in those areas reporting high number of suicides so that an effective dent on the problem is made and the incidence of farmers’ suicide which is of national concern could be curbed.

The package aims at establishing a sustainable and viable farming and livelihood support system through debt relief to farmers, improved supply of institutional credit, crop-centric approach to agriculture, assured irrigation facilities, watershed management, better extension and farming support services, improved marketing facilities and subsidiary income opportunities through horticulture, livestock, dairying, fisheries. For alleviating the hardships caused to debt stressed families of farmers in the affected districts, ex-gratia assistance from Prime Minister’s National Relief Fund (PMNRF) was also proposed.

Section IV Issues and Concerns

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. One of the major impediments constraining the adoption of new technological practices, land improvements and building up of irrigation and marketing infrastructure has been the inadequacy of farm investment capital. 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. It might be the case from supply side that short-term credit bears low credit risk, lower supervision and monitoring costs, and a better asset liability management.

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 lower 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 continues to be a cause for concern. This observed phenomenon may be attributed, inter alia, to the “risk aversion” tendency of the bankers towards small and marginal farmers as against the large farmers, who are better placed in offering collaterals.

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 study6 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, 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.

Section V

Implications for the Future

Indian agriculture still suffers from: i) poor productivity, ii) falling water levels, iii) expensive credit, iv) a distorted market, v) many intermediaries who increase cost but do not add much value, vi) laws that stifle private investment, vii) controlled prices, viii) poor infrastructure, and ix) inappropriate research. Thus the supply leading approach with mere emphasis on credit in isolation from the above factors will not help agriculture to attain the desired growth levels. Furthermore, agriculture being a State subject, States are required to play a more pro-active role in agriculture development by putting in place adequate infrastructure through means such as RIDF.

As noted above, the share of marginal and small farmers in the total credit (both disbursed and outstanding) has been shrinking. The need to augment the credit flow to the lower strata of the farming community, which has more share in the total operational land holdings becomes all the more important.

This underscores the scope for supplementing the land inputs of marginal and small farmers with the non-land inputs such as credit with a view to enhancing the productivity and thereby the production performance of Indian agriculture. In this context, the need for linking credit supply to input use assumes importance. There is also a need for exploring new innovations in product design and methods of delivery, through better use of technology and related processes. It needs to be seen whether credit going to farmers especially small and marginal is in sufficient quantity and if so whether it will have any meaningful effect in the absence of other supportive measures for ensuring their economic viability. In this context, creation of production and employment opportunities in the rural sector through public investment assumes critical importance. The SHG-Bank Linkage model is an outstanding example of an innovation leveraging on community-based structures and existing banking institutions.

In future, concerted efforts have to be made for enhancing the flow of credit to critical infrastructure areas such as irrigation, marketing and storage, etc., and also to areas such as watershed/ wasteland development, wind energy, allied activities such as poultry, horticulture, dairying, etc.

With regard to KCCS, there is a need to upscale its outreach to cover all the eligible farmers by creating greater awareness and giving greater publicity to the scheme. Updation of land records and sensitisation of bank staff through training programmes will further add to the spread of the scheme. The exercise of preparing special agricultural credit plans with higher component of direct finance with a special thrust on small and marginal farmers should also receive high priority.
The success of KCC scheme depends on less stipulated norms. High value agriculture needs higher working capital and also entails higher risks. Facilitating credit through processors, input dealers, NGOs, 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.

Section VI Concluding Observations

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. The Committee has, however, made it clear that recapitalisation should only be considered if it is preceded by legal and institutional reforms by State Governments aimed at making co-operatives democratic and vibrant institutions running as per sound business practices, governance standards and regulated at the upper tiers by the RBI. In this connection, 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, 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.

Merging and revamping of RRBs that are predominantly located in tribal/backward regions is seen as a potentially significant institutional arrangement for financing the hitherto unreached population. Such an exercise is currently on and the State Governments and Sponsor Banks have to come together and cooperate in this area. 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. The SHG-Bank linkage programme is built upon the existing banking infrastructure, it has obviated the need for the creation of a new institutional set-up or introduction of a separate legal and regulatory framework. Policy making bodies have an important role in creating the enabling environment and putting appropriate policies and interventions in position, which enable rapid up scaling of efforts consistent with prudential practices.

There is also a need to explore the possibility how SHGs can be induced to graduate into matured levels of enterprise. The SHG Bank-Linkage programme also needs to introspect whether it is sufficient for SHGs to only meet the financial needs of their members, or whether there is a further obligation on their part to meet the non-financial requirements necessary for setting up business and enterprises. In the process, ensuring the quality of SHGs warrants priority attention. 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.

To conclude, an assesment 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.

Notes

^1. 1990s referred wherever covers the period from 1990-91 to 2001-02, the latest year for which the data are available.

^2. RIDF was setup under the initiative of the Government of India in 1995-96 with an initial corpus of Rs.2,000 crore to provide loans to State Governments for financing rural infrastructure projects.

3. ____________        Press Releases.
4.     Mohan, Rakesh (2004) “Agricultural Credit in India: Status, Issues and Future Agenda” RBI Bulletin, November.
5.     NABARD “Annual Report” various issues.
6.     Pawar, Sharad (2005) Speech at the Meeting of the National Development Council, New Delhi on June 27,
7.     Reddy, Y.V. (2001) “Indian Agriculture and Reform: Concern, Issues and Agenda” RBI Bulletin, March.
8.     Reserve Bank of India “Annual Report”, various issues
9. ________________‘‘Handbook of Statistics on the Indian Economy”, 2004-05.
10. ________________”Report on Trend and Progress of Banking in India”, various  issues.
11. _______________(2004) Report of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System
(Chairman: Prof. Vyas)
12. ______________ (2005) Report of the Expert Group on Investment Credit (Chairman: Y.S.P. Thorat).

* The author is Assistant Adviser in the Department of Economic Analysis and Policy of the Bank. He is grateful to Shri K.U.B Rao, Adviser for constant encouragement. The responsibility for the views expressed in the paper rests with the author only and the usual disclaimer applie.