A
loan in time saves nine
Faulty
policies, changing economics, inflexible credit have all call for
a revamp of the agriculture credit system. An overview by Jaya Mahale
At
first glance, the figures related to agriculture credit in India
seem robust. There is an extensive structure in place for disbursal
of credit, which includes thousands of commercial banks, cooperative
banks and regional rural banks. The sector has shown an annual growth
rate of 21 per cent, 15 per cent and 21 per cent in the first three
years of the 9th Five Year Plan. The actual flow of credit in the
first three years was Rs 113,428 crore, just short of the targeted
Rs 116,800 crore. The compounded annual growth rate for the 9th
Plan is expected to be around 20 per cent. The share of commercial
banks in the total agriculture credit went up from 49 per cent in
1996-97 to 52 per cent in 2001-02 and the share of other banks have
been growing too.
But
a closer scrutiny of agriculture credit, in the context of the economy,
reveals several chronic problems. The strength of the rural financial
institutions (RFI) is more quantitative than qualitative. The credit
policy is too crop centric, thus non-crop and other high value activities
do not get adequate credit support. Banks lend largely to direct
agriculture. Of the 18 per cent banks that have to lend to the sector,
only around 4.5 per cent is to indirect agriculture, which includes
warehousing, sorting, packing, grading, testing and cold chains,
among other things. Most indirect activities are not considered
‘agriculture’ for credit purposes. Moreover, the RFIs are not well
integrated with agriculture support systems like research, extension,
the supply chain and processing.
As
a result of crop centric policies and lack of planned crop diversification,
only traditional crops have credit access. Thus farmers have continued
to grow crops that attract credit rather than opt for commercial
crops, where the cost of production is higher, coupled with higher
risk due to market forces and lower credit accessibility.
Effective
credit mechanism
One
test of an effective credit mechanism is the capital formation in
agriculture. A healthy capital formation would indicate that agriculture
credit is productive. However, in the last decade there has been
a negative growth in capital formation, of 0.22 per cent. The share
of capital formation in agriculture in the total gross capital formation
declined to 10.5 per cent in 2001 from 18.6 per cent in 1980-81.
Public sector capital formation showed negative annual growth rate
of 0.13 per cent during 1990-95, a clear indication that State governments
have cut back on investment in the sector and that profitability
has been on the decline.
The
declining profitability can be attributed to escalating cost of
production with less than proportionate increase in market prices.
Stagnation in yields has only added to the problems, as have shrinking
size of land holdings, making the farm size economically unviable.
The
other test of an effective credit system is rural indebtedness.
According to National Sample Survey Organisation (NSSO) 1991-92
figures, of the total debts of Rs 37,343 crore, 59 per cent were
of rural households, and 80 per cent were those of cultivators.
Rural debt went up from Rs 1956 crore in 1961 to 6193 crore in 1981
and to Rs 22211 crore in 1991. But despite the extensive credit
flow structure, the farmers have continued to rely on the informal
credit sector.
Informal
credit
After
regional cooperatives and regional rural banks, the second most
popular source of rural credit is informal credit. This is particularly
true for small and marginal farmers. The interest rates in the informal
sector range from 24 to 60 per cent per annum. However, there is
no monitoring of whether or not the credit is used productively.
Rising consumption needs among farmers has forced them to channel
the credit away from productive needs. Another reason for a thriving
informal credit mechanism is that the system of disbursal of formal
credit is time consuming with too many formalities. As farmers do
not get timely credit, the sowing, application of fertilisers and
harvesting, are delayed and this reduces yield and productivity.
Also, the formal credit institutions do not cater to consumption
and other credit requirements of the rural population.
A
study by RS Deshpande, on suicides by farmers in Karnataka, points
out that the cost of going through the formal credit process is
approximately equal to the difference in the interest rates between
the formal and informal sector. The study also notes that although
the formal credit institutions have monthly repayment schedules,
the actual pressure to repay is felt only at the end of the year.
The study suggests that simplification of disbursement rules and
application procedures by various banks would help reduce rural
indebtedness.
Inputs
dealers are a new source of informal credit. The difficulty in getting
timely credit has forced farmers to buy inputs from traders on credit.
However, this puts them at the mercy of the traders who often sell
substandard or improper products and the farmer does not have the
option of going to another dealer. This kind of a debt trap has
far reaching consequences on the productivity and the quality of
the output.
Land
continues to be the most popular collateral for agriculture loans.
As a result marginal farmers with small land holdings have lesser
access to credit than farmers with medium or larger holdings. Farmers
working on leased land have virtually no access to formal credit
and have to rely on moneylenders. Post harvest too, banks do not
lend inventory to the farmers, a practice which is popular in the
manufacturing sector. Banks should be allowed to fund inventory
on warehousing receipts..
Except
a few public sector banks such as State Bank of India and Punjab
National Bank, most other banks lend only around 15 per cent or
less to the agriculture sector as against the mandatory 18 per cent
laid down by the RBI. These banks can now park the balance funds
with Nabard for investment through the Rural Infrastructure Development
Scheme (RIDF).
Another
chronic problem in the agriculture credit system is that of the
cooperative banks. This segment has the largest network of rural
credit branches. However, they are financially weak with low source
base, low volume of business and poor recovery. The cost of funds
for cooperative banks is higher than commercial banks. More than
60 per cent of the resources of Primary Agriculture Credit Societies
(Pacs) are borrowings from higher financing institutions. In the
case of a majority of Pacs, almost 60 per cent of the total lending
is not recovered. High transaction cost, poor fund management and
high NPAs have made many of these banks unviable.
An
important prerequisite to reduce the risk in agriculture is affordable
crop insurance. The Comprehensive Crop Insurance Scheme for Kharif
crops of 1985 and the National Agriculture Insurance Scheme for
Rabi crops of 1999 were aimed at providing comprehensive coverage
with subsidised premiums. However, even after the subsidy the insurance
cost works out to about one to two per cent of the total production
cost, which is very high, given the high production cost and low
profitability. Thus crop insurance is yet to catch on.
Several
committees and task forces set up by the government have submitted
recommendations on improving the rural credit system. On the basis
of these recommendations the government and Nabard have taken several
steps to improve the agriculture credit delivery system. The important
ones are the Self Help Group (SHG) Programme and the Kisan Credit
Cards (KCC).
contd
