Opening credit

Achieving the targets laid down in the budget is possible only if we start at the roots and eradicate the problems that exist, says VS Vyas

Agriculture needs a much larger amount of credit than what the formal credit institutions are disbursing at the moment.
One of the major objectives of the Tenth Plan is to raise the rate of growth in agricultural output to 4 per cent per annum, from a disappointing rate of 2.4 per cent witnessed in the last decade. Even if the proportion of credit to total agricultural output were to remain the same at around 8-9 per cent, a substantially larger amount of credit would be needed to raise additional production.
The changes in agriculture in India are also augmenting the need for an increased flow of credit. In the first place, proportion of purchased inputs in agriculture is increasing rapidly with corresponding increase in the requirement of credit. Secondly, the share of high value crops and high value enterprises in the agricultural sector is progressively increasing. The latter besides being more input intensive also demand higher investment in transport, storage and processing.
Estimates made for the Tenth Plan suggest that the credit need for agriculture, in the country during the plan period would be over Rs 7,36,000 crore. Available data suggests that the rural financial institutions (RFIs) have disbursed approximately Rs 70,000 crore of credit or approximately, 84 per cent of the projected flow of Rs 82,000 crores, during the last year.
Obviously, there is a big gap between the credit needs for agricultural production as estimated by the planners and the amount disbursed by the RFIs. The question here is that why has this need for credit not converted into effective demand, and why is the organised financial sector not helping in bridging this gap.
A study conducted by the World Bank – National Council of Applied Economic Research indicates that, in Uttar Pradesh and Karnataka, the share of formal credit institutions involved with rural credit are quite insubstantial, even after efforts spanning over half a century.
Available data suggests that most of the credit from formal sources is concentrated in a few regions, mainly in the southern, central and western regions, and there too, in a few states. A map prepared for the Advisory Committee on Flow of Credit to Agriculture, indicates that the whole of the North-East, the tribal belt stretching from Jharkhand to Andhra Pradesh and parts of Maharashtra as well as the north-western part of Rajasthan are characterised by weak co-operative and regional rural banks (RRBs), and inadequate coverage by commercial banks. Also, there has not been any improvement in the credit-deposit ratio of states like Bihar and Orissa. In fact, the proportion of credit going to small borrowers in the agricultural sector is declining, even though the definition of‘small borrower account’ has been changed since March 1999 from Rs 25,000 to Rs 2,00,000. Many committees and studies have pointed out that procedural delays and hurdles in applying for loans are as severe as in the past. Also, the effective rate of interest that borrowers – especially small borrowers – have to pay is substantially higher than the statutory rate of interest. Without remedying these defects, the objective of enhancing the flow of credit for augmenting agricultural production cannot be fulfilled. In fact, it may lead to further distortions in the distribution.
The intention behind the Finance Ministry’s strategy is to put pressure on the supply of credit in the hope that the increase in supply will create its own demand. Keeping in view the past experience, this would not be an effective proposition. There are certain basic preconditions to ensuring success in meeting the targets of agricultural credit in the coming years. They are: augmenting the absorptive capacity of agricultural producers, strengthening delivery systems, mitigating or minimising uncertainty, and providing insurance against risk in agricultural production.
With the role of the state in providing infrastructure to agriculture declining, the hope was that private investment would fill the gap.
Incidentally, this has not happened. The reason for private investment not measuring up to the requirement is not fully acceptable. The principal cause is the continuous deceleration in the rate of growth in investment credit. During the last 30 years, the rate of increase in investment credit has decelerated from 20 per cent (in the seventies) to 12 per cent (in the nineties). And the sharpest fall has come in the rate of increase in investment credit by commercial banks, the decadal rate of growth declining from 30 per cent in the seventies to 12 per cent in the nineties. If this is not corrected and banks are forced to increase their credit to agriculture, the emphasis will be more and more on short-term crop finance for ‘viable farms’. Recent data on credit advanced by commercial banks reveals that this trend has already seeped in.
Unfortunately, the other principal arm – cooperative banks – are the least prepared for advancing investment credit. (See story on pgs 28- 29) The main vehicle for disbursing medium to long-term credit to agriculture, the Agricultural and Rural Development Co-operative Societies, are the weakest part of the co-operative sector.
Focused attention needs to be given to the rehabilitation of these banks and societies, in order to meet the objective of further advancing investment credit.
Generating demand is one part of the study; equally important are the strength and capabilities of the delivery system. RFIs are also beset with serious problems. Co-operative banks, which account for nearly half of crop loans and account for a much larger share in investment credit, are in bad shape. Most District Central Co-operative Banks are not able to meet their minimum banking requirements. The weakest link in the chain is the primary co-operative societies. The causes of the weaknesses of the co-operative structure are well known, but so are the steps to remedy the defects.
The strategy here should be to reward those cooperatives which meet the commonly agreed upon reforms, and to withdraw support from those which are not prepared to change their organisation structure and procedures.
RRBs were promoted as the ‘third channel’ for rural credit, along with co-operatives and commercial banks. These were designed as lowcost banking institutions with a regional focus, serving small farmers and rural artisans. Two of these three features have already been eroded.

contd...

TO READ FURTHER... SUBSCRIBE TO YOUR COPY TODAY!!!