A mechanism to turn bad debt to good debt

Banks consider agricultural finance a bad debt as monthly EMI is not feasible; and a deficient Monsoon erases the prospect of return on time. The situation calls for a different mechanism to increase agricultural financing. Mohd Mustaquim reports
A mechanism to turn bad debt to good debt

Agriculture being the largest employment generator, employing to a little less than 50 percent population of the country, has been the primary focus since the first Five Year Plan. The Reserve Bank of India, defining it as a priority sector, mandates all public and private sector banks to lend the sector at least 18 percent of their lending.

Agricultural lending can be categorised as direct and indirect. Loans to individual farmers, joint liability groups, companies directly engaged in agriculture, loans to distressed farmers indebted to non-institutional lenders, Primary Agricultural Credit Societies (PACS) are classified as direct lending.

Whereas, financing more than Rs two crore to producer companies, farmers’ service societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) are classified as indirect lending.


Mismanagement in agriculture credit portfolio of the banks has been a prominent impediment. When the residents of Delhi and Chandigarh took loans worth Rs 32,400 crore, only Rs 31,000 crore was disbursed as farm loan in the state of Bihar, Jharkhand, West Bengal and Uttar Pradesh combined. Additionally, 53 percent of agricultural loans in West Bengal, 44 percent in Maharashtra and 29 percent in Tamil Nadu have been diverted to the states’ urban and metropolitan cities.

According to a recent report of National Sample Survey Organisation (NSSO), Indian farmers are highly dependent on non-institutional channels. Nearly 40 percent of all loans came from informal sources with 26 percent advanced by moneylenders. Small and marginal farmers suffer the most with only 15 percent of their credit coming from institutional sources such as government, cooperatives and banks; while farmers with more than 10 hectares of land get around 79 percent loans from institutional sources.


The same problem also blights the disbursement of the funds. “46 percent of agricultural loans in the country is given in the months of January, February and March. To achieve the target of 18 percent lending to agriculture sector till March 31, 26 percent of loans are given in the month of March only. As a farmer, I can tell you, there is no sowing during this period,” laments Ajay Vir Jakhar, Chairman, Bharat Krishak Samaj.

“We are asking RBI to ask Comptroller and Auditor General of India to audit the agricultural lending portfolio of all public sector banks. CAG can conduct such an audit if RBI asks. We are not interested in prosecuting the managing directors of the banks. But this should be stopped immediately,” he further says.

However, DK Kanwaria, Assistant General Manager, Union Bank of India, refutes the claim: “During this fiscal, by December 2014, we already disbursed Rs 33,000 crore. While only 3,000 crore will be disbursed during January to March 2015, as we have a target of Rs 36,000 crore. Out of the Rs 36,000 crore total agriculture lending, we have a target of 28,000 crore for direct agriculture lending.”

Tractors and agricultural machineries are used around 50 days, rotavators are used just for 10 days in a year but the farmers has to pay the annual interest, leading farmers to debt. That’s what happening in states like Punjab and Haryana.

Jhakhar suggests, “Provision of collective ownership of farm machinery is required. There should not be subsidies or loans for individual ownership of machineries. As 80 percent of farmers are small and marginal, they would be in debt if there are individual ownership of machineries.” He further says, “This situation will not make farming sustainable. If farming is not made self sustainable, farmers will continue migrating from villages to the cities and we will never be able to solve the problem of the country.”

The NSSO survey further reveals that about 52 percent of the agricultural households in the country were estimated to be indebted. Among the major States, Andhra Pradesh had the highest share of indebted agricultural households in the country (92.9 percent) followed by Telengana (89.1 percent) and Tamil Nadu (82.5 percent).

Echoing Bharat Krishak Samaj’s chairman’s observation, Nitin Puri, President and Country Head, Food and Agribusiness, Yes Bank, says, “Farm credit system needs to be streamlined. Collective ownership of agricultural machineries and custom hiring will be a good module for their access to small and marginal farmers. To provide access to the extension services to the farmers, the domain should have expertise. It would ensure food and nutritional security for the nation.”



In pursuit of electoral gain during the past 10-15 years, farm loan waivers have dismantled cooperative banks in the country. “Cooperative banks have been systematically killed in the past 10-15 years by repeated farm loan waivers. Now, the Government is asking the public sector banks to establish at least 25 percent of their branches in the non-banked rural areas,” laments Jakhar.

The Finance Ministry maintains that public sector banks will increase the access of agricultural credit. But the officials of public sector banks in the rural areas are transferred within 2-3 years, making their stay rather unproductive. Unlike them, cooperative banks, whose officials are mostly from the same areas, are equipped with better local knowledge and understanding.

Local knowledge is necessary for disbursing agricultural credit effectively. So, cooperative banks and post offices can be the effective mediums to reach out to the farmers rather than commercial banks. The postmen of 153,000 post offices in the rural know every house very well.

It is clear that banks are not interested to finance agriculture sector. Their lending is in compliance with the RBI’s guidelines. They consider it a loss-making one. Monthly EMI is not feasible in agricultural finance; a deficient Monsoon erases the prospect of return on time. Therefore, the situation calls for a different mechanism to increase agricultural financing.

Agriculture, with exports worth USD 40 millions and imports half of it , should be sustainable, and it should be a commercial activity propped with consistent policies.

The Changing Face of Rural India