Farm Credit: Miles to Go

There has been a reluctance among the banks and financial institutions in lending farmers. Though many innovative initiatives and RBI guidelines have paved the way for agriculture loan system, it still has miles to go. By Mohd Mustaquim

Farm Credit: Miles to Go

There has been a reluctance among the banks and financial institutions in lending farmers. Though many innovative initiatives and RBI guidelines have paved the way for agriculture loan system, it still has miles to go. By Mohd Mustaquim

The banks and financial institutions have been extremely reluctant to finance farmers as agriculture credit is considered a bad debt for them. However, following the Reserve Bank of India’s guidelines, they have to finance agriculture sector at least 18 per cent of their total Adjusted Net Bank Credit (ANBC). Within 18 per cent, 8 per cent is dedicated to the small and marginal farmers, having lesser than 5 acres of farm land. The rest of 10 per cent lending goes to the big farmers, agriculture infrastructure services providers, Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies, warehousing, market yards, food processing, among other ancillary activities.

Despite having all regulatory mechanism, farmers are still struggling to get funds from the banks and financing institutions. As per a recent report of National Sample Survey Organisation (NSSO), the farming community is highly dependent on non-institutional financing sources. Nearly 40 per cent of farm loan is still coming from unorganised sources and 26 per cent from local moneylenders. Only 15 per cent funds are coming from banks and institutional financing sources.

Around 83 per cent of farmers are having lesser than 2 hectares of farmland, but according to the NSSO figures, 79 per cent of institutional lending goes to the big farmers, having more than 25 acres farmland. The question here is how much institutional lending is left for those 83 per cent small and marginal farmers? The banks’ reluctance in farm credits can be seen in their disbursing model.

“Around 46 per cent of agricultural loans are given in the months of January, February and March. To achieve the target of 18 per cent 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 that there is no sowing during this period,” farmer leader Ajay Vir Jakhar points out.

Agri credit system suffers from multiple challenges, especially for the smallholding farmers. “Bankers seek collateral, but the small and marginal farmers may not have that. Credit is a fundamental right of the farmers similar to the right to work. Thus, the banks need to evolve the required mechanism so that the funds can reach the most intended beneficiaries,” says Debasish Mallick, Deputy Managing Director, Export Import Bank of India.

Reducing Transaction Cost

Due to these complexities, the small farmers do not prefer to go to the complex banking system. Against all odds, Kisan Credit Cards, launched by National Bank For Agriculture And Rural Development (NABARD) in 1998, were widely accepted by the banks and financing institutions.

According to Krishan Jindal, CEO, NABARD Consultancy Services (Nabcons), 140 million farmers’ credit needs to be met by the banks and non banking financial institutions. That’s why the Government has to give special impetus on agriculture sector. “Approximately 90 million farmers have been issued Kisan Credit Cards (KCCs) for facilitating them farm credit. They can draw from any designated branch of the bank for their agricultural needs such as fertilisers, seeds, pesticides and other farm expenditure,” Jindal says.

Around 4 million self-help-groups are getting agricultural loan from the banks through KCCs and distribute it to their member farmers, he adds.

Behind the banks’ reluctance in financing small farmers, Jindal adds another reason. “The transaction cost is higher than the benefit banks make in the form of interest. However, KCCs have reduced the transaction cost which has made it a successful initiative,” he says.

Due to the deficient monsoon, agricultural growth has been stagnant in recent years. According to a CRISIL report, the agricultural growth in 2012-13 was 1.5 per cent; in 2013-14, it was 4.2 per cent; in 2014-15, -0.2 per cent and in 2015-16, it is expected to be 1.1 per cent. There was 11 per cent fall in agricultural exports in 2014-15 while it fell 23 per cent during April to December 2015.

During this period, the agriculture credit growth has been 4 per cent. Pallav Mahapatra, Chief General Manager, State Bank of India, says, “It is a good sign that banks and financing institutions are working better and the farm credit sector is growing more than the agricultural growth.”

“Earlier, the criteria for getting loan for a tractor was at least 8 acres of land. Later, it has been reduced to 2.5 acres. It would ease the small and marginal farmers to get the credit from the banks,” Mahapatra adds.

While coming up with innovative initiatives, banks and institutional lenders need to start thinking that the agriculture credit is profitable and sustainable business though there are many challenges in the system.

India has over last six decades developed various indigenous financing models. If these models are implemented rightly and all intended beneficiaries get benefits of agriculture loan, the agriculture sector will see a handsome growth and will open window for agriculture jobs. It would be a boon for the sector which employs more than half of the population as well as for the food processing industry, rural and overall Indian economy.

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