India is well poised to become a US $ 2 trillion economy soon, and among its fast growing sectors agriculture will continue to be the backbone of growth. Compared to the average growth rate of 4.1 percent in the eleventh five-year plan (2007-12), it has recorded a growth rate of 1.4 percent and 4.7 percent in the first two years of the twelfth five year plan. Though it works out to only 15.2 percent and 13.9 percent respectively in the same period, in terms of its GDP contribution, it has the potential to rise. Food grain production has already increased by 20 million tonnes to reach 264.4 million tonnes in FY14. It is also set to increase with an additional 25 million tonnes by 2016-17.
Though according to the economic survey – FY14, one-sixth of the Gross Domestic Product (GDP) is contributed by agriculture, but its contribution is more critical than its monetary value per se. Agricultural commodities have a relatively significant weight in price indices, and also in anchoring inflation expectations. In terms of employment also agriculture dominates, accounting for about sixty percent of the total labour force. The inadequacy of private investment in fulfilling the capital requirements of agriculture has raised the concerns about the state of the rural infrastructure, which could turn into a binding constraint on growth. Banks, therefore, are guided to lend 40 percent of their advances to prioritised sector and 18 percent to agriculture sector to strengthen the rural economy.
Initiatives to spur agriculture lending:
Several initiatives have been taken in recent years to improve the agricultural credit delivery mechanism. However, some bottlenecks persist affecting the flow of credit to agriculture. In order to attain higher growth, what is required is flow of adequate credit and insurance against crop losses and robust irrigation facilities for meeting the needs of the rural economy. Beside newer forms of credit assessment and risk management systems in place, upgrading skills, and ushering in changes in attitudes and mind-sets are also crucial. Also, tendency of farmers to migrate to cities as migrant workers needs to be discouraged by making farming a profitable venture.
Information technology is to be increasingly used to facilitate transformation in various processes of rural credit delivery and to cut down the turnaround time. The changing economic conditions and experience from the operation of the priority sector lending schemes over the years led to a need for revisiting the priority sector guidelines in line with current national priorities. Accordingly, the Reserve Bank in August 2011 set up a Committee (under the chairmanship of M. V. Nair) to re-examine the existing classification and suggest revised guidelines with regard to priority sector lending classification and related issues.
Revised guidelines for Priority Sector:
Looking at the trend and tasks, the overall target of priority sector lending assigned to banks has been kept intact at 40 percent of the net bank credit. However, in view of the growing network of foreign banks, it was felt that there is a need to re-look into the preferential treatment given to them under priority sector lending. Accordingly, it was decided that foreign banks that have 20 branches or more will be subject to the same targets as that of domestic banks, to be achieved within a period of five years from April 1, 2013.
The focus of the Committee was on direct lending by banks to marginal farmers and micro enterprises. The revised guidelines aim to refocus direct agricultural lending to individuals; Self-Help Groups (SHGs) and Joint Liability Groups (JLGs) engaged in agriculture and allied activities. Bank loans to farmers through entities like Primary Agricultural Credit Societies (PACS) ceded to controlled by banks have been included under direct lending to agriculture. This would facilitate banks that do not have a wide presence in rural areas and would otherwise have difficulty in meeting the targets. In view of inadequate credit flow to the services sector, some changes were made by expanding the definition of the services sector to include services, which were not specifically listed earlier under priority sector lending, with a ceiling of up to Rs.100 lakhs per unit.
Raising the credit limits:
In order to increase the flow of credit to certain segments covered under the priority sector, loan limits were raised with effect from April 1, 2013. Loan limits to farmers against hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months was increased from Rs 25 lakhs to Rs 50 lakhs both under direct and indirect agriculture. In case of loans to dealers/sellers of fertilizers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs, the limit was raised from Rs 100 lakhs to Rs 500 lakhs per borrower. Similarly, the limit of bank loans to Micro and Small Enterprises (MSEs) engaged in providing or rendering of services was increased from Rs 200 lakhs to Rs 500 lakhs per borrower/unit, provided they satisfy the investment criteria for equipment as defined in Micro, Small and Medium Enterprises Development Act, 2006.
Distribution of agriculture credit:
While there have been concerns about non-adherence to agriculture target by banks in general, a further disaggregated analysis shows that only about one fourth of total agricultural credit is going to small and marginal farmers. Further, the share of small and marginal farmers in total agricultural accounts continued to decline. However, on the positive side, share of small and marginal farmers in the total agricultural credit witnessed an increasing trend. Importantly, the present trends indicate that 13.6 percent of total agricultural credit was absorbed by corporate, partnership firms and institutions engaged in agriculture.
Lending to agriculture sector:
The bank lending to agriculture sector has increased from Rs 4,683 crores in March 2011 to Rs 5,110 crores in March 2012 to Rs 6,074 crores in March 2013 gradually stepping it up in absolute terms. The growth rate of agriculture lending works out to 10.6, 14.1 and 7.6 percent during the same period.
The trend of agriculture lending in the recent years is as under:
Target and Achievement for Agricultural Credit
(Amount in Rs. Billion)
Source: National Bank of Agriculture and Rural Development
It can be seen that banks have always surpassed their allocated targets and are well committed to help agriculture grow. Since dispensation of credit is a function of demand and supply, it varies according to the economic conditions but the uptick has to be sustained to bring about thrust of growth in agriculture. The target of bank lending to agriculture is raised to Rs 8 lakh crores with continuation of interest subvention scheme (concessional agriculture loans at 7 percent) for short term crop loans. It can aid agriculture growth to reach 4 percent, reinforcing the strategic role in accelerating the reviving trend of the economy.
Given the capacity building for farming done so far, a further collaborative support is needed in terms of improved seed quality, better scale of mechanization, improved irrigation facilities to reduce dependency on seasonal rains. Fixing of realistic support prices to make the enterprise attractive for farmers, more marketing support, sharing of research outcome with local farmers, marketing of processed food, intense export promotion of agriculture produce and similar focused support will go a long way to improve productivity. Beyond these, availability of easy institutional credit will help farmers to reduce dependency on local money lenders who charge usurious interest rates. If flow of credit and all interdependent factors are addressed in proper perspective, the rural economy can significantly improve with renewed thrust on agriculture sector.
(Author: Dr. K. Srinivasa Rao, GM – Strategic Planning, Bank of Baroda, Mumbai)