The Hindu Business Line : Farm credit needs a lending hand

Even as the banking scene is changing, so are the needs of farmers, who are thought of as a class of interest rate-insensitive habitual borrowers with an insatiable thirst for credit. But this is far from the truth as they are also major savers, and pay high enough interest rates to make rural banking remunerative, says N. K. Thingalaya, suggesting that banks must re-orient their rural services to changed times.

SINCE the implementation of financial sector reforms, the growth of rural banking business has slowed.

While these reforms have by-passed the rural sector, they have almost put up a go-slow signal, if not a no-entry board. Bankers' interest in rural banking appears to be waning, as can be seen from the decline in the number of rural branches and the drop agricultural accounts serviced by them the last few years.

In the context of globalisation, there is an imperative to prepare Indian farmers to face international competition. Credit needs of the farm sector must be reviewed from this angle and the necessary policy changes introduced.

Rural credit flow

The common perception of rural credit is influenced by the belief that farmers are a class of interest rate-insensitive habitual borrowers with an insatiable thirst for credit. It is not readily recognised that this image has undergone a dramatic change since the institutionalisation of rural credit.

The change has been wrought by the penetration of banks into the rural areas.

The access to saving facilities provided by local branches has attracted rural savings to flow into the banks. A major share of the funds available with banks for rural lending, thus, is generated from the savings of the farmers themselves.

The Table shows the changing pattern of the farmers' reliance on the banking system.Indian farmers are not only a group of perpetual borrowers from the banking system, but are also a numerically significant group of depositors.

The latter role is often ignored in the cost analysis of rural credit. In the last ten years, the extent of farmers' reliance on the banking system for credit has changed considerably. In 1992, they obtained direct agricultural finance of Rs 17,835 crore, while their own savings in the banks totalled Rs 26,211 crore.

That is, the credit they availed themselves of was 68 per cent of their savings. In 2002, farmers' deposits with the commercial banks went up to Rs 1,08,233 crore; the volume of credit availed by them rose to Rs 47,430 crore, or 44 per cent of their deposits.

The savings bank deposits of farmers amount to Rs 7,445 crore, constituting 19 per cent of the total bank deposits.

Nearly 43 per cent of the farmers' money in banks remain in the savings bank accounts, earning only 3.50 per cent interest per annum. On account the recent downward revisions of interest rates, the remaining deposits, may fetch 6-7 per cent.

What is to be noted is that the farmers provide the banking system more funds than what they get in turn as credit. Second, the interest rate differential (the difference between the interest paid on the farmer's deposits and the rate charged for his borrowings) is high enough to make the rural banking operations reasonably remunerative.

The transaction costs have to be reduced essentially by enlarging the volume of business handled at the branch level and not by curtailing expenditure.

Banks' fee-based income can be raised, if they can sell some financial services such as insurance and the products of mutual funds. Rural housing finance has not been able to attract the attention of bankers so far.

The Kisan Credit Card is a procedural innovation, which improves the efficiency of the credit delivery system.

For converting the Kisan Credit Card into a debit card, banks can explore the possibility of private sector collaboration; for instance, with ITC in its e-choupal programme.

(This company, entering into agri-business profitably, has set up 3,000 e-choupals, covering 18,000 villages and 18 lakh farmers.)

Crop insurance

Considering the size of the farm sector and the diversities of its cropping pattern, it may be expedient to have more than one crop insurance agency operating in this risk-prone field.

With the insurance sector thrown open, entry of private companies into this arena may have to be encouraged. They need not venture into the rural areas but can easily rely on the retail credit outlets set up by the banking sector.

There are 32,654 branch offices of commercial banks in the rural areas. They could be made the grassroots level outlets to undertake all the work relating to crop insurance. Working in close association with gram panchayats, the assessment of crop failure could be done by them.

Similarly, the collection of premium as well and the reimbursement of compensation can be handled by them, under a simplified system.

Besides the risks involved in the crop insurance business, one of the disincentives for the new entrants would be the regulated premium rates, the low volume of financial resources available and the huge cost of administration.

To reap the advantages of large-scale operations, the crop insurance companies can be provided an access to the funds mobilised by the rural branches of banks. This could be operationalised roughly as follows:

Every bank with rural business has to lend, in the form of subscribing to the commercial papers or bonds issued by Crop Insurance Companies (CIC), to, say, 25 per cent of their rural deposits or 50 per cent of farmers' deposits mobilised by them.

The interest rate on this amount could be fixed at not higher than 7 per cent, covering the cost of deposit mobilisation by banks in the rural sector.

Through this process, CICs would obtain financial resource of about Rs 29,000 crore at 7 per cent, without incurring any expenditure on the spadework for funds mobilisation.

Or, if banks can provide them a sum equivalent to the total amount of savings bank deposits of farmers (on which they pay only 3.5 per cent on the eligible balance), this amount would go up to Rs 37,445 crore.

The CICs should be able to deploy this amount profitably in lucrative avenues available in the financial market.

Another incentive which could be offered to them is tax holiday for the initial 10 years.

The loss of revenue to the exchequer would be too small compared to the benefits they can confer on the farm community.

(The author is former CMD, Syndicate Bank.)

More Stories on : Farm credit | Insight | Rural Development

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Farm credit needs a lending hand

Quiet flow the funds

Interim relief: A word of caution

Capital Account Convertibility — Right road, but best with speed-breakers

Keeping one's word

Private banks: Profitability easier to invent than reinvent

VC funding: Nothing ventured, nothing gained

Price cut in medicines

Ma Foi clarifies