The Hindu Business Line : Agricultural credit — Case for mitigating lending risks

IN A significant budget announcement in July 2004, the Finance Minister, Mr P. Chidambaram, promised a doubling of the flow of agricultural credit in three years. He followed it up by a series of discussions with Indian Banks' Association and the RBI. In effect, his exhortations to bankers have resulted in a new burst of activity by Nabard and the commercial banks, besides the cooperatives.

The progress of agricultural credit in India has depended crucially on government intervention over the years. What the future holds also depends on the package of incentives and policy measures, which the RBI and the Centre formulate and implement.

In this context, I was quite impressed by the historical review and analysis by Dr Rakesh Mohan, present Finance Secretary and former Deputy Governor, RBI, on agricultural credit, published in a recent issue of the RBI bulletin (November 2004).

He is frank about the problems and challenges faced by this sector, although he has not spelt out clearly his solution to end the ills plaguing the farm segment. Agricultural credit in India has already been studied by many Committees whose recommendations alone would occupy an army of policy-makers for a long time. A recent encyclopedic study was that done by the Khusro Committee in the 1980s. The recommendations faced the usual fate, accepted in part and implemented with less than missionary zeal.

Dr Rakesh Mohan points out that agricultural credit as a percentage of agricultural GDP has actually risen from 0.5 per cent in 1950-51 to 8.7 per cent in 2001-02. Agricultural credit as a share of total GDP has also risen, but at a lower rate from 0.3 per cent to 2.0 per cent. What is significant is that agricultural credit as a percentage of total credit has been declining. The share of institutional sources in farmers' debt, however, increased from 31.7 per cent in 1971 to 63.2 per cent in 1981 and 66.2 per cent in 1991.

The statistics may be comforting, but the position on the ground is that the farmers are still dependent, at least at the margin, and on usurious moneylenders who resort to all sorts of methods to collect their dues. The story of farmers' miseries in recent times owes a great deal to the failure of institutional credit to remove the role of the entrenched usurious moneylenders from our villages.

While deploring the excesses of moneylenders, policy-makers have to be aware that they perform their tasks with considerable efficiency, lending money in quick time and without too much formality or documents. There is merit in our bankers adopting some of their admittedly rough-and-ready techniques, if we are to reach our ambitious goal.

The problem of improving agricultural credit flow to the extent contemplated by the Finance Minister essentially turns on the efficiency of commercial banks as well as cooperatives. These suffer from different problems of control, regulation and inadequacy of resources. The cooperative movement is highly politicised and its management is in the hands of factional leaders.

At the moment, the Government has set up yet another study group to go into its problem. All this, however, requires a revolutionary change in approach. Nabard is the institution charged with regulation of cooperative lending institutions. To what extent it has got teeth to implement its responsibilities is not very clear. Hopefully, the Government will address all these issues in the course of its drive to increase the flow of rural credit.

Dr Rakesh Mohan rightly traces the expansion of agricultural credit in India to the nationalisation of banks in the late 1960s and the thrust given to priority sector lending from 1969. He, however, draws a distinction between the challenges faced at the time of the Green Revolution and those that arose in the 1960s.

The Green Revolution had primarily focussed on increased production of foodgrains. But, the consumption of foodgrains as a proportion of total agricultural produce has declined sharply in recent years. This is the consequence of rising per capita income and the resultant shift of food consumption to non-cereals. It shows up in the expansion of horticulture and consumption of fruits and vegetables. This is admittedly a common phenomenon in development. But agricultural credit has to address the issues thrown up by this diversification, which present different problems from a foodgrains-based farm regime.

Another aspect of change in the economy is the increasing transformation of retail trade from small shopping establishments to large supermarkets, especially in urban areas. Dr Mohan points out that this trend has been noticed in other countries, particularly South-East Asia, where the consumers' purchases have increasingly turned to dependence on the bigger and more efficient stores.

These stores represent a higher degree of marketing efficiency and sometimes deliver cheaper produce to the consumers. Our banks have to address the needs of these new trading entities, especially in the form of cold chains and the like, as well as helping install modern storages.

The credit needs of modernising India's agriculture have to be tailored to take account these systemic changes, particularly in the marketing infrastructure and generally in the output mix. It goes without saying that deregulation of marketing structures, removing the heavy hand of government and the amendment of the Essential Commodities Act is also essential to modernising agriculture by opening out markets to farmers.

The amendment to Essential Commodities Act, however, conflicts with the commitments to the contrary in the NCMP. All this necessarily means a change in the attitude of lenders to the needs of farmers.

In analysing the potential for growth of credit for agriculture, Dr Mohan points out that different regions have progressed at divergent rates. The northern region has a substantially lower ratio of credit to State Domestic Product compared to the southern. The figure for the northern region is 1 per cent and that for the southern region 2 per cent — both for the same period (1996-2001).

Dr Mohan rightly asks why banks, especially public sector banks with similar managements, should lend more aggressively to agriculture in the southern States than in the North. Perhaps, the difference is due to the different repayment cultures in the two regions. But Dr .Mohan does not hazard a guess as to the cause. He is perhaps concerned more with removing the regional discrepancies with a view to increasing overall flow of credit.

Dr Rakesh Mohan's essay also covers the issue of perception of greater risk in agricultural lending compared to other sectors. Agricultural lending shows a lower ratio of 12.8 per cent of NPAs, compared to 20.6 per cent for small-scale industries, but higher than 9.4 per cent for non-priority areas.

The data do suggest that agricultural lending is riskier than non-priority lending and lending to other priority sectors. The difference, in the view of Dr Rakesh Mohan, is not large enough to warrant excessive caution in bank lending to agriculture. I beg to differ. Rather it is important that policy-makers should look into the systemic causes for risk being greater in agricultural lending than in small-scale industries, which are also subject to market risks and competition from abroad.

The point is to mitigate these risks — at least those that are known through means such as crop insurance and the like. Further, the culture of repayment should be encouraged through early changes in the legal structure, which should enable banks to repossess assets owned by borrowers without going through complicated legal process and access to courts.

Unless the process of recovery gets easier, ease of lending which may result from the current growth, can lead to a bottomless pit of non-performing assets and a mass of indebted farmers.

Above all else, the pursuit of greater flow of credit to agriculture must involve a radically new approach which includes integration of marketing with credit — a method that has proved successful in the case of milk production. Unless such a radical change is brought about, credit to farmers will remain mere pie in the sky — notwithstanding promises by Ministers and Secretaries.

Dr Rakesh Mohan recalls that the success of the Green Revolution had hinged on its combining a package of incentives and practices, including credit and an assured off-take through Government purchase.

So too the success of the milk revolution heralded by Dr Kurien's unique and creditable accomplishment turned on the fact that the cooperatives, which lent money to the milkmen and women, also collected the milk and had power to adjust the debt repayments from out of payments due for milk.

Whether such a linkage is possible in horticultural marketing is yet to be explored. But bankers, including cooperatives, can surely arrange to hold a lien on the sale proceeds of farm production in specified markets. Here is where the convergence of modern retailers can play an important role.

They can arrange credit for farmers and also link up arrangements to collect the produce for sale through their retail outlets. The time is ripe for a holistic thinking on issues of agricultural credit and marketing. Credit alone will not suffice. It has to be looked as an integral part of production and marketing.

I do hope the Farmers' Commission under the Chairmanship of Dr M. S. Swaminathan will initiate an exploration into such lateral thinking, which alone will enable the much-needed growth in agricultural credit and contribute usefully to increased agricultural output.