The Hindu Business Line : Priority for the small entrepreneur

One needs to look at the Input-Output matrix of the economy to know and prioritise the sectors that are important. What could be done is to limit the concept of the priority sector only to the small entrepreneur, be it in agriculture or small industry or trade. The big players will have no difficulty in getting credit, whether they are in the priority sector or not.

IN THE latest Annual Policy Statement (APS) for 2005-06 the Reserve Bank of India (RBI) has, inter alia, dealt with agricultural credit in the section on Credit Delivery Mechanism.

It has pointed to the Union Budget proposal to increase the flow of credit to agriculture by 30 per cent this year.

Some time ago, the Government announced its proposal to double agricultural advances in the next three years.

This is a massive job. One can make the assumption that during the last three-and-a-half decades of social banking and priority sector advances, banks have already identified and financed the creditworthy, or the creamy, section of agriculture.

Further growth could mean an adverse selection to meet the target. This is not to argue that small and marginal farmers do not deserve credit.

But where the technology is not available for raising crop productivity the emphasis has to be first on providing the same, supported by ancillary facilities such as marketing.

Credit by itself cannot make an unviable farmer a viable one, especially where he is subsistence producing and not for the market. Extension agencies should help farmers take up such activities such as dairying to supplement income.

Despite innumerable reforms and recommendations of myriad committees the agricultural credit situation is still considered intractable.

Till recently we did not have up-to-date data collected through field investigations to gauge the extent to which the credit needs of various groups of farmers are met by various agencies.

The National Sample Survey Organisation (NSSO) recently came out with a Situation Assessment Survey of Farmers for 2003. But the full report is not yet available.

According to the results published in newspapers, around a half of the farmers are indebted at the all-India level. But the proportion varies from 4 per cent in Meghalaya to 82 per cent in Andhra Pradesh. More interesting is the finding on outstanding debt.

Commercial banks account for 36 per cent while moneylenders' share is 26 per cent. Including government the share of institutional agencies is 58 per cent. The proportion ranges between 31 per cent in Andhra Pradesh and 80 per cent in Kerala and Maharashtra.

Even after 35 years of priority sector lending banks hardly meet a third of farmers' credit needsAndhra Pradesh appears to be a State where institutional agencies have shown poor performance, with reported cases of debt suicides among farmers.

In the past data relating to priority sector lending were available from the regular annual rural credit surveys conducted by the RBI and the decennial investigations of RBI/NSSO. While NSSO can conduct all-India surveys it may not be in a position to undertake in-depth studies at the district level which is what concerns policy makers. Till around the middle of 1970 the Division of Rural Surveys of the then Economic Department in the RBI used to undertake such field studies at the district level.

The results were used extensively in policy making by the RBI, the Government and international agencies.

It is time the RBI thought of reviving the Division of Rural Surveys in its Department of Economic Analysis and Policy on its own instead of waiting for a recommendation to that effect by an expert committee.

Better still, it could set up a Division of Field Studies to cover the small producer and trader in urban as well as rural areas.

In the APS, there is a reference to a survey to be conducted by an outside agency to assess customer satisfaction on bank credit delivery in the rural areas.

The results can be predicted. It will be adverse to banks if small farmers are given adequate representation in the sampling scheme.

It would indicate a better and more intelligent use of resources to enlarge the scope of the field investigation and make it a full-fledged rural credit survey in selected areas, designed to produce results with a short period.

It would be a better use of resources to enlarge the scope of the field investigation to become a full-fledged rural credit survey, referred to above, in selected areas in different States designed to produce the results within a short period.

The problem is not one of quantum of credit but of the number of borrowers. It is well known that production credit needs are directly related to the size of cultivated land holding.

It is also an established fact that the distribution of holdings in the country is highly skewed with big farmers constituting a small proportion of the agricultural community and holding the lion's share in the total land available for cultivation.

However, since they are prosperous their credit needs are not as pressing as those of the small farmer. Many large farmers are also moneylenders.

The availability of agricultural credit from banks, commercial or cooperative, on relatively easy terms makes it possible for them to profit through arbitrage by borrowing from them for lending to small farmers at a higher interest rate.

On the other hand, though the number of small farmers is large, their credit needs are a small proportion of total demand.

It is just a question of organisation to ensure that credit reaches such a large group in time. Many programmes have been devised to deal with the problem, without much success.

A mere enlargement of agricultural credit by banks over a period of time, as envisaged by the Government, will not help the small farmer unless the basic organisational problems are solved.

Of course, efforts are being made in this direction through the organisation of farmer-groups but more needs to be done.

According to the APS, some are of the opinion that the modifications over time in the concept and definition of priority sector advances have led to a loss of focus.

It has called for a debate on the issue, but this will be little more than tinkering with eligible groups, as in the past.

It has called for a debate on the whole issue. It is not likely to lead the policy-makers anywhere except for tinkering here and there with the eligible groups, as in the past. It is an issue in political economy.

The priority is in social terms although garbed in economics linking it to the contribution of the favoured sectors to gross domestic product.

One needs to look at the Input-Output matrix of the Leontief type for the economy to know and prioritise the sectors that are important.

What could be done now is to limit the concept of the priority sector only to the small entrepreneur, be it in agriculture or small industry or trade. The big players will have no difficulty in getting credit, whether they are in the priority sector or not.

There used to be a sub-target for small farmers within the one for agriculture. One does not hear of it any more.

(The author is a former Officer-in-Charge of the Department of Economic Analysis and Policy, Reserve Bank of India.)

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