The Hindu Business Line : Banks must look beyond credit to help farm sector

It is well recognised that, in addition to seed, fertilisers, water and agro-chemicals, credit is an important input for agriculture. Usually cash-strapped, farmers need adequate and timely credit to be able to access inputs and market the output. In agrarian economies, there usually is a positive correlation between flow of credit and farm output. In our country, a large part of rural credit is through informal channels such as private moneylenders.

The ‘Farm Credit Package’ announced in June 2004 (when the new government assumed office) stipulated doubling of the flow of institutional credit for agriculture in the following three years. New Delhi seldom misses an opportunity to talk about the expanding flow of institutional credit to the farm sector.

Encouraging performance

Economic Survey 2006-07 points out that the target of 30 per cent growth in agricultural credit in 2004-05 was surpassed, with actual growth in overall credit by all agencies rising to 44 per cent to touch Rs 1,25,309 crore. Based on this encouraging performance, the target for flow of institutional credit for agriculture and allied activities for 2005-06 was raised to Rs 1,41,000 crore which, again, was surpassed, with the actuals at Rs 1,80,486 crore. The Survey points out that the target for such credit for 2006-07 was fixed at Rs 1,75,000 crore, of which 85 per cent (close to Rs 1,50,000 crore) was achieved by December 31, 2006.

According to the RBI’s annual report, the credit flow to the agricultural sector exceeded the target for the third consecutive year during 2006-07. As against the target of Rs 1,75,000 crore, the actual disbursement of farm credit by the banking system was Rs 2,03,296 crore. For 2007-08, the Union Budget has fixed a credit target of Rs 2,25,000 crore and an addition of five million farmers to the banking system. The actual credit flow exceeding the target is, no doubt, commendable. Together with Kisan Credit Cards, the credit flow in the last three years must have made some difference to the rural economy.

Now, look at the Reserve Bank of India’s Mid-Term Review of the annual policy statement for 2007-08. The domestic scheduled commercial banks, both public and private, are required to formulate special agricultural credit plans (SACPs) to achieve a distinct improvement in credit flow to agriculture.

According to the RBI, during 2006-07, disbursements to agriculture by public sector banks (PSBs) and private sector banks under SACP aggregated Rs 1,22,443 crore and Rs 25,360 crore respectively against the target of Rs 1,80,160 crore and Rs 40,656 crore. In other words, the credit flow through PSBs has fallen short of the target by as much as a third. The performance of private sector banks is worse; their shortfall is close to 40 per cent of the target.

It is common knowledge that India’s farm sector growth has displayed wide variations year after year. The annual growth rate of the last 10 years has averaged a mere 2.3 per cent. Apart from the very modest growth rate, a disturbing trend is the increasing indebtedness of farmers, the widening agrarian crisis and continuing suicides in such numbers.

A paradox

The combination of expanding farm credit and worsening agrarian crisis is truly paradoxical and deserves to be investigated. There is one school of thought which believes that increasing the flow of farm credit is actually leading to higher suicide rates. Farmers who are unable to repay loans resort to the extreme step.

That this is happening amidst an economic boom, propelled by accelerated growth in the manufacturing and services sectors (both of which have logged double-digit growth rates), is even more ironical. On the one hand, two-way flow of foreign direct investment and the retail revolution are adding to the country’s glamour. On the other, food shortages, poor quality of life in rural areas and large-scale migration to urban areas in search of livelihood also coexist.

In India, the relationship between farm credit and farm output appears tenuous. The robust rate of farm credit expansion as officially claimed does not seem to reflect in the agricultural performance. Admittedly, apart from credit, there are several other factors needed for farm sector development.

Credit and output

Indeed the tenuous relationship between credit and output casts a shadow on the claims made in official circles. It is likely that farm credit continues to flow to big farmers, while small and marginal farmers are left out.

Nearly 80 per cent of the farmers own less than two hectares of land. It is likely that many small and marginal farmers are even now unable to access institutional credit in time. The credit distribution or delivery mechanism needs to be further activated to reach the really needy. According to the World Bank, about 87 per cent of marginal farmers (who own less than two hectares of land), and 70 per cent of small farmers have no access to credit from a formal financial institution in India.

Capacity building

While on credit, it is necessary to emphasise that improved distribution of credit by itself is unlikely to produce notable results. Credit is but a tool that enables growers to access requisite inputs and cultivate the crop. Once the crop is produced, it has to be marketed; and marketed at a price that would leave some profit for the grower.

There are two major weaknesses in the country’s post-harvest agricultural operations — poor rural infrastructure (warehouses, access roads to markets, cold chains) and tardy flow of price and market information.

Institutions, including public and private sector banks, have been lending to growers and seem to believe that their duty is done once the farm credit or priority sector lending target is fulfilled. For banking institutions, the easiest job is to lend money — it is like plucking low hanging fruits.

Handholding needed

Indeed, banks that are genuinely interested in their rural customers must work towards building capacity among their borrowers to repay the loan. Considering the distress facing agriculture, time has come, in our country at least, for lending institutions to go beyond the mundane task of giving a loan and waiting for the borrower to return the money.

Banks must become proactive and strive to build capacity among borrowers, especially those in agriculture. It is possible through a combination of activities — assist growers to get together; enable them improve the produce quality; help them access appropriate warehouses; and disseminate price and market information. Small growers need handholding for some time.

If this is done, the average Indian farmer has the potential to turn into a savvy trader. On their part, banks need to show deeper empathy to the small borrowers. And unless banks take up capacity building in right earnest, expanding credit flows may not benefit the farmer.