Many new banks see lending to agriculture and other allied sectors as a poison pill or the price to be paid for enjoying the rewards of a bank license. Of course, this is a sector that doesn't easily lend itself to enthusiastic lending.
There are a number of risks including vagaries of monsoon, climate change, poor data availability, fragmented markets, low prices, poor estimation of costs, low technology adoption as well as the age old problem of credit risk.
MINUSCULE PROGRESS
Although there have been steps taken to address each of these issues, the progress made has been minuscule.
Banks have, therefore, had to be compelled by rules and regulation to provide more funding to this sector. For instance, they are required to open a branch in rural/semi-urban area for every 3 branches they open in a urban or metro area.
The Government has also asked fixed priority sector targets under which lending to agriculture sector occupies pride of place. Banks have to lend at least 18 per cent of their loans to agriculture.
According to latest available figures, there are about 32,580 rural branches out of a total of 86,000 bank branches in the country. But this large number is more a legacy of nationalisation, when the Government forced banks to start reaching out to rural India. The number of rural branches has not grown commensurate with the level of activity seen in rural India.
More recently, this number almost seems stagnant even as banks tend to crowd each other out in urban areas. Private banks that escaped nationalisation as well as those that came in more recently need to do more for this sector.
DISBURSEMENT TARGETS
Government prods banks by setting higher targets every year for disbursement of agricultural loans.
For instance, banks were set a target of ensuring credit flow of Rs 3.25 lakh crore in 2008-09 and about Rs 3.75 lakh crore in 2009-10. For this fiscal the finance minister has once again hiked the target to Rs 4.75 lakh crore. Although the Government targets for higher disbursement are usually met at the aggregate level, individual banks still find it very difficult to meet the sub-targets for agricultural lending.
More than half the banks, in both public and private sector, did not meet their agricultural lending targets under priority sector in 2008-09 and 2009-10.
Many banks prefer to take the option of depositing the shortfall in the rural infrastructure development fund (RIDF) even if it earns them considerably less interest, because of the fear of loans turning bad and becoming irrecoverable. Recent debt waivers, done alternately by central and state governments haven't done much to improve the credit repayment culture in this country. Branch managers tell you that their borrowers now just wait for the next big waiver announcement.
FOOD SECURITY
Government and banks need to take these issues a lot more seriously given the importance of agriculture to the country.
It may contribute only 14 per cent of the country's gross domestic product and its share may even go down as the country's service economy expands. But that is no yardstick to judge its value – for something larger is at stake – food security for a billion plus people.
The havoc created by high food prices is visible everywhere. Each of us have felt it with our purse.
And high food prices are now turning out to be a bit longer than a passing phenomenon – and may even turn out to be permanent.
Not very surprisingly, high food prices have not necessarily benefited farmers. Instead unremunerative prices coupled with hostile growing conditions (droughts/floods alternately causing havoc) have forced large number of farmer suicides.
More recently, we have also seen a crisis develop in the microfinance industry in some States that has led to undesirable repercussions – return of the moneylender.
SYSTEM'S FAILURE
It was in order to check the prevalence of usurious lending practices that banks were asked to spread out into interior areas and spread formal banking to rural habitats. Moneylenders provided over 70 per cent of the funds for farmers six decades ago.
Thanks to nationalisation and the spread of banking services, and some determined Government effort to increase credit access, that share has since shrunk to about 30 per cent. But that is still a high number and reflects both the failure of the banking system to penetrate the target market fully as well as the hidden potential.
NEED OF THE HOUR
The role that banks play in agriculture development – both directly and as a catalyst to get greater investment into this sector is crucial. As the economic survey of the Government noted, there have been no big technological breakthroughs since the first green revolution.
What we now need is higher production and productivity in pulses, oilseeds, fruits and vegetables – areas that were untouched in the first revolution and now needed for a second green revolution. For this the country needs to invest more in agriculture.
And that can happen only if banks chip in with funds in a much bigger way and with a great deal more of engagement than what they are doing now.
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