Is the budgetary thrust on agriculture lending helping farmers?

Credit flow into agriculture has been driven by policy thrust, particularly through lending targets, interest subvention scheme and priority sector lending stipulations. The government’s subsidy payout under the interest subvention scheme has gone up over nine times over the past decade. But, despite these initiatives, accessibility to credit remains weak for small and marginal farmers.

Also, banks’ bad loans in the agriculture sector have risen sharply in recent years, with the issue of diversion of agriculture loans for non-agriculture purposes and falling share of crop-related investment credit, indicating deeper issues that need immediate attention.

Not helping small farmers

The Centre has been raising its agriculture lending target quite substantially in recent years. From ₹8-lakh crore in FY15, the agriculture lending target was set at ₹13.50-lakh crore for FY20. Banks have been overshooting the targets notably over the years. For instance, in FY19, as against the target of ₹11-lakh crore, banks lent ₹12.56-lakh crore.

But despite such plum aggregate figures, a large section of small and marginal farmers are still not covered by banks. According to the RBI's report on agriculture credit, only 41 per cent of small and marginal farmers are covered by banks. As per priority sector lending returns (FY16), the number of accounts under the small and marginal category are 5,13,88,257 and the total number of small and marginal farmers in the country as per Agriculture Census, 2015-16, was 12,56,35,000.

Rising bad loans

The government has been running the interest subvention scheme for over a decade under which banks extend short-term crop loans of up to ₹3 lakh each to farmers at a concessional rate of 7 per cent. Timely repayment is incentivised by an additional subvention of 3 per cent. The interest subvention scheme is extended for a period of up to six months, to small and marginal farmers having Kisan Credit Card (KCC) on loans against negotiable warehouse receipts stored in ware houses accredited by the Warehousing Development Regulatory Authority (WDRA).

The flipside of the subvention scheme has been that there has been a sharp rise in the share of short-term crop loans (75 per cent) over the years. The share of crop-related investment credit has in turn falling drastically, impeding the long-term growth of the sector.

Importantly, the scheme has not led to prompt repayment. On the contrary, NPAs in agriculture loans have been rising sharply over the years. From about 2.5 per cent some five years back, NPAs in agriculture loans are over 8 per cent (as of March 2019). Anecdotal data from few large banks suggest that there is a growing stress in agri bad loans that need attention. For instance, SBI’s NPAs in agri loans is 13.6 per cent (as of September 2019) sharply up from 6.37 per cent in April 2017 (after its merger with associate banks). Bank of India’s agri NPAs are 16.9 per cent (as of September), against 6.3 per cent in March 2016. For Bank of Maharashtra, the agri NPA ratio is 22.6 per cent (as of December), a significant increase from 12-odd per cent levels in FY17.

While HDFC Bank’s overall asset quality has been under check, it has been witnessing signs of stress in its agri portfolio. ICICI Bank, too, in its concall post December quarter results, stated that there were NPA additions to the KCC portfolio.

Aside from the issue of overleveraging, deterioration in credit culture on the back of farm loan waivers has led to delinquencies. Diversion of loans is also a huge cause for concern.

Diversion of funds?

RBI data suggest that in some of the States, agri-credit is far higher than their agri-GDP, indicating the possibility of diversion of credit for non-agricultural purposes. For instance, in States such as Tamil Nadu and Kerala, agri-credit outstanding is a high 170-180 per cent of the underlying agri-GDP. In Karnataka and Telangana, too, the ratio of agri-credit to agri-GDP is over 100 per cent.

Also, some of the States are getting significantly high credit against their input cost requirement such as Andhra Pradesh (7.5 times), Kerala (6 times), Goa (5 times), Telangana, Tamil Nadu and Uttarakhand (4 times) and Punjab (3 times).

Allied activity including livestock, forestry and fisheries, that contribute 40 per cent of the total agriculture output, has only 10 per cent share in total credit to agriculture. But in some States, such as Andhra Pradesh, Tamil Nadu, Karnataka, Maharashtra and Telangana, their share of the overall allied loan outstanding is much higher than their contribution to overall allied output.

The RBI report also highlights issues with KCC loans where, in some States, the incidence of crop loans outside KCC is very high. In Tamil Nadu, Andhra Pradesh, Kerala and Karnataka, 71 per cent of the crop loans are disbursed outside of KCC. This could be due to loans availed against gold as collateral. But this is a concern as there is high probability that such loans are higher than the actual requirement. This can also lead to diversion of funds.

Also, there is wide disparity in the number of small and marginal farmers in a State as against the number of loan accounts. Tamil Nadu, for instance, has only a 6 per cent share in the total number of small and marginal farmers, but leads with a share of 17 per cent in total number of loan accounts and highest share in amount outstanding (13 per cent).

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