Budget 2021

Budget raises agri lending target to Rs 15 lakh crore. But is this enough to tackle rural, farmer distress?

Radhika Merwin BL Research Bureau | Updated on February 01, 2020

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On the contrary, this will only add to rising Agri NPAs of banks

The Budget has set the agriculture lending target to Rs 15 lakh crore for FY21, up from Rs 13.5 lakh crore last year. This implies 12 per cent annual growth in agri lending target over the past five years. But upping the lending target alone is not enough to meet the farmers needs. This is because, accessibility of credit to small and marginal farmers still remains weak. Also, the proportion of short term crop loans to crop related investment credit which was 51:49 in 2000 has sharply changed to 75:25 in 2018, according to RBI report. This has meant declining investment credit which is imperative for meeting long term needs of the agriculture sector.

According to an RBI report, as per Agriculture Census 2015-16, the total number of operational holdings in the country was 146 million and total operated area was 157.14 million hectares in 2015-16. The small and marginal holdings taken together (0.00-2.00 ha) constituted 86.21 per cent, while their share in the operated area stood at 47.34 per cent in 2015-16. The average size of land holding in 2015-16 was 1.08 hectare.

Under the priority sector lending norms, banks have to meet a sub-target of 8 per cent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, for small and marginal farmers.

At the aggregate level, banks have been able to achieve the sub-target of small and marginal farmers. But a large proportion of small and marginal farmers have not been covered by banks. As per PSL Returns (2015-16), the number of accounts under the small and marginal category are 5,13,88,257, while the total number of small and marginal farmers is 12,56,35,000. This means, that only 41 per cent of small and marginal farmers are covered by banks.

There is also a wide regional disparity. In Bihar for instance, while small farmers constitute about 13 per cent of total number of small and marginal farmers in the country, share in total number of loan accounts is just 7 per cent. Uttar Pradesh, while has the highest share in small farmers in the country at 18 per cent, their share in loan accounts is just 10 per cent. Tamil Nadu on the other hand, while has 6 per cent share in the total number of small and marginal farmers, it leads with a share of 17 per cent in total number of loan accounts.

Towards non-agriculture purpose

As the loan extended to the MFIs by banks qualify for priority sector lending, there has been a phenomenal growth of MFIs during the period 2013 -2019. The RBI regulations stipulated that a minimum of 50 per cent of the MFI loans are to be deployed for income generating activities, such as agriculture, animal husbandry and trading. Non-income generating loans are used for consumption, housing, education, water and sanitation and health etc. The trend in the flow of credit for agriculture and non-agriculture purposes by NBFC-MFIs show that in 2018-19, about 64 per cent of credit was for non-agriculture purposes.

Also, the interest rate charged by MFIs was in the range of 19 to 24 per cent during 2018-19, higher than that charged by banks.

Falling investment credit

The government has been running the interest subvention scheme for over a decade under which banks extend short term crop loans of up to Rs 3 lakh 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 loan against negotiable warehouse receipts stored in ware houses accredited by Warehousing Development Regulatory Authority (WDRA).

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

Increasing fragmentation of land has also made it unviable for investment credit as the average landholding size has declined from 2.28 hectare in 1970-71 to 1.08 hectare in 2015-16 (Agriculture Census 2015-16), according to RBI report.

Bad loan worries

Raising agri lending targets aggressively has led to overleveraging, and diversion of funds. Deterioration in credit culture on the back of farm loan waivers has led to rise in delinquencies.

From about 2.5 per cent some five years back, NPAs in agriculture loans are over 8 per cent (as of March 2019). SBI’s NPAs in agri loans is 13.8 per cent (as of December 2019) sharply up from 6.37 per cent in April 2017 (after its merger with associate banks). For Bank of Maharashtra, agri NPA ratio is 22.6 per cent (as of December), a significant increase from 12-odd per cent levels in FY17.

Published on February 01, 2020

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