DEEPAK MOHANTY PANEL REPORT ON FINANCIAL INCLUSION. Farm loans: Interest subsidy scheme distorting the credit system

To alleviate agricultural distress, a Reserve Bank of India panel has recommended a slew of measures, including doing away with the current interest subsidy scheme, instituting a universal crop insurance scheme for small and marginal farmers, and digitisation of land records.

The committee on medium-term path on financial inclusion, headed by Deepak Mohanty, Executive Director, RBI, suggested that the Centre should come up with universal crop insurance for small and marginal farmers at a heavily subsidised rate, the money for which can be funded by doing away with the current interest subsidy scheme.

It observed that the interest subsidy scheme has distorted the agricultural credit system and seems to have impeded long-term investment. Under the scheme, the Centre provides interest subvention at 2 per cent for short-term crop loans of up to ₹3 lakh. Additionally, a 3 per cent incentive is given for prompt repayment of loans.

The committee said millions of small farmers live on the precipice, starved of credit. In the absence of bold structural reforms by way of digitisation of land records and giving tenancy certification to enable credit to the tiller, the problem is likely to persist.

It expressed concern that although agricultural credit has been rising every year, as reflected in an increase in the number of accounts, the extent of financial exclusion remains large, especially for tenant farmers, share-croppers and agriculture labourers who still have limited or no access to the formal credit system.

Additionally, indirect credit has risen more impressively compared to direct credit, due mainly to more and more categories being brought within the ambit of priority sector lending for agriculture.

“It therefore becomes exigent to find out ways to reach the small and marginal farmers for agri-credit, taking due care of risk factors.

“One of the primary reasons is the reluctance of landowners to formally lease out their land for cultivation for fear of losing their rights over the land. As a result, banks are reluctant to grant credit for want of any evidence of cultivation,” the committee said.

The owner of the land is often not the cultivator even in the case of small and marginal holdings, it added.

Hence, the Committee recommended that in order to increase formal credit supply to all agrarian segments, digitisation of land records should be taken up by states on a priority basis.

In order to ensure actual credit supply to the agricultural sector, the committee recommended the introduction of an Aadhaar-linked mechanism for Credit Eligibility Certificates.

For example, in Andhra Pradesh, the revenue authorities issue Credit Eligibility Certificates to tenant farmers (under the Andhra Pradesh Land Licensed Cultivators Act). Such tenancy/ lease certificates, while protecting the owner’s rights, enable landless cultivators to obtain loans.

The Reserve Bank of India may accordingly modify its regulatory guidelines to banks to directly lend to tenants/lessees against such credit eligibility certificates.

The Centre, according to the panel, may phase out the agricultural input subsidy and replace it with an income transfer scheme, which could potentially transform the agriculture sector besides promoting financial inclusion. This would first require digitisation of land records for clear titles and credit linkages to establish evidence of cultivation.

The Centre may restructure the Agriculture Insurance Company (AIC) to take up the role of a dedicated Crop Insurance Corporation, the committee suggested.

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