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To address gaps in credit delivery to the agriculture sector, a Reserve Bank of India panel has recommended suitable measures, including the setting up of a credit guarantee scheme jointly by the Centre and States, upping the target for banks to lend to small and marginal farmers (SMFs), and avoiding loan waivers.
Underscoring that there is no guarantee scheme available to banks to cover the default risk of borrowers, the central bank’s internal working group (IWG) to review agriculture credit suggested that the Government of India, in partnership with State governments, should set up a credit guarantee fund for the agriculture sector.
This scheme for the agriculture sector should be on the lines of credit guarantee schemes implemented in the micro, small and medium enterprises (MSME) sector.
Federal institution
In order to consult States and build consensus among them over reforms related to agriculture, the IWG, which was headed by MK Jain, Deputy Governor, felt that there is a need for a federal institution, established on the principle of cooperative federalism, having representation from both Central as well as State governments. Hence, it recommended that the government should set up a federal institution, on the lines of the GST (Goods and Services Tax) Council.
The group sought enhancement in the sub-target for SMFs from the existing 8 per cent of adjusted net bank credit to 10 per cent with a roadmap of two years. In this regard, it reasoned that SMFs account for more than half of the total agricultural output at the national level and hold a major share in the high value crop production.
Farm-loan waivers
The group suggested that the Central and State governments should undertake a holistic review of the agricultural policies and their implementation, as well as evaluate the effectiveness of current subsidy policies with regard to agri inputs and credit, in a manner which will improve the overall viability of agriculture in a sustainable manner. In view of this, loan waivers should be avoided.
Banks should be allowed to give consumption loans to farmers up to a sanctioned limit of ₹1 lakh under priority sector lending (PSL), provided they are able to obtain collateral security and are satisfied with their repayment capacity based on the cash flows of the borrowers, the group said. However, such loans will not classify for PSL-Agri.
The IWG said interest subvention scheme should be replaced with direct benefit transfer to targeted beneficiaries – SMFs, tenant farmers, sharecroppers, oral lessees, and landless labourers as individual borrowers or through self-help group/joint liability group model, with an overall limit of ₹3 lakh per individual farmer.
Further, in order to curb the mis-utilisation of interest subsidy, banks should provide crop loans, eligible for interest subvention, only through the Kisan Credit Card mode.
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