No credit for small farmers

Despite having only a 15 per cent share in GDP, agriculture still employs more than 60 per cent of India's rural population.

The Centre continuously boasts of doubling credit to this sector and providing interest relief of two per cent for prompt payments, and the like.

But a look at the Reserve Bank of India statistics on direct credit for farmers during the past five years reveals that there is a fall in actual money going to farmers.

The number of direct agriculture accounts has declined by 2 per cent between 2006 and 2011.

The consistent rise in the contribution to the National Bank for Agriculture and Rural Development's Rural Infrastructure Development Fund (RIDF) from the commercial banks is the best indicator of the decline in the share of direct farm credit to what is officially termed as total credit to the agriculture sector.

Blurring the line

As if this was not enough, the draft recommendations of the M.V. Nair Committee on priority-sector credit restructuring suggest that the commercial banks, more particularly the public sector banks, have found convenient ways of distancing the actual producer from their credit net.

This, even as there is tacit admission by the committee that prioritisation would continue to have a significant role to play in the credit portfolio of Indian banks.

Thus, it has pointed out: “The need for directed lending in India would continue considering that there is lack of access to credit for a vast segment of the society. Commercial banks need to play significantly enlarged role for developing and deepening financial services in the rural areas and urban markets. Credit remains a scarce commodity for certain sections/sectors and they continue to remain outside purview of the formal financial system.”

The problem, however, lies in the detail. The Nair Committee, too, chose to do away with the present distinction of direct and indirect agriculture credit that, together, should account for 45 per cent of the 40 per cent of priority sector credit or 18 per cent (not more than 4 per cent for indirect agriculture credit).

This it has done by redefining agriculture as a “sector [that] needs to be seen as a single set of activities encompassing production, storage and distribution.

As there is a seamless inter-connectivity of the entire agriculture value chain, its impact on output, income and employment in rural economy is highly positive.

Therefore, ‘agriculture and allied activities' may be seen as a composite sector within the priority sector, which then necessitates doing away with the distinction between direct and indirect agriculture lending, it has argued.

Not preferred clients

Activities such as storage, processing and trading of agriculture products are basically commercial in nature and they, no doubt, significantly add value.

The farmers, however, are not the preferred clients of banks for the simple reason that there is more risk than just credit risk. Like the mullah who kept searching for a key in the backyard, instead of in the house where he actually lost it, the Nair committee has found the solution in lending to that part of agriculture, which yields net earnings to banks without having to directly lend to numerous farmers, growing a variety of crops in diverse agro-climatic zones and requiring detailed supervision.

Experience during the post-reform period has shown that direct credit to farmers is expensive for the banks and requires supervision that they are inadequately equipped with.

Indirect credit to agriculture — that is not crop production, but the post-production value chain — is armchair lending and, yet, more remunerative. Banks have not shied away from lending for such activities, because of the value they bring to the business of banks.

They carry investment and working capital as also trade credit. Banks lend to these activities just like fish taking water, whether the RBI classifies them under priority or not.

The Nair Committee has also left the RIDF window open as an option for the banks should they fail to achieve the 18 per cent credit target for redefined agriculture.

In essence, the redefined agriculture would provide an opportunity to banks to distance themselves from lending directly to small and marginal farmers and tenants for production.

Lend to small farmers

The Report acknowledges that 80 per cent of the farmers are small and marginal and, therefore, they should be provided with 9 per cent of adjusted non-bank credit. This amounts to half of the total allocation.

A small holding sucks less credit, but the numbers are more and, therefore, the allocation should have been in terms of number of farmers and not in terms of amount, if the intention of the Committee were genuine. The banks can lend to rich farmers and those in irrigated areas more than the large number of small and marginal farmers living in dry land areas.

For those engaged in dairy, fisheries or horticulture, depending on how the small and marginal are defined and categorised, banks would find it convenient to show achievement under this allocation.

Agriculture is too broadly defined for banks. God save the farmers if the Report finds favour with the RBI.

If the RBI is serious about priority credit dispensation, it would do well to ask banks to undetake direct lending for farming in rural and semi-urban areas to the extent of 80 per cent of the total so-called agricultural lending.

There should be penal provisions for non-performance that discourage window-dressing and escape routes such as through the RIDF.

(The author is a former senior executive of State Bank of India and Regional Director, PRMIA, Hyderabad chapter.)

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