A credible blueprint for agriculture credit

S Adikesavan | Updated on September 15, 2019

If implemented well, the roadmap traced by the RBI’s Internal Working Group can significantly boost farm incomes

In these difficult times for the national economy, it pays to have a little bit of optimism similar to the outlook of the late Swedish statistician and physician Hans Rosling, who wrote in his bestseller Factfulness about “Ten reasons we’re wrong about the world and why things are better than you think”.

Last Friday’s report of the Internal Working Group (IWG) of the RBI on agriculture credit, headed by its Deputy Governor MK Jain and pivoted by Ashok Gulati, is remarkable for its data aggregation on the work done so far, which then provides the optimistic backdrop for a blueprint for immediate action.

If taken up in earnest by all stakeholders, like the governments at the Centre and the States, this plan can give a booster dose to incomes in the rural sector in general, with a focus on agriculture and allied activities.

The various initiatives taken over the years at the national level has led to a spectacular increase in the credit support for agriculture. Credit to agriculture, which was just about 20 per cent of the sectoral GDP in the 1990s (reform years), has grown to 51 per cent in 2018 . In the last five years, coinciding with Modi 1.0, the jump was about 10 per cent! This is a pleasant revelation as far as credit reach in quantitative terms are concerned.


What then are the issues to be tackled in this crucial segment, which impinges upon the livelihood of half our working population? To my mind, four broad themes emerge from the report which if tackled properly, will be a game-changer for this sector.

The report states that “The number of (loan) 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. This means, despite so many initiatives aimed at financial inclusion, only 40.90 per cent of small and marginal farmers could be covered by SCBs. There is a need to increase the coverage of SMF by banks as they constituted 86 per cent of total operated holdings.”

What the government and the banks should immediately do is design a credit product which will cover the approximately seven crore of small and marginal farmers, catering to their comprehensive credit needs including some income supplement.

Here, the conventional credit product of the KCC seems to have outlived its utility. It has no doubt served the purpose of improving credit penetration but the time has come to overhaul/redesign it completely.

Just consider this anomaly. The revised five-year KCC loan was adopted from 2013-14 and envisaged an automatic increase of 10 per cent of the loan every year. The initial assessment is linked to the Scale of Finance ( SoF), the loan amount fixed for crop per acre. This would imply that the loan in year five (FY 2018-19) would be nearly 150 per cent of the SoF of 2013-14.

Now, when the time comes for giving a fresh KCC loan this year, banks are faced with a current SoF which is lower than 150 per cent of the SoF of 2013-14. Will bankers have to set a lower loan limit for farmers than what was given in the previous year ? There are no answers currently.

The second significant theme which the report highlights is that agri credit has been much too skewed in favour of crop loans at the cost of the allied agri activities. It is observed that the allied sector has a share of 38-42 per cent of the agricultural output during 2014-2016, though it has only a share of 6-7 per cent in total agri credit during the same period (see chart).

With a livestock population of 125 crore, India has been the world’s largest milk producer with an output of 188 million tonnes worth over ₹6.50 lakh crore. With fish production at 13.7 million tonnes, we are next only to China.

According to the Central Statistics Office’s (CSO) detailed crop-wise estimates, the value of milk produced exceeded the total value of foodgrains (cereals plus pulses) in 2014-15 itself. This has been one of the imperceptible changes that has happened in agriculture in the last 15-20 years. In point of fact, the “White” has outpaced the “Green” in revolutionary terms in the last two decades.

Allied activities

One reason why bank credit has flown more towards crop loans is because of the sizeable interest subsidy which crop loans get as opposed to loans for allied agri activities.

One recent announcement by the Union government has been the inclusion of the allied agri activities for KCC loans, which will ensure that interest subsidy flows for this segment too. Hopefully, the skewness in credit flow will get corrected over a three-year period.

Here again, what the banks should seek to do is introduce a combo loan for the small/marginal and landless farmers covering the loan requirement for allied agri also. Add to that a share of credit for income supplements, as some of their income comes from services and labour for which they need upfront support.

The third notable theme is the focus on public investment that the report incorporates. Public investment in agriculture has shown a secular declining trend. In the 1970s, one remembers having studied at school about huge investments in dams and irrigation like Hirakund (1957), Bhakra Nangal (1963) and Beas (1974).


Gross Capital Formation (which is a proxy for investments) in agriculture as a percentage of agri-GDP was 9.2 per cent in 1980-81, and reached its peak at 18.2 per cent in 2011-12. Thereafter, it showed a declining trend till 2015-16 and then a slight upward trend with 13.8 per cent in 2016-17. Further, the public GCF, which was at 43.2 per cent during 1980-81 has come down significantly to 18.8 per cent during 2016-17. As the report states, there is thus a need for the governments to improve their spending towards capital expenditure, which ultimately will stimulate the demand for investment credit in the agriculture sector.

Which leads us to the fourth and most important theme. Agriculture is a State subject and therefore the States have to act. The IWG’s recommendation for an inter-State GST-type council for agriculture has not come a day too soon.

Finally, the immediate action should be to put money in the hands of farm households with soft/long tenors of repayment. This will be a pump-primer for rural demand and increase farm incomes immediately. There is something known as ‘income-multiplier of credit’, that is an increase in incomes which can be induced by lending.

If banks could innovate a new credit product especially targeted at small/marginal/landless farmers, that would be in line with the IWG’s objective. It would also go quite a way towards making Prime Minister Modi’s 2016 Bareilly speech on doubling farmers incomes a reality.

The writer is a senior bank executive. The views are personal

Published on September 15, 2019

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