The importance of rural India in our economy can hardly be over-emphasised. A critical step towards meeting the aspirations of rural India is understanding the changing rural credit structure.
The share of rural areas in total Net Value Added (NVA, a measure of GDP) is close to 50 per cent. Analysing the split sector-wise, it is no surprise that approximately 95 per cent of the Net Value Added (NVA) in agriculture, fishing, and forestry emanates from rural areas; for the manufacturing sector, this figure is 51 per cent.
Unfortunately, for financial services, the share of the rural as a percentage of the total is as low as 13 per cent.
The aspirations of the next billion have evolved. There is an increasing demand for enhanced and more stable income levels, better infrastructure, and the growing adoption of various digital services. These trends are ushering in change in the financial services space leading to more cost-effective, efficient, faster, and secure products.
The rural credit delivery structure has so far relied heavily on public sector banks, cooperative banks, and Regional Rural Banks (RRBs). This structure has achieved considerable success in reducing the dependence on non-institutional credit. After nationalisation in 1969, the share of institutional sources in farmers’ debt has remarkably improved from about 32 per cent in 1971 to 66.1 per cent in 2019, as per the latest NSSO Survey (Source: All India Debt and Investment Surveys, Various Issues, NSSO).
The lending landscape
The institutional lending landscape in rural India is quietly undergoing a digital transformation. Existing players and small finance banks (SFBs), payments banks, and NBFCs/NBFC-MFI have increasingly started delivering institutional credit via digital modes.
New entrants are complementing the work of existing banks and filling the gaps in access and availability of financial services.
Fintech companies have a digital edge and a wide variety of services that are redefining the lending landscape in MSME and retail segments. It is only a matter of time before the agriculture lending space experiences similar disruptive innovation.
Fintech partnership with existing lenders can be just the catalyst we need. Agriculture lending will have to move from individual lending to value chain-based financing.
It is a necessary transition as agricultural credit requirements have expanded beyond financing foodgrain production. India is one of the largest producers of fruits and vegetables globally, and the sector is infrastructure, logistics and storage intensive.
The wide range of activities is amenable to value chain financing as the risks are shared among various stakeholders.
As of 2022, India has a vibrant ecosystem of agri-start-ups and active investors, making it the perfect time for launching innovative agrifintech products.
In this year’s Budget speech, the Finance Minister called for collaborative delivery of digital and technology-based services to farmers by involving various stakeholders. Soon, we will see the Agri Stack mature and play an important role in digitising the agriculture ecosystem. There are four key requirements to provide agriculture lending with a digital boost.
The four elements
First, land records need to be digitised and linked with lending intuitions for charge creation at the branch level.
Second, digitising the cash movement will make it more transparent and create the stepping stone to value chain-based financing.
Third is to digitise the other productive assets with farmers, the information reaching to farmers in the form of advisories or services and geotag the warehouses.
Finally, creating an e-registry can monetise the other assets that farmers own and aid in accessing institutional credit.
While these parts of the puzzle are important by themselves, the idea is to bring them all together to create a cohesive solution to the discussed gaps and challenges.
Digital agriculture credit is not merely replacing the physical processes but effectively improving and transforming the sector itself. For example, using drones to monitor fields can improve the efficiency and accuracy of agri insurance products.
Another challenge is monitoring the use of agriculture credit. Institutional lenders can monitor the fields using drones to confirm the proper use of sanctioned capital, thereby ensuring a higher likelihood of loan repayment.
At the national level, a case exists for crop-specific targeting of production subsidies.
Wherever there is a loss of groundwater, the system cannot yet identify the farmers still growing water-intensive crops or reward those who have already switched to more drought-resistant choices.
Therefore, the interest subvention presently is universally applied. With digital agri credit, the incentives can be optimised and dovetailed with national priorities such as sustainable agriculture.
The advent of technology supported by the rapid spread of smartphones and the internet in rural India must be utilised to serve the last mile and the time is ripe for the agriculture credit delivery structure to get a makeover. The sooner this happens the better.
Bhanwala is former chairman of Nabard and is currently a Senior Advisor at Omnivore and the Executive Chairman at Capital India Finance Ltd; Mehrotra is the Chief General Manager at Nabard. Views expressed are personal