Finance or credit is a critical input for production and trade. Timely and adequate availability of finance is necessary for sustained growth in production and trade volumes.

We recognise the positive correlation between credit flow on the one hand and production and/or export on the other. While correlation exists, it is as yet unclear if credit is actually a causative factor for changes in production/trade. More research is needed to demonstrate if changes in credit flow cause changes in production/export.

In our country, traditional methods of financing have by and large delivered, and will continue to play a role; but we need to recognise that they are inefficient systemically.

So, both borrowers and lenders explore newer methods of finance customised to suit their specific needs. Structured financing and warehouse receipts are two such tailormade ways of financing production/export.

Structured financing is transaction-based lending which ensures better quality of asset for the lenders even as it substantially reduces the risk associated with lending. It also helps traceability of goods or trade financed even as it helps eliminate over-trading.

Warehouse receipt financing works on the basis of goods brought into an accredited warehouse for which the warehouse-keeper issues a receipt of storage, indicating quantity, quality and other parameters. The receipt can then be pledged, either fully or partially, with a commercial bank and money can be borrowed.

India’s priority sector lending policy has the right intention of supporting the sections that are critical for the economy but are generally vulnerable and deserve support. Such sections include farmers, exporters and micro, small and medium enterprises.

Considering the size of the economy as also the widely varying size and number of borrowers, one can say that our priority sector lending policy is appropriate for our socioeconomic status. Of course, it is an entirely different question whether such lending has achieved its objectives in full.

But higher allocation of credit alone is most unlikely to lift the fortunes of players in the priority sector. It must be conceded that credit is a necessary condition, but not a sufficient condition.

So, we need to go beyond priority sector lending. Indeed, policymakers must seek to reduce the economy’s over-dependence, if any, on credit given the various challenges like costs, operational inefficiencies, and risk of unintended exclusion/inclusion of borrowers.

It is common knowledge that small farmers are left out. Many are forced to continue to depend on moneylenders and the like for credit needs. Also, there are regional disparities in the requirement and disbursal of credit.

OECD experience

Priority sector lending is known as directed credit programme in developed countries. Here we can learn something from the policies and experience of OECD countries (a group of rich, industrialised nations) as far as agriculture is concerned.

The OECD countries spend as much as $500 billion annually on ‘farm support’, a euphemism for subsidy. Of this, $80-90 billion is spent on what is described as ‘general services’ which cover farm research and development, agri infrastructure and innovation systems, quality inspection, control and certification, market development, bio-security, and so on. The expenditure is crop neutral.

It is necessary for us to learn from the OECD experience and step up such expenditure. It will help reduce the vulnerability of growers and other value chain participants to supply chain inefficiencies and market shocks. The government has no doubt created the Agriculture Infrastructure Development Fund (AIDF), but the nation needs to get a report card of its progress.

The US continues to implement Export Credit Guarantee Programme (GSM-102) related to export credit guarantees by the US Department of Agriculture. The programme aims to encourage commercial export financing of agricultural commodities from the US by providing credit guarantees.

There’s need for the introduction of ESG (environmental, social and governance) principles in India’s priority sector lending programme, especially for farm exports. We export several million tonnes of rice and sugar every year, often subsidised. Rice and sugar are water guzzlers. Amid acute water scarcity in the country, export of rice and sugar would mean indirect export of water.

Lending institutions must demonstrate a moral duty towards the society and environment protection. The rationale of priority sector lending deserves a review.

Excerpts of a speech delivered by the writer, a policy commentator and agribusiness specialist, during the Reserve Bank of India, College of Agricultural Banking, Conference on Credit Flow to Priority Sector that concluded on March 4

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