Agriculture credit disbursements have grown at a decent pace only in the last five to six years. At the start of the millennium, achieving a disbursement target of ₹64,000 crore (2001-02) seemed like an uphill task for banks, whereas in 2020-21 they surpassed the target of ₹15 lakh crore. The concerted efforts of the government, RBI, Nabard and rural financial institutions (commercial banks, cooperative banks and RRBs) have streamlined the agriculture credit system to meet the requirements of the last mile.
However, keeping in mind the evolving needs of the agri value chains, the agriculture credit system has an important role to play. This brings us to the question of how to better equip the system for such a role.
Today, rural India contributes close to 30 per cent of the country’s GDP. Gone are the days when ‘rural’ and ‘agriculture’ went hand-in-hand and the role of policy should therefore grow beyond agriculture credit to all-encompassing rural credit. As per the latest Situation Assessment Survey of agricultural households (NSSO, Report 587) the share of income from crop production out of the average total monthly income (₹10,218) of an agricultural household was 37 per cent. In other words, for an average agricultural household, almost 63 per cent of its monthly income comprises non-crop production activities!
This is proof that the profile of the agricultural households has shifted away from solely crop production. Naturally, our approach to agriculture (and rural) credit must reflect this change. The nature of requirements, mechanics of lending, collaterals and the approach itself perhaps call for a hard reorientation.
One of the important dimensions of the agriculture credit policy is the interest subvention scheme introduced to provide farmers access to affordable credit. The way the scheme is structured currently has limitations in directing credit to a particular crop or a region. However, with the advent of data-based technology and fintech companies increasingly playing an important role, it is possible to adopt a differentiated need-based approach. This would enhance the effectiveness of subvented credit.
Though currently, FPOs are outside the purview of subvented credit, they are fast emerging as the new vehicle to spearhead value chain financing in agriculture. Furthermore, as most members of FPOs are small and marginal farmers it not only fulfils the eligibility criteria but presents an additional channel for furthering cheaper directed credit. This will have a dual impact — it will enhance the productivity of credit and at the same time direct the credit flow to the desired outcome to fill an existing gap. The agritech fund under Nabard announced in the Budget 2022 is a welcome move. Under Nabard’s expert stewardship the fund can be instrumental in helping agri-entrepreneurs and millions of farmers via FPOs .
Another area that has escaped scrutiny till now is the impending impact of increased demand for horticulture production on the agriculture credit system. The current agriculture credit system is perhaps tilted more towards meeting the needs of foodgrain production systems as up until 2012, when foodgrain production was higher than horticulture production. Today, the scope of value addition in horticulture crops, and improved farmer profits, is significant.
Then again, efficient storage, logistic and transportation require a certain degree of specialisation and intensive capital investments. Since returns may be low in the initial period of investment there exists a definitive case to provide either fiscal incentives or subsidies or a combination of both to encourage investments and offset the low returns in the initial years.
Capital formation in agriculture consists of investments in newer areas and demand for replacement capital. Term lending in agriculture has in recent years seen an uptrend. While the emergence of agritech funding has raised hopes for increased investment flow in the sector, it would be naïve to believe that it can fill the role that public investment needs to play.
The agri-horticulture sector is at the cusp of value chain financing. In dairy and poultry, to a certain extent, we already see visible efforts in value chain financing. A similar replication in the agri-horticulture space at a larger scale is yet to happen. FPO driven value chains can be a game-changer but how to develop them would require a separate article,uffice it to say here that immense potential exists. Another area that also needs to be dealt with separately is skill in agriculture and the role of agriculture credit given the space constraint.
Rural aspirations are on the rise and need to be met at a fast pace to bridge the rural-urban divide and address income inequalities. An important driver of growth in rural areas which has a large multiplier effect on rural infrastructure development. Larger rural infrastructure investment through continued enhanced outlays for the Rural Infrastructure Development Fund (RIDF) will catalyse growth in rural areas and generate employment. Dovetailing public investment creation with private investments through micro plans can enhance indirect employment generation in rural areas and boost the credit absorption capacity.
Going forward the focus should shift away from merely furthering outreach to enhancing productivity and sustainability itself. The Environment, Social and Governance (ESG) requirements provide a huge potential but currently, the protocols have not developed to the extent required so that lending based on them can become transformational. The recent report of the committee set up by SEBI for enabling SSE (Social Stock Exchange) provides some part solutions for institutionalising ESG funding and linkages.
In Formula one racing the pit stop area is critical where the formula cars pause for any repairs, maintenance and small adjustments to complete the race successfully. The time for a pit stop for the agri credit system is here! And some of the aspects (not complete in any measure) that can be addressed in the pit stop have been summarised in the article.
The writer is ex-chairman of Nabard, and is currently Senior Advisor of Omnivore and Executive Chairman at Capital India Finance Ltd