Farm loans
“The predominance of agricultural loan against gold as collateral is a matter of concern as the quantum of loan must have been de-linked from the scale of finance,” the report stated. The scale of finance is an economic jargon for the actual costs of cultivation on a per hectare basis.
This trend of taking out larger loans against gold could be particularly true of Tamil Nadu, Andhra Pradesh, Kerala and Karnataka, the study said.
The government subsidises short-term crop loans to make farming cheaper. Moreover, banks must necessarily lend to farmers because agriculture is a “priority lending sector”. For instance, all scheduled commercial banks must direct 40% of their adjusted net bank credit towards priority sector lending.
Farmers get crop loans at a cheaper 7% as compared to consumer loans, which range from anything between 12% and 14%. For those making timely repayments, the effective rate of interest is even lower at 4%.
Banks tend to lend more easily to farmers who additionally pawn their gold as “these are secured loans”, the RBI study said. “This ultimately leads to diversion of funds and consequently, high incidence of indebtedness among the farmers,” it added.
The study called on banks to “flag agricultural loans sanctioned against gold as collateral”.
According to a 2018 National Bank for Agriculture and Rural Development survey, “more than one in two agricultural households surveyed in 2018” were indebted. The size of debt owed by them was nearly equal to their annual incomes.
For deeper insights, RBI calculated the ratio of crop loans vis-àvis the value of farm output as well as cultivation costs. It found 11 states had higher loan-output ratio than the national average. This shows a “huge disparity” in access to credit, according to the study.
Kerala had the highest loanoutput ratio of 0.90, while West Bengal (0.09) the lowest. Though Rajasthan, Uttar Pradesh and Bihar had values of loan-output ratio above the all-india average (0.32), farmers in these states did not have “adequate credit” to meet their requirements, pointing to a lack of clear picture, the RBI study said.
To be sure, farmers rely on a variety of sources, especially private lenders, to meet their costs. Nearly 30% of agricultural households take loans from high-interest private lenders, according to Nabard’s 2018 “all-india financial inclusion survey”. The RBI study said this too was a “cause of concern”. The RBI study assumes significance because unproductive loans that don’t go into generating more farm income end up creating debt traps.
Poor returns from farming could be just one of the reasons why farmers may be using cheaper crop loans to “smoothen” consumption needs, such as at the time of a wedding in the family, said economist Abhijit Sen. “Farmers could be taking out farm loans for capital investments too,” he said.
Capital investment refers to any spending on farm assets, such as a tractor, for which farmers need to pay higher interests. “The problem is also that banks have had to meet farmers’ need for long-term credit requirements which should have been met by cooperative banks,” Sen said.
The inability to repay debts has prompted an “unprecedented increase”in farm loan waivers since 2014-15, amounting to ₹2.4 lakh crore or 1.4% of the country’s 2016-17 GDP (at current prices, or prices not adjusted for inflation), the RBI study noted.
The government’s Volume 2 of “Report of the Committee on Doubling Farmers’ Income” states that the “average monthly consumption expenditure of a farm household” was ₹6,223 and farming costs have risen by over a third in the last five years.