Fixing farm credit
More steps needed for agri-credit to reach farmers
The Reserve Bank of India (RBI) has done well to revert to the old practice of making a distinction between direct and indirect lending to agriculture to ensure greater flow of bank credit straight to the farmers. Earlier, the loans disbursed to both farmers and some kinds of agri-business enterprises used to be clubbed together as agricultural lending. This system worked against farmers’ interests. Agri-businesses received preferential treatment as banks could reduce their transaction and administrative costs by avoiding the large mass of farmers; they could also circumvent the risks associated with farming. The new directive from the RBI rightly asks the banks to lend 13.5 per cent credit directly to individual farmers for buying farm inputs and machinery.
This move was overdue. Some recent studies based on RBI data showed that the share of farm loans above ~10 lakh has been on the rise. These loans are, obviously, not going to the farmers, the bulk of whom are small and marginal land holders. RBI’s records for Maharashtra indicate that over 40 per cent of the bank loans under the category of farm credit are advanced from urban and metropolitan branches. Worse still, a sizeable part of the agricultural credit was disbursed between January and March whereas the farmers actually require loans prior to the crop sowing season that begins in June for kharif and October-November for rabi.
Little wonder, therefore, that despite the phenomenal surge in the total flow of agricultural credit – from just around ~1 lakh crore in the mid-2000s to ~8.5 lakh crore targeted for 2015-16 – the dependence of farmers on the informal sector, including moneylenders, has not diminished perceptibly. This is borne out by the findings of the All India Debt and Investment Survey of the National Sample Survey Organisation for 2013 (released in December 2014). It shows that nearly 44 per cent of the outstanding debt of rural households was from the informal sector. And over 33 per cent of the total debt was owed to the moneylenders who can charge interest rates in excess of 30 per cent.
This aside, the government’s move to offer additional interest subvention of three per cent for the timely repayment of farm loans, which reduced the effective interest rate for agricultural loans to just four per cent, has proved counterproductive. This has encouraged banks to lend more to the same set of farmers who repay their loans regularly. Beneficiaries of such highly subsidised credit also have an incentive to put this money in fixed deposits to earn higher interest and make a fast buck through arbitrage.
How can the credit pipeline be improved? First, since land usually serves as the collateral for agricultural loans, an improvement in land records is imperative. Also needed is a legal framework for land-leasing to enable the large number of land lease-holders and tenant farmers to access low-cost institutional credit. Better targeting can be expected to wean farmers away from moneylenders and reduce their distress. The RBI’s latest move is just one step in that direction.