Expanding Viable Agri-Finance
28th Aug, 2021
The agriculture sector has not only become self-sufficient but has emerged as a net exporter of several agricultural commodities like rice, marine products, cotton etc. They contribute more than 50 percent of the total agricultural and allied output. Institutional credit at a reasonable cost all along the Agri-value chain can catalyse the transformation of subsistence farmers into vibrant commercial farmers.
Agriculture Credit as a Bulwark in Enhancing Development
- Indian agriculture is dominated by small and marginal farmers that account for 86 percent. This institutional structure poses a unique challenge in enabling easy access to modern inputs, technology and finally remunerative markets.
- Access to affordable institutional credit becomes crucial to start and sustain a good crop cycle based on quality inputs.
- Credit facilitates other important agricultural functions such as marketing, warehousing, storage and transportation, all of which are crucial to productivity.
- Agricultural credit also plays an important role in providing essentials during adversity, like crop failure due to reasons such as drought and pest infestation or loss incurred due to price crash.
- Consistent efforts have been made in India over the years to enhance the access of the agricultural sector to institutional credit.
Evolution of Agriculture Institutional Credit Policies
- Credit co-operative movement: The objective of this movement was to provide affordable credit to farmers, especially the small and marginal ones. Till the end of the 1960s, this cooperative structure had assumed the responsibility of providing production credit to the farmers.
- All-India Rural Credit Survey Committee (AIRCSC, 1951-54) laid the foundation of the institutional framework to establish a sound credit delivery system for financing agriculture and allied activities.
- Kisan Credit Card: The nationalisation of commercial banks in 1969, the economic reforms in 1991 and the introduction of Kisan Credit Card (KCC, in 1998).
- Regional Rural Banks (RRBs):An important intervention for expanding the coverage of agricultural creditinvolved the establishment of the Regional Rural Banks (RRBs) in 1976.
Agricultural Credit under Priority Sector Lending:
- Priority Sector Lending (PSL) was launched in 1974 to statutorily earmark a fraction of credit to areas deemed as priority sectors.
- The objective of the PSL has been to ensure that vulnerable and weaker sections of the society get access to credit.
- At present, RRBs and Small Finance Banks (SFCs) are required to meet a target of 75 percent towards PSL.
- As per the new guidelines, the approach of agriculture under priority sector is to focus on 'credit for agriculture instead of 'credit in agriculture' to give impetus to financing of supply value chain in the sector.
- RBI Report (2019) showed that only 40.90 percent of small and marginal farmers could be covered by SCBs and there was a wide divergence in credit share among states. As a measure, the RBI has given higher weightage to incremental priority sector credit in 'identified districts' where PSL credit flow is comparatively low.
NABARD - Fostering Rural Prosperity:
- NABARD, in 1992, introduced the Self-Help Group (SHG) model to further enhance the financial inclusion of the excluded segments.
- Its primary objective was to connect the informal workforce to the formal banking sector, the SHGs employ their pooled resources to disburse loans to their members through the agency of the banks.
- The banks' issue credit against the groups guarantee and the size of loans could be multiple times that of the resources deposited with the banks. NABARD is responsible for refinancing such credit.
Kisan Credit Card Scheme:
- The Kisan Credit Card (KCC) scheme was introduced in 1998, is aimed at providing adequate and timely credit support from the banking system under a single window with flexible and simplified procedures for the farmers for their overall credit requirements.
- As per Agriculture Census 2015-16, the number of landholdings was approximately 145 million, which implies that around 45 percent of farmers possess operative KCCs. However, there may be farmers with multiple KCC cards and the actual coverage may be lower.
Evaluating the Performance of Banking System
- The outstanding advances to agriculture and allied activities have grown significantly to 216.04 trillion in 2019-20 (15.2 percent of total bank credit).
- Agricultural credit as a percentage to Agriculture GDP increased from two percent in the 1970s to 47 percent by 2019-20, portraying significant progress made in lending to agriculture.
- In India, scheduled commercial banks (79 percent) are the major players in supplying credit to the agriculture sector followed by rural cooperative banks (15 percent), regional rural banks (5 percent) and microfinance institutions (1 percent).
Initiatives are taken by the Government
- Interest Subvention Scheme(ISS) for providing credit for crop production at the reduced interest rate,
- Soil Health Cards (SHC) for improving agricultural productivity,
- Pradhan Mantri Krishi Sinchai Yojana (PMKSY) to ensure irrigation facilities and
- Pradhan Mantri FasalBima Yojana (PMFBY), for providing a safety net against natural calamities. It is the world’s largest crop insurance scheme and 3rd largest in term of premium.
Synergising Basket of Financial Initiatives with use of Technology
Digital technology and the use of digital means have introduced new channels of service delivery and new product types that are changing the business model, incentives and cost/ benefit analysis of serving the agricultural sector for financial service providers.
Digitisation of Land Records:
- The computerisation of the Land Records Scheme to digitise all land records started in 1988-89.
- In 2008 Digital India Land Record Modernisation Programme (DILRMP) was launched by the Government of India, with the aim to minimise the scope of land or property disputes and enhance transparency in the land records.
- This will help in reducing the instances of double or multiple financing on the same piece of land.
One Nation One Market:
- National Agriculture Market popularly known as e-NAM launched in 2016, is an innovative initiative in agricultural marketing to enhance farmer's accessibility digitally to multiple numbers of markets and buyers.
- It will bring transparency in trade transactions with the intent to improve price discovery mechanism, quality commensurate price realisation and to develop the concept of "One Nation One Market" for agriculture produce.
- The online and transparent bidding system is encouraging farmers to increasingly trade on the e-NAM platform.
Pradhan Mantri Jan Dhan Yojana:
- The Pradhan Mantri Jan Dhan Yojana (PMJDY) was launched in August 2014 with the objectives of providing universal access to banking facilities to all households, conducting financial literacy programmes, creation of credit guarantee funds, micro-insurance and unorganised sector pension schemes.
- These accounts have been linked with several social security and insurance schemes i.e., Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana and Atal Pension Yojana in May 2015.
- A digital pipeline has been laid through linking of Jan-Dhan accounts as well as other accounts with the account holders' mobile numbers and Aadhaar [Jan Dhan-Aadhaar-Mobile (JAM)] and is providing the necessary backbone for the provision of composite financial services.
Challenges in Agriculture Financing
- As per the NABARD's Financial Inclusion Survey Report 2016-17, indicated that 72 percent of the credit requirement was met from institutional sources and 28 percent from non-institutional sources.
- Out of the total agricultural households, approximately 30 percent still avail credit from non-institutional sources.
- The short-term crop loans are eligible for the Interest Subvention Scheme that incentivises farmers to avail such agricultural loans leading to misutilisation of government subsidy.
- The problem of financial exclusion gets aggravated due to the lack of legal framework for landless cultivators as the absence of documentary evidence becomes a major hindrance for extending credit to this segment of the farming community, who take up cultivation work on oral lease.
Thinking Outside the Box
To cater to the challenges, Internal Working Group formed by RBI to review agricultural credit, made assorted recommendations that couldassist in resolving the stated challenges.
- Banks should provide crop loans, eligible for interest subvention, only through KCC mode to curb the mis-utilisation of interest subsidies.
- For better monitoring of branches by banks and easier implementation of KCC, there should be uniformity in the scale of finance (SoF) for both crops and allied activities.
- The corpus of the Rural Infrastructure Development Fund (RIDF) should be enhanced.
- The government of India should push state governments to complete the digitisation process and updating of land records in a time-bound manner.
- State governments should give access to banks to digitised land records to verify the land title and create charges online.
- Improve institutional credit delivery through technology-driven solutions to reduce the extent of financial exclusion of agricultural households.
- Institutional credit at a reasonable cost all along the Agri-value chain can catalyse the transformation of subsistence farmers into vibrant commercial farmers. Linkage of Farmer Producer Organisations (FPOs), marketing cooperatives and integrators with banks will enable them to reap the benefits of economies of scale as well as of assured markets for their produce. This will also be in line with the enhanced role being envisaged for FPOs in the Agri-ecosystem and synergise the efforts of the policymakers in propelling farmer incomes.