Institutional Credit in Agriculture

Relevance: GS-III: Major crops-cropping patterns in various parts of the country, – different types of irrigation and irrigation systems storage, transport, and marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers.

Introduction

• Credit is one of the critical inputs for agricultural development. It capitalizes farmers to undertake new investments and/or adopt new technologies.
• The importance of agricultural credit is further reinforced by the unique role of Indian agriculture in the macroeconomic framework along with its significant role in poverty alleviation.
• Realizing the importance of agricultural credit in fostering agricultural growth and development, the emphasis on the institutional framework for agricultural credit is being emphasized since the beginning of the planned development era in India.
• In India, a vast network of financial institutions exists, with the co-existence of dual (institutional and noninstitutional) financial systems operating in the rural credit market. A large number of institutional and non-institutional agencies lend money to farmers (directly or indirectly) for their short- and long-term needs.

Farmers' Financial Inclusion in India: A Overview

• Access to institutional credit necessitates the possession of assets and profits that are used to assess a prospective borrower's creditworthiness. In the absence of such creditworthiness, access is denied.
• According to the most recent agricultural census, 87% of agricultural households own less than or equal to two hectares of land. This means that 87% of farmers are small or marginal, according to the Reserve Bank of India's description. The size of one's income is proportional to the size of one's landholdings.
• Personal funds and those acquired from institutional sources are the two most common ways to invest in agriculture. With an increase in the size of land owned, the dependence on non-institutional sources decreases.
• According to the NSSO Situation Assessment Survey of Agricultural Households (2013), 52% of farming households are in debt, with rates as high as 89-92% in some states.
• Though the RBI issued guidelines (2014) for extending loans to landless farmers and for a debt-swapping scheme to convert informal loans of farmers into bank loans, they have remained merely on paper.
• However, many state governments push for a loan waiver which is only an element of immediate and temporary relief.
• According to the findings, farmers' household incomes must be increased and access to institutional credit encouraged in order to increase investment in high-value agricultural assets, which drives agricultural productivity.

The institutional credit agencies: It includes rural cooperatives, Regional Rural Banks (RRBs), Scheduled Commercial Banks (SCBs), NABARD, Non-Banking Financial Institutions (NBFIs), Microfinance Institutions (MFIs), Small Finance Banks (SFBs), and other government agencies. Of these, SCBs, RRBs, and cooperatives are the three main rural financial institutions (RFIs) that provide credit to the agricultural sector at the village level by leveraging on their geographical and demographic outreach.

The non-institutional sources: It comprises moneylenders, friends, relatives, traders/commission agents, landlords, and others with varying shares in lending over time.

The multi-agency approach: It includes the Rural Cooperative Institutions are mandated to address the ‘last mile problem associated with the delivery of affordable credit to farmers. It can be broadly classified into short-term and long-term institutions, each with distinct mandates. The focus of short-term cooperatives, viz., state cooperative banks (StCBs), district central cooperative banks (DCCBs), and primary agricultural credit societies (PACS) has been primarily on providing crop loans and working capital loans to farmers and rural artisans. Long-term cooperatives such as state cooperative agriculture and rural development banks (SCARDBs) and primary cooperative agriculture and rural development banks (PCARDBs) dispense medium and long-term loans for a range of activities, including land development, farm mechanization, minor irrigation, rural industries, and lately, housing.

Micro Finance Institutions (MFI)

• They give loans (usually up to ₹50000) to the poor Farmers without collateral along with flexible EMI options, but interest rates higher than banks as MFI can’t accept deposits- they arrange funds via banks/NBFC/ All India Financial Institutions (AIFI) & keep their profit margin in between.
• E.g. Bandhan Bank, SKS (Andhra), Cashpor (UP), Ujjivan (Karnataka).
• Regulator: RBI + Ministry of Corporate Affairs.

Priority Sector Lending (PSL)

• The RBI mandates banks to lend a certain portion of their funds to specified sectors, like agriculture, Micro, Small, and Medium Enterprises (MSMEs), export credit, education, housing, social infrastructure, renewable energy among others.
• All scheduled commercial banks and foreign banks (with a sizable presence in India) are mandated to set aside 40% of their Adjusted Net Bank Credit (ANDC) for lending to these sectors.
• Regional rural banks, co-operative banks, and small finance banks have to allocate 75% of ANDC to PSL.
• Revised Priority Sector Lending Guidelines: It has defined farmers with landholding of up to one hectare as marginal farmers, and farmers with a landholding of more than one hectare and up to 2 hectares as small farmers.

Kisan Credit Card (1998)

• The Kisan Credit Card (KCC) scheme was introduced in 1998 for providing adequate and timely credit support from the banking system under a single window with the flexible and simplified procedure to the farmers for their cultivation and other needs like the purchase of agriculture inputs such as seeds, fertilizers, pesticides, etc. and draw cash for their production needs.
• The scheme was further extended for the investment credit requirement of farmers viz. allied and non-farm activities in the year 2004.
• KCC covers post-harvest expenses, produce marketing loan, consumption requirements of farmer household, working capital for maintenance of farm assets and activities allied to agriculture, investment credit requirement for agriculture, and allied activities.
• The Kisan Credit Card Scheme is implemented by Commercial Banks, RRBs, Small Finance Banks, and Cooperatives.
• Budget-2018: Kisan Credit Card (KCC) extended to Animal Husbandry and Fisheries farmers.

Interest Subvention Scheme

• It aims to provide short-term crop loans up to ₹3 lakh to farmers at an interest rate of 7% per annum.
• Lending institutions – PSBs and private sector commercial banks offer interest subvention of 2 % by the government.
• The policy came into force with effect from 2006-07. The scheme is being implemented by NABARD and RBI.

Regional Rural Banks (RRBs)

• RRBs are financial institutions that ensure adequate credit for agriculture and other rural sectors.
• Regional Rural Banks were set up on the basis of the recommendations of the Narasimham Working Group (1975), and after the legislation of the Regional Rural Banks Act, 1976.
• Stakeholders: The equity of a regional rural bank is held by the Central Government, concerned State Government, and the Sponsor Bank in the proportion of 50:15:35.
• The main objectives of RRBs are
  • To provide credit and other facilities to the small and marginal farmers, agricultural labourers, artisans, and small entrepreneurs in rural areas.
  • To check the outflow of rural deposits to urban areas and reduce regional imbalances and increase rural employment generation.
• The RRBs are required to provide 75% of their total credit as priority sector lending.

Small Finance Banks (SFBs)

• Small Finance Banks are the financial institutions that provide financial services to the unserved and unbanked region of the country.
• They are registered as a public limited company under the Companies Act, 2013.
• They are required to extend 75% of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending by the Reserve Bank of India.
• At least 50% of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

National Bank for Agriculture and Rural Development (NABARD)

• NABARD is a development bank focussing primarily on the rural sector of the country. It is the apex banking institution to provide finance for Agriculture and rural development. Its headquarter is located in Mumbai, the country’s financial capital.
• It is a statutory body established in 1982 under Parliamentary act-National Bank for Agriculture and Rural Development Act, 1981.
• It was set up based on the Shri B. Sivaraman committee recommendation.
• It provides refinance support for building rural infrastructure.
• It prepares district-level credit plans to guide and motivating the banking industry in achieving these targets.
• It supervises Cooperative Banks and Regional Rural Banks (RRBs) and helping them develop sound banking practices and integrate them into the CBS (Core Banking Solution) platform.
• Refinance – Short Term Loans: Crop loans are extended to farmers for crop production by financial institutions, which support ensuring food security in the country.
• Rural Infrastructure Development Fund (RIDF): It was set up with NABARD in 1995-96 by the RBI out of the shortfall in lending to the priority sector by scheduled commercial banks for supporting rural infrastructure projects.
• Long-Term Irrigation Fund (LTIF): The LTIF in NABARD was set up with an initial corpus of Rs 20,000 crore for funding 99 irrigation projects during 2016-17 following announcement in the Union Budget.
• RuPayKisan Cards (RKCs): NABARD has been at the forefront of the technology revolution by helping rural financial institutions in providing RuPayKisan Cards (RKCs) to all their farmer clients.

Issues in Institutional Credit

1. Inadequacy: 
   • The rural credit volume of the country remains insufficient in comparison to its increasing demand resulting from price increases of the agricultural inputs, despite the expansion of the rural credit structure.
2. Amount of Sanction Is Inadequate:
   • The amount of loan sanctioned to farmers by the agencies is also insufficient to meet their various aspects of agricultural operations.
   • Farmers frequently divert such loans for unproductive purposes, diluting the very purpose of such loans, because they consider the amount of loan sanctioned to be inadequate and insignificant.
3. Lesser Attention to Poor Farmers: 
   • The needs of small and marginal farmers have been ignored by rural credit agencies and their schemes.
   • As a result, credit agencies are paying less attention to the credit needs of poor farmers, while credit agencies are paying more attention to the creditworthiness of relatively well-off farmers.
   • Agriculture credit has risen by 500% in the last decade, but only 20% of the 12.56 crore small and marginal farmers have access to it.
   • Just about 15% of the subsidized unpaid loan comes from institutional sources for households with the smallest landholdings (up to two hectares) (bank, co-operative society). Households with more than two hectares of land have a 79% share.
4. Overdue is on the rise: 
   • The issue of agricultural credit overdue continues to be a source of concern.
   • Agricultural advances to various institutions are also not being recovered in a sufficient manner. Farmers' low repayment ability has also contributed to the rise in overdue. As a result, credit institutions are becoming more cautious about lending to farmers.
5. Institutional Coverage Is Inadequate: 
   • In India, the institutional credit system continues to fall short of the country's rising needs.
   • Cooperative credit institutions such as primary agricultural credit societies, land development banks, commercial banks, and regional rural banks have not been able to reach all of the country's rural farmers.
6. Excessive bureaucracy: 
   • Agricultural credit provided by institutions is subject to red tape. Credit institutions continue to apply burdensome rules and formalities when approving loans to farmers, forcing them to rely more on expensive non-institutional sources of credit.
7. Uneven Distribution of Institutional Credit: 
   • In 2019, the RBI's internal working group found that credit disbursal to the farm sector was higher than agriculture GDP in some states, and the ratio of crop loans disbursed to input requirements was highly unequally distributed.
   • Kerala (326%), Andhra Pradesh (254%), Tamil Nadu (245%), Punjab (231%), and Telangana are some examples (210%).

Measure to Improve the Institutional Credit

• Financial Inclusion: Given the emergence of several alternative financial models, viewing the problem of financial exclusion as a market failure with no market-oriented solutions is no longer accurate. Financial exclusion must also be defined clearly; this is an exercise that will highlight what needs to change and provide insights into appropriate solutions. It refers to the obstacles or constraints that keep people from using financial services. It can range from not having a bank account to financial illiteracy.
• Direct Income Assistance (DIA): Giving small and marginal farmers direct income support on a per hectare basis, rather than heavily subsidizing credit, is one way to empower them.
• Encouraging Farmer Producer Organisations(FPO): Streamlining the agri-credit system to allow for higher crop loans to farmer producer organizations, or FPOs, or small farmer FPOs, against commodity stocks can be a win-win model for agriculture development.
• Leveraging Technology: With cell phone penetration among agricultural households in India at 89.1%, ambitious efforts to increase institutional credit distribution through technology-driven solutions have the potential to reduce the degree of agricultural households' financial exclusion.
• Promoting Agri-Entrepreneurs of the 21st Century: According to reports, farmers have been able to obtain loans via mobile phone applications. These apps use satellite imagery reports to capture the extent of land owned by farmers in states with digitized land records, and they expand the crop to digitally extend Kisan Credit Card loans.
• Federalism in Cooperation: Reforming the land leasing system and establishing a national-level agency to create consensus among states and the federal government on agriculture credit reforms are also necessary to close the gap and meet the greatest number of small and marginal farmers.
• Impact investments: In India, impact investments have gained a lot of momentum and have a promising future. It has been earned in the form of debt investments in co-operatives and food companies, equity investments in retailers and ag-tech firms, and other forms of investment that aim to achieve optimum input factor and energy use, effective resource management, and so on.
• Priority should be given to the ability to repay rather than the collateral: The size of landholdings and the level of income of agricultural households have a significant impact on the variables of financial inclusion, such as savings, investment, and even credit. In order to double farmers' incomes and rescue those in debt, India must change this reality, particularly in terms of credit. The reliance on income and landholdings for credit defeats the purpose of financial inclusion.
• Philanthropy as a Source of Affordable Credit: Charitable donations with no obligation to repay the money allows for more flexibility in the design of credit instruments for India's small and marginal farmers. A revolving fund may be established to hold contributions, repaid loans, and loan interest. Interest-free loans are not a safe idea because there have been reports of arbitrage exploitation in the past. Credit instruments may also be sympathetic to farmers who are deeply in debt and forgive loans. However, in order to prevent wilful default motivated by the anticipation of loan waivers, such waivers must be issued on a case-by-case basis.

Conclusion

India's agricultural crisis is worsening. It has recently thrown the economy into a downward spiral. While it is true that the economy requires land and labour reforms, it also requires creativity in addressing long-standing issues such as financial exclusion. Ensuring food security, practising climate-smart agriculture, and achieving the broader goal of sustainable agriculture have a bearing on the achievement of the Sustainable Development Goals agenda of 2030. Each of these objectives in turn depends crucially upon access to agricultural credit. This emphasizes the importance of solving outstanding issues in the context of agricultural credit disbursement in India. In agricultural credit, one of the major concerns of the lending institutions is to cover credit risks involved in extending loans to the farmers. However, no provisions are in place to cover the market risks faced by the farmers. Further, to ensure financial inclusion of small and marginal farmers, the banking system also needs to adhere to the Priority Sector Lending (PSL) guidelines issued by the RBI.