Farm credit should be targeted better

   By Power Corridors ,  11-Nov-2019
Farm credit should be targeted better

Farm credit policy should be revisited and waivers must be discontinued, says an academic paper

The policy of interest subvention needs a serious review. Generalized farm loan waivers should be stopped, these are some of the recommendations of a paper ‘Agricultural Credit System in India: Evolution, Effectiveness and Innovations’ by the Indian Council for Research on International Economic Relations (Icrier) and the Centre for Development Research (ZEF), University of Bonn.
The paper has been authored by Ashok Gulati and Ritika Juneja. Gulati, a prominent agricultural economist, is a former chairman of the Commission for Agricultural Costs & Prices. Juneja is with Icrier.
A subvention of 5 percentage points, i.e., giving loans at 4 per cent while the normal rate being 9 per cent, seems to have led to significant diversion of agri-loans to non-agriculture purposes. The paper points out that in some states, especially Kerala and some other southern states, agri-loans amount to substantially more than 100 per cent of the value of agri-inputs. “This is a clear indication that agri-loans are being used for other purposes. It is better to empower farmers by giving direct income support on per hectare basis rather than by hugely subsidizing agriculture credit.”
Gulati and Juneja write that with these improvements, the agri-credit system can serve the needs of the farming community even better, and it can also be a role model for many smallholder economies of SubSaharan Africa and South and Southeast Asia.
For efficiency and financial sustainability, the interest subvention scheme should focus on small and marginal farmers only and transactions should be tracked at the individual farmer level for transparency, says the Icrier-ZEF paper.
It has also criticized farm loan remissions. “As the ill effects of generalized debt waivers on financial health of the banking sector as well as on the credit culture are quite clear, such policy measures should be discontinued. Additionally, to provide efficient credit delivery, unfolding innovative business models such as Bharat banking, Business Correspondent/Business Facilitator, and Joint Liability Group lending need scaling up.”
In agricultural credit, one of the major concerns of the lending institutions is to cover credit risks involved in extending loans to the farmers, the paper says. However, no provisions are in place to cover the market risks faced by the farmers. One of the possible ways out is to link Farmer Producer Organizations (FPOs), marketing cooperatives, and integrators with banks, as exemplified by the self-help group-bank linkage programme.
These producer organizations and integrators can be potential channels for extending credit to the farmers across the entire value chain, the Icrier-ZEF paper says. Organizing farmers into groups will enable them to reap the benefits of economies of scale as well as of assured markets for their produce.
The poultry industry in India, for instance, is majorly organized and commercial (80 per cent). Poultry farmers (operating on different farm sizes) are linked with big integrators such as Venkateshwara Hatcheries and Suguna poultry farm through contracts where farmers raise poultry birds of certain quantity and quality at pre-determined prices and integrators provide inputs, technical guidance and credit along with the commitment to buy back the fully grown birds.
This, the paper says, is a win-win model which covers market risks of farmers and credit risks of integrators. Liberal lending by banks to such mature business models and FPOs can ensure guaranteed returns with relatively low risks and uncertainties. In addition to ensure inclusiveness, FPOs with greater percentage of small and marginal farmers can be categorized as a priority area for extending loans.
The Icrier-ZEF paper lauds Kisan Credit Cards (KCCs) and Self-Help Group Bank Linkage Programme as the “innovations that have credibly improved the reach of formal credit to the last mile.” But while the cumulative number of KCC issued reached 150 million as of March 2016, only about 10 percent of farmers used KCC in the agricultural year 2015-16.
Issuance of KCC in remote villages should be expedited to ensure financial inclusion of more farmers, especially of small and marginal ones. This will ensure timely and affordable credit to the resource-constrained farmers’ groups by overcoming the challenges of collateral stipulations, the paper says. “In addition, KCCs should be made Aadhaar enabled and a centralized database should be created across the states to track the number of KCCs issued, in operation, amount of loan availed, defaults at any banks, etc. by a farmer. Such a robust mechanism will ensure credit monitoring, which is absent from the current system.”
Another benefit of KCC is that it can also cater to the consumption credit needs of farming families, the paper says. As SHGs credit lending is a very small part of the overall credit needs of the agricultural sector, it is a matter of further study to look at the challenges involved and to find ways to incentivize credit in agriculture and allied sector through SHGs.
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 Reserve Bank of India. They mandate that at least 8 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure, whichever is higher, be for small and marginal farmers (out of 18 per cent stipulated for the agricultural sector). Tradable PSL certificates are a step in the right direction, the paper says.
The data for direct and indirect credit should continue to be captured separately for policy evaluation overtime and to ensure that the banks do not short-change farmers and lend proportionally more to activities that were previously included under indirect finances, the Icrier-ZEF paper says.