Credit For Agricultural Sector: A Poor Harvest

Updated: Dec 23 2002, 05:30am hrs
The credit flow to the rural sector still remains riddled with problems and the government is trying ways and means to make it more farmer-friendly. Experts feel that there is an urgent need for revamping the institutional set-up.

The government has planned measures like rehabilitation of cooperative banks, fostering linkages of self-help groups (SHGs) with banks and micro-finance institutions (MFIs), implementation of personal insurance package for Kisan Credit Card (KCC) holders, review of the National Agricultural Insurance Scheme (NAIS) and setting up of the proposed Agriculture Insurance Company to administer the NAIS and other farm insurance schemes.

The government is also thinking in terms of suggesting conversion of the primary agriculture cooperatives (PACs) into mini-banks and strengthening their infrastructure so that they can mobilise the deposits locally and lend to the farmers at a low rate of interest. Nabard is working out the modalities for fostering greater linkages between the SHGs and the banks.

Union agriculture minister Ajit Singh, after getting the support from the states, has initiated a new debate that Nabard and the proposed new Agriculture Insurance Company to be floated by Nabard, GIC and four insurance PSUs, should be placed under the administrative control of his ministry.

The taskforce on agriculture credit has estimated a credit flow of Rs 7,36,570 crore during the Tenth Plan period for achieving the 4 to 4.5 per cent growth rate in the farm sector as envisaged in the National Agriculture Policy. This seems to be a challenging task as the total credit flow to agriculture in the year 2000-01 has been only Rs 53,504 crore and is expected to be Rs 66,771 crore in 2001-02.

Mr Singh boldly points out that not all the commercial banks have achieved the target of 18 per cent priority sector lending. The bank loans to the farmers carry much higher rates of interest than those for housing, transport and purchase of car and consumer durables.

He says that 40 per cent of the farmers are unable to access credit from institutional agencies and depend upon local moneylender who charge much higher rates of interest. He says that the average interest rate on farm loans charged by institutional agencies is around 14 per cent, while that for housing loan is 9.5 per cent and transport and commercial activities is 12 per cent.

He pleads that the Indian farmers cannot have access to global markets by making their produces cheaper in a situation of such interest rates. He also says biotechnology sector needs not just credit support but venture capital as well.

Mr Singh says that the focus should be on a combination of measures, such as encouraging group loans, providing tractors to PACs for custom hiring, encouraging state agro-industries corporations to acquire tractors and combine harvesters for custom hiring and providing loans for tractors and power tillers to rural youth under self-employment schemes.

Mr Singh is right in his views. A document prepared by his ministry quoting RBI sources substantiates that the share of the commercial banks in priority sector lending was only 11 per cent of the net direct credit in 2000-01 as against the target of 18 per cent.

The document alleges that commercial banks have a bias towards urban areas. Out of the total credit disbursement, the commercial banks disbursed only 10.1 per cent in rural areas, 11.7 per cent in semi-urban areas as against 78.2 per cent in urban areas in the year 2000. The document states the NPAs of commercial banks due to priority sector lending is only Rs 7,376.65 crore while that in the non-priority sector is as high as Rs 27,307.01 crore.

The share of regional rural banks (RRBs) in credit flow to agriculture is at a meagre 7 per cent and their credit-deposit ratio is very low at 41 per cent while, on the other hand, their investment deposit ratio is as high as 70 per cent.

The cooperative banks account for 41 per cent share in credit flow to agriculture, 31 per cent in rural deposit and the small farmers constitute 44 per cent of their total membership. These banks cater to the needs of about 50 per cent of the small and marginal farmers. Many of the cooperative banks are, however, far from being strong and self-sustaining business enterprises.

This is due to the cooperative banks functioning under considerable operational limitations caused by the dual control of RBI and the state registrar of cooperative, politicisation of the institutions, low resource base, inadequate volume of business, poor recovery management, high NPAs and lack of professionalism, the document says.

The document paper also says that the resources of the cooperative banks in the form of share capital and reserves is just 12 per cent and their deposits constitute only 52 per cent and borrowings is 36 per cent.

The farm ministry document paper states that despite the RBI pushing the bank rate down from 11 per cent to 6.25 per cent over last four-and-half years, the average lending rates of commercial banks to agriculture have not been adequately responsive.

The rate of interest charged on small loans is about 12 per cent and if other expenses are included it would work out to 15 per cent.

The stipulation of interest rate not exceeding PLR is also proving counter-productive as commercial banks discourage small loans. The interest rate charged by RRBs is in the range of 14 to 17 per cent. The RRBs have adopted investment route for achieving viability and their share of farm loans is minuscule.

The interest rate charged by PACs is in the range of 14 to 15 per cent. This is due to the Nabard providing refinance for only 23 per cent of the total lending at the rate of 5.5 to 7.5 per cent to state cooperative banks (SCBs), high transaction cost of the three-tier system and SCBs retaining a margin of 3 to 3.5 per cent on refinance availed from Nabard while simultaneously charging higher interest rate on SAO loans provided to the district central cooperative banks (DCCBs) from their own resources and the similar practice adopted by DCCBs towards PACs.

National Cooperative Agriculture and Rural Development Banks Federation chairman TD Janardan Rao and National Federation of State Cooperative Banks MD B Subrahmanyam, however, contest the view that the prevailing three-tier cooperative structure adds much to the transaction costs.

They say that speedy recapitalisation of cooperative banks, reduction in Nabards interest rate on refinance and augmentation of refinance fund and operation of the proposed apex National Cooperative Bank of India can solve the problem.