PSU banks to crack the whip, to review farm credit to stop diversion

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Updated: August 26, 2019 6:58:00 AM

As per the latest NITI Aayog calculations being cited for this purpose, crop loan disbursement to states far exceeded their cost of production in FY18, clearly suggesting a massive diversion towards other consumption purposes.

As per the latest NITI Aayog calculations being cited for this purpose, crop loan disbursement to states far exceeded their cost of production in FY18, clearly suggesting a massive diversion towards other consumption purposes.

Amid growing fears that some agricultural loans may have been diverted to non-farm use, the finance ministry has asked state-owned lenders to review their agri portfolios. Loans for exports and education, part of the priority sector, are also up for fresh scrutiny, sources told FE.

The government wants to ensure that the priority-sector credit is utilised for intended purposes and not exploited by unscrupulous elements; the drive is also aimed at correcting a big regional disparity in the flow of farm credit, mostly disbursed at a heavily-subsidised interest rate of 4% and comes after finance minister Nirmala Sitharaman announced on Friday, the government would upfront a capital infusion of Rs 70,000 crore to help banks step up lending

One of the sources stressed: “The review is not at all intended to hinder the flow of credit to these sectors; rather it will improve the availability of credit to the needy by curbing its abuse.” The review is an important part of the ongoing brainstorming exercise by PSBs to ease the flow of credit and support the government’s efforts to turn India into a $5 trillion economy in the next five years.

As per the latest NITI Aayog calculations being cited for this purpose, crop loan disbursement to states far exceeded their cost of production in FY18, clearly suggesting a massive diversion towards other consumption purposes. This also explains why farm loan waivers, announced by several states in recent years, are an ineffective tool to tackle the agrarian crisis.

Crop loans to Chandigarh, Delhi and Puducherry — which are barely known for agriculture — stood at 1,997%, 1,173% and 816%, respectively, of their value of inputs (which comprises cost of farm inputs and that of hired labour) in FY18.

In Kerala, it was as much as 274% of the value of inputs, followed by Himachal Pradesh (186%), Tamil Nadu (166%), Punjab (159%), Telangana (143%) and Andhra Pradesh 140%, according to the Niti Aayog analysis. In contrast, some other states — often the poor ones with a huge number of small farmers — that deserve the subsidised farm credit more don’t get much. Crop loans availed of by the North-Eastern states were only a tiny fraction (mostly between 2% and 7%) of their cost of production in FY18. Similarly, Jharkhand received loans to the tune of only 11%, West Bengal 17%, Maharashtra 32%, Bihar 33% and Uttar Pradesh 42%. At the aggregate level, crop loans were to the tune of 72% of the cost of production.

Even an analysis by former Commission for Agricultural Costs and Prices chairman Ashok Gulati, released in April 2016, had suggested that 30-40% of the funds allocated under the interest subvention scheme for farm credit got diverted to non-agricultural usage.
This means for the government to ensure better farm income, crop loans have to be well distributed and utilised for the intended purpose.

Of course, as bankers say, farmers sometimes divert crop loans, constrained by their immediate exigency. But that alone doesn’t answer the question of massive credit flow to states that barely produce farm items or hardly set up agri marketing infrastructure.

Farm loans were as much as Rs 11.6 lakh crore in FY19, as per the Interim Budget for FY20. According to the RBI rules, domestic banks are required to lend 18% of their adjusted net bank credit or credit equivalent to off-balance sheet exposure, whichever is higher, towards agriculture.

A sub-target of 8% is also prescribed for lending to small and marginal farmers. Since a substantial chunk of bank credit thus goes to agriculture, experts have often called upon the government to tighten the scrutiny of it, without much success though.

While the Modi government had pledged to double farmers’ income in seven years through 2022, the growth of agriculture and allied sectors remained muted in its first term, mainly due to lack of bold structural reforms, especially in farm marketing, and two successive years of drought.

Farm and allied sector growth crashed to 2.9% in FY19 from 5% in the previous fiscal.

 

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