By BS Sivakumar

The emergence of policies like Priority Sector Lending (PSL), an initiative aimed at providing affordable and easy credit to the weaker segments which are also creditworthy and viable, has done a yeoman’s task in ensuring credit flow to India’s vast agriculture sector. However, the inherent risks of monsoon dependence, low yields, poor market linkages, sudden changes in demand and supplies besides the frequent changes to key policies on the export of surplus produce continue to make Indian agriculture a high-risk category for lenders.

Perhaps, the lack of full-fledged organized credit channels, despite the high dependency of the population on agriculture, also stems from such deficiencies. The agri credit-to-GDP ratio remains significantly lower compared to other sectors with only 40 percent of the farmers having any formal access to it – a scenario that has dented the small and marginal farmers more than their bigger counterparts. Even though credit accessibility has improved considerably in rural areas, the overall contribution of retail credit to rural regions was very modest at 18.8 percent of total credit in 2021, highlighting the persistent urban-rural credit divide.

That explains the shrinkage of the share of agriculture in India’s GDP at 15 percent in 2022-23 from 35 percent in 1990-91, besides a rapid expansion in industrial and service sectors. It may also stem from the fact that the largest share of agri credit has been by way of crop loans whose size are limited by the size of arable land and the output per acre – which is unlikely to improve – unless the organised credit and modern agriculture practices become more prevalent in our country.

Also read: Farm credit target for FY25 may be set at Rs 24 trillion

But with the country becoming one of the largest exporters of rice, sugar, and onions with a significant market share, the growth of India’s agriculture is as much as the world’s needs now. Our inflationary pressures are being closely watched by the international community amid the rampaging impact of climate change on the overall agriculture production. With food and food products becoming an important part of global trade and India beginning to be the centre of it, it is time to unshackle the myths around the viability of agriculture, particularly from the perspective of making organised credit available to farmers to ensure our food security and balanced growth.

Successive governments have tried to improve the quality of life in rural areas for equitable and inclusive development. Today, rural areas are as advanced as urban areas regarding information consumption while the rural infrastructure is also getting a considerable facelift. The agriculture sector, which remains the biggest employer, having seen a 5.30 percent growth in opportunities in the last six years, will have to accommodate the emerging needs of the large-scale “demographic transition” happening now.

Thus, it is imperative to sustain the farming sector and rural communities with adequate organised credit. So far, the policies of the Reserve Bank of India and programmes of the Ministries of Agriculture and Finance have done a remarkable job in this direction. Here are some of the noteworthy developments:

  1. More farmers JAM the credit lane: The ever-deepening reach of bank branches into underbanked and unbanked areas and the introduction of Business Correspondents as an extension of the banks ensure more farmers are reached out in more distant areas than before. The improvement in mobile connectivity, the Aadhaar-enabled digital onboarding of customers, and the government’s push to open the Jandhan accounts have brought more farmers into the banking ambit and has given banks the data of cash flows of farmers to assess their creditworthiness. We know this as the JAM trinity which has made a significant positive impact.
  2. Specialists to weigh farm loans: With different sectors getting larger and the credit demands becoming more specialized, lenders are developing specialized teams to focus on lending to large and critical sectors. Banks now have specialized teams for consumer financing, commercial equipment financing, MSME enterprise financing and Agriculture financing. Even within this, there is a specific focus on funding for agri enterprise and value chain finance, micro-credit to farmers, farm equipment loans, and pledge financing.  
  3. Sharper credit underwriting minimizes risks: The organized credit mechanism ensures that the credit underwriting is sharper, more informed, and the credit risks are minimized. Further such teams also bring benefits to their customers through knowledge of various government schemes like the Agri Infrastructure Funding to develop advanced agri infrastructures like greenhouses, rural warehouses and cold storages, equipment for output grading and sorting, AMI scheme for financing marketing linkages, MOFPI funding for funding to agri exporters, NHB / NHM schemes for funding/grants to activities in intensive farming, horticulture development etc. The schemes provide either long-term interest subsidies, credit guarantees, or grants to farmers for various initiatives.
  4. Bridge funding route to avoid distress: Organized credit through pledge financing allows for bridge funding in the absence of any collateral to ensure farmers don’t have to sell their harvest in distress and allows them gradual release of their commodities as per their requirements or price attractiveness.
  5. Making the borrowing viable: Access to organised credit continues to bring down the cost of borrowing for farmers and enable them to escape the clutches of local money lenders. With the RBI’s focus on credit literacy, transparency of interest costs, and the competition amongst lenders to price down their products to attract the best credit quality, the farmers stand to benefit.

From our experience, we can see the coming of age of organised credit in the agriculture sector. The current push from the government has been through schemes aimed at small individual farmers and for smaller farmer groups /FPOs with funding sizes up to Rs 200 lakhs, appropriate for rural entrepreneurs. It allows rural economic development on the lines of micro-enterprises funding.  Most of the government schemes ensure that funds are routed through competent banks that do credit due diligence of the project and monitor the cash flows.

The focus must be on asset and value creation, enabling farmers to go for intensive farming and higher output from even small land acreages. The growing demand for fruits and vegetables, meat products and processed food ensures farmers are assured of market demand. In a sense, India’s farms hold immense wealth, especially at a time, when the country has emerged as a giant in agriculture output across many areas.

The government has set the agenda of doubling the farmers’ income, recognising the importance of market reforms to ensure fair prices and better market access for farmers. As a combined effect of these realities and aspirations, the Indian agricultural economy is on the cusp of a massive disruption with agri-tech companies creating new value chains and weeding out existing inefficiencies. As new challenges including those from climate change are expected to emerge, farmers need faster and better access to financing to build capacity, consistency, and efficiency besides opportunities for diversification. By undertaking more policy-level changes to improve seed quality and systematic country-level planning of total yields of critical crops per season, India can become Atmanirbhar in the near future.

(The author is President and Head – Agri Business Group, Kotak Mahindra Bank. Views expressed are personal and not necessarily those of financialexpress.com.)