Digital and score-based retailing approach to crop loans would enable banks to position this segment as their growth driver, much like retail loans, and gradually make it immune to syndromes such as loan waivers
By Shankar A Pande
Crop loan is a lifeline for over 145 million farmers in India. Every year, millions of farmers and thousands of bank branches go through a hectic process of granting crop loans delivered through Kisan Credit Cards. Denial or delay in crop loans forces farmers to borrow from informal sources, on adverse terms. Despite the fact that during 2018-19, banks disbursed Rs 12.55 trillion worth farm loans (majority as crop loans), this massive loan segment continues to be treated as a necessary evil by banks, rather than mainstreaming as a commercial proposition like retail loans.
The Centre provides interest subvention on crop loans up to Rs 3 lakh, and with additional incentive for timely repayment, effective interest rate works out to affordable 4%. Banks are also mandated to secure crop insurance cover for farmers, who have to pay a minimal premium.
Despite these measures to make crop loans affordable, only 61% of farmers have accessed institutional loans (NAFIS 2016-17). Due to predominantly manual crop loaning processes in banks, there are substantial direct and indirect costs inflicted on farmers on account of loss of precious time, potential wage opportunities, expenses on visits to banks/other offices, legal expenses on verification of land records/documentation, processing fee levied by some banks. The possibility of desperate farmers getting fleeced by local ‘agents’ also cannot be ruled out.
Undue glorification of farm loans through politically-motivated waivers is common. Although the NDA government has resisted announcing farm loan waivers and yet managed to win two consecutive general elections, this fiscal prudence was not replicated during the several assembly elections held since 2014, as political parties promised loan waivers as their main electoral strategy. Subsequently, the elected state governments announced farm loan waivers aggregating a whopping Rs 2.4 trillion.
Irrational loan waivers cause systemic damage as farmers tend to postpone repayments, NPAs rise in banks that show reluctance in extending new loans, and state governments resort to fiscally-imprudent acts such as higher market borrowings and curtailing expenditure on capital investments and welfare programmes to fund waivers. Not surprisingly, agricultural NPAs crossed Rs 1.04 trillion mark in July 2019, their proportion to total outstanding agri-loans rose from 9.6% in July 2018 to 11.04% in July 2019, and states that implemented waivers ended up in bad fiscal math.
Today, subsidised crop loans are a necessity for farmers. But there are issues relating to their accurate targeting, end-use, skewed distribution across states, exclusions, adverse selection, actual impact in terms of incremental farm productivity/output, etc. Correct diagnosis and mitigation of these issues can be possible only through analysis of credible micro data and trends on farm credit.
Within the priority sector norms for agriculture, banks are required to provide 8% loans to small and marginal farmers. The presence of women and lessee farmers, who also need credit, is steadily growing in India. With existing manual loan operations and related data, it becomes difficult to track actual progress on these parameters. This calls for a paradigm shift in approach and an open mind by all the stakeholders to adopt disruptive fintech ideas for making crop loans work better for farmers, banks, governments.
Some transformative ideas
First, crop loans should continue to be delivered to farmers based on a well-evolved methodology comprising crop-wise acreage, crop seasonality, district-wise scale of finance. However, we need to make crop loan delivery simple, transparent and efficient through process automation to allow timely, hassle-free, cost-effective credit access to farmers.
Second, banks must change the prism of looking at crop loans to see the multi-billion worth banking opportunity with 145 million aspirational rural customers, having cross-selling opportunities. So, instead of getting nudged by the government and regulator ‘to do more’, banks need to act proactively and disruptively to make crop loaning a serious and competitive business, like retail loans.
Third, to safeguard financial interests of farmers in the event of a natural calamity or market adversity, the government may create a ‘National Agriculture Calamity Fund (NACF)’ within a credible national-level agency. A set of operational guidelines comprising eligibility criteria, operating procedures and supervisory mechanism may be evolved. Mandatory annual contributions to NACF by the central/state governments may be facilitated by the Finance Commission in its resource-sharing formula. States granting loan waivers outside the NACF mechanism may be disincentivised in devolution of the formula.
Fourth, to make crop insurance a preferred choice of farmers, insurance firms and banks, refinements such as early remittance of premium collected by banks to insurance firms, timely payment of premium subsidy by state/central governments, use of advanced remote-sensing and digital technologies for timely and trustworthy conduct of crop cutting experiments at farmer level, building effective grievance mechanism, etc, may be expedited. This would ensure seamless integration between crop loaning and insurance processes.
Fifth, with numerous data points involved in crop loan operation for 145 million farmers, the segment is a mammoth big data game. Manual handling of this massive data during crop loan processes results in inefficiency, delays, biases, opaqueness and even exclusions. Further, in the absence of digitisation, banks, governments and other stakeholders are deprived of power of data analytics for making informed decisions on policies, products, processes, cross-selling opportunities, etc. Therefore, there is an urgent need to adopt modern financial technology in crop loaning.
Sixth, creating a robust ‘National Data Platform on Farmers (NDPF)’ to warehouse data on individual farmers, covering their demographics, land records, credit history, lease/contracts, agro-climatic risks, crops, scale of finance, crop insurance, interest subvention, PM-Kisan, land lease contracts, etc, is another necessity. Since several institutions shall become the data pipelines and/or users of this data, NDPF may be promoted as a joint venture of central/state governments, financial institutions and other stakeholders, managed by an exclusive national authority. Data on NDPF may be made available to users on payment.
Seventh, there are risks associated with crop cultivation and loaning, often manifested as distress to both farmers and banks. But banks do not systematically factor structured risk assessed at farmer level in their crop loaning decisions. With farmer-level micro data on NDPF, it will be possible to evolve appropriate risk-assessment models and generate a ‘Farmer Rating and Credit Score (FRCS)’, the framework for which may be evolved jointly by credit risk experts and stakeholders. Score may be updated annually and made available to individual farmers on NDPF. Crop loan eligibility for a farmer, worked out using usual standard criteria, may be further moderated, based on his/her score. Such a risk-based lending approach would help in promoting judicious borrowing by farmers and responsible lending by banks.
Eighth, a standardised ‘National Crop Loaning Portal (NCLP)’ may be developed under the aegis of Indian Banks’ Association (IBA) as a fully digitised and paper-light end-to-end solution for crop loaning. NCLP shall be able to access data from all the relevant databases of the government, banks, credit information bureaus, insurance agencies, etc, through an appropriate digital interface. Farmers may be given access for making online loan application, tracking and viewing loan transaction details.
Ninth, gradually, FRCS-score-based approach may also be adopted for deciding differential eligibility of farmers under interest subvention, insurance subsidy and subsidies under other government programmes. This will prompt farmers to improve their FRCS scores—to maximise benefits. It would also help in improving targeting, transparency, de-duplication, efficiency and inclusiveness under farmer welfare programmes.
The proposed NACF and NDPF shall prove to be major steps towards promoting cooperative federalism in Indian agriculture. Loan process automation would enable banks to easily outsource basic loan processes to other agencies. Data-driven, digital and score-based approaches to crop loaning would help liberate farm loans from the crutches of political patronage and bring these in sync with market dynamics, triggering reforms, innovations and competitiveness. Finally, the adoption of a digital and score-based retailing approach to crop loans would enable banks to position this segment as their growth driver, like retail loans, and gradually make it immune to syndromes such as loan waivers.
The author is chief general manager, NABARD, Uttar Pradesh. Views are personal