Agricultural Credit

  • March 23, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Agricultural Credit

Subject: Economy

Section: Agriculture

Context: Farmers seeking loans from private money lenders in Maharashtra increased by 27% and the loan amount raised by 42 % in 2021.

Concept:

  • Majority of these farmers seeking loans are small and marginal farmers.
  • Their dependence on private money lenders multiplied due to Covid-led lockdowns, closure of markets, and unseasonal rains. 
  • However, licensed money lenders is just the tip of the iceberg and a huge numberof illegal private money lenders have tightened the noose around the necks of farmers in Maharashtra.
  • Apart from agriculture and non-agricultural credit societies, the State allows licensed moneylenders to provide loans to individuals. For this purpose, licenses are issued by the office of the Commissioner for Co-operation and Registrar Co-operative Societies. In 2020, the number of license holder money lenders was 12,993 while in 2021 the number was 12,001.

Why Farmers seek loans?

According to NSS 77th round data- The Situation Assessment of Agricultural Households and Land and Holdings of Households in Rural India, 2019, small landholding households avail loans for:

  • medical expenditure for hospitalisation, doctor’s fees, purchase of medicines, medical diagnostic tests like scans, X-rays, ECG, EEG, and other pathological tests.
  • consumption expenditures including the purchase of durable household assets, clothing for use of the household, etc.
  • Crop failure and losses due to unseasonal rains have added to their problems.

Evolution of Agricultural Finance in India and Policy Milestones

The institutional framework of agricultural finance was shaped by the overarching demands of the nation. The evolution of agricultural credit policies and milestones can be broadly categorised into three distinctive phases.

Phase 1 (1951 – 1969)

  1. The Government of India initiated the first five-year plan in 1951 with the thrust on developing the primary sector. The National Credit Council in a meeting held in July 1968 emphasised that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small-scale industries, sectors deemed as ‘national priority’.
  2. In 1969, when the first phase of nationalisation of banks took place, there were 6955 public sector bank branches and the average population per branch office was 64,000. To boost rural development, the Reserve Bank of India had then prescribed 1:3 ratio for opening of branches in urban and rural/semi-urban centres.

Phase 2 (1970-1990)

  1. The channel for institutional credit to agriculture during the first two decades of independence was the cooperative sector. With the nationalisation of commercial banks in 1969, the decade of 1970s marked the entry of commercial banks into agricultural credit. This period saw the introduction of the Lead Bank Scheme and regulatory prescription of Priority Sector Lending – two landmark development policies that have not only survived till date but have also served as the fuel for channelling agricultural credit and rural development.
  2. The Regional Rural Bank Act, 1976 was enacted to provide sufficient banking and credit facility for agriculture and other rural sectors.
  3. The National Bank for Agriculture and Rural Development (NABARD) came into existence in 1982, with the enactment of NABARD Act 1981, to promote agriculture and rural development.
  4. NABARD, in 1992 introduced the Self-Help Group (SHG) model to further financial inclusion of the excluded segments.
  5. In 1989, the Reserve Bank introduced the service area approach (SAA) and Annual Credit Plan (ACP) system as tools for reaching out to the rural areas.

Phase 3 (1991 onwards)

  1. The economic reforms of the 1990s, started with the implementation of the first Narasimham Committee Report of 1991, emphasising financial soundness and operational efficiency of the financial sector – including that of rural financial institutions. The Reserve Bank of India gradually deregulated the interest rate regime to aid improvement in the operational efficiency of banks.
  2. The first major nationwide farm loan waiver was announced in 1990 and the cost to the national exchequer was around ₹100 billion.
  3. Pursuant to the 1995 Union Budget announcement, GoI established the Rural Infrastructure Development Fund (RIDF) with NABARD. RIDF was mainly meant for funding of rural infrastructure projects which in turn were supposed to deepen the credit absorption capacity in a state by giving loans to state governments and state-owned corporations. Scheduled commercial banks contribute to the corpus of the fund to the extent of their shortfall in achieving the priority sector lending target.
  4. During 1992-93, NABARD started the pilot project on SHG-Bank Linkage programme – a partnership model involving SHGs, banks and NGOs. In the initial years, the scheme progressed slowly but picked up gradually.
  5. The Kisan Credit Card (KCC) was introduced as a financial product in 1998 to provide hassle free credit to farmers.
  6. The Union Government introduced the Ground Level Credit (GLC) policy in year 2003-04. Under this policy, GoI announces GLC targets for agriculture and allied sector in the Union budget every year which banks are required to achieve during the financial year. These targets are set region-wise, agency-wise (SCBs, RRBs & Cooperative banks) and loan category wise (crop and term loan).
  7. vii. The year 2006 saw a host of developments. Pursuant to the budget announcement for 2006-07, the Union Government introduced the interest subvention scheme (ISS) for short term crop loans to enable farmers to avail farm credit at reduced interest rates. The Business Correspondents (BCs) and Business Facilitators (BFs) were rolled out for the first time by the Reserve Bank of India to further the cause of financial inclusion. NABARD introduced the Joint Liability Group (JLG) model, an extension of the earlier SHG model for reaching out to tenant farmers and share-croppers with access to credit.
  8. Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008 announced by the Union Government involved waiving institutional debt for small farmers and a one-time settlement opportunity with 25 per cent rebate to other farmers. This massive write-off of agricultural loans involving ₹525.16 billion was envisaged to provide relief to the persistent problem of farmers’ indebtedness and alleviate the financial pressure faced by the farmers.
  9. In 2009-10, the Government introduced the prompt repayment incentive (PRI) of 3 per cent under the ISS to bring down the effective rate of interest to 4 per cent to those farmers who repaid their loans on or before the due date to inculcate repayment habits.
  10. In July 2012, the Priority Sector Lending (PSL) guidelines were revised by the Reserve Bank to widen the eligible activities. Again in April 2015, the guidelines were revamped based on the recommendations of the Internal Working Group (IWG). The salient features of the revamped PSL guidelines relating to agricultural sector are:
    1. The distinction between direct and indirect agricultural credit was dispensed with.
    2. A sub-target of 8 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, was prescribed for small and marginal farmers.
    3. Focus shifted from ‘credit in agriculture’ to ‘credit for agriculture’.

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Agricultural Credit economy