Sourovi De
Summer intern 2010

“Indian agriculture has made great strides in the last fifty years of the twentieth century. From chronic hunger and abject dependence on the import of foodgrains, the country has achieved self-sufficiency not only in the production of foodgrains, but has emerged a net exporter of foodgrains consecutively for the last six years, despite the trebling of the country’s population in the last six years.“

‘State of the Indian Farmer’—A Millennium Study
(Commissioned by the Ministry of Agriculture, Government of India)

Without entirely discounting the achievements of Indian agriculture, asking pertinent questions about the situation of land and water resources, rural infrastructure, input management, terms of trade, agricultural marketing, credit facilities etc. is crucial for constructing a realistic understanding of the real health of Indian agriculture. This essay attempts to assess one such dimension—agricultural credit.

For a country where two-thirds of its population is dependent on agriculture, there is no denying the fact that agricultural growth is critical for the growth of the entire economy. In fact, from time to time, agricultural growth—or the lack of it—has served as a parameter for overall economic growth of the country. Under such conditions, coupled with the sheer limitation on expanding crop area, growth of farm productivity is crucial and depends heavily on sustained infusion of credit. However, in a developing country like India, depending on farmers’ savings for acquiring farm capital only leads to marginal variations in the existing traditional technology. Availability of credit at reasonable rates, therefore, becomes a pre-requisite for agricultural growth.

Having appreciated the importance of credit for a farmer to expand his ownership of resources and exploit the opportunities thrown at him, it is equally crucial to assess the demand-supply situation of agricultural credit in India, and reckon the presence of a gap therein, if any. Factoring in the future demands of agricultural sector, the Kotaiah Group (Planning Commission, 1996) estimated the demand for agricultural credit for the Ninth Five Year Plan (1997-2002) at Rs. 2,297,500 million—an estimate that would have required a 16% growth in the rate of credit flow during the plan. It was also mentioned that approximately 47% of this credit demand was from small and marginal farmers.

As far as supply of agricultural credit is concerned, only data regarding disbursements from institutional sources (such as commercial banks, cooperative banks and regional rural banks) are available whereas non-institutional lenders (for instance, indigenous sources like village moneylenders) remain chiefly unorganised and unaccounted for inspite of their playing a massive role in supplying  credit to their immediate community members. A study done on Uttar Pradesh by Desai (1988) showed that in 1984-5, the aggregate credit supply for agricultural production from all institutional sources amounts to Rs. 32,190 million, when the credit requirement by farmers amounted to Rs. 278,240 million. This is a chasm pertinent to Uttar Pradesh for the year 1984-5 alone but can be used to sketch an understanding of the credit demand-supply chasm at the national level. This, to a large extent, explains the important role played by usurious moneylenders in the unorganised sector who cater to this lacuna discussed above. Moreover, according to World Bank estimates for the mid-1980s, this need-versus-availability gap is further aggravated by the fact that only around a third of the institutional disbursements went to the small and marginal farmers (i.e. farmers who own one hectare of land or less), while we noted earlier that close to half the farm credit need is generated by these farmers.

Besides, along with agriculture, several sectors compete for credit from institutional sources, i.e., there are competitors for credit in the real estate sectors, consumer loans to meet demands for household durables like white goods and vehicles, information technology etc. Though agriculture, small and cottage industries are favoured by policy directions, several capital-intensive and emerging sectors are competing with agriculture for institutional credit. According to RBI’s stipulations, commercial banks are required to achieve a target of lending 18% of total credit towards agriculture. Data for the year 2003 shows that commercial banks failed to meet this target by 3.7%. Some reasons for this shortfall could be found in the fact that information technology and real estate have also entered the ambit of priority sector lending and, as mentioned above, increased the competition for institutional credit. Secondly, bankers are averse to the piling up of non-performing assets (NPA) among rural and agrarian loans. Third, the nature of credit delivery mechanisms followed by formal sources of lending like commercial banks is not compatible, in many ways, to what one might expect from a poor-friendly lending policy (for instance, a marginal farmer might want to offer his labour as collateral while a commercial bank has no such provision and asks for formal collaterals such as land).

It is worthwhile, at this point, to elaborate on the credit cycle of mobilisation, lending and recovery. The first stage entails mopping up resources from the society through deposit mobilisation. Further, funds so mobilised are lent out to borrowers who have viable rural/agricultural projects to pursue; and finally, recovering the lent out amount for again lending them along with whatever resources may have been mobilised in the intervening period. However, Surjit Singh and Vidya Sagar, in their book Agricultural Credit in India, state that cooperative banks and regional rural banks have soft-pedalled on the front of generating resources through deposit mobilisation, often citing reasons such as the lack of savings with the poor. They have mostly depended on refinancing or funds allotted to them from upper tier institutions. This has led to several inefficiencies with respect to management of funds and maintaining tighter repayment and recovery practices, as neither the shareholders nor the day-to-day managers of these banks have an incentive to treat these funds as their own. In the case of regional rural banks, there is no stipulation regarding the sections of the population from where deposits can be mobilised but there is a bar on lending to ‘economically resilient’ classes. This has averted deposits from the non-poor sections in the face of an absence of commensurate facilities of loans and advances. On the front of canvassing for awareness among agriculturalists regarding the availability of requisite lending facilities and creating suitable credit options for potential borrowers, institutional lenders have failed in varying degrees. This is more so for commercial banks who have not been able convert their operating standards in accordance with the needs of development banking.

These discussions bring us to the final stage of the credit cycle—recovery of loans. Surjit Singh and Vidya Sagar, in their book Agricultural Credit in India state that cooperative banks, regional rural banks and commercial banks have all failed to yield results in rural loan recoveries. Agricultural loan overdue and non-repayments have been ‘chronically high, all-pervasive and neutral’ to the type of credit institution. In some respects, this might be blamed on weather conditions leading to failure of crops, diversion of production loans for consumption purposes and the weak legal provisions for enforcement of loan contracts. Further, a notion has settled among many rural borrowers that loans taken by them are ‘government support’ and hence, needn’t be repaid. This notion has been fanned, from time to time, by local leaderships for fulfilment of their vested interests. Thus, Singh and Sagar state that some willing repayers have withheld repayments in expectation of a write-off. These expectations, in fact, have often been fuelled by periodic announcements of interest subsidies and/or loan waivers. Thus, we see the battered shape of all the three stages of the credit cycle—deposit mobilisation, lending and recovery—in all the three credit systems examined here—commercial banks, cooperative banks and regional rural banks.

India has faced three distinct phases of credit’s involvement in the process of agricultural growth. Prior to the nationalisation of banks in 1969, cooperative banks and indigenous moneylenders were the chief suppliers of agricultural credit. Post-1969 witnessed what is often called a period of social banking. This phase saw priority being given to small and marginal farmers in the disbursement of loans. In the post-liberalisation phase ensued since 1991, financial liberalisation and deregulation, coupled with measures towards fiscal discipline have led to a reduced attention towards agriculture in general, and agricultural credit, in particular. Within these three phases, there have been issues galore—ranging from an inability of existing institutional credit sources to meet the demand for agrarian credit, the issue of emerging sectors like IT and real estate competing for credit from the banking sector to the problems faced in the processes of deposit mobilisation, lending and loan recovery. Though not an exhaustive list of prevailing issues in agrarian credit, this essay has attempted to establish the broad, pertinent conclusion that India’s rural and agrarian sectors need credit polices to lead them from subsistence production towards surplus production.

Bibliography

• Surjit Singh & Vidya Sagar; Agricultural Credit in India (Academic Foundation, New Delhi 2004)
• Yoginder K. Alagh; State of the Indian Farmer—An Overview (Academic Foundation, New Delhi 2004)
• Jean Dreze, Peter Lanjouw and Naresh Sharma; Credit in Rural India—A Case Study (The Suntory Centre—London School of Economics and Political Science, London 1997