22

Agriculture Credit

K. P. Mani

22.1 Introduction

Agriculture production depends on factors like the availability of land, quality seeds, irrigation facilities, the application of fertilizers and timely availability of credit, and a host of other factors. Credit is a critical input for revitalizing agriculture. Starting from the All India Rural Credit Survey Committee in 1954, the necessity for credit delivery system is overemphasized. Later, a number of other committees also looked into the matter. Over the years, India adopted a multi-agency approach for providing agriculture credit. The major agencies which provide agriculture credit are the cooperatives, the Regional Rural Banks (RRB) and the commercial banks. These agencies provide credit under three types of plans—short term, medium term and long term.

22.2 Types of Agriculture Credit

Short-term credit is normally given for a period of 15 months, exclusively for purchasing seeds, manures, fertilizers, labour charges and similar quick needs of the farmers. Shortterm credit is repaid immediately after the harvest. Medium-term loans are provided for purposes like sinking of wells, purchase of bullocks, pumping plants and to make improvements in implements. The period of medium-term loans is from 15 months to 5 years. It is very difficult to get the exclusive details on medium-term credit because the data on medium-term credit is either clubbed with the short-term credit or the long-term credit. Loans repayable over a long period of time, normally above 5 years, are included in the long-term credit. Long-term credit in agriculture is aptly explained as the capital formation in agriculture or investment in agriculture. Long-term agriculture development can be achieved only through a sufficient capital formation in agriculture. In India the capital formation in agriculture is declining and this is one of the burning issues of agriculture. The capital formation in agriculture is discussed separately in the later part of this chapter.

22.3 The Growth Trends in Agriculture

The credit needs of the farmers are closely linked to the cropping pattern and the growth trends in agriculture. The mid-1960s, marked by the beginning of the green revolution, was something like a watershed in the growth of the Indian agriculture. During the preGreen Revolution period, production of all crops recorded an impressive average growth rate of 3.13 per cent per annum. During the subsequent period (1964–81) the growth rate subdued at 2.10 per cent. The rate of expansion in the agricultural production was remarkably high during the 1980s. The production indices of food grains showed a steep rising trend throughout the decade except for a downward movement during 1986–88. More spectacular was the rising trend in the output of the non-food grains, particularly during the second half of the decade. The production of all the crops recorded a growth rate of 3.77 per cent, during the first half of the 1980s, and it accelerated to 3.92 per cent during the second half of the decade, compared with 2.10 per cent during 1964–65 to 1980–81. During the 1990s, however, the growth rate of agricultural production slowed down considerably to 2.44 per cent, as the growth rate of food grains decelerated to 1.63 per cent. Not only that the growth rate decelerated, the absolute production levels of food grains remained far below the planned targets. Food grains output failed to keep pace with the population growth and, resultantly, the per capita availability of food grains which had reached a level of 510 grams per day in 1991 declined to an average level of 452 grams per day during the subsequent year. The same trend continued in the later years also. One of the reasons responsible for this trend is the notable changes in the composition of areas under food crops and non-food crops. These trends indicate that the cropping pattern has skewed in favour of the non-food crops in the recent years. This strategy got further momentum because of the policy of export-led growth under the globalized regime. It is well accepted that the shifts in the cropping pattern, experienced across the states will definitely influence the financial needs of the farmers because the financial requirements are estimated based on the scale of finance which is crop and location specific.

22.4 Sources of Agriculture Credit

22.4.1 Cooperatives and Farm Credit

As a significant component of the multi-agency approach to credit delivery in India, cooperative banks hold an important position especially in the rural credit scenario and played a pivotal role in the development of the rural credit over the years. The cooperative movement in India is 100 years old. In the next work of cooperative institutions providing agriculture credit, the most important is the Primary Agriculture Credit Societies. The geographical spread of the entire cooperative credit system covers over 76 per cent of the rural credit outlets, and it has a market share of about 20 per cent (2008) of the total rural credit in the country. Over the years, the long-term cooperative credit structure has grown tremendously with changes envisaged in its role from time to time. The structure now has a membership of 1.4 crores, net owned funds of Rs 3814 crores and loans and advances outstanding of Rs 1874 crores, respectively. The structure has, however, not developed uniformly and there are states where it has started showing palpable signs of infirmity. The gross net performing assets of the state cooperative and rural development banks and primary cooperative agriculture and rural development banks have also been fairly high at 19.19 per cent and 16.05 per cent, respectively. Further, such loan defaults have led to clogging of the cooperative credit with the consequence that even in states where the cooperative system has developed to some extent, it had not always functioned in the manner it was expected. Indeed the accumulation of losses, provision for NPAs, etc. have affected both the deposits and the borrowings of the cooperative banks to a considerable extent. Given this background, any observer of the cooperative credit scenario in India today is confronted with a host of issues concerning the vulnerabilities that have weakened the system vis-à-visa the need for cooperative reforms to achieve the twin objectives of the effective credit delivery and the financial sustainability. These include organizational, managerial, financial and operational issues. The important among them are as follows.

1. Integration of short- and long-term structures: The need for having two structures, short- and long-term, requires to be examined particularly in the context of the institutional viability and convenience to members. A number of committees and commissions have called for the integration of the short- and long-term structures as possible solution, by taking advantage of the diversified services.
2. Revitalization of cooperative banks: The revitalization package for cooperative banks should take into account the financial, operational, organizational and other related aspects. Any revamping process need to have financial support for cleansing the balance sheets of the cooperative credit institutions with institution-specific conditions.
3. Deployment of resources: The cooperative banks have to be allowed a greater freedom to deploy their funds exclusively on business considerations. This would improve the profitability of the banks.
4. Duality of control: There is a need for doing away with the duality of control between the state governments and the central bank. Removing the overlapping of controls will go a long way in imparting the functional autonomy and operational efficiency to the cooperatives.
5. Focus on development of the base tier: The cooperative organizations should support infrastructure development, strengthen resources base, improve connectivity and effective management with professionalism for inspiring the confidence of the people and muster their active participation.
6. Member-driven cooperatives: Every effort is required for empowering the cooperative banks by turning them into member-driven enterprises. This required formulation of policies that give genuine character of cooperatives, make the federal organizations more responsive and responsible towards their members, develop selfreliance and self-confidence and decentralize power of decision-making. The adoption of the essential features of the Model Cooperative Societies Act recommended by the Choudhary Brahm Prakash Committee and bringing in necessary amendments in the state cooperative society’s acts, so as to reflect the spirit of democratization and selfreliance, will be a step in the right direction.

 

From these points it is evident that it is high time to revamp the cooperative institutions and also the disbursement of the agriculture credit. While the Indian cooperative movement celebrated a century in 2004, a big concern expressed was ‘Whether the cooperatives are withering away from cooperative principles?’ One of the vital components in the cooperative rural credit, which requires immediate attention, is the long-term farm credit through cooperative which resultantly leads to the capital formation in agriculture.

From Table 22.1, it is seen that the cooperative credit stood at Rs 4,403 crores in 1991–92, which improved to Rs 10,047 crores in 1993–94, which is a substantial increase. In the later years, the cooperative credit gradually improved and reached Rs 48,258 crores in 2007–08. In 1995–96, the short-term credit through cooperative banks increased to Rs 8,331 crores, the percentage growth being 89.21 per cent. This increased further and touched Rs 23,920 crores in 2003–04, the addition being Rs 15,589 crores over a period of five years, the annual average increase being Rs 3,117.80 crores. At the same time the medium- and long-term credit recorded only a marginal increase over the years. This established the claim that the medium- and long-term credit is not getting the required priority, which is one of the concerns of the agriculture credit delivery mechanism. It is also to be noted that the share of the cooperatives stood at 39.03 per cent in 1991–92, 47.56 in 1995–96 and 37.60 in 2003–04, but only 20 per cent in 2008–09. Considering the type, short-term cooperative credit constituted 62.18 per cent of the total short-term credit in 1991–92, 57.35 in 1995–96 and 46 in 2003–04. These trends clearly state that the role of the cooperatives in extending institutional credit is notably falling, even though there is an increase in absolute terms. In the case of the medium- and long-term credit, it is also seen that the shares of the cooperatives in 1991–92, 1995–96, 2003–04 and 2006–07, respectively, were zero, 28.61, 22 and 12.90 per cent. Considering the strategic importance of the long-term credit, a special agency was started in the name Land Development Bank, now known as the Agriculture and Rural Development Bank to provide long-term loans for agricultural activities particularly the infrastructure development in agriculture. However, the current data of these banks across the country indicate that they give only meager amount for the long-term agriculture development. Hence, without hesitation one can infer that the role of cooperative credit in augmenting investment in agriculture is very limited.

 

 

22.4.2 Commercial Banks

The second institution providing credit to agriculture is the commercial banks (Table 22.2). One of the objectives behind bank nationalization was to provide the maximum credit to the farming operations throughout the country. The network of commercial banks altogether provided long-term credit worth Rs 2,341 crores in 1991. This increased to Rs 2,528 crores in 1993–94, 15,683 crores in 2001–02 and 12,874 crores in 2006–07. Compared to the long-term credit, the short-term credit constituted a major part of commercial bank credit for agriculture. For instance, in 2005–06, short-term credit constituted 80 per cent of the total commercial credit and in 2006–07 it reached 76.88 per cent. The commercial banks credit constituted 20.89 per cent in 1991–92, made gradual increase and reached about 68 per cent in 2008–09. Thus, in absolute terms, there is an increase in the commercial bank credit over the years. However, there are reasons behind this trend which deserves special mention.

1. As mentioned above, many banks were nationalized in 1969 and also in 1980 with the objective of providing credit to agriculture and related activities. As a consequence of this, bank branches in the rural areas expanded tremendously. Thus the total expansion in bank branches made an increase in the absolute amount of agriculture credit.
2. There is an important stipulation by the Reserve Bank of India that the banks should disburse 40 per cent of their advances for the priority sector and 18 per cent for agriculture. Thus the banks are particular to reach this target by any means.
3. Gold loans are very popular today, even in the urban areas. The most important reason behind this trend is the pledging of gold ornaments in the name of agricultural loans.

When we go for a microscopic analysis of commercial banks credit for agriculture, it will be clear that since 1990 the commercial banks initiative in providing agriculture credit is gradually coming down, one probable reason is the priority given to services sector as a consequence of globalization and reforms. Another reason, which also deserves mention, is the mounting of overdues of the commercial banks from agricultural loans. Based on the present norms, any overdue over a period of time will aversely affect the bank profitability as well as the professional working of the bank. At the same time, if the agriculture sector has to achieve the desired level of agricultural growth of 4–4.5 per cent, commercial banks have to give added priority to agriculture sector in the coming years.

22.4.3 Regional Rural Banks

The last component in the types of organizations providing farm credit is the RRB. The RRB, a new entrant into the banking scenario, provides only a small share of the institutional support for agriculture. In 1991–92, RRBs disbursed just Rs 336 crores for agriculture, that too as short-term credit. This subsequently increased and reached Rs 3,172 crores in 2000, the respective shares of short- and long-term credit being 76 and 24 per cent. In 2008–09, the amount reached Rs 26,724 crores, an increase of 8.5 times compared to the dawn of this century. In 2008–08, the share of the short-term credit remained at 60 per cent. The fall in the share of the short-term credit is a good sign since the priority given for long-term credit by the RRBs is notably improving. Its share constituted 2.99 percent in 1991–92, 7.60 in 2003–04 and 7.81 in 2006–07 (Table 22.3).

The flow of the institutional credit comprising of cooperatives, RRBs and commercial banks was very meager from 1951 to 1971 (Table 22.4). The total credit accumulated to Rs 678.90 crores in 1970–71, the per cent share of short-term credit and long-term credit being 76.49 and 14.86 per cent, respectively. Since 1971, there is a notable increase in the agriculture credit. These trends are the direct consequence of the Green Revolution. The revolution promoted the use of technology, which necessitated more credit in the form of investment in agriculture. However, these enhancements in agriculture credit were only short-lived. Since 1985, again, there is stagnation in the agriculture credit particularly the long-term credit. The shift in the strategies due to globabalization is one of the probable reasons for this shift. The situation again changed in the recent years, particularly 2004 (Figure 22.1). The government and policy makers realized that the neglect of agriculture, particularly long-term credit, will retard the agriculture growth. Long-term credit is one of the serious concerns of agriculture credit discussions popularly known as the capital formation in agriculture.

 

 

TABLE 22.4 Flow of Institutional Credit for Agriculture and Allied Activities 1991–92 to 2008–09 (Rupees in Crore)

Year	Amount	Growth rate
1950–51	24	—
1960–61	214	791.66
1970–71	678	216.82
1980–81	2126	213.56
1990–91	3972	86.82
1991–92	11202	182.02
1993–94	15169	35.41
1995–96	22032	45.24
1997–98	31956	45.04
1999–2000	46268	44.78
2001–02	62045	34.09
2003–04	86981	40.19
2005–06	180486	107.50
2007–08	254657	41.09
2008–09	292437	14.83

 

22.5 Capital Formation in Agriculture

The literature on under-developed and developing economies contains various hypotheses on their low rates of capital formation. Nurkse (1962) opined that the incentive and ability to invest are weak because the domestic market is narrow and domestic savings are meager. Lewis (1957) attributed low investment to low savings, which, in turn, is due to the small ratio of profit to national income. According to Singer (1964), it is the lack of investment opportunities which inhibits the people’s desire to save and invest. Dearth of entrepreneurship, lack of integration between savings and investment, absence of financial intermediaries to mobilize savings and institutional barriers are among the other factors usually referred in this context.

 

 

Table 22.5 gives the growth and composition of investment in agriculture. The gross capital formation in agriculture stood at Rs 1034 crores in 1950–51, constituting 22.14 per cent of the gross domestic capital formation. During the first decade, the gross capital formation in agriculture increased at the rate of 5.19 per cent per annum. By 1970–71, the gross capital formation reached Rs 7379 crores, the per cent share in the gross capital formation being 15.63, the compound growth rate during the decade from 1960–61 to 1969–70 being 12.17 per cent. During the same period, the public and private sectors, respectively, contributed 28.51 and 71.49 per cent. In the next decade, there were substantial improvements in the gross capital formation in agriculture. The reasons are obvious—the green revolution and the resultant consequences such as more technology orientation, more investment in R&D, etc. However, the pertinent question is whether this tempo was maintained in the later years. Between 1980–81 and 1985–86, the gross addition of capital formation in the agriculture sector was Rs 2404 crores, the per cent contributions from public and private sectors being 37.54 and 62.46, respectively. However, quiet surprisingly, an inverted trend is observed since 1985. In 1985, gross capital formation in agriculture contributed just 8.43 per cent to the gross domestic capital formation. The gross capital formation in agriculture and allied sectors as a proportion of total GDP stood at 2.66 per cent in 2004–05 and improved to 3.34 per cent in 2008–09. Similarly, the gross capital formation in agriculture and allied sectors relative to GDP in this sector has also shown an improvement from 14.07 per cent in 2004–05 to 21.31 in 2008–09. Another notable change during this period was the significant cut in the public sector contribution and improvement in the private sector share (Figure 22.2). Little numerical wisdom suggests the complementarity between the gross capital formation in the private sector and the public sector and also between gross capital formation in the agriculture sector and the flow of institutional credit. Thus the gross capital formation through the private sector can be augmented, provided there is a considerable investment in the public sector and vice versa. Recent technological innovations, strategy of export-led growth and mounting pressure on the land recommended for improving cropping intensity. This is possible only with substantial growth in capital formation. It is proposed in the Eleventh Five Year Plan to increase public investment in agriculture from 3 per cent of GDP to 4 per cent.

 

From the above discussions, the following observations emerge with respect to disbursement of the agriculture credit in India.

1. There is a continuous fall in the savings of the public sector, which constitute an integral part of the gross domestic capital formation. However, these trends are reversing in the recent years.
2. The share of the gross capital formation in agriculture to gross domestic capital formation came down drastically since 1990, compared to the 1950s.
3. The decline in the share of the agricultural sector’s capital formation in GDP from 2.2 per cent in the 1990s to 1.7 per cent in 2004–05 is a matter of concern.
4. The decline in the share of agricultural sector’s capital formation in GDP is mainly due to the fall in the public investment in irrigation, particularly since 1990. This is mainly due to the absence of complementarities among the public and private sectors.
5. The public sector investment on agriculture, which accounts for about one-third of the total investment, has been drastically declining in the recent years and it is the private sector which is playing a major role.
6. Cooperative sector is emerging as a major source of capital formation. The unutilized resources pending with the cooperatives can be more effectively utilized, if policy prescriptions are issued particularly in the context of decentralized planning and the Panchati Raj.
7. Even though the institutional finance for agriculture has increased substantially over the years, the share of the long-term finance to the total institutional credit is still seen to be very low.
8. The institutional agencies, particularly the commercial banks, are maintaining the Reserve Bank of India norm of priority sector credit (40 per cent of the advances). However, they do not satisfy the norm of 18 per cent for the agriculture credit. For instance, since 1990s, this share consistently came down and currently it is only 13 per cent on an average at the all India level. This is probably one of the consequences of the economic reforms in India.
9. The per hectare investment availability is much lower than the prescribed norms.
10. There is an indication of a reversal of this unfavourable trend with the public sector investment in agriculture reaching its highest level of Rs 12591 crores in 2004–05. The U turn depends on the government vision, attitude and polices.

22.5.1 Suggestions

1. The need for having two structures, short- and long-term, requires to be examined in the context of institutional viability and convenience to the members.
2. Appropriate and prudent regulatory and supervisory systems, with an emphasis on institutional safety and sound users also, need to be created to strengthen the Rural Infrastructure Development Fund (RIDF).
3. The institutional development would require attitudinal changes, focusing on the establishment of high quality efficient and sustainable services in which farmers are treated as valuable clients.
4. Short-, medium- and long-term credit should be integrated and linked with processing, marketing and agro servicing.
5. Simplification of structures, procedures and formalities to make them provide better services to the members.
6. Redrafting the scale of finance norms. Currently, the scale of finance is not seriously linked to the cost of cultivation. As a consequence of this, the scale of finance suggested for different crops may not be the real requirement. This leads to the serious problem of credit gap. The credit gap is the difference between the credit demanded and disbursed. Credit disbursement is based on the scale of finance which is underestimated many times.
7. Greater thrust for processing, value addition and organized marketing for maximizing benefits to the farmers.
8. More investment on the part of the government so that the problem of lack of complementarity between the public and private investment can be avoided.
9. In agriculture credit disbursement, we have multiple agencies. However, their role is not very clearly defined. As a result of this, duplication is noticed in the disbursement of credit.
10. It is a long time demand that the procedures for getting credit from the institutional agencies are to be minimized and made farmer friendly.
11. Strengthening the working of the State Level Bankers Committee so that the defects in the working of banking institutions can be streamlined.

In recent years, the government also launched the Kisan Credit Cards for the benefit of the farmers. Similarly, Self Help Groups (SHG) also play some active role in promoting the farm activities.

22.5.2 Kisan Credit Cards

The Kisan Credit Card scheme was introduced in 1998–99 to enable the farmers to purchase agricultural inputs and draw cash for their production needs. The scheme is applicable throughout the country. Beneficiaries covered under this card are issued with a credit card and a pass book with relevant details of the beneficiary. Production credit limits are fixed taking into account the entire production credit needs for one year plus the related activities associated to the crop production. Short-term credit is in the form of a revolving cash credit facility involving an unlimited number of withdrawls and repayments within the limit, fixed on the basis of the operational land holding, cropping pattern and scale of finance. Table 22.6 presents the progress of the Kisan Credit Cards in India.

 

 

From Table 22.6 it is seen that the total number of Kisan Credit Cards remain at around 80–90 lakhs, with notable fluctuations. It is also seen that the commercial banks are playing a major role in the distribution of the Kisan Credit Cards. The share of the cooperatives in the distribution of the Kisan Credit Cards is coming down over the years. In 2008–09, cooperative institutions distributed 13.44 lakh cards, followed by RRBs, 14.15 lakh cards, and commercial banks 58.34 lakh cards; the total being 85.93 lakh cards. In this year, the share of the cooperatives, RRBs and commercial banks, respectively, remained at 15.65, 16.45 and 97.90 per cent. Amount-wise, Rs 46,729 crores was distributed in the year 2006–07, which increased to Rs 53,085 crores in 2008–09, the percentage increase being 13.60. At the same time, an amount of Rs 88,262 crores was disbursed in the year 2007–08. Thus, compared to 2007–08, there is a reduction of 39.85 per cent in the disbursement through Kisan Credit Cards. So it is felt that the policy of Kisan Credit Cards has not penetrated into the farming community across the states (Table 22.7).

 

 

22.5.3 Micro Finance

Another form of intervention associated with the rural financing and the priority sector financing is the micro finance. Micro finance is applicable not only to agriculture but also to many other small investments. In an effort to mainstream micro credit and to extend its reach, the Reserve Bank of India issued very detailed guidelines in February 2000 stipulating that the micro credit extended by banks to the individual borrowers directly or through any intermediary would henceforth be reckoned as part of their priority sector lending. Banks were given the freedom to formulate their own models to choose any intermediary for extending the micro credit. The SHG bank linkage programme implemented by the commercial banks, the RRBs and the cooperative banks has emerged as the major micro-finance programme in the country.

Table 22.8 presents the growth of the SHG linked micro-credit programme. By the end of 2002–03, there were 717,360 accounts with a cumulative amount of Rs 1,022 crores which reached 3,625,941 with a cumulative amount of Rs 8,849 crores by the end of 2007–08. During the period, the number of accounts increased by 5 times and the amount by 8.6 times. As on 31 March 2009, the commercial banks had a maximum share of the SHG savings, which was 58 per cent. This was followed by the RRBs, 26.60 per cent and then the cooperative banks with 15.40 per cent. Pursuant to the announcement made in the Reserve Bank Annual Policy Statement for the year 2007–08, all regional offices of the Reserve Bank were advised to undertake an evaluation of the SHG Bank Linkage Programme. This was intended to ascertain the degree of transparency in maintaining accounts by the SHG and their adherence to the best practices. The evaluation of SHG, carried out by the regional offices, revealed that there was scope for improvement in the area of books of accounts. It also brought out that the rotation of group leaders was generally not followed by SHGs; however, other best practices like strict adherence to attendance of group meetings, recording minutes of the meetings and prompt repayment of bank loans were being followed. The momentum of growth in the micro-finance sector has brought into focus the importance of regulating the sector to function in an efficient and orderly manner. There would be a need for greater transparency in their functioning for facilitating their reach to un-banked population of the country.

 

22.5.4 Moneylenders

Moneylenders are the oldest source of agriculture credit. Certain groups of moneylenders are farmers also, but they are involved in lending money to their fellow farmers at a reasonable rate of interest. The other type of moneylenders are professional moneylenders, who lend money to the farmers with professional terms and conditions like a very high interest rate, repayment immediately after harvest, etc. Over the years, the influence of moneylenders has declined sharply in the farm credit scenario of India, still they play a significant role. They are popular even today because they have only limited formalities, they give loan at any time of the year for any agricultural purpose and are easily approachable.

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