A new working group suggests a raft of measures to improve agri credit. Sadly, the previous results do not inspire confidence
The report of the M K Jain-led internal working group, which was submitted last week, is the latest in the ever-growing list of official recommendations on agricultural credit.
In February 2019, the RBI formed this working group to study three aspects: Factors that drive agricultural credit, building a cost-effective and inclusive credit system and enforcing credit discipline (impact of loan waivers on state finances and agricultural credit).
Right at the time of RBI’s inception in 1935, it was felt that the central bank should pay special attention to agri credit. So, the RBI Act laid foundation to a special Agricultural Credit Department to study the problems and coordinate with the agencies concerned.
With the broadening of its scope, the department was rechristened as the Rural Credit and Department. Till date, there have been several committees and working groups to study and suggest measures to boost agri credit.
The Jain report has a chart that tracks how India’s agriculture credit markets have fared since 1950. The ratio of agri credit outstanding to agri GDP increased from 0.6 percent in 1950-51 to 10 percent in 1971-72 and 22 percent by 1987-88. This was on account of several policies such as five-year plans, the bank nationalisation, the bank branch policy and priority sector lending.
Worryingly, the ratio declined during 1991 economic reforms, which led to the start of Kisan Credit Card scheme in 1998. This coupled with other measures paid off as the ratio zoomed to the 50 percent level as of today.
This form of agri credit is deemed as an institutional source of agri finance that consists of banks, cooperatives and the like, with a mere 10 percent share in 1951, which now reads 72 percent. The other source is non-institutional involving relatives, moneylenders and landlords, which for long has been a bane for Indian agriculture due to higher interest rates, but still remains high at around 28 percent, as against 90 percent earlier.
One of the objectives of the committee is to suggest ways to increase the percentage of institutional finance. And it has made several suggestions on that front.
First, digitise land records and make them accessible to banks for easier verification of collateral. Second, make a federal institution on the lines of the GST Council to take inputs from both the Centre and states to reform the sector. Third, banks should leverage technology in a major way and explore collaborations with agri-tech companies. Four, for small and medium farms (SMFs), banks should not insist on land records for loans up to Rs 2 lakh. Five, consumption loans up to Rs 1 lakh can be given to farmers under priority sector loans provided banks are convinced of collateral security.
The committee also noted that there is a wide disparity across states when it comes to agri credit. The ratio of agri credit to state GDP is highest at 200 percent for Kerala and just 20 percent for the North-East and West Bengal.
The panel suggested that the Rural Infrastructure Development Fund (RIDF) should be used as a tool to deepen credit absorption in these states. The RIDF, set up under NABARD in 1995, gets funds from commercial banks to make up for shortfall in priority sector loan targets. Banks have lowered their contribution to the RIDF from 60 percent in 2008-09 to nearly 18 percent today, which needs to go up.
One big problem faced by Indian agriculture is high fragmentation of land holdings into small and marginal farms. According to the Agricultural Census 2015-16, the small and marginal holdings taken together (up to 2 hectares) were 86 percent of the total holdings in 2015-16, but their share in the operated area stood much lower at 46.94 percent.
The report asked state governments to conduct awareness initiatives for land consolidation so that the farmers can achieve economies of scale and have the incentives to make long-term investments.
It also pointed to the need for monitoring agri loans against gold as collateral, which needs to be flagged separately. This is because the loans against gold are sanctioned on the collateral and are higher than actually needed by farmers, thus leading to high indebtedness.
The working group favours direct benefit transfer (DBT) compared to interest subvention schemes. On farm loan waivers, it proposed that the governments avoid waiver and instead review and make the existing policies more efficient.
The panel also reviewed agricultural policies and systems of China. Based on those learnings, it has recommended establishing a centralised database for capturing all kinds of data and a credit guarantee scheme for agricultural loans.
To sum up, the working group has listed several suggestions to improve the working of agricultural credit. The Indian agriculture system is a maze with several ministries and organisations responsible for different tasks and any committee recommendations are often lost in the process. To avoid this, the Jain committee has marked out specific ministries and organisations against each suggestion, which is really helpful.
Even then, given the nature and sensitivity of the agriculture sector in India, where both the Centre and states play a role, the recommendations of any agriculture committee only go that far. We have to wait and see the distance this committee’s proposals travel.Amol Agrawal teaches economics at Ahmedabad University. Views expressed are personal.