The amount of agricultural credit has exploded in the recent past. But its impact is not showing up to the extent it should. Going by the Reserve Bank of India estimates, the total disbursement of agricultural credit soared by 755 per cent between 2000 and 2010. But it has resulted neither in commensurate growth in farm productivity, nor in the sale of seeds, fertilisers, pesticides and farm machinery. More importantly, the dependence of farmers on informal sources of credit, notably moneylenders, has not declined. The Planning Commission estimates that about 80 million of India’s 128 million land-holding farmers continue to be out of the institutional system of credit. Clearly, much of this expansion of credit is missing its target, and is not reaching small and marginal farmers — who need it the most. Worse, recent reports suggest that relatively well-off large farmers, who enjoy preferential access to bank loans, are misusing the highly subsidised credit for non-agricultural purposes — or even for making a fast buck by putting the money in fixed deposits or other lucrative financial instruments, utilising the arbitrage opportunities open to them.
Several factors are responsible for this problem, of which at least three are significant. First, the ill-advised broadening of the definition of agricultural credit means both direct and indirect credit to agriculture to be treated as priority farm-sector lending. This allows banks to advance loans for “allied activities” or to even put their funds in entities connected only vaguely with agriculture, such as non-banking rural financial institutions, rather than lending directly to farmers, which is higher-risk. Second, populist farm debt waivers like UPA-I announced in 2008 have severely dented India’s loan repayment culture. Wilful default by farmers has become more common, in the expectation that debt will be forgiven come election time. The government has tried to repair the moral hazard problem it created by offering two per cent additional interest subvention for timely loan repayment; but even this boomeranged. It led to the short-listing of non-defaulting farmers — and the banks lent more and more to the same group of individuals, further excluding small and marginal farmers.
The third major factor is the relatively high cost of servicing loans to farmers. Banks often need to deploy special teams to chase farmers for loan recovery after harvests, which adds to their costs. In any case, bringing more farmers into the banking network – essential to increase the direct flow of credit – needs the opening of bank branches in unbanked areas, which is inherently a loss-making exercise. What is needed, therefore, is to make a clear distinction between direct and indirect credit and a redefinition of both these categories unambiguously. In addition, annual targets should be fixed not just for banks’ total disbursement or rural credit, but also for the expansion of their agricultural customer base. Unless banks reach out to small and marginal farmers, the objectives behind increasing the flow of farm credit will remain ill-served.