Leaks in lending

Subsidised farm credit also goes to companies

There has been a massive surge in institutional agricultural credit over the past decade. But the benefit of that has not reached as much to farmers as it has to agri-businesses and companies branching out into agriculture-related activities. This is clear from an analytical study of agricultural credit by scholars at the Tata Institute of Social Sciences, based on a Reserve Bank of India (RBI) report. This study indicates that less than 30 per cent of agricultural credit was issued by banks’ rural branches. The remainder, over 70 per cent, was lent by branches in metropolitan, urban and semi-urban areas. Further, many loans were of Rs 1 crore or more each. These could not have gone to farmers, the bulk of whom till tiny farms of less than one hectare. Diversion of subsidised agricultural credit to other sectors on such a scale is untenable even if the recipients are indirectly related to agriculture. Farmers badly need finance to meet their operational expenses and invest in yield-enhancing inputs. The overall flow of institutional agricultural credit has been rising rapidly since 2004 when the previous government, led by the United Progressive Alliance, decided to double farm credit in three years. That objective was met — but the annual targets for agricultural credit continued to be increased by big margins every year, touching a massive Rs 8.5 lakh crore in 2015-16.

Worryingly, though the RBI had capped the banks’ indirect lending to agriculture at 4.5 per cent of their total farm sector lending in 2012, the impact of this measure is not yet visible. Neither has the proportion of loans going to farmers shot up by any appreciable extent, nor has the relevance of the informal sector for meeting the farmers’ financial needs diminished significantly. This is borne out by the All India Debt and Investment Survey of the National Sample Survey Office for 2013 (released in December 2014). It showed that nearly 44 per cent of the outstanding debt of rural households in 2013 was from the informal sector. Worse still, over 33 per cent of the total debt was owed to moneylenders.

One reason for this could be the expansion of the concept of farm lending through a series of changes in the definition of direct and indirect agricultural credit during the 2000s. It seems likely that commercial banks have been able to exploit the loopholes in the existing definition and guidelines to show a part of their loan disbursals from urban branches as being agricultural credit. This apprehension is fuelled by the fact that the expansion of commercial banks’ rural network has hardly kept pace with the increase in total farm credit. Most small and marginal farmers – or 80 per cent of all India’s farmers – still need to tap the informal sector to meet their consumption and investment needs. Besides, there are indications that more advances are going to the same farmers who repay their loans regularly, thanks to the government’s policy of giving an additional interest subvention of three per cent for timely repayment. All these are disturbing trends that need to be looked into and suitably addressed so that cheaper agricultural credit goes to the targeted beneficiaries and serves its intended purpose.