Round-trip accounts

Govt shouldn't read farm credit growth as an achievement

The latest Reserve Bank of India (RBI) data showing robust growth of nearly 20 per cent in agricultural credit this year, even as lending to industry and services has tended to lag, are unsurprising. Some of it is due to progressively higher annual targets for farm credit, and growing pressure on banks to meet them; much of it could also be attributed to the diversion of subsidised farm loans to other end-uses. Many farmers take crop loans at a highly reduced interest rate of four per cent under the government's interest subvention scheme and go ahead to park these funds in fixed deposits at far higher rates, thereby making a quick buck. Such recycling of hired funds has, in fact, become easier since last year, when the Kisan Credit Card (KCC) scheme was modified to replace the KCC passbooks with ATM-cum-debit cards. The banks, especially their rural branches, too, tend to ignore such round-tripping of funds - after all, it helps them show a good performance twice over, on both priority sector credit disbursement and deposit growth.

The flow of credit to the farm sector has, in fact, consistently been buoyant - exceeding the targets every year - ever since 2003-04 when, in response to farmers' suicides, the government and the RBI began strict monitoring of the priority sector lending. It got a further boost in 2006-07 with the introduction of the interest rate subvention mechanism, which brought down the effective cost of agricultural loans from seven per cent to four per cent. Besides, relentless pressure on the public sector banks to open their branches in unbanked areas and the implementation of the Rs 13,600-crore revival package for the co-operative credit structure seem to have begun impacting agricultural lending.

This year's remarkable upswing in farm credit can additionally be attributed to at least three more factors. First, the farmers' credit needs had increased due to drought in some states, notably Maharashtra and Gujarat, and the rainfall deficiency at the beginning of the monsoon season in many areas, necessitating re-sowing. Higher expenses on key farm inputs, including fertilisers, pesticides, diesel and labour, pushed up credit demand. Second, the RBI has cracked down on "indirect" credit, forcing banks to lend more funds directly to farmers. Third, relatively slack credit demand from other sectors forced banks to concentrate more on agriculture.

It is unfortunate that some in the government are trying to read this growth in agricultural credit as an achievement. If it were an accomplishment, then it would have eroded the relevance of unorganised sources of agricultural finance such as moneylenders. That hasn't happened. In any case, a sizable part of the credit repeatedly lands up with the same set of non-defaulter farmers, regardless of whether they invest these funds in agriculture or recycle it to make easy profits. Unless these issues are suitably addressed, the real purpose of making cheap finance available to farmers remains unserved.