Rural indebtedness

The annual targets for credit flow to agriculture may have been exceeded in the past couple of years, but the broad farm credit scenario remains nearly unchanged: the share of the non-formal sources (read moneylenders) in the total credit remains almost unchanged and the plight of the small and marginal farmers has not improved much. What is worse, the number of farmers who are unlikely to be able to repay the loans has remained large enough to cause concern. This has been borne out by a credit survey conducted by the Ludhiana-based Punjab Agricultural University (PAU) on behalf of the Punjab State Farmers' Commission. It has found that while as many as 90 per cent of the farmers are heavily indebted, about 13 per cent of them have a debt burden that is higher than what they can hope to earn in two years. An equally disconcerting fact brought out by the survey is that institutional finance still accounts only for about 60 per cent of the total farm credit, the balance coming from non-institutional sources.

These findings are not surprising but they do give rise to certain doubts that need to be addressed. The most pertinent among these is whether the huge money that is being pumped into the rural sector is well-targeted. It is also relevant to ask whether the present approach (of lending amounts far higher than the repayment capacity) will lead to alienation of farmers from their land due to payment default. Well, the answers are not too simple though the former issue seems to have partly been addressed by the PAU's study. It has indicated that the bulk of the institutional credit is going to those farmers who have a high asset base, rather than to the small and marginal farmers, who need it the most. This could arguably be because of the lending institutions' bid to keep transaction costs low, as otherwise they would have to deal with a very large number of small borrowers spread over a very large area. The introduction of Kisan credit cards seems to have failed to effectively curb this distortion because the credit limits in these cards, too, are determined on the basis of the assets of the farmers. But what is not so clear is the inclination of the banking sector to continue to prefer lending for crop production rather than non-crop based agricultural activities, such as dairy, fisheries, bee-keeping and the like, most of which are relatively lucrative and involve far less risks.

Instances of losing land for inability to repay are not happening on any noticeable scale possibly because in such cases, farmers opt to end their lives to escape such a misfortune. The non-institutional credit, on the other hand, remains relevant largely because the farmers' needs for non-production loans are fairly substantial and the institutional sources do not meet them fully, though they are no longer wholly averse to lend for this purpose. In view of all this, a relook at the whole approach towards farm credit seems necessary. The aim of credit should, after all, be to enable farmers get over their disabilities and begin earning more rather than the other way round as seems to be the case at present.