Tuesday, April 7, 2015

Indian Agriculture - Transforming a Natiion

Can Modi’s eloquence respond to farm credit vows?
Mobile Banking can show the way.

Poverty in riches and riches of the poor - both are now with the banks. The Prime Minister has also asked the bankers to see the red herring in farmers' suicides with compassion and advised passion for extending credit to the farmers. Banks should now see how their machines can be taught this human touch beyond the click of the mouse!!


 “India accounts for only about 2.4 % of the world’s geographical area and 4 % of its water resources, but has to support about 17 % of the world’s human population and 15 % of the livestock. Agriculture is an important sector of the Indian economy, accounting for 14% of the nation’s GDP, about 11% of its exports, about half of the population still relies on agriculture as its principal source of income and it is a source of raw material for a large number of industries.” (State of Indian Agriculture 2013-14, Ministry of Agriculture, GoI, New Delhi)
Policy Brief
‘Agriculture credit is one of the main drivers of agricultural production.’[1] Farming and credit have been highly interdependent for ages because the farmer would have his cash stashed either in soil or in silo and never in liquid form for him to spend for both production and consumption requirements. So is the case for credit at any cost and anywhere for the farmer. This is where the roots of money lender lie. He sits in the village close to the farmer.
Efforts at institutionalizing money lender started with the starting of primary cooperative agricultural credit societies. Post nationalization, nationalized banks, regional rural banks took to agriculture lending in a big way. NABARD was established in 1982 to accelerate productive agricultural credit flow with focus on improving the lot of the small and marginal farmers.

Post liberalization, with India becoming an important constituent of the WTO, Agreement on Agriculture and Market Access has also witnessed diversification of agriculture and rural economy. The wide ranging definition of farming encompassing dairy, poultry, piggery, fisheries, and all animal husbandry and horticulture activities led to inadequacies and delays in extension of credit from institutions. Public sector banks are mandated to extend credit for agriculture that now includes agro-industry and agri-businesses up to 18 % of the total credit.

RIDF helped Banks and NABARD more than the farmers:
The banks that fail to reach the target have to invest the shortfall in the Rural Infrastructure Development Fund (RIDF) of the Government of India. RIDF is expected to provide backend infrastructure to make credit effective eventually. Union Minister for Finance allocates the RIDF as part of the annual budget announcement. During the last ten years, even crop loan targets are also announced in the Annual Budget speech of the Finance Minister although that has no relationship with the annual statement of accounts of the Union Government.

NSSO in its 70th edition (Jan-Dec 2013) throws some evidence in this direction. 95% of the agricultural households used whatever land they had for some agricultural activity or other during the year.[2] The size of average operational holding has significantly come down to an uneconomic level of just 1.15acres.[3] The sunk costs for crop production have been rising to unsustainable levels and labour costs today have come to take a major slice at around 35% according to the field level information.

Government softened Interest rates for farm credit
Having seen that the farmer living on debt is more a necessity than evil, efforts would become necessary to ensure that such debt does not eat into the vitals of his existence. This has led to the government announcing a slew of measures for flow of credit at least cost (now 7% per annum – the difference between the commercial lending rate and 7% would be reimbursed to the banks). It also incentivized prompt repayment by announcing a further reduction of 3% per annum for those who repay the loans on due dates. Thus farmers who repay the loans promptly would be able to secure credit at just 4% per annum.
Interest subvention scheme has also been extended for post-harvest loans for small and marginal farmers availing loans against ware house receipts and against Kisan credit cards for a period exceeding six months after crop harvest. The limit for collateral free loans has been enhanced from Rs.50000 to Rs.1,00,000. In the event of loss arising out of natural calamities like cyclones, floods, drought etc., rescheduling and rephasement in accordance with the guidelines evolved by the state Level bankers’ Committee has also been facilitated. Efficiency and equity are thus taken care of.  This aspect will be dealt with subsequently in some detail as to the situation on the ground.

“As compared to 257.1 Million tonnes of food grain production during 2012-13, the total horticulture production was 268.9 Million tonnes. The annual growth rates for area and production of horticulture crops during 2012-13 over 2011-12 were 1.9% and 4.5% respectively. Percentage share of vegetables production in the total horticulture production was highest (60.3 % during 2012-13) as compared to other horticulture crops.
During 2013-14 the total value of export of horticulture produce from India to different countries was Rs. 14365 crore. Export of flowers from India was about Rs. 456 crore. The percentage share of calorie intake from fruits and vegetables has increased from 6.9% in 2004-05 to 7.0% in 2009-10 in rural areas and 7.2% to 8.0% in urban areas during the corresponding period.” [4]

The Reality:
Average Annual Growth (%)
Average Annual Growth (%)

10th Plan (2002-03 to 2006-07)
11th Plan (2007-08 to 2011-12)

Total Food grains
Total Nine Oilseeds
Source: State of Indian Agriculture, 2012-13, Department of Agriculture and Cooperation, Ministry of Agriculture, Government of India.

Growth rates in area declined for food grains between the tenth and eleventh plans but both production and yield rates have been rising indicating that the farmers in spite of all odds are toiling to squeeze oil out of sand to provide food security to the economy.

The annual increases of crop loans from banks have led to 250mn-260mn tons of food production in the country during the last five years. It will be of interest to see the growth of credit for agriculture that covers all the activities defined under agriculture till 2012. The annual growth rate of credit has been inconsistent when seen in comparison with the growth rates of production of various crops. Banks can be seen to be supporting the government during the election years – 2005-06; 2009-10 more than the other years. The baggage of NPAs in this sector and other sectors seems to have had an impact in the election year 2013-14. It is also noticed that achievement of targets by itself did not lead to increase in growth rates of credit for agriculture.

While the allocated targets have always exceeded as per the RBI statistics, we see no reason or rhyme in the very allocation of crop loan targets. They do not indicate any relationship with either the area or production or yields. The disaggregated details also indicated that urban agriculture has increasingly got better attention than rural agriculture. There has also been variation between long term credit that goes for capital formation and the short term crop loans. While the crop loans have gone up by five times during the period 2004-14, the investment credit has only doubled. This indicates that the contribution of bank credit for capital formation in the farm sector has not been significant. Further, it also indicates that the short term loans that basically consist of crop loans is of that high order because of targets assigned in the Union Budgets year after year.  

Incremental credit target in the Union Budgets Rs. Crores
Annual Growth of total agricultural credit %
Source: Union Budgets for the defined years; Annual Reports and Report of the Trend and 
Progress of Banking of the RBI for the relative years (compiled by the author)

Either the credit is distributed unrelated to production or undelivered credit is getting into the target achievements year after year. Going by the experiences of the two States of Andhra Pradesh and Telangana who announced loan write off as a ploy for winning the bourses, the banks have failed to establish the claims in several cases due to one or more of the following lapses:
Both the State Governments announced write off of farm loans with the premise that the farmers have suffered huge losses due to both natural and manmade calamities and that the farmers would not be able to bear the losses by themselves. The arguments adduced became contentious with the RBI reasoning out otherwise on the basis of independent enquiries. Nevertheless the promises held out to the farmers by the Governments were allowed to be a pass through. But when the state governments asked the banks the details of the outstanding farm loans, the figures held out did not match the actual availment by the farmers. The discrepancies arose on account of the following reasons:
·         Several borrowers rushed to the banks after the announcement of loan write-off to pledge gold ornaments;
·         A few farmers availed in both the States citing varying land records;
·         Several farmers were noticed to have availed loans using fraudulent pattadar pass books;
·         The quantum of loan availed and the crops grown did not match with the relative scales of finance prescribed by NABARD;
·         There were also benami loans.
Reconciliation of accounts that deserved write off took therefore as much as six months leading to unrest among farmers as they were unable to obtain crop loans for the season ahead.
Scrap APMC Act and write a new law
In order to provide better price to the farmer, APMC Act requires modifications in a manner that the farmers will have a say in the markets and would be able to deliver their produce on cash and carry basis. Technological changes to the functioning of markets become imminent. Huge investments required for this purpose should qualify for investment finance portfolio of banks and speedy investments as well once the Act provides for facilitating provisions. The other important area requiring speedy investments is storage and distribution channels in the farm sector. The third area of equal importance that has already been announced in the Union Budget 2015-16 is providing finance in adequate measure for agro businesses and agro industries and as part thereof, producer companies and producer cooperatives in recognition of value chain management in farming portfolio.
In fine, banks’ role in financing farming and allied activities as also the value chain assumes criticality in the emerging context of Indian economy targeting double digit growth by 2020. Whenever there was sluggish growth in the farm sector, in spite of its dwindling share in GDP, the overall growth of the economy suffered.
Banks have to be effective partners in growth of farm sector
It is imperative that the banks have to be effective partners in growth with their wholehearted involvement in the programmes of the government to increase farm production both quantitatively and qualitatively. Banks have to extend credit with extension support through effective coordination with the Agricultural universities, research and development institutions, and the extension machinery of the government.
Banks have to keep their records clean and improve their data bases to reflect the farm credit flow to various activities, various client groups, like the small and marginal farmers, area wise and activity wise so that reliable data would lend to improvement of policies on an ongoing basis.
Mobile banking should be a handy tool substituting moneylender
Now that the mobile phone is in his palm cant the banks use this disburse credit through this instrument?  It should be possible. The farmer can go to the input dealer of his choice and purchase the inputs according to his requirement through the mobile bank. The dealer gets his price instantaneously. His cash requirements for consumption and labour can be met from his Rupay or ATM card. This obviates the farmer visiting the branch for availing credit repeatedly excepting for securing sanction of the limits. His credit requirements can be met at any time he wants and not just during the banking hours. It is time banks take technology to the farmers faster than ever. When credit is received in time, his loyalty to the institution improves. His repayment obligations are not forsaken.
Governments can concentrate on taking weather and crop insurance effectively. Only in severe natural calamities like the chronic drought, hailstorms or devastation by tsunamis the loan write-off can be done by the Parliament and Legislatures as per the recommendations of the SLBC. The usually occurring cyclones, floods and drought can be tackled by rephrasing and rescheduling both investment and short term credit through RBI refining this product.
*This paper has been prepared for the Seminar on 'Indian Agriculture - Transforming a Nation' on April 5, 2015. The author is member of the Board of Governors of the FRSF, Hyderabad.

[1] Reserve Bank of India, Annual Report 2013-14,
[3] State of Indian Agriculture, Ministry of Agriculture and Cooperation, Government of India, 2013-14
[4] Hand Book of Horticulture, 2014, Ministry of Agriculture, Govt. Of India: