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From plate to plough: Unravelling agricultural credit

An idea of this diversion of agri-credit to non-agricultural purposes can be had by looking at agri-credit as a percentage of the value of input requirements in agriculture. (Representative image)

By Ashok Gulati & Ritika Juneja

Normally, credit off-take in a particular sector is treated as a sign of performance of that sector. Higher the off-take, better performance is likely to be. From that angle, ground level credit (GLC) to agriculture and allied sectors has shown tremendous off-take. For example, in FY19, the banking sector disbursed Rs 12.55 trillion as GLC to agriculture, surpassing the government's own target of Rs 11 trillion. This should call for celebration, but, unfortunately, growth in agriculture sector hasn't been commensurate. How does one reconcile this? Let us try to understand and unravel some less known facts about agri-credit in India.

The accompanying graphic presents the absolute amount of direct institutional credit flow to the agriculture sector. There is no doubt that over a longer period, from 1971-72 to 2017-18, there has been more than a 1,000-time increase in agri-credit, from a meagre Rs 7.8 billion to Rs 8,235 billion. However, as a percentage of agricultural GDP, which should be the real measure of agri-credit growth, it has not been a smooth rise over all these years. For example, during the pre-reform period (i.e., 1971-72 to 1989-90) direct agri-credit flow as percentage of agri-GDP increased at a modest average annual growth rate (AAGR) of 4.2%.

However, during 1990-91 to 1999-2000, AAGR decelerated to 3.2%. But, thereafter, during 2000-01 to 2007-08 it witnessed tremendous growth at 12% only to fall back to just 3.6% during 2008-09 to 2017-18. The massive growth during 2000-01 to 2007-08 appears to be due to innovation in credit instrument in the form of Kisan Credit Card (1998), and policy intervention in the form of Interest Subvention Scheme (2006) that incentivised short-term credit. However, the slowdown after 2008 appears to be due to a loan waiver scheme (2008), which led bankers to be more conservative in lending to farmers for fear of increasing wilful defaults due to expected loan waivers in coming years.

Interestingly, the NABARD All India Financial Inclusion Survey (NAFIS) of 2015-16 reported that only 30.3% of all agriculture households availed credit from institutional sources. It could be that the remaining agri-households (about 70%) either don't need credit, or they are not 'bankable', or both. But, the fact that almost 70% of agri-households did not avail institutional credit shows that there is still a lot of scope for the banking sector to increase its reach, be it for production purposes (crop loans), or investment, or even consumption needs.

Government of India started off the interest-subvention scheme in 2006, whereby crop loans would be given to farmers at 7% interest rate. Later, it added a provision for those paying back their loans in time regularly to get crop loans at a 4% interest rate. This is done in a situation where the interest rates in the informal sector, or even through micro-finance institutions generally ranged from 15-30%. This has created a huge opportunity to take large crop loans at subsidised interest rates from the banking sector, and then divert them for non-agriculture purposes. An idea of this diversion of agri-credit to non-agricultural purposes can be had by looking at agri-credit as a percentage of the value of input requirements in agriculture.

The accompanying graphic presents the state level picture for the triennium average ending (TE) TE 2016-17. The total short-term credit (outstanding) to agriculture and allied sectors as a proportion of input requirements (GVO-GVA) was substantially above 100% for many southern and northern states: Kerala (326%), Andhra Pradesh (254%), Tamil Nadu (245%), Punjab (231%), Telangana (210%) etc (see graphic). This is a clear indication that agri-loans are being diverted to other non-farm purposes. One of the key reasons for this diversion lies in low rates of interest being charged under the interest subvention scheme.

Another interesting feature is that in the total direct credit (outstanding) to agriculture and allied sectors, the share of short-term credit witnessed a significant jump from 44% in 1981-82 to 74.3% in 2015-16 whereas, somewhat disquietingly, that of long-term credit fell from 56.1% in 1981-82 to 25.3% in 2015-16.

Since long-term credit is basically for investments, and capital formation in agriculture, this dramatic fall in the share of long-term credit takes a heavy toll on the improvements in farm productivity, and overall growth of the agri-sector.

It is, therefore, high time to revisit the interest subvention policy, which is leading to these sub-optimal results. Also, for transparency, all crops loans, especially those availing interest subvention, must compulsorily be routed through Kisan Credit Cards (KCCs). Interestingly, it was reported in the latest economic survey that the cumulative number of KCCs issued was 150 million as of March, 2016, but the NAFIS survey, somewhat puzzlingly, reported that only 10% of farmers have used KCCs in the agricultural year 2015-16. This requires deeper research, but, nevertheless, issuance of KCCs in remote villages needs to be expedited.

A bolder step in this direction, however, would be to empower farmers by giving direct income support on a per hectare basis rather than by hugely subsidising credit, which is leading to massive diversion of agri-credit to non-agriculture purposes. Streamlining the agri-credit system to facilitate higher crop-loans to farmer producer organisations (FPOs) against commodity stocks can be a win-win model to spur agriculture growth. Can the government plug the diversion, and make agri-credit system more efficient and inclusive?

Gulati is Infosys chair professor for agriculture & Juneja is Consultant, ICRIER Views are personal