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Project on Assessment of Key Issues Related to Monetary Policy
[Source: RBI Report on Currency & Finance 2003-04]
Module: 5 Bank Credit
Credit to Agriculture
As a key sector of the Indian economy, agriculture receives priority in the credit delivery mechanism. The Reserve Bank of India Act is unusual among central banks to have specific provision for attention to agricultural credit. Notwithstanding the impressive geographical spread and functional reach, the rural financial institutions at the start of the 1990s were found in a poor shape and characterised by several weaknesses such as decline in productivity and efficiency, erosion of repayment ethics and profitability (Mohan, 2004d). Accordingly, during the 1990s, steps were undertaken to strengthen the rural financial institutions through recapitalisation of select regional rural banks, introduction of prudential accounting norms and provisioning requirements for all rural credit agencies.
At the same time, it needs to be noted that lending to the agricultural sector is inherently risky. This is due to several risks that a farmer faces, and of these, future price and monsoon conditions are the most severe and almost entirely beyond the control of the farmer. Efforts have been made to mitigate these risks through various mechanisms such as the Minimum Suppor t Price (MSP) mechanism. While the MSP route has been useful, its coverage is limited to cereals like rice and wheat and, in some areas, cotton. Accordingly, if some elements of insurance are ab initio not viable, extending credit becomes more risky and hence constrained. This high risk is reflected in high interest rates on such loans and high non-performing loans (NPLs) in the agricultural sector. At the same time, it is relevant to note that NPLs to the agricultural sector are not as high as those of loans extended to the small-scale sector and 'other priority sector'. Illustratively, during 2001-03, for the public sector banks, the non-performing assets (NPAs) (as per cent to outstanding advances) averaged 12.0 per cent for the agricultural sector as compared with 20.6 per cent for SSI loans, 12.2 per cent for 'other priority sector' and 9.4 per cent for 'non-priority sector'. If public enterprises are excluded from the 'non-priority sector' group, the proportion of NPAs in the agricultural sector may be comparable to this group. Thus, the difference between NPLs in the agricultural sector and the 'non-priority sector' is probably not large enough to warrant excessive caution in bank lending for agricultural purposes .
Against this backdrop, steps were initiated in the late 1990s to increase flow of credit to the rural sector through introduction of schemes such as Kisan Credit Cards (Box VI.2). The current strategy adopted by the Reserve Bank to increase the flow of credit to the agricultural sector may be summarised as follows. First, the coverage of rural credit is extended to include facilities such as storage as well as credit through NBFCs. Second, procedural and transactional bottlenecks are sought to be removed, including elimination of Service Area.
Box VI.2
Initiatives to Improve Credit Flow to the Rural Sector
Public sector banks have been advised to formulate Special Agricultural Credit Plans (SACP) to fix self-set yearly targets for achievement. The targets fixed by the banks generally provide for an increase of about 20 to 25 per cent over the disbursement made in the previous year. At present, a sub-target of 18 per cent of net bank credit has been stipulated for lending to the agriculture sector by domestic scheduled commercial banks. This is inclusive of both direct and indirect finance provided by banks. With a view to ensuring that the focus of the banks on the 'direct' category of agricultural advances does not get diluted, it was stipulated in 1993 that agricultural lending under the 'indirect' category should not exceed one-fourth of the sub-target of 18 per cent, i.e., 4.5 per cent of net bank credit. All agricultural advances under direct as well as indirect categories continue to be reckoned in computing performance under the overall priority sector lending target of 40 percent of net bank credit. The scope of priority sector lending has been expanded to include, inter alia, financing of agri-clinics and agribusiness centres.
Shortfall of public as well as private sector banks in lending to the priority sector is allocated for contribution to the Rural Infrastructure Development Fund (RIDF) established with the NABARD in 1995-96. The RIDF has contributed to improvement of infrastructure like irrigation, roads and bridges. Funds in the RIDF are increasingly being used for schemes, which more directly benefit the farmers rather than contributing only to rural infrastructure improvement.
Areas that need to be given priority for sanction, e.g., irrigation, water and soil conservation are being identified. RIDF assistance has also been linked to agricultural/rural reforms in the States. Effective 1998-99, banks have been issuing Kisan Credit Cards to farmers on the basis of their land holdings so that the farmers can use them to readily purchase agricultural inputs such as seeds, fertilisers and pesticides. This scheme aims at adequate and timely support to the farmers for their cultivation needs including purchase of inputs in a flexible and cost-effective manner. Over the last couple of years, the Kisan Credit Card Scheme has emerged as an effective tool for catering to the short-term credit requirements of the farmers. A National Impact Assessment Survey, carried out by the National Council of Applied Economic Research (NCAER) for the Reserve Bank, shows that the KCC Scheme has had many benefits. These include:
augmentation in flow of credit to the agriculture sector; about 6 per cent decrease in cost of borrowings for farmers after they were given KCCs; cost of borrowings for KCC holders from formal sources is about 3 per cent lower than those for non-KCC holders; significant drop in the number of borrowers depending exclusively on informal sources for their short-term credit needs; reduction in cost of borrowings from informal sources by about 3 per cent; significant saving in time spent in taking short-term agricultural loans; and decline in cost of delivering credit due to simplification in procedures.
Approach, reducing margins, redefining overdues to coincide with crop-cycles, new debt restructuring policies, one-time settlement and relief measures for farmers indebted to non-institutional lenders. Third, the Kisan Credit Card Scheme is being improved and widened in its coverage while some banks are popularising General Credit Cards (GCCs) which is in the nature of clean overdraft for multipurpose use, including consumption. Fourth, public and pr ivate sector banks are being encouraged to enhance credit-delivery while strengthening disincentives for shortfall in priority sector lending. Fifth, banks are urged to price the credit to farmers based on actual assessment of individual risk rather than on a flat rate depending on category of borrower or end-use while ensuring that interest-rates charged are justifiable as well as reasonable. In brief, the thrust is on enhancing credit-delivery with improved risk assessment systems that lead to a regime of reasonable credit prices. Such a change has to be implemented within the framework of existing legal and institutional constraints: and to this limited extent, there has been a major change in the mindset. The issues relating to flow of agricultural sector were re-examined by the Vyas Committee and several recommendations of the Committee have been implemented (RBI, 2004).
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