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Why there are big loopholes in farm credit

November 14, 2012 11:04 IST

Some loopholes that allowed banks to avoid lending directly to farmers and yet claim to be meeting farm credit targets have recently been plugged by the Reserve Bank of India when it altered priority-sector lending norms.

RIt is clear that much agricultural credit, heavily subsidised by the government, is being either misdirected by banks or misused by its recipients.

The total flow of such credit has increased manifold in the past decade; but a commensurate impact is visible neither in agricultural growth nor in farmers' reduced dependence on informal sources of credit.

The use of inputs like fresh seeds, fertilisers, pesticides and farm machinery hasn't expanded proportionately, either.

Apparently, just boosting the amount of agricultural finance is not enough -- it should reach needy farmers and, more importantly, must be invested by them in farming, not elsewhere.

Some loopholes that allowed banks to avoid lending directly to farmers and yet claim to be meeting farm credit targets have recently been plugged by the Reserve Bank of India when it altered priority-sector lending norms.

Most banks found extending finance to agricultural institutions far more convenient than loaning funds directly to farmers, which entailed a higher recovery risk and transaction cost.

Thus, the share of indirect credit in total agricultural credit supplied by commercial banks surged from 11 per cent in the mid-1990s to nearly 30 per cent in 2011.

The changed guidelines have capped the loans to institutional sector: indirect credit can constitute, at most, 4.5 per cent of total lending -- a quarter of the 18 per cent of total lending earmarked for agricultural credit.

The remaining 13.5 per cent has to go directly to farmers.

The RBI, thus, wants the proportion of indirect credit to decrease.

Yet the scope for wrongfully utilising cheaper finance for purposes other than agriculture is still vast and is being exploited by many farmers, especially richer ones.

The banks hand out short-term crop loans at four to seven per cent interest under the government's interest subvention scheme.

Many farmers reportedly reinvest money borrowed at these low rates in higher-interest instruments like fixed deposits, making quick money out of the arbitrage.

Thus, all the principles involved in agricultural lending, including interest subvention, need to be re-examined if subsidised agricultural finance is to be better used.

Banks, on their part, will have to rework their farm sector lending strategies to comply with the new norms.

One way of doing so is to resume financing primary co-operative agricultural credit societies, to which the banks stopped lending nearly three decades ago, out of concern at the number of such loans that were becoming non-performing assets.

The other available option is to open more branches in rural areas, especially in unbanked regions, to reach out to more farmers.

At present, over 80 million of India's 128 million farmers are said to have no bank accounts.

Roping them into the banking network will, obviously, reduce their dependence on informal credit networks, besides increasing direct credit.

Yet even this, unless the end use of loans is strictly monitored, will fail to enhance agricultural investment and thus productivity.

Business Standard
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