K G Karmakar, former MD, NABARD, teaches at S P Jain Institute for Management Research

Over a period from 2010 to 2013 Rs 1,425 billion will have been disbursed by all banks to farmers under the heading of agricultural credit. This is not a small sum, and if we take into account the bonanza due to doubling of agricultural credit from 2004 to 2006 and the Agricultural Debt Waiver and Debt Relief (ADWDR) scheme in 2008, farmers should be a very happy lot. But small and marginal farmers and agricultural labourers who deserve subsidised credit rarely get it. It is being diverted to corporates and big and medium farmers.

Bankers are basically businessmen who deal with depositors’ moneys and not government-created funds. They need to ensure that loans given are duly repaid. Typically, the banker–client relationship begins with a deposit account; this enables the client to understand banking discipline and over time, the banker and the client understand each others’ businesses. In the mandated banking era, soft loans were given on DRDA recommendations, but when it came to repayments, government officials found it expedient to delay loan recoveries in the ‘certificate’ cases indefinitely, and huge amounts had to be written off by banks across the country. As if this was not enough, vested interests (including senior leaders of various political parties) went around exhorting people not to repay dues or repay loans for government schemes, as these were government-sponsored and need not be repaid! In 2008, Rs 720 billion agricultural debt was waived, crop loans up to Rs 300,000 per account were written-off, and repayment burdens in investment credit loans were ostensibly reduced to re-open choked lines of credit for farmers. But did this really benefit the smallholder farmer? Bankers do not give loans to defaulters, and after the 2008 bonanza, only 35 per cent of the defaulters have been able to get fresh loans. Rural deposits are being mopped up to finance urban clients. All banks prefer to gather deposits from rural and semi-urban branches and the credit–deposit ratio of rural and semi-urban branches of all commercial banks, hovers around 20 to 30 per cent. The share of agricultural credit through rural and semi-urban branches has declined sharply, while the share of metros and urban branches has grown from 15 per cent in 2007 to 34 per cent in 2009! Only 20 per cent farmers have access to bank credit and big farmers with large or ‘benami’ holdings who can offer collateral, actually get loans. Regional Rural Banks (RRBs) and cooperatives have been reduced to playing side-roles and do not matter much in the rural credit market. The vacuum in rural credit is largely met by shopkeepers, agents and moneylenders. Interest rates are high due to inherent risks in production and marketing, all of which are unwillingly borne by the small farmer. The crop loan insurance scheme too, which is yet to be re-designed, does not really help the small farmer. With acute poverty in rural areas for smallholder farmers and agricultural labourers, there is a curious reluctance on the Reserve Bank of India’s (RBI’s) part to enforce discipline in agriculture/priority sector lending by banks. If banks fail to achieve these crucial targets, why are they not being penalised for not meeting them? What signal is RBI giving the commercial banks? Parking funds in default with NABARD under the Rural Infrastructure Development Fund (RIDF) is not much of a penalty. Of late, certain banks have refused to meet even these modest obligations under RIDF and punitive action by RBI, if any, is kept a closely guarded secret.

In 2008, Rs 720 billion agricultural debt was waived, crop loans up to Rs 300,000 per account were written-off, and repayment burdens in investment credit loans were ostensibly reduced. But did this really benefit the smallholder farmer?

There is also the curious matter relating to Differential Rate of Interest (DRI) Loan Scheme under which banks were expected to provide small loans not exceeding Rs 15,000 at 4 per cent interest to the poorest of the poor to enable them to make a living. SC/ST beneficiaries were supposed to get 40 per cent of these advances. Banks were expected to give a maximum of up to 1 per cent of net bank credit under this scheme and this was to be accounted for under priority sector advances. In a bizarre move, RBI has permitted DRI lending by RRBs sponsored by commercial banks to be accounted for as part of DRI loans of the sponsor bank. Each RRB is a different entity and why this is not allowed for all other advances, is not clear. Of more importance is that no monitoring is ever done of these DRI advances. Most bankers may have even forgotten about this scheme and Members of Parliament and Non-Governmental Organisations need to monitor the progress achieved under this scheme. The more relevant question to be asked is why RBI is decisively pro-banker in its attitude and is not bothered about monitoring this scheme. Another very serious problem is that statistics trotted out by banks relating to agricultural lending is suspect, as it is compiled not from the computerised data from branches but from special agricultural credit returns from regional/zonal offices, which can be easily manipulated. As banks are now largely computerised, why was the Service Area Monitoring and Implementation Scheme (SAMIS) discontinued and why is a separate reporting system allowed, only for agricultural loans? Not content with denying cheap funds to NABARD and turning a Nelson’s eye to their many transgressions in denying credit to small farmers, RBI tamely acceded to devastating changes in defining agricultural credit by permitting commercial financing for export-oriented and capital-intensive agriculture to be added to this category while credit limits for existing norms of agri-credit were increased. High value loans to corporates for agriculture and allied activities exceeding Rs10 million per unit, is clubbed under priority sector lending. Increasing the comfort levels of banks when farmers are committing suicide is unjustified, to say the least. Loans to input dealers, irrigation equipment suppliers and NBFCs that on-lend to agriculture also qualify as farm credit as part of indirect finance to agriculture (up to 4.5 per cent of Nett Bank Credit {NBC}). Bonds subscribed for REC are part of indirect lending to agriculture. Even with such relaxed norms, banks fail to achieve their targets and this should be an eye-opener as regards the extent of denial of credit to smallholder farmers by rural and semi-urban branches of commercial banks, Regional Rural Banks and the Primary Agricultural Credit Societies. With only about 17% of farmers having access to institutional credit, most smallholder farmers are forced to depend upon money-lenders, agents, adtiyas, etc.

With acute poverty in rural areas for smallholder farmers and agricultural labourers, there is a curious reluctance on the RBI’s part to enforce discipline in agriculture/priority sector lending by banks

Between 2000 and 2006, direct finance to agriculture grew at 17 per cent while indirect agriculture grew at 33 per cent. Loans exceeding Rs 100 million in agriculture grew from 33 per cent in 2000 to 54 per cent in 2006. Thus the doubling of credit between 2004 and 2006 when UPA – I was in power ensured that not the too many farmers got fresh credit, and hence the ADWDR scheme in 2008 was designed to clear up chocked lines of credit to farmers. This has resulted in a sharp decline in loans of less than 25,000 to 200,000. Loans to these categories declined from 35 per cent in 2000 to 13 per cent in 2006! Thus while credit was being doubled, smallholder farmers were being denied credit. The number of rural branches of commercial bankers has been slowly declining (ostensibly due to viability reasons) and the number of smallholder farmer loan accounts has also been declining. Why is the RBI not exposing what commercial banks are doing? What has the government been doing as big cultivators and corporates have gained and smallholder farmers have been squeezed out of the credit race?

Development Strategies for Credit Planning

Credit planning had not received the required attention in development planning till the introduction of social control over banks in 1969. Based on the recommendations of the Study Group of the National Credit Council, the area approach was implemented and the Lead Bank Scheme (LBS) was introduced. Under the LBS, districts were allocated individual commercial banks which were to act as pace setters in the designated districts in providing integrated banking facilities. The designated lead bank was to prepare District Credit Plans (DCPs) in consultation and coordination with other banks and the government. Though considerable effort was put in the preparation of DCPs, certain shortcomings were observed, in particular that the DCPs were not aligned with the development schemes of the districts and emphasis on agriculture was in- adequate. With a view to correcting this, NABARD in 1988-89 took the initiative of preparing district-wise Potential Linked Plans (PLPs) for agriculture and rural development. The basic objective of PLP is to map the existing potential for development and evolve an appropriate mechanism through which it could be exploited over a specified timeframe. These plans attempt at making projections of credit requirements in different sectors of the economy in a district, taking into account the physical potential, availability of infrastructure, marketing support, absorption capacity, strengths and weakness of rural credit institutions, etc. The PLPs aim at reflecting, in a more realistic way, the micro needs vis-à-vis the potential as also linkages with development agencies with a view to providing meaningful direction to the flow of ground level credit. Under the Service Area Approach (SAA) introduced in 1989 all rural and semi-urban branches were allotted specific villages (generally in geographically contiguous areas) to take care of the overall development and credit needs of that areas. In order to further enhance the effectiveness of agricultural credit, RBI can: a) Extend the LBS to cover all branches/banks, including urban cooperative banks, foreign banks and urban/metro branches. b) Prescribe a suitable mechanism to capture data pertaining to banks operating in a particular district without a branch, particularly in respect of new generation private sector banks. c) Finalise the revised MIS under LBS and issue operational guidelines, including the revised coding system, so that credit flow from branches is aggregated from core banking solutions only. d) Penalise the banks which are unable to achieve Priority sector Targets and Agricultural lending targets and also the CMD’s and EDs who are unable to achieve targets.