FINANCING AGRICULTURE IN INDIA: Article Analysis

Introduction:

• Finance in agriculture is as important as other inputs being used in agricultural production. Technical inputs can be purchased and used by farmer only if he has money (funds).
• But his own money is always inadequate and he needs outside finance or credit. Professional money lenders were the only source of credit to agriculture till 1935.
• They used to charge unduly high rates of interest and follow serious practices while giving loans and recovering them. As a result, farmers were heavily burdened with debts and many of them perpetuated debts.
• With the passing of Reserve Bank of India Act 1934, District Central Co-op. Banks Act and Land Development Banks Act, agricultural credit received impetus and there were improvements in agricultural credit.
• A powerful alternative agency came into being. Largescale credit became available with reasonable rates of interest at easy terms, both in terms of granting loans and recovery of them. Although the co-operative banks started financing agriculture with their establishments in 1930’s real impetus was received only after Independence when suitable legislation were passed and policies were formulated.
• Thereafter, bank credit to agriculture made phenomenal progress by opening branches in rural areas and attracting deposits.
• Till 14 major commercial banks were nationalized in 1969, co-operative banks were the main institutional agencies providing finance to agriculture. After nationalization, it was made mandatory for these banks to provide finance to agriculture as a priority sector.
• These banks undertook special programs of branch expansion and created a network of banking services throughout the country and started financing agriculture on large scale.
• Thus agriculture credit acquired multi-agency dimension. Development and adoption of new technologies and availability of finance go hand in hand.
• In bringing “Green Revolution”, “White Revolution” and “Yellow Revolution” finance has played a crucial role.
• Now the agriculture credit, through multi agency approach has come to stay. The procedures and amount of loans for various purposes have been standardized.
• Among the various purposes “Crop loans” (Short-term loan) has the major share.
• In addition, farmers get loans for purchase of electric motor with pump, tractor and other machinery, digging wells or boring wells, installation of pipe lines, drip irrigation, planting fruit orchards, purchase of dairy animals and feeds/fodder for them, poultry, sheep/goat keeping and for many other allied enterprises.

Agricultural Credit System in India

Farmers get external financial assistance from two sources namely,

1. non-institutional or unorganized agencies, and
2. Institutional or organized agencies.

Non-Institutional Sources of Finance in India

Why Non Institutional sources more attractive:

• Unrestricted supply of credit for any purpose.
• Easy access by farmers as money lenders maintain close relationship with rural families.
• Method of business adopted are simple and flexible.
• Timely availability of credit without much formalities.
• Knowledge on local conditions and experience of money lender facilitate his business.
• Money lenders do not insist upon any particular type of security for the grant of loans

Unfair Practices of Money Lenders

Money lenders deceive the farmers through many ways such as:

• They manipulate bonds and promissory notes obtained from debtors and enter large sum than actually lent.
• They give no receipt for repayments and often they deny such repayments.
• They charge very high rate of interest
• They give loans for both productive and unproductive purposes which results in indebtedness

Land Lords

• Small farmers and tenants rely on land lords for finance to meet out their productive and unproductive expenses.
• This source of finance has all the defects associated with money lenders. Interest rates are exorbitant.
• Often small farmers are forced to sell out their lands to these land lords and they become land less labourers. Landless labourers bonded labourers.

Institutional Credit Agencies

• As compared to the quantum of credit requirement and the capacity of institutions to meet these credit demands under multiagency system, it is impossible to completely wipe out the private agencies from the rural scene.
• The Banking committee, (1931) and the Banking Commission (1972) offered suggestions to get over the evil aspects of private lending agencies and bring them under sound credit system. These suggestions may be adopted till the institutional agencies attain the capacity to meet the full demand for credit.

The major institutions supplying credit to agricultural sectors are :

• Government
• Cooperatives
• Commercial Banks
• Regional Rural Banks
• National Bank for Agricultural and Rural Development

Government:

• The government sector banks extend both short term as well as long-term loans. These loans are popularly known as “Taccavi loans” which are generally advanced in times of natural calamities. The rate of interest is low and it is not a major source of agricultural finance.

Commercial Banks:

• Previously commercial banks (CBs) were confined only to urban areas serving mainly the activities of trade, commerce and industry.
• The insignificant participation of CBs in rural lending was explained by the risky nature of agriculture due to its heavy dependence on monsoon, unorganized nature and subsistence approach.
• Through nationalisation of CBs in 1969 and CBs were made to play an active role in agricultural credit was accelerated and they are the largest source of institutional credit to agriculture.

 Micro financing:

• Micro financing through Self Help Groups (SHG) has assumed prominence in recent years. SHG is a group of rural poor who volunteer to organise themselves into a group for eradication of poverty of the members. They agree to save regularly and convert their savings into a common fund known as the Group corpus. The members of the group agree to use this common fund and such other funds that they may receive as a group through a common management.
• As soon as the SHG is formed and a couple of group meetings are held, an SHG can open a Savings Bank account with the nearest Commercial or Regional Rural Bank or a Cooperative Bank.
• This is essential to keep the thrift and other earnings of the SHG safely and also to improve the transparency levels of SHG’s transactions. Opening of SB account is the beginning of a relationship between the bank and the SHG.
• Once this process is over, banks liberally lend to the groups or to members and recover the loans conveniently. The banks even offer subsidy to the amount of loans borrowed based on their good response.

Cooperative Credit Organisation

Cooperative Credit Societies:

• The history of cooperative movement in India dates back to 1904 when first Cooperative Credit Societies Act was passed by the Government.
• Soon after the independence, the Government of India following the recommendations of All India Rural Credit Survey Committee (1951) felt that cooperatives were the only alternative to promote agricultural credit and development of rural areas.
• Accordingly, cooperatives received substantial help in the provision of credit from Reserve Bank of India as a part of loan policy and large scale assistance from Central and State Governments for their development and strengthening. Many schemes involving subsidies and concessions for the weaker sections were routed through cooperatives. As a result cooperative

Institutions registered a remarkable growth in the post-independent India.

• Cooperatives play a very important role in disbursement of agricultural credit. Credit is needed both by the distribution channel as well as by the farmers. The distribution channel needs it to finance the fertilizers business and farmers need it for meeting various needs for agricultural production including purchasing fertilizers.
• The credit needed by the farmers for purchase of fertilizers and other inputs is called ‘short term’ credit or ‘production credit’ whereas credit needed by the distribution channel is called ‘Distribution Credit’.
• Cooperatives also play a very important role in disbursement of ‘Medium Term’ and ‘Long Term’ credit needed by the farmers’.
• In India, 78 per cent of the farmers belong to the category of small and marginal farmers and they depend heavily on credit for their agricultural operations.
• These farmers will not be able to adopt the modern agricultural practices unless they are supported by a system which ensures adequate and timely availability of credit on reasonable terms and conditions.

REGIONAL RURAL BANKS

• In the multi-agency approach to provide credit to agriculture, Regional Rural Banks (RRB’s) have special places.
• They are state sponsored, regionally based and rural oriented commercial banks. An effort was made to integrate commercial banking within the broad policy thrust towards social banking keeping in view the local peculiarities.
• The genesis of the RRBs can be traced to the need for a stronger institutional arrangement for providing rural credit. RRBs were supposed to evolve as a specialised rural financial institution for developing the rural economy by providing credit to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
• Regional rural banks in India have penetrated every corner of the country and extended a helping hand in the growth process of the country. The importance of the rural banking in the economic development of a country cannot be overlooked. As Gandhiji said “Real India lies in villages,” and village economy is the backbone of Indian economy.
• Every RRB may undertake the following types of functions: The granting of loans and advances particularly to small and marginal farmers and agricultural laboursers individually or to a group, cooperative societies, agricultural processing societies, cooperative farming societies, etc.
• The Granting of loans and advances to artisans, small entrepreneurs and small traders, businessmen, etc. The Reserve Bank of India has brought RRB’s under the ambit of priority sector lending on par with the commercial banks. They have to ensure that 40 per cent of their advances are accounted for the priority sector.
• Within the 40 per cent priority target, 25 per cent should go to weaker section or 10 per cent of their total advances to go to weaker section
• RRBs were set up in those regions where availability of institutional credit was found to be inadequate but potential for agricultural development was very high.
• However, the main thrust of the RRBs is to provide loans to small and marginal farmers, landless labourers and village artisans. These loans are advanced for productive purposes. At present 196 RRBs are functioning in the country lending around Rs 9,000 crore to rural people, particularly to weaker sections.

The RRBs have following objectives:

• to develop rural economy
• to provide credit for agriculture and allied activities
• to encourage village industries, artisans, carpenters and craftsmen, etc
• to reduce dependence of weaker sections on money lenders
• to identify a specific and functional gap in the present institutional structure
• to supplement the other institutional agencies in credit delivery to rural areas
• to make backward and tribal areas economically better by opening new branches.

NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT

• National Bank for Agriculture and Rural Development (NABARD) was established in the year 1982 by an Act of Parliament and was entrusted with all matters concerning policy, planning and operation in the field of credit for agriculture and other economic activities in rural areas.
• The Bill for setting up the Bank was passed by the Parliament in December, 1981 and National Bank for Agriculture and Rural Development came into existence on 12th July, 1982. Before that, this job was being done by Reserve Bank of India.

Objectives

• NABARD works for progressive institutionalisation of the rural credit and ensures that the demands for credit from agriculture including the new and upcoming areas like floriculture, tissue culture, bio-fertilisers, sprinkler irrigation, drip irrigation etc. are met. It is also vested with the responsibility of promoting and integrating rural development activities through refinance.

Functions

• It helps in planning and operational matters related to credit for agriculture and allied activities, rural artisans, village industries and other rural development activities;
• It extends refinance to commercial banks for term loans in relation to agriculture and rural development;
• It provides short term credit to state cooperative banks, RRBs, and other financial institution notified by RBI for a period not exceeding 18 months by way of refinance for agricultural operations, marketing of crops and marketing and distribution of agricultural inputs.
• It offers direct loan by way of refinance to all eligible institutions for a period not exceeding 25 years.
• It provides finance for production and marketing activities of rural artisans, cottage industries, small-scale industries, handicrafts etc. in the rural areas.
• It facilitates all eligible financial institutions for conversion of production loans into term loans in the times of natural calamities,
• It contributes to share capital and securities of eligible institutions and State Governments concerned with agriculture and rural development.
• It also helps State Governments to contribute to the share capital of eligible institutions working for rural development.
• It offers advice and guidance to State Governments, Cooperative federations and National Cooperative Development Corporation (NCDC) and functions in close contact with Central Government in matters related to agriculture and rural development.
• It coordinates and monitors all agricultural and rural lending activities with a view to tying-up with extension and planned development activities in rural areas
• It conducts training, consultancy and research relating to agricultural finance and agricultural and rural development.

KISAN CREDIT CARD SCHEME

Objective:

• The KCCS aims at adequate and timely support from banking system to farmer for crop production and ancillary activities. The credit limit (loan) is sanctioned in proportion to the size of the owned land but some flexibility is provided for leased-in land in addition to owned land. The borrowing limit is fixed on the basis of proposed cropping pattern.
• The nature of credit extended under KCCS is revolving cash credite., it provides for any number of withdrawals and repayments within the limit. This feature would provide flexibility and reduce the interest burden upon KCCS beneficiary.
• Security and margin norms would be in conformity with the guidelines issued by RBI and NABARD from time to time. With effect from 2001-2002, it was made obligatory for the implementing agencies to operate the KCCS with an in-built component of life-insurance for KCCS beneficiary.
• The KCCS as envisaged has substituted all other existing institutional modes of short term credit delivery.

Benefit of KCC Scheme:

• Simplifies disbursement procedures
• Removes rigidity regarding cash and kind
• No need to apply for a loan for every crop
• Assured availability of credit at any time enabling reduced interest burden for the farmer.
• Helps buy seeds, fertilizers at farmer’s convenience and choice
• Helps buy on cash-avail discount from dealers
• Credit facility for 3 years – no need for seasonal appraisal
• Maximum credit limit based on agriculture income
• Any number of withdrawals subject to credit limit
• Repayment only after harvest
• Rate of interest as applicable to agriculture advance
• Security, margin and documentation norms as applicable to agricultural advance
• Access to adequate and timely credit to farmers
• Full year’s credit requirement of the borrower taken care of. Minimum paper work and simplification of documentation for withdraw  of funds from the bank.
• Flexibility to draw cash and buy inputs.
• Assured availability of credit at any time enabling reduced interest burden for the farmer. Flexibility of drawals from a branch other than the issuing branch at the discretion of the bank.

Personal Accident Insurance Scheme

Scheme covers risk of KCC holders against death or permanent disability resulting from accidents caused by external, violent and visible means, as under: Death due to accident (within 12 months of the accident) caused by outward, violent and visible means — Rs.50,000/- Permanent total disability — Rs.50,000/- Loss of two limbs or two eyes or one limb and one eye — Rs.50,000/- Loss of one limb or one eye — Rs.25,000/-

• Nominated office of insurance company to issue a Master Insurance Policy to each DCCB/RRB covering all its KCC holders.
• Premium payable Rs.15/- for a one year policy while Rs.45/- for a 3-year policy.
• Designated insurance company will nominate one office at district level to function as nodal office for co-ordinating implementation of personal accident insurance scheme for KCC holders in the district.
• Insurance coverage available under Policy only from date of receipt of premium at insurance company
• Banks to ensure to incorporate name of Nominee in Kisan Credit Card-cum-Pass Book.
• Simplified claim settlement procedure evolved under Scheme whereby an Enquiry-cum-Verification Committee comprising Branch Manager of implementing bank, Lead Bank Officer and representative of insurance company to certify nature of accident causing disability/death and recommend settlement of insurance claims.

 RuPay Kisan Credit Cards

• RuPay is an Indian domestic card scheme conceived and launched by the National Payments Corporation of India (NPCI). It was created to fulfill the Reserve Bank of India’s desire to have a domestic, open loop, and multilateral system of payments in India.
• RuPay facilitates electronic payment at all Indian banks and financial institutions, and competes with MasterCard and Visa in India.
• NABARD, in January, 2013 set up Special Project Unit- Kisan Credit Card (SPU-KCC) with a mandate for encouraging cooperative banks and Regional Rural Banks across the country to issue Rupay KCC debit cards.
• The overarching goal is to develop cash-less eco system by enabling the farming community to avail all new banking facilities at par with urban area of the country

Concerns:

• Impact on improving crop productivity and output has been not so satisfactory, leave alone expected
• Significant disparities in the flow of credit among States, districts, villages and even within the village
• Significant imbalance between short-term and term loans, between credit disbursed to agriculture and allied activities as also across components of agricultural term loans, viz. irrigation development, farm mechanization, land development, plantation and horticulture, hi-tech agriculture, etc.
• Difficulties experienced to easy and reliable access of institutional credit by small, marginal and tenant farmers, share croppers, oral lessees, landless laborers, households residing in hilly, tribal, desert, drought prone and most backward and vulnerable areas in particular[v]problem of loan repayments leading to building up huge amount of NPA has become serious and pernicious.
• In order to ensure that credit in particular and financial services in general achieve their intended objectives, now the need to create enabling policy environment and effective credit planning is greater than before.

Way Forward:

• Government, RBI and the legislators need to demonstrate a serious concern and commitment to address these issues. Following policy intervention, inter alia, need immediate attention along with formulating a strategic action plan.
• Policy should address to create enabling environment that can significantly enhance credit absorption capacity of the geographical areas and farmers in each village.

For this, policy should focus on critical areas, namely

• Investing significantly in rural infrastructure to improve farm fuel/energy, transport, communication, storage, processing and marketing facilities
• Establishing State of Art Agri-meteorology in all agro-ecological regions
• Expanding irrigation and reclamation of wastelands
• Integrating agricultural education, research and extension services and strengthening capacity-building of farmers to bridge the huge yield gap between the potential yields and actual yields at field level in rain-fed and irrigated farming systems
• Development and use of genetically engineered seeds, micro-irrigation system, greenhouse technology, integrated nutrient and pest management technique, computer-based modeling to track disease and pest incidence
• Expanding farm mechanization program
• Promotion of remote sensing technology.
• Policy and programs involving timely and adequate investment in agriculture would facilitate farmers’ access to frontier technologies for production, food processing and preservation, farm-to-market/fork linkages, agricultural research and extension, weather and crop forecasting, large-scale development of bio-diesel, modernization, mechanization and commercialization of agriculture.
• Appropriate proportion of public, private and foreign investment should remedy the situation of investment shortage in agriculture and help transform a ‘negative subsidy regime’ into a ‘capital-intensive positive Agricultural Marketing Service regime’ and stimulate India’s agricultural producers to access global markets.
• Drought, flood and weather codes need to be developed and used to seek short and long-term solution to the recurring problems of floods, drought and cyclones, thereby minimizing damage to rural livelihoods. Government, Agricultural Universities & Indian Council of Agricultural Research institutes along with industrial, business and commercial houses in close coordination should accelerate their efforts to accomplish this task.
• Government should hold regular dialogues and consultations with banks on every issue rather than intervening in banks’ affairs in the nature of mandatory requirements.
• This would facilitate banks to productively & profitably use their organizational, professional, managerial & financial resources to design loan & other financial products to match farmers’ needs in each of the 127 agro-ecological regions of the country [rather than one-fits-all],
• Recruit farmer-friendly staff & train them to design, market & deliver the financial products. Flow of indirect credit to agriculturehas as much significance as direct credit to agriculture.

Conclusion:

• Role of credit to agriculture cannot be viewed just as a support to food-producing activity but it should focus “need to improve the overall income and economic well being of the farmers” as agriculture has been the basic requisite for national sovereignty.
• The analysis of thr relationship between agricultural and non-agricultural growth in India confirms that farm & non-farm sector in rural areas are complimentary to each other and risks mitigating. Rural credit policy and programs need to focus on farm & rural non-farm sector development to alleviate rural poverty, deprivation and suffering.

Model Mains Question: Agriculture has been the basic requisite for national sovereignty. Analyse the statement.

Source:India Microfinance, Shodhganga