Context: Agricultural Credit in India.
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- In the financial year (FY) 2018-19, banks disbursed Rs 12.55 trillion as ground level credit (GLC) to agriculture, surpassing the government’s target of Rs 11 trillion. Yet the agriculture sector’s performance has not been commensurate.
- Agricultural credit has played a vital role in supporting farm production in India.
- Though the outreach and amount of agricultural credit have increased over the years, several weaknesses have crept in which have affected the viability and sustainability of these institutions.
- During the pre-reform period (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 per cent.
- Later during 1990-91 to 1999-2000, AAGR decelerated to 3.2 per cent per annum.
- During 2000-01 to 2007-08, it witnessed a tremendous growth at 12 per cent per annum.
- It again fell back to just 3.6 per cent per annum in the period between 2008-09 and 2017-18.
The massive growth during 2000-01 to 2007-08 appears to be due to an innovative credit instrument, the Kisan Credit Card (KCC) and a policy intervention ‘the Interest Subvention Scheme’, which incentivised short-term credit.
Kisan Credit Card (KCC):
- Crop loans provide farmers with necessary credit to help them meet their working capital needs. KCC is a type of crop loan that banks offer. However, the KCC loan can be used for a number of other purposes and not just to meet working capital requirements.
- Kisan Credit Card or KCC is a scheme specifically designed by NABARD to provide farmers with financial support.
- The short-term loan is intended to help farmers receive timely financial aid and support from the banking system. The money can be used for multiple purposes.
- Regional Rural Banks, Cooperative Banks and Public Sector Commercial Banks have implemented the Kisan Credit Card scheme in India.
- Its primary objective is to provide easily attainable short term loans to farmers. The scope of this unique facility also includes term loans for agriculture and other allied activities and is a determining factor for consumption loan.
The basic features associated with the Kisan Credit card are mentioned below:
- Credit to meet the financial requirements of agricultural and other allied activities.
- Ancillary credit for crop production and other contingencies.
- Investment credit for agricultural requirements such as dairy animals, pump sets etc.
- Produce marketing loans.
- Post-harvest expenses.
- Insurance coverage for Kisan Credit Card holders, including asset insurance and personal accident insurance scheme (PAIS).
Salient Features of Kisan Credit Card Loan Scheme:
- All farmers who are eligible for the Kisan Credit Card will be issued a smart card cum debit card in addition to the Kisan Credit Card.
- The facility of revolving credit is available for any amount of withdrawals and repayments made within the credit limit. However, installments of the amount withdrawn have to be repaid within 12 months.
- Based on the annual review, banks will determine the validity of the existing credit card.
- Credit limits can be increased at the issuing bank’s discretion to accommodate for changes in cropping pattern, increase in operating costs, etc. as an incentive for good record on credit card usage.
- Conversion/rescheduling of loans also permissible in case of damage to crops due to natural calamities.
Interest Subvention Scheme:
- It was announced in the budget of 2006-07, to ensure that farmers receive short term credit at 7% with an upper limit of Rs. 3.00 lakh on the principal amount.
- The scheme provides interest subvention of 2% per annum to Banks on use of their own resources.
- Besides, additional 3% incentive is given to the farmers for prompt repayment of the loan, thereby reducing the effective rate of interest to 4%.
- To provide relief to farmers affected by natural calamities, Interest Subvention of 2% has been made available to banks for the first year on restructured amount of crop loans. Such restructured loans will attract normal rate of interest from the second year onwards as per the policy laid down by the RBI.
Drawbacks of Agricultural credit system in India:
- The interest subvention scheme created opportunities for farmers to take crop loans at subsidised interest rates from the banking sector and then divert them for non-agriculture purposes.
- In 2016-17, the total short-term credit to agriculture and allied sectors as a proportion of input requirements (GVO-GVA) was substantially above 100 per cent for many states in South and North India — Kerala (326 %), Andhra Pradesh (254 %), Tamil Nadu (245 %), Punjab (231 %), Telangana (210 %). This is a clear indication that agri-loans are being diverted for non-farm purposes.
- The share of short-term credit witnessed a significant jump from 44 per cent in 1981-82 to 74.3 per cent in 2015-16 whereas the share of long-term credit fell from 56.1 per cent in 1981-82 to 25.3 per cent in 2015-16. Since long-term credit is basically for investments and capital formation in agriculture, this dramatic fall in the share of such credit takes a heavy toll on farm productivity and the overall growth of the agri-sector.
- Delay in settlement of interest and low budgetary support to scheme hampers banks growth
- Inadequate Institutional Coverage: In India, the institutional credit arrangement continues to be inadequate as compared to its growing needs. The development of co-operative credit institutions like Primary agricultural credit societies, land development banks, commercial banks and regional rural banks, have failed to cover the entire rural farmers of the country.
- Unsettled claims lie at 35,000 crore and the current budgetary allocation is not enough to solve the problem.
- Lesser Attention of Poor Farmers: Rural credit agencies and its schemes have failed to meet the needs of the small and marginal farmers. Thus, lesser attention has been given on the credit needs of the needy farmers whereas the comparatively well-to-do farmers are getting more attention from the credit agencies for their better credit worthiness.
- The last Economic Survey reported that 150 million Kisan Credit cards had been issued by March 2016. But the NAFIS survey reported that only 10 per cent of farmers used such cards in the agricultural year 2015-16.
- Also, All India Financial Inclusion Survey (NAFIS) of 2015-16 by NABARD reported that 30.3 per cent of all agriculture households availed credit from institutional sources.
- This highlights that almost 70 per cent of agri-households did not avail institutional credit shows that there is much scope for the banking sector to extend its reach — be it lending for production purposes (crop loans), investment or even consumption purposes.
- All crop loans should be routed through Kisan Credit Cards to ensure farmers don’t use loans for non-agricultural purposes
- Streamlining the agri-credit system to facilitate higher crop loans to farmer-producer organisations against commodity stocks can be a win-win model to spur agriculture growth.