In agri-credit, small farmers are still outside the fence

AGRICULTURE/ ECONOMY/ GOVERNANCE

Topic:

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 
• GS-3: Issues related to direct and indirect farm subsidies; Transport and marketing of agricultural produce and issues and related constraints.
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment 

In agri-credit, small farmers are still outside the fence

Context: Farmers on the warpath would mean that agriculture reforms have again occupied centrestage not just in the minds of the politicians but also policymaker.

Why farmers are protesting against farm laws: Click here and here

Why earlier government negotiations have failed: Click here

What is the long term solution advocated by experts: Click here

Do You Know?

• As in the Agriculture Census, 2015-16, the total number of small and marginal farmers’ households in the country stood at 12.56 crore. These small and marginal holdings make up 86.1% of the total holdings. 
• RBI has set a cap that out of a bank’s overall adjusted net bank credit, 18% must go to the agriculture sector, and within this, 8% must go to small and marginal farmers and 4.5% for indirect loans

Farm Credit and Small Farmers

• Institutional Credit avoids Debt Trap: To enable small farmers to diversify their crops or improve their income they must have access to credit at reasonable rates of interest. This prevents them from going to private moneylender who charge exorbitant rate of interest leading to debt trap
• Subsidised Agri-credit Increasing every year: The central government announces an increase in the target of subsidised agriculture credit limit every year and banks surpass the target. In 2011-12, the target was ₹4.75-lakh crore; now, agri-credit has reached the target of ₹15-lakh crore in 2020-21 with an allocated subsidy of ₹21,175 crore.
• Agri-credit has become less efficient in delivering agricultural growth: Unfortunately, while the volume of credit has improved over the decades, its quality and impact on agriculture has only deteriorated. Over 85% of farmers’ income remain stagnant over the years.
• Agri-Credit not reaching Small Farmers: In the last 10 years, agriculture credit increased by 500% but has not reached even 20% of the 12.56 crore small and marginal farmers. Households with the lowest land holding (up to two hectares) getting only about 15% of the subsidised outstanding loan from institutional sources (bank, co-operative society). The share is 79% for households having land more than two hectares.
• Agri Machinery still financed by non-subsidised loans: Despite an increase in agri-credit, even today, 95% of tractors and other agri-implements sold in the country are being financed by NBFCs, at 18% rate of interest or by Banks at 11%.
• Bulk of subsidised agri-credit is grabbed by big farmers and agri-business companies: A loose definition of agri-credit has led to the leakage of loans at subsidised rates to large companies in agri-business. In 2017, 53% of the agriculture credit that NABARD provided to Maharashtra was allocated to Mumbai city and suburbs, where there are no agriculturists, only agri-business. 
• Institutional Credit is Unevenly Distributed: RBI’s internal working group in 2019 found that in some States, credit disbursal to the farm sector was higher than their agriculture GDP and the ratio of crop loans disbursed to input requirement was very unevenly distributed. Examples are in Kerala (326%), Andhra Pradesh (254%), Tamil Nadu (245%), Punjab (231%) and Telangana (210%). 
• Diversion of credit for non-agriculture purposes: The subsidised credit disbursed at a 4%-7% rate of interest is being disbursed to other purposes due to corruption and loopholes in the system. At times these loans are refinanced to small farmers in the open market at a rate of interest of up to 36%.
• Ignored by new farm laws: Even new farm laws have not addressed the reform in the agriculture credit system

Way Forward

• Direct Income Support: One way to empower small and marginal farmers is by giving them direct income support on a per hectare basis rather than hugely subsidising credit. 
• Promoting Farmer Producer Organisations(FPO): Streamlining the agri-credit system to facilitate higher crop loans to farmer producer organisations, or the FPOs of small farmers against commodity stocks can be a win-win model to spur agriculture growth
• Leveraging Technology: With mobile phone penetration among agricultural households in India being as high as 89.1%, the prospects of aggressive effort to improve institutional credit delivery through technology-driven solutions can reduce the extent of the financial exclusion of agricultural households. 
• Promoting New Age Agri-Entrepreneurs: There are reports that farmers have been able to avail themselves of loans through mobile phone apps. These apps use satellite imagery reports which capture the extent of land owned by farmers in States where land records are digitised and they grow the crop to extend the Kisan Credit Card loans digitally
• Cooperative Federalism: Other steps needed are reforming the land leasing framework and creating a national-level agency to build consensus among States and the Centre concerning agriculture credit reforms to fill the gap and reach out to the most number of small and marginal farmers.