Farm Power & Machinery Management 3(2+1)

Lesson 24. Agricultural credit

The accessibility to institutional credit is higher in the Southern region where the level of agricultural development is also higher. It is kind of vicious cycle operating in less developed States. Less availability of credit influences adversely the adoption of modern technology and private capital investments, which in turn lowers the productive capacity of the agricultural sector and results in lower productivity and production, and also pushes the farmers to borrow from non-institutional sources. Consequently, the demand for agricultural credit for short and long-term purposes is dampened.

Two innovations, viz., micro-finance and Kisan Credit Card Scheme (KCCS) have emerged as the major policy developments in addressing the infirmities associated with the distributional aspects of credit in the recent years (Mohan, 2004). The KCCS has emerged as the most effective mode of credit delivery to agriculture in terms of the timeliness, hassle-free operations as also adequacy of credit with minimum of transaction costs and documentation. The cooperative banks (51.5%) had a major share followed by commercial banks (36.9%).

The incidents of suicide by farmers have been mainly reported from Andhra Pradesh, Karnataka, Maharashtra, and Kerala. Such incidents have also been reported from the States of Odisha, Gujarat, and Punjab. To mitigate the distress of farmers, the Government of India decided to launch a special rehabilitation package in 31 districts in Maharashtra, Andhra Pradesh, Karnataka, and Kerala. The 31 Districts were identified based on the severity and magnitude of the incidence of farmers’ suicide, as reported by the State Governments. The intent is to initially solve the problem and correct the situation in those areas reporting high number of suicides so that an effective dent on the problem is made and the incidence of farmers’ suicide which is of national concern could be curbed. The package aims at establishing a sustainable and viable farming and livelihood support system through debt relief to farmers, improved supply of institutional credit, crop-centric approach to agriculture, assured irrigation facilities, watershed management, better extension and farming support services, improved marketing facilities and subsidiary income opportunities through horticulture, livestock, dairying and fisheries. For alleviating the hardships caused to debt stressed families of farmers in the affected districts, ex-gratia assistance from Prime Minister’s National Relief Fund (PMNRF) was also proposed.

Despite the significant strides achieved in terms of spread, network and outreach of rural financial institutions, the quantum of flow of financial resources to agriculture continues to be inadequate. One of the major impediments constraining the adoption of new technological practices, land improvements and building up of irrigation and marketing infrastructure has been the inadequacy of farm investment capital. Farmers seem to borrow more short-term credit in order to meet input needs to maintain continuity in agricultural operations without much worrying about long-term capital formation in the face of agricultural bountiness. It might be the case from supply side that short-term credit bears low credit risk, lower supervision and monitoring costs, and a better asset liability management. The flow of investment credit to agriculture is constrained by host of factors such as high transaction costs, structural deficiencies in the rural credit delivery system, issues relating to credit worthiness, lack of collaterals in view of low asset base of farmers, low volume of loans with associated higher risks, high man power requirements, etc. The large proportion of population in the lower strata, which is having major share in the land holdings, receives much less credit than its requirements. The growing disparities between marginal, small and large farmers continue to be a cause for concern. This observed phenomenon might be attributed, inter alia, to the “risk aversion” tendency of the bankers towards small and marginal farmers as against the large farmers, who are better placed in offering collaterals.

Indian agriculture still suffers from: (i) poor productivity, (ii) falling water levels, (iii) expensive credit, (iv) a distorted market, (v) many intermediaries who increase cost but do not add much value, (vi) laws that stifle private investment, (vii) controlled prices, (viii) poor infrastructure, and (ix) inappropriate research. Thus the supply leading approach with mere emphasis on credit in isolation from the above factors will not help agriculture to attain the desired growth levels. Furthermore, agriculture being a State subject, States is required to play a more pro-active role in agriculture development by putting in place adequate infrastructure.

The share of marginal and small farmers in the total credit (both disbursed and outstanding) has been shrinking. The need to augment the credit flow to the lower strata of the farming community, which has more shares in the total operational land holdings, becomes all the more important. This underscores the scope for supplementing the land inputs of marginal and small farmers with the non-land inputs such as credit with a view to enhancing the productivity and thereby the production performance of Indian agriculture.