Misuse of agriculture credit

The lingering suspicion that a sizeable part of the institutional loans extended to the farm sector is being misused and misdirected has virtually been confirmed by a recent review of agricultural credit by an internal working group of the Reserve Bank of India (RBI). It has found that several states are getting more institutional agricultural finance than their annual farm sector gross domestic product (agri-GDP). In some states, the amount of such finance has been observed to be much higher than the estimated total farm input requirement by their farmers. In Andhra Pradesh, for instance, the crop loans given between 2015 and 2017 were seven and a half times the sum needed by the cultivators to meet their input needs. Yet, the informal sector (read moneylenders) remains a critical source of funding for farmers all over the country. Clearly, a significant part of the highly subsidised credit being extended to farmers is getting diverted to non-agricultural purposes. In fact, this is not the first definitive evidence of misutilisation of this money. Indications to this effect have been captured in some earlier studies as well. A 2015 study, based on the RBI data, had revealed that the bank branches located in urban and semi-urban areas also disbursed large sums as agricultural loans. Also, the disbursement of crop-linked credit continued even during agriculturally lean periods when farmers normally do not seek loans. 

Several other glaring flaws also mar the agricultural credit sector. The most significant among these is its skewed distribution. The bulk of it is going to the big landholders, leaving small and marginal farmers at the mercy of moneylenders. The RBI report reckons that nearly 41 per cent of the small and marginal farmers, who constitute over 86 per cent of the total farm households and need credit the most, are not covered by the scheduled commercial banks. So are a large number of tenant farmers and sharecroppers who also badly need low-cost loans. What is worse, agriculture’s allied fields and the farmers’ long-term investment needs are by and large being neglected in credit allocation. The associated sectors such as animal husbandry, fisheries and forestry, which now account for about 40 per cent of the agri-GDP, are getting less than 7 per cent of the total institutional loans. Similarly, the share of the investment credit in the overall farm loans has shrunk sharply from almost 50 per cent in 2000 to barely 25 per cent in 2016. This apart, the present system of higher subvention of interest on timely repayment is being exploited by some resourceful farmers to invest subsidised finance in fixed deposits at higher interest rates. 

Some of these drawbacks can, no doubt, be overcome by replacing the interest subvention system with direct benefit transfer to the targeted beneficiaries as suggested by the RBI’s working group. This can benefit tenants, sharecroppers and landless labourers who are now being denied institutional credit. Routing all crop loans through Kisan Credit Cards can be another way to curb some malpractices. But, admittedly, such moves may not rid the credit system of all its ills. Consultations with stakeholders, including bankers and borrowers, seem vital to seek solutions to other critical issues.

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