Latur: Mujeeb Sheik, a farmer from Gangapur Village in Latur district owns three acres of land. He cannot raise a loan of more than Rs 15,000 per acre from a bank. Going by prevalent market rates, Sheik’s farm is worth Rs 10 lakh per acre.
His difficulty in cobbling together money to buy farm equipment, seed, fertiliser and other agricultural essentials is typical of the banking experience of small farmers in Marathwada. Small and marginal farmers here are deemed the least creditworthy, according to the bankers and farmers Firstpost interviewed. They are deemed the least creditworthy in the rural economy of the region. Banks prefer lending to businessmen, traders, entrepreneurs and agro-businesses instead.
Indian agriculture has largely become a gamble, dependent on the weather and other factors beyond the farmers control. Since farmers solely dependent on land do not have the ability to service debt, formal credit institutions are reluctant to lend to them. Farmers need money to buy seed, agricultural equipment and inputs, or even for daily needs and social obligations like the education or marriage of their daughters. The only option is money lenders, who charge usurious rates of interest.
The under-investment in agriculture by successive governments has contributed to declining farm incomes. On the other hand, climate change and the rising frequency of extreme weather events have increased the risks to agriculture, making lending to farmers a more difficult proposition. Banks and cooperative financial institutions have norms to which they have to adhere before lending money. Their first concern is whether the client has the ability to service the loan.
In order to understand how credit functions in a rural area, Firstpost met executives of the Osmanabad Janta Cooperative Bank Ltd in Latur in the third week of March. Vaijanath Shinde is the vice-president of the bank. “Small farmers don’t have the capacity to repay,” Shinde was categorical, “We sometimes lend to farmers, but only small amounts of a lakh rupees or so.”
The bank prefers lending to businessmen, traders, shopkeepers and agro-businesses, because these have the potential to stimulate economic activity, thus generating an income stream that can be used for debt-servicing.
In other words, in a hierarchy of creditworthiness farmers are at the bottom, and businessmen are on top.
Nationalised commercial banks have different norms. According to Reserve Bank of India guidelines, PSU banks have to give 18 percent of their total loans to agriculture, out of which eight percent is to be given to small and marginal farmers. However, a situation where drought has led to a collapse in agriculture, can have unintended consequences for such lending.
The only asset that a small or marginal farmer has is agricultural land — which can be used as security against a loan. However, public sector banks do not give agricultural loans on the basis of the value of the land, but on the value of the crops and the total cost of cultivation. The loans that can be raised on the latter are much smaller than on the former.
It explains why Mujeeb Sheik is able to raise only Rs 15,000 per acre even though some estimates suggest that agricultural land in his village is worth many times more than that.
In Marathwada, crop value has collapsed to near-zero as water scarcity has shrunk agricultural yields. With it, the ability of farmers to raise loans on their land has declined.
“It is a sad situation. Agricultural economic activity has all but ceased because of water scarcity,” Jayant Sinha, an independent banking consultant who was formerly the chief general manager for rural business at the State Bank of India, said in an interview.
Before giving out loans, banks do a risk assessment of the borrower: the ability to repay a loan amount and the interest are the primary concerns for the bank. In order to do this borrower must have a viable business model in place that generates a stream of income that can service the debt.
“We want to help small farmers, but we also have to be careful about not increasing our non-performing assets,” Shinde said in an interview in the Latur branch of the bank. “We give money to people who can repay.” He stressed that the bank was concerned about not increasing its bad loans — also called Non Performing Assets (NPAs).
In part, the rules are designed to prevent predatory lending.
In 2008, a ripple in the subprime market in the United States led to the collapse of Bear Stearns and Lehman Brothers, and the onset of a worldwide economic depression. Predatory subprime lending — loans to people who didn’t have the ability to repay — led to the collapse of several banks in the US.
Cooperative societies have a long history in Maharashtra. There are sugar, dairy, financial and many other cooperatives in the state. The Osmanabad Janta Coop Bank functions in Solapur, Beed, Latur and Osmanabad districts of Maharashtra and Bidar in Karnataka. It has 80,000 shareholders and two lakh depositors.
When someone applies for a loan, the bank looks at the turnover, balance sheet, market value, business model and most importantly, the ability to repay. This is where the small farmer loses out, as he has none of the above. The bank will also keep collateral as security against a loan.
Again, a farmer has very little to offer except his land.
The bank does lend to entrepreneurial farmers. For instance, dairy farming, poultry and goat-rearing are farming activities that tap into a certain demand and generate income. In fact, Shinde says that dairy farming is the most lucrative, since the daily demand for milk in Latur city alone is over a lakh litres. Ironically, although there is a lot of demand for food crops, the political economy of agriculture is structured in such a way that the primary producer gets little value for his produce.
“The creditworthiness of a farmer is the most risky, because the output depends so much on environmental factors,” Shinde said.
Agriculture in India is still largely dependent on the monsoon rains. Marathwada has received scanty rainfall for the past four years and is in the midst of a drought. Scarcity of water has wrecked the local economy and impacted social life. Farmers who have seen their incomes decline because of the un-remunerative nature of agriculture have turned to money lenders who charge astronomical rates of interest. The money is meant for day-to-day needs or for social obligations like the education or marriage of children.
Unable to repay the loans, farmers see suicide as the only way out of the debt trap.
This is the tenth segment of a 13-part series on Marathwada’s drought.
Part 11: Insurance that doesn't even cover the cost of cultivation
Read the previous parts of the series here:
Part 1: Region is parched, impoverished and desperate, but it's a crisis of its own making
Part 2: In the midst of severe economic downturn, private water sellers reap profits in Latur
Part 3: Drought has brought the economy down and is forcing farmers to leave the region
Part 4: Water scarcity has created a region where trust has eroded and left the social fabric frayed
Part 5: Maha has the most dams in the country, but the least effective irrigation network
Part 6: A surveyor of suicides tells the story behind the statistics and the lonely struggle of Indian farmers
Part 7: Will outreach help reduce farmer suicides?
Part 8: 'Toothless' laws lead to water exploitation
Part 9: Shirpur, Jal Biradari projects show impact of small local initiatives