Farm lending in India is a puzzle; FM must solve it before giving targets for banks
The only option is to plug the leakages in the credit disbursal system to ensure that the loans reach the intended beneficiary
The government’s misdirected enthusiasm to push bank lending further to the high-risk agricultural sector may boomerang on lenders, especially public sector banks, resulting in further stress on their already strained balance sheets, in the face of falling farm output.
Every year, the government increases the lending limit for farmers through budgetary allocations. In the union budget 2015 too, finance minister Arun Jaitley upped the farm credit target for banks to Rs 8.5 lakh crore, thus making total farm loans contribute about 14 percent of total bank loans.
That is when, over years, agriculture as a percentage of GDP has fallen drastically. The mismatch in credit off take to agricultural sector and the sector output has been highlighted by the economic survey released ahead of the budget. The survey had highlighted the threat of giving blind lending targets to banks, without making sure the end use of the money and the repayment record.
Citing a study titled Bank Credit to Agriculture in India in the 2000s: Dissecting the Revival, the survey makes it clear that the higher targets for farm credit is helping neither the needy farmers nor the banks. It is the large farmers who are making the most of the farm loans.
Here is where things stand. During 2007-14 credit to the farm sector has grown on an average 16 percent, while the average agricultural GDP growth has been at 3.78 percent. Meanwhile, the share of the agriculture sector in the overall GDP has declined from 16.80 percent in 2007-08 to 13.94 percent in 2013-14.
A closer look at the numbers reveal that in 2008-09, when the banks' farm loan outstanding stood at Rs 338,656 crore, the GDP growth in the sector was actually a (-)0.15 percent. In 2009-10, the outstanding loans stood at Rs 416,133 crore and the growth inched up just 0.44 percent. Further, in 2012-13, when the amount was a higher Rs 589,914 crore, the growth was a lowly 1.42 percent.
The trend points to the disconnect between the loan disbursement and the sector's productivity. Given the steady increase in credit, the agriculture productivity also should have increased. But clearly this has not happened.
Attempting to solve this mystery, the Economic Survey citing the study notes that agricultural credit has grown more than eight times in the last 15 years even as agriculture’s share in GDP has remained almost constant and significant urbanisation has occurred during this time.
It also demands a scrutiny into the sharp increase in the share of large-sized loans in agricultural credit over the last few years. The reason for this could be the substantial increase in share of agricultural credit outstanding that emanates from urban and metropolitan areas, which, the survey finds, as "deeply puzzling".
It also notes a concentration of disbursal of loans during January-March, a period when farmers do not borrow generally.
"This shows that in order to meet priority sector lending targets banks possibly raise their lending activity in months when farmers may not necessarily need it the most," the survey says citing the study.
It also notes a sharp decrease in the share of long-term credit from 70 percent in 1991-92 to 40 percent in 2011-12.
"Thus, the portion of agricultural credit that was used for capital formation in agriculture has become small," it says.
All in all, the study cited by the survey provides an overwhelming proof that the so-called farm loans are not reaching the intended beneficiaries.
"The implication of this evidence is that lending to agriculture may be excessive and going predominantly to large farmers. It is not being used for agricultural capital formation. Perhaps most significantly a large share of it may not be going to core agricultural activities at all," the survey says summing up the study.
Viewed in this back drop, the increased lending target of Rs 8.5 lakh crore is unfair for both banks and farmers.
Banks, for one, are straddled with high non-performing assets due to the protracted industrial slowdown. It also has to be remembered state-run banks are in need of Rs 2.2 lakh crore of capital by March 2019, while the government has earmarked a meagre Rs 7,940 crore for them in the Budget 2015-16. The onus to fund projects for the revival of the economy also rests with them to a large extent.
Farmer suicides, meanwhile, are continuing unabatedly. This year, with the failure of monsoon, the distress among the farming community has become heavier. According to this Bloomberg report, in Maharashtra alone about 4,200 farmers committed suicide due to indebtedness last year. This number is the highest from 2007, says the report citing data from Vidarbha Jan Andolan Samiti that fights for farmers' rights.
Clearly, the government cannot leave the farmers in the lurch, especially at a time of distress.
So, the only option is to plug the leakages in the credit disbursal system to ensure that the loans reach the intended beneficiary and not the middle-men or the large farmers.
Kishor Kadam contributed to this story
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