The new crop insurance scheme approved by the Union Cabinet must be viewed from two angles.
The first is that there has been considerable volatility in farm output due to the vagaries of nature which has often resulted in lower production or excess unseasonal rainfall that has destroyed crops.
This has in turn led to financial distress of farmers who have not been able to service their debt leading to a build-up of NPAs thus pressuring the banking system. In fact, this has led to the debate about whether there should be loan waivers to farmers which are policies pursued by both the central and state governments.
The second is that the government has been working towards spreading financial literacy by providing access to the common man to insurance products in both the life and health segments thus bringing about some degree of financial inclusion. Starting a new crop insurance scheme can be viewed as an extension of the same ideology.
It must, however, be remembered that crop insurance has always been there and what one is viewing today is a modification of the same to ensure that it becomes more affordable to the farmers. The Comprehensive Crop Insurance Scheme (CCIS, 1985) superseded by the National Agricultural Insurance Scheme (NAIS) has been in existence for a long time.
The new scheme works towards making it more attractive for the farmers. The farmers have now to pay just 2% of the premium for kharif crop and 1.5% for rabi while the same for horticulture will be fixed at 5%. The balance premium is to be paid by the government – both state and central.
The advantage of this scheme for the farmers besides the low premium is that the compensation would be complete with no reductions/haircuts. Hence it should be a more alluring scheme for the farmers.
Such a move is pragmatic for all the parties concerned. The farmers will be incentivised to go in for insurance and lower uncertainty as the premium will be low and compensation complete. By harnessing technology, the weather movements will be tracked so that assessment becomes easy too for the insurance companies.
The government will benefit because even in the past the onus of debt servicing in the limiting case meant waivers which in turn strained the budget. The same amount will now be part of the budget to the extent of the premium paid, while the government would be out of the loss compensation process which was the case earlier. In fact, this is theoretically a more prudent alternative where farmers are made more conscious of the risk which is then spread across various entities.
Banks can be happier now that their loans are serviced and would have an incentive to lend more to this segment beyond the priority sector compulsion. In the past, this particular segment of loans became sticky for them as invariably there are famers in some geography whose crops get affected leading to possible delinquency.
The insurance companies would of course have a mixed emotion. While their overall level of business would increase substantially as more farmers join the scheme, the payouts could pressure their own profitability. But then this is the risk which goes with all insurance products.
As all regions will not be afflicted with adverse weather conditions, it may be assumed that the risk is well spread out. Besides, the insurance companies can always take reinsurance to further diversify the risk across market participants.
For the success of such a scheme the main challenge will be spread of awareness so that farmers are made cognizant of the product which must have a simple design. As it is more of a market-oriented measure to cover volumetric risk, farmers have to be educated about the scheme in terms of how it will help them. There has to be wide-scale outreach programmes carried out to drive home the advantage of these products.
Second, the smaller farmers have to be targeted as this is particularly the vulnerable class. Presently the scheme does not distinguish between the large and small farmer as that does raise the issue of identification.
Third, the scheme has to work in the sense that the process has to be seamless so that all the claims are settled seamlessly. Further, given the volumes that may be involved, insurance companies have to be geared up to handle such transactions.
Fourth, as part of housekeeping, land records need to be in place for making assessment of the premium.
Fifth, we need to have access to weather data in various regions that is not captured by the IMD. Efforts by private players to create such weather stations like those by NCMSL (National Collateral Management Services Limited) have to increase as all decisions on premium as well as payouts would be contingent on this data.
Last, crop loan practices are weak which has to change as often banks do not insist on this when giving a loan.
We have witnessed significant changes in the way in which agriculture is transacted in the last decade or so. The two main risks which farmers confront are price and volumetric. The former is addressed to an extent by the MSP and while the electronic spot and futures markets have come up quite well, they have not been able to as yet penetrate existing practices with farmers who not fully aware of them. Hence while electronic spot markets have worked in states like Karnataka, the futures market is still a distance away.
We need to pick up learnings from this experience when trying out this insurance scheme and create the infrastructure to ensure that a larger population of the farming community is covered.
Banks today do insist on farmers taking some insurance and would probably once again have to play a critical role in spreading the good word given that they are the first point of contact with the farmers. The new payments banks and small banks would also enable this process to proliferate.
The author is chief economist, CARE Ratings. Views are personal
Updated Date: Jan 15, 2016 08:18 AM