Accelerating Rural Financing Process by Banks in India:
Need For Creating Enabling Environment
The goal of Union Government to double the flow of farm credit in three years [2004-05 to 2006-07]was achieved in two years. Actual flow of credit during the year 2006-07 is expected to exceed the target of Rs.1,750,000 million set for the year by Rs. 150,000 million. - by Dr. Amrit Patel & Dr Gopal Kalkoti
The goal of Union Government to double the flow of farm credit in three years [2004-05 to 2006-07]was achieved in two years. Actual flow of credit during the year 2006-07 is expected to exceed the target of Rs.1,750,000 million set for the year by Rs. 150,000 million. During April to December 2006, around 5,337,000 new farmers, as against target of five million, were linked with the institutional credit system. For the year 2007-08, target of farm credit disbursement has been fixed at Rs.2,250,000 million[28.6% over target of 2006-07] and an addition of five million new farmer-borrowers.
Performance of public sector banks in particular, alongwith their sponsored RRBs, has indeed been satisfactory in increasing flow of credit to farm sector, improving recovery and containing overdues & NPAs. Their involvement in financing weaker sections of the society and beneficiaries under Differential Interest Rate scheme & Government sponsored programs [ SJGRY &PMRY] has also improved. However,the share of institutional credit declined to 57% in 2001 as compared to 64% in 1991. Moreover, debt sourced from money lenders, the very informal agents the institutionalization of credit was designed to replace, increased in overall share of rural debt from nearly 18% in 1991 to nearly 30% in 2001. According to recent Survey, formal institutional credit provision in India now accounts for just 27% of total cultivator debt, & that this reduces to just 20% if data for the five States reporting the highest proportion of fromal rural debt are removed. Moreover, nearly 90% of households reporting no debt, either formal or informal are headed by small & marginal farmers suggesting institutional â€“rather than self-exclusion. Intriguingly, Andhra Pradesh, the State with the highest concentration of SHGs, MFIs & banks, reports the highest proportion of rural non-institutional debt [nearly 73%] and the highest proportion of rural money lender debt [nearly 57%] for all States in India, according to All India Debt & Investment Survey, 1991 & 2001. It is in this context an attempt is made here to analyse the data on the performance of banks, more importantly public sector banks, & appreciate the immediate need to create enabling environment that can facilitate banks to [i] expand outreach especially in remote locations to cover small/marginal & tenant farmers, share croppers, oral lesees, landless labourers and households residing in dryland, desert, drought prone, hilly & tribal areas of the country [ii] understand the new & diversified demand for rural financial products & services emerging in the changed rural socio-economic scenario & meet them [iii] introduce improvements in operational management, inter alia, HRM & Training policy for rural areas; reducing transaction costs & mitigating portfolio risk on a continuing basis and [iv] pursue rural finance research & development tasks.
Dr. Amrit Patel holds a doctoral degree in Rural Studies and Masters in Agricultural Science. He has extensive research and teaching experience with Gujarat Agricultural University and College of Agricultural Banking of Reserve Bank of India. He has extensive rural banking and micro-credit experience with 25 years with the Bank of Baroda and 10 years as consultant for the World Bank, Asian Development Bank, and International Fund for Agricultural Development. He has worked in Tajikistan, Azerbaijan, Bangladesh, Uganda, Kenya, and India. Dr. Patel has published 3 books on optimal farming practices, use of tools in farming, and rural economics and has contributed over 500 papers on these subjects.
Farm Credit Disbursements by Cooperative, Commercial & Regional Rural Banks
[ 2001-02 to 2005-06] Rs. in Million
Figures in brackrt indicate % share to total * Provisional figures
Farm credit disbursements progressively increased from Rs. 620,450 million in 2001-02 to Rs. 1,574,800 million in the year 2005-06 reflecting rise by 153.8%. Commercial banks & RRBs recorded phenomenal rise by 216% & 189% respectively as compared to 58% by cooperatives. While there has been progressive rise in each successive year in case of cooperatives, commercial & regional rural banks, there has been spectacular increase during 2004-05 & 2005-06 in respect of commercial banks & RRBs. The share of cooperatives in the total disbursements of short-term & long-term credit progressively declined from 37.9 per cent in 2001-02 to 23.65 per cent in 2005-06 whereas that of commercial banks recorded progressive increase from 54.13 per cent to 67.41per cent during the corresponding years. RRBs accounted for 7.82 per cent in 2001-02 which progressively rose to 9.91 per cent in 2004-05 but declined by one percentage point in the following year. Agriculture credit flow for the banking system as a whole during 2005-06 has surged to Rs 1,804,860 million, reflecting 128 per cent of the target of Rs 1,410,000 million that was set for that year.
Flow of Farm Credit during April to December 2005 & 2006 [Rs. In Million]
Figures in brackets indicate percentage share in the total.
Figures in bracket with * indicate percentage increase during April-Decemberâ€™06 over April-Decemberâ€™05
Agriculture credit flow target for 2006-07 had been pegged at Rs 1,750,000 million. However, for the fiscal year 2006-07, agriculture credit up to December 2006 stood at Rs 1,493,430 million which represented a 25.38 per cent increase over the achievement of Rs 1,191,150 million recorded in the same nine-month period in the previous year. Agriculture credit flow during April to December 2006 from public sector banks grew by 25.91 per cent to Rs 868,650 milion from Rs 689,910 million during the corresponding period in the previous year. In case of private sector banks, it increased by 40.90 per cent to Rs 141,340 million from Rs 100,310 million. While cooperative banks recorded increase by 14.60 per cent from Rs. 289,470 million to Rs 331,740 million during the period, the RRBs showed increase by 36.10 per cent from Rs. 111,460 million to Rs 151,700 million. Share of public sector banks in the total disbursement during April-Decemberâ€™06 accounted for as high as 58 per cent folowed by cooperative banks at 22 per cent where as RRBs & private sector banks had almost equal share of 10 & 9 per cent respectively.
Priority sectors & Agriculture Outstanding Credit by Public Sector & Private Sector Banks
[31st March, 2000 to 31st March,2006] Rs. in Million &
Figures in bracket indicates % to Net Bank Credit
During the seven year period from
2000-2006 public sector banksâ€™
outstanding credit to priority sectors
Agricultural advances of public sector banks during the period rose by 242% from Rs. 452,960 million to Rs. 1,549,000 million whereas that of private sector banks increased significantly by 799% from Rs. 40,230 million to Rs. 361,850 million during the period. Share of agricultural advances in the net bank credit by public sector banks ranged between 14.3% & 15.7% whereas that of private sector banks varied from 8.3% to 14.2% during the period. Neither public sector banks nor private sector banks as a group could achieve targeted agricultural credit of 18% of net bank credit.
During 2005-06, all public sector banks [except State Bank of India (SBI) and State Bank of Patiala] were able to meet the priority sector target of 40 % of net bank credit in 2005-06 & only 10 public sector banks met the 18 % sub-target for agriculture. None of the private sector banks could meet sub-target for lending to agriculture.
Banksâ€™ Outstanding Loan to Weaker Sections & NPA Status as on 31st Marchâ€™06 [Rs. in Million]
All banksâ€™ outstanding loan to weaker sections of the society as on 31st Marchâ€™06 amounted to Rs. 1,045,768.9 million with NPA amount of Rs. 88,172.6 million accounting for 8.43 per cent of outstanding loan. Only eight banks in the public & nationalized sector could achieve the stipulated target of 10% of net bank credit, whereas none of the old & new private sector banks could meet the target.
While 19 nationalized & nine public sector banks as a group had 8.17% & 8.45% NPAs, respectively, eight old & 20 new private sector banks as a group had higher percentage of NPAs at 11.3% & 9.43% respectively.
Targets & Achievements under Service Area Credit Plan &
Recovery of Direct Agriculture by
Public Sector Banks during 2000-01 to
2005-06 [Rs. in Million]
Figures in brackets under Achievements indicate % achievements of targets
Figures in brackets under Recovery indicate % recovery to demand & under overdue indicate % overdue to demand
Rural & Semi-Urban branches of each of the public sector banks have been alloted Service Area comprising specified number of villages, since April, 1989. Each branch is expected to formulate Service Area Credit Plan every year for the purpose of providing credit to the rural households. This micro level credit planning exercise should help the bank to progressively bring within its fold all eligible house holds for providing credit & related services. In the ultimate process this exercise should prove to improve quality & productivity of lending. RBI has since the year 1994-95 has advised public sector banks to ensure 25% annual growth rate in the matter of disbursement of credit in their Service Area. Accordingly, the data presented in the above Table showed that annual growth was between 12.5% and 24.% during 2000-2001 to 2003-04. The growth was spectacularly high at 54.5 during 2004-05 which, however, declined to 44.6% in the following year. Disbursements of credit as against targets ranged from 92.1% to 117.3% during the six year period. Achievements were higher than 100% only in the last two years. This is attributed to Finance Ministerâ€™s directives to double the farm credit disbursement in three years effective from April, 2004.
Public sector banks recovery to demand
under direct agricultural advance was
69.3% during the year 2001 which
gradually increased during following
three years. It, however, phenomenally
rose to 84.1% in the year 2005. During
the five year period the demand , loan
amount to be recovered & percentage of
recovery to demand have progressively
increased in the successive years
whereas over due amount has increased
until the year 2004 & then it steeply
declined by Rs.29,620 million in the
Number of Self-Help-Groups & Credit Disbursed by banks during 2004-06 [Rs.in Million]
Fogures in brackets indicate % share in the total
As reported under the NABARD-GTZ Rural Finance Program, at around 98 % on time repayment to the SHGs is reported to be very high. As on Marchâ€™06 the number of SHGs stood at just over two & quarter million , of which over one & a half million had outstanding bank loans. Even with this huge number of SHGs it is estimated by the Committee on Financial Inclusion that the number of SHGs will have to be doubled to cover all the 50 million poor households in the country.
NPA Status of Public Sector Banks in 2004-05 & 2005-06 [Rs. in Million]
Figures in bracket indicate percentage share in the total NPA amount.
Figures in bracket with * indicate percentage share in the NPA amount of priority sectors.
Figures in brackets with ** indicate NPA % of Balance Outstanding as on 31st Marchâ€™05
NPA status of public sector banks revealed that during the year 2005-06 though amount of NPA under priority sector advances declined to Rs.223,740 million from Rs.233,970 million in 2004-05 share of NPA in the total NPA increased to 54.1% from 49.1%. In respect of agricultural advances NPA amount declined by Rs.10,510 million & its share in the total NPA amount also declined by 0.2 per centage points, whereas its share in the priority sectors NPA amount declined significantly from 31% to 27.7% during the period.
As of 31st March 2005, total NPAs constituted 4.96% of total loan outstanding. NPAs under priority sectors were as high as 7.02% of its outstanding loans as against 3.87% in respect of all other loans. Within priority sectors, agriculture NPAs accounted for 6.6% of its outstanding loans which were significantly lower than that of small scale industries [ 10.29%] but marginally higher than that of other priority sectors [5.64% ].
Priority sector loan outstanding accounted for 34.7% of total loan outstanding where as share of priotity sector NPAs in the total NPAs was as high as 49.05%. NPAs under agriculture were 15.21% of total NPAs as against share of agricultural advances at 11.45% of total outstanding loans. There was wide difference in respect of small scale advances with regard to its share of NPAs in the total NPAs [16.43%] as compared to 7.93% share in the total outstanding loans. Other priority sector advances had also higher percentage share of NPAs[ 17.42%] in the total NPAs when compared with its share [15.32%] in the total loan outstanding.
Public sector banks were able to clean their balance sheets by writing off NPAs built over a period of time in financing Government sponsored programs viz, IRDP,Agro-Service-Centers & high tech projects viz, Floriculture, Aquaculture, Mushroom Farming, Tissue Culture etc.
In case of private sector banks while NPA amount under priority sectors has increased by Rs. 950 million in the year 2005-06 its share in the total NPA amount has significantly increased to 29.2% from 24.9% in the previous year. NPA amount under agriculture as well as its share in the total NPA amount & in the priority sectors also increased marginally.
As on 31st Marchâ€™05 NPA status of 196 RRBs was Rs.28,043.5 million & that of 20 SCARDBs at Rs. 54,373.8 million, 727 PCARDBs at Rs. 40,559.1 million, 31 SCBs at Rs. 60,716 million & 367 DCCBs at Rs. 145,196 million accounting for 8.5%; 31.27%; 31.9%; 16.25% & 19.87% respectively of the loan outstanding.
In order to encourage Rural Financial Institutions to play catalytic role in lubricating the process of both fam sector development & rural rejuvenation at a time when the country has launched its 11th Five Year Plan[2007-08 to 2011-12], enabling environment needs to be created specifically in the areas of removal of urban-biased policies, sound agricultural & rural development policies, promotion of broad-based rural financial sector reforms & development of effective legal system to enforce contracts, sound interest rate policies, & appropriate legal status & prudential regulation of Rural Financial Intermediaries etc.
Investment in Agriculture:
Investment pattern both in public & private sector during the period from 1999-2000 to 2004-05 has been irratic as total investment was as low as Rs. 381,760 million in 2001-02 which increased to the highest level at Rs. 478,330 million in 2003-04 but declined to Rs. 431,230 million in the following year. Average annual investment during the six year period was Rs. 442,027 million reflecting share of public & private sector at 21.32 % & 78.68% respectively. Gross Capital Formation as percentage of total GDP ranged from 1.7 to 2.2 & that of Agricultural GDP from 8.4 to 10.2 respectively with average value of 2.0 & 9.3 respectively.
Investment, more importantly in public sector, supported by well intentioned public policy is both essential & desirable in specific areas such as, [I] development of irrigation [ exploiting potential surface irrigation & ground water resources, generation of electricity/power to draw ground water] [ii] intensifying soil & moisture conservation measures, [iii] land development & reclamation [iv] improving drainage system [iv] strengthening flood control measures [v] all weather road to facilitate transport [vi] storage/warehousing facilities & cold chains [vii] marketing infrastructure [viii] developing sound information, communication & market intelligence system [ix] building integrated agricultural research, extension & education system and [x] effective soil & water testing facilities and quality control & pricing system to facilitate competitively &timely supply of farm inputs [ seeds, fertilizers, pesticides, water, fuel, farm equipment & machinery etc]. Public investment has potential to substantially improve credit absorption capacity of farmers & geographical areas and ultimately stimulates private sector investment & facilitates smooth flow of bank credit for undertaking seasonal agricultural operations & investment purpose which in the ultimate process lays strong foundation of sustainable agriculture.
Creation of rural infrastructure to integrate rural development with banking & finance, particularly is a must in respect of upgrading literacy & education level & providing all weather roads, electricity which have direct impact on information & communication technology,
Public & Private Sector Investment & Share of Agriculture in GDP &
Gross Capital Formation as percentage of GDP at 1990 prices [Rs. in Million]
Figures in bracket indicate % share of public & private sector investment to total.
Farm Productivity & Returns
Productivity of crops per hectare & milk per lactation has been low as compared to other countries as well as in the world[ Table No.9] & return per hectare [Table No.10]is not remunerative for small & marginal farmers to sustain a reasonable standard of living even in prosperous regions, leave dryland, desert & drought prone areas.
Productivity of crpos /ha & milk/ lactation period in India & other countries
Source: FAO publications
Farming even in well-endowed States where yields of crops viz, wheat, paddy, sâ€™cane, cotton & mustard are relatively very high & farmers receive better minimum support price is not more remunerative. These States & crops are Punjab [wheat & paddy]; Tamil Nadu [Sâ€™cane]; Andhra Pradesh [Cotton] & Gujarat [Mustard]. What clearly emerges from the exercise is that under the best irrigated conditionsâ€”making it feasible to take out two seasonal crops or one full crop of sugarcaneâ€”a farmer owning one hectare of land would earn a profit of Rs. 12,000 & Rs.23,000 respectively. This would be on an average per month Rs. 2000 only. Even after factoring in net income from milk & sale of by-products such as straw[ say Rs. 1000] the maximum that farmers in Indiaâ€™s well endowed areas can earn around Rs. 3000 per month, assuming no crop losses due to natural calamities such as hailstorms, floods, pest-disease infestations & weather abberations etc. According to 1995-96 Agricultural Census out of 115.58 holdings, 61.6% & 18.7% are marginal & Smallâ€ holdings with average size of 0.40 hectare& 1.42 hectares respectively. Thus, over 80 per cent of Indiaâ€™s farming families own less than two hectares. And only 30 per cent of Marginal & Small holdings are â€œ wholly irrigatedâ€ & rest being either â€œpartly irrigated or wholly unirrigatedâ€ It can safely be concluded that three-fourths of Indian farmers can earn only upto Rs. 3000 per month. Stagnating yields & rising costs make farming day by day unremunerative or non-viable. Stagnating yields & rising costs make farming day by day unremunerative or non-viable. The average farm size is becoming smaller & cost-risk-return structure of farming is becoming adverse. All this is increasingly pushing farmers into debt, leading to distress & even suicides in some cases. Even NSSO survey reveals that nearly 40 per cent of farmers would like to quit farming, if they have option.
Table No. 10
Return to better-off farmers from different crops
Source: Business Line, Chennai dated July 27, 2006
As per the Commission for Agricultural Costs & Prices [CACP] latest data for the year 2005-06, the total cultivation costs cover & refer to actual production expenses in cash & kind incurred by the farmer plus rent paid to leased-in-land plus imputed value of family labour plus rental value of owned land plus interest on value of other owned capital assets. These numbers particularly relating to costs tend to be on the lower side & to that extent may little exaggerate the actual returns accruing to farmers.
The costs of paddy in Punjab as estimated by CACP in 2005-06 were Rs. 480.53 & MSP were Rs. 600 per quintal & yield of 58.55 quintals per hectare. Thus net return from growing paddy in Punjab per quintal was Rs. 119.47 & per hectare was Rs. 6994.97 during 2005-06. Thus, it can be observed that if a farmer were to raise two crops [ paddy in kharif & wheat in rabi season] he would annually earn Rs. 12,657/- [ Rs. 6994.97 + Rs. 5662.69]. In case of sugarcane return per hectare would be higher at Rs. 23,568, which however is full 12- month crop unlike 120 to 150 days each for paddy, wheat, cotton & mustard.
Research institutes should, therefore,
address issues viz, diversification of
agriculture; availability of limited
water; minimum use of chemicals;
integrated pest, nutrient & water
management; cost reduction & maximum
return per rupee investment.
Productivity of crops must necessarily
be significantly stepped up at
farmerâ€™s field level through provision
of proven & demonstrated cost-
effective & high- return technology;
supply of quality inputs including
water & electricity on time & at
reasonable price. On lines Land Grant
College of the USA integrated concept
of research, extension & education may
need to be operationalised by Farm
Universities. Besides, India will have
to embark upon farmer-friendly
research in bio-technology to improve
productivity, products of
international quality standards &
marketability. First Green Revolution
began with seed-water-fertilizer
technology, second will begin with
bio-technology Farm Input Regulatory &
Development Authority needs to be
established to develop & enforce
strict quality standards in respect of
quality, price & relable source of
supply of seeds, fertilizers,
pesticides, fuel/energy, water, farm
equipment etc. Soil, water & input
testing laboratories must be
established for this purpose.
Pressure on Land
There are 1.4 million large holdings exceeding 10 hectares with an average size of 17.33 hectares of which around 11% are â€œ wholly irrigatedâ€. There are about 10,000 farmers in Punjab alone having holdings exceeding 40 hectares. As against this, 71.18 million out of 115.58 million holdings were â€œ Marginalâ€ holdings of less than one hectare, with an average size of 0.40 hectare. Another 21.64 million constituted â€œ Smallâ€ holdings of 1-2 hectares, with an average size of 1.42 hectares. Thus, over 80 per cent of Indiaâ€™s farming families own less than two hectares. And only 30 per cent of Marginal & Small holdings are â€œ wholly irrigatedâ€ & rest being either â€œpartly irrigated or wholly unirrigated In the context of competing demand for land & water there is immediate need for â€œLand & water reformsâ€ to guarantee the fulfillment of objectives of social equity, growth & modernization of rural economy among all rural inhabitants. About 65% of the population deriving livelihood from farming; farm population growing by 1.84 per cent annually; the average farm size becoming smaller & cost-risk-return structure of farming becoming adverse. All this is increasingly pushing farmers into debt, leading to distress & even suicides in some cases. Even NSSO survey reveals that nearly 40 per cent of farmers would like to quit farming, if they have option. Pressure on land needs to be reduced progressively by 30 % in five years through creating significant number of self-employment opportunities in secondary & tertiary sectors of economy. Autonomous bodies viz, Khadi & Village Industries, Handloom/ Handicraft /, Coir / Silk / Tea/ Coffee & Rubber Boards etc, must be made responsible & accountable for creating enabling environment such that progressively self-employment opportunities in these avenues absorb the released labour force from the farm sector.
The concept of agricultural banking & credit should be replaced by rural banking & finance for total integrated rural development & not farm sector or for that matter any other sector in isolation. Rural house-holds expect a variety of financial services, not only credit, Government may consider doing away with stipulation of targets & sub-targets. Let RFIs concentrate on their Service Area to bring every household within the fold of banking & finance during 11th Five Year Plan. Financial sustainability [not alone operational viability] of RFIs is a must. Government may therefore need to reimburse the loss incurred by RFIs while providing credit at concessional interest rate when Government is committed to the principle of social equity & removing regional imbalances. Code of ethics not to vitiate climate of recovery of bank credit through interest waiver & loan write offs need to be evolved & meticulously implemented. It is for RFIs to consider this on its merits.
The spatial spread of cooperatives across the country, especially in more remote & economically deprived areas has already identified itself with the rural households. Every sixth village has a cooperative; cooperative membership touches the lives of 480 million rural households, more than half the aggregate rural population. Seventy per cent of rural cooperative clients are marginal & sub-marginal farmers. This sharply focuses the need for its revival, restructuring & reforming through greater involvement & commitment by State Governments.
Subsidy linked Credit programs
sponsored by Government agencies
should have clear demarcation of role,
functions & accountability between
sponsorers & RFIs and should help
targeted beneficiaries to fully
achieve the enshrined