(GIST OF KURUKSHETRA) Expanding Viable Agri-Finance

[August-2021]

Expanding Viable Agri-Finance

Introduction:

The agriculture sector has not only become self-sufficient but has emerged as a net exporter of several agricultural commodities like rice, marine products, cotton etc. Indian agriculture is dominated by small and marginal formers that account for 86 percent of oil holdings and 47 percent of the operated area - with an average landholding size of 1.08 hectares. They contribute more than 50 percent of the total agricultural and allied output. Institutional credit at reasonable cost all along the agri-value chain can catalyse the transformation of subsistence farmers into vibrant commercial farmers. A win-win model to spur agriculture growth is linkage of Farmer Producer Organisations (FPOs), marketing cooperatives and integrators with banks, as exemplified by the SHG-bank linkage programme. This will enable them to reap the benefits of economies of scale as well as of assured markets for their produce.

Agriculture Credit as a Bulwark in Enhancing Development:

Agriculture financing plays an important role in supporting both on and off-farm agricultural activities and businesses. For a farmer, access to affordable institutional credit becomes crucial to start and sustain a good crop cycle based on quality inputs. In an indirect manner, credit facilitates other important agricultural functions such as marketing, warehousing, storage and transportation, all of which are crucial to productivity.
Agricultural credit also plays an important role in providing essentials during adversity. To be able to absorb the shock of crop failure due to reasons such as drought and pest infestation or loss incurred due to price crash, the farmers must be financially equipped.

Agricultural Credit under Priority Sector Lending:

Priority Sector Lending (PSL) was launched in 1974 to statutorily earmark a fraction of credit to areas deemed as priority sectors. The objective of the PSL has been to ensure that vulnerable and weaker sections of the society get access to credit. At present, RRBs and Small Finance Banks (SFCs) are required to meet a target of 75 percent towards PSL.
Besides the overall PSL targets (40 percent), banks are required to achieve agriculture target of 18 percent and a sub-target of 8 percent of ANBC for small and marginal farmers. The sub-targets are being gradually revised from 2020-21 onwards to 10 percent by 2023-24 in a phased manner. As per the new guidelines, the approach of agriculture under priority sector is to focus on 'credit for agriculture’ instead of 'credit in agriculture' to give impetus to financing of supply value chain in the sector. This is in alignment to the policy focus on developing agriculture holistically to enhance farmer incomes.

Kisan Credit Card Scheme:

The Kisan Credit Card scheme, introduced in 1998, is aimed at providing adequate and timely credit support from the banking system under a single window with flexible and simplified procedure for the farmers for their overall credit requirements.
As per 2020 data, 65.3 million KCC are operative and Rs. 6.97 lakh crore is outstanding against these operative KCCs.
Synergising Basket of Financial Initiatives with use of Technology:
Digital technology and the use of digital means to communicate, transact, source and analyse data have introduced new channels of service delivery and new product types that are changing the business model, incentives and cost/benefit analysis of serving the agricultural sector
for financial service providers.

Digitisation of Land Records:

GoI started the Computerisation of Land Records Scheme to digitise all land records in 1988-89. Thereafter, in August 2008, the Digital India Land Record Modernisation Programme (DILRMP) was launched by Government of India, with the aim to minimise scope of land or property disputes and enhance transparency in the land records. Digitisation of land records has the potential to address various issues relating to agricultural credit, provided banks are given access to view land records online and/or they are given the facility to create charge online over land. This will help in reducing the instances of double or multiple financing on the same piece of land.

One Nation One Market:

National Agriculture Market popularly known as e-NAM launched in 2016, is an innovative initiative in agricultural marketing to enhance farmer's accessibility digitally to multiple numbers of markets and buyers, and to bring transparency in trade transactions with the intent to improve price discovery mechanism, quality commensurate price realisation and to develop the concept of "One Nation One Market" for agriculture produce.

Challenges in Agriculture Financing:

First, banks should develop an MIS to flag agricultural loans sanctioned against gold as collateral in core banking solution (CBS) to segregate such loans for effective monitoring of end use of funds.
Second, banks should provide crop loans, eligible for interest subvention, only through KCC mode to curb the mis-utilisation of interest subsidy.
Third, Banks should be allowed to give consumption loans to farmers upto a sanctioned limit of Rs. 1 lakh under PSL provided banks are able to obtain collateral security and are satisfied with their repayment capacity based on the cash flows of the borrowers. However, such loans will not classify for PSL-Agri.
Fourth, to improve ease of credit, the limit of Rs. 3 lakh for waiving collateral security by the banks in case of tie-up arrangements should be revised to Rs. 5 lakh under the existing KCC guidelines subject to the condition that the tie-up arrangements are between the producers and processing units without any intermediaries.
Fifth, for better monitoring of branches by banks and easier implementation of KCC, there should be uniformity in scale of finance (SoF) for both crops and allied activities. Towards this objective, state-wide SoF for crops should be prescribed separately for irrigated and unirrigated areas by the State Level Bankers' Committee (SLBC). IBA in consultation with NABARD should fix a pan-India SoF for allied activities.
Sixth, the corpus of Rural Infrastructure Development Fund (RIDF) should be enhanced. State governments should be sensitised to allocate a larger portion of their borrowing from RIDF for the purpose of absorbing funds for rural infrastructure development in their state.
Seventh, Government of India should push state governments to complete the digitisation process and updation of land records in a time bound manner. State governments should give access to banks to digitised land records to verify the land title and create charge online.
Eighth, aggressive efforts are needed to improve institutional credit delivery through technology driven solutions to reduce the extent of financial exclusion of agricultural households.

Way Forward:

Institutional credit at reasonable cost all along the agri-value chain can catalyse the transformation of subsistence farmers into vibrant commercial farmers. A win-win model to spur agriculture growth is linkage of Farmer Producer Organisations (FPOs), marketing cooperatives and integrators with banks, as exemplified by the SHG-bank linkage programme. This will enable them to reap the benefits of economies of scale as well as of assured markets for their produce.
This will also be in line with the enhanced role being envisaged for FPOs in the agri-ecosystem and synergise the efforts of the policymakers in propelling farmer incomes.