INDIAN ECONOMY – PROJECT

An Economic Strategy for Inclusive and

Sustainable Growth of India – Sector Agri credit

SUBMITTED BY GROUP E8
INDIAN INSTITUTE OF MANAGEMENT, LUCKNOW
SUBMITTED ON 15/04/2020
SUBMITTED TO

ARITRA BHATTACHARYA PGP35203

PROF. K.G. SAHADEVAN S APARAJITA PGP35229
THANVEER SULTHAN AKBAR PGP35244
THRISHNA GOPAL PGP35245
VEENANJALI TANDYALA PGP35247

We Aritra, Aparajita, Thanveer, Thrishna and Veenanjali hereby declare that the report is our
joint effort and that no part of the report is copied from any published/unpublished sources
 TABLE OF CONTENTS

Table of Contents
Problems in current Agri-credit in India:...................................................................................................................................... 9
The direction of Reform in Agri-credit in India:...................................................................................................................... 10

List of Tables

List of Figures
Executive Summary
Agriculture plays a key role in the Indian context - employing approximately 50% of the workforce.
The report aims to provide a sense of the current status of the agricultural credit that is available in India, the
reforms that are in place, the ineffectiveness of few of the policies and the way forward in implementing a
more robust agri-credit system in India.

The report mainly covers the types of agriculture credit - Short term, Medium term and Long term;
Institutional and non-institutional sources of credit; Types of credit - For example: Kisan Credit Card(KCC),
Farmer Producer Organizations (FPO), etc. Further, some of the major issues prevalent in the current agri-
credit system in India - Land fragmentation, insufficiency in the volume of credit provided, inequality in
availing credit between the marginal and well-to-do farmers, documentation requirements hindering small
farmers to avail credit - have been discussed. The direction of the reform in terms of measures that need to be
adopted to construct a robust agri-credit system in India have been suggested. Few of them include -
Introduction of portable warehouses, Enhancing the sub-target of small and marginal farmers in terms of
priority sector lending, replacement of Interest Subvention Scheme with Direct Benefit Transfer have been
explained in detail.

Currently, the major issues that need to be addressed to attain a sustainable economic growth due to
agri-credit in India include the fragmentation of land holdings, minimizing the regional disparity in the
absorption of agri-credit. Based on these, some of the strategic recommendations include the adoption of an
effective lending system based on the ability to repay rather than on the collateral, leveraging the
manufacturing sector as a means to address problems of sporadic wages and reducing the dependence on
casual wage labour, innovations in addressing problems of creditworthiness using FinTech players, ensuring
regional parity in agri-credit absorption through NABARD increasing RIDF in less penetrated regions. These
measures have been explained in detail and the report thereby places a progressive timeline of the current
situation and the recommendations that could be deployed to attain a more effective agri-credit system in
India.

1 Introduction
Agriculture has a key role to play in the development of Indian Economy. According to the agriculture
census in 2015-16, the number of operational holdings in India was approximately 145 million and the area
for the same was around 157 million hectares. Of this, small and marginal holdings accounted for around 86
percent and in terms of area it was around 47 percent.

The Indian agriculture industry primarily has four sectors- crop, livestock, fisheries, forestry. Over the years,
the Government of India has come up with various policies that have led to major revolutions in the above
departments- green revolution, white revolution, gene revolution and blue revolution respectively.

This has helped improve the productivity of the industry as a whole. Also, the agriculture sector has become
self-sufficient and has evolved as a major exporter of various agricultural commodities.

The agriculture credit policies have played a critical part in the development of the agricultural sector over
the years. Institutional credit, the foundation for which was laid by the All India Rural credit Service
Committee is a very important constituent that has contributed to the growth of the agricultural industry.
 The responsibility of giving production credit to farmers was handled by the cooperative structure till the
end of 1960’s. In 1969 and 1980, commercial banks were nationalized with the aim of bringing social
control. Moreover in 1976, Regional Rural banks were established to provide rural credit. They acted as
alternate agencies to commercial banks. With these kinds of developments, the credit needs of the agriculture
sector were met by a multi-agency approach.

In 1968, the commercial banks were asked by the National Credit Council to increase their participation in
financing of agriculture and small-scale industries. These were considered the priority sectors and in 1972,
this definition of priority sectors was formalized. The problem of financial exclusion has been addressed over
the years by expanding the definition and scope of priority sectors. This was made so that the credit policies
benefit those segments of population who have been historically ignored from accessing credit.

The institutional framework implemented over the years has significantly benefited the agricultural sector.
For example, Standard Chartered Bank’s contribution to agriculture and allied sector has grown from 16
percent of agriculture GDP in 1980-81 to to almost 50 percent now.

Although formal agricultural credit has experienced a significant growth , there are quite a few challenges, a
couple of them are mentioned below:

● A large number of tenant farmers, landless labourers and sharecroppers face problems in getting
institutional credit because of lack of a proper legal framework.
● There is a disparity in the amount of credit granted to different states. Moreover, certain states like
Bihar, West Bengal, Chattisgarh etc received credit that was not proportional to their respective
agricultural output.

2 Objectives of the Report

This report explores the Agri-Credit sector in the Indian context. The report sheds light on the relevance of
the sector to the population and the economy. The report also elaborates on the current status of the Agri-
Credit sector in the country and recent policies that affect the growth and development of the sector, and the
direction of reforms taken by policy-makers. Further, the report makes a recommendation in terms of a
strategic plan for the Agri-Credit sector that would enable the sector to effectively contribute towards
achieving inclusive and sustainable growth of the economy.

3.1 The relevance of the Agri-Credit sector

The Agricultural sector plays a significant role in the Indian economy, contributing close to 16% to the Gross
Domestic Product of the country and employing close to 50% of the workforce. Agricultural credit may be
defined as the amount of investible funds made available for the business of farming. Agricultural credit, also
known as Farm credit plays a crucial role in strengthening and developing both, input and output markets in
agriculture. Finances sourced and routed appropriately for agricultural operations is like oiling the wheels of
a vehicle so it functions smoothly. This is particularly true in the Indian context, where there are plenty of
small farmers with little to no resources and in dire need (Agarwal, 1969).The fact that the sector contributes
only 16% to the Nation’s GDP while employing close to 50% of the workforce shows that the employed are
likely to be impoverished. Properly channelized credit can break this vicious cycle of poverty. It could
provide the farmers employment opportunities or productive assets. Agri-credit, thus has a major role to play
in improving the income of families in the rural areas (Padmanabhan, 1986).
Agricultural credit is particularly essential in the Indian context because of the following reasons:

Low income of farmers – A person involved in a non-agricultural sector earns much more than his
counterpart involved in the agricultural sector in India. This is the case across all states in the country. The
income of the rich in the agricultural sector is comparable with the income of the clerical workers in non-
agricultural sectors (Tarshis, 1969).

Uncertain income – In addition to the income being low, it is also uncertain in the agricultural sector. As
observed by Morman (1919), “the business of farming is the most precarious of all industries and it is very
risky at the best”.

Increase in expenditure – Agriculture, over the years, because of the adoption of modern cultivation
methods, has become an extremely capital-intensive activity.

Typical production pattern – Since agriculture is a seasonal activity, the activity has to be planned
depending on the season, irrespective of the flow of funds. The gestation period of the crop also has to be
taken into account.

Inability to raise funds through other sources – Farmers don’t have the option of raising funds for
development by floating shares, unlike those involved in non-agricultural sectors.

Diversification and commercialization of agriculture – Indian agriculture has been experiencing

diversification and commercialization over the past several decades. Farm credit could be a powerful
instrument in bringing about this change.

3.2 CURRENT STATUS

Types of Agricultural credit in India:

Agriculture credit can be broadly classified based on the period and purpose of the credit:

1. Short term credit: These loans are provided to farmers to address the day-to-day functions like
procuring seeds, fertilizers, salary and so on. These loans are given for a period of maximum fifteen
months.

2. Medium term credit: This type of credit is issued for a period of fifteen months - five years. This is
mainly used for buying agricultural equipment, cattle, etc,.

3. Long term credit: These loans are issued for a period of more than five years to purchase land.
3.3 SOURCES OF AGRICULTURAL CREDIT IN INDIA

NABARD- National Bank for Agricultural And Rural Development - takes care of the long term and short
term needs of institutions providing agricultural credit.
The main sources of agricultural credit can be divided as:

● Institutional Sources - Commercial banks, RBI, NABARD

● Non-institutional Sources - Moneylenders, Traders, Landlords

Graph 1 Graph 2
3.4 Types of credit

1. Agriculture credit under priority sector lending

The objective of Priority Sector Lending - PSL - is to make credit available to the weaker sections of the
society and to ensure adequate flow of credit to sectors like agriculture and MSME.
Under this scheme:

● All Scheduled Commercial Banks are required to meet a target of 40% of Adjusted Net Bank Credit
(ANBC) or credit equivalent of Off-Balance Sheet Exposure, whichever is higher of the two for PSL.
● Banks are also required to achieve an agriculture target of 18% and a sub target of 8% of ANBC.
● At the aggregate level, banks have been able to achieve the 40% target but private sector banks have
achieved only 16.30% in the sub-target while public sector banks have achieved 18.12% in 2018-19.

2. Interest Subvention Scheme for Short-term Crop loans (ISS)

Introduced in 2006-07, ISS was aimed at providing short term crop loans, at a sub vented rate of interest. However,
there were few obstacles hindering the successful implementation of the scheme.
● Increasing fragmentation of land (2.28 hectare in 1970-71 to 1.08 hectare in 2015-16).
● Prevalence of tenancy

3. Kisan Credit Card (KCC)

Introduced in 1998, KCC was aimed at providing adequate and timely credit support from the banking system with a
simple procedure for farmers to meet their credit requirement.
As of 2019, the number of active KCC accounts was 66.2 million. However, in states like Tamil Nadu, Kerala,
Karnataka and Andhra Pradesh, 71% of crop loans are disbursed outside of KCC.

4. Self-help group - Bank Linkage Program

The major objectives of the SHG-BLP program introduced in 1992:

● Making informal groups as clients to banks
● Introducing collateral-free credit
● Permission to lend without specifying purpose

Deendayal Antyodaya Yojna - National Rural Livelihood Mission (DAY-NRLM):

DAY-NRLM -a reorganized version of “Swarna Jayanti Gram Swarozgar Yojna (SGSY)” - aims to reach
out to 100 mn rural people in 0.6 million villages all over India through self-help groups.

5. Farmer Producer Organizations (FPO)

Aggregating farmers into Producer Organizations can address issues such as insufficient storage spaces,
organized markets, latest technologies in farming, etc as a result of fragmented land holding. NABARD has
totally supported over 3,000 FPO across states.
3.5 Problems in current Agri-credit in India

● Despite the expansion of agricultural credit structure, the volume of the credit in the country is still
not sufficient when compared with its growing requirement arising out of the increase in prices of
agricultural inputs.
● The amount of loan issued to the farmers by the agencies is insufficient in meeting the different
aspects of agricultural operations. Considering the amount of loan approved as inadequate and
insignificant, the farmers often divert such credit for unproductive purposes. They are, therefore,
diluting the very purpose of such an investment.
● Rural credit agencies and their schemes have failed to meet the needs of the small and marginal
farmers. Thus, lower attention is given to the credit requirements of needy farmers. In contrast, the
comparatively well-to-do farmers are getting more attention from the credit agencies for their better
creditworthiness.
● The development of co-operative credit institutions such as Primary agricultural credit societies, land
development banks, commercial banks, and regional rural banks have failed in covering the entire
rural farmers of the country.
● Institutional agricultural-credit is subject to red-tapism. Credit institutions are still adopting
burdensome rules and formalities for advancing loans to farmers, which ultimately forced the farmers
to depend more on costly non-institutional sources of credit.
● Reach of Institutional credit to the end farmer needs to be digitized and need to be updated in a timely
fashion.
● The more critical issue that India is currently facing is that Land size per owner is quite small,
working on land consolidation might help serve the purpose.
● Lending by un-institutionalized lenders can lead to perpetual indebtedness of farmers (A Bhaduri,
1973). Due to the concentration of land-ownership and usury within the same class, sharecroppers,
tenant farmers, the contractual labourers find a substantial portion of the harvest being spent in
repaying the loans to the lender. Thus, a semi-feudal system of interlinkage prevails between Credit
market, output market and labour market, whereby the farmer in practice is tied to the land, although
legally he is free to move.
● There exists vast regional disparity in terms of absorption of agri-credit which should be minimized.
4 Recommendations
4.1 Strategic Plan

Farm-loan waiver is not a sustainable Agri-credit strategy

a) It leads to moral hazard whereby farmers intentionally default in anticipation of future bailouts
b) Banks will tend to reallocate loans to lower-risk groups in order to avoid such defaults which in turn
leads to lower availability of credit
c) Farm-loan waivers have a significant impact on the fiscal deficit
d) Such waivers act as a kind of subsidy to bigger farmers who take credit whereas small and marginal
farmers, the sharecroppers and the agricultural labourers who can not take loan because of low credit
worthiness get no share of such state helps.
Strategies for an inclusive and sustainable growth

1) Creditworthiness should be decided on the basis of ability to repay rather than collateral
● The principle of minimalization should be followed which focuses on trying to minimize the
probability of economic loss for both the lender and the borrower
● We need to increase availability of micro-credit to small and marginal farmers, the sharecroppers and
the contractual tenants without mortgage. The poor Indian farmer has low creditworthiness and also
may not have any asset to borrow against. It is however imperative for credit to be available to him so
he has the ability to improve productivity with better equipment, seeds, fertilizers and irrigation. This
will widen the ambit of institutionalized lending and also be the stepping stone towards a more
inclusive economic growth
● An agricultural credit scheme should be developed which measures the ability of the farmer to repay
the loan on the basis of optimum utilization of disbursed credit. In such a system it will be important
to monitor the utilization of credit by the borrower
● A crop loan scheme should be initiated whereby the harvested crops at the end of the season is used
as mortgage. Determinant of the loan should be productive capacity and not on existing property
titles.

2) Market reform is necessary to alleviate fear of default and risk of NPA in the crop loan scheme
where repayment is based on sale proceeds of agricultural produce
● APMC markets are the primary market infrastructure in the country. Although the norm of the
National Commission of Farmers is that there should be at least one regulated market within a radius
of 5 kms, it is not being fulfilled. Traders and commission agents have also hijacked the business in
such markets. APMC restricts the farmer from selling outside these markets and mandates selling
through these agents. Reforms to allow the farmer to sell to anyone and anywhere is necessary.
● The electronic National Agricultural Market (e-NAM) which enables transparent pricing and removes
the middle-men should be implemented by all State Govts.
● The Govt needs to encourage institutional private players to enter the agricultural marketing supply
chain. Launch of online markets by institutional private players will ensure desired price discovery.
The government needs to regulate such markets to achieve fair competition, fair bidding and ethical
practices
 ● There is also need to increase the number of open auction platforms, cold storage units and electronic
weighbridges to ensure fair price discovery

3) Leverage the manufacturing sector as a source of formal earnings

● One of the main obstacles in the path of credit-worthiness of agricultural households is the
irregularity of income and the lack of reliable income documentation. Instead of engaging surplus
workforce of the household in the family farm, efforts need to be taken to engage them in agro based
manufacturing viz. food processing etc.
● A recent trend is the increased movement of the manufacturing setup to rural areas for use of cheap
land and labour. This ruralized manufacturing setup can be viewed as an avenue to increase formal
income of agricultural households
● Policymakers should identify the factors that catalyze the process and create an enabling environment
for the same.

4) Leverage impact investments for sustainable access to agricultural credit

● Empirical evidence in behavioral economics suggests that humans adhere to social norms, care about
being fair and are driven to make a positive social impact. The success of the Ujjwala scheme is
testimony to the above assumption
● Impact investments in India have gained a lot of traction in recent years. In 2018 agriculture
accounted for 67% of the impact investments for financial inclusion. Impact investments have been
received in the form of investments in food enterprises and cooperatives, retailers that seeks to
achieve optimal utilization of resources and enterprises that want to mitigate climatic uncertainties in
agriculture
● It is necessary to take the next step where we extend the reach of impact investments to marginal
farmers. Returns can be tied to the realization of social impact promised. For example, in the face of
distress events the farmer would find it impossible to repay the loan. In such cases, the social impact
could be freeing a farmer of a debt trap.
● Policymakers need to encourage such ‘patient capital’ by formulating robust methods of measuring
social impact, securing investor protection and gaining public trust.

5) Philanthropy for affordable credit

● Charitable donations provide flexibility in designing credit instruments for small and marginalized
farmers. A revolving fund can be created that allows waiving off of loans for farmers in a serious debt
trap. However suitable measures need to be taken to ensure such a fund is not exploited.
● High risk, low quality credit assets can be financed so as to extend the ambit of credit even to the
underserved
6) Enrolling fintech players to solve the problems of assessing creditworthiness of small and marginal
farmers
● FarmDrive in Kenya has developed an app which collects agronomic, social, economic, satellite and
environmental data pertaining to the farmer, analyses them using Machine Learning and then
generates a credit score
● FarMart a fintech player in India has developed a system which evaluates 50 parameters to assess the
creditworthiness of the farmer. It then allocates cashless loans using virtual credit cards that farmers
 use for purchase. It has introduced market linkages programs which help farmers to get fair prices for
their produce. Money from the produce is used in loan repayment

● The Govt. needs to build an enabling environment for such fintech players through tax concessions,
investment flow and through public private partnership (PPP) models

7) Allay uncertainties of crop failure

● This can be done by the Govt paying the premiums for crop insurance of the farmers.
● Farmers unable to afford crop insurance will fall under the scheme and thus their risk of defaulting in
case of a crop failure will reduce which in turn increases credit-worthiness

8) Ensure Regional Parity in absorption of Agric-credit

● States in central, eastern and north-eastern India have very low agricredit (measured by
agricredit/agriGDP) as compared to the southern, western and northern states. It is very important to
narrow this gap for an inclusive economic growth
● NABARD should increase the allocation of RIDF in these states and state governments should be
sensitized to spend a large portion of these funds for rural infrastructure development and to increase
agri-credit absorption.

4.2 The direction of Reform in Agri-credit in India

● The Government should adopt measures to increase the reach of Institutional Credit to the end
consumer. In this aspect, GoI should push state governments in fast completion of the digitization
process and updating of land records in a time-bound fashion. In turn, State governments should give
access to digitized land records to banks to verify land titles and create charge online. GoI should set
up a federal institution, where both central and state governments can work together in this area.
Aggressive efforts are required to improve institutional credit delivery through technology-driven
solutions to reduce the extent of financial exclusion of agricultural households. Banks should
collaborate with agri-tech companies/start-ups to provide access to credit in an integrated, timely, and
efficient manner to the farmers.

● Innovations like portable warehouses/cold storage and mobile-based apps providing farm machinery
on a rental basis are successfully operating on a small scale. Hence, the GoI implement scaled-up
models across the country. Further, banks should prompt the provision of credit for innovative
solutions that aid the agriculture sector.

● The Government should address Regional Disparity by making Priority Sector Lending guidelines
revisit the feasibility of introducing suitable measures in the improvement of the credit off-take in
central, eastern, and north-eastern states. NABARD should progressively increase the allocation of
Rural Infrastructure Development Fund (RIDF) in central, east, and north-eastern states over a while.
● Corpus of RIDF should increase, and state governments should be sensitized to allocate a more
significant portion of their borrowing from RIDF to absorb funds for rural infrastructure development
in their state.
● The Government should enhance the sub-target of Small and Marginal Farmers under Priority Sector
Lending. Revise the sub-target for SMF from the existing 8 percent of Adjusted Net Bank Credit to
10 percent with a roadmap of two years. Step up Financial Inclusion and Financial Literacy initiatives
for SMFs.

● State governments should promote and conduct awareness initiatives for land consolidation so that
the farmers can achieve economies of scale, thereby giving an incentive to make long term
investments.

● The interest subvention scheme should be replaced with Direct Benefit Transfer to target
beneficiaries, i.e., SMF, tenant farmers, sharecroppers, oral lessees, and landless laborers as
individual borrowers. Banks should provide crop loans only through Kisan Credit Card mode so as to
curb misuse of the scheme.

● In view of improving the KCC scheme, the limit of ₹0.3 million for waiving collateral security in
case of tie-up arrangements should rise to ₹0.5 million. Given the condition that the tie-up
arrangements are between the producers and processing units without any intermediaries to improve
the ease of credit. For better monitoring of branches by banks and more straightforward
implementation of KCC, there should be concord in the scale of finance (SoF) for both crops and
allied activities. Towards this objective, state-wide SoF for produce should be guided separately for
irrigated and unirrigated areas by the State Level Bankers’ Committee (SLBC). IBA, in deliberation
with NABARD, should fix a pan-India SoF for allied activities.

● NABARD should design a financing model for the credit requirements of Farmers Producer
Organizations and Companies across the entire supply and value chain. Further, NABARD should
promote women-oriented FPOs by identifying successful women SHGs.

● The impact of Priority Sector Lending Certificates (PSLC-Agri and PSLC-SMF) on lending to the
agriculture sector at the ground level should be scrutinized in detail.

● GoI and state governments should undertake a holistic review of the agricultural policies and their
implementation and evaluate the effectiveness of current subsidy policies concerning Agri inputs and
credit in a manner that will improve the overall viability of agriculture sustainably. Because of the
above stated, loan waivers should be avoided.

● Currently, there is no central database of the Indian agriculture sector due to which the planning/
policy formulation lacks effectiveness and is challenging to monitor. GoI should develop a
centralized database capturing details related to crops cultivated, cropping patterns, output, irrigated
area, soil health, natural calamity, etc. Besides, farmer-wise information like identity, land records,
loan availed, the subsidy is given, insurance and details of crop cultivated, etc. should also be
captured.

● There is no guarantee scheme available to cover the default risk of the borrowers in India. GoI with
state governments should set up a credit guarantee fund for the agriculture sector along the lines of
credit guarantee schemes in the MSME sector.
5 Conclusion
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