review of agriculture
Revival of Agricultural Credit in the 2000s:
An Explanation
R Ramakumar, Pallavi Chavan
This paper examines credit to agriculture provided by
the commercial banks, including regional rural banks,
and finds that contrary to the general perception that
the credit revival began in 2004, the actual revival
started after 2000. The increase in credit was to a
large extent the result of a growing share of indirect
finance, which, in turn, has been broadened in
scope to cover many new kinds of farm lending.
Moreover, even as direct lending to agriculture has also
grown, there has been a sharp increase in the share of
large-sized advances for financing agri-business-
oriented enterprises, rather than for the small and
marginal farmers.
The authors thank S L Shetty, V K Ramachandran and V Sridhar for their
comments on a draft of this paper. An earlier version of the paper was
presented at the national conference on ‘Making Growth Inclusive with
Reference to Employment Generation’, at the Jawaharlal Nehru Universi-
ty, New Delhi in June 2007. The views expressed in the paper are person-
al and not of the organisations with which the authors are associated.
R Ramakumar (ramakumarr@gmail.com) is at the Tata Institute of
Social Sciences, Mumbai.
Economic & Political Weekly  december 29, 2007
I
t is by now well-documented that the trends that emerged in
India in the 1990s with respect to the supply of rural credit
in general, and agricultural credit in particular, were distur­
bing. In the 1990s, there was (a) large-scale closure of commer-
cial bank branches in rural areas; (b) a widening of interstate in-
equalities in credit provision, and a fall in the proportion of bank
credit directed towards regions, where banking was historically
underdeveloped; (c) a sharp fall in the growth of credit flow to
agriculture; (d) increased sidelining of small and marginal farm-
ers in the supply of agricultural credit; (e) increased exclusion of
the disadvantaged and dispossessed sections of the popu­lation
from the formal financial system; and (f) strengthening of the
hold of moneylenders on rural debt portfolios [for details, see
the collected papers in Ramachandran and Swaminathan 2004;
Shetty 2006; Chavan 2005 and 2007].
In 2004, the government announced its intent to double the
flow of credit to agriculture over a period of three years. This
increase in credit flow has been an integral part of the so-called
“new deal for rural India” promised by the United Progressive
Alliance government. A “comprehensive credit policy” was an-
nounced in June 2004, which included the commitment to raise
agricultural credit flow by 30 per cent every year, financing of
100 farmers per branch (thus, 50 lakh farmers in a year), two to
three new investments in agricultural projects per branch every
year and a host of debt-relief measures, such as debt restructur-
ing, one-time settlement and financial assistance to redeem loans
from moneylenders [Ministry of Agriculture 2007]. From 2004
onwards, it is regularly claimed in official circles that the flow
of credit to agriculture has been increasing at a rapid rate, even
surpassing its annual targets [Ministry of Finance 2007; NABARD
2006]. In fact, an impression is often gained from the official
statements that the problem of agricultural credit has been set
right with the doubling of credit flow and the concurrent expan-
sion of microcredit.
In this paper, we plan to closely analyse the claim that
slowdown in the supply of agricultural credit has been reversed
after 2004. Secondary data on banking from different publi­
cations of the Reserve Bank of India (RBI) have been used for
this purpose. Commercial banks emerged as an important
institution for supplying agricultural credit only after the na-
tionalisation of banks in 1969. Presently, though agricultural
credit is supplied by both commercial banks and cooperatives,
credit from commercial banks (including regional rural banks)
account for about 78 per cent of the total credit disbursed to
agriculture.1 The discussion in this paper pertains only to the
57
review of agriculture

credit provided by the commercial banks, including regional growth rate of credit to agriculture in the 2000s was due to a
rural banks. regular increase of credit in every year after 2000, and not just
after 2004.
1 Trends in Growth of Agricultural Credit The increase in the growth rate of agricultural credit in the
Historically, agricultural credit has comprised mainly the credit 2000s was so significant that the level of credit reached in 2006
provided directly to cultivators, which was called “direct finance considerably higher than what it would have been, if credit had
to agriculture”. Within direct finance to agriculture, a short- grown in the 1990s and 2000s at the growth rate of the 1980s.
term credit or a credit for seasonal agricultural operations has In Figure 2 (p 60), we have plotted the deflated series of credit
accounted for a significant share. The short-term loans to agri­ to agriculture between 1980 and 2006, and projected forward a
culture are referred to as the “crop loans”, as they are advanced linear trend line of credit during the 1980s only. As is clear, the
for crop cultivation against the hypothecation of the crop to be plot of credit supply crosses the trend line by about 2003, and the
cultivated by the farmer. The crop loans are provided as cash or credit supplied in 2006 is at a point much above the projected
in kind, such as the supply of fertilisers and seeds. Apart from the trend line of the 1980s. This method, of course, does not account
crop loans, direct finance also includes credit for medium- and for the deficits in the supply in the years between 1990 and 2003,
long-term investment in agriculture. The second component of when the credit supply was below the trend line. Nevertheless,
agricultural finance is called “indirect finance”, which does not it does provide an indication of the extent of increase in credit
go directly to cultivators, but to the institutions that support agri­ after 2000.
cultural production in rural ar- There has been a marked ab-
Table 1: Rate of Growth of Credit Outstanding from
eas. The typical forms of indirect Scheduled Commercial Banks to Selected Sectors (1975-2006, in % per annum) sence of association between the
finance to agriculture are loans to Sector 1975-80 1980-90 1990-2000 2000-06 sharp growth of agricultural
input dealers for their role in the Growth rate of credit outstanding to: credit in the 2000s and the
Agriculture and allied sectors 20.4 8.7 1.8 20.5
provision of agricultural inputs Artisans and craftsmen 27.4 21.0 2.3 14.1 growth of agricultural output
and loans to electricity boards for Other small-scale industries 12.0 7.5 2.4 4.1 and agricultural employment.
supplying power to cultivators. Total bank credit 12.9 7.9 6.7 17.7 The rates of growth of gross do-
Growth rates of GDP at constant prices from:
In the 1990s, when India be- Agriculture 1.1 4.7 3.4 1.9 mestic product (GDP) from agri-
gan to implement the policy of Agriculture and allied sectors 0.9 4.4 3.4 2.0 culture and unregistered manu-
financial sector liberalisation, Unregistered manufacturing 4.7 5.8 6.3 4.8 facturing (a proxy for the infor-
Figures are annual exponential growth rates estimated after deflating credit outstanding with the GDP
there was a significant slowdown deflators. The figures include credit supplied by regional rural banks. mal sector and small-scale in-
in the growth of commercial Sources: ‘Basic Statistical Returns’, Reserve Bank of India, various issues; ‘Handbook of Statistics on Indian
Economy – 2005-06’, Reserve Bank of India; http://www.indiastat.com. dustries) were lower in the 2000s
bank credit to agriculture com- over the 1990s (Table 1). Also,
Table 2: Rate of Growth of Direct and Indirect Finance Outstanding to Agriculture
pared to the 1980s.2 As Table 1 and Allied Activities from Scheduled Commercial Banks (1975-2006 , in % per annum) data on employment from the
shows, after recording an annual Type of Finance Growth Rates of Credit National Sample Survey (NSS)
rate of growth of 8.7 per cent be- 1975-80 1980-90 1990-2000 2000-06
show that the rate of growth of
Total finance to agriculture and allied activities 20.4 8.7 1.8 20.5
tween 1980 and 1990, agricul- Direct finance to agriculture and allied activities 23.3 10.0 1.5 17.4
wage employment in agriculture
tural credit grew at just 1.8 per Indirect finance to agriculture and allied activities 12.9 2.7 3.5 32.9 was negative (-3.2 per cent) be-
cent per annum between 1990 Figures are annual exponential growth rates worked out after deflating the credit outstanding by gross tween 1999-2000 and 2004-05.
domestic product deflators. Data includes credit supplied by regional rural banks (RRBs).
and 2000. In the case of other Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues; ‘Handbook of Statistics on India The respective growth rate was
Economy – 2005-06’, Reserve Bank of India.
rural occupations such as arti- positive (1.1 per cent) between
sans and craftsmen and small-scale industries, the decline in the 1993-94 and 1999-2000. These trends prompt a harder look at
growth of credit was equally sharp. Further, the growth rate of the pattern of growth of agricultural credit in the 2000s in com-
agricultural credit in the 1990s was less than the growth rate of parison with the earlier decades.
the rural population in the corresponding period [Chavan 2002].
The slowdown in agricultural credit in the 1990s appears to 2 Features of Agricultural Credit in the 2000s
have been reversed in the period after 2000. Between 2000 and There are three distinct features of the growth in agricultural
2006, agricultural credit grew by 20.5 per cent per annum, which credit, which have had a major role in determining the extent
was significantly higher than the growth rate recorded for the of increase in credit supply as well as its distribution within the
1990s. It was not just agricultural credit that grew rapidly in the agricultural sector. These features are discussed separately in the
2000s; credit to artisans and craftsmen and other small-scale subsections below.
industries also grew at rates faster than in the 1990s.
An important point to note here is that the revival of agri­cu­l­ 2.1 Role of Indirect Finance
tural credit had begun after the year 2000 itself. This is contrary First, a significant proportion of the increase in total bank credit
to the general perception that the revival in the 2000s was owing to agriculture between 2000 and 2006 was accounted for by in-
to the government’s announcement in 2004 to double the sup- direct finance to agriculture. Of the total increase in credit sup-
ply of credit to agriculture. The log plot of credit to agriculture ply to agriculture between 2000 and 2006, about one-third was
and the plot of per capita credit to agriculture in rural areas in contri­buted by indirect finance. Between 2000 and 2006, while
Figure  1 (p 59) establish this fact clearly. In other words, the high direct finance grew at an annual rate of 17 per cent, indirect
58 december 29, 2007   Economic & Political Weekly
 review of agriculture

finance grew at an astonishing annual rate of 32.9 per cent – Loans extended to state electricity boards (SEBs) for reimburse-
(Table 2, p 58). ment of expenditure towards providing low-tension connection
In the decade of the 1990s and after, the share of indirect to individual farmers from step-down points for energising wells
finance in total agricultural finance has consistently risen were always classified as indirect finance to agriculture. From
(Table 3). Between 1985 and 1990, there was a fall in the share of 2001 onwards, loans to SEBs for systems improvement under the
indirect finance in total agricultural finance; the share began to Special Project Agriculture (SI-SPA) were also considered as in-
rise after 1990 to reach 15.5 per cent in 2000, 25.9 per cent in direct finance to agriculture. From July 2005 onwards, loans to
2002 and 27.9 per cent in Figure 1: Log Plot of Credit to Agriculture and Per Capita Credit to Agriculture power distribution corpora-
2006. Thus, while the share in Rural Areas Figure 1(Deflated Figures,
Log plot of credit 1975 toand2006)
to agriculture per capita credit to agriculture in rural areas, deflated figures, 1975 to 2006 tions or companies, emerg-
18.0
of indirect finance in total 1,40,000 ing out of the bifurcation or
140000 18.0

agricultural finance had be- 1,20,000 120000

16.0 16.0 restructuring of SEBs as part
gun to rise in the 1990s, its 14.0 14.0 of Logpower sector reforms were
of credit to agriculture
Log of credit to agriculture (right hand side axis)
increase in the 2000s was 1,00,000 100000
12.0 12.0
also considered as indirect fi-
considerably faster. nance to agriculture.
80,000 80000
10.0 10.0
From the 1990s onwards, – From August 2001 onwards,
8.0
the definition of what con- 60,000 60000
8.0
loans extended under the
stitutes indirect finance 6.0 6.0 scheme for financing “agri­
40,000 40000

to agriculture has been Per capita credit to agriculture in rural areas (left hand side axis) (Rs ‘00) 4.0 4.0 clinics” and “agribusiness cen-
broadened significantly 20,000 20000
2.0 2.0
tres” were considered as indi-
by the RBI.3 The widen- rect finance to agriculture.
0 0 0.0 0.0
ing of the scope has, in all 1975 1980 1985 1990 1995 2000 2004 05 06 – From July 2001 onwards,
likelihood, influenced the Source: ‘Basic Statistical PerReturns’, Reserve Bank of India, variousYear issues; ‘Handbook of Statistics on Indian Economy – 2005-06’,
capita credit to agriculture in rural areas (Rs '00) Log of credit to agriculture
subscription to the bonds is-
Reserve Bank of India; Population Census of India – 1971, 1981, 1991 and 2001.
growth of indirect finance sued by the  rural electrifi-
from the mid-1990s. The major changes introduced in the defini- cation corporation (REC) exclusively for financing the pump set
tion of indirect finance are given below: energisation programme in rural and semi-urban areas was con-
– Till 1993, only direct finance to agriculture was considered as sidered as indirect finance to agriculture.4
a part of the priority sector target of 18 per cent for agriculture – From April 2000 onwards, loans from banks to non-banking
and allied activities. From October 1993, direct and indirect financial companies (NBFCs) for on-lending to agriculture were
finances have been considered together for meeting the priority considered as indirect finance to agriculture.
sector target. – From November 2002 onwards, loans for the construction and
– In October 1993, it was stipulated that indirect finance to agri­ running of storage facilities (warehouse, market yards, go-
culture only up to one-fourth of the total agricultural advances downs, silos and cold storages) in the producing areas and
would be considered while meeting the priority sector target of loans to cold storage units located in rural areas, which were
18 per cent for agriculture. However, the indirect finance over used for hiring and/or storing mainly agricultural produce,
and above one-fourth of total agricultural advances was allowed were consi­dered as indirect finance to agriculture. However,
to be reckoned while meeting the overall target of 40 per cent for from May 2004 onwards, loans to storage units, including cold
priority sector advances. storage units, that were designed to store agricultural produce,
– From May 1994 onwards, loans up to Rs 5 lakh for financing irrespective of their location, were treated as indirect finance
distribution of inputs for allied activities in agriculture, such as to agriculture.
cattle feed and poultry feed, were considered as indirect finances – From May 2004 onwards, if the securitised assets of a
to agriculture. The upper limits were revised and fixed at Rs 15 bank represented indirect finances to agri­c ulture, investment
lakh in April 2000, Rs 25 lakh in April 2002 and Rs 40 lakh in by banks in such assets was considered as indirect finance
October 2004. Table 3: Shares of Direct and Indirect to agriculture.
Finance in Total Credit to Agriculture from
– From June 1996 onwards, loans to dealers in Scheduled Commercial Banks
In this article, we have used data on the
drip irrigation systems, sprinkler irrigation (1985 to 2006, in %) supply of agricultural advances up to 2006,
systems and agricultural machinery were Share in Total Agricultural Credit
and hence, the changes in the definition of in-
Year Direct Indirect Total
considered as indirect finances to agriculture. Finance Finance direct finance only up to 2006 have been list-
From October 2002 onwards, the credit limit 1985 83.2 16.8 100.0 ed above. Some additional changes in the
to these dealers was raised from Rs 10 lakh to 1990 86.8 13.2 100.0
definition of indirect finance to agriculture
1995 85.9 14.1 100.0
Rs 20 lakh; it was further raised to Rs 30 lakh 2000 84.5 15.5 100.0 were introduced after 2006, which may be of
in October 2004. Till April 2003, only loans to 2001 83.9 16.1 100.0 significant rele­vance to future analyses
those dealers located in rural or semi-urban ar- 2002 74.1 25.9 100.0
on agricultural credit. These changes are
2003 77.8 22.2 100.0
eas were under the ambit of indirect finances. 2004 72.8 27.2 100.0 summarised below:
However, from April 2003 onwards, all dealers, 2005 76.1 23.9 100.0 – From April 2007 onwards, two-thirds of loans
irrespective of their location, were treated as 2006 72.1 27.9 100.0
given to corporates, partnership firms and in-
Source: ‘Basic Statistical Returns’, Reserve Bank of India,
eligible for such advances. various issues. stitutions for agricultural and allied activities
Economic & Political Weekly  december 29, 2007 59
 review of agriculture

(such as beekeeping, piggery, poultry, fishery and dairy) in ex- the category “other types of indirect finance” began to increase
cess of Rs 1 crore in aggregate per borrower was considered as from 1994 onwards, and recorded a phenomenal rise in the levels
indirect finance to agriculture. after 1999. From 1999 onwards, “total indirect finance” and
– From April 2007 onwards, loans to food- and agro-based “other types of indirect finance” have also moved in close tandem.
processing units with investments in plant and machinery up to Our estimates show that the share in total indirect finance of
Rs 10 crore (other than the units run by Table 4: Distribution of Amount Outstanding under Total “other types of indirect finance”, which
individuals, self-help groups and coop- Agricultural Advances by Scheduled Commercial Banks was 56.6 per cent in 1999 increased to
(by credit limit size-classes of loans, in %)
eratives in rural areas) were considered Credit Limit Size Share of Amount Outstanding in Total Amount
76.1 per cent in 2006.
as indirect finance to agriculture. Class of Loans (Rs) Outstanding An increase in indirect finance is
As we have seen, indirect finance 1985 1990 1995 2000 2003 2005 2006
necessary to improve the capacity
Less than 25,000 49.6 58.7 52 35.2 23.6 17.8 13.3
to agriculture expanded at a rate of 25,000 to 2 lakh 35.3* 23.9 26 32.4 34.4 34.1 31.4 of farmers to absorb more direct fi-
about 33 per cent per annum since the 2 lakh to 10 lakh 4.3 5.1 11.7 14.0 17.9 19.7 nance. However, the promotion of
late 1990s, thus aiding significantly 10 lakh to 1 crore 7.4 7.6 7.6 6.6 6.3 6.4 6.1 indirect finance should not lead to
1 crore to 10 crore 4.6 4.2 5.6 6.7 7.4 8.0 8.5
the growth of total agricultural credit 10 crore to 25 crore 3.0* 1.3* 3.5* 1.7 4.0 3.3 4.3 an undermining of direct finance.
(Table 2, p 62). Most of the above-cited Above 25 crore 5.7 10.4 12.6 16.8 The RBI’s advisory committee on flow
definitional changes (that either ex- Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of credit to agriculture and related
*  The data are not separately available for the corresponding size-classes.
panded the ambit of indirect finance Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues. activities in 2004 noted the demand
or steeply raised ceilings on loan sizes) Table 5: Distribution of Amount Outstanding under Indirect made by banks to relax the stipula-
also took place since the late 1990s. In Agricultural Advances by Scheduled Commercial Banks tion that indirect finance to agriculture
(by credit limit size-classes of loans, in %)
other words, the task of banks to follow Credit limit Size Class Share of Amount Outstanding in Total Amount Outstanding ) should not exceed 4.5 per cent of the
the government’s directive in 2004 to   of Loans (Rs) 1985 1990 1995 2000 2003 2005 2006 net bank credit.5 This stipulation was
double agricultural credit became con- Less than 25,000 7.4 10.1 6.9 2.8 2.8 1.6 0.9 earlier put in place in order to chan-
25,000 to 2 lakh 19.7* 9.2 4.5 5.2 3.9 3.1 2.2
siderably easier given the major chang- 2 lakh to 10 lakh 8.7 8.8 5.6 10.8 6.8 4.7 nel bank finance directly to farmers.
es in the definition of indirect finance. 10 lakh to 1 crore 32.4 40.1 32.2 21.7 11.7 12.4 9.5 The advisory committee rejected this
As mentioned, indirect finance to 1 crore to 10 crore 22.8 24.0 25.5 25.9 19.2 20.6 19.7 demand by banks and noted that “in-
10 crore to 25 crore 17.7* 7.9 22.2 8.6 11.7 9.3 9.6
agriculture was traditionally under- Above 25 crore 30.3 39.9 46.2 53.5 direct lending needs to be subject to
stood as loans that would not go direct- Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0 certain limitations, lest banks neglect
ly to farmers, but to the activities un- *  The data are not separately available for the corresponding size-classes. direct finance for agricultural produc-
Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues.
dertaken by individuals/institutions tion, which may jeopardise the goal
that aided farmers in undertaking cultivation. Loans given for of achieving annual growth of 4 per cent in agricultural produc-
the provision of agricultural inputs (to dealers), power (to elec- tion” [RBI 2004, p  32].6
tricity boards), and formal credit (to primary agri­cultural credit
societies) were such typical indirect activities. With the defini- 2.2 Increase in Loans with Large Credit Limits
tional changes introduced in the late 1990s, the meaning of indi- Secondly, much of the increase in the total advances to agriculture
rect finance itself has undergone a major change. In Figures 3a in the 2000s were on account of a sharp increase in the number of
and 3b (p 62), we have presented the trends in different types of loans with a credit limit of Rs 10 crore and above, and particularly,
indirect finance to agriculture between 1971 and 2006. As is clear, Rs 25 crore and above. In Table 4, we have provided the distribu-
the traditional components of indirect finance to agriculture did not tion of the amount of agricultural advances (direct and indirect)
exhibit any notable recovery in the 2000s. Instead, loans under by credit limit size-classes of loans for the period 1985 to 2006. A
Figure 2 Trends in the supply of total agricultural advances between 1980 and 2006, and projected linear trend
Figureline2:forTrends
credit supply
in theinSupply
the 1980s, deflated
of Total series, in Rs Advances
Agricultural crore between 1980 and 2006s comparison of figures for 2000 with those of 2006
and the Projected Linear Trend Line for Credit Supply in the 1980s, Deflated Series (in Rs crore) shows that the shares in total advances of ad-
14000000
1.4
vances with credit limit “less than Rs  25,000”
and “between Rs 25,000 and Rs 2 lakh” have
12000000
1.2
shrunk significantly. The share in total advances
10000000
of advances with a credit limit of Rs 25,000 fell
1.0
Advances to agriculture from 35.2 per cent in 2000 to 13.3 per cent in 2006.
8000000
8.0 The share in total advances with credit limit be-
tween Rs 25,000 and Rs 2 lakh also declined
6000000
6.0 from 32.4 per cent to 31.4 per cent in the same
period. On the other hand, the share in total ad-
Advances to agriculture 1980 to 1990
4000000
4.0 vances of advances with credit limit above Rs 25
crore increased sharply from 5.7 per cent in 2000
2000000
2.0
Linear advances to agriculture 1980 to 1990 to 16.8 per cent in 2006. Similarly, the share in
total advances of advances with credit limit be-
0
1980 1981
1980 1982 1983 1984 1985 1986
1985 1987 1988 1989 1990 1991
1990 1992 1993 1994 1995 1996
1995 1997 1998 1999 2000 2001
2000 2002 2003 2004 2005 2006
2004 05 06
tween Rs 10 crore and Rs 25 crore increased from
Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues.
Year
1.7 per cent in 2000 to 4.3 per cent in 2006.
60 Advances to agriculture Advances to agriculture, 1980 to 1990 Linear (Advances to agriculture, 1980 to 1990)
december 29, 2007   Economic & Political Weekly
 review of agriculture

To a large extent, the expansion of agricultural advances with direct finance to agriculture by their credit limits in two different
large credit limits can be explained by the growth of indirect fi- ways: first, by the regular classification followed in this paper,
nance to agriculture. In Table 5, we have provided the distribu- and secondly, a broad size-classification of less than Rs 2 lakh
tion of indirect agricultural advances by credit limit size-classes and above Rs 2 lakh. Between 2000 and 2006, there was a fall in
of loans for the period 1985 to 2006. The table speaks for itself; the share of direct finance with credit limit up to Rs 2 lakh from
between 2000 and 2006, the share of indirect advances with 78.5 per cent to 60.8 per cent. On the other hand, the share of
credit limit above Rs 25 crore in total indirect advances rose from direct finance with credit limit above Rs 2 lakh increased from 22
30.3 per cent to 53.5 per cent. In other words, more than half per cent to 39 per cent. Almost half of the increase in the amount
of the indirect finance to agriculture was accounted for by loans of direct finance outstanding to agriculture between 2000 and
with a credit limit of above Rs 25 crore in 2006. 2006 was accounted for by loans with a credit limit of above Rs
The growing shift in recent times towards loans with large 2 lakh, a size-class in which loans to marginal and small farmers
credit limits are closely related to the changes in official policy are hardly represented (even when we consider a classification
on agriculture in India, which increasingly favours the growth with Rs 10 lakh as the cut-off mark, the trends remain similar.
of a capital-intensive and export-oriented production pattern in The share of direct finance with credit limit less than Rs 10 lakh
agriculture. The changes in the definition of indirect finance to fell from 91 per cent in 2000 to 86 per cent in 2006. The data are
agriculture since the late-1990s have also been in line with the not presented here).
new emphasis in official policy. A closer analysis of changes in the supply of direct finance
to agriculture shows that the share of direct advances in every
2.3  Benefits of Credit Expansion to Big Cultivators credit limit size class above Rs 2 lakh increased between 2000
Thirdly, even while we note the increasing importance of indirect and 2006 (Table 6: Upper Panel). Significantly, there was an ex-
finance, the growth in direct finance to agriculture in the 2000s pansion in the supply of direct finance where the credit limits of
cannot be overlooked. As for data in Table 2 show, direct finance loans were above Rs 1 crore. The share of advances with credit
to agriculture grew at an annual rate of 17.4 per cent between limit of more than Rs 25 crore increased from 1.2 per cent in 2000
2000 and 2006. The magnitude of to 2.6 per cent in 2006. Similarly, for
Table 6: Distribution of Amount Outstanding under Direct
this growth rate is large and needs an Agricultural Advances by Scheduled Commercial Banks advances with credit limit between
explanation, particularly in view of (by credit limit size-classes of loans, in %) Rs 10 crore and Rs 25 crore, the cor-
continuing complaints from political Credit Limit Size Class Share of Amount Outstanding in Total Amount Outstanding
  of Loans (Rs) 1985 1990 1995 2000 2003 2005 2006
responding increase was from 0.4 per
movements and farmers’ organisations Less than 25,000 58.2 66.1 59.5 41.1 29.5 22.9 18.1 cent to 2.2 per cent. On the other hand,
that stagnation in agricultural credit 25,000 to 2 lakh 38.5* 26.1 29.6 37.4 43.1 43.8 42.7 the share of direct advances with credit
continues. 2 lakh to 10 lakh 3.6 4.5 12.8 14.9 21.4 25.5 limit of less than Rs 25,000 fell sharply
10 lakh to 1 crore 2.4 2.6 3.6 3.9 4.8 4.5 4.8
There are two aspects of the growth 1 crore to 10 crore 0.9 1.2 2.3 3.1 4.0 4.1 4.1 from 41.1 per cent in 2003 to 18.1 per
of direct finance to agriculture in the 10 crore to 25 crore 0.0* 0.3* 0.5* 0.4 1.8 1.4 2.2 cent in 2006. Thus, in the 2000s, there
2000s, which render it far less spectac- Above 25 crore 1.2 1.9 2.0 2.6 was a clear shift in the direct agricul-
Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0
ular than it is made out to be. The first Broad size-classes: tural lending of banks away from small
is related to changes in the size of loans   < 2 lakh – 92.2 89.1 78.5 72.6 66.6 60.8 borrowal accounts in favour of large-
under direct finance. Given that direct   > 2 lakh – 7.8 10.9 21.5 27.4 33.4 39.2 sized loan accounts.
Total advances – 100.0 100.0 100.0 100.0 100.0 100.0
finance comprises short-term, medium- *  The data are not separately available for the corresponding size-classes. The second disturbing aspect of the
term and long-term loans given to agri- Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issuses. growth of direct finance in the 2000s
culturists, it is reasonably expected that Table 7: Distribution of Number of Loan Accounts under Direct relates to increasing importance of
the size of loans, on an average, would Outstanding Finance from Scheduled Commercial Banks loans given to big cultivators. The RBI
(by size of operational holdings – 1980-81 to 2004-05, in %)
not be as high as in the case of indirect Year Marginal Small Marginal and Small Big All publishes data on loans provided to
finance. However, there has been a (1) Cultivators Cultivators
(2) (3)
Cultivators
(4)=(2)+(3)
Cultivators Cultivators
(5) (6)=(4)+(5)
cultivators, classified by the size of
considerable growth in the amount of 1980-81 45.8 25.0 70.7 29.3 100.0 operational holdings. Cultivators op-
direct advance to agriculture with very 1985-86 43.3 30.1 73.4 26.6 100.0 erating less than 2.5 acres are referred
high credit limits, a trend comparable 1990-91 43.7 30.9 74.6 25.4 100.0
to as “marginal” cultivators, between
1991-92 42.8 31.3 74.1 25.9 100.0
with that of indirect finance [see also 1992-93 42.1 31.0 73.1 26.9 100.0 2.5 acres and 5 acres are referred to as
Shetty 2006]. 1993-94 43.1 30.8 73.9 26.1 100.0 “small” cultivators and above 5 acres
Data in Table 6 show that in the 1994-95 42.0 31.1 73.1 26.9 100.0
are referred to as “big” cultivators.
1995-96 41.9 32.1 73.9 26.1 100.0
2000s, and particularly between 2003 1996-97 40.5 32.2 72.7 27.3 100.0 Notwithstanding the fact that data
and 2006, there was a fall in the shares 1997-98 39.8 32.9 72.7 27.3 100.0 are provided for only three land size-
of direct advances with lower credit 1998-99 38.3 32.2 70.6 29.4 100.0
classes and that they become avail-
1999-00 38.8 32.3 71.1 28.9 100.0
limits in total direct advances. The 2000-01 38.8 31.1 70.0 30.0 100.0 able with considerable time lag, these
accounts with a credit limit up to Rs 2 2001-02 40.0 32.3 72.3 27.7 100.0 data provide some indications of the
lakh are referred to as small borrowal 2002-03 37.5 32.3 69.7 30.3 100.0
socio-economic groups to which agri­
2003-04 39.9 31.5 71.3 28.7 100.0
accounts (the limit was Rs 25,000 till 2004-05 39.6 31.8 71.4 28.6 100.0 cultural  credit has been flowing in
1998). In Table 6, we have classified Source:‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India. recent times.
Economic & Political Weekly  december 29, 2007 61
 review of agriculture

In Table 7, we have provided data on the share of loan accounts bearing on the increase in the growth of total direct finance since
under direct finance held by marginal, small and big cultivators the late 1990s.
between 1980-81 and 2004-05, which is the latest year for which It needs to be noted that similar to the changes in the defini-
tion of indirect finance, the definition of direct finance
Figure 3a:3Trends
Figure Trends ininthe the Supply
supply of Different
of different Types
types of indirect of Indirect
advances Advances
to agriculture to Agriculture
by scheduled commercial by Scheduled
Commercial
banks, balanceBanks, Balance
outstanding, Outstanding,
deflated figures, 1971 toDeflated
2006, in RsFigures,
crore 1971 to 2006 (in Rs ’000 crore) to agriculture too has been broadened in some ways
50
50000.0 since the late 1990s.
45
45000.0 – From 1997 onwards, short-term loans to traditional
40
40000.0
plantations (such as tea, coffee, rubber and spices), ir-
Indirect advances outstanding (deflated Rs crore)

respective of the size of holdings, were considered as

35
35000.0
Total indirect finance direct finances to agriculture. Later, all loans (short-
30
30000.0
term, medium-term and long-term) to traditional and
25
25000.0
non-traditional plantations and horticulture, irrespec-
20
20000.0
tive of the size of holdings were considered as direct
15
15000.0
Loans to farmers
finance to agriculture.
10
10000.0
through – From April 2002 onwards, the upper limit for loans
Distribution of fertilisers and other inputs PACS/FSS/LAMPS
5000.05 given against the pledge or hypothecation of agricul-
0
tural produce (that includes warehouse receipts) for a
0.0
1971
1971 1976
1976 1981
1981 1986
1986 1991
1991 1996
1996 2001
2001 04 05 2006
06 period not exceeding six months was raised from Rs 1
Source: ‘Handbook of Statistics on Indian Economy 2005-06’, ReserveYear Bank of India.
lakh to Rs 5 lakh for a period not exceeding 12 months.
Figure 3b: Trends
Distribution in the
of fertilisers and Supply
other inputs of Different Types Loans toof Indirect
farmers Advances to Agriculture
through PACS/FSS/LAMPS Total indirect finance The changes summarised above are only up to 2006.
Figure 3 Trends in the supply of different types of indirect advances to agriculture by scheduled commercial
by Scheduled
banks, balance Commercial
outstanding, deflatedBanks, Balance
figures, 1971 toOutstanding
2006, in Rs crore (Deflated Figures – 1971 to 2006, in Rs ’000 crore) A few significant changes in the definition of direct
40
40000.0
finance were introduced after 2006 also. They are,
35
35000.0 – From April 2007 onwards, one-third of loans given to
corporates, partnership firms and institutions for agri­
Indirect advances outstanding (deflated Rs crore)

30
30000.0
Other types of indirect finance cultural and allied activities (such as beekeeping, pig-
25
25000.0 gery, poultry, fishery and dairy) in excess of Rs 1 crore in
aggregate per borrower was considered as direct finance
20
20000.0
to agriculture (as mentioned earlier, the remaining two-
15
15000.0
thirds were considered as indirect finance).
10
10000.0
– From April 2007 onwards, the upper limit for loans
Loans to
electricity boards
given against the pledge or hypothecation of agricul-
5
5000.0
tural produce (that includes warehouse receipts) was
0
0.0 raised from Rs 5 lakh to Rs 10 lakh. Till 2007, the above
1971
1971 1976
1976 1981
1981 1986
1986 1991
1991 1996
1996 2001
2001 04 05 06
2006

Source: ‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India.

type of loans was given only to indivi­dual farmers who
Year
had sought crop loans from banks. From 2007 onwards,
Loans to electricity boards Other types of indirect finance
landholding-wise data is available. The share of loan accounts these loans were given to individual farmers, irrespective of
held by marginal and small cultivators declined in the 1990s, whether they had sought crop loans.
a trend that more or less continued in the 2000s. The share of
accounts held by marginal and small cultivators together was 3 Conclusions
about 73 to 74 per cent in the mid-1990s; in 2004-05, the corre- The increase in the supply of credit to agriculture has been
sponding share was 71.4 per cent. On the other hand, the share of claimed to be one of the most significant achievements in the
loan accounts held by big cultivators rose from about 26 per cent agricultural sector after the formation of the new government
to 27 per cent in the mid-1990s to 28.6 per cent in 2004-05. in 2004. In this article, our effort was to critically examine this
Figure 4 (p 63) provides data on the amount of agricultural claim using secondary data on banking. Four conclusions of our
credit outstanding per account by the size classes of operational analysis may be summarised as below.
holdings for the period 1980-81 to 2004-05. The credit outstand- First, the growth rate of credit flow to agriculture from com-
ing per account for big cultivators was always higher than for mercial banks in the period 2000 to 2006 was 20.5 per cent per
small and marginal cultivators. Also, the difference in credit out- annum, which was significantly higher than the correspond-
standing per account between big cultivators and small and ing growth rate in the period between 1990 and 2000. How-
marginal cultivators has widened over the years. However, ever, contrary to general perception, this revival of credit flow
since the late 1990s, the credit outstanding per account for big to agriculture cannot be attributed to the announcement of the
cultivators rose at a rate highest for any period after 1980-81. government in 2004 to double credit flow to agriculture in three
As a result, the difference between the credit outstanding per years. In fact, the revival had begun in the late 1990s itself.
account of big cultivators on one side and small and marginal Secondly, the extent of revival of credit flow to agriculture in
cultivators on the other widened at a rapid pace. The expansion the 2000s would have been far less impressive in the absence of a
of credit supply to big cultivators is likely to have had a major sharp growth in indirect finance to agriculture. About one-third
62 december 29, 2007   Economic & Political Weekly
 review of agriculture

of the increase in credit flow to agriculture between 2000 and credit limit of more than Rs 10 crore, and particularly, more than
2006 was on account of the increase in indirect finance. This Rs 25 crore. In the year 2000, indirect finance with credit limit
growth did not originate from a growth in the traditional above Rs 25 crore accounted for less than one-third of the total
components of indirect finance, such as loans for the supply of indirect advances to agriculture. However, in 2006, indirect
inputs, power and credit to agriculture. The sharp growth in finance with credit limit above Rs 25 crore accounted for about
Figure 4: Amount of Agricultural Credit Outstanding per Account, by Land Size Classes of Operational
54 per cent of the total indirect advances to ag-
Holdings (1980-81 to 2004-05 in Rs ’000) riculture. It seems likely that these large loans
80 were advanced towards financing the new ac-
tivities added to the definition of indirect ad-
70
Big cultivators vances since the late 1990s.
60
Fourthly, while direct finance to agriculture
also grew rapidly in the 2000s, two features of
50 this growth were notable. There was a major
rise in the share of direct advances with a
40
credit limit of more than Rs 1 crore between
30 2000 and 2006. The amount of direct ad-
vances with  a credit limit of more than Rs 1
20
Small cultivators
crore formed 5 per cent of total direct ad-
Marginal cultivators vances in 2000; the corresponding share in
10
2006 was 9 per cent. The share of direct ad-
0 vances with credit limits “between Rs 10 crore
1980-81 1985-86 1990-91 1995-96 2000-01 2003-04 04-05
Source: ‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India.
and Rs 25 crore” as well as “above Rs 25 crore”
doubled between 2000 and 2006. It appears
indirect finance in the 2000s was, in all likelihood, a result of a that much of these large-sized advances were made towards
series of definitional changes effected since the second half of financing large agribusiness-oriented enterprises. Further, the
the 1990s. These definitional changes broadly involved (a) the most important beneficiaries of the increase in direct advances
addition of new forms of financing commercial, export-orient- since the late 1990s were the big cultivators (who possessed land
ed and capital-intensive agriculture; and (b) raising the credit above five acres). The share of number of loans outstanding to big
limit of many existing forms of indirect financing. Indeed, cultivators under direct finance increased between the mid-1990s
meeting the task of doubling agricultural credit appears to and 2004-05, and the loan per account of big cultivators in-
have become much easier for banks as a result of these defini- creased phenomenally since the late 1990s. There is little evi-
tional changes. dence to argue that the major beneficiaries of the revival in
Thirdly, the entire growth of indirect finance to agriculture agricultural credit in the recent years have been the small and
in the 2000s originated from a major expansion of loans with a marginal farmers.

Notes
1 See http://indiabudget.nic.in/es2006-07/chapt2007/
chap812.pdf.
2 The slowdown in the growth of agricultural credit
flow in the 1990s had prompted. Y V Reddy, the
present governor of the Reserve Bank of India to
note that “…the flow of credit to rural areas by [pub-
lic sector] banks in recent years has not been up to
the mark…In fact, the very purpose of deregulation
of interest rates for this sector, which was expected
to encourage banks to lend higher, does not seem to
have served its purpose fully” [Reddy 2001, pp 4-5].
3 Similar changes have been introduced in the 1990s
by the RBI in the definition of priority sector also. Ac-
cording to Y V Reddy, “…coverage of definition of pri-
ority sector lending has been broadened significantly
in the recent years, thus overestimating credit flows
to actual agricultural operations in recent years”
[Reddy 2001, p 5]. See Shetty (2006) for a list of
changes in the definition of priority sector.
4 However, in July 2004, it was decided not to con-
sider the investments made by banks after April 1,
2005 in the bonds of REC under indirect finance to
agriculture.
5 It may be reiterated here that indirect finance to
agri­culture over and above 4.5 per cent of the net
bank credit is considered under total priority sector
credit. This provision has provided an easy route for
banks to meet the overall target set for priority sector
credit.
6 It is a different matter, however, that many of the
changes in the definition of indirect finance to
agriculture in 2004 were made on the basis of the re-
port of the same advisory committee.
References
Chavan, Pallavi (2002): ‘Some Features of Rural Credit in
India with Special Reference to Tamil Nadu: A Study
of the Period after Bank Nationalisation’, MPhil thesis
submitted to Indira Gandhi Institute of Development
Research, Mumbai.
– (2005): ‘How ‘Inclusive’ Are Banks under Finan-
cial Liberalisation?’, Economic & Political Weekly,
October 22, pp 4647-49.
– (2007): ‘Access to Bank Credit: Implications for Ru-
ral Dalit Households’, Economic & Political Weekly,
August 4, pp 3219-23.
Ministry of Agriculture (2007): ‘Agricultural Credit’ in
Annual Report: 2006-07, New Delhi, at http://ag-
ricoop.nic.in/AnnualReport06-07/AGRICULTUR-
AL%20CREDIT.pdf.
Ministry of Finance (2007): ‘Budget 2007-08: Speech of
P Chidambaram, Minister of Finance’, New Delhi,
February 28, at http://indiabudget.nic.in/ub2007-
08/bs/speecha.htm.
National Bank for Agriculture and Rural Development
(NABARD) (2006): Annual Report 2005-06, Mumbai.
Ramachandran, V K and Madhura Swaminathan (eds)
(2004): Financial Liberalisation and Rural Credit in
India, Tulika Books, New Delhi.
Reddy, Y V (2001): ‘Indian Agriculture and Reform:
Concerns, Issues and Agenda’, RBI Bulletin, May.
Reserve Bank of India (2004): Report of the Advisory
Committee on Flow of Credit to Agriculture and Re-
lated Activities from the Banking System, Chairman:
V S Vyas, Mumbai.
Shetty, S L (2006): ‘Policy Responses to the Failure
of Formal Banking Institutions to Expand Credit
Delivery for Agriculture and Non-farm Informal Sec-
tors: The Ground Reality and Tasks Ahead’, Revised
Version of the Seminar Paper, Monthly Seminar
Series on India’s Financial Sector, ICRIER, New Delhi,
November 14.
available at
KC Enterprises
3-6-136/6, Street No. 17
Himayathnagar
Hyderabad 500 029
Andhra Pradesh
Ph: 09396250107

Economic & Political Weekly  december 29, 2007 63

IGIDR Full Page AD