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Reserve Bank of India’s (RBI) Internal Working Group (IWG) to Review...

  Jun 01, 2020

Reserve Bank of India’s (RBI) Internal Working Group (IWG) to Review Agriculture Credit: Recommendations

What are its recommendations?

How do you classify marginal and small farmers?

‘Marginal Farmer’ means a farmer cultivating (as owner or tenant or share cropper) agricultural land up to 1 hectare (2.5 acres).

‘Small Farmer’ means a farmer cultivating (as owner or tenant or share cropper) agricultural land of more than 1 hectare and up to 2 hectares (5 acres).

What is priority sector lending?

Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

Why does the IWG recommend higher amount of credit to SMFs?

The group is in favour of revising the sub­target for small and marginal farmers to 10% from the existing 8% of net bank credit with a roadmap of two years because the sector still faces challenges such as 

Why does IWG oppose loan waivers?

Loan waivers are not the panacea to address the underlying risks (to farmers). In fact, they destroy the credit culture which may harm the farmers’ interest in the medium to long term and also squeeze the fiscal space of governments to increase productive investment in agriculture infrastructure. They divert expenditure from social sector to populism.

Are interest subsidies desirable?

No, according to IWG. Farmers get crop loans upto Rs 3 lakh at a sub­sidised 7% rate in normal course which comes down further to 4% on prompt repayment. IWG said that subsidised interest rates have resulted in skewed distribution of agricultural credit in favour of production credit against investment credit. 

There is diversion of such cheap credit also to non-agricultural purposes. 

What alternative does it propose to interest rate subsidy?

Direct cash transfer as said above.

What important credit distortions did the IWG bring out?

  1. a sizeable part of the institutional loans extended to the farm sector is being diverted. In Andhra Pradesh, for instance, the crop loans given between 2015 and 2017 were seven and a half times the sum needed by the cultivators to meet their input needs. Yet, the informal sector (moneylenders) remains a critical source of funding for farmers all over the country. 
  2. agricultural credit sector and its skewed distribution. The bulk of it is going to the big landholders, leaving small and marginal farmers at the mercy of moneylenders. The RBI report reckons that nearly 41 per cent of the small and marginal farmers, who constitute over 86 per cent of the total farm households and need credit the most, are not covered by the scheduled commercial banks. So are a large number of tenant farmers and sharecroppers who also badly need low-cost loans. 
  3. agriculture’s allied fields are by and large being neglected in credit allocation. The associated sectors such as animal husbandry, fisheries and forestry, which now account for about 40 per cent of the agri-GDP, are getting less than 7 per cent of the total institutional loans. 
  4. Similarly, the share of the investment credit in the overall farm loans has shrunk sharply from almost 50 per cent in 2000 to barely 25 per cent in 2016. 
  5. the present system of higher subvention of interest on timely repayment is being exploited by some resourceful farmers to invest subsidised finance in fixed deposits at higher interest rates.

What corrections can be applied, according to the IWG?

IWG suggests that these drawbacks can be overcome by 

Based on the IWG report, what issues need policy attention?

The various initiatives taken over the years at the national level has led to a huge increase in the credit support for agriculture. Credit to agriculture, which was just about 20 per cent of the sectoral GDP in the 1990s (reform years), has grown to 51 per cent in 2018. However, the IWG report has brought to surface need for certain reforms. They are the following:

  1. Despite many initiatives aimed at financial inclusion, only 41% of small and marginal farmers could be covered by banks. There is a need to increase the coverage of SMF by banks as they constituted 86 per cent of total operated holdings.
  2. Agri credit has been much too skewed in favour of crop loans at the cost of the allied agri activities. It is observed that the allied sector has a share of 38-42 per cent of the agricultural output during 2014-2016, though it has only a share of 6-7 per cent in total agri credit during the same period. With a livestock population of 125 crore, India has been the world’s largest milk producer with an output of 188 million tonnes worth over Rs. 6.50 lakh crore. With fish production at 13.7 million tonnes, we are next only to China. One reason why bank credit has flown more towards crop loans is because of the sizeable interest subsidy which crop loans get as opposed to loans for allied agri activities. One recent announcement by the Union government has been the inclusion of the allied agri activities for KCC loans, which will ensure that interest subsidy flows for this segment too. Hopefully, the skewness in credit flow will get corrected over a three-year period.
  3. The third notable theme is the focus on public investment that the report incorporates. Public investment in agriculture has shown a secular declining trend. Gross Capital Formation in agriculture as a percentage of agri-GDP was 18.2 per cent in 2011-12 declining to 13.8 per cent in 2016-17. As the report states, there is thus a need for the governments to improve their spending towards capital expenditure, which ultimately will stimulate the demand for investment credit in the agriculture sector.
  4. Agriculture is a State subject and therefore the States have to act. The IWG’s recommendation for an inter-State GST-type council for agriculture is relevant.
  5. Direct benefit schemes will make money available to boost consumption and thus investment and employment.