India - Farm Credit slowdown

After years of healthy growth, the flow of credit to the agriculture sector has slowed down markedly this year. The ambitious goal of disbursing Rs 2,80,000 crore through institutional credit channels, against Rs 2,43,500 crore last year, is unlikely to be attained. The latest official reckoning is that in the first six months of the year, hardly a third of the stipulated amount has been advanced to the farm sector by commercial banks, regional rural banks (RRBs) and other institutional sources of credit. Not only is the pace of farm lending slower than what is required to meet the target, the total outgo so far is also well short of the last year’s corresponding position. Though farm credit invariably picks up in the second half of the year, the increase is usually marginal. Therefore, even if the finance ministry succeeds in pushing the banking sector to step up disbursement, the backlog is unlikely to be cleared. Failure this year would contrast with the experience in past years, when progressively higher targets were often exceeded by wide margins—which is why the government’s aim in 2004 of doubling farm credit has been achieved ahead of schedule.

Of the several reasons for retarded credit flow, the two most significant are the general absence of liquidity in the market and the severe blow dealt to the agricultural loan repayment culture by the loan waiver decision this year. This latter made banks and cooperatives alike wary of liberal lending, for fear of repayment defaults. The delay in providing the promised reparation to the banking sector for the written-off loans only worsened the situation. The first instalment of Rs 25,000 crore is being released only now. The cooperative banks and RRBs, which were hit the most by the debt waiver due to their greater exposure, are going to get only Rs 15,000 crore, which is not enough to help them recoup their losses in their entirety. In any case, the health of a sizable number of cooperative credit institutions is far from satisfactory and many of them have gone under in the recent past; the latest is the Gujarat-based Nutan Sahakari Bank, whose licence was cancelled by Reserve Bank last week on account of insolvency.

The reduced availability of institutional credit will force farmers to tap informal sources of credit, and pay usurious interest rates. Since the bulk of the borrowed money goes into buying yield-enhancing inputs, such as farm machinery, fertiliser, seeds, pesticides and the like, the credit crunch can potentially affect agricultural production as well. Timely action is called for to reverse the downturn in credit flow.