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Opinion - Farm credit
Agri-Biz & Commodities - Insight


Not by bank credit alone

S. Venkitaramanan

THE Finance Minister, Mr P. Chidambaram, has announced a new initiative to increase the flow of credit to the farm sector. Obviously, he has been led to this move by the story of apparent continued neglect of agriculture by the financial sector and by the various stories of severe distress among farmers in recent years. The initiative will involve a massive exercise in "directed" lending — a departure from the spirit of financial sector reforms.

The Indian Banks' Association, Nabard and the Finance Ministry are busy finalising the details of this massive injection of credit to agriculture. In summary, the programme involves a 30 per cent increase in farm credit in 2004-05 from Rs 80,000 crore to Rs 1,04,500 crore.

Of this, targets set for 27 public sector banks amount to Rs 57,000 crore, regional rural banks Rs 18,500 crore and cooperative banks Rs 39,000 crore. There is also a plan that each of the rural and semi-urban banks will take 100 new farmers under its fold during the year. With 3,30,000 such branches, this means an addition of 3 million new farmers to the banks' fold in a year. Quite an impressive and mind-boggling target!

The aims of Government in initiating such a massive scheme for rural credit expansion are laudable. But the questions that arise are — What are the dangers in such directed lending? And what are the means needed to make the credit useful?

Lest we forget, we had an encounter with similar over-enthusiasm in extension of credit through banking channels in the loan melas of the 1980s. Public memory may be short, but participants can easily recall the festival-like atmosphere that the rural loan melas had.

The involvement of the Government and political agencies was almost complete. The banks were literally force-fed a list of "eligible" borrowers, and cheques were handed out under the aegis of political leaders by Chairmen.

Whether or not this programme led to increase of crop production, it led to a crop of complaints. There was also persecution of many innocent bank managers, whose lending decisions were later found to be wrong. Hindsight is always a perfect 20:20, but the poor banker suffered because he was victim of targets and the mela atmosphere.

Care has to be taken to ensure that the latest Finance Ministry initiative does not degenerate into another loan mela. Lending decisions should be truly bankers' own and not dictated to by local government or political bigwigs.

Unfortunately, the time pressure and the incentive for reaching targets lead to many bankers adopting shortcuts. In fact, I have heard it said that, on the last occasion, bankers went by lists of eligible borrowers, given by local BDOs and other officials.

If they turned out to be uncreditworthy, so much the worse for the banks. But the pressure of performing and targets was too intense! The current programme should obviously avoid the temptation of being reduced to a political show.

While credit is essential, it is not enough. There are a number of improvements that are needed to make agriculture a truly rewarding occupation. First and foremost is the question of rural infrastructure — power, roads, markets, storage facilities. Removal of restrictions on location of storages financed by banks is one of the most important requirements.

At present, apparently to qualify as agricultural lending, storage facilities financed must be located in rural areas, even where marketing considerations would dictate that the storages should be nearer urban centres. This should be modified. Similarly, the restrictions on private sector opening new markets are relics of the old control raj.

Dr M. S. Swaminathan once mentioned that he had suggested an institution in the nature of a Horticultural Development Board authorised to set up cold storage installations and to enable better marketing of horticultural crops. This was in response to the periodic onion crisis of the 1970s — excess production followed by scarcity. This deserves a relook.

There have been certain initiatives in the recent Budgets to encourage investments in cold storage systems. But there is need to sustain such an initiative for private-public partnerships. Corporates should be induced through tax incentives to set up marketing chains.

Perhaps, the main lesson of the Amul success story is the successful integration of marketing production and credit. We need a lot more Amuls in the agriculture sector — particularly in the area of horticulture.

The fact that the farm sector needs more credit is not to be denied. But it is also essential to recognise that credit grows where the demand exists and is viable. Witness the recent boom in housing finance and consumable credit. The Government has to supplement its efforts on credit by a conscious programme for making agriculture a sustainable and profitable occupation. Subsidies, as such, and price controls are a "lazy" way of tackling this issue.

Abundant and reliable power, an open market for trading in agricultural produce without inter-State restrictions — these are among the minimum necessary conditions for agriculture to grow.

Above all, Government needs to focus on evolving a viable crop insurance programme. This requires a lot more groundwork than has been done so far. It has to be based on actuarially calculated premia based on production and yield data over the years. It is important that a sustainable basis be laid for such insurance without relief depending solely on crude "annavari" figures released by State Governments.

That and that alone would be the way out of the episodes of farmer suicides, based on inability to repay debts. The problem of insurance for drought-prone areas is particularly difficult to handle. That this problem would demand an upfront Government subsidy towards the farmers' premium is indisputable.

But that may be a better option than post-suicide ex gratia payments and widespread distress.

While the Finance Minister's initiative to expand agricultural credit through the commercial banks is welcome, there is no gainsaying the fact that the cooperative system needs to be massively restructured. A number of reports on India's cooperative credit structure are gathering dust in Delhi's dovecotes. The least that Mr Chidambaram can do is to initiate a review of all these reports and, more important, take action on them.

If India is to meet the challenges of modern agriculture, there can be no escape from more R&D focussed on India's specific needs. Fortunately, Dr M. S. Swaminathan has been chosen as head of a Commission on farmers' needs. There cannot be a better choice — a blend of scientist statesman and visionary — than Dr Swaminathan to look into the problems of India's farmers and suggest solutions.

We have also the fortunate conjuncture of a Minister for Food and Agriculture, Mr Sharad Pawar, who has hands-on experience of initiating a total revolution in horticulture, using a blend of local and foreign expertise in Baramati in Maharashtra. All that remains is for Mr Pawar to empower a thousand Baramatis all over India — a truly farmer-oriented movement for expanding production and marketing.

In this context, I would like to draw attention to the report of the Advisory Committee on flow of credit to agriculture and related activities from the Banking System, published on April 30, 2004. This Committee appointed by the RBI under the Chairmanship of Prof V. S. Vyas has made extremely detailed and worthwhile recommendations to be implemented by the Government and the RBI.

It is to be hoped that the UPA Government will expedite action on the report of the Dr Vyas' Committee as an adjunct to the implementation of its credit expansion scheme. The well-considered recommendations of the Vyas Committee need to be accepted in order to clear the decks for the successful launch of the ambitious new credit programme.

In assessing the new initiative, one has to remember the record of achievements of various banks insofar as the mandated targets for agricultural lending are concerned. While a target of 18 per cent of bank credit had been stipulated for domestic SCBs for lending to agriculture, the progress has been uneven.

In order to reduce the gap between the mandated figure and the achievement, the Government and the RBI stipulated that the difference between the 18 per cent and the actuals could be credited to the Rural Infrastructure Development Fund (RIDF), bearing a relatively lower rate of interest.

This was to be deposited with Nabard and used for lending to States for rural infrastructure development. In a sense, this was also of the category of investment in SLR bonds. The experience with the RIDF had not been too satisfactory. It is to be hoped that in setting the targets for the new programme, the Government has not allowed for a loophole in the form of a new RIDF.

While I applaud the UPA Government's initiative for extending more credit to farmers, I would argue that more than credit is needed.

Hopefully, the Manmohan Singh Government will be willing to walk the extra mile to meet the genuine demands that India's farmers have.

More than loan melas, we need a truly revolutionary transformation of India's rural marketing and infrastructure, with supplementation from India's scientific community led by Dr M. S. Swaminathan. Let not Mr P. Chidambaram's well-intentioned progranmme for expansion of lending turn into yet another politicised loan mela. Let it be a harbinger of true progress and promise for India's farming millions.

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