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Updated: July 12, 2012 23:29 IST

Beef up credit flow to farm sector: Subbarao

Special Correspondent
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D. Subba Rao
The Hindu
D. Subba Rao

While asking banks to find innovative ways of reaching out to farmers, the Reserve Bank of India (RBI) Governor D. Subbarao, on Thursday, said that improving the performance of agriculture was the key to India’s quest for inclusive growth and poverty reduction.

“We need to do many things to improve the performance of our agriculture sector; improving the flow of agricultural credit is one of the important ones. This requires effort from all the three institutional segments — commercial banks, RRBs and cooperatives,” said Dr. Subbarao while delivering the National Bank for Agriculture and Rural Development’s (NABARD’s) 30th anniversary lecture on ‘Agricultural credit-accomplishments and challenges’ here.

NABARD’s role

“Banks need to find innovative ways of reaching out to farmers, RRBs need to leverage on their comparative advantage and cooperatives have to improve their governance structures. As the premiere public institution in agricultural credit, NABARD’s role is crucial in this regard,” he added.

Despite the impressive gains made by the rural credit delivery system in terms of resource mobilisation, geographical coverage and functional reach, Dr. Subbarao said the financial health of the rural credit institutions had deteriorated raising questions about their sustainability. “Nearly three quarters of the farmer households still do not have access to the formal credit system and have no means to insure themselves against income shocks. This leaves them vulnerable to the informal money lenders.”

On cost of credit to agriculture, Dr. Subbarao said “We need further studies to understand whether the interest subvention scheme is distorting the flow of agricultural credit.” Anecdotal evidence suggested that some agricultural loans, contracted at a sub-market rate of interest because of the subvention, are being diverted to non-agricultural purposes. “This evidently defeats the objective of the subvention scheme, and needs to be corrected either by remodelling the subvention scheme or through tighter monitoring of the end use of agricultural loans.”

The RBI Governor said that some factors ostensibly translated into higher transaction costs, which included expenses incurred in appraisal of borrowers, processing, documentation and disbursement charges, loan monitoring/supervision and collection, and the proportionately allocated cost of branch, division and head office expenses. “It is necessary to reduce such transaction costs to lower the cost of delivery of credit and cost of funds to the ultimate borrower in the agricultural sector,” he added. Dr. Subbarao said that deteriorating financial health of unlicensed cooperative banks was an issue of concern. Of the 402 cooperative banks in the country as on March 31, 2009, 313 were unlicensed. After RBI’s intervention, as on April 1, 2012, there remained 43 cooperative banks which could not meet even the relaxed licensing norms. The RBI had given them six months time, up to September 30, to formulate action plans for attaining the eligibility norms. He said that the RBI had been guided by the need to protect the interests of depositors and the decision was taken in the best public interest.

Provision of credit was necessary, but not sufficient, to improve agricultural production in the country. “Credit needs to be supplemented by research and knowledge dissemination to the farmers,” said Dr. Subbarao, adding, “rebuilding an agricultural extension system that is knowledgeable, enthusiastic and sensitive to the Indian learning culture remains a challenge.”

Nearly 65 per cent of agriculture in India is rain-fed, cultivated largely by small and marginal farmers and improving productivity is critical to overall agricultural growth. “We cannot raise agricultural growth consistently to 4 per cent per annum without a focus on research and agricultural credit in rain-fed areas,” he said. There is also need for more robust weather insurance and agricultural extension services to target diversified livelihood options in the rain-fed areas.


If the banks cannot lend to farmers, then who will grow crops? The
basic necessity of a person is food. The government also need to
come up with innovative plans to modernize the agriculture sector.
They cannot simply be passive.

from:  Satish
Posted on: Jul 15, 2012 at 10:15 IST

Problem of delivery of credit to non-owner farmers of small and medium farm lands, crop
insurance procedure streamlining, control on quality of seeds and fertisers supplied, should
be addressed by government in an integrated manner. Of course price of the output should
follow the recommendations ofSwaminathan, based on cost of inputs not by
administered process. Just because you have bumper stocks in your god owns, you can not
ignore the agriculture sector.

from:  MVJRao
Posted on: Jul 15, 2012 at 09:28 IST

Government should bring out a separate AnnualBudget on the lines of Railway Budget and
fix procurement prices based on input costs(not administered prices) on the lines of petrol
prices, as recommended by SwaminathanCommittee which is sent to archives of Govt.
Effective distribution of seeds and fertilizers and credit to small and medium farmers with
proper control mechanism will definitely improve agricultural sector.

from:  MVJ Rao
Posted on: Jul 14, 2012 at 09:28 IST

Is it a blatant attempt by a bankrupt government to pauperise the well run banks? We Indians have a habit of high preaching and meddling into everything where we need not express opinion.

from:  Pramod
Posted on: Jul 13, 2012 at 14:37 IST

Governor Subbarao was rather vocal when he spoke of the problem of the credit
delivery mechanism in the rural areas. His touching upon the governance aspects
of rural institutions was essential for there is ample scope to raise the governance
as well as ethical standards in those organizations. His special mention of the need
for a thorough study of the subvention scheme in the light of the experiences
gained would go a long way in doing things in newer ways. The delivery
mechanism about which lot is said should be improved since it is often reported
that the final beneficiaries still are at the mercy of the intermediaries. We are yet to
see how far UADAI will come to the rescue. Transaction costs and delivery costs
together become a heavy burden on the ultimate beneficiaries. What was
introduced during the green revolution period like multiple advice on technology,
credit etc. should be integral to the agricultural development.

from:  Dr. K. U. Mada
Posted on: Jul 13, 2012 at 11:52 IST

That the RBI Governor had to raise this issue after over 60 years of the
Mundhra episode, speaks quite a lot on the way government is behaving
with the financial instituions it owns.

from:  s.subramanyan
Posted on: Jul 12, 2012 at 18:49 IST

This is a very bold statement coming from any Governor of the RBI
indicting the Government, though couched in a flowery language, which
I have seen as an Ex-Banker. It establishes direct interference of the
Government in the day to day functioning of the institutions which it
owns; the so called autonomy of these institutions is just an eye-wash
and there is always a divergence of perception between the RBI and the
Government on several basic issues relating to the country's economy
bordering on the encroachment of the turf of the RBI by the
Government. To quote a recent instance, the then FM was favoring
interest rates cut to facilitate growth while RBI maintained status
quo to control inflation pointing out that interest rates were not the
reasons for downward trend in the economy and several steps were
required from the Governmental level. I hope Dr.Manmohan Singh, as a
former Governor of the RBI and present FM/PM will see that no
encroachment happens. Hats off to Duvvurigaru.

from:  T.N.Sethumadhavan
Posted on: Jul 12, 2012 at 17:47 IST
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