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.
“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.