How ‘rural' is India's agricultural credit?

One of the most intriguing features of India's agrarian economy in recent years is the persistence of agrarian distress in many regions, even while agricultural credit flow has risen sharply. Rising flow of credit to agriculture is normally associated with buoyancy in the farm sector. A closer look at the data on agricultural credit reveals that what is termed agricultural credit may have very little to do with agriculture, the way we know it.

It is well known that the 1990s were a period of sharp fall in the growth of agricultural credit flow in India. Numerous studies and reports have argued that one of the major factors associated with the agrarian distress in the late-1990s and 2000s was an increase in rural indebtedness, especially to moneylenders. According to the All India Debt and Investment Survey (AIDIS), the share of total debt of cultivator-households taken from formal sources fell from 64 per cent in 1992 to 57 per cent in 2003. In the same period, the share of total debt taken from moneylenders almost doubled from 10.5 per cent to 19.6 per cent.

In the 2000s, however, there was a reversal of the slide in agricultural credit flow. From the early-2000s, growth of credit to agriculture began to pick up. Commercial banks and Regional Rural Banks (RRBs) played a major role in the revival of agricultural credit.

The revival story

The growth of agricultural credit from commercial banks and RRBs, which was 1.8 per cent between 1990 and 2000, increased to 19.1 per cent between 2000 and 2007. The share of credit supplied by commercial banks and RRBs in total agricultural credit increased from 30.1 per cent in 2000 to 52 per cent in 2007.

In part, the revival of agricultural credit was inspired by the announcement by the central government in 2004 that the flow of agricultural credit would be doubled between 2004-05 and 2007-08. Three distinct features of the revival story are worth noting (see R. Ramakumar and Pallavi Chavan, “Revival in Agricultural Credit in the 2000s: An Explanation,” Economic and Political Weekly, December 29, 2007).

First, a significant proportion of the increase in agricultural credit from commercial banks was accounted for by indirect finance to agriculture. Indirect finance refers to loans given to institutions that support agricultural production, such as input dealers, irrigation equipment suppliers and Non-Banking Financial Companies (NBFCs) that on-lend to agriculture.

Second, a number of changes were made in the definition of agricultural credit under the priority sector. The definitional changes broadly involved (a) the addition of new forms of financing commercial, export-oriented and capital-intensive agriculture; and (b) raising the credit limit of many existing forms of agricultural financing. To cite an instance, loans given to corporates and partnership firms for agriculture and allied activities in excess of Rs 1 crore in aggregate per borrower was considered as priority sector lending under agriculture, from 2007 onwards.

These definitional changes were initiated from around the mid-1990s, during the period of financial sector reforms. According to Y.V. Reddy, former Governor of the Reserve Bank of India (RBI), “… coverage of definition of priority sector lending has been broadened significantly in the recent years, thus overestimating credit flows to actual agricultural operations in recent years” (“Indian Agriculture and Reform: Concerns, Issues and Agenda,” RBI Bulletin, May 2001, p. 5).

Third, much of the increase in the total advances to agriculture in the 2000s was on account of a sharp increase in the number of loans with a credit limit of Rs.10 crore and above, and especially Rs.25 crore and above.

Even within direct agricultural finance, which goes directly to farmers, there was a sharp rise in the number of loans with a credit limit above Rs.1 crore. It seems likely that these large loans were advanced towards financing the new activities added to the definition of agricultural credit.

Recent data on banking has brought out a fourth disturbing feature of the revival in agricultural credit. There has been a sharp growth of agricultural finance that is urban in nature. Between 1995 and 2005, the share of agricultural credit supplied by urban and metropolitan bank branches in India increased from 16.3 per cent to 30.7 per cent ( Table). The share of agricultural credit supplied by metropolitan branches alone increased from 7.3 per cent in 1995 to 19 per cent in 2005. While there was a moderate decrease in these shares between 2006 and 2008, urban and metropolitan branches continued to supply about one-third of the total agricultural credit in 2008. Concurrently, there was a sharp fall in the share of agricultural credit supplied by rural and semi-urban branches from 83.7 per cent in 1995 to 69.3 per cent in 2005. In 2008, the share of rural and semi-urban branches in total agricultural credit was 66 per cent.

Inside Maharashtra

Let us now take Maharashtra, which boasts of strong banking development and yet is the State with the largest number of suicides by farmers. In Maharashtra, almost half of the total agricultural credit from commercial banks in 2008 was provided by metropolitan branches. Mumbai alone had a share of 42.6 per cent in the total agricultural credit supplied in Maharashtra as a whole in 2008. As a result, there has been a widening of the gap between the rural and metropolitan areas of Maharashtra in the provision of agricultural credit. Rural branches provided only 25.7 per cent of the total agricultural credit in Maharashtra in 2008.

It may be argued that credit taken, whether in metropolitan or rural areas, would ultimately benefit the agricultural sector. What is missed in this argument is that an urban and metro-centric supply of agricultural credit would only benefit large corporations with their headquarters in cities and engaged in agricultural production.

The actual farmer in the villages, particularly the small and marginal ones, would benefit the least from the non-rural nature of growth of agricultural credit. Regionally speaking, farmers from Vidarbha in Maharashtra, the region from where a large number of farmers' suicides have been reported, are likely to be the section that has the least benefit.

The increasing concentration of agricultural credit in the urban and metropolitan areas offers a missing link in the discussion on the persistence of agrarian distress despite the revival in agricultural credit in the 2000s.

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Printable version | Oct 20, 2020 11:19:13 AM |

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