What are farm loans?
Lending to the agriculture sector by banks and institutions in India is not just about providing funds to farmers who want to grow crops. Farm credit, going by its definition spelt out by the Reserve Bank of India, includes short-term crop loans and medium-term or long-term credit to farmers. Short-term crop loans are basically borrowings by farmers for six months or a maximum one year to help them raise money before and after harvest. So, banks disburse loans for a range of activities such as buying fertilisers, harvesting, spraying, sorting, grading and transportation of produce to the nearest market. These could be for farmers who are into traditional farming which include a range of crops including sugarcane and pulses besides plantations like tea, coffee and rubber and horticulture. For other activities such as irrigation and farm development or buying of equipment, lenders provide loans for a longer period — for more than a year.
Are other segments of lending by banks classified as loans to the farm sector?
Yes. For instance, banks offer loans for construction of storage facilities — warehouses, godowns and silos, market yards, cold storage units — and for soil conservation and watershed development, seed production, bio-pesticides and plant tissue culture. Though these fit into the broad definition of lending to the farm sector, these are classified as agri-infrastructure loans. Apart from these, there also is lending for ancillary agricultural activities — such as agri-business centres, agri-clinics, food and agro-processing, to customer service units managed by individuals or institutions who maintain a fleet of tractors, bulldozers etc.
Are banks obliged to lend to farmers?
Yes. Starting from the time when the farm sector contribution to GDP or national income was high, policymakers set out mandatory lending targets for banks. In categories defined as priority sector for lending, agriculture is virtually at the top besides small and medium enterprises and housing, export, education and social infrastructure. So 40% of bank credit has to be earmarked for the priority sector with a target set for foreign banks in India too. Within this, there is a sub-limit of 18% for agriculture. Even within this 18%, the RBI has set a target of 8% for small and marginal farmers. Lenders who fail to achieve this target will have to contribute to the Rural Infrastructure Development Fund or RIDF, handled by the central government for making good the shortfall.
Who qualifies as a small or marginal farmer?
For the purpose of lending, a marginal farmer is defined as one with a landholding up to one hectare, while small farmers are those whose landholding is between one and two hectares. It also covers landless agricultural labourers, tenant farmers and sharecroppers, besides self-help groups or groupings of individual small and marginal farmers in agriculture and allied activities.
How much can banks lend to these individual farmers, corporate farmers, cooperatives, farmers’ organisations?
For farmers, lenders can go up to Rs 50 lakh backed by pledge or hypothecation of their produce for a period not exceeding 12 months.
For corporate farmers, cooperatives of farmers and other organisations that are into dairy, fishery, animal husbandry, beekeeping, sericulture and the like, the aggregate limit is Rs 2 crore. For agricultural infrastructure, the borrowing limit is way higher — Rs 100 crore for a borrower. Among ancillary agricultural activities, the loan limit for disposal of farm produce has been pegged at Rs 5 crore for farmers’ cooperatives, while for food and agro-processing it can go up to Rs.100 crore for each borrower.
Is there a cap on interest rates on banks set by the regulator or the government ?
Banks have to lend at a maximum rate of 7% to farmers with the government offering a subsidy of 3% to borrowers who are prompt in repayment. What the government, which controls a large number of state-owned banks, does is subvention or in other words compensation to banks for lending at such low rates.
So why is there competition among state governments to write off farm loans?
It is not just state governments but also successive central governments that have waived farm loans. It may be a political move but in many cases, farmers have been unable to repay because of crop failures or when there is a bumper crop — as has been the case this time and they have to reckon with low prices offered for their produce, including what is called the minimum support price or MSP. In Maharashtra for instance, where the state government has announced a blanket loan waiver of Rs 30,000 crore, the trouble is that it has to content with lower price realisation after two successive years of drought, and after having had to struggle to raise money during the sowing season because of demonetisation.
What is the worry in such loan waivers?
Bankers and economists complain that such a write-off encourages a culture of indiscipline among borrowers. What this does, they say, is promote moral hazard, or in other words it leads to a practice of other borrowers choosing not to repay in the hope of similar loan waivers in the future. RBI governor Urjit Patel had voiced concern earlier about how such loan write-offs undermine an honest credit culture and lead ultimately to a higher cost of borrowing for other borrowers. Besides that, the larger worry is of the fiscal health of state governments or their finances. That’s because the write-offs will not be funded or supported by the central government, as Finance Minister Arun Jaitley said Monday, although Prime Minister Narendra Modi had made an announcement earlier in the run-up to the polls in Uttar Pradesh.
It will mean that each state will then have to find the resources or money to fulfil such promises, which in turn means higher borrowings and perhaps lower spending on development or infrastructure.