The Reserve Bank of India’s Internal Working Group (IWG) to review agricultural credit — headed by Deputy Governor MK Jain — has raised several concerns on the farm front as lakhs of small and marginal farmers (SMF) are yet to be covered by the banking system.
Despite so many initiatives and schemes aimed at financial inclusion, only 40.90 per cent of SMF could be covered by the scheduled commercial banks (SCBs), the report submitted by the RBI panel has said.
Those farming for consumption not availing bank credit
the RBI’s Internal Working Group to review agricultural credit noted that among the probable reasons why a major share of small and marginal farmers are left out of institutional credit could be that their credit demand could be for consumption purposes. Another reason, the panel said, could be that banks do not find tenant farmers, sharecroppers and landless labourers — who are not able to offer collateral security to avail institutional credit, or are involved in unviable subsistence agriculture — credit worthy.
On the other hand, the working group has raised concerns over SMF seeking funds outside the banking system. A significant portion, approximately 30 per cent of agricultural households, still avail credit from non-institutional sources only which is a “cause of concern”, the RBI panel said in its report.
At the aggregate level, banks have been able to achieve the sub-target of SMF under the priority sector lending (PSL). “Though this reflects a satisfactory performance in terms of achievement of target by banks, a large proportion of SMF have not been covered by SCBs,” Jain panel said.
The IWG report succintly reveals the extent of financial exclusion in the farming sector.
As per PSL Returns, 2015-16 of the banks, the number of accounts under the small and marginal category are 5.138 crore and the total number of SMF in the country as per Agriculture Census, 2015-16 was 12.563 crore. This indicates that more than seven crore SMF are not covered by the banking system.
“There is a need to increase the coverage of SMF by banks as they constituted 86.21 per cent of total operated holdings and have 47.34 per cent share in the operated area,” the IWG said.
The RBI panel said there is a need to ascertain the reasons why 30 per cent are still left out from getting institutional credit. It said the probable reasons could be that their credit demand could be for consumption purposes or they could be tenant farmers, sharecroppers and landless labourers who are not able to offer collateral security to avail institutional credit, or they are involved in unviable subsistence agriculture or banks do not find them credit worthy.
“As a result, these farmers find it convenient to borrow money from non-institutional sources due to easy accessibility,” it said. The analysis by the working group shows that the presence of a large number of SMF in a state has not translated into proportionate number of loan accounts, highlighting the extent of financial exclusion among these farmers.
Furthermore, the pattern of percentage share in the number of loan accounts in a state does not match with the percentage share in amount outstanding particularly in the states such as Bihar, Odisha and West Bengal, the report said.
Tamil Nadu has come out as an outlier, having only 6 per cent share in the total number of SMF, although it is the leading state in terms of share in total number of loan accounts (17 per cent) and the highest share in amount outstanding (13 per cent).
Similarly, Andhra Pradesh has a higher share in the number of accounts as compared to its share in number of SMF across the country.
“Further, in states such as Bihar, Jharkhand, Odisha and West Bengal, the percentage share in loan outstanding is not proportionate to their percentage share in the number of loan accounts. This, in a way, may be an indication that the amount of loan per account for small and marginal farmers in these states was lower than that of other states,” the IWG report said.
As per the NABARD All India Rural Financial Inclusion Survey (NAFIS) 2016-17, the share of non-institutional credit in 2015 was 28 per cent.
As against this, the share of institutional credit in agriculture increased from 10.2 per cent in 1951 to 63 per cent in 1981 and thereafter the share of institutional credit was hovering in the range of 63-65 per cent during 1981 to 2013.
As per the NAFIS, in 2015, the share of institutional credit was approximately 72 per cent.
According to the Jain panel report, the total number of operational holdings in the country was 146 million and total operated area was 157.14 million hectare (ha) in 2015-16.
The small and marginal holdings taken together (0.00-2.00 ha) constituted 86.21 per cent, while their share in the operated area stood at 47.34 per cent in 2015-16. The average size of land holding in 2015-16 was 1.08 ha.
On regional disparity in agricultural credit, the Reserve Bank panel said some of the states are getting much higher share — as high as 10 per cent of total agricultural credit — compared to other states getting as low as 0.5 per cent.
Also, in some states — Bihar, Chhattisgarh, Jharkhand, West Bengal — bank credit was not proportionate to their share in agricultural output, it added.
Though at the aggregate level banks, have been able to achieve the overall PSL target of 40 per cent, so far they have failed to achieve the agriculture target of 18 per cent at system-wide level, the report said.
However, public sector banks have achieved 18.12 per cent as against private sector banks’ achievement of 16.30 per cent in fiscal year 2018-19.