Overhaul agri credit

The RBI mandates banks to finance priority sectors (such as agriculture) up to 40 per cent in overall bank credit. The mandate for agriculture credit is up to 18 per cent.

The priority sector lending (PSL) guidelines issued on September 4 rightly emphasised the necessity of financing agriculture in myriad ways; financing in 184 credit-starved districts (where per capita priority sector lending is ₹6,000) and higher weightage for such loans, stepping up loans to small and marginal farmers from 8 per cent to 10 per cent in a phased manner, emphasis on financing: farmer producer organisations, pledge and warehouse receipt loans, start-ups, etc.

Agriculture credit comprises short-term (loans <18 months) and long-term (loans >18 months) loans. The loans given to agriculture reached a respectable ₹13.74 lakh crore in FY2020 and bankers should be acknowledged for achieving agriculture credit targets every year.

Long-term loans

But an inconvenient fact that lingers is the extent of long-term loans and granular details. Long-term loans have been rising and reached a healthy 40 per cent in FY2020. Long-term loans are crucial as they propel capital formation in agriculture.

Hence, the government supports them through credit-linked subsidies. The recent ₹1,00,000-crore Agriculture Infrastructure Fund is an illustrious example. The activity-wise breakup of long-term loans and the crop-wise breakup of short-term loans are not available in public domain, constraining policy review. This is not a surmountable issue if everyone is willing.

The emphasis so far was to provide different types of short-term and long-term loans. It is time we look at agriculture credit with a pair of new glasses especially when doubling farmers’ income is the national goal.

We have always financed production. Now let’s look at markets as the starting point. To illustrate, an aggregator supplying to agriculture markets might have developed his supply chain and also financed it. But, timely credit with reasonable interest rates is a universal problem.

If banks analyse such supply chains and provide necessary credit to all their constituents, efficiency improves and supply chain expands benefiting farmers immensely and, in turn, banks.

Efficiencies play out in terms of more farmers linked to an aggregator, better crop-husbandry practices, improved post-harvest practices as farmers receive direct market feedback, linkages to agri-input manufacturers, direct involvement of transport, storage, processing and marketing players, overall reduction in intermediaries and, thereby, reduced loan defaults.

This is called ‘agriculture value chain financing’.

Is this approach not happening? Yes, it is happening, to some extent, for a long time in the sugar and dairying sectors. But considerable scope for optimisation and improvisation of value chain exists for the income gain of farmers. In other crop segments, value chain financing is limited.

Can it be expanded? Yes, it should be. Should anyone mandate this? No, because it can expand the bank’s business and benefit farmers and the entire supply chain.

May be, incentivisation of bankers might hasten the shift — ₹100 financed under value chain may be counted as ₹125 under PSL.

The writer is Deputy Managing Director, NABARD. Views are personal