STATUS OF RURAL AND AGRICULTURAL FINANCE IN INDIA

STATUS OF RURAL AND AGRICULTURAL FINANCE IN INDIA Dr. K. K. Tripathy The public capital formation in the agricultural sector is on the decline and the traditional concern about accessibility of agricultural credit to the needy rural inhabitants is still alive even after increasing bank branch network, channelling credit through rural credit co-operatives, evolving specialised rural banking institutions (i.e., Regional Rural Banks) and the setting up of apex rural financial agencies like the National Bank for Agriculture and Rural Development (NABARD). India s credit policy aims at providing affordable financial services to the people who have either been left sidelined or have been ignored by the mainstream formal financial institutions. The Reserve Bank of India (RBI) and the Government of India (GoI) have emphasised the significance of rural finance and attempted to create an enabling environment for rural banking towards hassle-free credit inflows to the farm and non-farm sectors in rural areas. Despite the abundance of plans and policies relating to the flow of credit to the agricultural and rural sector, the flow and distribution of agricultural credit in the country remains a topic of great research and debate. The public capital formation in the agricultural sector is on the decline and the traditional concern about accessibility of agricultural credit to the needy rural inhabitants is still alive even after increasing bank branch network, channelling credit through rural credit co-operatives, evolving specialised rural banking institutions (i.e., Regional Rural Banks) and the setting up of apex rural financial agencies like the National Bank for Agriculture and Rural Development (NABARD). In this backdrop, this study attempts to review the rural credit scenario and highlight the issues and problems of the country s banking for rural cultivators and the economically poor. The broad objective of the paper is to assess the country s agricultural and rural credit policies and examine the trends and progress in rural credit flow and its access. Rural credit policies In pre-independent India, the Cooperative 3 3

Societies Act was enacted in 1904 to combat rural indebtedness and to provide a formal and legalised institutional status to credit societies. Cooperation became a philosophy of life and an important guiding principle for the all-round development of people. As self-supporting voluntary community associations, the cooperatives were expected to realise social, economic and political objectives ranging from self-help and grass-root participation to production, distribution and social control over resource allocation and mobilisation. The early years of the twentieth century experienced continuous official attention regarding the provision of rural credit where efforts were taken to (a) giving legal recognition to credit societies in 1912; (b) taking action on a report submitted by Maclagan Committee (1915) on cooperation in India and establishing three tier provincial cooperative banks; (c) founding RBI in 1935 and ensuring the setting up of an agricultural credit department within the Central Bank; and (d) provision of agricultural credit through State Cooperative Banks or any suitable agency engaged in the business of agricultural credit. Post-independent India pursued a Five-Year Planning strategy where cooperatives came to be accepted as an essential instrument of social policy. The Third Five-Year Plan (1961-1966), upholding the values of socialism, freedom of association and democracy, explained: Cooperative should become progressively the principal basis of organisation in many branches of economic life. India promoted an institutional structure for agricultural and rural credit where the cooperative sector ensured directed credit to the farmers and the State Bank of India and its associates were engaged in financing cooperative agencies. The cooperative system was unable to provide adequate support to the needy farmers and rural entrepreneurs as the demand for credit for agricultural inputs, seeds and fertiliser, farm equipment and other allied activities grew manifold with the passage of time. The All-India Rural Survey Committee, constituted in July 1966, recommended the adoption of a multi-agency approach for financing the rural and agricultural sector. This prompted the GoI to nationalise leading banks in 1969 (and in 1980). Following the recommendations of the Working Group on rural banks [constituted by RBI under the chairmanship of M. Narasimham,, Regional Rural Banks (RRBs) 44 were set up in 1975. The NABARD was created in 1982 to enable a sustainable rural specific banking infrastructure and to coordinate and direct the rural financial institutions in a professional and specialised manner. The NABARD played a central and significant role in extending financial assistance and facilitating institutional development in the area of rural credit. The GoI s policy initiatives for strengthening the rural credit delivery mechanism, after bank nationalisation, has laid emphasis on enhancing the flow of credit at the grass-root level through an appropriate credit planning, adoption of regionspecific strategies, rationalisation of lending policies and procedures and reduction of cost of rural borrowings. The credit policy emphasised on the disbursement of rural credit through a multi-agency network consisting of Commercial Banks, RRBs and credit cooperatives. Trends in the Supply of Rural : The flow of agricultural and rural credit witnessed a rapid increase after the first round of bank nationalisation. Between 1971-72 and 2011-12, the agricultural credit witnessed around 578 times jump from merely Rs. 883 crore in 1971-72 to Rs. 5,11,029 crore in 2011-12 (Table-1). The rapid credit growth in rural sector has led to the decline in the role of informal credit agencies, including money lenders as a source of credit. The opening up of rural bank branches was not only due to the supply-side push through government s social control over rural banking but also due to the increase in demand because of population increase and diversification of agroproducts in the post-green revolution era. This is evident from Table-2 where one can see that the initial growth in the spread of rural branch-banking in India during 1980s faded with time and followed a downward trend after 1991. Table-2 shows the distribution of rural population and rural bank offices in India from 1971 to 2012. There were 4,817 rural bank branches during 1971 catering to almost 75 % of people. The corresponding figures for 2012 were 36,334 and 71 %, respectively. While the percentage of rural bank offices to total bank offices was the highest (58.5 per cent) at the end of 1991, it gradually reduced to 36.9 per cent during 2012. The downward trend of post-1992 era (Banking Reform Era) in the opening

TABLE-1: INSTITUTIONAL CREDIT TO AGRICULTURE AND ALLID ACTIVITIES (SHORT AND LONG TERM; 1971-72 TO 2011-12) Year Share in Total (Per Cent) Total Cooperatives State Govts. SCBs RRBs (Rs. Crore) 1971-72 87.1 11.2 1.7-883 1981-82 57.7 3.6 34.8 3.9 4,296 1991-92 50.2 2.9 41.7 5.2 11,538 2001-02 56.4 0.8 34.4 8.4 54,195 2002-03 52.2-38.8 9.0 65,175 2003-04 48.0-43.4 8.6 83,427 2004-05 42.7-45.9 11.3 1,05,303 2005-06 33.4-56.0 10.6 1,44,021 2006-07 28.5-60.8 10.7 1,89,513 2007-08 29.6-58.2 12.2 1,94,953 2008-09 23.89-65.32 10.77 2,45,976 2009-10 16.51-74.33 9.16 3,84,514 2010-11 16.68-73.86 9.46 4,68,291 2011-12 17.21-72.13 10.65 5,11,029 Sources: Handbook of Statistics on Indian Economy, Reserve Bank of India (2012) and Economic Survey, Government of India (2012-13) Notes: SCBs: Scheduled Commercial Banks RRBs: Regional Rural Banks up of bank offices in rural areas may be due to the excessive pressure on the banking system to follow prudential norms on income recognition, asset classification and their provisioning. Profit considerations in the liberalised and globalised scenario have taken priority over expansion of the bank spread in rural areas. TABLE-2: DISTRIBUTION OF POPULATION AND BANK OFFICES IN INDIA (1971-2012) Year % of Rural Population Bank Offices % of Rural to Total Rural Total Banks to Population Total Banks 1971 75.1 4,817 13,622 35.4 1981 69.6 17,656 35,707 49.4 1991 65.4 35,206 60,220 58.5 2001 72.2 32,562 65,919 49.4 2003 71.8 32,303 66,535 48.6 2005 71.3 32,082 68,355 46.9 2007 70.9 30,585 72,165 42.4 2009 70.4 31,829 80,514 39.5 2011 70.2 33,779 90,775 37.2 2012 71.0 36,334 98,536 36.9 Sources: Reserve Bank of India (www.rbi.org.in); Census Statistics 1971, 1981, 1991 and 2011; Economic Survey, 2012-13 The increase in bank credit in the last few years has been a heartening phenomenon in India s banking sector which reflects the economic reform policies followed since 1990 s. However, the overall higher order credit growth in the banking system has not supported the desired expansion of agricultural credit and credit to small-scale industries. Table-3 shows that while the Bank disbursed during 1970-71 as a percentage to the Agriculture GDP was 0.3, the same increased to 2.3 during 1990-91 and to an all-time high of 56.94 per cent during 2010-11. During 1970-71 - 1990-91, the agricultural credit disbursement grew by 12.5 times which resulted in 1.7 times increment in the Agri-GDP. The growth in credit disbursement and Agri-GDP between the years 1990-91 and 2010-11 shows that 46 times increment in credit flow has resulted in 1.84 times increase in the Agri-GDP. This clearly indicates that though the credit disbursement in rural areas has increased manifold the same has caused a very minimal increment in the Agri-GDP. This may be due to a continuous decline in the total factor productivity in Indian Agriculture caused by the absence of a suitable technological breakthrough in Indian agriculture in the post-green revolution era. Indian banking structure grew in strength and stability in the post-nationalisation period. The flow of bank credit to the priority sector considerably rose where the advances to agriculture, small scale sector, small borrowers and other weaker sections of the society indicated a rapid and notable increase. 5 5

Year TABLE-3: AGRICULTURAL CREDIT, AGRICULTURE GDP, TOTAL GDP AND TOTAL COMMERCIAL BANKS CREDIT (1970-71 TO 2010-11) Agricultural Disbursed Agri-GDP Disbursed as a % of Agri-GDP Total GDP Agri- as a % of Total GDP Total Bank Disbursed by CBs Agri-credit as a % of Total CBs 1970-71 818 2,58,665 0.3 5,89,787 0.1 4,684 17.5 1975-76 1,675 2,89,695 0.5 6,84,634 0.2 10,877 15.4 1980-81 3,436 3,05,906 1.1 7,98,506 0.4 25,371 13.5 1985-86 7,159 3,62,783 1.9 10,13,866 0.7 56,067 12.8 1990-91 10,188 4,44,880 2.3 13,47,889 0.7 1,16,301 8.8 1995-96 23,692 5,04,527 4.7 17,37,741 1.3 2,54,015 9.3 2000-01 38,127 5,92,227 6.4 23,42,774 1.6 5,11,434 7.5 2005-06 1,80,486 6,80,628 26.5 32,53,073 5.5 15,07,077 11.9 2010-11 4,68,291 8,22,415 56.94 49,37,006 9.4 39,42,083 11.8 Sources: Handbook of Statistics on Indian Economy, Reserve Bank of India (2012) and Economic Survey, Government of India (2012-13) Notes: 1. Agriculture GDP (Agri-GDP) includes that part of GDP due to forestry, fishing, mining and quarrying 2. GDP figures are in constant (1999-2000) prices till 2000-01 and thereafter at 2004-05 prices. Although the post-nationalisation period in the Indian banking yielded significant changes in the operational policies and practices of the formal financial agencies in the rural areas, yet, it failed to make a significant dent in the age-old attitude of the rural bankers towards financing the so-called less creditworthy but productive small and marginal farmers. The increased outreach and access to agricultural credit in the post-bank nationalisation period coupled with augmented demand due to the Green Revolution of 1960s and enhanced focus on directed priority sector lending could not correct the weaknesses in the rural financial delivery system. This adversely affected the viability and sustainability of these institutions. Further, the security-orientation of loans and the economic and social status of the rural borrowers were the major constraints in requisite credit mobilisation irrespective of branch expansion in rural areas. Rural and Co-Operatives: Primary Agricultural Cooperative Societies (PACs), the grass-root level arms of the three-tier cooperative credit delivery system in India, have been engaged in delivering credit to the poor and weaker sections of the society. As on March 31, 2012, as many as 7.27 lakh villages in India are covered with 93,413 co-operative credit societies (Table-4). There were 1 PAC in every 7.8 villages. Out of 93,413 PACs, as many as 40.74% were loss making as in March 2012. TABLE-4: SELECT INDICATORS OF PRIMARY AGRICULTURAL CO-OPERATIVE SOCIETIES IN INDIA (AS ON MARCH 31, 2012) 1 No. of PACs* 93,413 2 No. of Villages 7,27,911 3 Village/PAC Ratio 7.8:1 4 No. of Profit Making PACs 44,554 5 No. of Loss Making PACs 38,065 6 % Profit Making PACs to Total 47.69 7 % Loss Making PACs to Total 40.74 Source: Trend and Progress of Banking in India, Reserve Bank of India (2012) Note: *Includes no-profit-no-loss PACs as well. The long-term credit cooperative structure consists of the central land development banks at the state level, called State Cooperative Agricultural Rural Development Banks (SCARDBs) and Primary Cooperative Rural Development Banks (PCARDBs) at the district level. The data on year-wise advances and outstanding loans during 1980-81 - 2009-10 indicate that though the advances have marked a rising trend after 1990-91, the ratio of outstanding loans to advances also has jumped manifold (Table 5). Government s interventions and NABARD s control and monitoring mechanism have had a very limited impact on the financial performance reported by various categories of cooperative 66

banks. The increasing Non-Performing Asset (NPA) as a percentage of loans indicates towards a weak financial health of the short term and long term cooperative credit institutions. Growing NPA is due to the gradual erosion in the return to the assets. Thus, these cooperative institutions are now depending heavily on refinancing, budgeting support/state finances and market borrowings. Accumulated losses and NPAs have eaten away their own funds (capital and reserves). As a result, there is a weak possibility of adequate internal generation of resources for sustainable operation of these cooperative banking institutions. This has impacted the financial and operational sustainability of the cooperative institutions. rural credit and Commercial Banks: As in March 2012, 81,240 commercial bank branches were operating in India (Table-6). Out of this, 29.26 per cent were in rural areas which handled 31.41 per cent of the total loan accounts (13.08 crore). The remaining 70.74 per cent of total bank offices consisting of as many as 68.59 per cent of total loan accounts were in urban/metro or semiurban areas. This indicates a great rural-urban divide in the spread of bank offices and access to finance from commercial banks. Data on loan outstanding indicates that an average metropolitan borrower had an outstanding of Rs. 77,079 followed by urban (Rs. 44,806), semi-urban (Rs. 14,811) and rural (Rs. 9,254) borrowers. TABLE-5: COOPERATIVE CREDIT: LOANS ADVANCED AND AMOUNT OUTSTANDING (1980-81 TO 2009-10 IN RS. CRORE) Year PACs SCARDBs PCARDBs Advanced Outstanding Advanced Outstanding Advanced Outstanding 1 2 3 4 5 6 7 1980-81 1,769 2,621.. 362 1,609 1985-86 3,111 4,263.. 595 2,685 1990-91 4,311 6,486 384 1,348 376 2,014 1995-96 10,552 12,980 1,798 6,857 1,219 4,098 2000-01 25,698 34,522 2,586 12,596 1,866 8,276 2005-06 42,920 51,779 2,907 17,678 2,296 12,870 2006-07 49,613 58,620 2,436 18,644 1,970 12,179 2007-08 57,643 65,666 2,226 18,217 1,773 9,529 2008-09 58,787 64,045 2,585 16,279 2,045 11,229 2009-10 74,935 76,480 3,205 16,999 2,465 11,512 Source: Handbook of Statistics on Indian Economy, Reserve Bank of India (2012) TABLE-6: POPULATION GROUP-WISE DISTRIBUTION OF SCHEDULED COMMERCIAL BANK OFFICES, ADVANCE AND OUTSTANDING (AS IN MARCH 2012) Population Offices (Nos.) Accounts (Nos.) Outstanding (Rs. Lakh) Rural 23,776 (29.26) Semi-Urban 22,468 (27.6) Urban 17,878 (22.0) Metropolitan 17,118 (21.07) All-India 81,240 (100.0) 4,11,15,982 (31.41) 3,10,47,873 (23.7) 1,74,42,503 (13.3) 4,12,74,939 (31.5) 13,08,81,297 (100.0) Source: Basic Statistical Returns, Reserve Bank of India (2012) Note: Figures within the parentheses indicate percentage to the column total. 38,05,176.5 (7.9) 45,98,608 (9.6) 78,15,121.5 (16.2) 3,18,13,763 (66.3) 4,80,32,669 (100.0) Loan Outstanding per Account (Rs) 9,254 14,811 44,806 77,079 36,699 7 7

An analysis of the trend of disbursement of finance and loan accounts by category of farmers, it is observed that during 1981-82, out of the total loan accounts with commercial banks, 75.2 per cent were small and marginal farmer (SMF) borrowers possessing land up to 5 acres (Chart-1). However, the credit disbursement to small and marginal farmers was 48.4 per cent of the total disbursement during that year. The majority of finance has gone to the big farmer borrowers owning more than 5 acres of land. Chart-1 indicates that there is a wide gap between the loan accounts and credit disbursal to small and marginal farmers and big farmers during 1980-81 2011-12. During 2011-12, 77.8 per cent of loan accounts (small and marginal farmers) received 63.5 per cent of total disbursed credit whereas 22.2 per cent of loan accounts belonging to the big farmers obtained 36.5 per cent of total loan amount disbursed. This indicates that the credit expansion initiatives have helped considerably the big farmers. Conclusion & The Road Ahead The flow of institutional credit to agriculture and allied activities has increased after the implementation of bank nationalisation and financial liberalisation policies in India. The commercial banks contribute to the majority share of the institutional credit to agriculture. However, the objective of easy accessibility to rural finance has not been fulfilled to the desired extent even after six decades of conscious efforts for institutionalisation of the rural credit. While the cooperative credit institutions are facing difficulties, particularly in mobilising adequate internal resources so as to become self reliant and economically viable units, the distribution of institutional credit to agriculture by commercial banks has lacked equity. The flow of credit from commercial banks has benefited largely the big cultivators in comparison to the small and marginal farmers. This necessitates reviewing the existing policy on flow of rural-credit to ensure adequate, timely and affordable direct credit assistance to the majority of small and marginal farmers in the rural areas. The cooperatives have a great potential in not only enhancing credit facilities to the poor and the needy, but also in distributing effectively agricultural inputs and essential items at the village level. Professionalisation of cooperatives along with modernisation of their operational procedures would facilitate their development as self-reliant and economically viable rural financial organisations. Better managerial skills with efficient risk management, transparency, accountability and quality services are the need of the hour to revitalise the cooperative credit in rural India. To increase the outreach of cooperative credit to its millions of poor members, steps are needed to ensure that the cooperative credit institutions are memberdriven and are based on self-help and democratic principles. The mere revival of institutional credit flow to rural sector will have far less impact on agriculture as there is an increasing trend in the flow of indirect finance to agriculture and rural sector. Indirect finance and finance through NABARD s Rural Infrastructure Development Funds provided an easy escape route for banks to meet their overall target under priority sector lending. This has, no doubt, adversely impacted the overall flow of direct credit to agriculture and rural sector. The policy action is, thus, imminent to review the commercial banks indirect financing and targeting NABARD s Rural Infrastructure Development Fund for parking of funds aimed at fulfilling the objective of priority sector lending. Last but not the least, measure need to be taken to provide a facilitating environment for development of an effective microfinance sector in the country as the flow of microfinance through Self- Help Groups has significant potential in achieving the objective of financial inclusion in transparent and cost-effective manner. (The author is a Director in the Ministry of Rural Development. Views are personal. E-mail: tripathy123@rediffmail.com) 88