Farm credit industry has seen transformation, but changes are on the way
Currently, farm credit is being delivered, besides informal money-lenders, by institutional agencies viz. commercial banks, Regional Rural Banks and Co-operatives. The money-lenders supply a little less than half of the total borrowings of farmers mostly for consumption purposes including conspicuous consumption. The share of private local area banks is yet to assume significant proportion in farm credit. There are also recently entered micro-finance institutions (MFIs) and their numbers have been proliferating. The high rate of interest ranging from 15-50 % charged by the MFIs generally make them unsuitable for farm credit as the average rate of return on investment in agriculture may be around 15-20 %. More recently, the emergence of corporate finance, primarily in financing agri-machinery has been observed. Of all sources, institutional credit, is still the predominant source of credit.
By virtue of a central government mandate, the credit flow to agriculture more than doubled from Rs.869.8 thousand crore in 2003-04 to Rs.2.29 lakh crore in 2006-07. This reflected the view that farm credit is indeed productive. But in 2008, the same government announced a Debt Waiver and Debt Relief Scheme writing off loans worth Rs.73 thousand crore. This implied ex-post sterility of farm credit.
The biggest challenge before farm credit from institutional sources has always been the increase in outreach, i.e. timely availability of farm credit in adequate amount to a large section of disadvantaged farmers. Right from the time of independence, institutionalisation of farm credit has been the prime objective and yet in practice there is a tardy process lingering on the exclusion of a large number of small, marginal and sub-marginal farmers. Credit also has a strong tendency to perch on where it is relatively safe and shy away from the risky rainfed regions that constitute around 60% of the total cultivated area. Since most of the farmers currently borrowing from financial institutions are located in irrigated areas, the challenge before institutional credit is to increase its outreach in the rainfed and dry regions in keeping with the technological leverage in these areas.
Currently, farm credit is being delivered, besides informal money-lenders, by institutional agencies viz. commercial banks, Regional Rural Banks and Co-operatives. The money-lenders supply a little less than half of the total borrowings of farmers mostly for consumption purposes including conspicuous consumption. The share of private local area banks is yet to assume significant proportion in farm credit. There are also recently entered micro-finance institutions (MFIs) and their numbers have been proliferating. The high rate of interest ranging from 15-50 % charged by the MFIs generally make them unsuitable for farm credit as the average rate of return on investment in agriculture may be around 15-20 %. More recently, the emergence of corporate finance, primarily in financing agri-machinery has been observed. Of all sources, institutional credit, is still the predominant source of credit.
By virtue of a central government mandate, the credit flow to agriculture more than doubled from Rs.869.8 thousand crore in 2003-04 to Rs.2.29 lakh crore in 2006-07. This reflected the view that farm credit is indeed productive. But in 2008, the same government announced a Debt Waiver and Debt Relief Scheme writing off loans worth Rs.73 thousand crore. This implied ex-post sterility of farm credit.
The biggest challenge before farm credit from institutional sources has always been the increase in outreach, i.e. timely availability of farm credit in adequate amount to a large section of disadvantaged farmers. Right from the time of independence, institutionalisation of farm credit has been the prime objective and yet in practice there is a tardy process lingering on the exclusion of a large number of small, marginal and sub-marginal farmers. Credit also has a strong tendency to perch on where it is relatively safe and shy away from the risky rainfed regions that constitute around 60% of the total cultivated area. Since most of the farmers currently borrowing from financial institutions are located in irrigated areas, the challenge before institutional credit is to increase its outreach in the rainfed and dry regions in keeping with the technological leverage in these areas.
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