Summary Notes on Agricultural Credit Issues

Summary Notes on Agricultural Credit Issues(Reference: India’s Agricultural Development under the New Economic Regime: Policy Perspective and Strategy for the 12th Five Year Plan Vijay Paul Sharma, W.P. No. 2011-11-01, IIM(A), November 2011.)

Agricultural credit has played a pivotal role in increasing agricultural production in India. The Green Revolution characterised by a higher use of modern inputs like fertilizers, high yielding variety seeds, irrigation and other inputs, increased credit requirements which were provided by the agricultural financial institutions.

The flow of credit to agriculture has increased significantly in the recent period as the total institutional credit to agriculture increased from Rs. 86,981 crore in 2003-04 to Rs. 446779 crore in 2010-11, at an annual compound growth rate of about 25 percent. The actual achievement in flow of credit has exceeded the targets during the period . In terms

of total agency wise share, the commercial banks recorded a considerable growth (from around 36 per cent in TE 1993-94 to about 75 percent in TE 2010-11), while cooperative banks despite their wide network lost their dominant position and their share declined from 58.3 percent inTE 1993-94 to 15.8 percent in TE 2010-11. The share of Regional Rural banks (RRBs) has increased from about 5 percent to 9.4 percent during the above period (Figure 12). Since cooperatives have strong presence in rural areas, the co-operative credit institutions need revamping to improve the efficiency of the credit delivery system in rural areas.

Though the amount of agricultural credit has increased during the last few years, several

weaknesses have crept in which have affected small and marginal farmers’ access to formal sources of credit. The Task Force on Credit Related Issues of Farmers observed that small and marginal farmers especially tenant farmers, oral lessees, share-coppers, who constitute the bulk of farming community, do not have adequate access to formal sources of credit (GoI,2010c). Between TE 1993-94 and TE 2008-09, the share of small and marginal farmers in total operational holdings increased but their share in number of credit accounts decreased from75.3 percent to 69.2 percent and in amount of credit disbursed decreased from 53.6 percent to 48.6 percent (RBI, 2011). On the other hand, for medium and large farmers the share of credit increased from 46.4 percent in TE 1993-94 to 51.4 percent in TE 2008-09 and number of accounts increased from 24.7 percent to 30.8 percent during the period. Similarly, per account credit disbursed across farm sizes had increasing skewed and the gap has widened between small and marginal and large farmers. There are wide variations in the availability of institutional credit per hectare of gross cropped area in different States.

The region-wise per account credit disbursed by commercial banks for different size-class farmers shows that amounts are relatively higher in northern and western region while in north-east and eastern regions credit disbursal is poor, which is a matter of concern. Another issue is decline in rural branches of commercial banks in the post-reforms period. Total number of commercial bank offices has increased significantly since nationalization of banks in 1969, the number of rural branches, which reached its peak in early 1990s (pre-reforms era), hasdeclined significantly in the post-reforms period (Figure 13). In contrast metropolitan, urban and semi-urban branches have increased during this period. Furthermore, share of indirect credit in total credit has increased significantly from less than 20 percent in early-1990s toabout 67 percent in early-2000s and then marginally declined to about 50 percent in 2008-09 (RBI, 2011).

It is a matter of great satisfaction that there has been significant improvement in flow of

agricultural credit in recent years but there is a need to address distributional aspects of

agricultural credit including not much improvement in the share of small and marginal farmers,decline in rural branches, increase in the share of indirect credit in total agricultural credit and significant regional and inter-class inequalities in credit.