Renewed thrust on agriculture lending

In order to double the income of the farmers by 2022 when the country completes 75 years of independence, several policy initiatives are mooted. Income of farmers cannot be raised unless the ecosystem is revamped including accelerating flow of institutional credit to the farm sector.

• Flow of bank credit to hinterland has to be made more seamless and cost-effective to induce farmers to modernise farming techniques and use improved quality of seeds. A host of agencies will have to coordinate to disseminate financial, digital, improved farming literacy among farmers to ensure that the vision of doubling their income could be accomplished by 2022

Among many policy reforms, RBI has granted in-principle approval for 10 small finance banks setting them a priority sector lending target of 75 a percent instead of 40 per cent for other banks and effective from January 1, 2016m, the priority sector lending target of 56 Regional Rural Banks (RRBs) have been raised from 60 per cent to 75 per cent.

A sub-target of 8 per cent is also assigned where the credit should flow to small and marginal farmers while RBI also removed the distinction between direct and indirect lending targets that can help spruce credit flow to large hi-tech agriculture projects too. It also allowed trading of priority sector lending certificates (PSLCs) to be in the standard lot size of Rs 25 lakh each through an E- portal (E- Kuber) of RBI so that banks which can lead to priority sector beyond their mandatory level can sell their excess portfolio to other banks at a premium.

Thus, complete focus of banks in rural areas on PSL can be rewarding. Also, other banks unable to lend to priority sector will be able to reach PSL targets. This can bring more vibrancy in lending to priority sectors in general and agriculture sector in particular. It will encourage banks which are capable of providing loans under priority sector to make commercial use of their core competence.

RBI thus introduced four kinds of PSLCs – agriculture, small and marginal farmers, micro enterprises and general. Despite mandatory lending of 18 per cent of advances in agriculture, the flow of institutional credit is not robust to support growth. The data on credit to farm sector will indicate the trend.

Status of agriculture sector lending
Advances to agriculture sector are growing, still it is unable to keep pace with the needs of a farming community. In fact, the percentage of growth of advances to agriculture sector on year-on-year (YoY) basis has come down from 16.5 per cent to 13.5 per cent in the last one year though the annual growth of agriculture and allied sector has increased from -0.20 per cent in FY15 to 1.1 per cent in FY16 as per advanced estimates.

The government is envisaging a robust agriculture growth of 4 per cent in FY17 due to several factors, most important being the positive monsoon forecast. Another important factor is the expansion of delivery points of banks to serve farming community in hinterland classified as ‘unbanked, centres. The expanded use of Business Correspondents(BC) points can speed up the inclusion.

Rural/semi-urban branches
Though digital banking is driving many banking operations, yet the actual delivery of rural credit is still done through brick and mortar branches due to a low level of literacy among rural masses. Thus, the growth of rural banking infrastructure in the form of branches still continues to be significant.

The number of bank branches in rural and semi-urban centres has been rising in the last three years from 71,533 in December 2013 to 84,440 in December 2015, adding around 13000 branches. Thus, 65 percent of bank branches occupies rural space. A Large network of such branches enables greater outreach to the farming community.

In addition to expanding banking network, many other initiatives are also mooted to fulfill, the mandate to double the farm income.

Other policy Perspectives
National Agriculture Market, (e-NAM) has been recently launched to enable farmers to sell their produce anywhere in the country. The e-NAM platform will connect 21 mantis from eight states in the first phase. The centre aims to bring 585 mantis across India to the platform by March 2018.

Horticultural crops such as onions and potatoes are often sold at varying rates in different states and a unified market can help bring parity in prices and help stem inflation as well. Agricultural Produce Market Committee (APMC) Acts—state laws that currently govern how farm produce can be traded—to allow for electronic trading, and the centre has approved 365 mandis from 12 states to join the platform.

The eight states that will be part of the platform in the first phase are Gujarat, Telangana, Rajasthan, Madhya Pradesh, Uttar Pradesh, Haryana, Jharkhand and Himachal Pradesh. The platform will begin by trading in 25 crops, including wheat, maize, pulses, oilseeds, potatoes, onions and spices. M

oreover, Union Budget FY17 has allocated Rs 35,984 crore for the agriculture sector and farmers' welfare, with major thrust on irrigation programmes. Funds will be mobilised by levying a Krishi Kalyan Cess on all taxable services and a Krishi Kalyan surcharge on domestic undisclosed income. The Budget has also earmarked Rs 38,500 crore for the rural job guarantee scheme. These resources will aid the process.

Small finance banks
Debut of first Small Finance Bank (SFB) – Capital Small Finance Bank at Jallandhar on April 24, 2016 marks the beginning of a new regime of differentiated banking system perpetuating in India. It was hitherto operating as a Local Area Bank since 2000. It is the first SFB commencing operations among the 10 new entities that were given in-principal approval.

It adds to the rural banking infrastructure in addition to the network of branches of regional rural banks, cooperative banks besides a large network of rural and semiurban branches of large banks. Its two distinct features are higher priority sector lending target of 75 per cent of NDTL and 50 per cent of its loan size should be below Rs 25 lakh which means the number of beneficiaries will expand. These two conditionalities make SFBs more oriented towards lending in the hinterland.

Way forward
These set of new banks can help banking system to reach farm credit target of Rs 9 lakh crores for FY17. The farmers can continue to get loans up to Rs 3 lakh at a concessional interest rate of 7 percent. These policy initiatives can converge together to create the growth momentum needed in farm sector to raise their income levels.

But much beyond these, the flow of bank credit to hinterland has to be made more seamless and cost-effective to induce farmers to modernize farming techniques and use improved quality of seeds. A host of agencies will have to coordinate to disseminate financial, digital, improved farming literacy among farmers to ensure that the vision of doubling their income could be accomplished.