ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Agricultural Credit in the Post-Reform Era

The negative policy on credit for agriculture and other priority sectors, which has been prevalent since the beginning of the post-reform era, has manifested itself in three broad areas: the enervation of the institutional architecture for rural credit, disincentivisation of credit flow to agriculture through the mechanical application of Basel norms and the squeeze on resources available for agricultural credit operations. This paper discusses these areas and also the experience of a couple of advanced economies. It suggests a set of reforms which will reverse the policy coarctation for agricultural credit. It argues that the successful promotion of the deepening of rural financial markets, which would ensure uninterrupted flow of credit to agriculture will require systematic rather than isolated efforts, with related actions being undertaken on several fronts.

T he financial sector reforms after 1991 systematically undermined the institutional credit arrangements for agriculture. A clear and explicit reversal of the policy of social and developmental banking was the leitmotif of these reforms. However, the polity, especially since May 2004, has displayed some response to the concerns about the insufficient flow of credit to agriculture. The programme of doubling of agricultural credit in three years and provision of short-term credit to farmers at an interest rate of 7 per cent are the outcomes of these concerns. But these are basically isolated and reactive interventions aimed at improving the supply. These interventions are at best piecemeal steps within an overall policy vacuum as far as the rural financial system is concerned. The issues of policy and the institutional environment for the emergence of a robust rural financial system are yet to be touched. The discourse on the suitable architecture for rural financial institutions (RFIs) is conspicuous by its absence. The successful promotion of the deepening of rural financial markets, that would ensure an uninterrupted flow of credit to agriculture, will require systematic rather than isolated efforts, with related actions being undertaken on several fronts.

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