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Are Gold Loans Glittering for Agriculture?

Credit is essential for small and marginal farmers in India, whose low incomes limit savings, making them more vulnerable to several risks. Priority sector lending norms have channelled more formal credit to this sector. The interest subvention scheme for short-term crop loans makes formal credit more economical for farmers. However, there are issues of accessibility, most notably arising out of difficulties in presenting documentation, giving rise to a prevalence in the use of gold/jewellery as collateral. Loan data from three districts in Karnataka has highlighted some important lessons. The use of gold tends to exclude poorer farmers from availing all the benefits of the scheme, and poses issues of accessibility to formal credit. Digitisation of land records and farmer information, coupled with reduced recognition of gold loans in priority sector lending can be valuable to the Indian agriculture sector.

India’s banks are in trouble. Mounting unpaid debt has led to an unsightly mass of non-performing assets (NPAs) in the sector, which have to be dealt with. Surprisingly or unsurprisingly, the most recent data from the Reserve Bank of India (RBI 2017) show that it is industries (micro, small, and medium enterprises or MSMEs and large, though the rise in default is more prominent among the latter) and infrastructure that constitute the greatest increases and percentages of loan default. In spite of the accessibility of this sector to banks (since large industries are likely to be prominent and located in urban areas), recovery of loans remains poor. Yet, the caution that should have been exercised in giving loans to this industrial group possibly has instead been directed towards sectors such as agriculture, as we observe that farm sector NPA levels have remained fairly constant over the last four years (RBI 2017).

The farm sector in India is characterised by a prevalence of small and marginal farmers. This farmer group, which cultivates 85% of operational holdings in India (GoI 2014), tends to have low incomes owing to a small scale of operation (Mishra 2007), and consequently, most earn barely enough to cover basic consumption needs (NCEUS 2008). In turn, they possess low or non-existent savings, and thereby, an inability to invest in capital for increasing the capacity to generate income.

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Updated On : 5th Jul, 2018

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