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Revival of Agricultural Credit in the 2000s: An Explanation

This paper examines credit to agriculture provided by the commercial banks, including regional rural banks, and finds that contrary to the general perception that the credit revival began in 2004, the actual revival started after 2000. The increase in credit was to a large extent the result of a growing share of indirect finance, which, in turn, has been broadened in scope to cover many new kinds of farm lending. Moreover, even as direct lending to agriculture has also grown, there has been a sharp increase in the share of large-sized advances for financing agri-businessoriented enterprises, rather than for the small and marginal farmers.

REVIEW OF AGRICULTUREEconomic & Political Weekly december 29, 200757The authors thank S L Shetty, V K Ramachandran and V Sridhar for their comments on a draft of this paper. An earlier version of the paper was presented at the national conference on ‘Making Growth Inclusive with Reference to Employment Generation’, at the Jawaharlal Nehru Universi-ty, New Delhi in June 2007. The views expressed in the paper are person-al and not of the organisations with which the authors are associated.R Ramakumar (ramakumarr@gmail.com) is at the Tata Institute of Social Sciences, Mumbai.Revival of Agricultural Credit in the 2000s: An ExplanationR Ramakumar, Pallavi ChavanIt is by now well-documented that the trends that emerged in India in the 1990s with respect to the supply of rural credit in general, and agricultural credit in particular, were distur-bing. In the 1990s, there was (a) large-scale closure of commer-cial bank branches in rural areas; (b) a widening of interstate in-equalities in credit provision, and a fall in the proportion of bank credit directed towards regions, where banking was historically underdeveloped; (c) a sharp fall in the growth of credit flow to agriculture; (d) increased sidelining of small and marginal farm-ers in the supply of agricultural credit; (e) increased exclusion of the disadvantaged and dispossessed sections of the population from the formal financial system; and (f) strengthening of the hold of moneylenders on rural debt portfolios [for details, see the collected papers in Ramachandran and Swaminathan 2004; Shetty 2006; Chavan 2005 and 2007]. In 2004, the government announced its intent to double the flow of credit to agriculture over a period of three years. This increase in credit flow has been an integral part of the so-called “new deal for rural India” promised by the United Progressive Alliance government. A “comprehensive credit policy” was an-nounced in June 2004, which included the commitment to raise agricultural credit flow by 30 per cent every year, financing of 100 farmers per branch (thus, 50 lakh farmers in a year), two to three new investments in agricultural projects per branch every year and a host of debt-relief measures, such as debt restructur-ing, one-time settlement and financial assistance to redeem loans from moneylenders [Ministry of Agriculture 2007]. From 2004 onwards, it is regularly claimed in official circles that the flow of credit to agriculture has been increasing at a rapid rate, even surpassing its annual targets [Ministry of Finance 2007; NABARD 2006]. In fact, an impression is often gained from the official statements that the problem of agricultural credit has been set right with the doubling of credit flow and the concurrent expan-sion of microcredit. In this paper, we plan to closely analyse the claim that slowdown in the supply of agricultural credit has been reversed after 2004. Secondary data on banking from different publi-cations of the Reserve Bank of India (RBI) have been used for this purpose. Commercial banks emerged as an important institution for supplying agricultural credit only after the na-tionalisation of banks in 1969. Presently, though agricultural credit is supplied by both commercial banks and cooperatives, credit from commercial banks (including regional rural banks) account for about 78 per cent of the total credit disbursed to agriculture.1 The discussion in this paper pertains only to the This paper examines creditto agriculture provided by the commercial banks, including regional rural banks, and finds that contrary tothe general perception that the credit revival began in 2004, the actual revival started after 2000. The increase in credit was to a large extent the result of a growing share of indirect finance, which, in turn, has been broadened in scope to cover many new kinds of farm lending. Moreover, even as direct lending to agriculture has also grown, there has been a sharp increase in the share of large-sized advances for financing agri-business-oriented enterprises, rather than for the small and marginal farmers.
REVIEW OF AGRICULTUREdecember 29, 2007 Economic & Political Weekly58credit provided by the commercial banks, including regional rural banks.1 Trends in Growth of Agricultural CreditHistorically, agricultural credit has comprised mainly the credit provided directly to cultivators, which was called “direct finance to agriculture”. Within direct finance to agriculture, a short-term credit or a credit for seasonal agricultural operations has accounted for a significant share. The short-term loans to agri-culture are referred to as the “crop loans”, as they are advanced for crop cultivation against the hypothecation of the crop to be cultivated by the farmer. The crop loans are provided as cash or in kind, such as the supply of fertilisers and seeds. Apart from the crop loans, direct finance also includes credit for medium-and long-term investment in agriculture. The second component of agricultural finance is called “indirect finance”, which does not go directly to cultivators, but to the institutions that support agri-cultural production in rural ar-eas. The typical forms of indirect finance to agriculture are loans to input dealers for their role in the provision of agricultural inputs and loans to electricity boards for supplying power to cultivators. In the 1990s, when India be-gan to implement the policy of financial sector liberalisation, there was a significant slowdown in the growth of commercial bank credit to agriculture com-pared to the 1980s.2 As Table 1 shows, after recording an annual rate of growth of 8.7 per cent be-tween 1980 and 1990, agricul-tural credit grew at just 1.8 per cent per annum between 1990 and 2000. In the case of other rural occupations such as arti-sans and craftsmen and small-scale industries, the decline in the growth of credit was equally sharp. Further, the growth rate of agricultural credit in the 1990s was less than the growth rate of the rural population in the corresponding period [Chavan 2002]. The slowdown in agricultural credit in the 1990s appears to have been reversed in the period after 2000. Between 2000 and 2006, agricultural credit grew by 20.5 per cent per annum, which was significantly higher than the growth rate recorded for the 1990s. It was not just agricultural credit that grew rapidly in the 2000s; credit to artisans and craftsmen and other small-scale industries also grew at rates faster than in the 1990s. An important point to note here is that the revival of agricul-tural credit had begun after the year 2000 itself. This is contrary to the general perception that the revival in the 2000s was owing to the government’s announcement in 2004 to double the sup-ply of credit to agriculture. The log plot of credit to agriculture and the plot of per capita credit to agriculture in rural areas in Figure1 (p 59) establish this fact clearly. In other words, the high growth rate of credit to agriculture in the 2000s was due to a regular increase of credit in every year after 2000, and not just after 2004.The increase in the growth rate of agricultural credit in the 2000s was so significant that the level of credit reached in 2006 considerably higher than what it would have been, if credit had grown in the 1990s and 2000s at the growth rate of the 1980s. In Figure 2 (p 60), we have plotted the deflated series of credit to agriculture between 1980 and 2006, and projected forward a linear trend line of credit during the 1980s only. As is clear, the plot of credit supply crosses the trend line by about 2003, and the credit supplied in 2006 is at a point much above the projected trend line of the 1980s. This method, of course, does not account for the deficits in the supply in the years between 1990 and 2003, when the credit supply was below the trend line. Nevertheless, it does provide an indication of the extent of increase in credit after 2000. There has been a marked ab-sence of association between the sharp growth of agricultural credit in the 2000s and the growth of agricultural output and agricultural employment. The rates of growth of gross do-mestic product (GDP) from agri-culture and unregistered manu-facturing (a proxy for the infor-mal sector and small-scale in-dustries) were lower in the 2000s over the 1990s (Table 1). Also, data on employment from the National Sample Survey(NSS) show that the rate of growth of wage employment in agriculture was negative (-3.2 per cent) be-tween 1999-2000 and 2004-05. The respective growth rate was positive (1.1 per cent) between 1993-94 and 1999-2000. These trends prompt a harder look at the pattern of growth of agricultural credit in the 2000s in com-parison with the earlier decades.2 Features of Agricultural Credit in the 2000sThere are three distinct features of the growth in agricultural credit, which have had a major role in determining the extent of increase in credit supply as well as its distribution within the agricultural sector. These features are discussed separately in the subsections below.2.1 Role of Indirect FinanceFirst, a significant proportion of the increase in total bank credit to agriculture between 2000 and 2006 was accounted for by in-direct finance to agriculture. Of the total increase in credit sup-ply to agriculture between 2000 and 2006, about one-third was contributed by indirect finance. Between 2000 and 2006, while direct finance grew at an annual rate of 17 per cent, indirect Table 1: Rate of Growth of Credit Outstanding from Scheduled Commercial Banks to Selected Sectors (1975-2006,in % per annum)Sector 1975-801980-901990-20002000-06Growth rate of credit outstanding to: Agriculture and allied sectors 20.4 8.7 1.8 20.5Artisans and craftsmen 27.4 21.0 2.3 14.1Other small-scale industries 12.0 7.5 2.4 4.1Total bank credit 12.9 7.9 6.7 17.7Growth rates of GDP at constant prices from: Agriculture 1.1 4.7 3.4 1.9Agriculture and allied sectors 0.9 4.4 3.4 2.0Unregistered manufacturing 4.7 5.8 6.3 4.8Figures are annual exponential growth rates estimated after deflating credit outstanding with the GDP deflators. The figures include credit supplied by regional rural banks.Sources: ‘Basic Statistical Returns’, Reserve Bank of India, various issues; ‘Handbook of Statistics on Indian Economy – 2005-06’, Reserve Bank of India; http://www.indiastat.com. Table 2: Rate of Growth of Direct and Indirect Finance Outstanding to Agriculture and Allied Activities from Scheduled Commercial Banks(1975-2006, in % per annum)Type of Finance Growth Rates of Credit 1975-801980-901990-20002000-06Total finance to agriculture and allied activities 20.4 8.7 1.8 20.5Direct finance to agriculture and allied activities 23.3 10.0 1.5 17.4Indirect finance to agriculture and allied activities 12.9 2.7 3.5 32.9Figures are annual exponential growth rates worked out after deflating the credit outstanding by gross domestic product deflators. Data includes credit supplied by regional rural banks (RRBs). Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues; ‘Handbook of Statistics on India Economy – 2005-06’, Reserve Bank of India.
Advances to agriculture 1980 to 1990 Linear advances to agriculture 1980 to 1990
REVIEW OF AGRICULTUREEconomic & Political Weekly december 29, 200761To a large extent, the expansion of agricultural advances with large credit limits can be explained by the growth of indirect fi-nance to agriculture. In Table 5, we have provided the distribu-tion of indirect agricultural advances by credit limit size-classes of loans for the period 1985 to 2006. The table speaks for itself; between 2000 and 2006, the share of indirect advances with credit limit above Rs 25 crore in total indirect advances rose from 30.3 per cent to 53.5 per cent. In other words, more than half of the indirect finance to agriculture was accounted for by loans with a credit limit of above Rs 25 crore in 2006. The growing shift in recent times towards loans with large credit limits are closely related to the changes in official policy on agriculture in India, which increasingly favours the growth of a capital-intensive and export-oriented production pattern in agriculture. The changes in the definition of indirect finance to agriculture since the late-1990s have also been in line with the new emphasis in official policy. 2.3 Benefits of Credit Expansion to Big Cultivators Thirdly, even while we note the increasing importance of indirect finance, the growth in direct finance to agriculture in the 2000s cannot be overlooked. As for data in Table 2 show, direct finance to agriculture grew at an annual rate of 17.4 per cent between 2000 and 2006. The magnitude of this growth rate is large and needs an explanation, particularly in view of continuing complaints from political movements and farmers’ organisations that stagnation in agricultural credit continues. There are two aspects of the growth of direct finance to agriculture in the 2000s, which render it far less spectac-ular than it is made out to be. The first is related to changes in the size of loans under direct finance. Given that direct finance comprises short-term, medium-term and long-term loans given to agri-culturists, it is reasonably expected that the size of loans, on an average, would not be as high as in the case of indirect finance. However, there has been a considerable growth in the amount of direct advance to agriculture with very high credit limits, a trend comparable with that of indirect finance [see also Shetty 2006]. Data in Table 6 show that in the 2000s, and particularly between 2003 and 2006, there was a fall in the shares of direct advances with lower credit limits in total direct advances. The accounts with a credit limit up to Rs 2 lakh are referred to as small borrowal accounts (the limit was Rs 25,000 till 1998). In Table 6, we have classified direct finance to agriculture by their credit limits in two different ways: first, by the regular classification followed in this paper, and secondly, a broad size-classification of less than Rs 2 lakh and above Rs 2 lakh. Between 2000 and 2006, there was a fall in the share of direct finance with credit limit up to Rs 2 lakh from 78.5 per cent to 60.8 per cent. On the other hand, the share of direct finance with credit limit above Rs 2 lakh increased from 22 per cent to 39 per cent. Almost half of the increase in the amount of direct finance outstanding to agriculture between 2000 and 2006 was accounted for by loans with a credit limit of above Rs 2 lakh, a size-class in which loans to marginal and small farmers are hardly represented (even when we consider a classification with Rs 10 lakh as the cut-off mark, the trends remain similar. The share of direct finance with credit limit less than Rs 10 lakh fell from 91 per cent in 2000 to 86 per cent in 2006. The data are not presented here).A closer analysis of changes in the supply of direct finance to agriculture shows that the share of direct advances in every credit limit size class above Rs 2 lakh increased between 2000 and 2006 (Table 6: Upper Panel). Significantly, there was an ex-pansion in the supply of direct finance where the credit limits of loans were above Rs 1 crore. The share of advances with credit limit of more than Rs 25 crore increased from 1.2 per cent in 2000 to 2.6 per cent in 2006. Similarly, for advances with credit limit between Rs 10 crore and Rs 25 crore, the cor-responding increase was from 0.4 per cent to 2.2 per cent. On the other hand, the share of direct advances with credit limit of less than Rs 25,000 fell sharply from 41.1 per cent in 2003 to 18.1 per cent in 2006. Thus, in the 2000s, there was a clear shift in the direct agricul-tural lending of banks away from small borrowal accounts in favour of large-sized loan accounts. The second disturbing aspect of the growth of direct finance in the 2000s relates to increasing importance of loans given to big cultivators. The RBI publishes data on loans provided to cultivators, classified by the size of operational holdings. Cultivators op-erating less than 2.5 acres are referred to as “marginal” cultivators, between 2.5 acres and 5 acres are referred to as “small” cultivators and above 5 acres are referred to as “big” cultivators. Notwithstanding the fact that data are provided for only three land size-classes and that they become avail-able with considerable time lag, these data provide some indications of the socio-economic groups to which agri-culturalcredit has been flowing in recent times. Table 6: Distribution of Amount Outstanding under Direct Agricultural Advances by Scheduled Commercial Banks (by credit limit size-classes of loans, in %)Credit Limit Size Class Share of Amount Outstanding in Total Amount Outstanding of Loans (Rs) 1985 1990 1995 2000 2003 2005 2006Less than 25,000 58.2 66.1 59.5 41.1 29.5 22.9 18.125,000 to 2 lakh 38.5* 26.1 29.6 37.4 43.1 43.8 42.72 lakh to 10 lakh 3.6 4.5 12.8 14.9 21.4 25.510 lakh to 1 crore 2.4 2.6 3.6 3.9 4.8 4.5 4.81 crore to 10 crore 0.9 1.2 2.3 3.1 4.0 4.1 4.110 crore to 25 crore 0.0* 0.3* 0.5* 0.4 1.8 1.4 2.2Above 25 crore 1.2 1.9 2.0 2.6Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0Broad size-classes: < 2 lakh – 92.2 89.1 78.5 72.6 66.6 60.8 > 2 lakh – 7.8 10.9 21.5 27.4 33.4 39.2Total advances – 100.0 100.0 100.0 100.0 100.0 100.0* The data are not separately available for the corresponding size-classes.Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issuses.Table 7: Distribution of Number of Loan Accounts under Direct Outstanding Finance from Scheduled Commercial Banks (by size of operational holdings – 1980-81 to 2004-05,in %)Year Marginal Small Marginal and Small Big All CultivatorsCultivators Cultivators CultivatorsCultivators (1) (2) (3) (4)=(2)+(3)(5) (6)=(4)+(5)1980-81 45.8 25.0 70.7 29.3 100.01985-86 43.3 30.1 73.4 26.6 100.01990-9143.730.9 74.6 25.4100.01991-92 42.8 31.3 74.1 25.9 100.01992-93 42.1 31.0 73.1 26.9 100.01993-94 43.1 30.8 73.9 26.1 100.01994-95 42.0 31.1 73.1 26.9 100.01995-96 41.9 32.1 73.9 26.1 100.01996-97 40.5 32.2 72.7 27.3 100.01997-98 39.8 32.9 72.7 27.3 100.01998-99 38.3 32.2 70.6 29.4 100.01999-00 38.8 32.3 71.1 28.9 100.02000-01 38.8 31.1 70.0 30.0 100.02001-02 40.0 32.3 72.3 27.7 100.02002-03 37.5 32.3 69.7 30.3 100.02003-04 39.9 31.5 71.3 28.7 100.02004-05 39.6 31.8 71.4 28.6 100.0Source:‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India.
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