Why RBI had to protect small farmers
The RBI norms towards targeted marginal lending for the small farmer is a structural solution to aid themunlike bailout packages, which provide only short-term relief
In its latest overhaul of priority sector lending rules, the central bank has stipulated that lenders should funnel at least 8% of their credit to small and marginal farmers. While the overall agriculture loan growth has galloped over the past decade, the chart shows why the Reserve Bank of India (RBI) has taken this step.
There has been a sharp increase in the size of large-sized loans. Yes, the average loans generally have got larger, but that would only be a partial explanation. In other words, these loans are predominantly going to large and richer farmers. Not only are the small farmers getting the worst part of the bargain, any signs of distress owing to a poor monsoon or crop failure typically leads them to moneylenders.
Data from the National Sample Survey Office provides evidence. It shows that except for the top two decile classes in terms of assets, the percentage of rural households indebted to non-institutional agencies is higher than those who borrow from formal sources such as banks, insurance companies, finance companies and self-help groups. Moreover, as much as 69% of all non-institutional finance is given at interest rates of 20% and above.
The RBI norms towards targeted marginal lending for the small farmer is a structural solution to aid them—unlike bailout packages, which provide only short-term relief.
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