Despite govt push, growth in bank loans to farm sector slows

Despite govt push, growth in bank loans to farm sector slows
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First Published: Wed, Sep 10 2008. 10 29 PM IST

Updated: Wed, Sep 10 2008. 10 29 PM IST
Mumbai: Bank credit to India’s farm sector has slowed drastically in the past couple of years despite the government pushing hard for it.
Reserve Bank data show growth in agriculture loans by banks fell to about 11.5% in the past two years from some 55% in fiscal 2005 and 2006. Overall, institutional credit to farmers, including loans from co-operative banks and regional rural banks, has slowed to 12.6% in fiscal 2007 and 10.8% in fiscal 2008 from some 44% the previous two years.
Bankers expect a further deceleration in such loans this year following the Rs71,700 crore farm loan waiver by the Union government, which they say, could encourage more defaults. “We fear farmers will not be forthcoming to repay bank loans. Given a choice, we would not be enthusiastic about giving loans to this sector,” said the chairman of a large public sector bank who asked not to be named.
Another reason behind these banks’ lukewarm response to farm loans is the low returns. Banks offer small farm loans of up to Rs3 lakh at 7% and get a government subsidy of 2%—but bankers say the cost of such loans is much more.
“The cost of money alone is now around 9% and smaller loans have a high transaction cost. We are making losses on farm loans,” the bank chairman said. The Indian Banks’ Association, a bankers’ lobby, has been asking for higher subsidy on farm loans.
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Decelerating Flow (Graphic)
In absolute terms, though, credit flow has increased to Rs2.25 trillion in 2007-08 from Rs1.25 trillion in 2004-05.
“The base effect could be one of the reasons for the dip in growth in bank credit to the agricultural sector,” said Asok Kumar, executive director, Axis Bank Ltd. “Another reason could be that there is not much investment happening in the sector in terms of development of land and mechanization.”
Under banking rules, at least 18% of all loans must go towards agriculture. But still farmers have had to go to moneylenders. The share of institutional agencies such as the government, cooperative societies and commercial banks to total indebted households has dipped to 50.9% in 2002 from 65.4% in 1991. However, the share of non-institutional agencies such as landlords and moneylenders to such households rose from 43.4% to 57.3% during this period, RBI says.
“Banks have not been able to replace moneylenders as farmers look for timely and hassle-free credit. Availing credit from a bank is still cumbersome,” said Gobinda Banerjee, general manager for priority sector lending at Punjab National Bank. Banerjee blamed the relatively low penetration of banks in rural areas as one of the main reasons for the dip in institutional credit flow to the sector. Another reason, he said, was the slow 2% growth of the sector because of which the need for credit was low.
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First Published: Wed, Sep 10 2008. 10 29 PM IST