ROOT OF THE PROBLEM
Between 1961 and 2003, the number of landholdings in India doubled from 51 million to 101 million but the area under cultivation declined from 133 million hectares to 108 million hectares. Not all land is irrigated. With 16% of world’s population, India has only 4% of the world’s total available fresh water and rain-fed areas account for only 60% of cultivable land. The income from agriculture has been going down and small and marginal farmers are the worst affected. And while diversification to high-value commercial crops has increased yields and incomes of farmers, it has also exposed them to the risks associated with such crops, largely on account of volatile global prices. This has promoted farmers to borrow more from non-institutional sources, such as local moneylenders, at higher rates of interest. And because rain-fed areas are prone to droughts, crop failures have driven farmers to distress and even suicides.
LEVEL OF INDEBTEDNESS
According to the latest All India Debt and Investment Survey (AIDIS) and the Situation Assessment Survey of Farmers (SAS), conducted by National Sample Survey Organization (NSSO) in January-December 2003, 43.42 million, or 48.6%, of 89.33 million farmer households were indebted and the average outstanding debt per household was Rs12,585. A state-wise analysis shows that in 2003, incidence of indebtedness was higher in states with high input intensive or diversified agriculture such as Andhra Pradesh, Tamil Nadu, Punjab, Kerala, Karnataka and Haryana. Moneylenders, the source of 70% of loans in 1951, accounted for 26.8% in 2002.
COST OF CREDIT AND SOURCES
Short-term loans account for much of farm credit although their share has gone down from 70.3% of overall credit in 1975-76 to 58.1% in 2005-06. Short-term crop loans are used for buying inputs and long-term loans for building assets such as irrigation pump sets, tubewells, even buying land.
The share of cooperative banks in agricultural credit in this period has gone down from 69.5% to 21.8% and that of commercial banks has risen from 24.2% to 69.5%.
However, cooperative credit societies have more than double the number of rural outlets and four times more accounts than commercial banks and regional rural banks (RRB) put together. In March 2003, commercial banks had 16.04 million accounts with an average loan size of Rs31,585 and cooperative societies had 63.09 million accounts with an average borrowing of Rs6,637.
There are 31 state cooperative banks, 366 district central cooperative banks and 105,000 primary agriculture credit societies that disburse farm loans. 196 RRBs with 14,000 branches covering 516 districts have a customer base of 62 million.
Overall, non-institutional sources for credit could be around 30-35%, but farmers in Andhra Pradesh, Rajasthan, Assam, Bihar and Punjab depend more on non-institutional sources than the rest of India. In all these states, except Bihar, the share of moneylenders in farmers’ outstanding debt is higher than that of commercial banks with Andhra Pradesh topping the list at 53%.
As on June 2002, the cost of about 85% of outstanding farm loan from institutional sources was in the range of 12-20%. On the other hand, 36% of outstanding debt from non-institutional sources such as moneylenders carried an interest burden of 20-25% and another 38%, 30% and above.
There are regional disparities when it comes to disbursement of loans. For instance, the southern region accounts for one-third of farm credit even though it accounts for less than one-fifth of farm households. The eastern region’s share is far less compared with its exposure to agriculture and Bihar’s share in farm credit is 2.4% while it accounts for 8% of farm households in the country.
When banks fail to disburse the required 18% of their loans to farm sector, they have the option of investing the shortfall in RIDF, managed by Nabard. Set up in 1995, RIDF has, through 13 tranches, built a corpus of Rs80,000 crore. Up to March 2005, RIDF had sanctioned close to Rs43,00 crore but disbursed Rs25,348 crore. Here also, one sees regional disparities.
For instance, the southern region accounts for 30% of funds distributed while central, eastern and northern regions that account for about 58% of farm households have received only 38% of sanctions and 35.4% of funds till March 2006.
Overdue loans are those where payment is due but the borrower is in no po-sition to pay. After some time, an overdue loan becomes a non-performing asset. The bulk of crop loans are short-term in nature. The loans for summer crop (known as kharif) are disbursed between May and August every year and are due for repayment after 31 March of the following year. If it is not paid by that time, it becomes “overdue”.
Farmers are always given two crop seasons to return the money. An overdue loan becomes an NPA when it is not paid for two years for single-crop areas and one year for a multi-crop areas. So, a loan whose repayment is due on 31 March 2008 will remain a standard asset till 31 March 2010 if the farmer cultivates only one crop. In case he cultivates two crops a year, it will remain a standard asset till 31 March 2009. If he does not pay by that time, banks need to provide for such a loan. A loan that remains an NPA for 12 months is a “substandard” asset; beyond 12 months it is a “doubtful” asset and when banks have no hope of recovering a loan, it turns into a “loss” asset.
Banks need to provide for 10% of their outstanding substandard assets. For doubtful loans, they need to provide 20% for first year, 30% for second and third year and 100% beyond that. Banks need to either write off loss assets or provide 100% for them. Banks are also required to provide 0.25% for standard agricultural loans.