Mumbai: Cash-starved rural cooperative societies may soon have access to a third source of funding if Andhra Pradesh succeeds in widening financing avenues in the state’s villages, in an attempt to wean farmers off their dependence on usurious moneylenders.
The state has become the first to amend its Cooperative Societies Act to allow banks to lend money to farmers for non-agricultural needs through primary agricultural cooperatives, or PACs.
Under the laws now followed by various other state governments, PACs can avail financing only from state administrations and refinancer National Bank for Agriculture and Rural Development, or Nabard.
“This model is being adopted because the state government was not always able to fund PACs adequately and the demand from farmers for non-farm loans is on the rise,” said U. Raghava, vice-president for implementation at Hyderabad-based CoOptions Technologies Ltd, which is providing technology for the project. “The model is mainly to take care of the non-agricultural needs of farmers. For agricultural loans, Nabard is there.”
Andhra Pradesh has now allowed commercial banks to provide any additional funds required by PACs, routing the funds through district-level cooperative credit banks.
Maharashtra and Tamil Nadu also plan to amend their laws to allow banks to finance PACs, according to bankers.
For banks, the move—especially if adopted by other states as well—will help fulfil their so-called priority loan commitment to the farm sector and expand their credit portfolios. Banks have to channel 18% of their total advances to the farm sector.
“While there is a business opportunity here, this model is mainly to prevent people from going to the moneylenders,” said an executive with state-run Union Bank of India, which is in talks with the Andhra Pradesh government and 20 PACs in Nizamabad district.
“We are on a channel-testing mode,” said the Union Bank executive, who asked not to be named. “We are presently testing whether money disbursed through this channel comes back as well or not.”
The bank will initially disburse Rs2-3 crore towards the priority sector farm loans, targeting an average loan size of Rs25,000-30,000, the maximum being Rs50,000, he added. It will start giving non-farm loans as well to farmers if the model proves efficient.
Axis Bank Ltd is also in discussions with the Andhra Pradesh government and several PACs but has not struck a deal yet, said a bank official who didn’t want to be named. Officials at Bank of Baroda and Bank of India, who also spoke on condition of anonymity, said they had not yet decided on lending to farmers through PACs.
The banks will have to route their funds to PACs through district-level cooperative societies.
A recent Reserve Bank of India report on farmer indebtedness said average outstanding debt per farmer household was Rs12,585 in 2003, the latest year for which such data was available.
The total debt of farmer households was estimated at Rs1.12 trillion in 2003, of which Rs65,000 crore was from institutional sources and Rs48,000 crore from non-institutional sources such as moneylenders and traders.
Private money lenders accounted for Rs29,000 crore and traders Rs6,000 crore.
Farmers, particularly in drought-prone Andhra Pradesh, Karnataka and Maharashtra, accounted for large-scale defaults on agricultural loans taken from banks, prompting a Rs71,700 crore debt waiver and relief for farmers this year.
Banks, in turn, have become more cautious about whom they lend money to.
Although Nabard and banks provide short-term crop loans, PACs and other organized lenders—in the absence of banks in rural areas—are not always able to fund farmers’ non-agricultural requirements. As a result, farmers are forced to approach moneylenders, who charge 30-36% on loans, much higher than the 10-12% interest rates PACs charge.
Only profitable PACs without major flaws in their previous three audited annual results, and with a recovery record of more than 90%, will be able to avail such loans from banks, the Union Bank official mentioned earlier said.