New Delhi: Why is it that a farm loan costs nearly as much as a car loan? The question gains relevance since long-term investments in agriculture in India are quite low. Only about a quarter of the ₹ 8 trillion farm credit extended in 2014-15 was long-term loans. Harsh Kumar Bhanwala, the chairman of Nabard, India’s apex bank for rural finance, thinks it is high time such investments are incentivized by the government. Edited excerpts from an interview:
Why is it that long-term investments in agriculture—say in irrigation or mechanization—are so low?
Ever since the interest subvention scheme started from 2006-07 (for up to ₹ 3 lakh short-term crop loans are subsidized, meaning farmers pay 4% interest and the rest is subsidized by the government) the credit flow has increased…money is available cheap for crop loans. But the share of long-term loans have come down from 33% (in 2003) to 19% in 2013-14. Last year, it increased to 24% with our focus. Thing is, from 0% (interest on crop loans in some states) you reach 10-11% for term lending.
Short term is up to 18 months, say, working capital loans in seasonal agriculture operations. Beyond that, you have activities like irrigation and dairy units, farm mechanization... The requirement is long-term investment in agriculture. We have prioritized refinancing to long-term operations.
Now, 85% of investment in agriculture—gross capital formation—is private. Initially, the government made sizeable investments. But flow to that sector was declining. The government gave us priority sectors’ shortfall funds for long-term loans. This is working well. This is helping banks to re-orient their policies to increase term lending.
Don’t you think interest rate on term lending is high? Charging the farmer the same for drip irrigation as for a personal loan to buy a car?
Logically, how can interest rates be lower? Somebody has to subvent (or subsidize) the interest rates. Some state governments are contemplating that and there is a demand to the centre as well. But then, there are fiscal issues. The centre spends about ₹ 20,000 crore for subsidizing interest on short-term loans. To extend that to long-term loans will cost another ₹ 5,000 crore. But there has been a demand from farmer organizations.
And then, farmers don’t get formal credit…
Small and marginal farmers have lower institutional coverage, that too, mostly from co-operatives and regional rural banks. Considering this, there is a need to increase ground level credit, but this should not be further penetration of the same person. We should aim for widening the base... we suggested last year, and we will again suggest (to centre) that there should be a target for coverage of small and marginal farmers.
Data shows that farmers are heavily indebted in states like Punjab and Andhra Pradesh. Is there a contradiction—that on one side we complain farmers are not getting enough credit and on the other side, that they are indebted?
This is linked to profitability of agriculture. Credit alone cannot solve problems. Agriculture has to grow through extension, inputs and investments. The farmer also needs to use credit to diversify into allied activities like poultry or dairy and newer crops. The problem with states like Punjab is that this diversification hasn’t happened as it happened in southern states. Along with a focus on term lending, we are requesting governments to increase the efficiency of extension systems... from our side, we are using farmers’ clubs (there are 1,40,000 of them) as a platform.
Secondly, the average land holding is coming down. This means with the same number of people drawing sustenance from the same patch of land, productivity will be low. Their surpluses will be low. And existing markets will find it difficult to procure due to lower volumes and higher transaction costs. Since last year, Nabard is forming farmer producer organizations and supporting them. About 2,000 such groups will be promoted by this year.
Nabard is also implementing a credit scheme for landless farmers (joint liability groups). How has it performed?
See, farmers cannot get formal credit based on oral leasing. We require some tenancy reforms in state governments, such that while rights of land owners are protected, due recognition is also given to the tiller. So (until that happens) we came out with the mechanism of joint liability groups for landless small and marginal farmers. Over 13.5 lakh groups have been formed so far in two years and over ₹ 13,000 crore loans disbursed. The Centre is working on a model land leasing law (being prepared by the NITI Aayog) and that could open up a lot of funding opportunities and economies of scale for such farmers.
How is Nabard addressing the farm distress situation?
Distress in agriculture is manifold. This year, we saw several issues... due to commodity price, climate-induced and quality of inputs (fake pesticides in Punjab). You can take some precautions, say, even if the crop gets wiped out, if a farmer is into activities like dairying or poultry, there will be some income. So, we have to promote mixed farming and interest subvention should not be limited to crop loans. We need to incentivize these long-term activities.
At the farmers’ field poly houses, efficient irrigation has to be promoted. Also, weather prediction can be improved. During hailstorms, our pilot projects in Maharashtra could alert farmers—many of them were saved. Therefore, we are proposing three ways to reduce distress—diversification, technology application for irrigation efficiency and better predictability of local weather phenomenon. Further, we need to revamp the crop insurance schemes.
How is Nabard’s flagship self help group (SHG) bank linkage programme functioning?
The programme mobilized some ₹ 11,000 crore of deposit and annual credit disbursement is around ₹ 33,000 crore. But I am seeing some distress. In some states, in some banks, the non-performing assets (NPAs) have gone up. The number of bank officials has come down and with a thrust on lot of other programmes, they are not able to devote as much time. Overall NPAs are 6%, but in some states, it is as high as 20%. We are trying to revitalize this through a digitization project called e-shakti to restore the confidence of branch managers in (women) self help groups. With this, the branch manager knows sitting in his cabin details related to the group and sees when a group is rated well. Then he will lend. Nearly 10 crore households are a part of the programme: about 79 lakh groups. But only 42 lakh were credit-linked. That will get a significant boost with digitization. Point is, if you stop funding SHGs, whatever little NPAs are there will keep on increasing.
Any fresh areas Nabard is venturing into?
Credit flow for rural housing may not be much. We are trying to work with state government entities—corporations—which are active in the housing space. If they take up rural housing, we will fund them. We have created a policy framework but this is still at the stage of discussion.