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Role of Banks in Agricultural Lending - India

Article  in  SSRN Electronic Journal · October 2009

DOI: 10.2139/ssrn.1483243

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 Role of Banks in Agricultural lending - India

Sri Subramaniam, Researcher, Chennai, India

Sai Ravi Subramaniam, Instructor, MUM, Fairfield, Iowa, USA

Abstract

Indian banking sector have responsible commitment to straighten the agricultural

sector in lending. India growing in population needs more food production even to

meet its own demand. It is critical now that agricultural sector has been pushed as

secondary sector rather than primary. Author has conceptually presented in this article

the need for banking sector to consider improving their lending schemes. The primary

objective of the author is to highlight that banks data are not sufficiently supporting

the Priority sector lending, which in turn is going to have big impact on the

agricultural sector itself. The factors like branch operations, number of branches in

rural areas, financial inclusion and its impact, credit deposit ratio, lending policies,

RBI policy, sectoral development and other factors are analyzed with empirical

evidence and statistical relevance. Authors are of opinion that agricultural sector

needs more attention from union government and also they should watch how their

policies are implemented in banks. More researchers should drive their academic and

empirical research to show how rural branches at micro level functions. Authors are

given their own suggestions and conclusions based on the statistical data collected

from different reliable sources.

Key words – Banks, agricultural lending, priority sector lending, financial inclusion

Electronic copy available at: http://ssrn.com/abstract=1483243

“One of the reforms to be carried out during the incoming administration is a change in our monetary and

banking laws, so as to secure greater elasticity in the forms of currency available for trade and to prevent

the limitations of law from operating to increase the embarrassment of a financial panic (William Howard

Taft (1857–1930), U.S. President)”.

Introduction

Banks are always referred as “backbone” for developing countries.

Commercialized banks need to support various sectors to have balanced growth in the

economy. It should ensure that economic growth percolates through all sections of

masses. But unfortunately, in agricultural sector small and Marginal farmers suffer

seriously due to non availability of funds for their occupation. Medium and large scale

farmers may get necessary funds through submission of adequate collateral, while small

and marginal farmers deprived of all comforts including capital investment. World Bank

report pronounces around 1.1 billion people’s in India is poor at rural area (WDR, 2008).

One of the major reasons for the poverty is a low accessibility for credits by rural poor.

This leads authors to think deeply about the contribution of banks towards the

agricultural sector and what role they currently play in the economy. If banks are helping

agricultural mass heavily, then the concern about low accessibility and disbursement

raises doubts about the performance of financial sectors in India. In this article, author

tries to bring the importance of banks in helping and restoring the confidence in the

minds of rural farmers by providing more accessibility towards credits and other

facilities.

Electronic copy available at: http://ssrn.com/abstract=1483243

Indian financial system and financial institution

Indian banking sector has undergone numerous reforms and changes over the past

decades to enhance its performance to the international level. The financial independence

of the country depends on the sound financial system operating within the country. India

one of the largest country in south Asia, it has varied financial institutions, instruments

and financial system. Indian banking system was considered as well developed with the

presence of foreign and domestic banks including well developed stock market (Bery,

1996). Below table shows the latest data on Banks, branches until 2008.

Table 1 – No. of Banks in India

Table 1 reveals that nationalized banks are in the increasing trend and have extended into

different areas. In comparison with previous year, the trend shows generally increasing

and positive. Nationalized banks opened more branches while others are also seen in the

increasing trends.

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 Below table 2 shows number of branches opened during 2004-08 based on four

different division’s viz. rural, semi-urban, urban and metro places. RBI statistics claims

that most of the branches are inaugurated on rural sides than metro cities. The proportion

of bank branches in rural areas exceeds the metro numbers. It seems that number of

offices opened in rural areas during 2006/07 was 112 and that of urban seems to be 509

in number and that of metro 344. It is evident, even though number of branches in

operation exceeds in rural than urban; of late the concentration of banks were on urban

and metro areas.

Table 2 Number of branch offices opened during 2006-07

Source from www.rbi.org.in

Table 3 shows the accessibility and reachability of the individual consumers to the

banks or branches of banks in different countries. Geographically, Indian branches are

reachable even though, it doesn’t top in the table. Comparatively with other major

countries, it is well enough to maintain this position to serve to its client. But on the

contrary, for demographic penetration, India is much lesser than other countries. Growing

population in India is one of the factors that every nationalized bank has to consider to

4
see how to reach maximum number of clients. It will be useful if E-banking and E-

operations are designed to reach large number of clients and serve them at the best as

fast.

Table 3 – Geographic and Demographic penetration of banking services across the

countries listed below (2005)

Table 4 – Showing usage of banking services by Indian households (HHs) (2001)

The table above reveals among total number of households, rural mass usage of

banking services were apparently lower compared to that of urban mass. Even rural

household exceeds urban mass; it seems that banking services usage by rural mass was

5
bare minimum. This could be due to non-awareness of such services, illiteracy or even

lack of understanding about the advantage of banking services and banking products. In

addition these factors are also valid reason to assume that credit flow to rural mass is

lower because of lack of existence of schemes, poor communication and illiteracy etc.

Financial inclusion

Reserve bank of India (RBI) and other policy makers including National bank for

agriculture and rural development (NABARD) has framed policies initiating financial

inclusion with banks. The primary goal of the policy was to include the rural mass in the

banking operation and make it vulnerable for every individual rural mass to use them. In

view of that financial inclusion summits and workshops were conducted to impart the

importance of such theme to the rural mass. According to one of the recent survey

highlighted in the seminar, only 59% of the adult population in India has a savings

account and in rural areas they are only 39% enjoys banking facilities (ET Bureau, 2008).

The importance of including rural mass into the banking sector to make it reachable for

them was primarily a good objective to work on. But on the contrary, the function of

financial inclusion and its impact was not fruitful.

According to Skotch development foundation study on financial inclusion about

2.5 crore no- frill account opened during April 2007- May 2009, were largely non

operative. Only 11% of these accounts were currently active (Dhall, 2009, Sanjay Sinha,

2008). Additionally, these accounts were transacting with a minimum amount of Rs. 50 –

100, but charges Rs.50-250 for transaction fee and services. In support of this view,

Robin Roy, associate director of PWC, ; “The threshold levels for number of free

transactions is based on business considerations and primarily to optimize the costs

6
needed to serve this segment. But banks would need to seriously look at the bottom of the

pyramid. It’s the quality of no frills account holders that holds the key.”

According to Mckinsey’s recent survey on Indian banking practices and services

(2007) shows about potential growth for Indian banks in rural areas. In addition, the

report states that high geographic fragmentation in banking locations which makes

banking services not available to rural population. Almost 73% of customers dispersed in

and around 650,000 Indian rural villages as of 2005. There is a greater demand for

financial inclusion, but unfortunately the reach of such program was not strong to every

rural village in India. In addition, “The scale of business in financial inclusion is so big

that we need participation from big IT companies,” said KC Chakrabarty, deputy

governor, Reserve bank of India, and added lack of interest and involvement by big IT

companies was making banks’ endeavour of financial inclusion unsuccessful (Economic

times, 2009). Financial inclusion failed due to the lack of proper application, poor

delivery, in sufficient planning and rich do not have compassion for the poor

(Chakrabarty, 2009). Failure of this scheme has left 60% of the Indian mass not having

access to the financial services. It is important to gather forces like big IT industries

companies to support their schemes and RBI should monitor the functioning of the

scheme.

Rural credit policy

RBI has identified priority sectors like small scale industries, agriculture as

important sector to finance and issue more credits for their development. In a recent

article, Ramasubba Reddy (March, 2009) claims that C-D ratio (Credit-deposit ratio) for

metro cities by commercialized banks were highest to 87% and that of rural was 57%

7
only. As of March 2009, rural deposits were Rs.3.65 lakh crores, where as credits were

extended to Rs. 2.09 lakh crores only. If the same ratio like metro could have been

maintained the balance of Rs. One lakh crore should have been issued as credit to the

rural mass but reality is that it has been diverted towards the metro credits and

developments. Poor farmers were left in the hands of loan sharks with heavy interest

payments. Extrapolating the data from the RBI website, Reddy presents the below table

statistics showing application of funds towards metro region exceeds the other regions in

total.

Deposits and Credit of Scheduled Commercial Banks- MAHARASTRA STATE

March 2009 (Rs. in crore)
No. of % Credit- %
Offices share in Amount share in
the the
total total
Rural 2118 29% 14 301 1.56%
Semi-Urban 1397 19% 18 599 2.04%
Urban/Metro 3879 52% 870 468 96.40%
Total 7494 100 912,368 100
Source: RBI –Qtly Dep -Credit-Mar 09-Computed

Reddy claims that “Major chunk of credit to the extent of 96% of the total credit

in the State is given in Metro agglomerations. A megre 4 % of the total credit is given in

the rest of the vast track of Maharastra.” The discrimination between Metro and other

regions are evident and also clearly understood from the bank stand point of view. Also

to note that banks vision has changed from Agricultural development to Industrial

development issues.

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Source adapted from www.rbi.org.in

9
Debt profile of rural farmers

From the above graph, it is clearly evident that commercial banks credit policy

has shifted towards Industry sector rather than agricultural sector. The above graph

depicts the banking activities for 2007, showing that agriculture credits were in the range

between 12-13% from nationalized banks and scheduled banks. Only rural banks have

more agricultural attention than other banks. The question of availability of funds and

huge cartel of funds might be available from nationalized banks rather than rural banks.

Most of the regional rural banks will be operating as co-operative society, who has its

own limitation for sourcing funds because of member’s subscription, awareness of capital

share and other elements. More over regional rural banks operations were also restricted

to a particular region as standalone institution. This might not help much for Indian

farmer’s population who need more help to save them out of the crisis. Unless, a

nationalized bank comes out with more agricultural credit and loan to help the marginal

and small rural farmers, the fate of agriculture is always under conspiracy.

10
 The above table on debt profile clearly projects the data for year between 1993-94

and 99-2000 on source of debt for rural farmers. It was found that most of funds were

generated from Money lenders and it has considerably increased from 27.6% to 31.7%

instead banking credit allocation were only between 18.9% and 17.2% during these years.

The trend seems scary for economy because banks are leaving farmers unattended in the

hands of guilty loan sharks who are exploiting the need of farmers in greater extent and

leaving them in streets wandering for food and shelter even. Unless bank or government

steps into this situation to protect the poor gullible farmers, there is going to be a massive

decrease in agricultural employment, food production, and lead the country for food

shortage soon.

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 Above mentioned table also evidently shows the declining trend of farmer’s credit

compared to the deposits. The proportion seems not equal at all based on the table, where

farmers deposit more to the banks, but reaping less credits for their survival (Vallabh &

Chatrath, 2006).

Political intervention and rural loans

Nationalized banks have more political intervention rather than any other quasi

government bodies in India. Political intervention percolates into administrative and

operational works too. One such area it plays strongly is rural credits and agricultural

loans. Government decides on agricultural policy from time to time and enacts

agricultural reforms. Every year during fiscal budget session, agriculture becomes one of

the top demanded item and allocations towards agriculture sector will always be

commented in the floors of parliament.

Banks credit flow to Agriculture

2006-07 2007-08 2008-09 2009-10 Target
Co-operatives 42,840 48,258 36,762 60,000
RRBs 20,435 25,312 26,724 37.000
Commercial 166,485 181,087 223,663 2,28,000
Banks
Total 229,400 254,657 287,147
Increase over 48,914 25,257 3,25,000
previous year
Increase % 27% 11% 13% 13%
Increase in non- 28% 22.3% 17.3% 20% (est)
food bank credit
%
Source: Economic Survey and Budget Speech Jul 09

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 From the table data, it can be seen that agriculture credit for year 2007-2008 was

11% but of 2008-09 was 13%. There is an increase in the trend of agricultural

disbursement during the above mentioned year, but on the contrary it is evident that

increase in the agricultural during 2007- 08 and 2008-09 was less than other

corresponding periods. Total bank credit was estimated to increase by 20% in 2009-10,

but on the other hand targeted increase in agricredits was only 13%. Also summing up of

all three years agri credit growth was less than that of total bank credit growth. Country

facing drought situation, food shortage, it is necessary that agricredits have to be opened

to rural mass. Agricultural credit are particularly popular because the benefits are

transparent, while the costs are not, stated by Adams, Graham and von Pischke (2005).

Indian banks having constraints with financial resource have restrictions in amount

lending to agriculture, due to politicians intrude in bank affairs will face intertemporal

constraints similar to fiscal budget constraints.

Small and marginal farmers lack access to funding

Small farmers and Marginal farmer’s small loan amount for Rs 25000 declined

from 50% in 1990 to mere 10% in 2008. And loans over Rs one crore skyrocketed by

more than 400% during the same period. According to RBI data, institutional credit flow

to farmers registered a compound annual growth rate of 47% between 2003 and 2007, but

the number of farmer accounts grew by 22% and average loan per account increased by

20%. According to the NABARD’s latest report, only 27% of cultivator households get

getting credit. The rest, comprising mainly small & marginal farmers, have no access to

13
credit, though their landholdings constituted nearly 80% of total holdings and 36% of

area (NABARD Report).

In a recent interview with Dr. Raghuram Rajan, (2007) on bringing reforms into

banking sector in India, claims

" There is "very little evidence" that all the additional rural credit helped agricultural investment or

growth to any meaningful degree -- the most likely reasons being that much of the bank credit was

"misallocated" or not accompanied by sufficient public investment, leading to "a lot of wastage

(knowledge@wharton)".

In addition, Rajan states that, bank lending programs are also hijacked by politicians

in post nationalization era and admits that agricultural lending are highly manipulated by

them during election times.

Loan Mela

Nationalized banks “target loan” scheme is popularly known as Loan Mela’s.

Most of the banks will be urged to adapt Loan mela scheme due to stringent RBI

mandates. Every nationalized bank has to provide 18% of adjusted net bank credit to

agriculture sector, of which 13.5% is to be disbursed as direct credit and 4.5% towards

indirect credit to agriculture. Failing to maintain the required credits, banks will be forced

to give target loans to rural peoples. Administration of this program has been highly

criticized due to lack of proper scrutiny and awarding loans to unworthy creditors were

noted in this scheme. Commenting on the performance of this loan mela, Rajan (2009)

states that "This was without any credit evaluation and purely on the politician's word," he said.

"Obviously, [the politician's] friends and relatives got the credit, and obviously they didn't bother to repay

[the loans]."

14
Loan disbursement

India like developing countries always has corruption and bribery practices active

at all levels in the organizations. Banks are also not exempted from the clutches of such

practices. Bringing out the status of rural credit disbursement, Raghuram Rajan states that

“With the attraction of a highly subsidized rate, do people with the best credit get the

loan? The guy who has bribed the most gets the loan." He cited household surveys where

respondents reported paying bribes of up to 43% of their loan amounts to secure their

loans. He said the beneficiary has no intention of paying back the loan, "because that is

the only way he can justify the bribe." Stating the average time consumed for loan

disbursement has become 33 weeks and banks are not stepping forward to help the rural

farmers in during rural distress (Rajan, 2009).

Sectoral development

15
 Comparing different sectors and the investment range from banks towards these

sectors were shown in the above table. It shows that Industry ranks first in the sectoral

growth compared to agriculture. This clearly states that Indian economy has diverted

their vision from agriculture to Industrial sector after 1995. This visualizes clearly that

what steps that government will be adapting for the growth of agricultural sector will be

secondary rather than industrial sector development. The focus on Indian agricultural

sector is the need of the hour for the union government to consider that they have lot to

play to improve this dying sector and giving boost to the economy of the India.

Crop insurance

Farm sector credits can be protected by proper insurance coverage and risk

pooling. When our current Prime minister declared drought hit zones and identified

districts drought due to poor monsoon and rainfall, he urged ministry of agriculture to

come out with plans to meet the food scarcity issue in India. Ministry of finance and

planning commission in association with working group of Modified National

Agricultural Insurance Scheme (MNIAS) has assigned to identify the crop insurance

status and trends in India. To their surprise, in a recent survey during 03, they found only

4% of the country’s have availed a crop insurance scheme. In a subsequent survey done

by National Sample Survey Organization during 2003, they found out about 57% of

Indian farmers were even unaware about the crop insurance scheme (economic times,

2009). These data’s highlights that Indian farmers were not aware of such a facility where

by they can be covered for the risk element in the crops. It’s important to have some

farmer awareness education to coach the gullible, marginal farmers regarding availing

loans, credit availability, crop insurance, role of subsidies etc. This type of education

16
might help illiterate farmers and bring some awareness into them about those schemes

prevailing in the country.

Other factors

Other factor like broader span of control for banks and bank administration to

control rural mass leads to poor quality lending. In one of personal conversation with

author one of the bank administrative staff in charge for disposing agricultural loans

stated that some of the districts, & states, banks were asked to adapt more that 3 – 5

villages. Bank engages one or two officers in charge for agricultural credit disbursement

and lending operations. In most of the cases, it might be even only one officer or even

skeleton of staff with one manager and one officer with one teller cum clerk to take in

charge of entire rural bank administration. This bank might be controlling 3-4 village

rural population. Statistically, this branch going to handle 3-4 village farmers deposits

and credits. Bank administration might not be in a position to inquire the nature of loan

claimed or even to disburse the loan because, they might not be sure of the quality of the

creditors too. In case of target loans, banks might even admit loans to unscrupulous

account holders too. This is not an entertaining trend. It might be better if RBI can come

with how many bank personnel works in every branch and ratio of bank loan disbursal

per bank for every year. This might be good to trace them on micro level to understand

individual banks at rural level function and its operation. Policies hang over the walls of

banks but the realism is some thing different to assimilate. The other areas to explore

might be on bank level efficiency and its operation. How well individual bank manager

contributes to the community development and how well does bank integrate with the

rural society. This identification of bank and bank administration might help banks to

17
mingle with the society. This might even take banks to the door steps of the needy people

rather than depending on IT system and big IT companies backing for financial

inclusions and operations.

RBI need to revise their standards to understand that still India is an agriculture

base economy and it a developing country like India need to grow, first rural poverty

need to be eradicated. This can only be achieved by bringing out the Indian farmers out

of debts and helping them to have economic independence in their career. Developing

rural leadership, community leadership and rural colleges could bring the knowledge for

the gullible farmers. This might help them to get awareness about banking products and

services available. Authors are also interested to further explore the micro level

operations of rural banks and its administration in helping rural community with

statistical evidence. Need for bank is give a boost for the economy irrespective of sectors,

if banks have partial views on farmers and industrial persons, the views might be

hindering the growth of the banking sector at large too.

Conclusion

It is important to note that Indian products are known to world wide based on the

fertility and rich sources of food products. India, today on contrary struggling to achieve

food sufficiency due to lack of proper planning, leader and lack of capital. Farmer’s

accessibility towards capital is only through bank credits. If banking sector considers

development to Indian sub continent, it will be great to implement their plans, policies

and guidelines properly without any considerations and help the growth of agricultural

sector in India. Will bank support the growth of Indian agriculture to achieve food

sufficiency without any constraints?

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 List of references

1. “Agriculture for development”, World Bank Report, 2008

2. PTI (2009, 18th May). 20-PSU banks fail to meet farm sector lending target till

Nov. The economic times. Retrieved from http://economictimes.indiatimes.com

3. Ramasubba Reddy (2009).Discriminatory rural credit policy. Retrieved from

www.indianfarmers.org

4. Anup roy (2009, Aug 17). Banks to meet target by lending for allied agricultural

activities. Livemint.com. Retrieved from http://www.livemint.com

5. Reserve Bank of India (2009). Statistical tables relating to banks in India 2007-

2008. Retrieved from http://www.rbi.org.in

6. Census of India (2002). Household usage of banks. Retrieved from

http://www.censusindia.org

7. IST (2009, 18th Jul). IT players failed us in financial inclusion drive. The

economic times. Retrieved from http://www.economictimes.indiatimes.com

8. Yogesh Kochhar (2009, 11th Feb). Telecatalyse financial inclusion. The economic

times. http://economictimes.indiatimes.com

9. Sanjay Sinha (2009, 23rd April). Political limits to financial inclusion. The

economic times. http://economictimes.indiatimes.com

10. Vallabah & Suraj (2006). Role of Banks in Agriculture and Rural development.

The chartered accountant.Vol 1122, Feb 2006

11. Mckinsey & corporation (2007). Indian Banking: Towards Global Best Practices.

Mckinsey Quarterly. Nov 2006

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 12. Knowledge@wharton (2009, 7th May). As foreign banks detour, public banks

forge ahead. Retrieved from http://knowledge.wharton.upenn.edu

13. Knowledge@wharton (2009, 15th Nov). Raghuram Rajan on Rewriting the rules

for Indian banks. Retrieved from http://knowledge.wharton.upenn.edu

14. Prabha Jagannathan (2009, 16th Jul). Crop cover immersed in red tape. The

economic times. Retrieved from http://economictimes.indiatimes.com

15. Bery, S. 1996. “India: Commercial Bank Reform” in Financial Sector Reforms,

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American Countries (Ed) Faruqi, Shakil. EDI Seminar Series, The World Bank,

Washington, D.

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