Innovations in Agricultural Credit Delivery  - Rationalization and Policy Responses

-A Synoptic Note*

Institutional credit to the agricultural sector, after the introduction of the HYV associated technology (Green Revolution), has helped the farmers in adopting the new technology for boosting their production and productivity as also increasing their income levels. Bank credit also played a crucial role in augmenting the capital formation in the private sector in the agriculture sector of the country. The introduction of the Financial Sector Reforms in the early 90’s brought to the fore the primacy of the financial health of banks, especially the public sector banks, including their sustained viability. The entry of new generation private banks, domestic and foreign, did increase the level of competition and banks had a compelling reason to innovate to face the challenge of the competition and stay afloat. The innovations that came about in the financial sector, especially in agricultural credit, can be discerned at two levels. The first is the institutional arrangement for streamlining the credit delivery system including permitting entry of new entities like Local Area Banks (LAB) and the second level is at the level of processes and products. Such innovations were also largely facilitated by the breakthroughs achieved in the Information and Communications Technology and helped banks extend their outreach in rural areas and also in reducing their transaction costs.

In the former category is the evolving of the micro-finance programme through the SHG-Bank Linkage movement involving NGO, MFI and Banks that helped the poor in breaking the “poverty trap” through easy access to institutional credit and in improving the standard of living of the rural populace by augmenting their income levels. Some examples of these are the Self Help Groups (SHG), Grameen Bank Model, the Joint Liability Group and SGSY. In the wake of the integration of financial and commodity markets across the world economies, opportunities are available for banks to innovate and experiment with new processes and products to finance a host of activities and investment in the agricultural sector. Financing of contract farming and warehouse receipt financing can be bracketed in this category.

One of the policy responses of the GoI in 2005-06 has been to amalgamate the RRBs of a sponsor bank in a State to bring out economies of scale of operation and improve the financial health of these institutions. The number of RRBs has come down from 196 to 86 by March 2009 (45 amalgamated and 41 standalone).

In the wake of the findings of the NSSO Report on the increasing dependence of farm households on non-formal sources of credit, especially, the private moneylenders, the GoI’s policy response was to introduce the package of doubling of agricultural credit by banks in 2004. One of the components of the package was the Debt Swap Scheme under the banks were expected to redeem the loans of farmers taken from private money lenders and also finance them afresh. The GoAP also introduced two innovative schemes of debt swap. The first one was under the Indira Kranti Padham (IKP) under which the SHGs get loans upto Rs. 5 lakh, of which 50 per cent could be used for liquidating loans taken from money lenders. The State Level Bankers’ Committee (SLBC) formulated the second scheme and covers individual farmers. The dues to the moneylender would be settled directly by the bank through a cheque and the upper limit for existing borrowers is 50 per cent of the existing credit limit on crop loans with a cap of Rs. 50,000 while for new farmers, the limit is equivalent to a KCC limit based on cropping pattern and scales of finance and 50 per cent of limit for debt swap with a cap of Rs. 25,000.

The introduction of the Kisan Credit Card (KCC) in 1998 could be considered as a process and product innovation to facilitate easy access to production credit from Banks and coverage was extended to both investment and consumption loans in later years. More than 8 crore KCC are reported to have issued by Banks since its inception.

Following the recommendations of the Committee on Financial Inclusion, two funds, viz., Financial Inclusion Fund and Financial Inclusion Technology Fund were instituted to accelerate the process of achieving access to comprehensive financial services to at least 50 per cent of the excluded rural households by the year 2012.  With a view to redressing Financial Exclusion in unbanked areas, the RBI permitted banks to use the services of NGOs, SHGs, MFIs and other civil society organizations as their intermediaries for providing financial and banking services through the use of business facilitators and business correspondent model. The scheme has been implemented in many parts of the country.

Researchers are encouraged to base their contributions on micro-level empirical studies on any aspect of the innovations listed in the note and may address any of the following issues.  They are indicative and paper writers can address to any other issues having bearing on credit delivery and outreach.

a)     Has the outreach of the banks increased in terms of the credit widening and deepening due to the innovations?

b)     What are the factors/policies such as financial sector reforms in improving or reducing the access to credit?

c)      What are the alternative innovations in vogue to improve the credit outreach and what are the comparative costs and benefits of such innovations? Any better alternatives can be suggested?

d)     Is there a reduction in the transaction costs both from the banks’ and borrowers point of view and, if so, what is the magnitude of such reduction?

e)     Does the reduction in the transaction cost result in increased profitability of the banks in agricultural lending? Are the benefits of reduction in transaction costs passed on to the borrowers and if so, to what extent?

f)        What are the impacts of innovations on the asset less poor and the marginal/small farmers who have limited access to formal institutional sources of credit?

g)     What is the impact of amalgamation of Regional Rural Banks in terms of outreach, portfolio diversification, productivity and profitability?

*Prepared by B.Jayaraman, General Manager, Department of Economic Analysis and Research, NABARD, HO, Mumbai.