Revival of Agricultural Credit in the 2000s An Explanation by adp13197

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									REVIEW OF AGRICULTURE




Revival of Agricultural Credit in the 2000s:
An Explanation

R Ramakumar, Pallavi Chavan




                                                                           I
This paper examines credit to agriculture provided by                          t is by now well-documented that the trends that emerged in
the commercial banks, including regional rural banks,                          India in the 1990s with respect to the supply of rural credit
                                                                               in general, and agricultural credit in particular, were distur-
and finds that contrary to the general perception that
                                                                           bing. In the 1990s, there was (a) large-scale closure of commer-
the credit revival began in 2004, the actual revival                       cial bank branches in rural areas; (b) a widening of interstate in-
started after 2000. The increase in credit was to a                        equalities in credit provision, and a fall in the proportion of bank
large extent the result of a growing share of indirect                     credit directed towards regions, where banking was historically
                                                                           underdeveloped; (c) a sharp fall in the growth of credit flow to
finance, which, in turn, has been broadened in
                                                                           agriculture; (d) increased sidelining of small and marginal farm-
scope to cover many new kinds of farm lending.                             ers in the supply of agricultural credit; (e) increased exclusion of
Moreover, even as direct lending to agriculture has also                   the disadvantaged and dispossessed sections of the population
grown, there has been a sharp increase in the share of                     from the formal financial system; and (f) strengthening of the
                                                                           hold of moneylenders on rural debt portfolios [for details, see
large-sized advances for financing agri-business-
                                                                           the collected papers in Ramachandran and Swaminathan 2004;
oriented enterprises, rather than for the small and                        Shetty 2006; Chavan 2005 and 2007].
marginal farmers.                                                             In 2004, the government announced its intent to double the
                                                                           flow of credit to agriculture over a period of three years. This
                                                                           increase in credit flow has been an integral part of the so-called
                                                                           “new deal for rural India” promised by the United Progressive
                                                                           Alliance government. A “comprehensive credit policy” was an-
                                                                           nounced in June 2004, which included the commitment to raise
                                                                           agricultural credit flow by 30 per cent every year, financing of
                                                                           100 farmers per branch (thus, 50 lakh farmers in a year), two to
                                                                           three new investments in agricultural projects per branch every
                                                                           year and a host of debt-relief measures, such as debt restructur-
                                                                           ing, one-time settlement and financial assistance to redeem loans
                                                                           from moneylenders [Ministry of Agriculture 2007]. From 2004
                                                                           onwards, it is regularly claimed in official circles that the flow
                                                                           of credit to agriculture has been increasing at a rapid rate, even
                                                                           surpassing its annual targets [Ministry of Finance 2007; NABARD
                                                                           2006]. In fact, an impression is often gained from the official
                                                                           statements that the problem of agricultural credit has been set
                                                                           right with the doubling of credit flow and the concurrent expan-
                                                                           sion of microcredit.
                                                                              In this paper, we plan to closely analyse the claim that
                                                                           slowdown in the supply of agricultural credit has been reversed
                                                                           after 2004. Secondary data on banking from different publi-
The authors thank S L Shetty, V K Ramachandran and V Sridhar for their     cations of the Reserve Bank of India (RBI) have been used for
comments on a draft of this paper. An earlier version of the paper was     this purpose. Commercial banks emerged as an important
presented at the national conference on ‘Making Growth Inclusive with      institution for supplying agricultural credit only after the na-
Reference to Employment Generation’, at the Jawaharlal Nehru Universi-     tionalisation of banks in 1969. Presently, though agricultural
ty, New Delhi in June 2007. The views expressed in the paper are person-
                                                                           credit is supplied by both commercial banks and cooperatives,
al and not of the organisations with which the authors are associated.
                                                                           credit from commercial banks (including regional rural banks)
R Ramakumar (ramakumarr@gmail.com) is at the Tata Institute of             account for about 78 per cent of the total credit disbursed to
Social Sciences, Mumbai.
                                                                           agriculture.1 The discussion in this paper pertains only to the
Economic & Political Weekly   december 29, 2007                                                                                             57
REVIEW OF AGRICULTURE

credit provided by the commercial banks, including regional                                       growth rate of credit to agriculture in the 2000s was due to a
rural banks.                                                                                      regular increase of credit in every year after 2000, and not just
                                                                                                  after 2004.
1 Trends in Growth of Agricultural Credit                                                              The increase in the growth rate of agricultural credit in the
Historically, agricultural credit has comprised mainly the credit 2000s was so significant that the level of credit reached in 2006
provided directly to cultivators, which was called “direct finance considerably higher than what it would have been, if credit had
to agriculture”. Within direct finance to agriculture, a short- grown in the 1990s and 2000s at the growth rate of the 1980s.
term credit or a credit for seasonal agricultural operations has In Figure 2 (p 60), we have plotted the deflated series of credit
accounted for a significant share. The short-term loans to agri- to agriculture between 1980 and 2006, and projected forward a
culture are referred to as the “crop loans”, as they are advanced linear trend line of credit during the 1980s only. As is clear, the
for crop cultivation against the hypothecation of the crop to be plot of credit supply crosses the trend line by about 2003, and the
cultivated by the farmer. The crop loans are provided as cash or credit supplied in 2006 is at a point much above the projected
in kind, such as the supply of fertilisers and seeds. Apart from the trend line of the 1980s. This method, of course, does not account
crop loans, direct finance also includes credit for medium- and for the deficits in the supply in the years between 1990 and 2003,
long-term investment in agriculture. The second component of when the credit supply was below the trend line. Nevertheless,
agricultural finance is called “indirect finance”, which does not it does provide an indication of the extent of increase in credit
go directly to cultivators, but to the institutions that support agri- after 2000.
cultural production in rural ar-                                                                                                                        There has been a marked ab-
                                        Table 1: Rate of Growth of Credit Outstanding from
eas. The typical forms of indirect Scheduled Commercial Banks to Selected Sectors (1975-2006, in % per annum)                                        sence of association between the
finance to agriculture are loans to Sector                                                              1975-80 1980-90 1990-2000 2000-06             sharp growth of agricultural
input dealers for their role in the     Growth rate of credit outstanding to:                                                                        credit in the 2000s and the
                                        Agriculture and allied sectors                                    20.4           8.7        1.8       20.5
provision of agricultural inputs Artisans and craftsmen                                                   27.4          21.0        2.3       14.1   growth of agricultural output
and loans to electricity boards for Other small-scale industries                                          12.0           7.5        2.4        4.1   and agricultural employment.
supplying power to cultivators.         Total bank credit                                                 12.9           7.9        6.7       17.7   The rates of growth of gross do-
                                        Growth rates of GDP at constant prices from:
   In the 1990s, when India be- Agriculture                                                                1.1           4.7        3.4        1.9   mestic product (GDP) from agri-
gan to implement the policy of Agriculture and allied sectors                                              0.9           4.4        3.4        2.0   culture and unregistered manu-
financial sector liberalisation, Unregistered manufacturing                                                 4.7           5.8        6.3        4.8   facturing (a proxy for the infor-
                                        Figures are annual exponential growth rates estimated after deflating credit outstanding with the GDP
there was a significant slowdown deflators. The figures include credit supplied by regional rural banks.                                              mal sector and small-scale in-
in the growth of commercial Sources: ‘Basic Statistical Returns’, Reserve Bank of India, various issues; ‘Handbook of Statistics on Indian
                                        Economy – 2005-06’, Reserve Bank of India; http://www.indiastat.com.                                         dustries) were lower in the 2000s
bank credit to agriculture com-                                                                                                                       over the 1990s (Table 1). Also,
                                         Table 2: Rate of Growth of Direct and Indirect Finance Outstanding to Agriculture
pared to the 1980s.2 As Table 1 and Allied Activities from Scheduled Commercial Banks (1975-2006 , in % per annum) data on employment from the
shows, after recording an annual Type of Finance                                                                 Growth Rates of Credit               National Sample Survey (NSS)
rate of growth of 8.7 per cent be-                                                                   1975-80         1980-90 1990-2000 2000-06
                                                                                                                                                      show that the rate of growth of
                                         Total finance to agriculture and allied activities              20.4            8.7          1.8       20.5
tween 1980 and 1990, agricul- Direct finance to agriculture and allied activities                        23.3           10.0          1.5       17.4
                                                                                                                                                      wage employment in agriculture
tural credit grew at just 1.8 per Indirect finance to agriculture and allied activities                  12.9            2.7          3.5       32.9  was negative (-3.2 per cent) be-
cent per annum between 1990 Figures are annual exponential growth rates worked out after deflating the credit outstanding by gross                    tween 1999-2000 and 2004-05.
                                         domestic product deflators. Data includes credit supplied by regional rural banks (RRBs).
and 2000. In the case of other Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues; ‘Handbook of Statistics on India           The respective growth rate was
                                         Economy – 2005-06’, Reserve Bank of India.
rural occupations such as arti-                                                                                                                       positive (1.1 per cent) between
sans and craftsmen and small-scale industries, the decline in the 1993-94 and 1999-2000. These trends prompt a harder look at
growth of credit was equally sharp. Further, the growth rate of the pattern of growth of agricultural credit in the 2000s in com-
agricultural credit in the 1990s was less than the growth rate of parison with the earlier decades.
the rural population in the corresponding period [Chavan 2002].
   The slowdown in agricultural credit in the 1990s appears to 2 Features of Agricultural Credit in the 2000s
have been reversed in the period after 2000. Between 2000 and There are three distinct features of the growth in agricultural
2006, agricultural credit grew by 20.5 per cent per annum, which credit, which have had a major role in determining the extent
was significantly higher than the growth rate recorded for the of increase in credit supply as well as its distribution within the
1990s. It was not just agricultural credit that grew rapidly in the agricultural sector. These features are discussed separately in the
2000s; credit to artisans and craftsmen and other small-scale subsections below.
industries also grew at rates faster than in the 1990s.
   An important point to note here is that the revival of agricul- 2.1 Role of Indirect Finance
tural credit had begun after the year 2000 itself. This is contrary First, a significant proportion of the increase in total bank credit
to the general perception that the revival in the 2000s was owing to agriculture between 2000 and 2006 was accounted for by in-
to the government’s announcement in 2004 to double the sup- direct finance to agriculture. Of the total increase in credit sup-
ply of credit to agriculture. The log plot of credit to agriculture ply to agriculture between 2000 and 2006, about one-third was
and the plot of per capita credit to agriculture in rural areas in contributed by indirect finance. Between 2000 and 2006, while
Figure 1 (p 59) establish this fact clearly. In other words, the high direct finance grew at an annual rate of 17 per cent, indirect
58                                                                                                                             december 29, 2007         Economic & Political Weekly
                                                                                                                                                                            REVIEW OF AGRICULTURE

finance grew at an astonishing annual rate of 32.9 per cent – Loans extended to state electricity boards (SEBs) for reimburse-
(Table 2, p 58).                                                                                              ment of expenditure towards providing low-tension connection
   In the decade of the 1990s and after, the share of indirect to individual farmers from step-down points for energising wells
finance in total agricultural finance has consistently risen were always classified as indirect finance to agriculture. From
(Table 3). Between 1985 and 1990, there was a fall in the share of 2001 onwards, loans to SEBs for systems improvement under the
indirect finance in total agricultural finance; the share began to Special Project Agriculture (SI-SPA) were also considered as in-
rise after 1990 to reach 15.5 per cent in 2000, 25.9 per cent in direct finance to agriculture. From July 2005 onwards, loans to
2002 and 27.9 per cent in Figure 1: Log Plot of Credit to Agriculture and Per Capita Credit to Agriculture                                                                power distribution corpora-
2006. Thus, while the share in Rural Areas 1 Log plot of credit to agricultureto 2006) credit to agriculture in rural areas, deflated figures, 1975 to 2006
                                           Figure (Deflated Figures, 1975 and per capita                                                                                  tions or companies, emerg-
                                                                                                                                                                     18.0
of indirect finance in total 1,40,000                                                                                                                                      ing out of the bifurcation or
                                                  140000                                                                                                     18.0




agricultural finance had be- 1,20,000              120000
                                                                                                                                                             16.0    16.0 restructuring of SEBs as part
gun to rise in the 1990s, its                                                                                                                                14.0    14.0     power sector
                                                                                                                                                                          of Log of credit to agriculture reforms were
                                                                        Log of credit to agriculture (right hand side axis)
increase in the 2000s was 1,00,000                100000
                                                                                                                                                             12.0    12.0
                                                                                                                                                                          also considered as indirect fi-
considerably faster.                                                                                                                                                      nance to agriculture.
                                 80,000            80000
                                                                                                                                                             10.0    10.0
   From the 1990s onwards,                                                                                                                                                – From August 2001 onwards,
                                                                                                                                                                     8.0
the definition of what con-       60,000            60000
                                                                                                                                                             8.0
                                                                                                                                                                          loans extended under the
stitutes indirect finance                                                                                                                                     6.0     6.0  scheme for financing “agri-
                                 40,000            40000

to agriculture has been                                                Per capita credit to agriculture in rural areas (left hand side axis) (Rs ‘00)        4.0     4.0  clinics” and “agribusiness cen-
broadened       significantly     20,000            20000
                                                                                                                                                             2.0     2.0
                                                                                                                                                                          tres” were considered as indi-
by the RBI.3 The widen-                                                                                                                                                   rect finance to agriculture.
                                       0              0                                                                                                      0.0     0.0
ing of the scope has, in all            1975              1980              1985                    1990               1995             2000               2004 05 06     – From July 2001 onwards,
likelihood, influenced the Source: ‘Basic Statistical Per capita credit to agriculture in rural areas (Rsissues; ‘Handbook of Statisticscredit to agriculture – 2005-06’, subscription to the bonds is-
                                                         Returns’, Reserve Bank of India, various      Year
                                                                                                         '00)                    Log of
                                                                                                                                        on Indian Economy
                                Reserve Bank of India; Population Census of India – 1971, 1981, 1991 and 2001.
growth of indirect finance                                                                                                                                                 sued by the rural electrifi-
from the mid-1990s. The major changes introduced in the defini- cation corporation (REC) exclusively for financing the pump set
tion of indirect finance are given below:                                                                      energisation programme in rural and semi-urban areas was con-
– Till 1993, only direct finance to agriculture was considered as sidered as indirect finance to agriculture.4
a part of the priority sector target of 18 per cent for agriculture – From April 2000 onwards, loans from banks to non-banking
and allied activities. From October 1993, direct and indirect financial companies (NBFCs) for on-lending to agriculture were
finances have been considered together for meeting the priority considered as indirect finance to agriculture.
sector target.                                                                                                – From November 2002 onwards, loans for the construction and
– In October 1993, it was stipulated that indirect finance to agri- running of storage facilities (warehouse, market yards, go-
culture only up to one-fourth of the total agricultural advances downs, silos and cold storages) in the producing areas and
would be considered while meeting the priority sector target of loans to cold storage units located in rural areas, which were
18 per cent for agriculture. However, the indirect finance over used for hiring and/or storing mainly agricultural produce,
and above one-fourth of total agricultural advances was allowed were considered as indirect finance to agriculture. However,
to be reckoned while meeting the overall target of 40 per cent for from May 2004 onwards, loans to storage units, including cold
priority sector advances.                                                                                     storage units, that were designed to store agricultural produce,
– From May 1994 onwards, loans up to Rs 5 lakh for financing irrespective of their location, were treated as indirect finance
distribution of inputs for allied activities in agriculture, such as to agriculture.
cattle feed and poultry feed, were considered as indirect finances – From May 2004 onwards, if the securitised assets of a
to agriculture. The upper limits were revised and fixed at Rs 15 bank represented indirect finances to agriculture, investment
lakh in April 2000, Rs 25 lakh in April 2002 and Rs 40 lakh in by banks in such assets was considered as indirect finance
October 2004.                                                         Table 3: Shares of Direct and Indirect                                   to agriculture.
                                                                      Finance in
– From June 1996 onwards, loans to dealers in ScheduledTotal Credit to Agriculture from   Commercial Banks
                                                                                                                                                     In this article, we have used data on the
drip irrigation systems, sprinkler irrigation (1985 to 2006, in %)                                                                             supply of agricultural advances up to 2006,
systems and agricultural machinery were                                                       Share in Total Agricultural Credit
                                                                                                                                               and hence, the changes in the definition of in-
                                                                      Year                  Direct            Indirect        Total
considered as indirect finances to agriculture.                                             Finance            Finance                          direct finance only up to 2006 have been list-
From October 2002 onwards, the credit limit 1985                                            83.2                16.8         100.0             ed above. Some additional changes in the
to these dealers was raised from Rs 10 lakh to 1990                                         86.8                13.2         100.0
                                                                                                                                               definition of indirect finance to agriculture
                                                                      1995                  85.9                14.1         100.0
Rs 20 lakh; it was further raised to Rs 30 lakh 2000                                        84.5                15.5         100.0             were introduced after 2006, which may be of
in October 2004. Till April 2003, only loans to 2001                                        83.9                16.1         100.0             significant relevance to future analyses
those dealers located in rural or semi-urban ar- 2002                                        74.1               25.9         100.0
                                                                                                                                               on agricultural credit. These changes are
                                                                      2003                  77.8                22.2         100.0
eas were under the ambit of indirect finances. 2004                                          72.8                27.2         100.0             summarised below:
However, from April 2003 onwards, all dealers, 2005                                          76.1               23.9         100.0             – From April 2007 onwards, two-thirds of loans
irrespective of their location, were treated as 2006                                        72.1                27.9         100.0
                                                                                                                                               given to corporates, partnership firms and in-
                                                                      Source: ‘Basic Statistical Returns’, Reserve Bank of India,
eligible for such advances.                                           various issues.                                                          stitutions for agricultural and allied activities
Economic & Political Weekly         december 29, 2007                                                                                                                                                            59
     REVIEW OF AGRICULTURE

     (such as beekeeping, piggery, poultry, fishery and dairy) in ex- the category “other types of indirect finance” began to increase
     cess of Rs 1 crore in aggregate per borrower was considered as from 1994 onwards, and recorded a phenomenal rise in the levels
     indirect finance to agriculture.                                                                                               after 1999. From 1999 onwards, “total indirect finance” and
     – From April 2007 onwards, loans to food- and agro-based “other types of indirect finance” have also moved in close tandem.
     processing units with investments in plant and machinery up to Our estimates show that the share in total indirect finance of
     Rs 10 crore (other than the units run by Table 4: Distribution of Amount Outstanding under Total                                                                       “other types of indirect finance”, which
     individuals, self-help groups and coop- Agricultural Advances by Scheduled Commercial Banks                                                                            was 56.6 per cent in 1999 increased to
                                                                                 (by credit                           loans,
     eratives in rural areas) were considered Credit Limitlimit size-classes ofShare ofin %) Outstanding in Total Amount
                                                                                              Size                           Amount
                                                                                                                                                                            76.1 per cent in 2006.
     as indirect finance to agriculture.                                          Class of Loans (Rs)                                  Outstanding                              An increase in indirect finance is
                                                                                                               1985      1990 1995        2000       2003 2005 2006
          As we have seen, indirect finance                                                                                                                                  necessary to improve the capacity
                                                                                 Less than 25,000               49.6 58.7 52 35.2 23.6 17.8 13.3
     to agriculture expanded at a rate of 25,000 to 2 lakh                                                    35.3* 23.9 26 32.4 34.4 34.1 31.4                             of farmers to absorb more direct fi-
     about 33 per cent per annum since the 2 lakh to 10 lakh                                                              4.3 5.1          11.7 14.0 17.9 19.7              nance. However, the promotion of
     late 1990s, thus aiding significantly 10 lakh to 1 crore                                                     7.4      7.6 7.6           6.6        6.3    6.4    6.1    indirect finance should not lead to
                                                                                 1 crore to 10 crore             4.6      4.2 5.6           6.7        7.4    8.0    8.5
     the growth of total agricultural credit 10 crore to 25 crore 3.0* 1.3* 3.5* 1.7 4.0 3.3 4.3                                                                            an undermining of direct finance.
     (Table 2, p 62). Most of the above-cited Above 25 crore                                                                                5.7 10.4 12.6 16.8              The RBI’s advisory committee on flow
     definitional changes (that either ex- Total advances                                                     100.0 100.0 100.0 100.0 100.0 100.0 100.0                      of credit to agriculture and related
                                                                                 * The data are not separately available for the corresponding size-classes.
     panded the ambit of indirect finance Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues.                                                        activities in 2004 noted the demand
     or steeply raised ceilings on loan sizes) Table 5: Distribution of Amount Outstanding under Indirect                                                                   made by banks to relax the stipula-
     also took place since the late 1990s. In Agricultural Advances by Scheduled Commercial Banks                                                                           tion that indirect finance to agriculture
                                                                                 (by credit limit size-classes of loans, in %)
     other words, the task of banks to follow Credit limit Size Class Share of Amount Outstanding in Total Amount Outstanding )                                             should not exceed 4.5 per cent of the
     the government’s directive in 2004 to of Loans (Rs)                                                       1985 1990        1995 2000 2003               2005 2006      net bank credit.5 This stipulation was
     double agricultural credit became con-                                      Less than 25,000                7.4 10.1         6.9        2.8 2.8          1.6    0.9    earlier put in place in order to chan-
                                                                                 25,000 to 2 lakh            19.7*       9.2      4.5        5.2 3.9          3.1    2.2
     siderably easier given the major chang- 2 lakh to 10 lakh                                                           8.7      8.8        5.6 10.8         6.8    4.7
                                                                                                                                                                            nel bank finance directly to farmers.
     es in the definition of indirect finance.                                     10 lakh to 1 crore            32.4 40.1 32.2 21.7 11.7                      12.4    9.5    The advisory committee rejected this
          As mentioned, indirect finance to 1 crore to 10 crore 22.8 24.0 25.5 25.9 19.2 20.6 19.7                                                                           demand by banks and noted that “in-
                                                                                 10 crore to 25 crore 17.7*              7.9 22.2            8.6 11.7         9.3    9.6
     agriculture was traditionally under- Above 25 crore                                                                                   30.3 39.9         46.2 53.5
                                                                                                                                                                            direct lending needs to be subject to
     stood as loans that would not go direct- Total advances                                                 100.0 100.0 100.0 100.0 100.0 100.0 100.0                      certain limitations, lest banks neglect
     ly to farmers, but to the activities un- * The data are not separately available for the corresponding size-classes.                                                   direct finance for agricultural produc-
                                                                                 Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues.
     dertaken by individuals/institutions                                                                                                                                   tion, which may jeopardise the goal
     that aided farmers in undertaking cultivation. Loans given for of achieving annual growth of 4 per cent in agricultural produc-
     the provision of agricultural inputs (to dealers), power (to elec- tion” [RBI 2004, p 32].6
     tricity boards), and formal credit (to primary agricultural credit
     societies) were such typical indirect activities. With the defini- 2.2 Increase in Loans with Large Credit Limits
     tional changes introduced in the late 1990s, the meaning of indi- Secondly, much of the increase in the total advances to agriculture
     rect finance itself has undergone a major change. In Figures 3a in the 2000s were on account of a sharp increase in the number of
     and 3b (p 62), we have presented the trends in different types of loans with a credit limit of Rs 10 crore and above, and particularly,
     indirect finance to agriculture between 1971 and 2006. As is clear, Rs 25 crore and above. In Table 4, we have provided the distribu-
     the traditional components of indirect finance to agriculture did not tion of the amount of agricultural advances (direct and indirect)
     exhibit any notable recovery in the 2000s. Instead, loans under by credit limit size-classes of loans for the period 1985 to 2006. A
           Figure 2 Trends in the supply of total agricultural advances between 1980 and 2006, and projected linear trend
     Figure 2: Trendssupply in the 1980s,Total Agricultural Advances between 1980 and 2006s
           line for credit in the Supply of deflated series, in Rs crore                                                                                          comparison of figures for 2000 with those of 2006
     and the Projected Linear Trend Line for Credit Supply in the 1980s, Deflated Series (in Rs crore)                                                            shows that the shares in total advances of ad-
      1.4
14000000
                                                                                                                                                                  vances with credit limit “less than Rs 25,000”
                                                                                                                                                                  and “between Rs 25,000 and Rs 2 lakh” have
      1.2
12000000
                                                                                                                                                                  shrunk significantly. The share in total advances
                                                                                                                                                                  of advances with a credit limit of Rs 25,000 fell
      1.0
10000000
                                                                                                                        Advances to agriculture                   from 35.2 per cent in 2000 to 13.3 per cent in 2006.
      8.0
 8000000                                                                                                                                                          The share in total advances with credit limit be-
                                                                                                                                                                  tween Rs 25,000 and Rs 2 lakh also declined
      6.0
 6000000                                                                                                                                                          from 32.4 per cent to 31.4 per cent in the same
                                                                                                                                                                  period. On the other hand, the share in total ad-
                Advances to agriculture 1980 to 1990
      4.0
 4000000                                                                                                                                                          vances of advances with credit limit above Rs 25
                                                                                                                                                                  crore increased sharply from 5.7 per cent in 2000
      2.0
 2000000
                      Linear advances to agriculture 1980 to 1990                                                                                                 to 16.8 per cent in 2006. Similarly, the share in
                                                                                                                                                                  total advances of advances with credit limit be-
        0
        0
       1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 05 06
          1980                          1985                       1990                    1995                         2000                  2004    2006
                                                                                                                                                                  tween Rs 10 crore and Rs 25 crore increased from
     Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issues.
                                                                                 Year
                                                                                                                                                                  1.7 per cent in 2000 to 4.3 per cent in 2006.
     60         Advances to agriculture       Advances to agriculture, 1980 to 1990       Linear (Advances to agriculture, 1980 to 1990)
                                                                                                                                                       december 29, 2007             Economic & Political Weekly
                                                                                                                                         REVIEW OF AGRICULTURE

   To a large extent, the expansion of agricultural advances with                          direct finance to agriculture by their credit limits in two different
large credit limits can be explained by the growth of indirect fi-                          ways: first, by the regular classification followed in this paper,
nance to agriculture. In Table 5, we have provided the distribu-                           and secondly, a broad size-classification of less than Rs 2 lakh
tion of indirect agricultural advances by credit limit size-classes                        and above Rs 2 lakh. Between 2000 and 2006, there was a fall in
of loans for the period 1985 to 2006. The table speaks for itself;                         the share of direct finance with credit limit up to Rs 2 lakh from
between 2000 and 2006, the share of indirect advances with                                 78.5 per cent to 60.8 per cent. On the other hand, the share of
credit limit above Rs 25 crore in total indirect advances rose from                        direct finance with credit limit above Rs 2 lakh increased from 22
30.3 per cent to 53.5 per cent. In other words, more than half                             per cent to 39 per cent. Almost half of the increase in the amount
of the indirect finance to agriculture was accounted for by loans                           of direct finance outstanding to agriculture between 2000 and
with a credit limit of above Rs 25 crore in 2006.                                          2006 was accounted for by loans with a credit limit of above Rs
   The growing shift in recent times towards loans with large                              2 lakh, a size-class in which loans to marginal and small farmers
credit limits are closely related to the changes in official policy                         are hardly represented (even when we consider a classification
on agriculture in India, which increasingly favours the growth                             with Rs 10 lakh as the cut-off mark, the trends remain similar.
of a capital-intensive and export-oriented production pattern in                           The share of direct finance with credit limit less than Rs 10 lakh
agriculture. The changes in the definition of indirect finance to                            fell from 91 per cent in 2000 to 86 per cent in 2006. The data are
agriculture since the late-1990s have also been in line with the                           not presented here).
new emphasis in official policy.                                                                A closer analysis of changes in the supply of direct finance
                                                                                           to agriculture shows that the share of direct advances in every
2.3 Benefits of Credit Expansion to Big Cultivators                                        credit limit size class above Rs 2 lakh increased between 2000
Thirdly, even while we note the increasing importance of indirect and 2006 (Table 6: Upper Panel). Significantly, there was an ex-
finance, the growth in direct finance to agriculture in the 2000s pansion in the supply of direct finance where the credit limits of
cannot be overlooked. As for data in Table 2 show, direct finance loans were above Rs 1 crore. The share of advances with credit
to agriculture grew at an annual rate of 17.4 per cent between limit of more than Rs 25 crore increased from 1.2 per cent in 2000
2000 and 2006. The magnitude of                                                                                                   to 2.6 per cent in 2006. Similarly, for
                                           Table 6: Distribution of Amount Outstanding under Direct
this growth rate is large and needs an Agricultural Advances by Scheduled Commercial Banks                                        advances with credit limit between
explanation, particularly in view of (by credit limit size-classes of loans, in %)                                                Rs 10 crore and Rs 25 crore, the cor-
continuing complaints from political Credit Limit Size Class Share of Amount Outstanding in Total Amount Outstanding responding increase was from 0.4 per
                                            of Loans (Rs)               1985 1990 1995 2000 2003 2005 2006
movements and farmers’ organisations Less than 25,000                   58.2 66.1 59.5 41.1 29.5 22.9 18.1                        cent to 2.2 per cent. On the other hand,
that stagnation in agricultural credit 25,000 to 2 lakh               38.5* 26.1 29.6 37.4 43.1 43.8 42.7                         the share of direct advances with credit
continues.                                 2 lakh to 10 lakh                      3.6       4.5 12.8 14.9 21.4 25.5               limit of less than Rs 25,000 fell sharply
                                           10 lakh to 1 crore             2.4     2.6       3.6      3.9 4.8         4.5 4.8
   There are two aspects of the growth 1 crore to 10 crore                0.9      1.2      2.3       3.1 4.0        4.1 4.1      from 41.1 per cent in 2003 to 18.1 per
of direct finance to agriculture in the 10 crore to 25 crore             0.0* 0.3* 0.5*               0.4 1.8         1.4 2.2      cent in 2006. Thus, in the 2000s, there
2000s, which render it far less spectac- Above 25 crore                                              1.2 1.9         2.0 2.6      was a clear shift in the direct agricul-
                                           Total advances             100.0 100.0 100.0 100.0 100.0 100.0 100.0
ular than it is made out to be. The first Broad size-classes:                                                                      tural lending of banks away from small
is related to changes in the size of loans   < 2 lakh                       – 92.2 89.1 78.5 72.6 66.6 60.8                       borrowal accounts in favour of large-
under direct finance. Given that direct       > 2 lakh                       –      7.8 10.9 21.5 27.4 33.4 39.2                   sized loan accounts.
                                           Total advances                   – 100.0 100.0 100.0 100.0 100.0 100.0
finance comprises short-term, medium- * The data are not separately available for the corresponding size-classes.                     The second disturbing aspect of the
term and long-term loans given to agri- Source: ‘Basic Statistical Returns’, Reserve Bank of India, various issuses.              growth of direct finance in the 2000s
culturists, it is reasonably expected that Table 7: Distribution of Number of Loan Accounts under Direct                          relates to increasing importance of
the size of loans, on an average, would Outstanding Finance from Scheduled Commercial Banks                                       loans given to big cultivators. The RBI
                                           (by size of operational holdings – 1980-81 to 2004-05, in %)
not be as high as in the case of indirect Year          Marginal       Small      Marginal and Small          Big         All     publishes data on loans provided to
finance. However, there has been a (1)                  Cultivators Cultivators
                                                           (2)           (3)
                                                                                       Cultivators
                                                                                       (4)=(2)+(3)
                                                                                                         Cultivators Cultivators
                                                                                                              (5)     (6)=(4)+(5)
                                                                                                                                  cultivators, classified by the size of
considerable growth in the amount of 1980-81 45.8                      25.0               70.7               29.3        100.0    operational holdings. Cultivators op-
direct advance to agriculture with very 1985-86 43.3                   30.1               73.4               26.6        100.0    erating less than 2.5 acres are referred
high credit limits, a trend comparable 1990-91 43.7                    30.9               74.6               25.4        100.0
                                                                                                                                  to as “marginal” cultivators, between
                                           1991-92        42.8         31.3               74.1               25.9        100.0
with that of indirect finance [see also 1992-93 42.1                    31.0               73.1               26.9        100.0    2.5 acres and 5 acres are referred to as
Shetty 2006].                              1993-94        43.1         30.8               73.9               26.1        100.0    “small” cultivators and above 5 acres
   Data in Table 6 show that in the 1994-95 42.0                       31.1               73.1               26.9        100.0
                                                                                                                                  are referred to as “big” cultivators.
                                           1995-96        41.9         32.1               73.9               26.1        100.0
2000s, and particularly between 2003 1996-97 40.5                      32.2               72.7               27.3        100.0    Notwithstanding the fact that data
and 2006, there was a fall in the shares 1997-98 39.8                  32.9               72.7               27.3        100.0    are provided for only three land size-
of direct advances with lower credit 1998-99 38.3                      32.2               70.6               29.4        100.0
                                                                                                                                  classes and that they become avail-
                                           1999-00        38.8         32.3               71.1               28.9        100.0
limits in total direct advances. The 2000-01 38.8                      31.1               70.0               30.0        100.0    able with considerable time lag, these
accounts with a credit limit up to Rs 2 2001-02 40.0                   32.3               72.3               27.7        100.0    data provide some indications of the
lakh are referred to as small borrowal 2002-03 37.5                    32.3               69.7               30.3        100.0
                                                                                                                                  socio-economic groups to which agri-
                                           2003-04        39.9         31.5               71.3               28.7        100.0
accounts (the limit was Rs 25,000 till 2004-05 39.6                    31.8               71.4               28.6        100.0    cultural credit has been flowing in
1998). In Table 6, we have classified Source:‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India.            recent times.
Economic & Political Weekly   december 29, 2007                                                                                                                        61
                                                            REVIEW OF AGRICULTURE

                                                              In Table 7, we have provided data on the share of loan accounts                                                                                bearing on the increase in the growth of total direct finance since
                                                            under direct finance held by marginal, small and big cultivators                                                                                  the late 1990s.
                                                            between 1980-81 and 2004-05, which is the latest year for which                                                                                      It needs to be noted that similar to the changes in the defini-
                                                                                                                                                                                                                         tion of indirect finance, the definition of direct finance
                                                                    Figure Trends in the Supply of Different Types of Indirect Advances to commercial
                                                             Figure 3a:3 Trends in the supply of different types of indirect advances to agriculture by scheduledAgriculture by Scheduled
                                                             Commercial Banks, Balance Outstanding, Deflated Figures, 1971 to 2006 (in Rs ’000 crore)
                                                                    banks, balance outstanding, deflated figures, 1971 to 2006, in Rs crore                                                                              to agriculture too has been broadened in some ways
                                                              50
                                                         50000.0                                                                                                                                                         since the late 1990s.
                                                              45
                                                         45000.0                                                                                                                                                         – From 1997 onwards, short-term loans to traditional
                                                              40
                                                         40000.0
                                                                                                                                                                                                                         plantations (such as tea, coffee, rubber and spices), ir-
     Indirect advances outstanding (deflated Rs crore)




                                                                                                                                                                                                                         respective of the size of holdings, were considered as
                                                              35
                                                         35000.0
                                                                                                                                                                                      Total indirect finance             direct finances to agriculture. Later, all loans (short-
                                                              30
                                                         30000.0
                                                                                                                                                                                                                         term, medium-term and long-term) to traditional and
                                                              25
                                                         25000.0
                                                                                                                                                                                                                         non-traditional plantations and horticulture, irrespec-
                                                              20
                                                         20000.0
                                                                                                                                                                                                                         tive of the size of holdings were considered as direct
                                                              15
                                                         15000.0
                                                                                                                                                                                                    Loans to farmers
                                                                                                                                                                                                                         finance to agriculture.
                                                              10
                                                         10000.0
                                                                                                                                                                                                         through         – From April 2002 onwards, the upper limit for loans
                                                                                                                  Distribution of fertilisers and other inputs                                      PACS/FSS/LAMPS
                                                          5000.05                                                                                                                                                        given against the pledge or hypothecation of agricul-
                                                                0
                                                                                                                                                                                                                         tural produce (that includes warehouse receipts) for a
                                                              0.0
                                                                  1971
                                                                   1971                  1976
                                                                                          1976                     1981
                                                                                                                  1981                1986
                                                                                                                                      1986               1991
                                                                                                                                                          1991         1996
                                                                                                                                                                         1996                    2001
                                                                                                                                                                                                 2001         04 052006
                                                                                                                                                                                                                      06 period not exceeding six months was raised from Rs 1
                                                             Source: ‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India. Year
                                                                                                                                                                                                                         lakh to Rs 5 lakh for a period not exceeding 12 months.
                                                            Figure 3b: Trends in the Supply of Different Typestoof IndirectPACS/FSS/LAMPSto Agriculture indirect finance
                                                                        Distribution of fertilisers and other inputs                      Loans farmers through Advances                        Total                       The changes summarised above are only up to 2006.
                                                                    Figure 3 Trends in the supply of different types of indirect advances to agriculture by scheduled commercial
                                                            by Scheduled Commercial Banks, Balance Outstanding (Deflated Figures – 1971 to 2006, in Rs ’000 crore)
                                                                    banks, balance outstanding, deflated figures, 1971 to 2006, in Rs crore                                                                              A few significant changes in the definition of direct
                                                             40
                                                         40000.0
                                                                                                                                                                                                                         finance were introduced after 2006 also. They are,
                                                             35
                                                         35000.0                                                                                                                                                         – From April 2007 onwards, one-third of loans given to
                                                                                                                                                                                                                         corporates, partnership firms and institutions for agri-
Indirect advances outstanding (deflated Rs crore)




                                                             30
                                                         30000.0
                                                                                                                                                                            Other types of indirect finance              cultural and allied activities (such as beekeeping, pig-
                                                             25
                                                         25000.0                                                                                                                                                         gery, poultry, fishery and dairy) in excess of Rs 1 crore in
                                                                                                                                                                                                                         aggregate per borrower was considered as direct finance
                                                             20
                                                         20000.0
                                                                                                                                                                                                                         to agriculture (as mentioned earlier, the remaining two-
                                                             15
                                                         15000.0
                                                                                                                                                                                                                         thirds were considered as indirect finance).
                                                             10
                                                         10000.0
                                                                                                                                                                                                                         – From April 2007 onwards, the upper limit for loans
                                                                                                                                                                                                      Loans to
                                                                                                                                                                                                electricity boards
                                                                                                                                                                                                                         given against the pledge or hypothecation of agricul-
                                                               5
                                                          5000.0
                                                                                                                                                                                                                         tural produce (that includes warehouse receipts) was
                                                               0
                                                             0.0                                                                                                                                                         raised from Rs 5 lakh to Rs 10 lakh. Till 2007, the above
                                                                  1971
                                                                  1971                  1976
                                                                                         1976                     1981
                                                                                                                  1981               1986
                                                                                                                                     1986              1991
                                                                                                                                                         1991          1996
                                                                                                                                                                        1996                    2001
                                                                                                                                                                                                2001          04 05 06
                                                                                                                                                                                                                   2006

                                                            Source: ‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India.
                                                                                                                                                                                                                         type of loans was given only to individual farmers who
                                                                                                                                                Year
                                                                                                                                                                                                                         had sought crop loans from banks. From 2007 onwards,
                                                            landholding-wise data is available. The share of loan accounts these loans were given to individual farmers, irrespective of
                                                                                          Loans to electricity boards                                               Other types of indirect finance



                                                            held by marginal and small cultivators declined in the 1990s, whether they had sought crop loans.
                                                            a trend that more or less continued in the 2000s. The share of
                                                            accounts held by marginal and small cultivators together was 3 Conclusions
                                                            about 73 to 74 per cent in the mid-1990s; in 2004-05, the corre- The increase in the supply of credit to agriculture has been
                                                            sponding share was 71.4 per cent. On the other hand, the share of claimed to be one of the most significant achievements in the
                                                            loan accounts held by big cultivators rose from about 26 per cent agricultural sector after the formation of the new government
                                                            to 27 per cent in the mid-1990s to 28.6 per cent in 2004-05.                                                                                     in 2004. In this article, our effort was to critically examine this
                                                                  Figure 4 (p 63) provides data on the amount of agricultural claim using secondary data on banking. Four conclusions of our
                                                            credit outstanding per account by the size classes of operational analysis may be summarised as below.
                                                            holdings for the period 1980-81 to 2004-05. The credit outstand-                                                                                     First, the growth rate of credit flow to agriculture from com-
                                                            ing per account for big cultivators was always higher than for mercial banks in the period 2000 to 2006 was 20.5 per cent per
                                                            small and marginal cultivators. Also, the difference in credit out- annum, which was significantly higher than the correspond-
                                                            standing per account between big cultivators and small and ing growth rate in the period between 1990 and 2000. How-
                                                            marginal cultivators has widened over the years. However, ever, contrary to general perception, this revival of credit flow
                                                            since the late 1990s, the credit outstanding per account for big to agriculture cannot be attributed to the announcement of the
                                                            cultivators rose at a rate highest for any period after 1980-81. government in 2004 to double credit flow to agriculture in three
                                                            As a result, the difference between the credit outstanding per years. In fact, the revival had begun in the late 1990s itself.
                                                            account of big cultivators on one side and small and marginal                                                                                        Secondly, the extent of revival of credit flow to agriculture in
                                                            cultivators on the other widened at a rapid pace. The expansion the 2000s would have been far less impressive in the absence of a
                                                            of credit supply to big cultivators is likely to have had a major sharp growth in indirect finance to agriculture. About one-third
                                                            62                                                                                                                                                     december 29, 2007              Economic & Political Weekly
                                                                                                                                                  REVIEW OF AGRICULTURE

of the increase in credit flow to agriculture between 2000 and                                              credit limit of more than Rs 10 crore, and particularly, more than
2006 was on account of the increase in indirect finance. This                                               Rs 25 crore. In the year 2000, indirect finance with credit limit
growth did not originate from a growth in the traditional                                                  above Rs 25 crore accounted for less than one-third of the total
components of indirect finance, such as loans for the supply of                                             indirect advances to agriculture. However, in 2006, indirect
inputs, power and credit to agriculture. The sharp growth in                                               finance with credit limit above Rs 25 crore accounted for about
Figure 4: Amount of Agricultural Credit Outstanding per Account, by Land Size Classes of Operational
                                                                                                                                    54 per cent of the total indirect advances to ag-
Holdings (1980-81 to 2004-05 in Rs ’000)                                                                                            riculture. It seems likely that these large loans
 80                                                                                                                                 were advanced towards financing the new ac-
                                                                                                                                    tivities added to the definition of indirect ad-
 70
                                                                                                       Big cultivators              vances since the late 1990s.
 60
                                                                                                                                       Fourthly, while direct finance to agriculture
                                                                                                                                    also grew rapidly in the 2000s, two features of
 50                                                                                                                                 this growth were notable. There was a major
                                                                                                                                    rise in the share of direct advances with a
 40
                                                                                                                                    credit limit of more than Rs 1 crore between
 30                                                                                                                                 2000 and 2006. The amount of direct ad-
                                                                                                                                    vances with a credit limit of more than Rs 1
 20
                                                                                   Small cultivators
                                                                                                                                    crore formed 5 per cent of total direct ad-
                                                                                                             Marginal cultivators   vances in 2000; the corresponding share in
 10
                                                                                                                                    2006 was 9 per cent. The share of direct ad-
  0                                                                                                                                 vances with credit limits “between Rs 10 crore
    1980-81                    1985-86                  1990-91                     1995-96          2000-01          2003-04 04-05
Source: ‘Handbook of Statistics on Indian Economy 2005-06’, Reserve Bank of India.
                                                                                                                                    and Rs 25 crore” as well as “above Rs 25 crore”
                                                                                                                                    doubled between 2000 and 2006. It appears
indirect finance in the 2000s was, in all likelihood, a result of a that much of these large-sized advances were made towards
series of definitional changes effected since the second half of financing large agribusiness-oriented enterprises. Further, the
the 1990s. These definitional changes broadly involved (a) the most important beneficiaries of the increase in direct advances
addition of new forms of financing commercial, export-orient- since the late 1990s were the big cultivators (who possessed land
ed and capital-intensive agriculture; and (b) raising the credit above five acres). The share of number of loans outstanding to big
limit of many existing forms of indirect financing. Indeed, cultivators under direct finance increased between the mid-1990s
meeting the task of doubling agricultural credit appears to and 2004-05, and the loan per account of big cultivators in-
have become much easier for banks as a result of these defini- creased phenomenally since the late 1990s. There is little evi-
tional changes.                                                                                            dence to argue that the major beneficiaries of the revival in
    Thirdly, the entire growth of indirect finance to agriculture agricultural credit in the recent years have been the small and
in the 2000s originated from a major expansion of loans with a marginal farmers.


Notes                                                             changes in the definition of indirect finance to            Reddy, Y V (2001): ‘Indian Agriculture and Reform:
                                                                  agriculture in 2004 were made on the basis of the re-         Concerns, Issues and Agenda’, RBI Bulletin, May.
 1 See http://indiabudget.nic.in/es2006-07/chapt2007/
                                                                  port of the same advisory committee.                      Reserve Bank of India (2004): Report of the Advisory
   chap812.pdf.
                                                                                                                                Committee on Flow of Credit to Agriculture and Re-
 2 The slowdown in the growth of agricultural credit                                                                            lated Activities from the Banking System, Chairman:
   flow in the 1990s had prompted. Y V Reddy, the              References                                                        V S Vyas, Mumbai.
   present governor of the Reserve Bank of India to                                                                         Shetty, S L (2006): ‘Policy Responses to the Failure
   note that “…the flow of credit to rural areas by [pub-      Chavan, Pallavi (2002): ‘Some Features of Rural Credit in         of Formal Banking Institutions to Expand Credit
   lic sector] banks in recent years has not been up to           India with Special Reference to Tamil Nadu: A Study           Delivery for Agriculture and Non-farm Informal Sec-
   the mark…In fact, the very purpose of deregulation             of the Period after Bank Nationalisation’, MPhil thesis       tors: The Ground Reality and Tasks Ahead’, Revised
   of interest rates for this sector, which was expected          submitted to Indira Gandhi Institute of Development           Version of the Seminar Paper, Monthly Seminar
   to encourage banks to lend higher, does not seem to            Research, Mumbai.                                             Series on India’s Financial Sector, ICRIER, New Delhi,
   have served its purpose fully” [Reddy 2001, pp 4-5].        – (2005): ‘How ‘Inclusive’ Are Banks under Finan-                November 14.
 3 Similar changes have been introduced in the 1990s              cial Liberalisation?’, Economic & Political Weekly,
   by the RBI in the definition of priority sector also. Ac-       October 22, pp 4647-49.
   cording to Y V Reddy, “…coverage of definition of pri-       – (2007): ‘Access to Bank Credit: Implications for Ru-
   ority sector lending has been broadened significantly           ral Dalit Households’, Economic & Political Weekly,
   in the recent years, thus overestimating credit flows           August 4, pp 3219-23.
   to actual agricultural operations in recent years”
   [Reddy 2001, p 5]. See Shetty (2006) for a list of         Ministry of Agriculture (2007): ‘Agricultural Credit’ in
   changes in the definition of priority sector.                   Annual Report: 2006-07, New Delhi, at http://ag-                               available at
                                                                  ricoop.nic.in/AnnualReport06-07/AGRICULTUR-
 4 However, in July 2004, it was decided not to con-
                                                                  AL%20CREDIT.pdf.
   sider the investments made by banks after April 1,
   2005 in the bonds of REC under indirect finance to          Ministry of Finance (2007): ‘Budget 2007-08: Speech of                         KC Enterprises
   agriculture.                                                   P Chidambaram, Minister of Finance’, New Delhi,                          3-6-136/6, Street No. 17
 5 It may be reiterated here that indirect finance to              February 28, at http://indiabudget.nic.in/ub2007-
                                                                  08/bs/speecha.htm.                                                           Himayathnagar
   agriculture over and above 4.5 per cent of the net
   bank credit is considered under total priority sector      National Bank for Agriculture and Rural Development                            Hyderabad 500 029
   credit. This provision has provided an easy route for          (NABARD) (2006): Annual Report 2005-06, Mumbai.                              Andhra Pradesh
   banks to meet the overall target set for priority sector   Ramachandran, V K and Madhura Swaminathan (eds)
   credit.                                                        (2004): Financial Liberalisation and Rural Credit in                        Ph: 09396250107
 6 It is a different matter, however, that many of the            India, Tulika Books, New Delhi.

Economic & Political Weekly    december 29, 2007                                                                                                                                  63
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