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Institutional credit: Small farmers need better access for farming, allied activities

Nearly 60 per cent of India’s small and marginal farmers still do not have access to institutional credit from scheduled commercial banks. This situation cannot be allowed to persist while setting ambitious targets such as doubling farmers income by 2022 and expanding to a $5-trillion economy by 2024. The number of small and marginal farmers outside the coverage of scheduled commercial banks, estimated at 7.42 crore, is just too large to be ignored. India has an estimated 12.56 crore small and marginal farmers, according to Agriculture Census of 2015-16, who together operated over 86 per cent of total farm holdings and held 47.34 per cent share in the operated area. In comparison, the large and medium-sized farmers operated under 30 per cent of the farm area. Better access to institutional finance at competitive rates with a comfortable payback period can ease the burden of financing activities as basic as buying seeds, fertilisers and pesticides. Microfinance institutions and NBFCs have emerged in the quasi-formal space, but their loans can be expensive.

The recommendations of the RBI’s panel to review agricultural credit are aimed at making formal banking more inclusive in rural India. Its recommendation to push States to digitalise and update land records is noteworthy. That will make land titles clearer, and therefore facilitate easy lending to small farmers. Updated, digital titles will also enable farmers to enter into transparent land transactions. Increasing the sub-target for these farmers from the current 8 per cent of the adjusted net bank credit to 10 per cent over a period of two years can make more funds available to this category of farmers. A separate definition for small and marginal farmers seeking credit for allied activities under the priority sector lending guidelines, with a cap of ₹2 lakh per farmer, can also prove beneficial if it ensures flow of funds to activities such as fishing and dairying, reducing dependence on agriculture for livelihood. The suggestion to also lend up to ₹1 lakh to the small and marginal farmers for consumption needs, where the farmer has the repayment capacity, is also worth considering — often expenses on social events, financed by high-interest loans, can drive a farmer family into debt. The report rightly notes that loan waivers should be avoided as they can vitiate the credit culture. A move away from waivers to addressing fundamental concerns is called for.

There can be no denying the importance of focussing credit on small farmers who are at the epicentre of rural distress and migration. However, the increased use of credit for short-term rather than investment purposes needs to be addressed. Fragmentation of land holding and tenancy conditions are factors that need to be overcome by encouraging consolidation of land holding. These aspects are linked to social relations in rural India as well. Finally, issues of credit delivery in farming cannot be delinked from political economy considerations.

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