Abstract
Why has the share of non-institutional finance sources for agricultural households not come down between 2002 and 2012? Is the dependency on non-institutional sources the same across farm size classes? Who are the major beneficiaries of the revival in agricultural credit in the 2000s? Are larger farmers becoming more productive and commercial thus requiring higher levels of credit? Are small farms becoming unviable, making it difficult for banks to finance them? This paper examines these issues empirically based on data from the Situation Assessment Survey (SAS) of Agricultural households and the All India Debt and Investment Survey (AIDIS) conducted by the National Sample Survey Organization (NSSO) in its 59th (i.e. 2003) and 70th round (i.e. 2013) and various publications from the Reserve Bank of India (RBI).
Keywords
Introduction
Credit is one of the critical inputs in agricultural production. It plays an important role in farmers’ decision making processes by meeting short-term working capital requirements as well as long-term investment needs. Recognizing the importance of agricultural credit in fostering agricultural growth and development, the main goal of rural policy in India since the beginning of the planned era (i.e. five year plans) has been the institutional framework for agricultural credit, as excessive reliance of farmers on money lenders and other informal credit sources has resulted in usurious interest rates and exploitation.
With the input-intensive Green Revolution which monetized the rural economy, together with an increase in consumption, there has been a substantial increase in the credit needs of farmers. This situation necessitated a multi-agency approach to meet the challenge of addressing their credit needs through formal agencies. As a result, a vast network of institutions providing credit for agriculture emerged, displacing usurious moneylenders and landlords. Over the years, there has been a striking increase in the share of formal financial institutions in the total credit availed by cultivator households. In the 1950s, non-institutional sources, particularly money lenders, accounted for virtually all the credit taken by cultivator households, with only negligible credit flow from the formal institutional structure. This situation had changed dramatically by the early 1980s, with formal financial institutions accounting for as much as 60% of total credit, which increased to 66% by the early 1990s.
However, with the implementation of the liberalization policy in the financial sector in the 1990s, there was a significant slowdown in the growth of commercial bank credit to agriculture compared with the 1980s. After recording an annual rate of growth of 6.8% between 1981 and 1990, agricultural credit grew at just 2.6% per annum between 1991 and 2001, mainly on account of pull back by commercial banks (Ramakumar, 2013). The liberalization of the branch licensing policy resulted in slowdown in the operation of commercial banks in rural areas with a significant reduction in the number of rural branches (Chavan, 2005; Ministry of Agriculture, 2007; Ramachandran and Swaminathan, 2005; Shetty, 2005; Subbarao, 2012). As a result, the gradual increase in the share of formal institutional credit in agriculture was reversed in the period between 1991 and 2002.
Over the 2000s, following reports of growing agrarian indebtedness to informal sources and the resulting distress, there was emphasis on reviving the supply of agricultural credit. Indeed, as many as three major policy initiatives focused on institutional credit to bolster the agricultural sector have been implemented since 2000. First, in 2004, a Comprehensive Credit Policy was announced with a mandate to step up institutional credit to agriculture by 30% per year; financing of 100 farmers per branch (thus, 50 Lakh 1 farmers in a year); two to three new investments in agricultural projects per branch per year, and a host of debt-relief measures, such as debt restructuring, one-time settlement and financial assistance to redeem loans from moneylenders (Ministry of Agriculture, 2007). Second, in 2006–07, the central government introduced an interest subvention of 2% for short-term credit up to rupees (Rs.) 3 lakh. The subvention was enhanced subsequently and by 2013–14, an additional subvention of 3% was available for prompt payment, making a total subvention of 5% and reducing the effective rate of interest for short-term credit to 4%. Third, in addition to the interest subvention schemes, there has been an intensification of debt waiver schemes as well. To address the issue of indebtedness of farmers, the Farmer’s Debt Waiver Scheme was announced by the central government in 2008, covering 3.69 crore 2 small and marginal farmers and 0.6 crore other farmers.
The new strategy paid dividends and resulted in the reversal of the slowdown of agricultural credit in the period after 2000. For instance, between 2002 and 2011, agricultural credit from Scheduled Commercial Banks (SCBs) grew by 17.6% per annum, which was significantly higher than the growth rate recorded for the 1990s; similarly, between 2004 and 2011 agricultural credit from SCBs witnessed an increase of Rs 364,776 crore as it grew from Rs 96,245 crore to Rs 461,021 crore. There was also an increase in the number of rural branches of commercial banks after 2006. Between 2006 and 2012, the number of rural bank branches rose sharply from 30,188 branches to 35,850 branches (Ramakumar, 2013).
Despite the impressive gains made by the rural credit delivery system in terms of resource mobilization, geographical coverage and functional reach, the financial health of agricultural households has deteriorated raising questions about the effectiveness of the rural credit policy. The results of the Situation Assessment Survey (SAS) of Agricultural Households in India, 70th round i.e. Jan-Dec 2013, show that in 2012, about 51.9% of agricultural households were indebted to one agency or the other i.e., either to institutional or non-institutional credit sources. That is, about 48% of agricultural households could not borrow. Compared to this, in 2002, the proportion of households who took credit was 48.6 %. Thus, the decrease in the proportion of households who could not obtain any loan was disappointingly low during a period (between the years 2002 and 2012) which saw the highest level of policy and institutional interventions. Another disturbing trend in the data is that increment in the proportion of borrowing households as one moves from tiny and small holdings to large holdings 3 . Regarding the source of credit, the latest report of AIDIS (2013), 70th round, has belied the expectations of an increase in the share of institutional credit, as the share of institutional credit in agriculture fell from 66.3% in 1991 to 64% in 2013.
The findings of these surveys warrant an examination of the effectiveness of rural credit policy. The specific questions that arise are: why has non-institutional finance for agricultural households not decreased between 2002 and 2012? Is the dependency on non-institutional sources the same across different farm size classes? Who are the major beneficiaries of the revival in agricultural credit in the 2000s? Are larger farmers becoming more productive and commercial, thus requiring higher levels of credit? Are small farms becoming unviable, making it difficult for banks to finance them? This paper examines these issues empirically at all India level only. The study is based on secondary data compiled from diverse sources. The data on borrowing patterns of farmers and related aspects were compiled from the 59th and 70th rounds of the SAS for farmers and AIDIS conducted by the NSSO . The data on supply of credit to agriculture through formal institutions were collected from various RBI publications . The analysis in the paper is subject to the limitation of taking into account the social/caste structure of cultivator households due to difficulty in getting data from the secondary sources.
The paper is organized into four sections. The first section outlines the borrowing patterns of the farmers and sources of finance across farm size classes. Section two is devoted to the flow of credit within agriculture and also by different farm size classes. Section 3 discusses institutional credit and farm size classes. The fourth section brings all these findings together to examine the effectiveness of rural credit policy and provides concluding observations.
Borrowing pattern of farmers
As providing access to institutional credit to farmers has been the main goal of the government’s agricultural credit policy since independence, we begin our analysis by looking at the extent to which agricultural households are able to borrow from any source. As per the latest SAS results, in 2012, about 51.9% of agricultural households were indebted to one agency or the other. Or in other words, about 48% of agricultural households could not borrow. Compared to this, in 2002, the proportion of agricultural households who could get credit was 48.6%. Therefore, there was a slight decrease in the proportion of households who could not obtain any loan during a period (between the years 2002 and 2012). 4 Most importantly, the data on extent of indebtedness by farm size further reveals that the proportion of borrowing of agricultural households increases as one moves from small and marginal land holdings (i.e. no more than 2 hectares) to large holdings (i.e. 10 hectares and over) (see Figure 1). For instance, in 2002, agricultural households with marginal and small farms constituted around 84% of all agricultural households, however only 46% of them were able to get a loan from one or other source. However more than 65% of agricultural households with medium and large farms (i.e. farms of more than 4 hectares) were able to borrow.
Proportion of indebted agricultural households by farm size.
Besides these disquieting trends, inequality of excess to credit across farm sizes has also widened between 2002 and 2012. For instance, in 2012, more than 77% of agricultural households with medium and large farms had obtained credit from one agency or the other, whereas only 48% of households with small and marginal farms could borrow. Therefore, in comparison to 2002, the difference across the farm size classes on the extent of indebtedness has widened in 2012, indicating that policy and institutional interventions during the period turned out to be more favourable to medium to large farmers compared with small and marginal farmers.
Regarding the source of credit, successive rounds of AIDIS showed that the share of non-institutional credit as a proportion of overall agricultural credit declined rapidly during the period 1951 to 1981, and more slowly in the next decade. However, the trend seems to have reversed during the period 1991 to 2002 (see Figure 2).
Share of outstanding debt of cultivator households from institutional and non-institutional sources.
The 2002 survey results showed that the institutional agencies provided only 61.1% of the credit available to farmers compared with a peak level of 66.3% in 1991. Although this figure increased to 64% in 2012, it remains below the highest level reached. 5 Therefore, efforts to increase the flow of credit to agriculture through institutional sources have not yielded the desired results.
Non-institutional credit sources were dominant in 1951, accounting for 90% of the outstanding debt of cultivator households, but their share declined rapidly to 79% in 1961, to 68% in 1971, and yet further to 43.8% in 1981. After 1981, the rate of decline slowed down and non-institutional sources accounted for 33.7% of credit in 1991. There was, however, a reversal of this pattern thereafter, with the share of non-institutional debt climbing to 39% in 2002 and dropping again to 36% in 2013. From 2002 to 2013, moneylenders played an increasing role in providing credit, rising from 17.5% in 1991, to 26.8% in 2002 and 29.6% in 2013 (see Table 1).
Breakdown of institutional and non-institutional agricultural credit.
Other agencies include financial corporations/companies; SHGs linked with banks/NBFC and other institutional agencies.
RRB: Regional Rural Banks; SHG: Self-help Groups; NBFC: Non Banking Financial Corporations.
Source: All India Debt and Investment Survey, Various Issues, NSSO.
Data from the SAS on the share of different financial sources in outstanding cash dues by farm size (Table 2) show that, the share of cooperatives in outstanding credit declined by about five percentage points at the aggregate level between 2002 and 2012 for all farm sizes except for tiny holdings of less than 0.4 ha, while the share of commercial banks increased by almost seven percentage points overall. For non-institutional sources, although the share of professional moneylenders at the aggregate level remained almost the same between 2002 and 2012, they have become relatively more important for near landless and tiny landholders in 2012, as shopkeepers and traders have lost interest in financing them. Overall, between 2002 and 2012, institutional sources have become the major source of finance for large farmers (more than 10 hectares), meeting around 79% of their credit requirements in 2012. The diversion of institutional funding to large-scale farmers occurred mainly to the cost of the smallest scale farmers, as 85% of their credit requirements are now being met from non-institutional sources. In general, the extent of institutional credit as a proportion of overall agricultural credit increased as one moves from tiny and small holdings to large holdings. Therefore, one can argue that the period from 2002 and 2012, when policy and institutional interventions were at their highest level (as discussed), was more favourable to large farmers compared to marginal and small farmers, and adversely affected those with the smallest holdings in terms of their access to institutional credit support.
Breakdown of Institutional and Non-Institutional Agricultural Credit sources by farm size.
Source: National Sample Survey Organisation, Situation Assessment Survey, 2003 and 2014.
Observations from the SAS were further supported by the data provided by RBI on distribution of scheduled commercial banks’ direct finance (outstanding) to farmers (short-term and long-term loans) by size of holdings. 6 The analysis shows that there has been an increase in disbursement across all three categories of land holdings 7 (under 2.5 acres, over 2.5 to 5 acres and over 5 acres) during the period from 1980-81 to 2011-12 in terms of the total amount disbursed, the number of accounts and the amount disbursed per account. However, the magnitude of such increase turned out to be higher for large farmers compared to marginal farmers. The credit outstanding per account for big cultivators was always higher than for small cultivators, however the gap between these two has further widened over the years. For instance, in 1990/91, the difference in average loan outstanding (i.e. amount disbursed per account) between marginal farmers and medium and large farmers was Rs. 13,876 which further increased to Rs. 30,000 in 1999/2000, and in 2010/11 it was more than Rs. 80,000. Large farmers capture of the benefits from agricultural credit is also supported by Ramakumar and Chavan (2007), who pointed out that the share of accounts (under direct finance) held by marginal and small cultivators together was about 73–74% in the mid-1990s, declining to 71.4% in 2004/05. On the other hand, the share of loan accounts held by big cultivators rose from about 26–27% in the mid-1990s to 28.6% in 2004/05.
In sum, the analysis shows that between 2002 and 2012, despite the high level of policy and institutional interventions, there was only a slight decrease in the proportion of agricultural households who could not obtain any loan, and also the proportion of borrowing of agricultural households increased with the size of land holdings. Unfortunately, compared to 2002, the disparity in the extent of indebtedness by farm size has widened in 2012. Source of credit flow i.e. institutional and non-instituional across the farm size classes clearly pointed out that the institutional interventions were more favourable to large farmers than to marginal and small farmers.
Flow of credit within agriculture
Credit provided directly to farmers, known as ‘direct finance to agriculture’ by institutional agencies (co-operative banks, commercial banks and regional rural banks), takes the form of either short-term or long-term credit (investment credit). The short-term loans to agriculture are also referred as crop loans. The crop loans are provided as cash or in kind, such as the supply of seeds and fertilizers. These loans enable cultivators to procure inputs such as fertilizer and seeds needed for agricultural operations. These loans are made available against the hypothecation of the crop to be cultivated by the farmer. Short-term credit is also meant to cover the cost of hired labour as well as part of the consumption needs of poorer farmers. The second component of direct agriculture finance, long-term credit, is meant for investment in fixed assets such as irrigation pumps, tractors, agricultural machinery, plantations and assets related to dairy farming, fishing and poultry. In addition, substantial lending which goes to the institutions that support agricultural production rather than directly to cultivators is known as indirect finance to agriculture. The traditional forms of indirect finance to agriculture are loans to input dealers for their role in the provision of agricultural inputs, and loans to electricity boards for supplying power to cultivators. From the 1990s onwards, the definition of what constitutes indirect finance to agriculture has been broadened significantly by the RBI. 8
Since the second half of the 1990s, indirect credit to agriculture has grown faster than direct credit, taking the share of indirect credit in the total agricultural credit supplied by institutional agencies from about 21.5% in 1993 to 48% by 2008 (see Figure 3). During the second half of the 2000s, i.e., from 2005 onwards, indirect credit even exceeded its prescribed sublimit under the priority sector guidelines by a narrow margin. The rising importance of indirect credit from the 1990s onwards on total bank credit to agriculture has been analyzed by several scholars (Chavan, 2013; Hoda and Terway, 2015; Ramakumar 2013; Ramakumar and Chavan 2007; Satish, 2007; Subbarao, 2012).
Shares of direct and indirect credit in total agricultural credit.
What emerges from these studies is that the rising importance of indirect credit reflects widening of its definition together with growing credit needs for strengthening the supply chain infrastructure. A significant proportion of the increase in total bank credit to agriculture in the 2000s was accounted for by indirect finance to agriculture. For instance, between 2000 and 2008, about one-third of the total increase in credit supply to agriculture was indirect. Therefore, without a sharp growth in indirect finance to agriculture, growth in agricultural credit flow in the 2000s would have been much lower. It is important to note that growth in indirect finance since 2000 did not originate from the traditional components of indirect finance, but was the outcome of a series of definitional changes since the second half of the 1990s as reflected in the phenomenal rise in the levels of ‘other types of indirect finance’ compared to traditional components of indirect finance (Ramakumar 2013).
As well as an increase in the importance of indirect finance in the overall credit supply to agriculture, there has also been a substantial increase in the volume of direct agricultural credit advanced by institutional agencies. Between 1975/76 and 2011/12, the volume of short-term credit from commercial banks, co-operative banks and Regional Rural Banks (RRBs) rose from Rs 1,377 crore to Rs 360,127 crore; long-term credit rose from Rs 1,772 crore to Rs 219,540 crore, and total credit rose from Rs 3,148 to Rs 579,667 crore at current prices. However, the growth in direct finance was much more impressive in the 2000s compared to the 1990s. For instance, direct finance grew at the rate of 17.8% per annum from 2000 to 2012 compared to 8.5% per annum in the 1990s. It is pertinent to mention that there has been a fall in the share of long-term credit in total direct agricultural credit since the early 1990s and the fall has been steep since 2000. Throughout the 1970s and 1980s, the share of long-term agricultural credit was rising, reaching a high of 66.5% by 1991/92. By 2011/12, it had fallen to 37.9% (see Figure 4). The available evidence also indicates a strong association between investment credit and private sector gross capital formation in agriculture (Dave, 2014). 9 Therefore, the recent sluggish performance of investment credit is a cause for concern given the slowdown in capital formation in agriculture.
Trend in total direct agricultural credit (Rs. billion, outstanding) and share of short-term and long-term credit.
Although the banks have been able to meet the overall agricultural credit target, they have invariably fallen short of targets set for investment credit. For instance, in 2007/08 banks met around 86% of the investment credit target, falling sharply to 58% in 2012/13 (see Table 3). Banks met 69% in the target in 2013/14, however this was on account of a reduction in the target limit which was reduced to Rs. 2 lakh crore from the previous year.
Investment credit target and level achieved (figures in Rs. million).
Source: Government of India (GOI) and National Bank for Agriculture and Rural Development (NABARD).
Disquietingly, there has been expansion of credit supplied to large-scale cultivators/farmers. The RBI publishes data on finance to farmers according to size of holdings. On the basis of size of holdings, farmers are categorized as ‘marginal’ (less than 2.5 acres), ‘small’ (between 2.5 to 5 acres) and ‘big’ (over 5 acres). Analysis of the share of loan accounts held by marginal, small and big cultivators under direct finance during 1980/81 to 2011/12 shows a decline in the share of loan accounts held by marginal cultivators in the 1990s, a trend that continued more or less up to 2010. The share of loan accounts held by marginal farmers declined from 43.7% in 1991 to 35% in 2010. On the other hand, the share of loan accounts held by big farmers rose from about 25.4% in 1991 to 30% in 2001 and to 35.9% in 2010 (see Table 4).
Distribution of number of loan accounts under direct outstanding finance from scheduled commercial banks. (in percentage)
Source: Handbook of Statistics on Indian Economy, various issues.
A similar trend was reflected in the amount of agricultural credit outstanding per account by farm size. Figure 5 shows the trend in agricultural credit outstanding per account by farm size for the period 1980/81 to 2011/12. The credit outstanding per account for big cultivators is consistently higher than that for small and marginal cultivators. Also, the difference in credit outstanding per account between big cultivators and small and marginal cultivators has widened over the years. However, since late 1990s, the credit outstanding per account for big farmers has increased at a much higher rate resulting in increasing divergence between the credit levels of big cultivators and of small and marginal cultivators. The average loan outstanding in 2012 is Rs. 96,618, ranging from Rs. 75,771 for marginal farmers to Rs. 145,759 for big famers. The average loan outstanding is three and a half times greater than that in 2001 (Rs. 26,584).
Amount of direct agricultural credit per account by land holding; 1980/81 to 2011/12.
However, the data on average loan outstanding by RBI does not capture loans given by non-institutional sources, which still represent a significant proportion of the outstanding debt of cultivator households in general and marginal farmers in particular. The data provided by RBI are available only for three land size classes. In order to assess the total average loan outstanding for farmer households, we have used the information from the 59th and 70th rounds of the SAS on average loan outstanding in each land size classes possessed. Table 5 shows average amount of outstanding loan per farmer household by farm size at the all India level for 2002 and 2012. The average outstanding loan per farmer household varied widely by farm size. The survey results shows that the average loan outstanding in 2012 is Rs. 47,000, ranging from Rs. 31,100 for farmers with no land to Rs 290,300 for farmers with 10 hectares or above. At aggregate level, the average loan outstanding is more than three and a half times greater than in 2002 (Rs. 12,585). However, near landless farmers showed the highest increase in average loan outstanding, five times greater in 2012 than in 2002in spite of the increase in their dependence on non-institutional sources of finance. The credit outstanding per account for big farmers (more than 10 hectares) increased at a much higher rate compared to near landless and marginal farmers, resulted in increasingdivergence between the credit outstanding per account of big cultivators and that of marginal cultivators in 2012.
Average amount of outstanding loan per farmer household by farm size.
Source: Naational Sample Survey Organisation, Situation Assessment Survey, 2003 and 2013.
Institutional credit and farm size classes
As discussed, the period between 2002 and 2012, which has seen maximum policy and institutional interventions and the subsequent reversal of the slowdown in agricultural credit, was more favourable to large farmers than to marginal and small farmers, and adversely affected near landless farmers in terms of providing institutional credit support. The observed trend needs to be analyzed carefully; in particular, are larger farmers becoming more productive and commercial thus requiring higher levels of credit? Or are small farms becoming unviable, making it difficult for banks to finance them? How have the non-institutional sources been able to retain a large share of outstanding debt despite the fact that the rates of interest charged by them are generally much higher than those charged by institutional sources? Regarding the viability of farming across farm sizes, Chand et al. (2011) in their study on farm size and productivity, argued that small farms are superior in terms of production performance. Crop intensity, which is the main source of growth in agriculture in India, was found to be highest in marginal holdings, and it declined with an increase in farm size. The study further argues that advances in technology and the scale factor in production did not dilute the superior performance of smaller holdings. However, small farms turned out to be weak in terms of generating adequate income to meet the consumption requirements (i.e. requirements for medical, education, housing and so on) of a farm family. The contribution of agriculture in to the total income of smallholders is extremely low. The SAS showed that agricultural households with less than 0.01 hectares of land were more dependent on waged employment (about 63.6% of their income) than farm business (cultivation and farming of animals) for their income. However, farming of animals generated more income than cultivation in the period from July 2012 toJune 2013 (see Figure 6). Agricultural households with more than 1 hectare of land reported cultivation/farm business as their principal source of income (contributing more than 50%). Cultivation accounted for most of the average monthly income of agricultural households with the largest land holdings (around 86%). The proportion of income from non-farm business in the average monthly income decreased as the land holding of agricultural households increased.
Distribution of income of agricultural households by each size class of land possessed.
However, the dependence on non-farm business by the landless and tiny and marginal holders is distress induced and not the real diversification of income in the strict sense as such activities tend to be unskilled and low-paid.
The SAS 59th round on the income, expenditure and productive assets of farmers households provides data on expenditure and the output quantity and value per farmer household for seven farm size categories. Dividing the value of output per household by the average size of holding gives the value of output per hectare for different farm sizes (Chand et al. 2011). The analysis shows an inverse relationship between farm size and land productivity (see Table 6).
Agricultural output per household, per hectare and per capita by farm size.
Source: Adapted from Chand et al., 2011.
For instance, the value of crop output per hectare was Rs 25,173 for holdings below 0.4 ha and Rs 18,921 for holdings of size 0.4 to 1 ha. As farm size increases toward 2 ha, productivity declined to less than Rs 17,000 per hectare. On large farms (4 ha to 10 ha), the value of aggregate crop production declined to Rs 13,500 per hectare. Farmers operating on landholdings above 10 ha (the very large size category) were found to have very low productivity (Rs 7,722), about half of the productivity of large holdings and less than one-third of the productivity in the smallest farms. The above results clearly indicate that agriculture productivity in marginal and small holdings is much higher than the average productivity for all size categories. Therefore, the analysis of survey result does not support the argument that the low viability of small farms makes it difficult for banks to lend to them. In fact, banks are becoming more risk averse and hence reluctant to lend to marginal and small farms, which can be attributed to a misplaced belief that borrowers in the agriculture sector, particularly small and marginal farmers with low per capita incomes, are risky and hence non-bankable.
The increasing reliance of near landless and marginal farmers on non-institutional sources of finance can be attributed to the growing reluctance of institutional agencies to finance them as reflected in the decline in the share of loan accounts held by them. Therefore, to meet their growing credit requirements, they are becoming more dependent on non-institutional sources. As much as 74% of the outstanding dues from non-institutional sources attracted interest rates of more than 15% in 2012 whereas the corresponding figure for institutional sources was only 10%. Further, outstanding debt at rates above 30% was as much as 34.1% for non-institutional sources and only 1% for institutional sources (see Table 7). It is, however, important to mention that non-institutional agencies also provide interest free loans and these loans account for almost 18% and 18.3% in 2002 and 2012 respectively, of the outstanding debt, which in turn helps them to lure rural clients.
Distribution of loans outstanding by interest rates.
Source: All India Debt & Investment Survey, National Sample Survey Organisation.
Overall, between 2002 and 2013, there has been a general decline in the average interest rate from 18.91% in 2002 to 17.00% in 2012. The decline is higher in the case of institutional loans by 264 basis points from 14.31% in 2002. Interest rate on non-institutional loans declined but only by 114 basis points from 26.34% in 2002. However, analysis of the distribution of outstanding loans to farmer households by the purpose of the loan from 2002 to 2012 throws some light on higher dependence on non-institutional financial sources. In general, farmers have taken loans for a range of purposes such as meeting capital and current expenses for the farm as well as non-farm business, household expenses including education, medical treatment, consumption, weddings, housing and other items. Distribution of loan outstanding according to purpose for the years 2002 and 2012, given in Figure 7(a) and (b), reveals that the share of loans taken for farm business has come down from 58% in 2002 to 28% in 2012, while non-farm business has accounted for a higher share (11.4% in 2012 compared to 6.7% in 2002). Increasingly, loans are taken to meet household expenses, and within that, loans for medical purposes have doubled and have trebled for education over this period. The share of other expenses has increased significantly over the decade.
Loan outstanding by purpose of loan, 2002.
Loan outstanding by purpose of loan, 2012.
Furthermore, in 2002, the distribution of purpose of loan by farm size shows that as farm size increases, loans are more likely to be taken for farm business and less likely to be taken for consumption, marriage and other expenditure. This has important implications for the financing agencies. Since formal agencies offer very few products designed to meet such household expenses, with the exception of a few items like education and housing, farming households with very small land holdings are therefore dependent on informal agencies to meet these credit requirements. This partly explains why the proportion of credit provided by non-institutional agencies has not come down between 2002 and 2012.
Discussion and conclusion
The analysis in this paper shows that despite a period of maximum policy and institutional interventions, the financial health of agricultural households deteriorated between 2002 and 2012.
Notwithstanding the efforts of all concerned, there was only a slight increase in the proportion of agricultural households who could borrow from any source during this period. Moreover, policy and institutional interventions turned out to be more favourable to large farmers than to small and marginal farmers, which resulted in further widening of inequality in the extent of indebtedness between small and large farms. Efforts to increase the flow of credit to agriculture through institutional sources have not yielded the desired results. Although of the proportion of institutional lending to cultivators/farmers had increased to 64% in 2012, it remains below the highest ever reached in early 1990s. Nonetheless, over the years, institutional sources have become the major source of finance for large farms and met around 79% of their credit requirements in 2012. The diversion of institutional credit to large farmers came mainly at the cost of very small-scale farmers, for whom 85% of credit requirements are now being met from non-institutional sources. In general, increment in the share of institutional credit as a proportion of overall agricultural credit was observed as one move from tiny and small holdings to large holdings.
From the second half of the 1990s, indirect credit to agriculture grew faster than direct credit. Between 2000 and 2008, about one-third of the total increase in credit supply to agriculture was indirect, described as ‘other types of indirect finance’ rather than traditional types of indirect finance. There was a sharp fall in the share of long-term credit in total direct agricultural credit since the early 1990s and the fall has been steep since the 2000s. Banks have invariably fallen short of targets set for investment credit. In 2012/13 banks met only 58% of the investment credit targets. Big cultivators were the major beneficiaries of the increase in direct advances. The share of loan accounts held by marginal farmers declined from 43.7% in 1991 to 35% in 2010. On the other hand, the share of loan accounts held by big farmers rose from about 25.4% in 1991 to 30% in 2001, and to 35.9% in 2010. Also, the difference in credit outstanding per account between big cultivators and small and marginal cultivators has widened over the years.
The total (institutional as well as non-institutional) average loan outstanding for farmer households has increased by 350% between 2002 and 2012. However, the credit outstanding per account for big farmers increased at a much higher rate compared to that for near landless and marginal farmers, resulting in an increase in the gap between the credit outstanding per account of big cultivators and marginal cultivators in 2012.
Agriculture productivity in marginal and smallholdings has turned out to much higher than the average productivity for all farm sizes, which suggests that the low viability of small farms should not be a reason for banks to refuse to lend to them. However, despite having a strong advantage in productivity, the contribution of agriculture to the total income of smallholders is extremely low, as reflected in theirhigher dependence waged employment for income. The proportion of income from non-farm business decreases in the average monthly income of agricultural households decreases as the amount of land held increases.
The analysis of distribution of loan outstanding by purpose shows that while the share of loans taken for farm business has decreased from 58% in 2002 to 28% in 2012, there has been an increase to 11.4% in 2012 from 6.7% in 2002 in the share of loans for non-farm business. Very small-scale cultivators borrowed a higher proportion of loans to meet household expenses, especially medical, education and other expenses, whereas farm business accounted for a large proportion of the loans taken by big farmers. Since formal agencies offer very few products to meet such household expenses, small-scale farmers are dependent on informal agencies for credit.
To conclude, the analysis in the paper clearly shows that policy and institutional interventions during the 2000s turned out to be more favourable to large farmers than to small and marginal farmers.
Footnotes
Author’s Note
This article contains some overlap with a previously published article: Credit for agricultural households: Growing inequity, Ashutosh Kumar Tripathi,
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, August 25 2015.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.