Direct and Indirect Farm Credit

Difference between direct and indirect farm credit

· Any loan to agriculture and allied sector is called farm credit. When the borrower is directly responsible for its repayment to the lending agency, it is direct farm credit. It includes short, medium and long term loans given for agriculture and allied activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) directly to individual farmers without limit for taking up agriculture / allied activities except nominal members or to agencies like PACS, primary land development banks etc.

· Indirect credit refers to, funds agriculture indirectly through some intermediary agency/institutions etc. which will be responsible for repayment. So funds availed by fertilizer dealers, state corporations, FCI, warehouses will come under indirect creditor to agriculture.

Why Banks go for indirect Farm Credits:

RBI has made it mandatory for all banks to lend at least 18 percent of total loans to agriculture. If the banks fail to do so, they are penalized by locking the shortfall for five years in a fund (Rural Infrastructure Development Fund) that returns 4 to 5 percent a year. Banks see this as an inconvenient necessity, because not only are bad loans in the sector higher but also the pricing of these loans is also abnormally low.

· So, the banks indulge in something called as ‘indirect farm credit’ in which they provide loans to the companies that make farm inputs and to the non-banking finance companies that then lend to the farmers etc.

Background of MV Nair Committee

The MV Nair committee recommended that the Banks’ exposure to priority sector loans may be retained at 40%. The committe also recommended severe changes should be made to exposure of foreign banks. Foreign banks’ priority sector target should be upped from 32% to 40%. This could put pressure on foreign banks to increase their lending to priority sector categories including agriculture and export sectors.

The committee has recommended that 5% of bank’s credit to NBFCs could be classified priority sector. Lending to gold companies shpuld not be classified as priority sector. Securitized loans could also be classified under the priority sector. This will remove the pressure on banks and NBFCs while lending to these sectors. It would come as a relief for banks and NBFCs. Special treatment should be given to small and marginal farmers and housing loans below Rs 2 lakhs should be classified under priority sector.

Problems in farm lending in India:

1. The months of April and May are of waiting and organizing for Indian farmers as they wait for the monsoon to plant a new crop. This gives a notation that the farm credit should increase in the month of April & May. However, as per a research commissioned by NABARD, the data shows otherwise. The study said that neither disbursement nor repayment have any correlation with the normal cropping season. This is one of the several anomalies.

2. In India, the farm loans have increased 755% from 2000 to 2010 to 390,000 crore. The farm loan target in Budget 2012 was increased from 475,000 crore to 575,000 crore (from 2011). Despite of such a high rise in the farm loans, the growth in the farm yields has been 18% during the same period.

3. Further, the farmers in the institutional fold pay 7% interest on crop loans, 4% if they repay on time. This has enabled interest arbitrage and the farmers are turning moneylenders, or investing in non-farm enterprises, fixed deposits and land.

The Nair committee on priority-sector lending has recommended the distinction between direct and indirect credit be done away with. This would disincentives the banks from partnering with specialised originators/intermediaries while nudging banks to open their own branches and originate through their own staff or agents. Thus it brings in strong measures to reduce intermediately approach for agri credit and ensures participation of banks directly in providing agri loans under priority sector. This step is an forward attempt to stop banks from just fulfilling their duties to meet their targets for PSL without fulfilling the purpose and to reduce intervention of middle man with safe collaterals to avail bank facilities. This will also help to replace moneylenders with Banks mandated with PSL targets to provide Agri credit at low interest rate to lower strata of farmers. It will being more transparency in the inclusion of needy farmers and restricts intervention of big landholders to dominate Banks finances. The approach can be considered one more stepping stone along with Kisan Credit Card scheme to ensure flow of agri credit directly to hands of small and marginal farmers.