Banking more on agriculture lending
Since inception, lending to agriculture sector (AS) has been an integral part of credit delivery of banks, more so after nationalisation of banks and introduction of concept of Priority Sector Lending (PSL) prescribed by Reserve Bank of India (RBI).
Now, banks can extend more finance to emerging activities such as food and agro-processing units, agriculture infrastructure such as storage, as well as those for soil conservation and watershed development, ancillary activities, agro-clinics and agribusiness centres forming part of farm lending. The expanded scope for lending will now open up new vistas of lending to agro-based export oriented units as well
Since inception, lending to agriculture sector (AS) has been an integral part of credit delivery of banks, more so after nationalisation of banks and introduction of concept of Priority Sector Lending (PSL) prescribed by Reserve Bank of India (RBI). PSL was first properly defined in 1972 after the National Credit Council emphasized that there should be a larger involvement of the commercial banks in lending to larger community. It is important for banks to lend to agriculture because of its increasing contribution to GDP.
During the last three years, the annual growth of the sector has been divergent at 1.2 percent (FY13), 3.7 percent (FY14) and 0.2 percent (FY15) due to its dependence on monsoon and other weather factors. Since agriculture is dependent on the vagaries of weather conditions, rainfall and mobility of agriculture produce, it has been performing differently. Despite the volatility of performance, it contributed 17.7 per cent, 17.2 per cent and 16.1 per cent to GDP during FY 13, FY 14 and FY15 respectively, continuing its dominance in stepping up economic growth.
With the rise in the base of GDP, its percentage contribution may come down but it continues to rise in terms of absolute amount. But the flow of credit to agriculture sector has always been contentious issue for the reason that rural penetration of banking system has not been adequate and banks are normally look at cost benefit in lending operations. Lending small loans in hinterland has high operating cost and sometimes, it may not be tenable for banks to lend to this sector. Hence, Reserve Bank of India (RBI) makes it mandatory for banks to lend to agriculture as part of its PSL.
As per RBI policy, 40 percent of loans of banks should go to sectors prescribed in PSL norms of which 18 per cent of loans were to go to agriculture. Out of the 18 per cent, 13.5 per cent were to go to direct agriculture and remaining 4.5 per cent to indirect agriculture. But recently, RBI in April 2015 had brought a major shift in policy where the difference between direct agriculture and indirect agriculture lending has been removed.
An added dimension has been introduced where banks have to mandatorily extend eight per cent of their overall loans to small and marginal farmers (farmers holding land of less than 2 hectares). Lenders will be allowed to achieve the new target in a phased manner. They will have to reach target of seven per cent by March 2016 and eight per cent by March 2017. Banks can now lend to agriculture in its entirety to either direct/indirect agriculture activities. This is a seminal change in the policy that can restructure the flow of credit to the crucial sector.
The difference in direct/indirect agriculture
With removal of distinction between direct/indirect lending to agriculture sector, it will be pertinent to identify defined activities in the two categories.
(a) Direct lending to agriculture
(i) Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers] engaged in agriculture and allied activities such as dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.
(ii) Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in agriculture and allied activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up to an aggregate limit of Rs 2 crore per borrower.
(iii) Loans to small and marginal farmers for purchase of land for agricultural purposes.
(iv) Loans to distressed farmers indebted to non-institutional lenders.
(v) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) ceded to or managed/ controlled by such banks for on lending to farmers for agricultural and allied activities.
(b) Indirect lending to agriculture
(i) If the aggregate loan limit per borrower is more than Rs 2 crore
in respect of loans to corporates dealing in agriculture, the entire loan will be treated as indirect finance to
(ii) Loans up to Rs 5 crore to producer companies set up exclusively by only small and marginal farmers for agricultural and allied activities.
(iii) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS).
Trends of credit to agriculture
The bank credit to agriculture had increased from Rs 4,63,600 crore in FY10 to Rs 8,29,500 crore in FY15, recording an annual compounded growth rate of 15.78 percent much beyond the average credit growth. The number of agriculture beneficiaries have increased from 5.037 crore in FY13 to 6.159 crores in FY15 indicating the broad-based trend.
But within priority sector credit, both public sector banks (PSBs) (16.5 per cent) and private banks (PVBs) (14.8 per cent) had a shortfall in advances to agriculture against the target of 18 per cent. The key policy change of RBI has been to remove the distinction between direct and indirect agriculture.
The policy shift now proposed can make it possible for banks to meet their entire agriculture lending target of 18 per cent of their net loans disbursed in the previous year by funding to indirect agriculture.
New scope of lending
As a result, banks can finance more to emerging activities such as food and agro processing units, agriculture infrastructure such as storage, as well as those for soil conservation and watershed development, ancillary activities, agro clinics and agribusiness centres forming part of farm lending.
The expanded scope for lending will now open up new vistas of lending to agro-based export oriented units as well. Thus the policy move of removal of distinction will enable banks to lend to several agro-linked enterprises that will bring transformation in the expansion of agro-space.
Banks can now work out a specific internal simplified agriculture credit policy framework to expand lending activities to the hitherto untapped sectors. On the whole, it is an innovative policy move to put agriculture lending on a fast track that will benefit strengthening of the rural economy.