As per Reserve Bank of India guidelines, commercial banks in India, need to have 40% of their advances under Priority Sector. Priority sector advances include following type of advances.

1. Agriculture and allied activities.
2. Micro, Small and Medium Enterprises
3. Export Credit
4. Housing
5. Social Infrastructure
6. Renewable Energy
7. Others.

Banks need to fund 40% of their net bank credit to priority sector. Why these sectors are called priority sectors, because these were neglected sectors in pre nationalisation era and banks were reluctant to fund to these sectors due to viability issues and concerns on repayments.

As a sub sector, advances under agriculture and allied activities has to be 18% of net bank credit. Targets for agriculture has been kept at the same level of 18% after nationalisation of Indian Banks first in 1969 and then in 1980, even though share of agriculture in GDP has come down from 55% at the time of independence to just 14% as on today. But the government is not ready to revise the agriculture targets for the banks because of the political compulsions.

Earlier agricultural advances were given only by the public sector banks, co-operative banks, regional rural banks and the primary agriculture credit societies (PACS). After the liberalisation of economy by the then Finance Minister, Mr Manmohan Singh, in 1992-93, banking was opened for private players also. As a result new age private sector banks came into existence in 1994.

Private sector banks mainly focussed on corporate financing and retail financing like personal loans, auto loans and credit cards initially for a period of 9-10 years. They were trying to meet their agricultural targets under priority sector by funding under corporate-agri, which means funding to big corporates, MFIs (Micro Finance Institutes) etc for onward lending to farmers. In 2004-05, a few private sector banks entered into Retail agriculture business with the launch of Kisan Credit cards (KCC), a product introduced by RBI in 1998 to fund to the individual farmers.

With the entry of private sector banks in the field of agriculture financing, agriculture credit started growing at a much faster pace that the earlier years.

Table- Credit growth in Scheduled Commercial Banks (SCBs) Rs in Crores

New age private sector banks started their operations in 1994 except Kotak Mahindra bank and Yes bank, which were started in 2002 and IDFC bank and Bandhan Bank which started their operations in 2015. A few of these banks started agricultural lending in the year 2004-2005 because of continuous pressure from the RBI. In the initial 5-6 years, they started very slowly as they didn’t have requisite skilled and experienced manpower. The only competitors were public sector banks who were also very slow and reluctant to fund to this sector as can be seen from the above data. Scheduled commercial banks had been doing only 7% of agricultural funding against target of 18%.

Situation changed after 2011-2012, when some more private sector banks came on the scene with very liberal policy norms on agricultural funding, which further prompted existing players including the public sector banks to dilute their funding norms and stay in this unhealthy competition.

Agricultural funding scenario was completely changed and by 2015, SCBs were able to achieve 13% of their agri targets. Whereas total advances of SCBs increased by mere 58% between 2012 and 2015, agricultural advances grew by a whopping 178% in the same period.

As the funding norms were diluted by the banks, their Non-Performing Assets (NPAs) under agri, began to rise.

Table- Growth of Agricultural Gross NPAs in commercial banks.

Amt in Rs Crores

Gross NPAs, which were only Rs 8331 crore at 2.24% of agri advances in 2010, swelled to Rs 69600 crore at 6.53% of total agricultural advances. This does not include restructured agri advances due to natural calamities, as data is not available.

Challenges in Agriculture Sector

Agriculture sector in India is facing very tough challenges which cannot be overcome without the active involvement of various government departments, financial institutes, agricultural universities and other nodal agencies like NABARD, NHB, NHM etc.

1. Shortage of water and irrigated area

Net irrigated area has been increased by approx. 200% since independence, which is a very nominal increase and is just 40% of net sown area. It means 60% of net sown area is still dependant on rainfall which can yield only one crop during the whole year because 80% of the rainfall in India is during summer season through North East monsoons. 40% of net irrigated area produces 70% of agriculture produce in the country.

2. Shortage of Labour

With the shifting of population from rural to urban areas for job requirement, there is a shortage of labour in rural India. Schemes like NREGA have further aggravated the problem.

3. Decrease in operational land holdings

With the decrease in land holdings due to divisions in the family, agriculture has become unviable for small and marginal farmers and there is little incentive to adopt capital intensive techniques.

4. Mounting overdues and Bad Debts

Due to high bad debts and overdues, banks are reluctant to fund in the rural areas. Due to insufficiency of funds, farmers are not able to do farm mechanisation and use of high quality fertilisers and seeds. This further reduces their yields.

5. Transportation and Marketing

Marketing and then transportation of the produce remains the biggest challenge for the farmers. They have to be dependent on middle men for these important activities, who eat away most of their profits.

6. Inadequate Storage Facilities

Due to inadequacy of storage facilities in the country like ware houses and cold storages, there is a huge wastage of not only perishable items like fruit and vegetables, but also grains and pulses. Even government procurement agencies like FCI don’t have enough storage space and every year tons of wheat, paddy and other crops are spoilt due to being kept in open for months together.

7. Land Revenue System

Land revenue system in India is very old and no proper records have been maintained especially in the eastern India. Banks are reluctant to fund against these lands where records are not updated.

8. Low Yields

Yields in India are lower as compared to world average both in cereals and vegetables and much lower if compared to USA and China. In spite of being no-2 in world rankings in production of wheat and vegetables, we are net importers of both these commodities. This can only be resolved by technology up gradation.

9. Debt Waivers

Debt waiver announcements by central and state governments are good for the political parties, but not for the economy of the country. Even RBI governors and many learned economists have spoken against it many a times. Just in the last year, following debt waivers have been announced by various state governments to gain the political mileage.

Maharashtra 34000 crore

UP 36000 crore

Punjab 10000 crore

Karnatka 8000 crore.

Debt waiver announcements have following repurcussions.

1. It increases the fiscal burden of the government

2. It creates the financial indiscipline amongst the farmers which affects the recovery position of financing institutes.

Risks in Agriculture Lending.

There are various risks for the lending institutes while financing to agriculture sector as summarised below.

2. Cash Flows are not regular and stable. Cash flows are seasonal and variable depending upon factors like yields, pricing, duration of crops and demand & supply of the commodity. Any change in government policies also affects the pricing.

3. Credit culture is missing in the rural areas. Farmers don’t know how much money they need to take for meeting their genuine requirements and how to repay it. Banks on their part don’t have any willingness to guide and educate them.

4. Because of lack of education, farmers are not able to manage the funds borrowed from the banks and hence face difficulties in repayments.

5. Natural calamities play a major role in crop failures and hence defaults in repayments.

6. Frequent announcements on debt waivers play a major role in spoiling the credit culture amongst the farmers.

7. Under developed marketing and transportation infrastructure is responsible for distress sale by the farmers and hence they cannot fetch better pricing for their crops.

8. Land revenue records are in very bad shape and hence banks are reluctant to fund.

Common Mistakes by the banks while funding to Agriculture Sector.

Over Financing.

Banks are supposed to follow Scale of Finance (SOF) which is specified by District Level Technical Committee (DLTC) while funding. Scale of finance covers all the expenses borne by the farmer while raising a crop till the time of harvesting. Over and above, some amount can be funded for other requirements like repairs and maintenance, including consumption.

Taking the example of State of Punjab, banks used to fund a very nominal amount on a typical wheat-paddy crop cycle in 2005 which used to vary between Rs 12000 to Rs 18000.

This amount has gone up to Rs 1.50-2.00 lac per acre in 2018 without any appreciable increase in SOF for these crops.

The above chart shows that in 2005, SOF for a wheat-paddy crop cycle in Punjab was Rs 11000 per acre and amount of funding was between 12000-18000 per acre, which was 110% to 160% of basic Scale of Finance.

The same is Rs 40000 per acre in 2018 and quantum of funding has gone up to Rs 1.50 lac to RS 2.00 lac per acre which is 375% to 500% of basic SOF.

This happened with the entry of new age private sector banks in rural lending in 2004-2005 and then the intense competition which started amongst them from thereon. Public sector banks had to enter this mad race to protect their market share.

So a 10 acre farmer in Punjab, whose funding requirement is around Rs 4 lac to 7 lac for raising the crop, would get around Rs 15 lac to Rs 20 lac. Farmers don’t know what to do with this extra funding because most of the farmers are involved purely in agriculture and their requirements are being met with just Rs 40-50000 per acre basis. This extra money moved towards consumption rather than production. Farmers started spending this money on buying new vehicles, renovating their houses or spending more money on marriages and other functions and getting nothing in return.

This had a cascading effect on the portfolio quality of the banks because the cash flows generated were not commensurate with the repayments demanded by the banks because of this over financing.

Leased Land Funding.

Another method adopted by the banks for over financing was funding basis the leased land.

Now what is leased land cultivation? A farmer X for example, has 10 acre of land holding. There is another farmer Y, who also has 10 acre land holding in the same village or a nearby village. This farmer Y is doing a job in some urban centre and is not able to cultivate his owned land. So he gives his land to X for cultivation and charges some rental in lieu of that. X will pay the lease rental and cultivate this land and will get all the profits arising thereupon.

In every village, there are a few farmers having ancestral lands on their names but unable to cultivate due to other engagements or health issues. Typically numbers could be 5-8% of total farmers in a village.

Most of these lease agreements are oral in nature without any documentary evidence and hence difficult to verify on the ground.

Banks have willingly taken the advantage of this route to over finance the farmers. Instead of 5-8% of cases coming with leased land, this ratio is more than 75% in the state of Punjab. Now it is very difficult to imagine, if there are 100 farmers in a village, 75 are cultivating land on lease basis also. If this is true, then whose land are they cultivating, the remaining 25?

Now let’s understand the risk involved.

Farmer X will get Rs 15-20 lac on his owned land cultivation of 10 acre as explained in point no-1.

Farmer X will also get Rs 15-20 lac on leased land cultivation of 10 acre land of Y. (Some banks have restricted the funding on leased land to RS 50-60 K only. In that case farmer X will get additional Rs 5-6 lac). So a farmer with actual requirement of Rs 4-7 lac (as per SOF) will get Rs 20 lac to 40 lac in this case. If the leased land cultivation is more say 20 acre, this amount will increase further to Rs 25 lac to Rs 50 lac which is a huge variation from actual need based requirement.

Since the lease agreements are oral in nature, it is very difficult to verify this leased cultivation and extent of leased land. So in all those cases, where farmer is not cultivating any land on lease basis, banks will end up in funding huge additional amount than what is required.

Farm Development Loans.

Farm development loans were also started by private sector banks for the purpose of land levelling, land reclamation, preparation of land for sowing etc. All these activities do not require any asset creation and hence it is very difficult to verify the end use. These loans are given in the form of term loans and have been often mis used by the farmers. Banks on their part have used these loans to augment their funding whereas funds have been used for personal usage by majority of the farmers. This funding is over and above the funding given for raising of crops.

Enhancement over existing exposure.

Banks have no such policy of limiting the exposure based on existing exposure of the farmer with some other lending institute.

For Example, a farmer A has an exposure of Rs 5 lac with bank X. He is approached by bank Y for an enhanced exposure. If this farmer is having a land holding of say 20 acre, he will become eligible for a funding of Rs 30 lac to 40 lac. Even though he is eligible for this funding as per bank’s internal policy, no effort is made by the bank to check on how he was managing his farm activities with just Rs 5 lac and how he plans to utilise this additional exposure of Rs 25-35 lac. Management of such huge funds is also a big issue due to lack of education and since farmers mostly are not involved in any business activity, this money goes into personal consumption and hence reduces the rate of return for the farmer.

There is no denying the fact that farmers should be funded based on their genuine requirements irrespective of the fact what the earlier institute has funded, but since the funding is far beyond the actual requirements as explained above, this carries a big risk of diversion of funds and hence inability of farmers to repay at a later date.

Multiple funding by multiple institutes on same piece of land and for same activity.

This is one of the biggest risk in the field of agri lending. Unless that piece of land is mortgaged to some lending institute already and the new financing institute is able to find it through the title search of the land, there is a risk of funding on the same land for the same purpose. Moreover, some of the banks and financial institutions, create second charge on the already mortgaged piece of land and fund extra amount to the farmer. This leads to double funding for the same activity, double beyond actual requirement and hence fraught with risks of non-payment.

Reckless competition.

Banks have devised some innovative ways to fund to the farmers and designed different products to suit their requirements. Earlier the farmers had to run from pillar to post for meeting their genuine funding requirements. Scenario has totally been changed with the entry of new age private sector banks, who have an altogether different business model where potential clients are chased by them.

While this has benefited the consumers (farmers), this has led to reckless competition amongst the banks which have entered a mad race to grab the share of the pie.

Conclusion.

Overfunding, Funding on the basis of oral leased land without proper scrutiny, multiple financing, products like Farm Development loans have all led to deteriorating quality of the portfolio of almost all the banks in this sector. NPAs in farm sector have reached a staggering figure of Rs 70000 crore as on 31.12.2017 and it is not going to stop here.

RBI has shown no intent to curb this reckless funding, even after their yearly audits of the banks. There has been no questioning on how a funding of 3-4 times of actual requirements is being made? What is the basis of this funding? How 75-80% of farmers are able to cultivate leased land of remaining 20-25% of farmers? How the end use of funds is being envisaged?

On their part, banks are now sulking their wounds. They have created huge teams for remedial management of the portfolio. Monthly disbursements have been curbed and focus is shifted towards recovery. Portfolios have been stagnant for the last 2-3 years and major work force is shifted either towards recovery or selling some other products.