As per a report submitted by the RBI to the Parliamentary Standing Committee on Agriculture, only 42.2% of agricultural credit disbursed in 2016-17 went to small and marginal farmers. Small and marginal farmers constitute over 85% of the total 120 Mn farming population in India.
This startling fact portrays a clear picture that the current agri-credit market is broken, which results in farm distress. Govt. of India’s ambitions Kisan Credit Card (KCC) schemes look good on paper, but the ground realities are far different. Through KCC, a farmer can avail INR 3 lakh loan on 1-acre plot at a low-interest rate of 4% pa. However, given the limited manpower, banks have no mechanism to monitor the utilization of the loan.
In most cases, farmers divert these loans into non-agriculture activities like marriage, house construction, or buying motorcycles. I have personally met individuals who avail KCC loans due the low-interest rates and loan the amount further at higher interest rates (as high as 50%) to others people in their villages.
Amid rising non-performing assets (NPAs) in the banking sector, mainly on account of corporate loan defaults, banks are not enthusiastic to lend to farmers. Successive loan waivers by various state governments for political mileage are adding fuel to the fire.
The current agri-lending scenario in the country is stifling agriculture growth.
Why Does A Farmer Need Credit?
Farmers have a very erratic cash flow. They receive a sum of money at the end of the crop cycle (five month), but have numerous expenses (personal and agricultural), which they incurred during the five months period.
To give you a perspective, imagine in place of receiving monthly salary, you receive a sum of money at the end of 5th month of your work. Most people would need warren buffer financial planning skills to survive through the months, let alone plan for the next five months.