How agri credit is missing those who really need it


Mains Paper 3: Indian Economy| Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Priority Sector Lendings

Mains level: Issues in lending to small and marginal farmers and institutional bottlenecks.


Small farmers are getting only 30-40% of loans meant for the sector, says RBI report

  1. As per information provided by the Reserve Bank of India showed that the small and marginal farmers are receiving only 30-40% of loans meant for the sector
  2. As per a report submitted by the RBI to the Parliamentary Standing Committee on Agriculture in response to its queries, only 42.2% of agricultural credit disbursed in 2016-17 went to small and marginal farmers

Only 35.5% of total agri credit to Rural Farmers

  1. The RBI data backs up this assertion, showing that only 34.5% of agricultural credit outstanding as of 2017 has gone to rural farmers
  2. The remaining has gone to semi-urban, urban, and metropolitan farmers
  3. The data also shows that the onus of providing agricultural credit is falling on the public sector banks, with 12 out of 23 of the private sector banks for which data is available having failed to meet the 18% lending target for the agricultural sector in 2017

There are two ways of seeing this

  1. One is that it is not equitable, where some farmers, the larger ones and the ones closer to urban areas, are over-represented in terms of access to credit
  2. Secondly, so far as the priority sector lending mandates are concerned, the mandate is not to reach a particular type of farmer. So, the programme itself is not targeted

Lending costs- Is it the real cause of discrepancies in such lending?

  1. The RBI’s rules are that 18% of a bank’s Adjusted Net Bank Credit must go to the agricultural sector and within this, 8% must go to small and marginal farmers
  2. While the banking sector has overall met this limit, there is still an inherent targeting problem arising out of the costs of lending to the sector
  3. The priority sector lending mandate is in place because it is felt that banks would not otherwise lend as much to this sector
  4. What then happens is that banks choose to lend to those areas where the cost of lending is lower, such as those close to urban areas, or to those farmers who are more credit-worthy. That is, the medium and large farmers

What are the issues associated with such lendings?

  1. The point is that these farmers would get credit even without the priority sector lending mandate
  2. It tells us that this calls for a deeper examination of the priority sector lending mandates
  3. Maybe the limit can be reduced, but the rules can be made stricter about to whom the loans are given to
  4. The data also shows a great disparity of performance between states, with some states such as Meghalaya giving 93.6% of its agricultural credit to small and marginal farmers, while other states like Sikkim have this proportion as low as 1.67%
  5. While some of this could be explained by the distribution of farmer types in these states, a large part of the discrepancy could be due to a targeting problem
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