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Empty claims of financial inclusion

Government has been broadcasting its success in doubling institutional credit to the agricultural sector. But these numbers have little meaning: 85% of accounts opened were inoperative, 72% had zero or minimum balance, and only 15% had a balance over Rs 100. It is paradoxical, writes P S M Rao, to talk about ‘inclusive growth’ when our policies and practices tread the path of exclusion

The government has good reason to be happy with institutional agricultural credit. The aggregate data shows that it has not only achieved its targets, but surpassed them. In 2004, the government wanted credit flow to the sector to be doubled in three years. That, claimed P Chidambaram, then Union finance minister, in his 2007-08 budget speech, happened in just two years. He went on to set bigger credit targets for the following year.

Judging by the targets set and the achievements, the agricultural sector is well supplied with credit. The target for 2007-08, of Rs 225,000 crore, was exceeded by Rs 348 crore. A higher target was set for 2008-09 -- Rs 280,000 crore. This too was exceeded by around Rs 7,000 crore. For 2009-10, the target is Rs 325,000 crore which, from all available reports, looks unlikely to be missed.

Yet the experiences of farmers do not match this ‘all is well’ version of agricultural credit and the numbers that make up the official data. There is enough proof for us to conclude that small farmers -- who constitute the bulk of the farming community -- did not get their fair share of credit. Before reviewing the farm credit scenario, it would be useful to summarise landholding sizes in India.

Farm size

According to the Ministry of Agriculture’s Agricultural Census Division data, 63% of the total 159.9 million hectares of operational holdings in 2001 was held by marginal farmers with less than 1 hectare of land. Small farmers with plot sizes totalling 1-2 hectares made up 18.9% of the holdings, which means that small and marginal farmers together account for a high 81.9% of operational holdings.

Further, it is difficult to ignore those who are classified as semi-medium farmers with holding sizes of 2-4 hectares of land, and constituting about 11.7% of total holdings, since most farmers who committed suicide in Vidarbha were in this category. The extent of land held by them did not yield enough produce to meet their minimum needs, let alone deliver a surplus to repay their debts. This is because land productivity is low; although these farmers are categorised as being above small-farmer level, they cannot be expected to be much above the poverty line. (This is why policymakers must recognise that ‘semi-medium’ farmers have to be included in schemes with even limited benefit, such as waiver of institutional loans.)

These three classes of farmer -- marginal, small and semi-medium -- account for 93.6% of holdings. Together, they operate in 100.6 million hectares, which works out to 62.96% of the total operational area. For that matter, 159.9 million hectares of total operational area in the country is distributed over 120.8 million holdings, big and small. That means the average size of holding in India is 1.32 hectares (the average holdings of marginal, small and semi-medium farmers are 0.40, 1.41 and 2.72 hectares respectively). No agriculture policy that ignores these facts will be effective.

While total credit has, according to the official data, increased every year for the last three years, how much of it reaches small and marginal farmers? Many studies point to the gap between credit and those whom it is supposed to reach. According to a World Bank report, as much as 87% of marginal and 70% of small farmers do not get credit through institutions. In fact, 51% of all farmers, big and small, enjoy no banking services at all, let alone credit. The Committee on Financial Inclusion’s observation (the C Rangarajan Committee, 2008) on farmers not getting enough credit is:

“National Sample Survey Organisation (NSSO) data reveals that 45.9 million farmer households in the country (51.4%), out of a total of 89.3 million households, do not access credit, either from institutional or non-institutional sources. Further, despite the vast network of bank branches, only 27% of total farm households are indebted to formal sources (of which one-third also borrow from informal sources). Farm households not accessing credit from formal sources as a proportion of total farm households is especially high at 95.91%, 81.26% and 77.59% in the northeastern, eastern and central regions respectively. Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion.”

This suggests that the bulk of farmers do not get institutional credit. Moreover, those who do cannot meet all their requirements; this means most farmers have to depend on informal sources of credit and then bear the high cost of interest and harsh terms. The rate of interest from non-institutional sources, according to the government’s own admission, ranges between 24% and 48% per annum. Interest rates in backward areas are higher than in developed centres, and the rate charged to poor people who have no collateral is more than the rate charged to rich farmers. Thus, poor farmers lose whatever small assets they have in the process of debt redemption.

This is not to say that the cost of borrowing from institutions is reasonable. A study I recently concluded in rainfed areas of Andhra Pradesh confirms that these costs too are burdensome. They included high interest rates ranging from 7% to 16%, with the low end of the interest scale coming into play only in case of loans for which the government interest subvention is eligible, and up to the time that loans do not become overdue. Then there are other charges levied by banks such as process fee, inspection charge, penal interest, equitable mortgage charge, service charge, no-dues certificate fee, gold loan process and appraisal charge and ledger folio charge. Not all banks impose these uniformly, yet every bank has its own way of collecting extra fees. In addition, crop insurance is compulsory for bank borrowers, adding another premium to the farmer’s burden. A paddy grower who takes loans for two crops in a year has to pay 4.5% of his/her loan amount as insurance premium (2.5% on rabi and 2% on kharif). This cost alone often cancels out whatever benefit the farmer may get on account of interest subsidy.

Worse, a sizeable number of farmers studied in the three sample villages -- one each in Mahboobnagar, Anantapur and Vizianagaram districts -- reported paying a bribe in order to get loans and subsidies. That, apart from having to visit banks and government offices a number of times to complete the paperwork demanded of them; in extreme cases, workers lost 90 days’ wages.

All this suggests that agricultural loans are difficult to come by, regardless of claims made by the central government.

There is the related issue of agricultural credit as a percentage of total bank credit declining over the years, although 72% of the population lives in rural areas, most of them dependent on agriculture and allied activities for their livelihood. The norm of earmarking 18% net bank credit to agriculture is rarely followed. According to Reserve Bank of India data, the share of agricultural advances to net bank credit ranged between 14.5% and 17.2% of the net bank credit between 2003 and 2009, in the case of public sector banks; it was 10.9% to 15.9% in the case of private banks. The share of agricultural and allied activities in the gross bank credit was in the region of 12% during the last five years, as shown in the accompanying table.

Table 1
Share of agriculture in gross bank credit in India (2005-09) (Amount in Rs crore)
Outstanding up to Agriculture and allied activities Percentage in total Total bank credit
Mar-05 124,269 11.88 10,45,954
Mar-06 173,875 12.04 14,43,920
Mar-07 230,180 12.49 18,41,878
Mar-08 275,343 12.25 22,47,289
Mar-09 338,656 12.78 26,48,501
Source: RBI’s Annual Report 2006-07 and 2008-09

Another worrisome trend is that specialised institutions set up to meet the credit needs of farmers and weaker sections are moving away from that role, at a time when the government is talking about strengthening the credit delivery system and financial inclusion. The share of cooperatives -- which were once synonymous with agricultural institutional credit -- in total agricultural credit has dropped to a mere 12.8% in 2006-07, from 33.9% in 2002-03 and over 50% about a decade ago. The wide network of cooperatives -- there are over 100,000 outlets all over India -- would have led them to occupy a dominant position in agricultural credit had reforms been aimed at helping the farm sector.

While cooperatives have been losing ground, commercial banks have increased their share from 33% in 1992-93, the year from which banking reforms started taking root, to nearly 78% in 2008-09. Earlier, they were not considered suitable for rural lending owing to their commercial approach and high cost of operation. This shows how the viability concerns of lending agencies are taking precedence over the social approach of protecting agriculture. Commercial principles are now widely applied to lending to a sector that’s responsible for providing livelihoods and food to the nation.

Similarly, regional rural banks (RRBs), which are exclusively set up to provide credit to weaker sections in rural areas, have changed character after the reforms introduced in 1992-93. Their responsibility of priority sector lending has been brought down to the level of other commercial banks, the focus being on the financial viability of RRBs rather than financial aid to farmers. As a result, RRBs are now mandated to earmark only 10% of their lending to weaker sections, from the original 100% -- a complete U-turn. If RRBs are to function as commercial banks there is no need for them to exist as separate entities.

Table 2
Share of different institutions in formal agricultural credit, in India
(Amount in Rs crore)
Institution/Year 1992-93 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Cooperatives 9,378 23,636 26,875 31,425 39,404 42,480 48,258 36,762
  (62.00) (33.97) (30.89) (25.07) (21.83) (20.00) (18.95) (12.80)
Regional rural banks 831 6,070 7,581 12,404 15,223 20,434 25,312 26,724
  (5.00) (8.72) (8.71) (9.89) (8.43) (10.00) (9.93) (9.30)
Commercial banks 4,960 39,774 52,441 81,481 125,859 140,382 181,088 223,663
  (33.00) (57.17) (60.29) (65.02) (69.73) (69.05) (71.11) (77.89)
Other agencies - 80 84 - - - - -
Total 15,169 69,560 86,981 125,309 180,486 203,296 254,658 287,149
Source: Economic Survey 2006-07,GOI and annual reports of different years of NABARD
Note: Figures in parentheses indicate relative share in total

Regional rural banks -- originally conceived as ‘social banks’ and defined as ‘region-based, rural-oriented, low-cost tiny commercial banks with a social approach’ -- have 73 metropolitan and 751 urban branches among a combined total of 15,029 branches, as of March 2008. What business did these banks have in urban and metropolitan areas? While their outstanding credit, as of September 2007, is Rs 52,449 crore, their rural credit is only Rs 35,003 crore. Similarly, their deposit portfolio of Rs 85,311 crore contains urban deposits of Rs 32,866 crore.

Closure of rural branches

Commercial banks as a bloc are showing an urban bias. They are either closing rural branches or shifting them to urban centres. According to RBI data, the number of rural branches of scheduled commercial banks (including RRBs) has come down by 4,313, from 35,389 branches in 1993 to 31,076 by March 2008. In contrast, the number of new urban and metropolitan branches has increased by 5,829 and 7,155 respectively. The change is seen -- both in the reduction of rural and increase in urban branches -- not only in relative share but in absolute numbers also (see Table 2).

Overall, even with a total of 76,050 bank branches the population-to-branch ratio has gone up to 15,000 from around 12,500, which was the ratio in the early-1990s. The focus being on profitability, the social objective of providing banking services to the people is taking a back seat although we hear a great deal about ‘inclusive growth’. While there are more than 600,000 settlements in India, only 30,000 have bank branches -- RBI Governor Dr D Subba Rao himself pointed this out recently.

It is well documented that the current agricultural crisis is the result of a host of factors including declining public investment in agriculture, rising input prices, an unresponsive institutional mechanism, non-remunerative product prices, and the absence of extension services. Farmer suicides are seen to be the consequence of farmers unable to clear their debts, mainly to private sources. This itself indicates the failure of institutional credit to meet the needs of farmers, particularly small and marginal ones.

It is paradoxical to talk about ‘inclusive growth’ whilst our policies and practices tread the path of exclusion. The reforms have not only resulted in reduced access to credit by farmers, particularly small and marginal farmers, they have also hiked banking and credit costs for this section. Measures like no-frills accounts and kisan credit cards have proved useless to farmers. In November 2005, the RBI asked banks to open accounts with small or no deposits, covering all households, as part of financial inclusion. By November 2008, tremendous progress was reported: 155 out of 355 campaign districts were said to have achieved ‘financial inclusion’. But the opening of bank accounts did not bring any tangible benefits to the poor. A study, jointly conducted by the College of Agricultural Banking of the RBI and the Chennai-based Centre for Microfinance of the Institute of Financial Management and Research, found that 85% of accounts opened were inoperative; 72% of accounts had zero or minimum balance, and only 15% of accounts studied had a balance of over Rs 100. The experience with kisan credit cards is the same. Although an impressive number of cards were issued -- 86,359,000 by 2009, according to data compiled by the National Bank for Agriculture and Rural Development (NABARD) -- most of the cards are not used as credit cards. Instead, agricultural cash credit (ACC) borrowers are converted to KCC holders without changing the lending procedure.

These examples show that recent trends are going against rural areas in general and agriculture in particular. Small and marginal farmers are hard done by; any assertions to the contrary neither hide the truth nor reduce the sufferings of India’s rural poor. Results that reflect true ‘inclusion’ will emerge only when sincere efforts are made to put in place policies that genuinely have the interests of agriculture and farmers at their heart.

(Dr P S M Rao is a consultant on microfinance, rural credit and livelihood issues. He was formerly with the Andhra Pradesh Grameen Vikas Bank)

Infochange News & Features, July 2010