epw paper credit

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review of agriculture

december 29, 2007 Economic & Political Weekly58

credit provided by the commercial banks, including regional

rural banks.

1 tnds n gowh o auu cd

Historically, agricultural credit has comprised mainly the credit

provided directly to cultivators, which was called direct fnance

to agriculture. Within direct fnance to agriculture, a short-

term credit or a credit or seasonal agricultural operations hasaccounted or a signifcant share. The short-term loans to agri-

culture are reerred to as the crop loans, as they are advanced

or crop cultivation against the hypothecation o the crop to be

cultivated by the armer. The crop loans are provided as cash or

in kind, such as the supply o ertilisers and seeds. Apart rom the

crop loans, direct fnance also includes credit or medium- and

long-term investment in agriculture. The second component o

agricultural fnance is called indirect fnance, which does not

go directly to cultivators, but to the institutions that support agri-

cultural production in rural ar-

eas. The typical orms o indirect

fnance to agriculture are loans to

input dealers or their role in the

provision o agricultural inputs

and loans to electricity boards or

supplying power to cultivators.

In the 1990s, when India be-

gan to implement the policy o

fnancial sector liberalisation,

there was a signifcant slowdown

in the growth o commercial

bank credit to agriculture com-

pared to the 1980s.2 As Table 1shows, ater recording an annual

rate o growth o 8.7 per cent be-

tween 1980 and 1990, agricul-

tural credit grew at just 1.8 per

cent per annum between 1990

and 2000. In the case o other

rural occupations such as arti-

sans and cratsmen and small-scale industries, the decline in the

growth o credit was equally sharp. Further, the growth rate o

agricultural credit in the 1990s was less than the growth rate o

the rural population in the corresponding period [Chavan 2002].

The slowdown in agricultural credit in the 1990s appears to

have been reversed in the period ater 2000. Between 2000 and

2006, agricultural credit grew by 20.5 per cent per annum, which

was signifcantly higher than the growth rate recorded or the

1990s. It was not just agricultural credit that grew rapidly in the

2000s; credit to artisans and cratsmen and other small-scale

industries also grew at rates aster than in the 1990s.

An important point to note here is that the revival o agricul-

tural credit had begun ater the year 2000 itsel. This is contrary

to the general perception that the revival in the 2000s was owing

to the governments announcement in 2004 to double the sup-

ply o credit to agriculture. The log plot o credit to agricultureand the plot o per capita credit to agriculture in rural areas in

Figure 1 (p 59) establish this act clearly. In other words, the high

growth rate o credit to agriculture in the 2000s was due to a

regular increase o credit in every year ater 2000, and not just

ater 2004.

The increase in the growth rate o agricultural credit in the

2000s was so signifcant that the level o credit reached in 2006

considerably higher than what it would have been, i credit had

grown in the 1990s and 2000s at the growth rate o the 1980s.

In Figure 2 (p 60), we have plotted the deated series o creditto agriculture between 1980 and 2006, and projected orward a

linear trend line o credit during the 1980s only. As is clear, the

plot o credit supply crosses the trend line by about 2003, and the

credit supplied in 2006 is at a point much above the projected

trend line o the 1980s. This method, o course, does not account

or the defcits in the supply in the years between 1990 and 2003,

when the credit supply was below the trend line. Nevertheless,

it does provide an indication o the extent o increase in credit

ater 2000.

There has been a marked ab-

sence o association between the

sharp growth o agricultural

credit in the 2000s and the

growth o agricultural output

and agricultural employment.

The rates o growth o gross do-

mestic product (GDP) rom agri-

culture and unregistered manu-

acturing (a proxy or the inor-

mal sector and small-scale in-

dustries) were lower in the 2000s

over the 1990s (Table 1). Also,

data on employment rom theNational Sample Survey (NSS)

show that the rate o growth o

wage employment in agriculture

was negative (-3.2 per cent) be-

tween 1999-2000 and 2004-05.

The respective growth rate was

positive (1.1 per cent) between

1993-94 and 1999-2000. These trends prompt a harder look at

the pattern o growth o agricultural credit in the 2000s in com-

parison with the earlier decades.

2 fus o auu cd n h 2000s

There are three distinct eatures o the growth in agricultural

credit, which have had a major role in determining the extent

o increase in credit supply as well as its distribution within the

agricultural sector. These eatures are discussed separately in the

subsections below.

2.1 ro o ind fnn

First, a signifcant proportion o the increase in total bank credit

to agriculture between 2000 and 2006 was accounted or by in-

direct fnance to agriculture. O the total increase in credit sup-

ply to agriculture between 2000 and 2006, about one-third wascontributed by indirect fnance. Between 2000 and 2006, while

direct fnance grew at an annual rate o 17 per cent, indirect

tbe 1: re gwh ced ousndn m

Shedued cmme Bnks Seeed Ses (1975-2006, in % per annum)Sector 1975-80 1980-90 1990-2000 2000- 06

Growth rate of credit outstanding to:

Agriculture and allied sectors 20.4 8.7 1.8 20.5

Artisans and craft smen 27.4 21.0 2.3 14.1

Other small-scale industries 12.0 7.5 2.4 4.1

Total bank credit 12.9 7.9 6.7 17.7

Growth rates of GDP at constant prices from:

Agriculture 1.1 4.7 3.4 1.9

Agriculture and allied sectors 0.9 4.4 3.4 2.0

Unregistered manufacturing 4.7 5.8 6.3 4.8

Figures are annual exponential growth rates estimated after deflating credit outstanding with the GDP

deflators. The figures include credit supplied by regional rural banks.Sources: Basic Statistical Returns, Reserve Bank of India, various issues; Handbook of Statistics on Indian

Economy 2005-06, Reserve Bank of India; http://www.indiastat.com.

tbe 2: re gwh De nd inde fnne ousndn auue

nd aed aves m Shedued cmme Bnks (1975-2006 , in % per annum)

Type of Finance Growth Rates of Credit

1975-80 1980-90 1990-2000 2000- 06

Total finance to agriculture and allied activities 20.4 8.7 1.8 20.5

Direct finance to agriculture and allied activities 23.3 10.0 1.5 17.4

Indirect finance to agriculture and allied activities 12.9 2.7 3.5 32.9

Figures are annual exponential growth rates worked out after deflating the credit outstanding by grossdomestic product deflators. Data includes credit supplied by regional rural banks (RRBs).

Source: Basic Statistical Returns, Reserve Bank of India, various issues; Handbook of Statistics on IndiaEconomy 2005-06, Reserve Bank of India.


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Economic & Political Weekly december 29, 2007 59

fnance grew at an astonishing annual rate o 32.9 per cent

(Table 2, p 58).

In the decade o the 1990s and ater, the share o indirect

fnance in total agricultural fnance has consistently risen

(Table 3). Between 1985 and 1990, there was a all in the share o

indirect fnance in total agricultural fnance; the share began to

rise ater 1990 to reach 15.5 per cent in 2000, 25.9 per cent in

2002 and 27.9 per cent in2006. Thus, while the share

o indirect fnance in total

agricultural fnance had be-

gun to rise in the 1990s, its

increase in the 2000s was

considerably aster.

From the 1990s onwards,

the defnition o what con-

stitutes indirect fnance

to agriculture has been

broadened signifcantly

by the RBI.3 The widen-

ing o the scope has, in all

likelihood, inuenced the

growth o indirect fnance

rom the mid-1990s. The major changes introduced in the defni-

tion o indirect fnance are given below:

Till 1993, only direct fnance to agriculture was considered as

a part o the priority sector target o 18 per cent or agriculture

and allied activities. From October 1993, direct and indirect

fnances have been considered together or meeting the priority

sector target.

In October 1993, it was stipulated that indirect fnance to agri-culture only up to one-ourth o the total agricultural advances

would be considered while meeting the priority sector target o

18 per cent or agriculture. However, the indirect fnance over

and above one-ourth o total agricultural advances was allowed

to be reckoned while meeting the overall target o 40 per cent or

priority sector advances.

From May 1994 onwards, loans up to Rs 5 lakh or fnancing

distribution o inputs or allied activities in agriculture, such as

cattle eed and poultry eed, were considered as indirect fnances

to agriculture. The upper limits were revised and fxed at Rs 15

lakh in April 2000, Rs 25 lakh in April 2002 and Rs 40 lakh in

October 2004.

From June 1996 onwards, loans to dealers in

drip irrigation systems, sprinkler irrigation

systems and agricultural machinery were

considered as indirect fnances to agriculture.

From October 2002 onwards, the credit limit

to these dealers was raised rom Rs 10 lakh to

Rs 20 lakh; it was urther raised to Rs 30 lakh

in October 2004. Till April 2003, only loans to

those dealers located in rural or semi-urban ar-

eas were under the ambit o indirect fnances.

However, rom April 2003 onwards, all dealers,irrespective o their location, were treated as

eligible or such advances.

Loans extended to state electricity boards (SEBs) or reimburse-

ment o expenditure towards providing low-tension connection

to individual armers rom step-down points or energising wells

were always classifed as indirect fnance to agriculture. From

2001 onwards, loans to SEBs or systems improvement under the

Special Project Agriculture (SI-SPA) were also considered as in-

direct fnance to agriculture. From July 2005 onwards, loans to

power distribution corpora-tions or companies, emerg-

ing out o the biurcation or

restructuring oSEBs as part

o power sector reorms were

also considered as indirect f-

nance to agriculture.

From August 2001 onwards,

loans extended under the

scheme or fnancing agri-

clinics and agribusiness cen-

tres were considered as indi-

rect fnance to agriculture.

From July 2001 onwards,

subscription to the bonds is-

sued by the rural electrif-

cation corporation (REC) exclusively or fnancing the pump set

energisation programme in rural and semi-urban areas was con-

sidered as indirect fnance to agriculture.4

From April 2000 onwards, loans rom banks to non-banking

fnancial companies (NBFCs) or on-lending to agriculture were

considered as indirect fnance to agriculture.

From November 2002 onwards, loans or the construction and

running o storage acilities (warehouse, market yards, go-downs, silos and cold storages) in the producing areas and

loans to cold storage units located in rural areas, which were

used or hiring and/or storing mainly agricultural produce,

were considered as indirect fnance to agriculture. However,

rom May 2004 onwards, loans to storage units, including cold

storage units, that were designed to store agricultural produce,

irrespective o their location, were treated as indirect fnance

to agriculture.

From May 2004 onwards, i the securitised assets o a

bank represented indirect fnances to agriculture, investment

by banks in such assets was considered as indirect fnance

to agriculture.

In this article, we have used data on the

supply o agricultural advances up to 2006,

and hence, the changes in the defnition o in-

direct fnance only up to 2006 have been list-

ed above. Some additional changes in the

defnition o indirect fnance to agriculture

were introduced ater 2006, which may be o

signifcant rele vance to uture analyses

on agricultural credit. These changes are

summarised below:

From April 2007 onwards, two-thirds o loansgiven to corporates, partnership frms and in-

stitutions or agricultural and allied activities

tbe 3: Shes De nd indefnne n t ced auue mShedued cmme Bnks(1985 to 2006,in %)

Share in Total Agricultural Credit

Year Direct Indirec t Total

Finance Finance

1985 83.2 16.8 100.0

1990 86.8 13.2 100.0

1995 85.9 14.1 100.0

2000 84.5 15.5 100.0

2001 83.9 16.1 100.0

2002 74.1 25.9 100.0

2003 77.8 22.2 100.0

2004 72.8 27.2 100.0

2005 76.1 23.9 100.0

2006 72.1 27.9 100.0

Source: Basic Statistical Returns, Reserve Bank of India,

various issues.

1975 1980 1985 1990 1995 2000 2004 05 06

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

1,40,000

1,20,000

1,00,000

80,000

60,000

40,000

20,000

0

Per capita credit to agriculture in rural areas (left hand side axis) (Rs 00)

Log of credit to agriculture (right hand side axis)

fue 1: l P ced auue nd Pe cp ced auue

n ru aes (Deflated Figures, 1975 to 2006)

Source: Basic Statisti cal Returns, Reserve Bank of India, various issues; Handbook of Statistics on Indian Economy 2005- 06,

Reserve Bank of India; Population Census of India 1971, 1981, 1991 and 2001.


4/8



(such as beekeeping, piggery, poultry, fshery and dairy) in ex-

cess o Rs 1 crore in aggregate per borrower was considered as

indirect fnance to agriculture.

From April 2007 onwards, loans to ood- and agro-based

processing units with investments in plant and machinery up to

Rs 10 crore (other than the units run by

individuals, sel-help groups and coop-

eratives in rural areas) were consideredas indirect fnance to agriculture.

As we have seen, indirect fnance

to agriculture expanded at a rate o

about 33 per cent per annum since the

late 1990s, thus aiding signifcantly

the growth o total agricultural credit

(Table 2, p 62). Most o the above-cited

defnitional changes (that either ex-

panded the ambit o indirect fnance

or steeply raised ceilings on loan sizes)

also took place since the late 1990s. In

other words, the task o banks to ollow

the governments directive in 2004 to

double agricultural credit became con-

siderably easier given the major chang-

es in the defnition o indirect fnance.

As mentioned, indirect fnance to

agriculture was traditionally under-

stood as loans that would not go direct-

ly to armers, but to the activities un-

dertaken by individuals/institutions

that aided armers in undertaking cultivation. Loans given or

the provision o agricultural inputs (to dealers), power (to elec-tricity boards), and ormal credit (to primary agricultural credit

societies) were such typical indirect activities. With the defni-

tional changes introduced in the late 1990s, the meaning o indi-

rect fnance itsel has undergone a major change. In Figures 3a

and 3b (p 62), we have presented the trends in dierent types o

indirect fnance to agriculture between 1971 and 2006. As is clear,

the traditional components o indirect fnance to agriculture did not

exhibit any notable recovery in the 2000s. Instead, loans under

the category other types o indirect fnance began to increase

rom 1994 onwards, and recorded a phenomenal rise in the levels

ater 1999. From 1999 onwards, total indirect fnance and

other types o indirect fnance have also moved in close tandem.

Our estimates show that the share in total indirect fnance o

other types o indirect fnance, which

was 56.6 per cent in 1999 increased to

76.1 per cent in 2006. An increase in indirect fnance is

necessary to improve the capacity

o armers to absorb more direct f-

nance. However, the promotion o

indirect fnance should not lead to

an undermining o direct fnance.

The RBIs advisory committee on ow

o credit to agriculture and related

activities in 2004 noted the demand

made by banks to relax the stipula-

tion that indirect fnance to agriculture

should not exceed 4.5 per cent o the

net bank credit.5 This stipulation was

earlier put in place in order to chan-

nel bank fnance directly to armers.

The advisory committee rejected this

demand by banks and noted that in-

direct lending needs to be subject to

certain limitations, lest banks neglect

direct fnance or agricultural produc-

tion, which may jeopardise the goal

o achieving annual growth o 4 per cent in agricultural produc-

tion [RBI 2004, p 32].6

2.2 ins n lons wh l cd lms

Secondly, much o the increase in the total advances to agriculture

in the 2000s were on account o a sharp increase in the number o

loans with a credit limit o Rs 10 crore and above, and particularly,

Rs 25 crore and above. In Table 4, we have provided the distribu-

tion o the amount o agricultural advances (direct and indirect)

by credit limit size-classes o loans or the period 1985 to 2006. A

comparison o fgures or 2000 with those o 2006

shows that the shares in total advances o ad-

vances with credit limit less than Rs 25,000

and between Rs 25,000 and Rs 2 lakh have

shrunk signifcantly. The share in total advances

o advances with a credit limit o Rs 25,000 ell

rom 35.2 per cent in 2000 to 13.3 per cent in 2006.

The share in total advances with credit limit be-

tween Rs 25,000 and Rs 2 lakh also declined

rom 32.4 per cent to 31.4 per cent in the same

period. On the other hand, the share in total ad-

vances o advances with credit limit above Rs 25

crore increased sharply rom 5.7 per cent in 2000

to 16.8 per cent in 2006. Similarly, the share in

total advances o advances with credit limit be-tween Rs 10 crore and Rs 25 crore increased rom

1.7 per cent in 2000 to 4.3 per cent in 2006.

tbe 4: Ds bun amun ousndn unde tauu advnes by Shedued cmme Bnks

(by credit limit size-classes of loans,in %)Credit Limit Size Share of Amount Outstand ing in Total Amount

Class of Loans (Rs) Outstand ing

1985 1990 1995 2000 2003 2005 2006

Less than 25,000 49.6 58.7 52 35.2 23.6 17.8 13.3

25,000 to 2 lakh 35.3* 23.9 26 32.4 34.4 34.1 31.4

2 lakh to 10 lakh 4.3 5.1 11.7 14.0 17.9 19.7

10 lakh to 1 crore 7.4 7.6 7.6 6.6 6.3 6.4 6.1

1 crore to 10 crore 4.6 4.2 5.6 6.7 7.4 8.0 8.5

10 crore to 25 crore 3.0* 1.3* 3.5* 1.7 4.0 3.3 4.3

Above 25 crore 5.7 10.4 12.6 16.8

Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0

* The data are not separately available for the corresponding size-classes.

Source: Basic Statistical Returns, Reserve Bank of India, various issues.

tbe 5: Dsbun amun ousndn unde indeauu advnes by Shedued cmme Bnks

(by credit limit size-classes of loans,in %)Credit limit Size Class Share of Amount Outstanding in Total Amount Outstanding )

of Loans (Rs) 1985 1990 1995 2000 2003 2005 2006

Less than 25,000 7.4 10.1 6.9 2.8 2.8 1.6 0.9

25,000 to 2 lakh 19.7* 9.2 4.5 5.2 3.9 3.1 2.2

2 lakh to 10 lakh 8.7 8.8 5.6 10.8 6.8 4.7

10 lakh to 1 crore 32.4 40.1 32.2 21.7 11.7 12.4 9.5

1 crore to 10 crore 22.8 24.0 25.5 25.9 19.2 20.6 19.7

10 crore to 25 crore 17.7* 7.9 22.2 8.6 11.7 9.3 9.6

Above 25 crore 30.3 39.9 46.2 53.5

Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0

* The data are not separately available for the corresponding size-classes.


1980 1985 1990 1995 2000 2004 05 06

fue 2: tends n he Suppy t auu advnes beween 1980 nd 2006s

nd he Pjeed lne tend lne ced Suppy n he 1980s, Deed Sees (in Rs crore)


1.4

1.2

1.0

8.0

6.0

4.0

2.0

0

Advances to agriculture 1980 to 1990

Linear advances to agriculture 1980 to 1990

Advances to agriculture


5/8



To a large extent, the expansion o agricultural advances with

large credit limits can be explained by the growth o indirect f-

nance to agriculture. In Table 5, we have provided the distribu-

tion o indirect agricultural advances by credit limit size-classes

o loans or the period 1985 to 2006. The table speaks or itsel;

between 2000 and 2006, the share o indirect advances with

credit limit above Rs 25 crore in total indirect advances rose rom

30.3 per cent to 53.5 per cent. In other words, more than halo the indirect fnance to agriculture was accounted or by loans

with a credit limit o above Rs 25 crore in 2006.

The growing shit in recent times towards loans with large

credit limits are closely related to the changes in ofcial policy

on agriculture in India, which increasingly avours the growth

o a capital-intensive and export-oriented production pattern in

agriculture. The changes in the defnition o indirect fnance to

agriculture since the late-1990s have also been in line with the

new emphasis in ofcial policy.

2.3 Bns o cd expnson o B cuvos

Thirdly, even while we note the increasing importance o indirect

fnance, the growth in direct fnance to agriculture in the 2000s

cannot be overlooked. As or data in Table 2 show, direct fnance

to agriculture grew at an annual rate o 17.4 per cent between

2000 and 2006. The magnitude o

this growth rate is large and needs an

explanation, particularly in view o

continuing complaints rom political

movements and armers organisations

that stagnation in agricultural credit

continues.

There are two aspects o the growtho direct fnance to agriculture in the

2000s, which render it ar less spectac-

ular than it is made out to be. The frst

is related to changes in the size o loans

under direct fnance. Given that direct

fnance comprises short-term, medium-

term and long-term loans given to agri-

culturists, it is reasonably expected that

the size o loans, on an average, would

not be as high as in the case o indirect

fnance. However, there has been a

considerable growth in the amount o

direct advance to agriculture with very

high credit limits, a trend comparable

with that o indirect fnance [see also

Shetty 2006].

Data in Table 6 show that in the

2000s, and particularly between 2003

and 2006, there was a all in the shares

o direct advances with lower credit

limits in total direct advances. The

accounts with a credit limit up to Rs 2

lakh are reerred to as small borrowalaccounts (the limit was Rs 25,000 till

1998). In Table 6, we have classifed

direct fnance to agriculture by their credit limits in two dierent

ways: frst, by the regular classifcation ollowed in this paper,

and secondly, a broad size-classifcation o less than Rs 2 lakh

and above Rs 2 lakh. Between 2000 and 2006, there was a all in

the share o direct fnance with credit limit up to Rs 2 lakh rom

78.5 per cent to 60.8 per cent. On the other hand, the share o

direct fnance with credit limit above Rs 2 lakh increased rom 22

per cent to 39 per cent. Almost hal o the increase in the amounto direct fnance outstanding to agriculture between 2000 and

2006 was accounted or by loans with a credit limit o above Rs

2 lakh, a size-class in which loans to marginal and small armers

are hardly represented (even when we consider a classifcation

with Rs 10 lakh as the cut-o mark, the trends remain similar.

The share o direct fnance with credit limit less than Rs 10 lakh

ell rom 91 per cent in 2000 to 86 per cent in 2006. The data are

not presented here).

A closer analysis o changes in the supply o direct fnance

to agriculture shows that the share o direct advances in every

credit limit size class above Rs 2 lakh increased between 2000

and 2006 (Table 6: Upper Panel). Signifcantly, there was an ex-

pansion in the supply o direct fnance where the credit limits o

loans were above Rs 1 crore. The share o advances with credit

limit o more than Rs 25 crore increased rom 1.2 per cent in 2000

to 2.6 per cent in 2006. Similarly, or

advances with credit limit between

Rs 10 crore and Rs 25 crore, the cor-

responding increase was rom 0.4 per

cent to 2.2 per cent. On the other hand,

the share o direct advances with credit

limit o less than Rs 25,000 ell sharply

rom 41.1 per cent in 2003 to 18.1 percent in 2006. Thus, in the 2000s, there

was a clear shit in the direct agricul-

tural lending o banks away rom small

borrowal accounts in avour o large-

sized loan accounts.

The second disturbing aspect o the

growth o direct fnance in the 2000s

relates to increasing importance o

loans given to big cultivators. The RBI

publishes data on loans provided to

cultivators, classifed by the size o

operational holdings. Cultivators op-

erating less than 2.5 acres are reerred

to as marginal cultivators, between

2.5 acres and 5 acres are reerred to as

small cultivators and above 5 acres

are reerred to as big cultivators.

Notwithstanding the act that data

are provided or only three land size-

classes and that they become avail-

able with considerable time lag, these

data provide some indications o the

socio-economic groups to which agri-cultural credit has been owing in

recent times.

tbe 6: Dsbun amun ousndn unde Deauu advnes by Shedued cmme Bnks(by credit limit size-classes of loans, in %)

Credit Limit Size Class Share of Amount Outstanding in Total Amount Outstanding

of Loans (Rs) 1985 1990 1995 2000 2003 2005 2006

Less than 25,000 58.2 66.1 59.5 41.1 29.5 22.9 18.1

25,000 to 2 lakh 38.5* 26.1 29.6 37.4 43.1 43.8 42.7

2 lakh to 10 lakh 3.6 4.5 12.8 14.9 21.4 25.5

10 lakh to 1 crore 2.4 2.6 3.6 3.9 4.8 4.5 4.8

1 crore to 10 crore 0.9 1.2 2.3 3.1 4.0 4.1 4.1

10 crore to 25 crore 0.0* 0.3* 0.5* 0.4 1.8 1.4 2.2

Above 25 crore 1.2 1.9 2.0 2.6

Total advances 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Broad size-classes:

< 2 lakh 92.2 89.1 78.5 72.6 66.6 60.8

> 2 lakh 7.8 10.9 21.5 27.4 33.4 39.2

Total advances 100.0 100.0 100.0 100.0 100.0 100.0

* The data are not separatel y available for the corresponding size-cla sses.

Source: Basic Statistical Returns, Reserve Bank of India, various issuses.

tbe 7: Dsbun Numbe ln auns unde D eousndn fnne m Shedued cmme Bnks(by size of operational holdings 1980-81 to 2004-05,in %)Year Marginal Small Marginal and Small Big All

Cultivators Cultivators Cultivators Cultivators Cultivators(1) (2) (3) (4)=(2)+ (3) (5) (6)=(4)+ (5)

1980-81 45.8 25.0 70.7 29.3 100.0

1985-86 43.3 30.1 73.4 26.6 100.0

1990-91 43.7 30.9 74.6 25.4 100.0

1991-92 42.8 31.3 74.1 25.9 100.0

1992-93 42.1 31.0 73.1 26.9 100.0

1993-94 43.1 30.8 73.9 26.1 100.0

1994-95 42.0 31.1 73.1 26.9 100.0

1995-96 41.9 32.1 73.9 26.1 100.0

1996-97 40.5 32.2 72.7 27.3 100.0

1997-98 39.8 32.9 72.7 27.3 100.0

1998-99 38.3 32.2 70.6 29.4 100.0

1999-00 38.8 32.3 71.1 28.9 100.0

2000-01 38.8 31.1 70.0 30.0 100.0

2001-02 40.0 32.3 72.3 27.7 100.0

2002-03 37.5 32.3 69.7 30.3 100.0

2003-04 39.9 31.5 71.3 28.7 100.0

2004-05 39.6 31.8 71.4 28.6 100.0Source:Handbook of Statistics on Indian Economy 2005-06, Reserve Bank of India.


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In Table 7, we have provided data on the share o loan accounts

under direct fnance held by marginal, small and big cultivators

between 1980-81 and 2004-05, which is the latest year or which

landholding-wise data is available. The share o loan accounts

held by marginal and small cultivators declined in the 1990s,

a trend that more or less continued in the 2000s. The share o

accounts held by marginal and small cultivators together was

about 73 to 74 per cent in the mid-1990s; in 2004-05, the corre-

sponding share was 71.4 per cent. On the other hand, the share o

loan accounts held by big cultivators rose rom about 26 per cent

to 27 per cent in the mid-1990s to 28.6 per cent in 2004-05.

Figure 4 (p 63) provides data on the amount o agricultural

credit outstanding per account by the size classes o operational

holdings or the period 1980-81 to 2004-05. The credit outstand-

ing per account or big cultivators was always higher than or

small and marginal cultivators. Also, the dierence in credit out-

standing per account between big cultivators and small and

marginal cultivators has widened over the years. However,

since the late 1990s, the credit outstanding per account or big

cultivators rose at a rate highest or any period ater 1980-81.

As a result, the dierence between the credit outstanding per

account o big cultivators on one side and small and marginalcultivators on the other widened at a rapid pace. The expansion

o credit supply to big cultivators is likely to have had a major

.

.

.

.

.

.

.

.

.

40

35

30

25

20

15

10

5

01971 1976 1981 1986 1991 1996 2001 04 05 06

Source: Handbook of Statistics on Indian Economy 2005-06, Reserve Bank of India.

fue 3b: tends n he Suppy Deen types inde advnes auue

by Shedued cmme Bnks, Bne ousndn (Deflated Figures 1971 to 2006, in Rs 0 00 crore)

Loans to

electricity boards

Other types of indirect finance

bearing on the increase in the growth o total direct fnance since

the late 1990s.

It needs to be noted that similar to the changes in the defni-

tion o indirect fnance, the defnition o direct fnance

to agriculture too has been broadened in some ways

since the late 1990s.

From 1997 onwards, short-term loans to traditional

plantations (such as tea, coee, rubber and spices), ir-respective o the size o holdings, were considered as

direct fnances to agriculture. Later, all loans (short-

term, medium-term and long-term) to traditional and

non-traditional plantations and horticulture, irrespec-

tive o the size o holdings were considered as direct

fnance to agriculture.

From April 2002 onwards, the upper limit or loans

given against the pledge or hypothecation o agricul-

tural produce (that includes warehouse receipts) or a

period not exceeding six months was raised rom Rs 1

lakh to Rs 5 lakh or a period not exceeding 12 months.

The changes summarised above are only up to 2006.

A ew signifcant changes in the defnition o direct

fnance were introduced ater 2006 also. They are,

From April 2007 onwards, one-third o loans given to

corporates, partnership frms and institutions or agri-

cultural and allied activities (such as beekeeping, pig-

gery, poultry, fshery and dairy) in excess o Rs 1 crore in

aggregate per borrower was considered as direct fnance

to agriculture (as mentioned earlier, the remaining two-

thirds were considered as indirect fnance).

From April 2007 onwards, the upper limit or loans

given against the pledge or hypothecation o agricul-tural produce (that includes warehouse receipts) was

raised rom Rs 5 lakh to Rs 10 lakh. Till 2007, the above

type o loans was given only to individual armers who

had sought crop loans rom banks. From 2007 onwards,

these loans were given to individual armers, irrespective o

whether they had sought crop loans.

3 conusons

The increase in the supply o credit to agriculture has been

claimed to be one o the most signifcant achievements in the

agricultural sector ater the ormation o the new government

in 2004. In this article, our eort was to critically examine this

claim using secondary data on banking. Four conclusions o our

analysis may be summarised as below.

First, the growth rate o credit ow to agriculture rom com-

mercial banks in the period 2000 to 2006 was 20.5 per cent per

annum, which was signifcantly higher than the correspond-

ing growth rate in the period between 1990 and 2000. How-

ever, contrary to general perception, this revival o credit ow

to agriculture cannot be attributed to the announcement o the

government in 2004 to double credit ow to agriculture in three

years. In act, the revival had begun in the late 1990s itsel.

Secondly, the extent o revival o credit ow to agriculture inthe 2000s would have been ar less impressive in the absence o a

sharp growth in indirect fnance to agriculture. About one-third

1971 1976 1981 1986 1991 1996 2001 04 05 06.

.

.

.

.

.

.

.

.

.

.

fue 3: tends n he Suppy Deen types inde advnes auue by Sheduedcmme Bnks, Bne ous ndn, Deed fues, 1971 2006(in Rs 000 crore)


50

45

40

35

30

25

20

15

10

5

0

Distribution of fertilisers and other inputs

Loans to farmers

throughPACS/FSS/LAMPS

Total indirect finance


7/8



o the increase in credit ow to agriculture between 2000 and

2006 was on account o the increase in indirect fnance. This

growth did not originate rom a growth in the traditional

components o indirect fnance, such as loans or the supply o

inputs, power and credit to agriculture. The sharp growth in

indirect fnance in the 2000s was, in all likelihood, a result o a

series o defnitional changes eected since the second hal o

the 1990s. These defnit ional changes broadly involved (a) the

addition o new orms o fnancing commercial, export-orient-

ed and capital-intensive agriculture; and (b) raising the credit

limit o many existing orms o indirect fnancing. Indeed,

meeting the task o doubling agricultural credit appears to

have become much easier or banks as a result o these defni-tional changes.

Thirdly, the entire growth o indirect fnance to agriculture

in the 2000s originated rom a major expansion o loans with a

credit limit o more than Rs 10 crore, and particularly, more than

Rs 25 crore. In the year 2000, indirect fnance with credit limit

above Rs 25 crore accounted or less than one-third o the total

indirect advances to agriculture. However, in 2006, indirect

fnance with credit limit above Rs 25 crore accounted or about

54 per cent o the total indirect advances to ag-

riculture. It seems likely that these large loans

were advanced towards fnancing the new ac-tivities added to the defnition o indirect ad-

vances since the late 1990s.

Fourthly, while direct fnance to agriculture

also grew rapidly in the 2000s, two eatures o

this growth were notable. There was a major

rise in the share o direct advances with a

credit limit o more than Rs 1 crore between

2000 and 2006. The amount o direct ad-

vances with a credit limit o more than Rs 1

crore ormed 5 per cent o total direct ad-

vances in 2000; the corresponding share in

2006 was 9 per cent. The share o direct ad-

vances with credit limits between Rs 10 crore

and Rs 25 crore as well as above Rs 25 crore

doubled between 2000 and 2006. It appears

that much o these large-sized advances were made towards

fnancing large agribusiness-oriented enterprises. Further, the

most important benefciaries o the increase in direct advances

since the late 1990s were the big cultivators (who possessed land

above fve acres). The share o number o loans outstanding to big

cultivators under direct fnance increased between the mid-1990s

and 2004-05, and the loan per account o big cultivators in-

creased phenomenally since the late 1990s. There is little evi-dence to argue that the major benefciaries o the revival in

agricultural credit in the recent years have been the small and

marginal armers.

Notes

1 See http://indiabudget.nic.in/es2006-07/chapt2007/chap812.pd.

2 The slowdown in the growth o agricultural creditow in the 1990s had prompted. Y V Reddy, thepresent governor o the Reserve Bank o India tonote that the ow o credit to rural areas by [pub-lic sector] banks in recent years has not been up tothe markIn act, the very purpose o deregulationo interest rates or this sector, which was expectedto encourage banks to lend higher, does not seem tohave served its purpose ully [Reddy 2001, pp 4-5].

3 Similar changes have been introduced in the 1990sby the RBI in the defnition o priority sec tor also. Ac-cording to Y V Reddy, coverage o defnition o pr i-ority sector lending has been broadened signifcantlyin the recent years, thus overestimating credit owsto actual agricultural operations in recent years[Reddy 2001, p 5]. See Shetty (2006) or a list ochanges in the defnition o priority sector.

4 However, in July 2004, it was decided not to con-sider the investments made by banks ater April 1,2005 in the bonds o REC under indirect fnance toagriculture.

5 It may be reiterated here that indirect fnance toagriculture over and above 4.5 per cent o the netbank credit is considered under total priority sector

credit. This provision has provided an easy route orbanks to meet the overall target set or priority sectorcredit.

6 It is a dierent matter, however, that many o the

changes in the defnition o indirect fnance toagriculture in 2004 were made on the basis o the re-port o the same advisory committee.

References

Chavan, Pallav i (2002): Some Features o Rural Credit inIndia with Special Reerence to Tamil Nadu: A Studyo the Period ater Bank Nationalisat ion, MPhil thesissubmitted to Indira Gandhi Institute o DevelopmentResearch, Mumbai.

(2005): How Inclusive Are Banks under Finan-cial Liberalisation?, Economic & Political Weekly,October 22, pp 4647-49.

(2007): Access to Bank Credit: Implications or Ru-ral Dalit Households, Economic & Political Weekly,

August 4, pp 3219-23.

Ministry o Agriculture (2007): Agricultural Credit in Annual Report: 2006-07, New Delhi, at http://ag-ricoop.nic.in/AnnualReport06-07/AGRICULTUR-

AL%20CREDIT.pd.

Ministry o Finance (2007): Budget 2007-08: Speech oP Chidambaram, Minister o Finance, New Delhi,February 28, at http://indiabudget.nic.in/ub2007-08/bs/speecha.htm.

National Bank or Agriculture and Rural Development(NABARD) (2006):Annual Report 2005-06 , Mumbai.

Ramachandran, V K and Madhura Swaminathan (eds)(2004): Financial Liberalisation and Rural Credit in

India, Tulika Books, New Delhi.

Reddy, Y V (2001): Indian Agriculture and Reorm:Concerns, Issues and Agenda,RBI Bulletin, May.

Reserve Bank o India (2004): Report of the AdvisoryCommittee on Flow of Credit to Agriculture and Re-lated Activities from the Banking System, Chairman:

V S Vyas, Mumbai.

Shetty, S L (2006): Policy Responses to the Failureo Formal Banking Institutions to Expand CreditDelivery or Agriculture and Non-arm Inormal Sec-

tors: The Ground Reality and Tasks Ahead, Revised Version o the Seminar Paper, Monthly SeminarSeries on Indias Financial Sector, ICRIER, New Delhi,November 14.

available at

Kc enpss3-6-136/6, Street No. 17

HimayathnagarHyderabad 500 029

Andhra PradeshPh: 09396250107

fue 4: amun auu ced ou sndn pe aun, by lnd Sze csses openHdns (1980-81 to 2004-05in Rs 000)


1980-81 1985-86 1990-91 1995-96 2000-01 2003-04 04-05

80

70

60

50

40

30

20

10

0

Big cultivators

Small cultivators

Marginal cultivators


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