The mystery of the boom in farm credit

The spurt in farm credit by commercial banks, including regional rural banks, has interestingly not led to any let-up in distress in the agrarian economy—a mystery that continues to baffle academics, policy planners and, more recently, bankers

Capital Calculus | Anil Padmanabhan

Last week, a clutch of bankers and policy wonks gathered in Bangalore to review recent trends in farm credit. On the face of it, credit to the farm sector is on an unprecedented spiral and, hence, logically should not be cause for worry.

That is precisely the point. The conclave was convened to attempt a candid review of some disconcerting trends in farm credit, which could potentially point to something sinister.

They had reason to do so. The spurt in farm credit by commercial banks, including regional rural banks, has interestingly not led to any let-up in distress in the agrarian economy—a mystery that continues to baffle academics, policy planners and, more recently, bankers. Especially, given the quantum of credit that has been extended and the fact that these loans were made available at an interest rate of less than around 7%—most state governments provide a reduction over and above the priority sector lending rate.


File photo of a rural bank

File photo of a rural bank

Four broad and interlinked trends, made available by some inspiring research undertaken by R. Ramakumar, Pallavi Chavan and Nirupam Mehrotra on farm credit, provide clear pointers that assist us in understanding these apprehensions, if not proving them.

First, there has been a stunning growth in farm credit, especially since the Congress-led United Progressive Alliance (UPA) was voted into power. While in general there was an increase in farm credit, there was a clear spike after 2004—after the UPA promised to double credit outflow in the next three years—growing by 44% each in 2004-05 and 2005-06. As a result, the average rate of agricultural credit from commercial banks rose from an annual average growth rate of 1.8% in the 1990s to 20.5% between 2000 and 2006. This trend held for the decade, and at the end of 2010-11, farm loan advances aggregated Rs. 446,779 crore compared with Rs.62,045 crore in 2001-02.

There was, however, no corresponding improvement in the farm economy. The overall growth in agriculture showed an impressive pick-up, growing from an annual average increase of 1.5% between 1999-2000 and 2004-05 to 3.5% in the next five years. However, much of this impressive increase has been due to growth in the production of cotton of about 12% a year. Increased frequency of farmer suicides only reinforces the claim that agrarian distress is still a cause for concern.

Secondly, most of this increase was inspired by what is officially defined as indirect finance—credit that flows to institutions supporting growth of agriculture as opposed to loans that flow directly to farmers. Of the big increase in farm credit that occurred in the first six years of the last decade, one-third was due to the growth of indirect finance.


File photo

File photo

This in turn has been brought about by liberalizing the definition of what constitutes indirect finance, including buying of land for the construction of godowns. This process, initiated from the early 1990s, accelerated in the last decade.

Thirdly, linked to the spurt in indirect finance, much of the increase in loan disbursal has occurred in the big-ticket category: between Rs. 10 crore and Rs. 25 crore, and Rs. 25 crore and above. Consequently, the share in total advances of loans with a credit limit of Rs. 25,000 dropped from 35.2% in 2000 to 13.3% in 2006.

In contrast, the share of loans of the ticket size of Rs. 25 crore and above increased from 5.7% to 16.8% over the same period. (Whatever happened to the UPA’s slogan of inclusiveness, which should logically have had the small and marginal farmer as the biggest beneficiary?)

Fourthly, as Chavan points out, there is a growing trend towards a preponderance of the disbursals flowing from urban and metropolitan branches in India. Its share, which was 16.3% in 1995, jumped to 30% in 2005.

In Maharashtra, one in two agricultural loans made out in 2008 flowed from metropolitan bank branches; Mumbai’s share alone was 42.6%. (It is a little difficult to imagine, despite the huge improvement in connectivity, a small and marginal farmer making the trip to an urban area to pick up the loan.)

Connecting the dots suggests that the concerns, evinced in some quarters, are legitimate. The obvious fact is that there has been a huge increase in farm credit in the last decade. However, it has not flowed directly to agriculture and particularly to the small and marginal farmers or to reduction of agrarian distress. The political economy of this trend is that this reinforces the existing power equations in rural India.

The fact that bulk of the disbursals have occurred in urban areas points to a trend that sectors associated with farming have been the greater beneficiaries. Given the liberal definitions, who is to guarantee that diversions of concessional credit into more lucrative avenues have not taken place?

So far this fear is expressed sotto voce, because data that can support or dispel this will be made available only after the results of decennial All-India Debt and Investment Survey are made available. That is still about two-three years away. Till then suffice to say, red flags have been raised in some quarters. Food for thought no doubt.

Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at


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