Institutional finance for agriculture: Analysis at macro and micro levels
Institutional finance for agriculture: Analysis at macro and micro levels
Institutional finance for agriculture: Analysis at macro and micro levels
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INSTITUTIONAL FINANCE FOR<br />
AGRICULTURE<br />
A:\;ALYSIS AT \L\CRO A.:\;D \lIeRO LE\'ELS<br />
A thesi.r submitted to the Ullil'ersit)' ol,\l)so,.e, ,\1)".rore,./o,. the award oltbe f)(~n'C<br />
olDodor o(Pbi/osop~)' ill E'ollolJli,:r<br />
l" nder rhe.: ~upc.:n·iSl()n of<br />
Prof. D Rajasekhar<br />
Institute <strong>for</strong> Social aM Economic Change, Bangalore<br />
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'7Tiis is to certify th<strong>at</strong> this thesis entitfeef ''<strong>Institutional</strong> 'Finance Jar )f.griculture:<br />
)f.nalysis <strong>at</strong> 9;(acro <strong>and</strong> 9;(icro revels" is a 60naJiefe research war/( carn'ref out 6)'<br />
§'agan (]3lhari Sahu inefepenefentfy unefer my Bu!efance anef supervIsIon.<br />
I also certify th<strong>at</strong> this has not 6een previousfy su6mitteef Jar the award' oj any efegree<br />
or efipfoma or associ<strong>at</strong>eship to any other university or instItution.<br />
lD<strong>at</strong>e: )f.pn[5, 2004<br />
J) . R~
I here6y decCare tfi<strong>at</strong> tfie thesis entided "InstitutiolUl{ q:inance <strong>for</strong> }fgricufture:<br />
}flUlfysis <strong>at</strong> Macro <strong>at</strong>ufMicro fevefs" is a resu{t of research. wor/(camcd-out 6} me ilt<br />
the Institute <strong>for</strong> Socia{ <strong>and</strong> 'Economic Cfiange, under tfie gUIdance of IDr, .0<br />
(RiLjaseRfiar, (Professor, ([Jecentra{is<strong>at</strong>ion <strong>and</strong>(Velidopment Vnit, IS'EC, :13allgu{ore,<br />
I furtfier decCare tfi<strong>at</strong> it fias not Geen prf'l'iousfy su6mltted eitfier in part orfu{{ to<br />
tliis or any otfier university <strong>for</strong> any degree, ([Jue acl00wledjJements fiave 6eetz mad,'<br />
wlienever any tliing fias Geen 60rrowed or cited from otlier sources,<br />
(D<strong>at</strong>e: }fpri{ 5, 2004<br />
.,' - -<br />
.:'!.<br />
(j'agan IBiiiari .saiiu
GLOSSARY<br />
CONTENTS<br />
a<br />
INTRODUCTION 1<br />
St<strong>at</strong>ement of the Problem 1<br />
Conceptual Framework 7<br />
Objectives of the Study 11<br />
Scope of the Study 12<br />
Chapter Scheme 14<br />
POLICIES, PROGRESS AND PROBLEMS IN AGRICULTURAL<br />
CREDIT: THEORETICAL ISSUES 17<br />
Introduction 17<br />
Phases of Banking Policies 18<br />
Movement of Directed Credit in India 31<br />
Subsidised Interest R<strong>at</strong>e <strong>and</strong> Its Impact on Agricultural Credit Flow 35<br />
Borrowing Costs <strong>and</strong> Dem<strong>and</strong> <strong>for</strong> Credit 41<br />
Concluding Remarks 44<br />
CREDIT FLOW TO AGRICULTURE: TRENDS AND CONTRIBUTING<br />
FACTORS AT ALL-INDIA LEVEL 49<br />
Introduction 49<br />
Credit Flow to Agriculture 52<br />
Distribution P<strong>at</strong>tern of Agricultural Credit of SCBs 57<br />
Achievement of SCBs in Agricultural Finance 62<br />
Credit Subsidy in Indian Agriculture 65<br />
Number of Rural Bank Branches <strong>and</strong> Agricultural Credit 71<br />
Determinants of Supply of Agricultural Credit 72<br />
Conclusions 77<br />
INSTITUTIONAL CREDIT TO AGRICULTURE: STATE AND<br />
DISTRICT LEVEL ANALYSIS 80<br />
Introduction 80<br />
R<strong>at</strong>ionale of St<strong>at</strong>e Selection <strong>and</strong> D<strong>at</strong>abase 81<br />
St<strong>at</strong>e-wise Flow of Agricultural Credit 83<br />
Distribution P<strong>at</strong>tern of Agricultural Credit 90<br />
Determinants of Credit Flow to Agriculture <strong>at</strong> the St<strong>at</strong>e Level 97
Credit Flow to Agriculture in Orissa<br />
District Level <strong>Analysis</strong> on Agricultural Credit Flow<br />
Conclusions<br />
105<br />
110<br />
117<br />
HOW DID MACRO POLICY OPERATE AT THE MICRO LEVEL? AN<br />
ANALYSIS OF CREDIT FLOW IN THE SELECTED BANK BRANCHES<br />
IN KALAHANDI DISTRICT, ORISSA 120<br />
Introduction 120<br />
D<strong>at</strong>abase 122<br />
Priority Sector Lending 132<br />
Agricultural Lending 136<br />
Security Based Lending 141<br />
Inter-Regional Differences in Priority Sector Lending <strong>and</strong> Deposits 145<br />
Conclusions 150<br />
VARIATIONS IN THE FLOW OF CREDIT TO FARM HOUSEHOLDS:<br />
i53<br />
Introduction<br />
N<strong>at</strong>ure of Credit Dem<strong>and</strong> of Different C<strong>at</strong>egories of Farmers<br />
Sources of D<strong>at</strong>a <strong>and</strong> Econometric Methodology<br />
Emerging P<strong>at</strong>terns in Rural Credit Market<br />
Factors Affecting Access to Formal Credit<br />
Determinants of Supply of Agricultural Credit<br />
Conclusions<br />
153<br />
154<br />
156<br />
160<br />
164<br />
170<br />
178<br />
CREDIT DELIVERY SYSTEM, CREDIT-GAP AND COPING<br />
STRATEGY OF AGRICULTURAL BORROWERS<br />
Introduction<br />
Credit Delivery System<br />
Borrowing Costs <strong>for</strong> Agricultural Credit<br />
The Credit-Gap ICG)<br />
The Coping Str<strong>at</strong>egies of Farmer Borrowers<br />
Conclusions<br />
SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS<br />
REFERENCES<br />
181<br />
181<br />
182<br />
188<br />
191<br />
196<br />
208<br />
210<br />
231
Figure 1.1: Factors th<strong>at</strong> Determine the Accessibility of Credit.. 1:<br />
Table 2.1: Distribution of Total Debt of Rural Households by Different Sources ................ 2\:<br />
Table 2.2: Lending Targets <strong>for</strong> Agriculture Sector.. . ................. 2"<br />
Box 2.1: Recommend<strong>at</strong>ions of the Gupta CommIttee ..<br />
Figure 2.1: R<strong>at</strong>ioning Behaviour of the Lender .........<br />
Figure 2.2: Borrowing Costs <strong>and</strong> Dem<strong>and</strong> <strong>for</strong> Credit<br />
, ............................................. ~7<br />
.. ..... ~o<br />
................................... ·14<br />
Table 3.1: Annual Average Growth R<strong>at</strong>es of Credit (~o) by SClls to Different Sc·ctors.. .54<br />
Table 3.2: Bank Group-wise Share of Outst<strong>and</strong>ing Credit of SCBs to Agriculture from<br />
Net Bank Credit........................................... ................ . ........................ 55<br />
Table 3.3: Distribution (%) of Outst<strong>and</strong>ing Credit <strong>for</strong> Agriculture <strong>and</strong> Allied Activities<br />
(Short <strong>and</strong> Long-Term) by Different Types of Lending Institutions. . ........ 56<br />
Table 3.4: Annual Average Growth R<strong>at</strong>es (%) of Outst<strong>and</strong>ing Credit to Agriculture. .. ..... 5;<br />
Table 3.5: Distribution of Outst<strong>and</strong>ing Credit to the Total Net Bank Credit by SClls (eo)<br />
by Sectors <strong>and</strong> Credit Limits .................. 5R<br />
Table 3.6: Distribution of Loan Accounts by seBs ('Yo) by Sectors <strong>and</strong> Credit Limits. .59<br />
Table 3.7: Distribution of Agricultural Credit by seBs ('Yo) by the Type of Lending R<strong>at</strong>es<br />
<strong>and</strong> Credit Limits ........................................................... ,........................... 61<br />
Table 3.8: Credit Limit-wise Annual Average Growth R<strong>at</strong>es of Loan Accounts ... . ............ 6~<br />
Table 3.9: Proportion of Credit Advanced to Agriculture from Net Bank Credit of SCBs<br />
(Including RRBs) ............................................... ............ . ...... 63<br />
Table 3.10: Distribution (%) of Direct Finance to Farmers by SCBs (Short <strong>and</strong> Long-Term<br />
Loans) by Size-Classes of L<strong>and</strong>holding............................... ..64<br />
Table 3.11: Distribution of Disbursement Loan Accounts on Direct Finance to Farmers by<br />
SCBs (Short-Term <strong>and</strong> Long-Term Loans)...................... . . .. .. ....... .65<br />
Table 3.12: Estim<strong>at</strong>ed Lending Costs Per Rs.l00 Outst<strong>and</strong>ing Loan. . ....... .... 67<br />
Table 3.13: Cost of Lending to Agricultural Sector rer Rs.l00 Outst<strong>and</strong>ing Credit of Clls<br />
Including RRBs .......... .......... .................... .....<br />
Table 3.14: Cost, Interest Income <strong>and</strong> Credit Subsidy to Agricultural Sector .. ...... 70<br />
Table 3.15: Region-Wise Growth R<strong>at</strong>e of Rural Bank Branches.... .. ............ .<br />
-,<br />
. .... " ...... ". i_<br />
Table 3.16: Description, Expected Sign <strong>and</strong> Coefficient of Variables Used in the Equ<strong>at</strong>ion ... 75<br />
. 6R<br />
Table 4.1: St<strong>at</strong>e-wise Annual Average Growth R<strong>at</strong>es (%) of Outst<strong>and</strong>ing Credit by SCBs ..... 84<br />
Table 4.2: St<strong>at</strong>e-wise Agricultural Sector Lending (~o) to Total Credit <strong>and</strong> Total Deposit.<br />
Table 4.3: St<strong>at</strong>e-wise <strong>and</strong> Size Class-wise Access to Direct Finance by the Farmers.<br />
Table 4.4: St<strong>at</strong>e-wise <strong>and</strong> Size Class-wise Outst<strong>and</strong>ing Credit (Direct Finance to Farme,,)<br />
Per Loan Account..... . ....... 9-1<br />
T"ble 4.5: St<strong>at</strong>e-wise <strong>and</strong> Size Class-wise Outst<strong>and</strong>ing Credit Per Hectare of Oper<strong>at</strong>i\'n,,1<br />
~ing ....... _........... . ... %<br />
Table 4.6: Estim<strong>at</strong>ion Result of Sargan's Criterion.... 101<br />
Table 4.7: Description, hpected Sign. <strong>and</strong> Coefficient of Variables in the Log-line,,,<br />
l\1odcl[Dependent Variable = CGA].. ... .......... 102<br />
. k7<br />
'1:\
Table 4.8: St<strong>at</strong>e Specific Intercepts of Fixed Effect Model.. I P .<br />
Table 4.9: Share of Agricultural Credit ('O) from Total Bank Credit bv Each Grnul' of<br />
Bank................................ .......................<br />
Table 4.10: Broad Sector-wise Distribution of Target <strong>and</strong> Achievements undl'f Annual<br />
Credit Plan of seBs (including RRB) ......<br />
Table 4.11: Some Selected Indic<strong>at</strong>ors of Sp<strong>at</strong>ial Distribution of Development. 111<br />
Table 4.12: Type of District-wise Share (%) of Agricultural Credit Given bv SeRs.. . ...... 111<br />
Table 4.13: District-wise Agricultural Sector Lending ('O) to Total Bank Credit <strong>and</strong><br />
Deposits .................................................................................. . ...... 11.1<br />
Table 4.14. Type of District-wise Outst<strong>and</strong>ing Credit Per Hectare of Gross Cropped Mea. 114<br />
Table 4.15: Description, Expected Sign, <strong>and</strong> Coefficient of Variables in the Log-Linear<br />
Model [Dependent variable = CGA] .................................... . ............... 116<br />
Table 4.16: District Specific Intercepts of Fixed Effect Model ............. .<br />
Ilt.<br />
He<br />
.. 116<br />
Table 5.1: Size Class-wise Number <strong>and</strong> Area under Oper<strong>at</strong>ional Holdings ..<br />
.124<br />
Table 5.2: Area under Irrig<strong>at</strong>ion, Fertiliser Consumption <strong>and</strong> Area under HYV IJ1<br />
Kalah<strong>and</strong>i District <strong>and</strong> Orissa .................................................... .<br />
Table 5.3: Socia-Economic Fe<strong>at</strong>ures of Kalah<strong>and</strong>i District ............................. .<br />
TE!b!e 5.4: Criteria to ~fine Advanced <strong>and</strong> Back ..·.. ard Blocks ..............<br />
Table 5.5: Sector-wise Flow of Bank Credit ................................................ .<br />
".. 12h<br />
. ...... 127<br />
'0,<br />
.............. 1.11<br />
............. 132<br />
Table 5.6: Purpose-wise Distribution of Agricultural Credit from 1996-97 to 2000·01 ........... 137<br />
Table 5.7: Sector-wise Recovery of Loan Amount to Dem<strong>and</strong> ...... .<br />
. .......... l3B<br />
Table 5.8: Interest Income on Advance ........................................ .. . ...... 1-10<br />
Table 5.9: Distribution of Agricultural Credit by Type of Security .......... .<br />
..I·B<br />
Table 5.10: Proportion of Priority Sector Lending to Total Credit <strong>and</strong> Total Deposits ........... 146<br />
Table 5.11: Proportion of Lending to Agriculture from Total Credit <strong>and</strong> Total Deposits ..... 147<br />
Graph 1: PSCBD <strong>and</strong> PSCBC in the Sample Bank Branches of jaip<strong>at</strong>na <strong>and</strong> Narla Block ..... 141'<br />
Graph 2: AGLCBD <strong>and</strong> AGLCBC in the Sample Bank Branches of Jaip<strong>at</strong>na <strong>and</strong> Narl.<br />
Block............................................................................. .150<br />
Table 6.1: Distribution of Borrowers by Farm Size (2001-02) ............. . ..161<br />
Table 6.2: Distribution of Loan by Farm Size in the Year 2001-02....... . ............. 162<br />
Table 6.3: L<strong>and</strong>holding-wise Number of Times Crop Loans (Kharif) Obtained bv<br />
Farmers <strong>for</strong> the Period 1999 - 2000 to 2001· 2002...... .16:1<br />
Table 6.4: Supply of Credit (Crop Loan) Per Hectare of Gross Cropped Area.<br />
Table 6.5: Definition, Measurement. Descriptive St<strong>at</strong>istics, <strong>and</strong> Expected Sign of<br />
Variables Used in the Prohit Equ<strong>at</strong>ion ............ . .............. 166<br />
Table 6.6: Access to Formal Credit: Probit Results ... 107<br />
Table 6.7: Definition, Measurement, Descriptive St<strong>at</strong>istics <strong>and</strong> Expected Sign of Variables<br />
used in the OLS Equ<strong>at</strong>ion...... J 7"<br />
Table 6.8: Determinants of <strong>for</strong>mal Credit: Selectivitv Correctl'd 01.5 Rl'sult.<br />
Table 6.9: Determinants of Formal Credit: Tobit Results ....<br />
Ih-l<br />
17S<br />
177
Table 7.1: Problems Faced by the Farmer Borrowers in Obtitining Loans<br />
Table 7.2: Size Class of L<strong>and</strong>holding-v.:ise Frequency Distribution of Problems Fd({'d b\'<br />
the Farmer Borrowers.......................... 1~S<br />
Table 7.3: Time Spent to get the Loan Sanctioned 187<br />
Table 7.4: Shortage of Amount Sanctioned to Amount Dem<strong>and</strong>ed.. 18~<br />
Table 7.5: Cost of Borrowing (Short-Term) from the Financial Institutions III till' Stud\,<br />
Area.................................................................... .. .............. 190<br />
Table 7.6: Cost of Borrowing of <strong>Institutional</strong> Credit by Farm Households According to<br />
the Size of Loan in the Study Area....................... . ....... 191<br />
Table 7.7: Extent of Dependency on Credit Per Acre of Gross Cropped Area (2001-02) ....... 192<br />
Table 7.8: L<strong>and</strong>holding-wise Credit-Gap....................... .. ....... .. . ... 195<br />
Table 7.9: Self-<strong>finance</strong> Capacity of Farmers Per Acre of Gross Cropped Area .. . ........ 196<br />
Table 7.10: Distribution of Borrowers by Number of Sources of Borrowing .................. . .. 197<br />
Table 7.11: The Predetermined Exchange R<strong>at</strong>e of Paddy in Interlocked Credit Market . 20~<br />
Table 7.12. Regions & L<strong>and</strong>holding-Wise Estim<strong>at</strong>ed Income Loss Per Bag of Selling<br />
Paddy due to Interlocked Credit Market in Kalah<strong>and</strong>i District, Orissa (2001-<br />
02) ...................................................................................... . .................... 205<br />
T?b!e 7,13: Farm Size <strong>and</strong> Coll<strong>at</strong>eral-wise Percentage of Lean Contracts <strong>and</strong> PErcEntag€<br />
of Loan (amount) Borrowed ............................................................. ................... . 207<br />
1B4
ABC<br />
ACRC<br />
AR<br />
ARC<br />
ATC<br />
Alls<br />
BC<br />
CBs<br />
CDR<br />
CFS<br />
CG<br />
Cl<br />
CRAFICARD<br />
CRR<br />
CRS<br />
CS<br />
DAP<br />
FFIs<br />
FRBS<br />
HYV<br />
IC<br />
IMR<br />
LAMPs<br />
LBO<br />
LDB<br />
LT<br />
MSP<br />
MVP<br />
NABARD<br />
NDC<br />
NDP<br />
OLS<br />
OPS<br />
PACSs<br />
PLCP<br />
PLR<br />
RBI<br />
RFIs<br />
RFMs<br />
RRB<br />
SAPs<br />
SBF<br />
SC/Sl<br />
SCBs<br />
SlR<br />
SSI<br />
ST<br />
TC<br />
TJ.<br />
TPS<br />
GLOSSARY<br />
Average Borrowing Cost<br />
Agricultural Credit Review Committee<br />
Average Revenue<br />
Agricultural Re<strong>finance</strong> Corpor<strong>at</strong>ion<br />
Average Transaction Cost<br />
Agricultural Term loans<br />
Borrowing cost<br />
Commercial Banks<br />
Credit Deposit R<strong>at</strong>io<br />
Committee on Financial System<br />
Credit-Gap<br />
Credit limit<br />
Committee to Review Arrangements <strong>for</strong> <strong>Institutional</strong> Credit <strong>for</strong> Agriculture <strong>and</strong><br />
Rural Development<br />
Cash Reserve Ra tio<br />
Constant Return to Scale<br />
Credit Subsidy<br />
Di-Ammonium Phosph<strong>at</strong>e<br />
Formal Financial Institutions<br />
Formal Rural Banking System<br />
High Yielding Varieties<br />
In<strong>for</strong>mal Credit<br />
Inverse Mills R<strong>at</strong>io<br />
Large Area Multi Purpose Societies<br />
Lead Bank Office<br />
L<strong>and</strong> Development Bank<br />
Long-Term<br />
Minimum Support Price<br />
Marginal Value Product<br />
N<strong>at</strong>ional Bank <strong>for</strong> Agriculture <strong>and</strong> Rural Development<br />
No Dues Certific<strong>at</strong>e<br />
Net Domestic Product<br />
Ordinary Least Squares<br />
Other Priority Sector<br />
Primary Agricultural Co-oper<strong>at</strong>ive Societies<br />
Potential Linked Credit Plan<br />
Prime Lending R<strong>at</strong>e<br />
Reserve Bank of India<br />
Rural Financial Institutions<br />
Rural Financial Markets<br />
Regional Rural Bank<br />
Service Area Plans<br />
Small Business Firm<br />
Scheduled Caste <strong>and</strong> Scheduled Tribe<br />
Scheduled Commercial Banks<br />
St<strong>at</strong>utory Liquidity R<strong>at</strong>io<br />
Small Scale Industries<br />
Short-Term<br />
Transaction Cost<br />
Term-Loan<br />
Total Priority Sector
(Dun'llg my post graau<strong>at</strong>ioll aays, I usea to pOllacr tli<strong>at</strong> aoillg a aoetor<strong>at</strong>e was not a smarr<br />
job, ana was a aream <strong>for</strong> me. Toaay, my aream nas m<strong>at</strong>ena[uea 1I'itn tnc co-oper<strong>at</strong>lOli <strong>and</strong>'<br />
ne[p, a gre<strong>at</strong> aea{ of tnougnt ana ef<strong>for</strong>ts of many peopfe III many '!'ays. It is neltfier<br />
possibfe nor suffident to acli.JlOwfeage tfiem in tfiis fomw{ "Wllller witfi a fcw woras.<br />
'First alla <strong>for</strong>emost, I remaill aeepfy Illaebtea to my supervisor q'rof rD. '1(aFlSCliJiar unacr<br />
wnose abfe guiJallce tfiis war/( fias beell camea out. J{is fie[pfu{ cntlcism, suggestions,<br />
meticu{ous reaefillg ana eaiting, constant encouragement, ana avera{[ morae support maac It<br />
possl6fe <strong>for</strong> me to compfete tfie tfiesis alia to see tfie figlit of tfie aay, I a1ll ever gr<strong>at</strong>ifll{ to<br />
filln.<br />
)'ls a researcfi scfiora,., I fearnt a wt from rDr. S. :Maafieswllrun, on a number of eCOllOlme<br />
issues tfirougfi aisCUSSIOns, in genera(, ana on m<strong>at</strong>ters refuting to tfie app(ze<strong>at</strong>ion of<br />
quantit<strong>at</strong>ive tecliniques, in particufur. I fOlzafy cfierisfi alla va{ue my associ<strong>at</strong>ion witfi film,<br />
I wouUf Ms to e:;;press my sillcere tlian/(} to !Frof 'R., 5. rDeslipanae <strong>for</strong> liis concenz a60ut<br />
my war/(since tfie beglnlll·ng. rBeing a teacfier ana as one of tfie p<strong>and</strong> me/n6crs <strong>for</strong> a[{ tfie<br />
semilwrs presentea <strong>at</strong> tfie Institute, lie offerea va[ua6fe comlllmts alia suggestions, wlilcfi<br />
lie[pea me a fot <strong>at</strong> aijferellt stages of my war/(, I am afso tfianliju[ to !Frofessors 'J( L<br />
'J(risfina, rB. 'J(amaiali alla'J(aifas Sarap, <strong>for</strong> tlielr va{ua6(e comments alu! suggestio liS.<br />
I sincerefy e:{press my gr<strong>at</strong>ifu&zess to tfie InstItute <strong>for</strong> Socia{ ana'Ecollomic Crwnge (ISLe)<br />
<strong>for</strong> providing me all opportunity to pursue my aoctora{ studies. I tlian/( tfie preVIous<br />
director Prof :M. C;OVlllaa '1(00 ana tlie presellt airector (Prof C;opaf'J( 7(aaefi.9di<strong>for</strong> lfielr<br />
support ana C/!couragement to my researcli war/(,<br />
:My sincere tlian/(} to !Frof Tom rBrass, 'Editor, 'lJie Jounzaf of Peasant Studies, Prof<br />
:N.s.s. :Narayana, Inaian St<strong>at</strong>isticaf Institute, r]3anga{ore, !Frof '1CP. 'l(pfirajan, Japan ana<br />
Prof Stein JfoUfm, rDepartment of )'lgn'cu{tura[ 'Economics, :Norway, <strong>for</strong> tfieir comments<br />
ana suggest io liS Oil cfiapters 6 ana 7.<br />
I wouUf lili.§ to e:;;press my aeep sense of gr<strong>at</strong>itllae to Professors :M.'R., :Narayall
ellcouragement, liefpfu{ a lid usefu{ discussiolls. I am afso tlia II iifll{ tD alfierf'lw{l\' mem6ers<br />
of 15'EC <strong>for</strong> 6eillg liefpfuC I am gr<strong>at</strong>efu{ to Prof flravil1if 'Pallaganya (,UIll('t'TSlty or<br />
:Maryfallli, VSfl) wlio visited 15'EC <strong>for</strong> a sliort time III 2002 <strong>for</strong> gi'l'lllg lls~ruf suggestiolls<br />
I alSo tliall/(a{{ tlie particip<strong>at</strong>lts of (}3i-allllua{ semitlars presetlted <strong>at</strong> IS'E( <strong>at</strong> nlnous st,lgcs<br />
of my study <strong>for</strong> tfieir constructive commetlts.<br />
fl researcli tfieme of tfie tl<strong>at</strong>ure requires discussioll witli scliofars, 6all/( staff a lid'<br />
illfonn<strong>at</strong>ioll from van'ous sources. I am immensefy gr<strong>at</strong>efu{ to everyolle wlio lias assisted me<br />
ill acliievillg tliis.<br />
I am tliallkju{ to my respolldetlts <strong>for</strong> proviiftng refev<strong>at</strong>lt i'ifonn<strong>at</strong>iotl <strong>at</strong>ld sliantlg tlielt<br />
eJiPerimce wfiife conductIng tlie survey, WlilCIi, itlfact, lie£ped me coIlSldera6fy ltl <strong>at</strong>lafyslllg<br />
tlie d<strong>at</strong>a 011 tfie 06jectives of tlie study.<br />
I am tliankju{ to :Mr. J{.JV. (j(all{]anL1tfulIl, 'R.sgistrar, IS'EC, <strong>at</strong>uf:Mr. 0/. (j(amappa,<br />
)1.ccounts Officer, !SC£C, <strong>for</strong> t!!e!·r fiefp.<br />
I am gr<strong>at</strong>efu{ to tlie pli. ([), Programme Co-ordin<strong>at</strong>ors (IS'EC) <strong>at</strong> differetlt POltltS of time<br />
alld:Mr. 1(s. Narayan <strong>for</strong> tlieir support <strong>at</strong> tlie needed time. I sitlcerefy acli.JlOuIedge ~Hr.<br />
J{.1( flmam<strong>at</strong>li <strong>for</strong>providi'tlg tlie tleeded d<strong>at</strong>a.<br />
I sillcerefy acli.JlOwfedge tfie fiefp alld assistance received from :Mr. 7(nsfilla Cfi<strong>and</strong>r<strong>at</strong>l <strong>at</strong>ld<br />
:Mr. S<strong>at</strong>isli 7(am<strong>at</strong>li ill tlie computer centre <strong>and</strong> tlie mem6ers of LI6rary staff of 15'EC<br />
especia{fy :Mrs. Lifa, 7(afyallappa, 'lIm/(<strong>at</strong>esli alld (j(ajamw. I tliall/( :Mr. 'lis.<br />
Partfiasar<strong>at</strong>liy <strong>for</strong> liis fiefp in edi'tillg of tfie tfiesis. I gr<strong>at</strong>efu{fy acli.JlOwfedge tlie liefp<br />
provided 6y :ManJufa in givill{] tlie tliesis its jina{ sliape.<br />
I taR.! tfiis opportunity to tli<strong>at</strong>ll( my jnelufs <strong>at</strong> IS'EC eSPec/a{fy (}3lianu, :M11ll~<br />
(Deept/~<br />
flmar, ([)eepi/(a, Sita/(<strong>at</strong>lta, ([)amilll~ S<strong>at</strong>ya, Pr<strong>at</strong>uslina, (}3initlia, SrideVl~ flsliisli, 'l(sliyama,<br />
Su60dli, Puma, ([)ukjia, J{ruslii, fltl<strong>and</strong>a 'lIadive£u, (}3adn~ {Bi/(asli, (jlta''laya, Sar6al/l <strong>at</strong>ld<br />
otliers <strong>for</strong> tlieir kjluf liefp <strong>at</strong> differetlt pOints of time. I am alSo tli<strong>at</strong>liifu{ to )llI<strong>at</strong>ltli,<br />
,/(nslitlagouda, :Madliavi, Saclil alld Jugafjor tliClr getlerous liefp.<br />
Last 6ut /lot feast, I am tliallkju{ to my pare'lts, 6rotliers, sisters, <strong>at</strong>ld my wife <strong>for</strong> tliClr<br />
COllSt<strong>at</strong>lt morae support Itl fu(fi[(ztlg my dream of compfeting tlie pli.·v' tliesls.<br />
qagan {}3inari Sanu
Chapter 1<br />
INTRODUCTION<br />
St<strong>at</strong>ement of the Problem<br />
A majority of the cultiv<strong>at</strong>ors find borrowing necessary as their own<br />
farm savings are inadequ<strong>at</strong>e to <strong>finance</strong> vanous agricultural<br />
development activities. It has been argued th<strong>at</strong> credit provides<br />
comm<strong>and</strong> over resources <strong>and</strong> facilit<strong>at</strong>es the needed liquidity to the<br />
farmers (Lipton 1976). Credit is assumed to be helpful <strong>for</strong> changing<br />
the composition <strong>and</strong> distribution of production in favour of deficit<br />
producers. Improved access to <strong>for</strong>mal credit is supposed to shift rural<br />
borrowing from in<strong>for</strong>mal market to <strong>for</strong>mal institutions, increasing the<br />
use<br />
... __ 1 ____ ' __ _<br />
LCL.HHUIUg,y, leading [0 increased<br />
production <strong>and</strong> higher income <strong>for</strong> the rural poor (Donald 1976; Sarap<br />
1990).<br />
With the introduction of new agricultural technology in India in<br />
the mid-1970s, the need <strong>for</strong> improving the quality of institutional<br />
credit (timely <strong>and</strong> adequ<strong>at</strong>e loan amount) to <strong>agriculture</strong> \\'as largely<br />
felt. With the assumption th<strong>at</strong> the new agricultural technology was<br />
scale neutral, it was felt th<strong>at</strong> increased access among the marginal<br />
farmers to credit would improve the employment potential <strong>and</strong><br />
contribute to better income distribution in rural areas.<br />
Taking the above into account, many committees recommcnckcl<br />
improvement in the outreach of the <strong>for</strong>mal financial institutions in<br />
favour of rural areas, <strong>and</strong> small <strong>and</strong> marginal farmers. The<br />
n<strong>at</strong>ionalis<strong>at</strong>ion of banks in 1969, various policies aimed ,,1 s()cia!<br />
banking <strong>and</strong> the establishment of Regional Rural Banks III 1 "7,'1
esulted in an increase in the number of bank branches in rur"l<br />
areas. During the mid-1980s, the m<strong>and</strong><strong>at</strong>oI'- priorit\, sector lending<br />
\'.-as introduced to ensure adequ<strong>at</strong>e credit flow to hitherto neglected<br />
sectors such as <strong>agriculture</strong> <strong>and</strong> alike. Undeniably, these resulted in a<br />
vast network of rural financial institutions, <strong>and</strong> a rapid growth c;f<br />
lending to all sectors including <strong>agriculture</strong>.<br />
However, the following problems <strong>and</strong> deficiencies 111 the rural<br />
credit delivery system were also noticed,<br />
:J The rural banking system in India made tremendous quantit<strong>at</strong>ive<br />
achievement by neglecting the qualit<strong>at</strong>iye aspects of the credit<br />
delivery system (Shivamaggi 2000), The empirical studies show<br />
th<strong>at</strong> institutional c;rFdit was Hccessed by the ,vel! to do among n .H"3.!<br />
people (Adams <strong>and</strong> Vogel 1986). Further, the Indian policy makers<br />
were unable to arrive <strong>at</strong> a banking structure <strong>and</strong> oper<strong>at</strong>ional<br />
system, which was suitable <strong>for</strong> the credit needs of the<br />
agriculturists (Shivamaggi 2000).<br />
:J The inequalities in the banking system across the regIOns <strong>and</strong><br />
social classes persisted (Bell 1990). This was because of the<br />
insistence on coll<strong>at</strong>eral (Sarap 1991) which could not be prO\'ided<br />
by the poor, complic<strong>at</strong>ed administr<strong>at</strong>ion proced u re s, lon a<br />
"<br />
distances from the villages to the branches, the cultural gap<br />
between bank officials <strong>and</strong> the poor, political interference,<br />
inflexible lending policies <strong>and</strong> procedures, lack of prO\'ision <strong>for</strong><br />
consumption credit <strong>and</strong> a widespread belief th<strong>at</strong> the poor were<br />
non-bankable.
J<br />
Although some of the rural poor obtained credit from the Form;l!<br />
Rural Banking System (FRBS), they found th<strong>at</strong> the credit \\';j"<br />
neither timely nor adequ<strong>at</strong>e <strong>for</strong> their needs (RaJasekhar <strong>and</strong><br />
Vyasulu 1990). The disbursal of loans without assessing the<br />
feasibility, viability <strong>and</strong> entrepreneurial experience of borrowers led<br />
to the problem of fungibilityl. There were also problems \\'ithin the<br />
banking system such as lack of linkages between credit <strong>and</strong><br />
production, extension, marketing, etc.<br />
::J<br />
The <strong>for</strong>mal banking system began to face problems of higher<br />
transaction costs 2 (due to lending small amounts to large numbers<br />
of borrowers) <strong>and</strong> recurring losses 1I1 the l<strong>at</strong>e 1980s. The<br />
managerial inadequacies within the banking system also caused<br />
problems (Vyasulu <strong>and</strong> Rajasekhar 1993).<br />
::J<br />
All the above culmin<strong>at</strong>ed in an alarming growth in overdue<br />
payments 3 . This, in turn, adversely affected the recycling of credit,<br />
<strong>and</strong> led to lower profit margins (Singh 1991; Rajasekhar <strong>and</strong><br />
1 It implies the process of financial substitution. For a detmled discussion, see, Von<br />
Pischke <strong>and</strong> Adams (1980), Ladman <strong>and</strong> Tinnermeier (1981), <strong>and</strong> Adams <strong>and</strong><br />
Vogel (1986).<br />
2 A study made by S<strong>at</strong>ish <strong>and</strong> Swamin<strong>at</strong>h (1989) found th<strong>at</strong> the average cost of<br />
lending of CBs, Primary Agricultural Co-oper<strong>at</strong>ive Societies (PACSs), RRl:ls <strong>and</strong><br />
L<strong>and</strong> Development Banks (LOBs) was gre<strong>at</strong>er than the average interest II1come<br />
from the agricu1tural sector. Discussing the \'lability of rural credn institutions.<br />
Gadgil (1986) emphasised the high cost of transaction, <strong>and</strong> the mounting loan<br />
delinquencies, which were eroding the strength of the rural cft"dit institutions.<br />
Desai <strong>and</strong> Namboodiri (1992) found th<strong>at</strong> all Rural Financial InstitutIons (1-11'151.<br />
except PACSs, prevailed under constant returns to scale (CI~S) in theIr transactio,"<br />
cost from the period 1961 to 1981. PACSs suffered from scale d,seconomlCS II1<br />
their transaction costs <strong>for</strong> the saIne reference period.<br />
J The causes of overdue payment haye been briefl.\" disruss('ri in l-\hcs;o (1 YS91 Ti:-::"<br />
issues rel<strong>at</strong>ing to overdues, default r<strong>at</strong>e, political Intervention 1:: sanction ar:c<br />
recoveries of loans. <strong>and</strong> defective lending policies ha\'e bee;; discussr'd ]T'.:<br />
Ra]asekhar <strong>and</strong> V,'asulu (1990). \'Yasulu <strong>and</strong> I
Vyasulu 1991). Many Commercial Banks (CBs), Regional Rural<br />
Banks (RRBs) <strong>and</strong> co-oper<strong>at</strong>ives were consequently incurring<br />
losses.<br />
This led to mounting pressure on the government from Indian<br />
bankers (<strong>and</strong> some outside agencies) to initi<strong>at</strong>e banking sector re<strong>for</strong>ms<br />
<strong>for</strong> the financial viability of the FRBS. Yielding to this pressure, the<br />
Government of India appointed the Narasimham Committee in 1991,<br />
which recommended measures to improve efficiency, profitability <strong>and</strong><br />
viability of the banking sector. The recommend<strong>at</strong>ions of the<br />
Narasimham Committee relevant to the present study were to reduce<br />
the share of credit to the priority sector from 40 per cent to 10 per<br />
cent of aggreg<strong>at</strong>e bank credit, deregul<strong>at</strong>ion of interest r<strong>at</strong>es, abolition<br />
of branch licensing, gradual phasing out of directed credit<br />
programmes, closing down of loss-making bank branches <strong>and</strong> so on.<br />
The committee was of the view th<strong>at</strong> easy <strong>and</strong> timely access to credit<br />
was far more important than its cost. Gradual reduction of the Cash<br />
t{eserve R<strong>at</strong>io (eRR) <strong>and</strong> St<strong>at</strong>utory Liquidity R<strong>at</strong>io (SLR) to enable the<br />
banks to have larger quantum of loanable funds was also<br />
recommended. Besides, the committee took the view th<strong>at</strong> the growth<br />
of <strong>agriculture</strong> <strong>and</strong> small industry reached a point where banks on the<br />
basis of their commercial judgement were in a position to meet the<br />
legitim<strong>at</strong>e productive needs.<br />
The Gupta Committee, set up in 1998, to examine the issues<br />
rel<strong>at</strong>ing to the quality of credit delivered by the banking system,<br />
highlighted the issue of how an improvement in the quality of lending<br />
helps the banking system to become financially viable. The committec<br />
suggested measures aimed <strong>at</strong> simplific<strong>at</strong>ion of proccdures <strong>for</strong>
agricultural credit <strong>and</strong> identific<strong>at</strong>ion of constraints faced bv the<br />
commercial banks to increase the flow of credit.<br />
The government did not accept all the recommend<strong>at</strong>ions made<br />
by the Narasimham Committee (1991), especially the one on reducing<br />
the target <strong>for</strong> priority sector. Nevertheless, it appears th<strong>at</strong>, the str<strong>at</strong>egy<br />
followed by Reserve Bank of India (RBI) was to keep the overall share<br />
of credit to priority sector <strong>at</strong> 40 per cent, <strong>and</strong> broaden the scope of<br />
priority sector to encourage diversion from direct priority sector<br />
lending. Since September 1990, interest r<strong>at</strong>es to the ultim<strong>at</strong>e<br />
borrowers were r<strong>at</strong>ionalised by the RBI. This policy was based on the<br />
Narasimham committee recommend<strong>at</strong>ion <strong>for</strong> deregul<strong>at</strong>ion <strong>and</strong><br />
abolition of concessional interest r<strong>at</strong>es so th<strong>at</strong> all r<strong>at</strong>es becamF<br />
positive in real terms.<br />
It can, there<strong>for</strong>e, be st<strong>at</strong>ed th<strong>at</strong> the banking sector re<strong>for</strong>ms may<br />
have the following positive as well as neg<strong>at</strong>ive impact on the credit<br />
flow to <strong>agriculture</strong>.<br />
[J Increased availability of funds to banks as a result of reduced CRR<br />
<strong>and</strong> SLR may have a positive impact on credit flow to <strong>agriculture</strong><br />
provided the banks are unable to find altern<strong>at</strong>ive <strong>and</strong> profitable<br />
non-agricultural avenues to disburse the credit.<br />
:J The de-regul<strong>at</strong>ion of interest r<strong>at</strong>es may increase the credit flow to<br />
<strong>agriculture</strong> because it has been often argued th<strong>at</strong> wh<strong>at</strong> m<strong>at</strong>ters to<br />
the farmers is the access to credit r<strong>at</strong>her than its costs. With deregul<strong>at</strong>ion<br />
of interest r<strong>at</strong>es <strong>and</strong> the concomitant increase in returns<br />
to banks, one can expect th<strong>at</strong> the quality of credit delivery system<br />
may be improved <strong>and</strong> the credit flow to <strong>agriculture</strong> stepped up.
o The introduction of credit norms rel<strong>at</strong>ing to profitability are also<br />
expected to increase the credit flow to <strong>agriculture</strong>, provided<br />
bankers perceive th<strong>at</strong> agricultural lending is profitable.<br />
o The closure of loss-making branches may, however, lead to<br />
reduction in credit flow to <strong>agriculture</strong>. This is because most of the<br />
loss-making branches during the pre-re<strong>for</strong>m period were found to<br />
be loc<strong>at</strong>ed in rural <strong>and</strong> semi-urban areas. If these branches are<br />
closed, the credit flow to <strong>agriculture</strong> may come down 4 .<br />
o The widening scope of priority sector may result in the gre<strong>at</strong>er<br />
availability of credit to priority sector, in general, <strong>and</strong> agricultural<br />
sector, in particular.<br />
The above lead to the following questions: Wh<strong>at</strong> have been the<br />
trends in credit flow to <strong>agriculture</strong>? Was there any difference in the<br />
credit flow to <strong>agriculture</strong> between the pre-re<strong>for</strong>m <strong>and</strong> re<strong>for</strong>m periods?<br />
Wh<strong>at</strong> factors governed the credit flow to <strong>agriculture</strong> during the prere<strong>for</strong>m<br />
<strong>and</strong> re<strong>for</strong>m periods? How did the policy of widening the scope<br />
of priority sector bank lending enhance the credit flow to <strong>agriculture</strong>?<br />
Did the r<strong>at</strong>ionalis<strong>at</strong>ion of interest r<strong>at</strong>es contribute to more credit flow<br />
to <strong>agriculture</strong>? Wh<strong>at</strong> was the impact of profit-oriented lending norms<br />
on the credit flow to <strong>agriculture</strong>? Wh<strong>at</strong> was the impact of closure of<br />
rural bank branches on the provision of credit to <strong>agriculture</strong>?<br />
4 In the earlier role of 'social banking', banks became the instruments of the st<strong>at</strong>e<br />
in the development process, \\:hich are now oriented towards profit maximis<strong>at</strong>ion<br />
which guides the evalu<strong>at</strong>ion of pre-re<strong>for</strong>m branch licensing polic\·. The sa\"lngs<br />
r<strong>at</strong>e in India, in fact, is positively associ<strong>at</strong>ed with the availability of bank<br />
branches. The evidence shows th<strong>at</strong> rural branches have increased their share of<br />
deposits <strong>and</strong> credit between 1969 <strong>and</strong> 1996 from 3.0 <strong>and</strong> 0.2 per cent to 15.4<br />
<strong>and</strong> 12.4 per cent. respectiveh' (Kohli 1999). For more detailed anah·sls. see. I'r ..<br />
(1988). P<strong>and</strong>it (1991). <strong>and</strong> Desai (1993).<br />
(,
Conceptual Framework<br />
The present study seeks to analyse these issues <strong>at</strong> both <strong>macro</strong> (all<br />
India <strong>and</strong> st<strong>at</strong>e <strong>levels</strong>) <strong>and</strong> <strong>micro</strong> (household) <strong>levels</strong>. Finance to<br />
<strong>agriculture</strong> <strong>at</strong> the <strong>macro</strong> level depends upon the collective impact of<br />
policies rel<strong>at</strong>ing to agricultural credit, in general, interest r<strong>at</strong>e <strong>and</strong><br />
norms rel<strong>at</strong>ing to profitability, in particular. The policy on <strong>finance</strong> <strong>at</strong><br />
the <strong>macro</strong> level primarily concerns with the level of credit flow to<br />
<strong>agriculture</strong>, terms <strong>and</strong> conditions under which it is made available,<br />
alloc<strong>at</strong>ion of credit between sub-sectors (production <strong>and</strong> investment<br />
credit) within <strong>agriculture</strong> to achieve production efficiency <strong>and</strong> so on.<br />
Besides, <strong>macro</strong> credit policies are concerned with the provision of<br />
cheap, adequ<strong>at</strong>e <strong>and</strong> timely credit (<strong>for</strong> both production <strong>and</strong><br />
investment) to the needy farmers. encouraging them to adopt nt'w<br />
agricultural technology, <strong>and</strong> pre <strong>and</strong> post-appraisal of loan<br />
disbursement, etc.<br />
These policies, In general, give guideline to <strong>micro</strong> level<br />
institutional <strong>finance</strong> agenCies having direct contact with the<br />
borrowers. The flow of credit to <strong>agriculture</strong> <strong>at</strong> this level depends on<br />
financial feasibility of the concerned project, mechanisms of client<br />
selection, repayment per<strong>for</strong>mance of the borrower, ability to provide<br />
coll<strong>at</strong>eral security, cost of lending, cost of borrowing <strong>and</strong> so on.<br />
There<strong>for</strong>e, it appears th<strong>at</strong> <strong>macro</strong> level credit policies may not address<br />
the problems rel<strong>at</strong>ing to agricultural credit <strong>at</strong> the <strong>micro</strong> level. Hence,<br />
an examin<strong>at</strong>ion of the constraints faced by the farmers to access<br />
institutional credit <strong>at</strong> the <strong>micro</strong> level is essential. Furthermore, many<br />
changes in agricultural credit policies have taken place during the<br />
re<strong>for</strong>m period (see, Chapter 2). which may have affected the flow of<br />
7
credit to <strong>agriculture</strong> directly or indirectly <strong>at</strong> both <strong>macro</strong> <strong>and</strong> mIcro<br />
<strong>levels</strong>.<br />
Credit Accessibility Problems<br />
It is well known fact th<strong>at</strong> rural financial markets are imperfect in<br />
n<strong>at</strong>ure. Cost involved in obtaining in<strong>for</strong>m<strong>at</strong>ion on potential clients,<br />
long distance from the village to the bank branches, the cultural gap<br />
between bank official <strong>and</strong> the poor, inflexible lending policies are some<br />
of the critical elements th<strong>at</strong> can restrict the outreach of rural financial<br />
institutions. Besides, rural farmers are faced with a number of<br />
constraints th<strong>at</strong> restrict their access to a given supply of <strong>for</strong>mal credit.<br />
The liter<strong>at</strong>ure on credit markets explains the outreach from<br />
supply side perspective <strong>and</strong> access from the viewpoint of the potential<br />
borrower, wherein both indic<strong>at</strong>e the same thing, i.e., who is obtaining<br />
credit. The term "accessibility" is used purposefully in this study to<br />
emphasise the link between bank-rel<strong>at</strong>ed <strong>and</strong> household-rel<strong>at</strong>ed<br />
factors to explain why certain households borrow, while others do not.<br />
In the context of credit accessibility, the problem has been looked <strong>at</strong><br />
from both breadth (the number of clients reached) <strong>and</strong> depth (type of<br />
clients reached) of outreach. To study these two aspects, both supply<br />
as well as dem<strong>and</strong>-rel<strong>at</strong>ed factors have been taken into account (see,<br />
<strong>for</strong> example, Sarap 1990, <strong>and</strong> Hashuliza <strong>and</strong> Kydd 1996).<br />
Furthermore, in the context of "accessibility", the issue of<br />
outreach (i.e., in terms of both breadth <strong>and</strong> depth) <strong>and</strong> sustainabilitv<br />
of financial institutions are often deb<strong>at</strong>ed (Yaron et I 1997). Critics<br />
note th<strong>at</strong> too much of importance to the breadth of outreach resulted<br />
in the neglect of the depth of outreach (Morduch 2000). The possible<br />
8
trade-offs between sustainability <strong>and</strong> the depth of outreach ha\'e been.<br />
there<strong>for</strong>e, the subject of an ongoing discussion in the rural credit<br />
markets (Rhyne 1998).<br />
The <strong>for</strong>egoing discussion suggests th<strong>at</strong> importance to the<br />
breadth of outreach may endanger the sustainability (viability) of the<br />
financial institutions. But, the reverse may not necessarily be true. In<br />
other words, if the sustainability is the main agenda then the depth of<br />
outreach seems to be crucial. If the credit transaction is looked from a<br />
lender's perspective, it is the objective of banks th<strong>at</strong> determine the<br />
flow of credit, <strong>and</strong>, in turn, its access by different c<strong>at</strong>egories of<br />
farmers.<br />
There<strong>for</strong>e, the credit transaction can be analysed from the<br />
characteristics of the supply versus dem<strong>and</strong> side. Since credit<br />
generally involves a time gap between the point when credit is given,<br />
<strong>and</strong> the future point when credit is repaid with interest, anything may<br />
happen in-between these two time points. So, the credit transaction<br />
involves interpersonal trust between the borrower <strong>and</strong> the lender.<br />
However, if the credit transaction IS looked from a lender's<br />
perspective, one can anticip<strong>at</strong>e pre-contractual (<strong>at</strong> the point of<br />
disbursement of loan), <strong>and</strong> post-contractual problems (<strong>at</strong> the point of<br />
loan repayment). The <strong>for</strong>mer brings the issue of adverse selection (i.e.,<br />
the fear of selecting a bad borrower), credit-worthiness <strong>and</strong> screening<br />
of the borrower. In the case of l<strong>at</strong>ter, a lender faces the problem of<br />
wilful <strong>and</strong> non-wilful default. Given these problems, wh<strong>at</strong> governs<br />
access to institutional credit <strong>for</strong> some peasant households but not<br />
others? A conceptual framework summarising the factors influencing<br />
access to credit is provided in Figure 1. 1.<br />
9
Figure 1.1: Factors th<strong>at</strong> Determine the Accessibility of Credit<br />
Financial Institutions<br />
Farm Household<br />
- objective of - beinfJ part of th<br />
the financial ~~~~~ service area<br />
products<br />
- capacity to take<br />
- mechanism of a loan<br />
borrower<br />
- willingness to take<br />
selection<br />
a loan<br />
Credit Outreach<br />
credit of the financial institutions are their objectives of the financial<br />
products, which may have positive or neg<strong>at</strong>ive effects on breadth <strong>and</strong><br />
depth of outreach. Objectives like reduction in cost of lending or<br />
specific<strong>at</strong>ion of target group can have a neg<strong>at</strong>ive effect on the breadth<br />
of outreach. The second c<strong>at</strong>egory of factors th<strong>at</strong> determine<br />
accessibility of credit product is the mechanism of borrower selection.<br />
To select a borrower they need either a guarantor or physical coll<strong>at</strong>eral<br />
or both. Elsewhere, it has been argued th<strong>at</strong> a guarantor can be<br />
considered as an important <strong>for</strong>m of social coll<strong>at</strong>eral, which IS more<br />
important than physical coll<strong>at</strong>eral (Vaessen 2001). Coll<strong>at</strong>eral<br />
requirements may have neg<strong>at</strong>ive impact on depth of outreach.<br />
From the borrower's perspective, factors th<strong>at</strong> influence access to<br />
credit can be put under the following three broad c<strong>at</strong>egories. (a) a<br />
borrower must be living in the area of oper<strong>at</strong>ion, (b) a borrower must<br />
have the capacity to take a loan, <strong>and</strong> (c) a borrower should be willing<br />
10
to take a loan. Capacity to take a loan refers to the household's<br />
capacity to meet the <strong>for</strong>mal selection criteria <strong>and</strong> banker's additional<br />
expect<strong>at</strong>ion on repayment capacity. In order to win over the lender's<br />
confidence, the borrower must be in a position to s<strong>at</strong>isfy the lender<br />
with some coll<strong>at</strong>eral both tangible <strong>and</strong> intangible. Willingness to take<br />
a loan depends upon the transaction costs, availability of credit from<br />
altern<strong>at</strong>ive sources with more <strong>at</strong>tractive terms <strong>and</strong> conditions, interest<br />
r<strong>at</strong>es <strong>and</strong> so on.<br />
The above theoretical framework on accessibility of institutional<br />
credit (Figure 1.1) expects th<strong>at</strong> many factors influencing the credit<br />
accessibility are <strong>at</strong> work. Since access to <strong>for</strong>mal credit is not common<br />
to all c<strong>at</strong>egories of farmers, it is necessary to analyse the factors th<strong>at</strong><br />
account <strong>for</strong> vari<strong>at</strong>ions in the credit flow. Even if some farmers are<br />
accessing <strong>for</strong>mal credit, is it sufficient to meet their requirement? If it<br />
is not, under wh<strong>at</strong> conditions do bankers decide the credit limit to a<br />
particular farmer? If the disbursed loan amount is largely influenced<br />
by supply-side factors, a larger gap between supply <strong>and</strong> dem<strong>and</strong> <strong>for</strong><br />
credit is the likely possibility. Furthermore, the magnitude of this gap<br />
may vary across different size classes of l<strong>and</strong>holdings.<br />
Objectives of the Study<br />
In the light of these issues, the present study on credit flow to<br />
<strong>agriculture</strong> derives its relevance <strong>and</strong> has the following objectives.<br />
• To study <strong>macro</strong> (all India) level trends of institutional credit to<br />
<strong>agriculture</strong> be<strong>for</strong>e <strong>and</strong> after the introduction of the banking<br />
sector re<strong>for</strong>m, <strong>and</strong> analyse the contributing factors.<br />
• To study dis-aggreg<strong>at</strong>ed trends (st<strong>at</strong>e <strong>and</strong> district level within<br />
Orissa) <strong>and</strong> contributing factors to the credit flow to <strong>agriculture</strong>.<br />
II
• To analyse the factors th<strong>at</strong> account <strong>for</strong> vari<strong>at</strong>ions in the flow of<br />
credit <strong>at</strong> the household level.<br />
• To measure credit gap among farm hOllseholds across the size<br />
class of l<strong>and</strong>holdings.<br />
Scope of the Study<br />
The <strong>macro</strong> level analysis on the credit flow to <strong>agriculture</strong>, has been<br />
confined to all India, while the st<strong>at</strong>e level analysis to 14 major st<strong>at</strong>es.<br />
These st<strong>at</strong>es consist of Andhra Pradesh, Bihar (undivided), Gujar<strong>at</strong>,<br />
Haryana, Karn<strong>at</strong>aka, Kerala, Madhya Pradesh (undivided)<br />
Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh<br />
(undivided) <strong>and</strong> West Bengal. The r<strong>at</strong>ionale <strong>for</strong> the selection of these<br />
st<strong>at</strong>es lies in the fact th<strong>at</strong> they account <strong>for</strong> 93 per cent of the<br />
popul<strong>at</strong>IOn <strong>and</strong> ':11.5 per cent of the Net Domestic Product (NDP) in the<br />
country (see, Rao et al 1999). Besides, these st<strong>at</strong>es have been<br />
accounting, on an average, 84.7 per cent of the total deposits in the<br />
country through Scheduled Commercial Banks (SCBs) including RRB<br />
<strong>for</strong> the last twenty years. Out of the total agricultural credit provided<br />
in the country through SCBs <strong>and</strong> RRBs, on an average, 95 per cent of<br />
it goes to these st<strong>at</strong>es (RBI, various years). The hill st<strong>at</strong>es of north <strong>and</strong><br />
north-eastern parts of India, which are considered as special c<strong>at</strong>egory<br />
st<strong>at</strong>es by the Planning Commission, have been excluded from the<br />
analysis due to significant differences in the structure of these<br />
economies from the rest of the st<strong>at</strong>es. It is also worth mentioning th<strong>at</strong><br />
in these hill st<strong>at</strong>es the important sources of income are government<br />
activities <strong>and</strong> there has hardly been any manufacturing base (Rao et<br />
al 1999).<br />
12
The district level analysis has been done <strong>for</strong> the st<strong>at</strong>e of Orissa<br />
because of its distinctive character of backwardness'- The Economic<br />
Survey of Orissa <strong>for</strong> the year 2000-01 notes with concern th<strong>at</strong> the<br />
credit deposit r<strong>at</strong>i0 6 (CDR) in the st<strong>at</strong>e declined from 80.59 per cent in<br />
1991 to 39.75 per cent in 1999-00, while per-bank branch popul<strong>at</strong>ion<br />
increased from 15,200 persons to 16,300 during the same period. The<br />
reduced CDR might be adversely effecting the credit flow to different<br />
sectors in the economy. It was, there<strong>for</strong>e, noted th<strong>at</strong> there was a need<br />
to look into the ground level credit flow to the different sectors in the<br />
st<strong>at</strong>e, in general, <strong>and</strong> to <strong>agriculture</strong>, in particular.<br />
The <strong>micro</strong>-level analysis has been carried in the specific context<br />
of Kalah<strong>and</strong>i district, Orissa. Loc<strong>at</strong>ed in the western part of the st<strong>at</strong>e,<br />
this district IS known 111 India <strong>for</strong> widespread poverty <strong>and</strong><br />
backwardness. For the <strong>micro</strong> level analysis, d<strong>at</strong>a from four different<br />
bank branches <strong>and</strong> 200 farm households (falling within the service<br />
area of these banks) have been collected. Since farmers in the study<br />
area hardly get crop loans during Rabi session, the <strong>micro</strong> level<br />
analysis is restricted to only Kharif crops <strong>for</strong> the year 2001-02.<br />
The secondary d<strong>at</strong>a <strong>for</strong> undertaking analysis <strong>at</strong> all India, st<strong>at</strong>e<br />
<strong>and</strong> districts level were collected from the Report on Currency <strong>and</strong><br />
Finance (RBI), Banking St<strong>at</strong>istics (RBI), Fertiliser St<strong>at</strong>istics (the<br />
Fertiliser Associ<strong>at</strong>ion of India), Indian Agricultural St<strong>at</strong>istics (Ministry<br />
5 An examin<strong>at</strong>ion of the d<strong>at</strong>a on <strong>levels</strong> of per-capita income, industrialis<strong>at</strong>ion,<br />
urbanis<strong>at</strong>ion <strong>and</strong> literacy r<strong>at</strong>e shows th<strong>at</strong> this st<strong>at</strong>e falls into the c<strong>at</strong>egory of<br />
'backward' .<br />
6 The CDR in Orissa was well below the all India average of 57.05 per cent in 1999-<br />
00, <strong>and</strong> the st<strong>at</strong>es with better CDR than Orissa included Tamil Nadu (88.0 %),<br />
Maharashtra (83.79 %), Andhra Pradesh (63.60 %), Karn<strong>at</strong>aka (61.01 %), Gujar<strong>at</strong><br />
(49.85 %), Madhya Pradesh (49.17 %), Rajasthan 146.69 %), West Bengal (45.17),<br />
<strong>and</strong> Kerala 142.29 %). This in<strong>for</strong>m<strong>at</strong>ion was collected from Bankmg St<strong>at</strong>istIcs.<br />
Quarterly H<strong>and</strong>out, RBI (March 2000).<br />
13
\-1<br />
of Agriculture, Government of India) <strong>and</strong> St<strong>at</strong>istical Abstract (Central<br />
St<strong>at</strong>istical Organis<strong>at</strong>ion, Department of St<strong>at</strong>istics <strong>and</strong> Programme<br />
Implement<strong>at</strong>ion, Government of India). For the analysis on trends in<br />
credit flow in Orissa st<strong>at</strong>e, d<strong>at</strong>a were collected from Stale Level<br />
Bankers Committee Meetings (Agenda Notes) <strong>and</strong> Orissa Agricultural<br />
St<strong>at</strong>istics (Director<strong>at</strong>e of Agriculture <strong>and</strong> Food Production, Orissa,<br />
Bhubaneswar).<br />
Since the banking sector re<strong>for</strong>ms have not made any impact on<br />
the financial p<strong>at</strong>tern of Co-oper<strong>at</strong>ives, the study is exclusively based<br />
on the <strong>finance</strong> provided by the Scheduled Commercial Banks to<br />
agricultural sector. The Scheduled Commercial Banks consist of St<strong>at</strong>e<br />
Bank or india <strong>and</strong> its Associ<strong>at</strong>es, N<strong>at</strong>ionalised Banks, Foreign Banks,<br />
Regional Rural Banks, <strong>and</strong> Other Scheduled Commercial Banks.<br />
In the case of <strong>micro</strong> level (households), analysis emphasis was<br />
gIven on the loan provided by <strong>for</strong>mal institutions. Nevertheless, to<br />
measure the credit-gap <strong>and</strong> to capture the dependency of the studygroup<br />
on in<strong>for</strong>mal sources of credit, loans provided by non-<strong>for</strong>mal<br />
agencies have been taken into account.<br />
Chapter Scheme<br />
The study comprises eight chapters.<br />
The second chapter provides a review of liter<strong>at</strong>ure on issues relevant<br />
to agricultural credit. This chapter by focusing on policies, progress<br />
<strong>and</strong> problems of agricultural credit in India, exammes the major<br />
directions in rural banking <strong>and</strong> credit policies during the post-
independence period, <strong>and</strong> the policy per<strong>for</strong>mance especially in respect<br />
of credit flow to agricultural sector.<br />
Chapter three, on "Credit Flow to Agriculture: Trends <strong>and</strong><br />
Contributing Factors <strong>at</strong> All India Level", analyses the trends in credit<br />
flow in terms of percentage <strong>and</strong> growth r<strong>at</strong>es, <strong>and</strong> contributing factors<br />
with the help of the ordinary least squares method.<br />
The fourth chapter covers the st<strong>at</strong>e <strong>and</strong> district level analysis on<br />
the credit flow to <strong>agriculture</strong> during pre-re<strong>for</strong>m <strong>and</strong> re<strong>for</strong>m periods. In<br />
this chapter also, a trend analysis in terms of growth r<strong>at</strong>e <strong>and</strong><br />
percentage has been made to examine the flow of credit to <strong>agriculture</strong>.<br />
It has to be mentioned here th<strong>at</strong> the proportion of net bank credit may<br />
not be able to explain the actual situ<strong>at</strong>ion in so far as the flow of<br />
agricultural credit <strong>at</strong> the ground level is concerned. There<strong>for</strong>e, the<br />
availability of credit per hectare of gross cropped area has been<br />
calcul<strong>at</strong>ed <strong>at</strong> both st<strong>at</strong>e <strong>and</strong> districts <strong>levels</strong> to analyse the vari<strong>at</strong>ions in<br />
the supply of agricultural credit. Factors contributing to the vari<strong>at</strong>ion<br />
in the supply of credit per hectare of gross cropped area have been<br />
analysed with the help of Fixed <strong>and</strong> R<strong>and</strong>om Effect models <strong>at</strong> both<br />
st<strong>at</strong>e <strong>and</strong> district <strong>levels</strong>.<br />
The fifth chapter explains the impact of <strong>macro</strong> level agricultural<br />
credit policy <strong>at</strong> <strong>micro</strong> level. To assess the impact of these policies on<br />
the p<strong>at</strong>tern of supply of credit to different sectors, the in<strong>for</strong>m<strong>at</strong>ion \\·as<br />
collected from four bank branches (two each belonging to commercial<br />
bank <strong>and</strong> RRB c<strong>at</strong>egories) loc<strong>at</strong>ed in advanced <strong>and</strong> backward blocks of<br />
Kalah<strong>and</strong>i district in Orissa. The factors accounting <strong>for</strong> vari<strong>at</strong>ions in<br />
the flow of credit to farm households have been analysed in the sixth<br />
IS
chapter. It is worth mentioning here th<strong>at</strong> an analysis on the vari<strong>at</strong>ions<br />
in the flow of credit can be undertaken either in terms of access to<br />
credit or amount obtained across the size classes of l<strong>and</strong>holdings. In<br />
this context, the farmers' access to institutional credit is estim<strong>at</strong>ed<br />
using the binary choice (Pro bit) model. The factors determining the<br />
amount of institutional credit lent were estim<strong>at</strong>ed with the help of<br />
Ordinary Least Squares (OLS) methods. However, the factors<br />
determining access to the credit to certain farmers is not r<strong>and</strong>om. In<br />
order to correct this problem of selectivity bias, Heckman two-step<br />
procedure has been used. In the first step, the Inverse Mills R<strong>at</strong>io (A)<br />
has been calcul<strong>at</strong>ed from the Pro bit equ<strong>at</strong>ion, <strong>and</strong> in the second step,<br />
this has been introduced as an additional explan<strong>at</strong>ory variable in the<br />
eqll<strong>at</strong>ion on determinants of credit.<br />
The credit delivery system <strong>and</strong> the extent of credit-gap <strong>for</strong><br />
different c<strong>at</strong>egories of farmers have been discussed in the seventh<br />
chapter. Given the self-<strong>finance</strong> capacity <strong>and</strong> per acre paid-out cost,<br />
the actual <strong>and</strong> rel<strong>at</strong>ive credit-gaps have been calcul<strong>at</strong>ed across the<br />
size-classes of l<strong>and</strong>holdings. The coping str<strong>at</strong>egies adopted by farmers<br />
in the study area have also been highlighted.<br />
The<br />
last chapter summanses the study, <strong>and</strong> discusses<br />
conclusions <strong>and</strong> policy implic<strong>at</strong>ions.<br />
16
Chapter 2<br />
POLICIES, PROGRESS AND PROBLEMS IN<br />
AGRICULTURAL CREDIT: THEORETICAL ISSUES<br />
Introduction<br />
There is a realis<strong>at</strong>ion In most of the low-income countries th<strong>at</strong><br />
agricultural credit is an important element in their development<br />
ef<strong>for</strong>ts. The popularity of credit is partly due to the notion th<strong>at</strong><br />
loans are necessary to acceler<strong>at</strong>e technological change in farming,<br />
<strong>and</strong> th<strong>at</strong> <strong>for</strong>mal credit is required to free farmers from their<br />
dependency on unorganised sector. The agricultural credit policies,<br />
in general, aim to have positive influence on the total volume of<br />
institutional credit, the use of agricultural inputs, investment on<br />
machinery <strong>and</strong> irrig<strong>at</strong>ion, agricultural output <strong>and</strong> productivity,<br />
rural income distribution <strong>and</strong> so on. These policies also aim to<br />
direct a larger share of institutional credit to the 'weaker' sections<br />
<strong>for</strong> their development.<br />
The declared objectives of the public policy with regard to<br />
rural credit, in general, <strong>and</strong> agricultural credit, in particular, in the<br />
post-Independent India were, there<strong>for</strong>e, "to ensure th<strong>at</strong> sufficient<br />
<strong>and</strong> timely credit <strong>at</strong> reasonable r<strong>at</strong>e of interest is made available to<br />
as large a segment of the rural popul<strong>at</strong>ion as possible" (Rangarajan<br />
1996). To achieve this objective, the expansion of <strong>for</strong>mal sector<br />
lending institutions, directed lending <strong>and</strong> subsidised credit policies<br />
were introduced <strong>at</strong> different points of time. A multi-agency<br />
approach was adopted as a n<strong>at</strong>ional policy <strong>for</strong> institutional credit<br />
where co-oper<strong>at</strong>ives, Commercial Banks <strong>and</strong> Regional Rural Banks<br />
were pressed into service to ensure sufficient agricultural <strong>and</strong> rural<br />
credit flow. Taking different types of farm credit needs into account,<br />
17
the provision of a range of credit services (long <strong>and</strong> short-term, <strong>and</strong><br />
large <strong>and</strong> small loans) was envisaged in the policies.<br />
This chapter discusses the major policy directions, progress<br />
<strong>and</strong> problems of institutional <strong>finance</strong> <strong>for</strong> <strong>agriculture</strong>. For this<br />
purpose, the period 1951-52 to 2000 has been divided into three<br />
sub-periods, viz., 1951-52 to 1969-70, 1970-71 to 1989-91 <strong>and</strong><br />
1991-92 to 1999-2000. The r<strong>at</strong>ionale <strong>for</strong> sub-periodis<strong>at</strong>ion has been<br />
the n<strong>at</strong>ionalis<strong>at</strong>ion of commercial banks in 1969 <strong>and</strong> the<br />
introduction of banking sector re<strong>for</strong>ms in 1991.<br />
Phases of Banking Policies<br />
The Pre-N<strong>at</strong>ionalis<strong>at</strong>ion Period (1951-52 to 1969-70)<br />
During 1950s, co-oper<strong>at</strong>ives <strong>and</strong> government were the mam<br />
providers of institutional <strong>finance</strong> to <strong>agriculture</strong>, though they<br />
accounted <strong>for</strong> a small share of the total credit (D<strong>and</strong>eker <strong>and</strong> Wadia<br />
1989; K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i 1992). According to the Report of the All<br />
India Rural Credit Survey Committee (1954) appointed by the RBI,<br />
out of the total amount borrowed by the cultiv<strong>at</strong>ors from different<br />
credit agencies (both <strong>for</strong>mal <strong>and</strong> in<strong>for</strong>mal), <strong>for</strong>mal agenCIes<br />
accounted <strong>for</strong> only 7.3 per cent. Of this, the commercial banks<br />
provided only 0.9 per cent, while government <strong>and</strong> co-oper<strong>at</strong>ives<br />
accounted <strong>for</strong> the rest. This meant th<strong>at</strong> as much as 92.7 per cent of<br />
the credit was provided by the in<strong>for</strong>mal sector consisting of<br />
moneylenders, rel<strong>at</strong>ives, big farmers <strong>and</strong> traders.<br />
The committee examined the rural credit delivery system m<br />
the light of the question on how to ensure an efficient supply of<br />
institutional credit to increase the productivity of the agricultural<br />
18
sector - a dominant sector in the n<strong>at</strong>ional economy. Taking the<br />
importance of credit in achieving the targets on agricultural<br />
production into account, the committee recommended new<br />
initi<strong>at</strong>ives like St<strong>at</strong>e partnership <strong>at</strong> different <strong>levels</strong>, <strong>and</strong> co-ordin<strong>at</strong>ion<br />
between credit <strong>and</strong> other economic activities, especially processing<br />
<strong>and</strong> marketing. Increased financial support from the government to<br />
co-oper<strong>at</strong>ives <strong>and</strong> RBI, <strong>and</strong> technical support to the co-oper<strong>at</strong>ives<br />
credit structure were the other important recommend<strong>at</strong>ions.<br />
Besides, financial institutions were designed <strong>at</strong> different <strong>levels</strong> to<br />
facilit<strong>at</strong>e the credit requirement of farmers to a gre<strong>at</strong>er extent. The<br />
st<strong>at</strong>e level co-oper<strong>at</strong>ive credit institutions consisted of St<strong>at</strong>e Cooper<strong>at</strong>ive<br />
Bank, Central L<strong>and</strong> Mortgage Bank <strong>and</strong> St<strong>at</strong>e Co-oper<strong>at</strong>ive<br />
Marketing Society in each St<strong>at</strong>e. The institutions of District Centr2-!<br />
Co-oper<strong>at</strong>ive Bank, Primary L<strong>and</strong> Mortgage Bank <strong>and</strong> District<br />
Marketing Society were <strong>for</strong>med <strong>at</strong> the district level <strong>for</strong> better<br />
alloc<strong>at</strong>ion of agricultural credit. Primary Agricultural Credit Societies<br />
(PACSs) <strong>and</strong> Large Area Multi Purpose Societies (LAMPs) were the<br />
primary level co-oper<strong>at</strong>ives. The committee also recommended the<br />
amalgam<strong>at</strong>ion of the Imperial Bank of India into the St<strong>at</strong>e Bank of<br />
India to extend banking facilities in the countryside. In 1963, the<br />
Agricultural Re<strong>finance</strong> Corpor<strong>at</strong>ion (ARC) was established in the RBI<br />
with a view to supplement long-term resources to credit institutions.<br />
These policies heralded a new phase in agricultural credit. During<br />
this period, the share of credit to rural households provided by the<br />
financial institutions - co-oper<strong>at</strong>ives, banks, <strong>and</strong> government rose<br />
from 7.2 per cent to 29.2 per cent (K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i 1992).<br />
19
Table 2.1: Distribution of Total Debt of Rural Households by<br />
Different Sources<br />
(in percenta e s)<br />
Sources 1951 1961 I 1971 I 19~<br />
Government, Co-oper<strong>at</strong>ives <strong>and</strong> Banks 7. 2 17. 3 I 29.2 I 6 J. 2<br />
Rel<strong>at</strong>ives <strong>and</strong> Friends Il. 5 5. 8: 13. 8 : 9.0.<br />
Moneylenders 80. 2 69.4 ! 54.2 i 24. 3'<br />
Others l. I 7.5: 2.8: 5 5 I<br />
Total credit fRs. crores <strong>at</strong> 1971-72 prices) NA 36,100 I 37,541 I 23,361 I<br />
Notes: NA - Not aVaIlable.<br />
Source: K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i (1992).<br />
A study by the RBI on the role of co-oper<strong>at</strong>ive credit in<br />
increasing farm production in 12 districts during the period 1963-64<br />
to 1965-66, however, found th<strong>at</strong>:<br />
;,. the share of credit provided by the co-oper<strong>at</strong>ives to total credit<br />
was small to moder<strong>at</strong>e in most of the districts;<br />
;,. a cnn ~;dpr~ hlp n~rt nf thp ,...,...,D,.l'1- "'~""s ....1~~P'""_ ........ ..4 +.,... ~U·l-lnl-U-U.J-U·'-"'Lj'-V-C-<br />
- - --"-- -- -~-- .r-'............ ....... ............ ........ .............. J.\. ~w~... uJ.,.. ........ L\""U LV r "'"<br />
purposes;<br />
;,. the co-oper<strong>at</strong>ive credit was found to be untimely, inadequ<strong>at</strong>e <strong>and</strong><br />
ineffective in increasing farm production; <strong>and</strong><br />
;,. the central co-oper<strong>at</strong>ive bank <strong>and</strong> the PACSs in several st<strong>at</strong>es<br />
remained stagnant in credit growth because of growing overdues,<br />
<strong>and</strong> th<strong>at</strong> PACS were not designed to mobilise the rural savmgs,<br />
considered to be an important source of loanable funds.<br />
In July 1966, the RBI constituted an All India Rural Credit<br />
Review Committee to undertake a comprehensive revIew of<br />
agricultural credit system so th<strong>at</strong> the bottleneck could be identified<br />
<strong>and</strong> remedied. The report, published in July 1969, found th<strong>at</strong> a<br />
number of banks <strong>and</strong> societies were weak in mobilising deposits,<br />
recovering loans <strong>and</strong> management. The remedial measures<br />
suggested were rehabilit<strong>at</strong>ion of weak branches, administr<strong>at</strong>ive <strong>and</strong><br />
policy measures <strong>for</strong> checking overdues, direct financing of cultiv<strong>at</strong>ors<br />
by central banks <strong>and</strong> of societies by apex banks in areas where they<br />
were weak. The committee also suggested streamlining the lending<br />
policies <strong>and</strong> procedures of co-oper<strong>at</strong>ive institutions to make credit<br />
20
more easily accessible to the small farmers according to scales of<br />
<strong>finance</strong> needed <strong>for</strong> different crops.<br />
Notwithst<strong>and</strong>ing these ef<strong>for</strong>ts, the objective of meeting the<br />
credit needs of farmers was hardly fulfilled (D<strong>and</strong>eker <strong>and</strong> Wadia<br />
1989). The share of public sector banks in the total agricultural<br />
credit was 5.4 per cent of net bank credit in 1969 (RBI 1997-98) due<br />
to their concentr<strong>at</strong>ion in urban areas, <strong>and</strong> non-suitability of<br />
repayment period <strong>and</strong> security to their requirement (Shajahan<br />
1998).<br />
Agriculture Sector Lending as a Major Policy Instrument<br />
(1969-91)<br />
This 'Nas the early phase of the green revolution in India. The advent<br />
of new technology <strong>and</strong> the introduction of High Yielding Varieties<br />
(HYV) in 1966 resulted in a gre<strong>at</strong>er dem<strong>and</strong> <strong>for</strong> improved seeds,<br />
fertilisers <strong>and</strong> increased applic<strong>at</strong>ion of irrig<strong>at</strong>ion w<strong>at</strong>er. This<br />
contributed to a substantial increase in the dem<strong>and</strong> <strong>for</strong> credit, <strong>and</strong><br />
the supply of adequ<strong>at</strong>e credit was considerably beyond the capacity<br />
of the co-oper<strong>at</strong>ives. Commercial banks were, there<strong>for</strong>e, introduced<br />
to a gre<strong>at</strong>er extent to provide agricultural credit under the policy of<br />
Social Control over banks in 1967. The entry of commercial banks in<br />
the sphere of agricultural credit was intensified with the<br />
n<strong>at</strong>ionalis<strong>at</strong>ion of 14 major commercial banks in 1969 <strong>and</strong> 6 more<br />
banks l<strong>at</strong>er.<br />
The declared objectives of the new policy, known as "social <strong>and</strong><br />
development banking" were to provide (Wiggins <strong>and</strong> Rajendran<br />
1987);<br />
21
• banking services in previously unbanked or under-banked rural<br />
areas;<br />
• substantial credit to specific activities including <strong>agriculture</strong> <strong>and</strong><br />
cottage industries; <strong>and</strong><br />
• credit to certain disadvantaged groups.<br />
The Government of India <strong>and</strong> the Reserve Bank of India (RBI)<br />
issued specific directives regarding "social <strong>and</strong> development<br />
banking" from time to time. These policies included the setting of<br />
targets <strong>for</strong> the expansion of rural branches, imposing ceiling on<br />
interest r<strong>at</strong>es, <strong>and</strong> setting guidelines <strong>for</strong> the sectoral alloc<strong>at</strong>ion of<br />
credit. During the early part of bank n<strong>at</strong>ionalis<strong>at</strong>ion, the N<strong>at</strong>ional<br />
Credit Council under the chairmanship of D.R. Gadgil had<br />
considered the deficiencies in the system of institutional credit <strong>and</strong><br />
<strong>for</strong>mul<strong>at</strong>ed the lending policies <strong>for</strong> the future. Specific lending<br />
targets were fixed <strong>for</strong> different sectors in terms of amounts to each<br />
major bank. In this context, two major steps were taken by the RBI<br />
to encourage the priority sector lending such as provision of<br />
re<strong>finance</strong> to commercial banks, <strong>and</strong> introduction of credit guarantee<br />
scheme as a support measure of bank lending.<br />
With the establishment of Regional Rural Banks in 1975,<br />
another wing to the agricultural credit was added. RRBs were<br />
designed to be low cost institutions like co-oper<strong>at</strong>ives <strong>and</strong><br />
professionalised in their management like commercial banks. Their<br />
target group was the 'weaker sections' consisting of small <strong>and</strong><br />
marginal farmers, agricultural labourers <strong>and</strong> rural artisans, <strong>and</strong><br />
their area of oper<strong>at</strong>ion was confined to specified districts.<br />
After n<strong>at</strong>ionalis<strong>at</strong>ion, lending to priority sectors became an<br />
essential component of bank lending. During the mid-1970s, the RBI
study group recommended expansion in the scope of priority sector<br />
lending to include not only <strong>agriculture</strong> (direct <strong>and</strong> indirect), smallscale<br />
industries, <strong>and</strong> export, but also road <strong>and</strong> w<strong>at</strong>er transport<br />
oper<strong>at</strong>ors, retail traders, small business, professional <strong>and</strong> selfemployed<br />
persons <strong>and</strong> educ<strong>at</strong>ion. This definition remained<br />
unchanged until the end of 1970s. For better provisioning of credit,<br />
the RBI advised the banks to raise the proportion of credit to the<br />
priority sector to total net bank credit to 33.3 per cent by March<br />
1979. In 1980, a working group set up under the chairmanship of<br />
K.S. Krishnaswamy to review the composition of the priority sector,<br />
included weaker sections <strong>and</strong> excluded export rel<strong>at</strong>ed lending from<br />
the priority sector. A major recommend<strong>at</strong>ion of the group was th<strong>at</strong> <strong>at</strong><br />
least 50 per cent of direct farm credit should go to weaker sections<br />
including marginal farmers, small farmers <strong>and</strong> agricultural<br />
labourers, or 40 per cent of the priority sector bank credit should be<br />
given to <strong>agriculture</strong> by March 1983.<br />
The Committee to Review Arrangements <strong>for</strong> <strong>Institutional</strong> Credit<br />
<strong>for</strong> Agriculture <strong>and</strong> Rural Development (CRAFICARD), 1981,<br />
endorsed th<strong>at</strong> commercial banks could playa significant role in the<br />
various programmes of rural development, <strong>and</strong> suggested measures<br />
to improve the quality of lending through these banks. The N<strong>at</strong>ional<br />
Bank <strong>for</strong> Agriculture <strong>and</strong> Rural Development (NABARD) was,<br />
there<strong>for</strong>e, set up in 1982 by the RBI <strong>for</strong> providing all types of<br />
production <strong>and</strong> investment credit <strong>for</strong> <strong>agriculture</strong> <strong>and</strong> rural<br />
development. NABARD is the apex institution accredited \\'ith all<br />
m<strong>at</strong>ters concerning policy, planning <strong>and</strong> oper<strong>at</strong>ions in the field of<br />
<strong>agriculture</strong> <strong>and</strong> other economic activities in rural areas. Its prime<br />
role is to provide credit <strong>for</strong> the promotion of <strong>agriculture</strong>, small-scale
· industries, cottage <strong>and</strong> village industries, h<strong>and</strong>icrafts <strong>and</strong> other<br />
rural crafts <strong>and</strong> allied economic activities in rural areas with a view<br />
to promoting integr<strong>at</strong>ed rural development <strong>and</strong> securing prosperitv<br />
<strong>for</strong> the rural areas. Other functions include co-ordin<strong>at</strong>ion of rural<br />
financing activities of all institutional works <strong>at</strong> the field level <strong>and</strong><br />
maintaining liaison with the Government of India, St<strong>at</strong>e<br />
governments, RBI <strong>and</strong> other n<strong>at</strong>ional level institutions.<br />
Another RBI working group under the chairmanship of A.<br />
Ghosh was set up to review the target of priority sector lending, in<br />
general, <strong>and</strong> <strong>agriculture</strong>, in particular, with reference to the n<strong>at</strong>ure<br />
of advances. The committee suggested a separ<strong>at</strong>e target <strong>for</strong> both<br />
direct <strong>and</strong> indirect farm lending from total bank credit. The direct<br />
farm lending was fixed to reach 14 per cent of net bank credit by<br />
March-1985. By taking the increasing need of credit <strong>for</strong> farming<br />
oper<strong>at</strong>ions into account, it was recommended to raise the proportion<br />
of direct farm lending to net bank credit to 16 per cent by March<br />
1987,17 per cent by 1989 <strong>and</strong> to 18 per cent by March 1990 (Table<br />
2.2). Furthermore, this group provided a comprehensive redefinition<br />
of the "weaker sections" <strong>and</strong> suggested achieving a target of either 10<br />
per cent of net bank credit or 25 per cent of total priority sectors<br />
lending by March-1985. Besides, total priority sector lending was<br />
increased to 40 per cent of the net bank credit by 1985. The lending<br />
targets <strong>for</strong> different kinds of agricultural advances are given below in<br />
Table 2.2.
__<br />
Table 2.2: Lending Targets or Agrtcu I ture Sector. u<br />
r=-N<strong>at</strong>~;e of Advance Target P~escribed from NetlWhen Target is to be :<br />
Bank Credit (in Per cent) i Reached ___!<br />
Direct advance <strong>for</strong> 16 , March-198~~.<br />
<strong>agriculture</strong> <strong>and</strong> allied 17 March- 1989<br />
activities 18 March-1990<br />
-j<br />
Direct + Indirect advance 18 I<br />
<strong>for</strong> agricu Iture <strong>and</strong> allied of which direct <strong>and</strong> indirect October-1993 I<br />
activities<br />
<strong>finance</strong> target were fixed <strong>at</strong><br />
13.5 % <strong>and</strong> 4.5 %<br />
respectively<br />
Source: RBI 1987-88 <strong>and</strong> 1993-94<br />
I<br />
The Re<strong>for</strong>m Period (since 1991)<br />
Preoccup<strong>at</strong>ion to achieve quantit<strong>at</strong>ive targets, ignoring qualit<strong>at</strong>ive<br />
aspects, high cost structure of oper<strong>at</strong>ions in rural areas, <strong>and</strong><br />
mounting overdues, became thre<strong>at</strong> to the viability of financial<br />
institutions. Consequently, the policy of competitive financial svstem<br />
was adopted in provisioning agricultural credit to improve the viability<br />
of financial agencies. This phase of policy started from 1991,<br />
particularly after liberalis<strong>at</strong>ion. The policy thrust of this phase can be<br />
found in the report of the Committee on the Financial System (CFS)<br />
chaired by M. Narasimham. In its very first paragraph, the report calls<br />
<strong>for</strong> a vibrant <strong>and</strong> competitive financial system to sustain the ongoing<br />
re<strong>for</strong>m in the structural aspects of the economy. The committee<br />
suggests the use of fiscal instrument <strong>for</strong> redistributive objective r<strong>at</strong>her<br />
than the credit system. Based on this, the committee recommends<br />
th<strong>at</strong> directed credit programmes be phased out. The proposals of the<br />
committee were deregul<strong>at</strong>ion of interest r<strong>at</strong>es, changing capital<br />
adequacy norms (to compete with banks globally), <strong>and</strong> removing<br />
branch licensing policy. Besides, the committee took the view th<strong>at</strong> a<br />
new institutional structure, I.e., market driven <strong>and</strong> based on<br />
profitability be cre<strong>at</strong>ed, <strong>and</strong> th<strong>at</strong> the role played by priv<strong>at</strong>e Indian <strong>and</strong><br />
<strong>for</strong>eign banks need to be enlarged. In short, the Narasimham<br />
25
Committee recommended th<strong>at</strong> banking policy be guided more by the<br />
market <strong>for</strong>ce than by regul<strong>at</strong>ions of public authority.<br />
However, the government did not favour the abolition of<br />
directed lending, delinking of the rural branches of public sector<br />
commercial banks <strong>and</strong> merging them into rural banking subsidiaries,<br />
or even the cre<strong>at</strong>ion of N<strong>at</strong>ional Rural Banks except gradual<br />
deregul<strong>at</strong>ion of lending r<strong>at</strong>e. In fact, the str<strong>at</strong>egy followed by the RBI<br />
was to keep the overall share of priority sector <strong>at</strong> 40 per cent of net<br />
bank credit, <strong>and</strong> broaden the scope of priority sector lending by public<br />
sector bank to encourage diversion from direct priority sector lending<br />
to the new areas added to this sector. The whole idea was to allow the<br />
banks to fulfil the target of priority sector, in general, flnrl 8gri('u!t'-m~,<br />
in particular, from the total advances by banks, without having to<br />
lend directly much more to those areas included in this sector in the<br />
early 1990s (Shajahan 1999).<br />
Although deregul<strong>at</strong>ion of interest r<strong>at</strong>e <strong>and</strong> other measures were<br />
recommended by CFS to improve efficiency, profitability <strong>and</strong> viability<br />
of the banking sector, the committee was silent on the quality of<br />
lending to achieve the above objective. The Gupta Committee (1998)<br />
looked into the quality of credit delivered by the banking system to<br />
identify the constraints faced by the commercial banks in increasing<br />
the flow of credit, introducing new products <strong>and</strong> services, <strong>and</strong><br />
simplifying procedures to enable rural borrowers to access adequ<strong>at</strong>e<br />
<strong>and</strong> timely agricultural credit from the commercial banks.<br />
The committee emphasised on pre-sanction appraisal to assess<br />
the borrower st<strong>at</strong>us, capability <strong>for</strong> undertaking the proposed activity,<br />
26
creditworthiness <strong>and</strong> the technical viability of the proposal. The<br />
committee suggested freedom to bank branches in the selection of<br />
beneficiaries <strong>and</strong> disposal of applic<strong>at</strong>ions. To ensure quick disposal <strong>at</strong><br />
least 90 per cent of the loan applic<strong>at</strong>ions should be decided <strong>at</strong> the<br />
branch level. Short-term credit needs of the farmer should include all<br />
requirements directly or indirectly rel<strong>at</strong>ed to production, post-harvest<br />
<strong>and</strong> household expenses. Repayment capacity should be assessed on<br />
the basis of aggreg<strong>at</strong>e household income from all sources including<br />
crop production <strong>and</strong> ancillary activities. Where the l<strong>and</strong> has already<br />
been mortgaged, asking <strong>for</strong> additional coll<strong>at</strong>eral by way of guarantors<br />
should be discouraged. Commercial banks should be free to fix the<br />
r<strong>at</strong>es of interest <strong>for</strong> loans of all amounts as has already been done in<br />
the case of co-oper<strong>at</strong>ives <strong>and</strong> RRBs. To overcome the credit gap<br />
problem, the r<strong>at</strong>e of <strong>finance</strong> should be fixed <strong>for</strong> service area of each<br />
bank on the basis of local conditions r<strong>at</strong>her than <strong>for</strong> the district as a<br />
whole. Major recommend<strong>at</strong>ions of the Gupta committee accepted by<br />
the RBI are given in Box 2.1.<br />
Box 2.1: Recommend<strong>at</strong>ions of the Gupta Committee<br />
• Simplific<strong>at</strong>ion of procedures regarding loan applic<strong>at</strong>ion, agreements/<br />
documents, etc;<br />
• R<strong>at</strong>ionalis<strong>at</strong>ion of internal return of banks;<br />
• Deleg<strong>at</strong>ion of power to branch managers;<br />
• Introduction of composite cash credit limit to agricultural farmers;<br />
• Introduction of new loan products with saving component;<br />
• Cash disbursement of loans;<br />
• Dispens<strong>at</strong>ion of No Dues Certific<strong>at</strong>e; <strong>and</strong><br />
• Discretion of the bank on m<strong>at</strong>ters rel<strong>at</strong>ing to margin/ security requirements<br />
<strong>for</strong> agricultural loans above Rs 10,000.<br />
Nevertheless, with a view to making credit effective <strong>and</strong> to<br />
promote <strong>agriculture</strong> <strong>and</strong> rural development, the RBI continued to take<br />
new initi<strong>at</strong>ives <strong>and</strong> reorient its credit policies. Among the other major<br />
policies, Potential Linked Credit Plan (pLCP), relax<strong>at</strong>ion in re<strong>finance</strong><br />
eligibility condition to St<strong>at</strong>e Co-oper<strong>at</strong>ive Banks <strong>and</strong> RRBs,<br />
27
introduction of cash credit <strong>and</strong> deregul<strong>at</strong>ion of interest r<strong>at</strong>es were<br />
prominent. The basic objective of PLCP (initi<strong>at</strong>ed by NABARD) is to<br />
explore the existing potential <strong>and</strong> work out an appropri<strong>at</strong>e credit plan<br />
through which such potential could be exploited to the maximum<br />
extent possible over a specified period of time. The credit estim<strong>at</strong>es<br />
made under this plan were expected to be revised with respect to<br />
changing economic scenario, technological improvement <strong>and</strong> cre<strong>at</strong>ion<br />
of further infrastructure <strong>and</strong> marketing facilities. To achieve gre<strong>at</strong>er<br />
efficiency in the ground level credit flow, a background paper goes to<br />
the concerned branch manager/lead bank officer (LBO) <strong>for</strong> preparing<br />
their Service Area Plans (SAPs).<br />
St<strong>at</strong>e Co-oper<strong>at</strong>ive Banks <strong>and</strong> RRBs, which lost their eligibility<br />
to obtain re<strong>finance</strong> facility from NABARD on account of failure to<br />
recover <strong>at</strong> least 40 per cent of the dem<strong>and</strong> of previous years, in order<br />
not to deny fresh credit to new <strong>and</strong> non-defaulting members of cooper<strong>at</strong>ives<br />
<strong>and</strong> RRBs this condition was relaxed in December 1993.<br />
The NABARD agreed to provide re<strong>finance</strong> to the extent of their<br />
recovery (RBI 1993-94). Furthermore, with a view to ensuring<br />
adequ<strong>at</strong>e <strong>and</strong> timely flow of rural credit as to meet the composite<br />
needs of farmers, the banks were advised to extend cash credit<br />
facilities to farmers with irrig<strong>at</strong>ion facilities <strong>and</strong> also to other farmers<br />
undertaking off-farm/ allied activities, but this applied strictly to<br />
those farmers having a good track record in repayment.<br />
28
R<strong>at</strong>ionalis<strong>at</strong>ion of interest r<strong>at</strong>e (r<strong>at</strong>e to the ultim<strong>at</strong>e borrowers 7 )<br />
IS the other important aspect of policy changes in the re<strong>for</strong>m phase.<br />
The process of r<strong>at</strong>ionalis<strong>at</strong>ion of the interest r<strong>at</strong>e <strong>for</strong> rural credit, in<br />
general, <strong>and</strong> agricultural credit, in particular, was initi<strong>at</strong>ed by the RBI<br />
in September 1990 based on the recommend<strong>at</strong>ions of the Narasimham<br />
Committee on deregul<strong>at</strong>ion of interest r<strong>at</strong>es <strong>and</strong> abolition of<br />
concessional lending r<strong>at</strong>es so th<strong>at</strong> all r<strong>at</strong>es became positive in real<br />
terms. The details of this <strong>and</strong> the official reaction to this<br />
recommend<strong>at</strong>ion are summarised below:<br />
(i) The recommend<strong>at</strong>ion th<strong>at</strong> the real r<strong>at</strong>es should be positive IS<br />
accepted.<br />
(ii)<br />
The lending r<strong>at</strong>es have heen mtionalised with a reduction in the<br />
number of concessional slabs <strong>and</strong> enhancement of some r<strong>at</strong>es,<br />
thereby reducing the element of subsidy.<br />
(iii)<br />
Since there is inadequ<strong>at</strong>e margin between the cost of funds <strong>and</strong><br />
lending r<strong>at</strong>es (to cover the cost of transactions <strong>and</strong> risk), there is<br />
need <strong>for</strong> evolving a two-slab structure of lending r<strong>at</strong>es. For the<br />
slab of credit limit above Rs. 2 lakhs, the interest r<strong>at</strong>e should be<br />
freely determined by the market, <strong>and</strong> one concessional interest<br />
<strong>for</strong> the credit limit up to Rs. 2 lakhs could be 2 to 3 percentage<br />
point below the Prime Lending R<strong>at</strong>e (PLR). This may lead to some<br />
increasing in the interest r<strong>at</strong>e <strong>for</strong> small loans. But the committee<br />
suggests th<strong>at</strong> wh<strong>at</strong> is important is the provision of timely <strong>and</strong><br />
adequ<strong>at</strong>e credit.<br />
1 The st<strong>at</strong>e intervention in interest r<strong>at</strong>e policies has been discussed with the<br />
in<strong>for</strong>m<strong>at</strong>ion collected from the RBI's Report 011 Currency <strong>and</strong> FlIlance Ivarious<br />
issues). For a detailed discussion of offlcial reaction on deregul<strong>at</strong>ion of interest<br />
r<strong>at</strong>es as recommended by Narasimham Committee 1991, see, RBI 11991-92), <strong>and</strong><br />
Gadgil 1997.<br />
29
(iv) The credit co-oper<strong>at</strong>ives, Commercial Banks <strong>and</strong> RRBs have all<br />
sustained large financial losses in rural lending, mainly because<br />
of high administr<strong>at</strong>ive costs, political interference, heavy overducs<br />
<strong>and</strong> a non-viable interest structure. Given the n<strong>at</strong>ure of activity of<br />
the co-oper<strong>at</strong>ive banks, it was decided th<strong>at</strong> the co-oper<strong>at</strong>ive credit<br />
structure should be totally freed from deposit/lending r<strong>at</strong>e<br />
control so th<strong>at</strong> these r<strong>at</strong>es could settle <strong>at</strong> realistic level.<br />
(v)<br />
Accordingly, lending <strong>and</strong> deposit r<strong>at</strong>es <strong>for</strong> all co-oper<strong>at</strong>ive banks,<br />
excluding Urban Co-oper<strong>at</strong>ive Banks 8 , were totally deregul<strong>at</strong>ed<br />
from October 1994 subject to a minimum lending r<strong>at</strong>e of 12 per<br />
cent. RRB lending r<strong>at</strong>es were also deregul<strong>at</strong>ed from August 1996.<br />
(vi)<br />
Lending r<strong>at</strong>es of scheduled commercial banks were freed <strong>for</strong><br />
credit limits of over Rs. 2 lakhs. The prescription of minimum<br />
lending r<strong>at</strong>e was abolished <strong>and</strong> banks were advised to obtain the<br />
approval of their respective Boards <strong>for</strong> the PLR which would be<br />
the minimum r<strong>at</strong>e charged by the banks <strong>for</strong> credit limit of over<br />
Rs. 2 lakhs, <strong>and</strong> required to apply uni<strong>for</strong>mly in all their branches.<br />
(vii) For credit limit of over Rs. 25,000 <strong>and</strong> up to Rs. 2 lakhs <strong>for</strong> all<br />
advances including term loans, a uni<strong>for</strong>m lending r<strong>at</strong>e of 13.5 per<br />
cent per annum was prescribed. Effective from October 1997,<br />
instead of a uni<strong>for</strong>m lending r<strong>at</strong>e, it was decided to charge a<br />
maximum r<strong>at</strong>e of 13.5 per cent per annum (RBI 1996-97).<br />
B<br />
From June 1995, the lending r<strong>at</strong>es of Urban Co-oper<strong>at</strong>ive banks were also<br />
deregul<strong>at</strong>ed subject to a minimum of 13 per cent per annum.
Thus, there was a gradual deregul<strong>at</strong>ion of interest r<strong>at</strong>e to the<br />
ultim<strong>at</strong>e borrowers since September 1990. The deregul<strong>at</strong>ion of<br />
interest r<strong>at</strong>e <strong>and</strong> their likely impact have been discussed in the last<br />
section of this chapter.<br />
Movement of Directed Credit in India<br />
In India, directed credit policies have been used <strong>for</strong> promoting<br />
<strong>agriculture</strong> <strong>and</strong> small-scale industries following the n<strong>at</strong>ionalis<strong>at</strong>ion<br />
of commercial banks in 1969 (Kohli 1997). Subsequently, banks<br />
were directed to lend 40 per cent of their net bank credit to priority<br />
sector. Under priority sector-lending, <strong>agriculture</strong> was targeted to<br />
facilit<strong>at</strong>e the adapt<strong>at</strong>ion of new technology to increase agricultural<br />
productivity. It is also argued th<strong>at</strong> <strong>agriculture</strong> was targeted beolllsf'<br />
it was a risky activity <strong>and</strong> households were credit r<strong>at</strong>ioned by the<br />
<strong>for</strong>mal sector (Swamin<strong>at</strong>han 1991; Kochar 1997). Hence, the<br />
commercial <strong>and</strong> co-oper<strong>at</strong>ive banks were directed to exp<strong>and</strong> their<br />
rural branch networks <strong>and</strong> to intensify their lending to <strong>agriculture</strong><br />
during the post n<strong>at</strong>ionalis<strong>at</strong>ion periods.<br />
However, India's directed rural credit programme was not a<br />
success in all respects (Naastepad 2001). Ramach<strong>and</strong>ran <strong>and</strong><br />
Swamin<strong>at</strong>han (2001) were also of the view th<strong>at</strong> although advances in<br />
the countryside increased substantially, such an increase was<br />
uneven, as was the case with green revolution, across regions, crops<br />
<strong>and</strong> classes. The households with an asset holding of less than Rs<br />
10,000 depended on priv<strong>at</strong>e agencies <strong>for</strong> 67 to 90 per cent of their<br />
credit needs (D<strong>and</strong>ekar <strong>and</strong> Wadia 1989). It is also found th<strong>at</strong>,<br />
although moneylenders became less important after independence<br />
due to government intervention in the agricultural credit market<br />
31
through directed credit policies, they still played an important role<br />
largely due to the poor quality of institutional credit (Rajasekhar <strong>and</strong><br />
Vyasulu 1990). Bell (1990) notes th<strong>at</strong> the RBI had exagger<strong>at</strong>ed the<br />
erosion of the moneylender's power in the unorganised credit<br />
market. This meant th<strong>at</strong> financial institutions did not help small <strong>and</strong><br />
marginal farmers, l<strong>and</strong>less labourers <strong>for</strong> whom they were primarily<br />
set up.<br />
It has been argued th<strong>at</strong> the low lending r<strong>at</strong>es set <strong>for</strong><br />
<strong>agriculture</strong> as compared to commercial <strong>and</strong> industrial r<strong>at</strong>es is one of<br />
the important factors <strong>for</strong> poor alloc<strong>at</strong>ion, <strong>and</strong> distribution of credit to<br />
this sector. The commercial banks have to cover the cost of their<br />
agricultural loan from profit arising out of other oper<strong>at</strong>ions <strong>and</strong><br />
cross-subsidise the <strong>agriculture</strong> sector (K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i 1992; Rao<br />
1994; Binswanger <strong>and</strong> Kh<strong>and</strong>ker 1995). A h<strong>and</strong>ful of liter<strong>at</strong>ure on<br />
directed credit policies also support the ineffectiveness in alloc<strong>at</strong>ing 9<br />
a larger share of <strong>for</strong>mal loans to <strong>agriculture</strong>, in general, <strong>and</strong> the<br />
rural poor, in particular, because of risks, return <strong>and</strong> costs of doing<br />
so are un<strong>at</strong>tractive to <strong>for</strong>mal lenders (Lad man <strong>and</strong> Adams 1978; Fry<br />
1979; Vogel <strong>and</strong> Larson 1980).<br />
Furthermore, because of asymmetry of in<strong>for</strong>m<strong>at</strong>ion between<br />
lender <strong>and</strong> borrowers, equilibrium credit r<strong>at</strong>ioning is an inherent<br />
fe<strong>at</strong>ure of financial market (Stiglitz <strong>and</strong> Weiss 1981; Cho 1986;<br />
Gibson <strong>and</strong> Tsakalotos 1994). Such r<strong>at</strong>ioning is inevitable in<br />
situ<strong>at</strong>ions where banks can distinguish between groups of borrowers<br />
9 It has been also argued th<strong>at</strong> oper<strong>at</strong>ions of Rural Financial Markets (RFMs) in<br />
most countries are resulting in inefficient alloc<strong>at</strong>ion of resources, causing<br />
income <strong>and</strong> asset ownership concentr<strong>at</strong>ion, allowing financial resources to flow<br />
out of low income areas <strong>and</strong>, in some cases, diverting resources out of<br />
<strong>agriculture</strong> (Adams <strong>and</strong> Tommy 1974; Vogel 1977; Araujo <strong>and</strong> Me\'er 1978).<br />
"<br />
.'-
(<strong>for</strong> example, on the basis of farm/ firm Size or sector), but cannot<br />
distinguish between individual (good or bad) borrower within a<br />
group. Besides, banks cannot filter the borrowers with high risk<br />
without incurring costs. It is also difficult <strong>for</strong> the banks to use the<br />
interest r<strong>at</strong>e as screening device due to adverse selection. This is due<br />
to the fact th<strong>at</strong> borrowers, willing to pay high interest r<strong>at</strong>es, may be<br />
less worried about repayment of the loan. Under these<br />
circumstances, a profit maximising bank will practice credit<br />
r<strong>at</strong>ioning <strong>and</strong> be reluctant to increase interest r<strong>at</strong>es in response to<br />
an excess dem<strong>and</strong> (Stiglitz <strong>and</strong> Weiss 1981). Consequently, high<br />
risky group borrower may be completely excluded from the market<br />
although their prospective investments offer a high-expected return.<br />
Since <strong>agriculture</strong> is a risky activity where farmers face sho~ks to<br />
their income, bankers are practising a tight credit r<strong>at</strong>ioning process,<br />
which pre-empts farmers from accessing credit (Besley 1994;<br />
Binswanger <strong>and</strong> Deininger 1997).<br />
The subsidised agricultural credit programmes <strong>and</strong> its impact<br />
on the per<strong>for</strong>mance of RFMs came under <strong>at</strong>tack lO as early as the<br />
mid-1970s (Helf<strong>and</strong> 2001). The liter<strong>at</strong>ure th<strong>at</strong> emerged in early<br />
1980s focused on issues of imperfect in<strong>for</strong>m<strong>at</strong>ion, adverse selection,<br />
moral hazard, market failures, <strong>and</strong> interlinked transactions (Stiglitz<br />
<strong>and</strong> Weiss 1981; Bardhan 1984; Hoff <strong>and</strong> Stiglitz 1993; Besley<br />
1994). This liter<strong>at</strong>ure focused on in<strong>for</strong>mal credit in part due to the<br />
demise of cheap <strong>for</strong>mal credit programme (Helf<strong>and</strong> 2001).<br />
10 The main criticisms were alloc<strong>at</strong>ive inefficiencies, concentr<strong>at</strong>ion of income <strong>and</strong><br />
wealth in a particular class of people, <strong>and</strong> failing to achieve their objectives of<br />
promoting agricultural modernis<strong>at</strong>ion. increasing agricultural output <strong>and</strong><br />
redistribution of income in favour of the rural poor. For more details, see, Shaw<br />
1973; Donald 1976; Adams <strong>and</strong> Graham 1981.<br />
33
In the directed credit policies, importance was given to th('<br />
outreach by neglecting the quality <strong>and</strong> cost of lending. Because of<br />
this, the <strong>for</strong>mal banking system began to face the problems of higher<br />
transaction costs (due to lending small amounts to a large number of<br />
borrowers). The disbursal of loans without assessing the feasibility,<br />
viability, <strong>and</strong> entrepreneurial experience of borrowers led the banks<br />
to incur losses due to the widespread problem of fungibility <strong>and</strong> poor<br />
repayment of the loan. Hence, notwithst<strong>and</strong>ing the empirical support<br />
<strong>for</strong> the positive growth effects of directed credit in both <strong>agriculture</strong><br />
<strong>and</strong> small-scale industry, the focus of India's recent financial<br />
re<strong>for</strong>ms is on the phasing-out of its directed credit programme<br />
(Shajahan 1999; Naastepad 2001).<br />
The financial re<strong>for</strong>m (Committee on the Financial System<br />
1991) was primarily concerned with the decline in productivity <strong>and</strong><br />
efficiency of the banking sector. The report points out th<strong>at</strong> directed<br />
credit had neg<strong>at</strong>ive effects on the income of banks through<br />
concessional interest r<strong>at</strong>es <strong>and</strong> high administr<strong>at</strong>ive costs of such<br />
loans. To improve efficiency, the Committee recommended reducing<br />
directed credit from the prevailing 40 per cent to 10 per cent of net<br />
bank credit over a three-year period. Because of strong opposition<br />
from farmers <strong>and</strong> small-scale industry <strong>and</strong> political lobby, the<br />
government has not officially accepted this recommend<strong>at</strong>ion.<br />
Nevertheless, the priority sector lending was reduced to 33 per cent<br />
of gross bank credit (Naastepad 2001). It is also argued th<strong>at</strong> the<br />
per<strong>for</strong>mance of the directed credit programme has been improved<br />
significantly by reducing interest r<strong>at</strong>e subsidies (on loans over Rs.<br />
200,000) <strong>and</strong> giving gre<strong>at</strong>er emphasis on lending along commercial<br />
lines to reduce non-per<strong>for</strong>ming loans (Sarkar <strong>and</strong> Agrawal 1997).
. \ l_<br />
There<strong>for</strong>e, it can be argued th<strong>at</strong> the policy to increase the efficiency<br />
of banking sector may have direct as well as indirect effect on the<br />
rural economy. In other words, how far the efficiency of the banking<br />
sector has been taken into account to increase the credit flow to<br />
<strong>agriculture</strong>, employment, <strong>and</strong> income distribution needs to be<br />
examined<br />
Importantly, despite increasing consensus to extend credit<br />
facility to <strong>agriculture</strong>, in general, <strong>and</strong> small <strong>and</strong> marginal farmer, in<br />
particular, banks were unable to fund those activities with high social<br />
return or those c<strong>at</strong>egories of credit-worthy borrowers who had been<br />
marginalised in credit markets (Stiglitz 1994). It is also argued th<strong>at</strong><br />
the unusually low setting of interest r<strong>at</strong>es on credit-saving (much<br />
lower than the opportunity cost of capital) limited the access of small<br />
<strong>and</strong> marginal farmers to institutional credit since these low r<strong>at</strong>es lead<br />
the lenders to select only borrowers with excellent credit r<strong>at</strong>ings<br />
(Kamajou 1980). So, given these problems wh<strong>at</strong> makes certain<br />
households to access institutional credit <strong>and</strong> others do not? This issue<br />
will be discussed 111 detail <strong>at</strong> the household level analysis.<br />
Nevertheless, the ineffectiveness of directed agricultural credit system<br />
in terms of alloc<strong>at</strong>ion have been discussed in gre<strong>at</strong>er detail more<br />
deeply in the subsequent section with respect to interest r<strong>at</strong>e policy,<br />
cost of lending, <strong>and</strong> the process of credit r<strong>at</strong>ioning.<br />
Subsidised Interest R<strong>at</strong>e <strong>and</strong> Its Impact on Agricultural Credit<br />
Flow<br />
Interest r<strong>at</strong>e plays an important role in determining the supph'<br />
of agricultural credit. In general, the interest r<strong>at</strong>e on agricultural loans<br />
is kept low to promote agricultural growth <strong>and</strong> to assist the rural poor<br />
in developing countries. Several decades of experience on the impact<br />
35
of low interest r<strong>at</strong>es indic<strong>at</strong>es th<strong>at</strong> cheap loans did not appear to have<br />
either increased agricultural output or reached the rural poor l I<br />
(Adams <strong>and</strong> Vogel 1986). Gonzalez-Vega (1984), <strong>and</strong> Ladmarr <strong>and</strong><br />
Tinnermeier (1981) argue th<strong>at</strong> subsidised interest r<strong>at</strong>es are the major<br />
contributing factors <strong>for</strong> fungibility on the part of borrowers <strong>and</strong> credit<br />
diversion on the part of lenders, low lender revenue <strong>and</strong> pohtical<br />
intervention into the credit market.<br />
Thus, if the interest income is gre<strong>at</strong>er than or <strong>at</strong> least equal to<br />
the cost of lending (break-even condition 12), this may positively<br />
influence the financial institutions ll1 increasing the supply of<br />
agricultural credit. However, default r<strong>at</strong>e plays an important role ll1<br />
determining the break-even level of interest r<strong>at</strong>e <strong>for</strong> a financial<br />
11 The question of why <strong>for</strong>mal credit is used to a lesser extent by small <strong>and</strong> potential<br />
borrowers is adequ<strong>at</strong>ely explained in the liter<strong>at</strong>ure. McKinon (1973) <strong>and</strong> Shaw<br />
(1973) are of the view th<strong>at</strong> the ceilings on interest r<strong>at</strong>es do not permit banks to<br />
incorpor<strong>at</strong>e the additional administr<strong>at</strong>ive costs th<strong>at</strong> are involved in advancing<br />
small loans <strong>and</strong> supervise them. The <strong>for</strong>mal lenders basically r<strong>at</strong>ion credit to the<br />
small borrowers in order to reduce their transaction costs (Gonzalez-Vaga 1984;<br />
Anderson <strong>and</strong> Khamb<strong>at</strong>a 1985) which are high <strong>for</strong> servicing small borrowers.<br />
Consequently, banks advance loans to those who offer lower risk <strong>and</strong> better<br />
security. Sarap (1991) is of the view th<strong>at</strong> a typical borrower in unorganised credit<br />
market has no access to organised credit market because of the coll<strong>at</strong>eral he<br />
offers is not acceptable in the organised credit market. Credit is invariably<br />
r<strong>at</strong>ioned in terms of the ability to offer coll<strong>at</strong>eral (Rudra 1982; Binswanger <strong>and</strong><br />
Sillers 1983). Lele (1981) is of the view th<strong>at</strong> credit worthiness criterion adopted by<br />
<strong>for</strong>mal credit institutions is alien<strong>at</strong>ing small farmers from borrowing.<br />
12 (Income from loan portfolio)" (Cost of lending)<br />
(1 + r) I (I - PJ) XJ" I (I + i + aJ) XJ ----------------- (*)<br />
where X, ~ size of each loan<br />
i ~ interest paid per unit of principal on borrowing <strong>and</strong> deposits<br />
a ~ I a, X, I L X,<br />
a J ~ administr<strong>at</strong>ive cost per unit of capital<br />
r ~ lending interest r<strong>at</strong>e<br />
p ~ I P, X, I I X, (expected default r<strong>at</strong>e on loan)<br />
PJ ~ per unit loss of principal due to default on a loan size <strong>for</strong> Xj<br />
B,· substituting the above values in the equ<strong>at</strong>ion (') we can obtain<br />
r" (i +a + p) I (l - p) ----------------- (break-even condition of intere,t r<strong>at</strong>e)<br />
For more details, see, Anderson <strong>and</strong> Khamb<strong>at</strong>a (1985) <strong>and</strong> Hulme <strong>and</strong> Mosel\<br />
(1996).<br />
36
institution. Higher the default r<strong>at</strong>es, higher the break-even interest<br />
r<strong>at</strong>e th<strong>at</strong> has to be charged. But, given the administr<strong>at</strong>ive interest<br />
r<strong>at</strong>e, the banks cannot increase their lending r<strong>at</strong>es irrespective of the<br />
default r<strong>at</strong>e. There<strong>for</strong>e, the banks will try to bring down the breakeven<br />
condition of lending r<strong>at</strong>e to the economic criterion 13 of r<strong>at</strong>e of<br />
interest by reducing the default r<strong>at</strong>e <strong>and</strong> the cost of lending. In order<br />
to reduce the default r<strong>at</strong>e, banks can adopt the process of credit<br />
r<strong>at</strong>ioning l4 . Furthermore, if there is r<strong>at</strong>ioning, there would exist an<br />
excess dem<strong>and</strong> <strong>for</strong> credit than the size of loan sanctioned <strong>at</strong> the profit<br />
maximising r<strong>at</strong>e. Even in the absence of interest r<strong>at</strong>es restriction, as<br />
the probability of default risk is more due to imperfect in<strong>for</strong>m<strong>at</strong>ion in<br />
the rural credit market, non-price credit r<strong>at</strong>ioning 15 is widely accepted<br />
in most of th" Lors (Gonzalez-Vega 1984). Besides, low interest r<strong>at</strong>e<br />
leads to low return <strong>and</strong> poor supervision, which may cause overdue<br />
<strong>and</strong> more risk to the financial institutions. To avoid these problems,<br />
financial institutions may prefer to concentr<strong>at</strong>e on a few selected<br />
13 The marginal efficiency of capital must be gre<strong>at</strong>er than or <strong>at</strong> least equal to the r<strong>at</strong>e<br />
of return on lending (i.e., lending r<strong>at</strong>e of interest). The economic benefit of<br />
investment on loans depends on the amount repaid by the borrowers. For more<br />
details, see, Anderson <strong>and</strong> Khamb<strong>at</strong>a (1985).<br />
14 It refers to a situ<strong>at</strong>ion where <strong>at</strong> the going r<strong>at</strong>e of interest in the credit transaction,<br />
the borrower likes to borrow more money but it is not permitted by the lender<br />
(Basu 1997; Ray 1998). Fried <strong>and</strong> Howitt (1980) are of the view th<strong>at</strong> credit<br />
r<strong>at</strong>ioning exists as a part of an equilibrium risk sharing arrangement between<br />
Formal Financial Institutions (F'Flsj <strong>and</strong> the borrower. Credit is invariably<br />
r<strong>at</strong>ioned in terms of ability to offer coll<strong>at</strong>eral (Rudra 1982; Binswanger <strong>and</strong> Sillers<br />
1983; Von Pischke et al 1983; <strong>and</strong> Sarap 1991). For a more detailed discussion<br />
on the impact of interest r<strong>at</strong>e ceiling <strong>and</strong> credit r<strong>at</strong>ioning, see, Gonzalez-Vega<br />
(1984), Anderson <strong>and</strong> Khamb<strong>at</strong>a (1985), <strong>and</strong> Basu (1997). E<strong>at</strong>on <strong>and</strong> Gersovitz<br />
(1981) have suggested a model with endogenous default costs where default leads<br />
to exclusion from the credit market. Given this. a contract is en<strong>for</strong>ceable provided<br />
th<strong>at</strong> each payment is less than the value of future access from the credit market.<br />
15 In the case of non-price credit r<strong>at</strong>ioning. the potential borrower is willing to pay<br />
the full price (i.e., non-interest term <strong>and</strong> conditions of the loan contract with<br />
interest r<strong>at</strong>e charged), but the <strong>for</strong>mal financial institutions are not willing to grant<br />
the loan of the size dem<strong>and</strong>ed. For more details, see, Jafee (1971 J, <strong>and</strong> Gonzalez<br />
Vega (1984).<br />
37
orrowers, those who have creditworthiness with excellent loan<br />
coll<strong>at</strong>eral <strong>and</strong> those who take large loans. This suggests th<strong>at</strong> a ceiling<br />
on lending r<strong>at</strong>e has two kinds of impact on the institutional credit<br />
market. The first type of impact can be observed in the flow of credit<br />
<strong>and</strong> the second one can be observed in access to credit by different<br />
c<strong>at</strong>egory borrowers.<br />
The interest r<strong>at</strong>e ceiling seems to have had similar impact in<br />
India. The provision of cheap credit to <strong>agriculture</strong> in India gives rise to<br />
two kinds of credit subsidyl6. First, the interest subsidy accrues to<br />
<strong>agriculture</strong> because the r<strong>at</strong>e of lending to this sector is lower<br />
compared to the other sectors of the economy. The second type of<br />
credit subsidy is the difference between the CO!lt of !lupplying credit to<br />
the agricultural sector, including defaults <strong>and</strong> r<strong>at</strong>e of interest received<br />
from outst<strong>and</strong>ing credit. Using the above conceptual framework,<br />
K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i's (1992) study reveals th<strong>at</strong> concessional interest<br />
r<strong>at</strong>es autom<strong>at</strong>ically result in cross subsidis<strong>at</strong>ion. They are of the view<br />
th<strong>at</strong> of the three types of banks in India, i.e., Commercial Banks<br />
(CBs), RRBs <strong>and</strong> Co-oper<strong>at</strong>ives, only CBs have the scope <strong>for</strong> crosssubsidis<strong>at</strong>ion.<br />
It happens in the case of CBs because they lend to a<br />
variety of sectors <strong>and</strong> have the possibility to lend to those activities<br />
th<strong>at</strong> earn interest of more than 16 per cent. Besides, they have also<br />
estim<strong>at</strong>ed th<strong>at</strong> during the 1980s, the total credit subsidy to<br />
<strong>agriculture</strong> was 7.36 per cent of the outst<strong>and</strong>ing. This implies th<strong>at</strong><br />
7.36 per cent of the total loanable funds could not come back to the<br />
banking system, <strong>and</strong> to th<strong>at</strong> extent the quantum of funds available to<br />
<strong>for</strong>mal banks came down. This is further corrobor<strong>at</strong>ed by Bishnoi's<br />
(1991) argument th<strong>at</strong> interest subsidy to priority sectors compared to<br />
16 For a detailed discussion, see, K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i (1992).<br />
38
the industrial sector has been the major contributing factor <strong>for</strong> lower<br />
credit flow to the <strong>agriculture</strong> sector.<br />
Can financial institutions go <strong>for</strong> higher lending r<strong>at</strong>e to get a<br />
good margin out of their deployment of funds to the <strong>agriculture</strong><br />
sector? The Agricultural Credit Review Committee headed by Khusro<br />
(1989) <strong>and</strong> the Committee on Financial System (1991) had<br />
recommended enhancement of lending r<strong>at</strong>es to cover risk <strong>and</strong><br />
additional costs associ<strong>at</strong>ed with it. In this context, a study made bv<br />
Gadgil (1992, 1994) reveals th<strong>at</strong>, by <strong>and</strong> large, farmers could af<strong>for</strong>d<br />
higher interest r<strong>at</strong>es if accompanied by an improvement in the quality<br />
of lending.<br />
In theory, however, a question was raised on whether one could<br />
take higher lending r<strong>at</strong>e as the criterion of the profitability. Stiglitz<br />
<strong>and</strong> Weiss (1981) argue th<strong>at</strong> increasing interest r<strong>at</strong>es or increasing<br />
coll<strong>at</strong>eral requirements could increase the riskiness of the bank's loan<br />
portfolio, either by discouraging safer investors or by inducing<br />
borrowers to invest in a riskier projects, <strong>and</strong> there<strong>for</strong>e, could decrease<br />
the bank's profit. This implies th<strong>at</strong> the bank may incur more loss with<br />
the increased lending r<strong>at</strong>e <strong>and</strong> it may adversely affect the viability of<br />
the system. It may also happen th<strong>at</strong> many good borrowers may move<br />
out from the <strong>for</strong>mal credit market with increasing lending r<strong>at</strong>e.<br />
Making a similar point on viability, Basu (1997) notes th<strong>at</strong> it is the<br />
default risk, r<strong>at</strong>her than the ceiling on interest r<strong>at</strong>e, which IS the<br />
major contributing factor of non-profitability <strong>and</strong> non-viability.<br />
Ceiling on Interest R<strong>at</strong>es <strong>and</strong> Access to <strong>Institutional</strong> Credit<br />
Gonzalez-Vega (1984) has developed a conceptual framework on credit<br />
r<strong>at</strong>ioning <strong>and</strong> their impact on access to institutional credit with the<br />
39
help of non-price credit r<strong>at</strong>ioning by assuming a binding ceiling on<br />
interest r<strong>at</strong>e is imposed on the banks. The Iron Law of Interest R<strong>at</strong>e<br />
Restrictiolls st<strong>at</strong>es th<strong>at</strong>, when interest r<strong>at</strong>e ceiling becomes more<br />
restrictive, the size of the loan granted to non-r<strong>at</strong>ioned borro\\·er<br />
classes increases, while the size of loan granted to the r<strong>at</strong>ioned<br />
borrower classes diminishes (Gonzalez-Vega 1984). The Iron Law of<br />
Interest R<strong>at</strong>e Restriction assumes th<strong>at</strong> dem<strong>and</strong> <strong>for</strong> credit is inversely<br />
rel<strong>at</strong>ed to the real r<strong>at</strong>e of interest <strong>and</strong> the lender's marginal cost<br />
increases with loan size (Figure 2.1).<br />
Figure 2.1 shows th<strong>at</strong> when r<strong>at</strong>ioning IS taking place, the<br />
marginal cost of the loan becomes equal to the ceiling interest r<strong>at</strong>e.<br />
Hence, depending on the rel<strong>at</strong>ive level of ceiling with respect to<br />
marginal cost of lending, some or all of the borrowers may be<br />
subjected to non-price credit r<strong>at</strong>ioning. Figure 2.1 also shows th<strong>at</strong>, <strong>for</strong><br />
the r<strong>at</strong>ioned borrower, credit is available along the lender's marginal<br />
cost curve whereas <strong>for</strong> non-r<strong>at</strong>ioned borrower along with his credit<br />
dem<strong>and</strong> curve.<br />
Figure 2.1: R<strong>at</strong>ioning Behaviour oftbe Lender<br />
r<br />
(Non-r<strong>at</strong>ioned borrower)<br />
MC2<br />
r<br />
r*<br />
MC.<br />
(R<strong>at</strong>ioned borrower)<br />
Credit) D,<br />
Source: Gonzalez-Vega (1984)<br />
D, (Credit)<br />
·HI
From the above theoretical model, one can see th<strong>at</strong> ceiling on<br />
interest r<strong>at</strong>e <strong>and</strong> cost of lending have serious implic<strong>at</strong>ion on access to<br />
institutional credit. Given the risks <strong>and</strong> transaction costs associ<strong>at</strong>ed<br />
with lending, most of the <strong>for</strong>mal financial institutions try to optimise<br />
the loan size to each class of borrowers by credit r<strong>at</strong>ioning devices.<br />
Thus, when credit r<strong>at</strong>ioning takes place, two things can happen. First,<br />
financial institutions may concentr<strong>at</strong>e on a select few, those who have<br />
credit worthiness with excellent loan coll<strong>at</strong>eral. Second, since access<br />
to credit <strong>and</strong> loan sizes are highly correl<strong>at</strong>ed with income level <strong>and</strong><br />
assets, large farmers <strong>and</strong> the well-to-do benefit most from the cheap<br />
credit (Lipton 1976; Lele 1981; Adams <strong>and</strong> Vogel 1986; Braverman<br />
<strong>and</strong> Guasch 1986).<br />
The above discussion focuses on the poor access to<br />
institutional credit by some c<strong>at</strong>egory of agricultural borrowers from<br />
the supply side point of view. However, the analysis of availability <strong>and</strong><br />
access to institutional credit by the borrower may not be complete<br />
without taking into account the dem<strong>and</strong> side problems. It is often<br />
argued th<strong>at</strong> small <strong>and</strong> medium borrowers are indifferent as to whether<br />
to seek a <strong>for</strong>mal or in<strong>for</strong>mal loan because they feel th<strong>at</strong> their total cost<br />
of acquiring a loan from either source are similar (Adams <strong>and</strong> Nehman<br />
1979). In this context, it is essential to focus the factors, which<br />
influence the dem<strong>and</strong> <strong>for</strong> institutional credit.<br />
Borrowing Costs <strong>and</strong> Dem<strong>and</strong> <strong>for</strong> Credit<br />
The liter<strong>at</strong>ure on <strong>for</strong>mal credit contains several explan<strong>at</strong>ions <strong>for</strong> the<br />
limited dem<strong>and</strong> of <strong>for</strong>mal credit by small <strong>and</strong> potential borrowers. The<br />
liter<strong>at</strong>ure focuses th<strong>at</strong> most poor do not seek <strong>for</strong>mal credit due to lack<br />
of profitable investment opportunities <strong>and</strong> poor idea of credit use.<br />
41
42<br />
Schrieder (2000) argues th<strong>at</strong> many poor do not approach <strong>for</strong> credit<br />
from institutional credit agencies as they value the risk associ<strong>at</strong>ed<br />
with indebtedness to be higher than the possible return on<br />
investment. The other studies (Adams <strong>and</strong> Nehman 1979; Aron 1981;<br />
Timberg <strong>and</strong> Aiyar 1984; Sarap 1990) focus on borrowing costsl' <strong>and</strong><br />
borrower's behaviour on dem<strong>and</strong> <strong>for</strong> credit. They argue th<strong>at</strong> higher<br />
borrowing costs incurred by small potential borrowers as compared to<br />
large borrowers discourage them to approach the <strong>for</strong>mal credit<br />
institutions.<br />
Ladman (1984) provides a theoretical framework on dem<strong>and</strong> <strong>for</strong><br />
credit based on the rel<strong>at</strong>ionship between average borrowing costs<br />
(ABC) <strong>and</strong> average revenue (AR) of debt <strong>finance</strong>d invest.!nent. Both AR<br />
<strong>and</strong> ABC incurred by the borrower represent revenues <strong>and</strong> borrowing<br />
costs divided by the size of the loan (Ll utilised <strong>for</strong> a particular<br />
purpose. He explains th<strong>at</strong>, with a given set of technology, the farmer,<br />
who relies upon credit, derives dem<strong>and</strong> schedule of loan from the<br />
value of marginal product by using successive loan units. It implies<br />
th<strong>at</strong>,<br />
BC = Total fixed transaction costs (Tl) + Other transaction costs<br />
(T2) <strong>and</strong> thus, ABC = (TI + T2)/ L<br />
Tl represents the amount of outlay the farmer must make in applying<br />
<strong>for</strong> a loan. The payment <strong>for</strong> applic<strong>at</strong>ion fees, service fees, documents<br />
<strong>and</strong> other paperwork are examples ofT\. The cost involved in payment<br />
<strong>for</strong> commission <strong>and</strong> bribe to offlcer / technician/ bank staff, leader or<br />
17 To obtain a loan a farmer has to go through the procedures th<strong>at</strong> are required by<br />
the lender's credit delivery system, which result in borrowing costs. The<br />
borrowing costs (Be) by the prospective borrower may include nominal interest<br />
payments made to the lender, additional loan transaction costs, <strong>and</strong> the changes<br />
in the purchasing power of the money over the loan period. For more details, see,<br />
Adams <strong>and</strong> Nehman (1979).
middleman <strong>for</strong> negoti<strong>at</strong>ion, travel to <strong>and</strong> from the financial institution<br />
<strong>and</strong> the opportunity cost of time involved are examples of T2.<br />
Since loan procedures <strong>and</strong> paperwork are independent, the<br />
average fixed cost declines with loan size. The borrowing cost also<br />
depends on the frequency of meeting bank staff, in<strong>for</strong>m<strong>at</strong>ion of<br />
borrower's st<strong>at</strong>us on efftciency of funds investment, credit worthiness<br />
<strong>and</strong> the number of times th<strong>at</strong> a farm household obtained loan from<br />
the institutional sector. For large <strong>and</strong> experienced borrowers, the<br />
transaction costs decline. These loan transaction costs appear to be<br />
much less important <strong>for</strong> large size borrowers. However, loan<br />
transaction costs appear to make up a very large part of borrowing<br />
costs <strong>for</strong> many small <strong>and</strong> medium si7.p horrowprs (Adl'lms <strong>and</strong> Nphman<br />
01 - •• - - - ,- - - ----- - --<br />
1979). Since total borrowing cost is the summ<strong>at</strong>ion of interest<br />
payment (r) <strong>and</strong> transaction cost, ABC declines with respect to the size<br />
of loan.<br />
Let us assume th<strong>at</strong> the borrower is a profit (n) maxlmlser <strong>and</strong><br />
thus seeks a loan if he expects n > 0 i.e. AR > ABC. Thus, the borrower<br />
would borrow until the point where marginal cost of borrowing<br />
(additional interest payment) is equal to marginal value product (MVP)<br />
from additional resources purchased with borrowed funds (Figure<br />
2.2). Given the interest r<strong>at</strong>es r, the vertical distance between r<strong>and</strong><br />
ABC represent transaction cost <strong>for</strong> any size of loan. Thus, larger the<br />
borrower's transaction cost, the higher will be the average borrowing<br />
cost <strong>and</strong> vice-versa <strong>for</strong> any given interest r<strong>at</strong>e.<br />
43
Figure 2.2: Borrowing Costs <strong>and</strong> Dem<strong>and</strong> <strong>for</strong> Credit<br />
ABC<br />
AR/ABC/D/MVP<br />
IT<br />
AR<br />
r<br />
TC<br />
D/MVP<br />
Source: Ladman (1984)<br />
Tl L* Dem<strong>and</strong> <strong>for</strong> Credit<br />
From the above analysis, one can say th<strong>at</strong>, gIVen the binding<br />
interest r<strong>at</strong>e, it is the bcrrc\ver~s transnction cost, v,thich determines<br />
the level of dem<strong>and</strong> <strong>for</strong> credit. Figure 2.2 shows th<strong>at</strong> borrowing<br />
threshold (TJ) is the point where ABC = AR. Below this amount there<br />
will be no dem<strong>and</strong> <strong>for</strong> credit because ABC> AR. If the borrower's TC<br />
exceeds a certain level of their expect<strong>at</strong>ion, they may not approach <strong>for</strong><br />
institutional credit. It is observed th<strong>at</strong> not all applicants <strong>for</strong> <strong>for</strong>mal<br />
credit receive a loan. The expected borrowing costs of a new <strong>for</strong>mal<br />
applicant may be increased by their rejection possibility. These<br />
rejection costs may be quite important if the probability of getting a<br />
new <strong>for</strong>mal loan is rel<strong>at</strong>ively low. Besides, many are of the view th<strong>at</strong><br />
differential borrowing cost strongly affects the willingness of the rural<br />
poor to seek loan from the <strong>for</strong>mal sector.<br />
Conclnding Remarks<br />
Realising the importance of credit In terms of changing the<br />
composition <strong>and</strong> distribution of production In favour of deficit<br />
producers, shifting rural borrowing from in<strong>for</strong>mal to <strong>for</strong>mal<br />
institutions, <strong>and</strong> increasing the use of improved variety inputs, the<br />
44
supply-led approach has been adopted m the pro\'lSlOnmg of<br />
agricultural credit in India. It is also realised th<strong>at</strong> both revealed <strong>and</strong><br />
potential dem<strong>and</strong> <strong>for</strong> credit exceeds the supply. Based on these<br />
consider<strong>at</strong>ions, banks were directed to exp<strong>and</strong> the share of net bank<br />
credit to <strong>agriculture</strong> sector. In the directed credit policy, importance<br />
was given to the outreach by neglecting the quality <strong>and</strong> cost of<br />
lending. The high cost structure of oper<strong>at</strong>ions in rural areas with low<br />
interest r<strong>at</strong>e was an important factor <strong>for</strong> the failure of directed credit<br />
system. When the supply-led approach started to thre<strong>at</strong>en the viability<br />
of financial institutions, the policy thrust since 1990s shifted to make<br />
agricultural credit a viable activity. In this phase of agricultural credit<br />
policy, importance was given to achieving quantit<strong>at</strong>ive target without<br />
neglecting the viability of the. financial institutions. Thus, the<br />
assumption of cross-subsidis<strong>at</strong>ion of agricultural credit was relaxed<br />
<strong>and</strong> the lending r<strong>at</strong>e to the ultim<strong>at</strong>e borrowers was r<strong>at</strong>ionalised in<br />
terms of reduction In the number of concessional slabs <strong>and</strong><br />
enhancement of some r<strong>at</strong>es. One could, there<strong>for</strong>e, expect th<strong>at</strong> the<br />
deregul<strong>at</strong>ion of interest r<strong>at</strong>es <strong>and</strong> improved quality of lending might<br />
have helped the <strong>for</strong>mal agencies to get more profit in agricultural<br />
lending, <strong>and</strong> enhanced the proportion of credit to <strong>agriculture</strong> to the<br />
total net bank credit. In this context, it is necessary to discuss the<br />
likely impact of interest r<strong>at</strong>e policy in the provisioning of agricultural<br />
credit.<br />
(al Except the Differential R<strong>at</strong>e of Interest Scheme oper<strong>at</strong>ed by the<br />
commercial banks <strong>and</strong> RRBs, identical r<strong>at</strong>es are prescribed <strong>for</strong> all<br />
sectors of the economy including <strong>agriculture</strong>, which vary directly<br />
with the size of loan <strong>and</strong> there are only three size slabs18 now. The<br />
18 First slab covers the credit limit up to Rs.25, 000. The second <strong>and</strong> third slabs<br />
cover above Rs.25, 000 <strong>and</strong> up to Rs.2 lakhs, <strong>and</strong> above Rs.2 lakhs of loan<br />
respectively.
<strong>at</strong>es are also identical <strong>for</strong> short <strong>and</strong> long-term loans <strong>for</strong> a given<br />
size. However, with the freedom given to rural co-oper<strong>at</strong>ive banks<br />
since October 1994 <strong>and</strong> to RRBs since August 1996 to determine<br />
their own lending r<strong>at</strong>es <strong>for</strong> all the slabs, the uni<strong>for</strong>mity of lending<br />
r<strong>at</strong>es to ultim<strong>at</strong>e borrowers has probably vanished.<br />
(b) Since all financial institutions induding commercial banks have<br />
been given freedom to determine the lending r<strong>at</strong>es <strong>for</strong> loans above<br />
Rs. 2 lakhs, different institutions may have <strong>for</strong>mul<strong>at</strong>ed different<br />
interest r<strong>at</strong>es on these loans.<br />
(c) If the lending costs (sum of financial, transaction <strong>and</strong> risk cost) of<br />
rural credit institutions [as estim<strong>at</strong>ed by the Agricultural Credit<br />
Review Committee (ACRC) <strong>for</strong> the period 1983-84 through 1985-86 J<br />
are compared with the lending r<strong>at</strong>es, the presently prescribed r<strong>at</strong>e<br />
<strong>for</strong> CBs on loans up to Rs.2 lakhs is inadequ<strong>at</strong>e to cover the costs<br />
of lending l9 . Since the maximum prescribed lending r<strong>at</strong>e <strong>for</strong> CB is<br />
13.5 per cent per annum <strong>for</strong> the credit limit of up to Rs.2 lakhs, it<br />
is not possible to increase, the lending r<strong>at</strong>e to cover the costs. Thus,<br />
the CBs have the following two options. First, they may neglect the<br />
borrower who dem<strong>and</strong>s agricultural loan up to the limit of Rs.2<br />
lakhs; second, they have to cross-subsidise this segment of<br />
agricultural borrowers. It may also be possible th<strong>at</strong> in order to<br />
minimise the extent of cross-subsidy, CBs may be concentr<strong>at</strong>ing on<br />
a particular c<strong>at</strong>egory of agricultural borrowers to achieve the<br />
lending target given to them. Commercial banks may also be<br />
moving towards a higher profit-oriented portfolio through diversion<br />
19 For CBs, the cost of lending was 14.48 per cent per annum, whereas <strong>for</strong> Cooper<strong>at</strong>ives<br />
<strong>and</strong> RRB it was 16.30 per cent <strong>and</strong> 15.70 per cent, respectively.<br />
46
of funds from sectors with lower returns to those having higher<br />
returns.<br />
(d) In the case of RRBs <strong>and</strong> co-oper<strong>at</strong>ive banks, as the lending r<strong>at</strong>es<br />
have been totally deregul<strong>at</strong>ed <strong>for</strong> all slabs of credit limit, it is up to<br />
them to raise the lending r<strong>at</strong>e suitably to meet the cost of lending.<br />
However, the increasing lending r<strong>at</strong>e of RRBs <strong>and</strong> co-oper<strong>at</strong>ive<br />
banks may induce their borrower to turn to CBs. Even if such a<br />
shift in dem<strong>and</strong> takes place <strong>for</strong> the loan amount of up to Rs 2<br />
lakhs, the CBs are unlikely to extend their credit facility to such<br />
borrowers. Even if CBs extend credit facility, they may not go<br />
beyond the prescribed level of 18 per cent of net bank credit.<br />
There<strong>for</strong>e, it is important to examine th~ rli!"trihlJtion p<strong>at</strong>tern of<br />
agricultural credit by CBs <strong>for</strong> below <strong>and</strong> above the credit limits of<br />
Rs 2 lakhs.<br />
Since financial institutions are not allowed to charge less than<br />
12 per cent of annual r<strong>at</strong>es on farm <strong>and</strong> non-farm loans, it is not the<br />
floor r<strong>at</strong>e but the ceiling r<strong>at</strong>e th<strong>at</strong> has been deregul<strong>at</strong>ed. In this<br />
context, the following questions arise. Does credit subsidy due to<br />
concessionary interest r<strong>at</strong>e adversely affect the credit flow to<br />
<strong>agriculture</strong>? Can increasing lending r<strong>at</strong>e be a solution to reduce the<br />
r<strong>at</strong>e of credit subsidy? Wh<strong>at</strong> is the interest r<strong>at</strong>e elasticity on the<br />
supply of agricultural credit? These questions have been discussed in<br />
the third chapter.<br />
The introduction of the PLCP is likely to be helpful in removing<br />
:he ground level problems on credit flow <strong>and</strong> bridge the gap between<br />
.arget <strong>and</strong> achievement of credit to the priority sectors. The policy of<br />
47
e<strong>finance</strong> facility by NABARD might have helped to restructure the<br />
lending activity of CBs <strong>and</strong> RRBs to different sectors including<br />
<strong>agriculture</strong>. Importantly, these policies may be helping CBs <strong>and</strong> RRBs<br />
to achieve their lending target given <strong>for</strong> <strong>agriculture</strong> sector.<br />
Nevertheless, setting of lending targets <strong>for</strong> <strong>agriculture</strong> might have<br />
resulted in a positive impact on the supply of credit to hitherto<br />
neglected sector by giving ample access <strong>for</strong> marginal <strong>and</strong> small<br />
farmers to institutional credit. In the context of these policy changes<br />
<strong>and</strong> recommend<strong>at</strong>ions made by both Narashimham <strong>and</strong> Gupta<br />
committees, the extent to which the <strong>for</strong>mal banking system has<br />
improved the access to agricultural credit is to be examined. This<br />
issue is taken up <strong>for</strong> discussion in the following chapters.<br />
48
Chapter 3<br />
CREDIT FLOW TO AGRICULTURE: TRENDS AND<br />
CONTRIBUTING FACTORS AT ALL-INDIA LEVEL<br />
Introduction<br />
The administered alloc<strong>at</strong>ion of credit to priority sectors <strong>at</strong><br />
concessional interest r<strong>at</strong>es is an important policy dimension of<br />
directed credit programmes. The r<strong>at</strong>ionale of this policy lies in the fact<br />
th<strong>at</strong>, without government interference through directed credit<br />
programmes, banks do not fund to those activities with high social<br />
return or those c<strong>at</strong>egories of credit-worthy people who are<br />
marginalised in the credit market (Stiglitz 1994). The directed credit<br />
policies in India have been used <strong>for</strong> promoting <strong>agriculture</strong> <strong>and</strong> smallscale<br />
industry. Agriculture has been targeted because it is a risky<br />
activity <strong>and</strong> households are credit r<strong>at</strong>ioned by the <strong>for</strong>mal sector<br />
(Swamin<strong>at</strong>han 1991; Kochar 1997). It is also felt th<strong>at</strong> the availability<br />
of concessional credit could help the farmer to adopt new technology,<br />
encourage investment on machinery <strong>and</strong> irrig<strong>at</strong>ion <strong>and</strong> augment the<br />
use of quality inputs to increase agricultural productivity. Thus,<br />
commercial <strong>and</strong> co-oper<strong>at</strong>ive banks were directed to exp<strong>and</strong> their<br />
rural branch networks <strong>and</strong> intensify their lending to <strong>agriculture</strong>.<br />
After the n<strong>at</strong>ionalis<strong>at</strong>ion, lending to priority sectors became an<br />
essential component of bank lending. By taking the increasing credit<br />
needs <strong>for</strong> farming oper<strong>at</strong>ions into account, specific lending targets<br />
were fixed <strong>for</strong> each major bank. Ultim<strong>at</strong>ely, it was recommended to<br />
raise the proportion of direct farm lending to 18 per cent of net bank<br />
credit by March 1990. However, India's rural directed credit<br />
programme has not been a success, specifically in terms of alloc<strong>at</strong>ion<br />
of resources, cost-effectiveness <strong>and</strong> access to credit <strong>for</strong> different<br />
49
c<strong>at</strong>egories of farmers due to the following: First, the agricultural<br />
lending r<strong>at</strong>es set by the government were lower than commercial <strong>and</strong><br />
industrial r<strong>at</strong>es, <strong>and</strong> hence, commercial banks could not cover the<br />
cost of their agricultural loan from profit ansmg from other<br />
oper<strong>at</strong>ions. This led to cross-subsidis<strong>at</strong>ion of the agricultural<br />
oper<strong>at</strong>ions (K<strong>at</strong>ula <strong>and</strong> Gul<strong>at</strong>i 1992; Rao 1994; Binswanger <strong>and</strong><br />
Kh<strong>and</strong>ker 1995). Second, the preoccup<strong>at</strong>ion to achieve quantit<strong>at</strong>ive<br />
targets, ignoring qualit<strong>at</strong>ive aspects <strong>and</strong> mounting overdues, became a<br />
thre<strong>at</strong> to the viability of financial institutions. Third, the disbursal of<br />
loans without assessing the feasibility, viability <strong>and</strong> entrepreneurial<br />
experience of borrowers (Rajasekhar <strong>and</strong> Vyasulu 1993) led the banks<br />
to incur losses due to the widespread problem of fungibility <strong>and</strong> poor<br />
repayment of the loan<br />
The effectiveness of directed credit programmes in stimul<strong>at</strong>ing<br />
investment, raising growth <strong>and</strong> reducing poverty was often deb<strong>at</strong>ed<br />
(Naastepad 2001). It is also argued th<strong>at</strong> directed credit was inferior to<br />
a market-based alloc<strong>at</strong>ion of resources in achieving growth <strong>and</strong><br />
redistributive objectives (World Bank 1989; Odedokun 1996; Varon et<br />
al. 1998). Hence, notwithst<strong>and</strong>ing the empirical support <strong>for</strong> the<br />
positive growth effects of directed credit in both <strong>agriculture</strong> <strong>and</strong> smallscale<br />
industry, the focus of India's recent financial re<strong>for</strong>ms has been<br />
on the phasing-out of its directed credit programmes (Shajahan 1999;<br />
Naastepad 2001). As explained by the Report of the Narasimham<br />
Committee on the Financial System (1991), the financial re<strong>for</strong>ms were<br />
primarily concerned with the decline in productivity <strong>and</strong> efficiency of<br />
the banking sector. The report points out th<strong>at</strong> the directed credit had<br />
neg<strong>at</strong>ive effects on the income of banks through concessional interest<br />
r<strong>at</strong>es <strong>and</strong> high administr<strong>at</strong>ive costs of such loans. To improve the<br />
50
efficiency, the Committee recommended reducing the directed credit<br />
from the prevailing 40 per cent to 10 per cent of net bank credit over a<br />
three-year period. Due to strong opposition from fanners <strong>and</strong> smallscale<br />
industry <strong>and</strong> political lobby, the government did not officially<br />
accepted this recommend<strong>at</strong>ion. In fact, the RBI has been following the<br />
str<strong>at</strong>egy of keeping the overall share of priority sector <strong>at</strong> 40 per cent of<br />
net bank credit, <strong>and</strong> broadening the scope of priority sector lending to<br />
encourage diversion <strong>for</strong>m it to the new areas added to this sector. In<br />
other words, importance was given to achieve the same quantit<strong>at</strong>ive<br />
target without neglecting the viability of the financial institutions.<br />
Thus, assumption of cross-subsidis<strong>at</strong>ion of agricultural credit was<br />
relaxed <strong>and</strong> the lending r<strong>at</strong>e to the ultim<strong>at</strong>e borrowers was<br />
r<strong>at</strong>ionalised in terms of reduction in the number of c:oncessiona.l slabs<br />
<strong>and</strong> the enhancement of some r<strong>at</strong>es. The other important<br />
recommend<strong>at</strong>ions include the abolition of branch licensing, closing<br />
down of loss making bank branches, gradual reduction of Cash<br />
Reserve R<strong>at</strong>io (CRR) <strong>and</strong> St<strong>at</strong>utory Liquidity R<strong>at</strong>io (SLR).<br />
One can, there<strong>for</strong>e, expect the following positive as well as<br />
neg<strong>at</strong>ive influences of banking sector re<strong>for</strong>ms on the credit flow to<br />
<strong>agriculture</strong>.<br />
1. Deregul<strong>at</strong>ion of interest r<strong>at</strong>e may have helped the <strong>for</strong>mal agencies<br />
to enhance the proportion of disbursement to agricultural sector in<br />
the overall net bank credit.<br />
2. Widening scope of priority sector may have resulted in the gre<strong>at</strong>er<br />
availability of credit to priority sector, in general, <strong>and</strong> <strong>agriculture</strong><br />
sector, in particular.<br />
3. Increasing the availability of funds to the banks as a result of<br />
reduced CRR <strong>and</strong> SLR may have a positive impact on the credit<br />
flow to <strong>agriculture</strong>.<br />
51
4. Since most of the loss-making bank branches during the prere<strong>for</strong>m<br />
period were loc<strong>at</strong>ed in rural areas. the closure of bank<br />
branches may lead to reduced supply of credit to <strong>agriculture</strong>.<br />
5. The recommend<strong>at</strong>ion of the Gupta Committee th<strong>at</strong> the quality of<br />
lending is to be improved may provide ample access to institutional<br />
credit by marginal <strong>and</strong> small farmers.<br />
The above raises the following questions. Does the banking sector<br />
re<strong>for</strong>ms improve the share of net bank credit to <strong>agriculture</strong> sector?<br />
Does profit-oriented lending norms persuade commercial banks to<br />
neglect <strong>agriculture</strong> sector? Does credit subsidy reduce the supply of<br />
agricultural credit? Can increasing lending r<strong>at</strong>e be a means to reduce<br />
the r<strong>at</strong>e of credit subsidy? Wh<strong>at</strong> is the interest r<strong>at</strong>e elasticity on the<br />
supply of agricultural credit? Wh<strong>at</strong> is the impact of the closure of<br />
rural bank branches on the provision of credit to <strong>agriculture</strong>? Does<br />
the expansion of the scope of <strong>agriculture</strong> sector bank-lending result in<br />
the gre<strong>at</strong>er availability of credit?<br />
This chapter addresses these questions by analysing the d<strong>at</strong>a<br />
collected from the Report on Currency <strong>and</strong> Finance <strong>and</strong> Banking<br />
St<strong>at</strong>istics on the total outst<strong>and</strong>ing credit provided by the Scheduled<br />
Commercial Banks (SCBs) to the <strong>agriculture</strong> sector.<br />
Credit Flow to Agriculture<br />
Soon after independence. the share of Formal Rural Banking System<br />
(FRBS) in the total credit was found to be insignificant. However. the<br />
n<strong>at</strong>ionalis<strong>at</strong>ion of banks in 1969. introduction of RRBs <strong>and</strong> priority<br />
sector lending has had the desired impact in stepping up the supply of<br />
credit to <strong>agriculture</strong>. The share of <strong>agriculture</strong> in the total credit<br />
provided by FRBS. which was only 7.1 per cent in 1969. increased to<br />
15.72 per cent of the total net bank credit by 1980.<br />
52
The total outst<strong>and</strong>ing credit disbursed by all the SeBs increased<br />
from Rs.28,391.73 crores in 1981 to Rs.460,080.68 crores by 2000.<br />
The annual growth r<strong>at</strong>e of total outst<strong>and</strong>ing credit was 15.38 per cent<br />
during this period (Table 3.1). The growth r<strong>at</strong>e during the period 1991-<br />
2000 was high as compared to th<strong>at</strong> during the period 1981- 91. One<br />
of the important contributing factors <strong>for</strong> rapid growth r<strong>at</strong>e during the<br />
re<strong>for</strong>m period was the policy decision to slash eRR <strong>and</strong> SLR to<br />
increase funds availability to the banking sector. The eRR declined<br />
from 15 per cent of dem<strong>and</strong> <strong>and</strong> time liability in 1991 to 8.5 per cent<br />
in 2000, while the SLR declined from 38.5 per cent to 25 per cent<br />
during the same period. Besides, the borrowing from RBI was stepped<br />
up after 1991 to facilit<strong>at</strong>e more funds to the SeBs (RBI 2001).<br />
Was the rapid growth in the total credit the same across all the<br />
sectors? Table 3.1 shows th<strong>at</strong> the annual growth r<strong>at</strong>es of credit to<br />
professional services <strong>and</strong> personal loans, <strong>finance</strong> <strong>and</strong> others were<br />
higher during the pre-re<strong>for</strong>m period. On the other h<strong>and</strong>, the r<strong>at</strong>e <strong>at</strong><br />
which credit was disbursed to industry, trade <strong>and</strong> transport oper<strong>at</strong>ors<br />
was high during the re<strong>for</strong>m period as compared to th<strong>at</strong> in pre-re<strong>for</strong>m<br />
period. The credit disbursed to <strong>agriculture</strong> sector increased <strong>at</strong> an<br />
annual growth r<strong>at</strong>e of 11.86 per cent during the period 1981-2000.<br />
These were, however, distinct inter-period vari<strong>at</strong>ions. While the<br />
annual growth r<strong>at</strong>e <strong>for</strong> the pre-re<strong>for</strong>m period was 14.77 per cent, it<br />
was only 10.90 per cent during the re<strong>for</strong>m period. Thus, the r<strong>at</strong>e <strong>at</strong><br />
which credit was disbursed to <strong>agriculture</strong> had declined <strong>at</strong> the all-India<br />
level.<br />
53
Table 3.1: Annual Average Growth R<strong>at</strong>es 2 () of Credit (%) by<br />
SCBs to Different Sectors<br />
Years ! Agricul- Indus Trans- Professional Trade Financel Others i For :<br />
I ture ·try port Services <strong>and</strong><br />
Opera- Personal<br />
I<br />
f se::~rs<br />
tors Loans<br />
,<br />
1981- 91 14.77 15.68 8.68 22.09 10.84 26.30 19.36 15.33<br />
1992 2000 10.90 16.21 11.48 20.68 15.16 24.76 16.44 16.14 i<br />
1981- 2000 11.86 15.80 7.82 21.31 13.06 26.12 17.57 15.38 I<br />
Source: Reserve Bank of India (Bankmg St<strong>at</strong>istics) <strong>for</strong> the Year 1981 to 2000.<br />
Wh<strong>at</strong> were the trends in the proportion of credit to <strong>agriculture</strong><br />
from SCBs? Out of the total agricultural credit, the RRBs provided<br />
two-thirds to one-half whereas the proportion in the case of SBI <strong>and</strong><br />
its associ<strong>at</strong>e banks, n<strong>at</strong>ionalised banks <strong>and</strong> other Scheduled<br />
Commercial Banks was much less. Table 3.2 shows th<strong>at</strong> <strong>agriculture</strong><br />
accounted <strong>for</strong> about 16.44 per cent of the total credit in the early<br />
1980s <strong>and</strong> suggests th<strong>at</strong> the banks were meeting the targets fixed on<br />
agricultural lending. However, the proportion progressively declined to<br />
9.92 per cent by 2000. Such a decline was uni<strong>for</strong>m across different<br />
bank groups. Thus, one can conclude th<strong>at</strong> the credit flow to<br />
<strong>agriculture</strong> even in proportion<strong>at</strong>e terms declined during the re<strong>for</strong>m<br />
period.<br />
10 The growth r<strong>at</strong>e has been calcul<strong>at</strong>ed by using the semi-log model, such as<br />
In Y, ~ \>1 + \>, t + U,<br />
where, t is the time period, PI <strong>and</strong> P, are parameters, <strong>and</strong> U, is the disturbance<br />
term.<br />
After estim<strong>at</strong>ing the above regression model, annual average growth r<strong>at</strong>e (over a<br />
period of time) has been calcul<strong>at</strong>ed by the following way, viz., Annual Average<br />
Growth R<strong>at</strong>e ~ (Antilog of the estim<strong>at</strong>ed P, - 1)* 100.<br />
The same procedure has been applied to calcul<strong>at</strong>e the growth r<strong>at</strong>es wherever they<br />
are required in this study.<br />
54
Table 3.2: Bank Group-wise Share of Outst<strong>and</strong>ing Credit of<br />
SCBs to Agriculture from Net Bank Credit<br />
(in per cent)<br />
I Total I<br />
Triennium SBI <strong>and</strong> Its N<strong>at</strong>ionalised Foreign Regional Other<br />
Ending I Associ<strong>at</strong>es Banks Banks Rural Scheduled<br />
with<br />
Banks Commercial I<br />
Banks<br />
1983 19.23 15.35 0.00 64.66 5.90 16.44<br />
1986 21.56 14.89 0.00 59.24 5.00 17.05<br />
1989 19.19 16.53 0.00 55.12 4.98 17.46<br />
1990· 16.90 15.44 0.34 54.37 9.60 15.94<br />
1993 15.86 14.18 0.54 50.45 8.14 14.38<br />
1996 12.75 11.97 0.33 49.53 5.63 11.94<br />
1999 11.56 11. 20 0.37 48.35 5.03 10.81<br />
2000· 10.36 10.48 0.36 48.12 4.42<br />
Source: Reserve Bank of India (Bankmg St<strong>at</strong>,st,cs) <strong>for</strong> the Years 1981 to 2000.<br />
Note: • One-year figure<br />
Figures up to 1981- 89 are <strong>for</strong> the period January to December <strong>and</strong><br />
thereafter, <strong>for</strong> the period April to March.<br />
9.92<br />
i<br />
The figures presented in Tables 3_1 <strong>and</strong> 3.2 do not include<br />
credit from co-oper<strong>at</strong>ives, which have traditionally been playing a key<br />
role in so far as short-term credit to <strong>agriculture</strong> is concerned. Table<br />
3.3 includes the co-oper<strong>at</strong>ive credit in the total outst<strong>and</strong>ing credit.<br />
The total outst<strong>and</strong>ing credit disbursed by co-oper<strong>at</strong>ives <strong>and</strong> the SCBs<br />
increased fram an average of Rs_ 8,618 crores in 1981-84 to Rs.62,<br />
608 crares by the year 2000. The co-oper<strong>at</strong>ives accounted <strong>for</strong> more<br />
than one-half of the agricultural credit in early 1980s. Their share had<br />
gradually declined to about one-third by l<strong>at</strong>e 1990s, while th<strong>at</strong> of<br />
SCBs <strong>and</strong> RRBs had increased. An important finding is th<strong>at</strong> although<br />
the share of commercial banks <strong>and</strong> RRBs in the total agricultural<br />
credit disbursed in the country increased during the re<strong>for</strong>m period<br />
(Tables 3.3), the share of these institutions in the net bank credit<br />
declined during this period (Table 3.2).<br />
55
Table 303: Distribution (%) of Outst<strong>and</strong>ing Credit <strong>for</strong><br />
Agriculture <strong>and</strong> Allied Activities (Short <strong>and</strong> Long-Term) by<br />
Dl off< eren t T L'YI'es 0 fLe n dO 109 I ns tOt 1 u to Ions<br />
=---<br />
Triennium Scheduled Regional Total<br />
Ending with Co-oper<strong>at</strong>ives Commercial Banks Rural Banks IRs. in Crores)<br />
(Excludinl( Rims)<br />
1983 55.28 41.49 3.23 8,618<br />
1986 45.9'1 49.01 5.01 13,811<br />
1989 40.18 53.56 6.26 20,922<br />
1990* 38.16 55.20 6.64 27,687<br />
1993 38.51 55.22 6.27 31,573<br />
1996 41.42 51.28 7.30 41,249<br />
1999 39.39 51.95 8.66 54,282<br />
2000* 37.02 53.41 9.57 62,608<br />
Note: * One-year figure. FIgures up to 1981-89 are <strong>for</strong> the penod January to<br />
December <strong>and</strong> thereafter, <strong>for</strong> the period April to March.<br />
Sources: 1) Reserve Bank of India (Report on Currency <strong>and</strong> Finance, Vol. II) from<br />
1981 to 1998.<br />
2) Figures <strong>for</strong> the years 1999 <strong>and</strong> 2000 have been collected from RBI,<br />
2001 (H<strong>and</strong> Book of St<strong>at</strong>istics on Indian Economy).<br />
The growth r<strong>at</strong>e of credit to <strong>agriculture</strong> from all the institutions<br />
(in absolute terms) was 11.74 per cent during the period 1981- 2000.<br />
On the other h<strong>and</strong>, the growth r<strong>at</strong>e in real terms 21 was only 3 per cent<br />
<strong>for</strong> the same period (Table 3.4). The growth r<strong>at</strong>es have been uneven<br />
across the sub-periods as well as across the bank groups. The credit<br />
in both absolute <strong>and</strong> real terms grew <strong>at</strong> a much faster r<strong>at</strong>e during the<br />
period 1981-91 as compared to the re<strong>for</strong>m period of 1991-2000. A<br />
similar p<strong>at</strong>tern can be observed across the bank groups also, although<br />
the growth r<strong>at</strong>es of credit flow from RRBs have been higher in both<br />
absolute <strong>and</strong> real terms probably due to a low base as compared to<br />
other financial institutions. The situ<strong>at</strong>ion of co-oper<strong>at</strong>ives appears to<br />
be even grimmer.<br />
" In order to calcul<strong>at</strong>e the growth r<strong>at</strong>es in real term, the outst<strong>and</strong>ing credit amount<br />
in each year has been defl<strong>at</strong>ed by the Consumer Price Index of Agricultural<br />
Labourers taking the year 1986·87 as a base.<br />
56
Table 3.4: Annual Average Growth R<strong>at</strong>es (%) of Outst<strong>and</strong>ing<br />
Credit to Agriculture<br />
Scheduled<br />
Year I Co-oper<strong>at</strong>ives Commercial Banks Regional Total I<br />
I<br />
(Excludin; RRB~ Rural Banks I<br />
Absolute Real Absolute Real Absolute Real Absolute Real_<br />
1981-1991 9. 83 2. 74 19.66 11. 93 26. I I 17.96 15. 26 7. 82<br />
1992-2000<br />
, 8. 47 0.61 9. 06 I. 16 15. 41 7. 06 9.31 I. 40'<br />
1981-2000 9. 79 I. 91 12. 95 4. II 17.99 8. 75 II. 74 3. 00<br />
Source: I) Reserve Bank of IndIa (Report on Currency <strong>and</strong> FInance, Vol. II) from<br />
1981 to 1998.<br />
2) Figures <strong>for</strong> the years 1999 <strong>and</strong> 2000 have been collected from RBI, 200 I<br />
(H<strong>and</strong> Book of St<strong>at</strong>istics on Indian Economy)<br />
The inter-sub-period differences in the flow of agricultural credit<br />
were also observed from the mean amount of outst<strong>and</strong>ing credit<br />
disbursed by the SCBs including RRBs by <strong>for</strong>mul<strong>at</strong>ing the null<br />
hypothesis th<strong>at</strong> "there is no significant difference in the mean amount<br />
of credit flow of the two samples". The t-test was carried out to test the<br />
different between the means of two samples. The calcul<strong>at</strong>ed t value<br />
(6.26) is gre<strong>at</strong>er than table value (2.10) <strong>at</strong> 5 per cent level. Based on<br />
this result, it is inferred th<strong>at</strong> there is a significant difference in the<br />
mean amount of outst<strong>and</strong>ing agricultural credit between the two subperiods.<br />
Distribution P<strong>at</strong>tern of Agricultural Credit of SCBs<br />
The proportion of credit to <strong>agriculture</strong> in the net bank credit declined<br />
from about 17 per cent during the pre-re<strong>for</strong>m period to 10.39 per cent<br />
during the re<strong>for</strong>m period, while the proportion of credit to nonagricultural<br />
sectors continuously increased between these two periods<br />
(Table 3.5). The proportion of agricultural credit <strong>for</strong> the loans in the<br />
size of less than Rs. 25,000 increased during the pre-re<strong>for</strong>m period.<br />
This has been <strong>at</strong>tributed to the prescribed targets on agricultural<br />
lending (Besley 1994), lack of altern<strong>at</strong>ive investment avenues <strong>for</strong> rural<br />
57
ank branches (Rajasekhar <strong>and</strong> Vyasulu 1993) <strong>and</strong> different policies<br />
without reference to the cost of funds (Gad gil 1994; Yaron 1994).<br />
However, the proportion of credit to <strong>agriculture</strong> <strong>for</strong> both sizes of credit<br />
limit has been declining during the re<strong>for</strong>m period. In the case of non<strong>agriculture</strong><br />
sector, the share of credit flow <strong>for</strong> the credit limit of less<br />
than Rs.2S,000 increased up to the last part of 1980s <strong>and</strong> declined in<br />
the 1990s. Importantly, the share of non-agricultural sector from the<br />
total credit <strong>for</strong> the credit limit of above Rs. 25,000 has been increasing<br />
during the last two decades. Thus, based on the discussion rel<strong>at</strong>ing to<br />
the volume of outst<strong>and</strong>ing credit (Table 3.5), it can be concluded th<strong>at</strong><br />
the banks have been showing bias in favour of non-<strong>agriculture</strong> sector<br />
lending.<br />
Table 3.5: Distribution of Outst<strong>and</strong>ing Credit to the Total Net<br />
Bank Credit by SCBs (%) by Sectors <strong>and</strong> Credit Limits<br />
Triennium Agricultural Sector Non·Agricultural Sector<br />
Ending Rs.25,OOO Above Sector Rs.25,OOO Above Sector<br />
with <strong>and</strong> Less Rs.25,OOO Total <strong>and</strong> Less Rs.25,OOO Total<br />
1983 8. 67 7. 78 16. 44 10.23 73. 32 83. 56<br />
1986 9. 58 7.47 17.05 12. 10 70. 85 82. 95<br />
1989 10. 39 7. 07 17.46 14. 77 67. 77 82. 54<br />
1991 * 8. 76 6.65 15. 40 13. 77 70. 83 84. 60<br />
1994 7. 36 6. 36 13.72 12. 47 73.81 86. 28<br />
1997 5. 61 5. 77 11. 39 8. 75 79. 86 88.61<br />
2000 4. 09 6. 29 10.39 5. 78 83.83 89.61<br />
Note: * Two-year figure<br />
Source: Reserve Bank of India (Banking St<strong>at</strong>istics) <strong>for</strong> the Years 1981 to 2000.<br />
The percentage of number of loan accounts in the agricultural<br />
sector to the total bank accounts had been declining during both prere<strong>for</strong>m<br />
<strong>and</strong> re<strong>for</strong>m periods (Table 3.6). Interestingly, although the<br />
number of accounts <strong>for</strong> the credit limit of less than Rs. 25,000<br />
declined In the case of the <strong>agriculture</strong> sector during the pre-re<strong>for</strong>m<br />
period, the proportion of amount of credit increased. This indic<strong>at</strong>es<br />
the credit r<strong>at</strong>ioning by banks to minimise transaction costs associ<strong>at</strong>ed<br />
58
with agricultural lending, by reducing the numbers of accounts <strong>for</strong><br />
better supervision <strong>and</strong> monitoring. In the case of non-agricultural<br />
sector, however, the proportions of both accounts <strong>and</strong> amounts <strong>for</strong> the<br />
credit limit of less than Rs. 25,000 increased during the pre-re<strong>for</strong>m<br />
period probably due to higher interest r<strong>at</strong>es on loans to nonagricultural<br />
activities.<br />
Table 3.6: Distribution of Loan Accounts by SCBs (%) by<br />
Sectors <strong>and</strong> Credit Limits<br />
Triennium AJ:ricultural Sector Non-Al!ricultural Sector<br />
Ending Rs.25,OOO Above Rs. Sector Rs.25,000 Above Rs. Sector<br />
with <strong>and</strong> Less 25,000 Total <strong>and</strong> Less 25,000 Total<br />
1983* 49. 30 1. 13 50. 43 46. 28 3. 29 49. 57<br />
1986 48.61 1. 07 49. 68 47. 20 3. 12 50. 32<br />
1989 45. II 1. 13 46. 24 50.47 3. 29 53. 76<br />
1991 ** 43. 46 1. 25 44. 71 51. 50 3. 79 55. 29<br />
1994 41. 02 1. 35 42. 37 53. 25 4. 38 57.63<br />
1997 40. 08 1. 90 41. 98 51. 42 6. 60 58. 02<br />
2000 34. 69 4. 02 38.71 45. 71 15.58 I 61. 29<br />
Note: • One-year fIgure, ** Two-year figure<br />
Figures up to 1981-89 are <strong>for</strong> the period January to December <strong>and</strong> thereafter, <strong>for</strong><br />
the period April to March.<br />
Source: Reserve Bank of India (Banking St<strong>at</strong>istics) <strong>for</strong> the Year 1981 to 2000.<br />
In the case of agricultural loans with credit limit of less than<br />
Rs.25,000, the proportions of accounts to total loan accounts <strong>and</strong><br />
amounts to the total net bank credit declined during the re<strong>for</strong>m<br />
period. Although the proportion of accounts <strong>for</strong> the credit limit of more<br />
than Rs. 25,000 increased in the case of agricultural sector, the net<br />
credit flow declined during the re<strong>for</strong>m period. It can be, there<strong>for</strong>e,<br />
argued th<strong>at</strong> the banks have been adopting both price <strong>and</strong> non-price<br />
credit r<strong>at</strong>ioning mechanisms to minimise lending risks by disbursing<br />
less loan amounts to borrowers in the agricultural sector.<br />
The tendency on the part of banks to provide more funds to the<br />
agricultural activities earning higher interest income seems to have<br />
become more prominent after the deregul<strong>at</strong>ion of lending r<strong>at</strong>e to<br />
59
ultim<strong>at</strong>e borrowers. Since the interest r<strong>at</strong>e charged was unable to<br />
cover the cost of lending (i.e., financial, transaction <strong>and</strong> risk costs).<br />
the lending r<strong>at</strong>e of RRBs was deregul<strong>at</strong>ed <strong>for</strong> all slabs of credit limit<br />
from August 1996. Prior to this, the lending r<strong>at</strong>es of CBs were also<br />
deregul<strong>at</strong>ed <strong>for</strong> the credit limit of over Rs. 2 lakhs from August 1994.<br />
For the credit limit of up to Rs. 2 lakhs, all CBs were asked to charge<br />
a maximum r<strong>at</strong>e of 13.5 per cent per annum. In the case of RRBs, as<br />
the lending r<strong>at</strong>es were totally deregul<strong>at</strong>ed <strong>for</strong> all slabs of credit limit, it<br />
was up to them to charge the r<strong>at</strong>e suitably to meet the cost of lending.<br />
The CBs can also follow the same str<strong>at</strong>egy <strong>for</strong> a credit limit of above<br />
Rs 2 lakhs. In this context, the following inferences can be drawn:<br />
(1) RRBs may find it com<strong>for</strong>table to extend their funds <strong>for</strong><br />
agricultural sector.<br />
(2) CBs may give priority <strong>for</strong> agricultural loan <strong>for</strong> the credit limit of<br />
above Rs. 2 lakhs to earn higher interest margin.<br />
(3) After the interest r<strong>at</strong>e deregul<strong>at</strong>ion, loans from CBs have become<br />
cheaper as compared to those given by RRBs. Under these<br />
circumstances, borrowers may prefer to obtain loan amounts up<br />
to Rs.2 lakhs from CBs provided th<strong>at</strong> service area regul<strong>at</strong>ions are<br />
favourable. The Gupta Committee, however, recommended th<strong>at</strong> a<br />
bank could lend to borrowers outside their service if they chose to<br />
do so.<br />
(4) If the third inference is true, then CBs must be providing more<br />
agricultural credit to the farmers <strong>for</strong> credit up to Rs 2 lakhs by<br />
cross-subsidis<strong>at</strong>ion approach.<br />
As the d<strong>at</strong>a on agricultural lending up to the credit limit of Rs. 2<br />
lakhs are not available separ<strong>at</strong>ely <strong>for</strong> RRBs <strong>and</strong> CBs, it is difficult to<br />
examine the third proposition. In other words, conclusions on the<br />
volume of credit disbursed to <strong>agriculture</strong> sector by RRB <strong>for</strong> this credit<br />
limit are difficult to be drawn. However, in spite of the deregul<strong>at</strong>ion of<br />
lending r<strong>at</strong>es of RRBs, the proportion of amount disbursed to<br />
60
agricultural loans of less than Rs. 2 lakhs by SCBs including RRB<br />
declined from 81.4 per cent in 1992 to 69.79 per cent in 2000 (Table<br />
3.7). In contrast, with complete deregul<strong>at</strong>ion of lending r<strong>at</strong>es in the<br />
case of credit limit of above Rs. 2 lakhs <strong>for</strong> both CB <strong>and</strong> RRBs, the<br />
proportion of outst<strong>and</strong>ing credit increased from 18.6 to 32.21 per cent<br />
during the same period. This indic<strong>at</strong>es the priority to agricultural<br />
loans of above Rs. 2 lakhs in the lending portfolio of CBs. There was<br />
an increase in the proportion of amount disbursed to agricultural<br />
loans in the range of Rs. 25,000 to Rs. 2 lakhs. This implies th<strong>at</strong> the<br />
declining share of agricultural loans up to Rs 2 lakhs was mainly due<br />
to a reduction in the share <strong>for</strong> the credit limit of less than Rs 25,000.<br />
This lends further credence to the earlier finding th<strong>at</strong> there was<br />
widespread credit r<strong>at</strong>ioning practice by CBs <strong>for</strong> borro\vers availing less<br />
than Rs. 25,000 of agricultural loans.<br />
Table 3.7: Distribution of Agricultural Credit by SCBs (%) by<br />
the Type of Lending R<strong>at</strong>es <strong>and</strong> Credit Limits<br />
Triennium Distribution (% I of Agricultural Proportion of Total Credit<br />
Ending Credit with Partially Regul<strong>at</strong>ed Credit with (Amount in !<br />
with Lending R<strong>at</strong>e Deregul<strong>at</strong>ed Rs. Lakhsl I<br />
Lendinl( R<strong>at</strong>e<br />
Rs.25,OOO Above Rs.25,OOO Above Rs. 2<br />
<strong>and</strong> less & up to Rs.2 lakhs Total lakhs<br />
1992 56. 25 25. 15 81. 40 18. 60 1,847,903<br />
1995 52. 62 26. 02 78. 64 21.36 2,329,370<br />
1998 47. 45 26. 07 73. 52 26.48 3.190,188<br />
2000- 36. 64 31. 15 67. 79 32.21 4,326,377<br />
Note: • Two-year figure<br />
Source: Reserve Bank of India (Banking St<strong>at</strong>istics) <strong>for</strong> the Year 1981 to 2000<br />
The number of loan accounts <strong>for</strong> all the sectors <strong>and</strong> also<br />
individual sectors, though rapidly increased during the pre-re<strong>for</strong>m<br />
period, registered neg<strong>at</strong>ive growth r<strong>at</strong>es during the re<strong>for</strong>m period.<br />
Interestingly, the neg<strong>at</strong>ive growth r<strong>at</strong>es in the loan accounts <strong>for</strong> both<br />
agricultural <strong>and</strong> non-agricultural sectors was solely due to the<br />
reduction in the number of accounts <strong>for</strong> the credit limit of Rs. 25,000<br />
61
<strong>and</strong> less. This suggests the neglect of small borrowers by seBs. This<br />
also implies th<strong>at</strong> the access of <strong>for</strong>mal credit to small borrowers was<br />
adversely affected. The relevant question, there<strong>for</strong>e, is wh<strong>at</strong> factors<br />
determine the access to <strong>for</strong>mal credit.<br />
Table 3.8: Credit Limit-wise Annual Average Growth R<strong>at</strong>es of<br />
Loan Accounts<br />
(in per cent<br />
Agricultural Sector Non·~iculture Sector For All<br />
Period Rs. Above Sector Rs. Above Sector Sectors<br />
25,000 Rs. Total 25,000 Rs. Total<br />
<strong>and</strong> Less 25,000 <strong>and</strong> Less 25,000<br />
1983-91 7. 94 I!. 94 8.03 I!. 83 12. 50 11. 87 10. 03<br />
1991-00 - 5. 33 16. 29 - 4.03 - 5. 18 19.70 - 1. 52 - 2.54<br />
1983-00 1. 05 11. 54 1. 57 3. 28 13. 66 4.63 3. 26<br />
Sources: Reserve Bank of India (Bankmg St<strong>at</strong>istics) <strong>for</strong> the Year 1981 to 2000<br />
Achievement of SCBs in Agricultural Finance<br />
The outreach ef<strong>for</strong>ts of the FRBS into the rural areas, in general <strong>and</strong><br />
<strong>agriculture</strong>, in particular, yielded positive results in quantit<strong>at</strong>ive<br />
terms. The outst<strong>and</strong>ing credit to <strong>agriculture</strong> by SeBs (including<br />
RRBs) increased from Rs. 4,863 crores in 1981 to Rs. 45,638 crores<br />
by 2000 (Reserve Bank of India 1981 <strong>and</strong> 2000). However, the share<br />
of agricultural credit to the net bank credit declined in the last two<br />
decades. Table 3.9, which presents the d<strong>at</strong>a on agricultural lending<br />
during the period 1981-2000, shows th<strong>at</strong> the SeBs hardly achieved<br />
the prescribed targets given to agricultural lending. Be<strong>for</strong>e October<br />
1993, only direct <strong>finance</strong> to <strong>agriculture</strong> was targeted <strong>and</strong> banks were<br />
supposed to lend 18 per cent of the net bank credit by 1990. But the<br />
achievement r<strong>at</strong>e of direct <strong>finance</strong> to <strong>agriculture</strong> was 13. 84 per cent<br />
(Table 3.9), well below the target of 18 per cent.<br />
62
Table 3.9: Proportion of Credit Advanced to Agriculture from<br />
Net Bank Credit of SCBs (Includif!g,--,R::=R,~B"s:L'-c=-:--:--_______ ---,<br />
Type of Triennium EndinJ: With !<br />
Advance ~3 1986 1989 1990' 1993 1996 1999 2000';<br />
Direct 12.91 14.28 15.21 13.84 12.59 10.23 9.20 8. 38 ~<br />
Finance Il+ O. 28JJ:- 1.79Ll- 4.16) I (- 5. 41) I (- 3. 2TI.J- 4. 30Jjl- 5. 1~<br />
'I<br />
Indirect 3. 53 2. 77 2. 25 2. 10 I. 79 I. 71 I. 62 I. 54<br />
Finance<br />
Total 16.44 17.05 17.46 15.94 14.38 II. 94 10.81 9.92<br />
I (- 2. 79) I (- 2. 88) (- 2.96) I<br />
Advance I (- 6. 06) 1(- 7. 19) 1[- 8. 081.<br />
Net Bank<br />
Credit (in 33,737 52.840 78,696 104,312 141,125213,841 332,248460,081<br />
Rs. Crores)<br />
Note: • One-year figure.<br />
1) Figures in parentheses represent shortfall or excess of target fixed <strong>for</strong><br />
<strong>agriculture</strong> from net bank credit <strong>at</strong> different points in time.<br />
2) Figures up to 1981-89 are <strong>for</strong> the period January to Decem ber <strong>and</strong><br />
thereafter <strong>for</strong> the period April to March.<br />
Source: Reserve Bank of India (Banking St<strong>at</strong>istics) <strong>for</strong> the Years 1981 to 2000.<br />
Since banks could not achieve the given target of direct <strong>finance</strong>,<br />
indirect <strong>finance</strong> to <strong>agriculture</strong> was brought under the purview of<br />
<strong>finance</strong> to <strong>agriculture</strong>, <strong>and</strong> clubbed with direct advances <strong>for</strong> meeting<br />
the 18 per cent sub-target to <strong>agriculture</strong> from October 1993. However,<br />
in order to ensure th<strong>at</strong> the focus of banks on direct agricultural<br />
lending was not diluted, the "indirect" advance to <strong>agriculture</strong> was<br />
stipul<strong>at</strong>ed to be one-fourth of total agricultural lending or 4.5 per cent<br />
of net bank credit. In order to ensure the inputs to allied agricultural<br />
activities of dairy, poultry, piggery <strong>and</strong> fishery, advances up.to Rs. 5<br />
lakhs <strong>for</strong> financing the distribution of inputs <strong>for</strong> the allied activities<br />
were reckoned as indirect agricultural advances under the priority<br />
sector effective from May 1994 [RBI 1993-941. Besides, the <strong>finance</strong><br />
extended to dealers in drip irrig<strong>at</strong>ion, sprinkler irrig<strong>at</strong>ion <strong>and</strong><br />
agricultural machinery was classified as "indirect <strong>finance</strong> to<br />
<strong>agriculture</strong>" <strong>and</strong> clubbed with the priority sector advances. Despite<br />
these ef<strong>for</strong>ts, the proportion of indirect advance to <strong>agriculture</strong> to net<br />
bank credit varied between 1.50 <strong>and</strong> 2 per cent <strong>for</strong> the last 8 years.<br />
Importantly, the total agricultural advances rapidly declined to 9.92<br />
6' .'
per cent of net bank credit by 2000 (Table 3.9), <strong>and</strong> the gap between<br />
target <strong>and</strong> achievement r<strong>at</strong>es <strong>for</strong> both direct <strong>and</strong> indirect advances<br />
was widening in the 1990s.<br />
The distribution of direct <strong>finance</strong> by size-classes of farmers<br />
(Table 3.10) during the last two decades shows th<strong>at</strong> the proportion of<br />
the amount disbursed <strong>for</strong> marginal <strong>and</strong> small farmers increased up to<br />
1980s. In 1990s, however, the share of the marginal farmers had<br />
declined from 29.7 to 23.8 per cent. At the same time, there was a<br />
marginal increase in the proportion of credit disbursed to small<br />
farmers <strong>and</strong> substantial increase in the same to medium/large<br />
farmers in this decade. This further supports the earlier argument<br />
th<strong>at</strong> <strong>for</strong>mal financial ~gencies preferred lending to better-off farmer3.<br />
Table 3.10: Distribution (%) of Direct Finance to Farmers by<br />
SCBs (Short <strong>and</strong> Long-Term Loans) by Size-Classes of<br />
La n db 0 ld· 109<br />
Triennium Marginal Small (2.5 Medium <strong>and</strong> Total<br />
Ending With 15 acres) IRs. Crores)<br />
1983 27. 3 19.4 53. 3 825. 0<br />
1986 26. 8 25. 3 47. 9 1,900.1<br />
1989 27. 8 25. 9 46. 3 2,958.5<br />
1991' 29. 7 24. 7 45. 5 3, 722. 3<br />
1994 28. 5 25. 1 46. 4 4, 278. 4<br />
1997 25.8 25. 1 49. 1 7, 589. 6<br />
2000 23. 8 25. 6 50. 6 11, 790. 1<br />
Note: * Two year figure.<br />
Figures gives <strong>for</strong> all the years are <strong>for</strong> the period july-june except <strong>for</strong> the<br />
year 1981 <strong>and</strong> 1982 (April-March).<br />
Source: Reserve Bank of India, 2001 (H<strong>and</strong>book of St<strong>at</strong>istics on Indian Economy)<br />
The changes in the distribution of loan accounts by size-classes<br />
of farmers during the period 1981 to 2000 (Table 3_11) reveal th<strong>at</strong> the<br />
proportion of accounts held by marginal farmers was generally large in<br />
the early 1980s as compared to the l<strong>at</strong>e 1990s. On the other h<strong>and</strong>,<br />
the proportion of loan accounts held by small <strong>and</strong> medium/large<br />
farmers increased, albeit with fluctu<strong>at</strong>ions. This suggests th<strong>at</strong> a<br />
64
larger number of medium <strong>and</strong> large sIze farmers (above 5 acres of<br />
l<strong>and</strong>) were obtaining credit from banks as compared with marginal<br />
farmers.<br />
Table 3.11: Distribution or Disbursement Loan Accounts on<br />
Direct Finance to Farmers by seBs (Short-Term <strong>and</strong> Long-<br />
Term Loans)<br />
Triennium Up to 2. Above 2. 5 Above 5 Total No. of<br />
Ending 5 Acres Acres to 5 Acres Accounts<br />
With (in %1 Acres (in 0/1 (in %1 (in OOOsl<br />
1983 51. 1 24. 0 24. 9 2,329.9<br />
1986 47. 2 29. 8 22.9 3, 960. 2<br />
1989 46. 8 31. 0 22. 2 4, 608. 4<br />
1991' 47. 7 30. 4 21. 9 4, 209. 3<br />
1994 44. 2 31. 2 24. 7 4,241.7<br />
1997 39. 0 31. 1 29. 9 5,241.2<br />
2000 39. 8 32. 8 27. 5 5,657.9<br />
Note: • Two year fIgure.<br />
Figures given <strong>for</strong> all the years are <strong>for</strong> the period July·June except <strong>for</strong> the<br />
year 1981 <strong>and</strong> 1982 (April-MarchI.<br />
Source: Reserve Bank of India, 2001 (H<strong>and</strong>book of St<strong>at</strong>istics on Indian EconomYI.<br />
Credit Subsidy in Indian Agriculture<br />
Subsidised credit to <strong>agriculture</strong> through concessional interest r<strong>at</strong>es<br />
<strong>and</strong> high defaults have been posing a thre<strong>at</strong> to the financial viability of<br />
credit institutions. If the interest income is gre<strong>at</strong>er than or <strong>at</strong> least<br />
equal to the cost of lending (break-even condition), this may positively<br />
influence the financial institutions to step up the supply of<br />
agricultural credit. However, default r<strong>at</strong>e plays an important role in<br />
determining the break-even level of interest r<strong>at</strong>e. Higher the default<br />
r<strong>at</strong>es <strong>and</strong> higher the break-even interest r<strong>at</strong>e th<strong>at</strong> has to be charged.<br />
Since it was difficult to cover the costs of lending, the RBI initi<strong>at</strong>ed<br />
several measures towards deregul<strong>at</strong>ion of interest r<strong>at</strong>es in 1990s. In<br />
the case of RRBs <strong>and</strong> co-oper<strong>at</strong>ives the lending r<strong>at</strong>es were totally<br />
deregul<strong>at</strong>ed <strong>for</strong> all slabs of credit limit. For Commercial Banks, only<br />
the interest r<strong>at</strong>e <strong>for</strong> the credit limit of above Rs. 2 lakhs was<br />
deregul<strong>at</strong>ed.<br />
65
In the deregul<strong>at</strong>ed interest r<strong>at</strong>e structure, the lending r<strong>at</strong>e<br />
varies with the loan size. However, <strong>for</strong> the credit limit of less than Rs 2<br />
lakhs in CBs, the hitherto prevalent distinction between preferred <strong>and</strong><br />
other investment was abolished. <strong>and</strong> the maximum interest r<strong>at</strong>e fixed<br />
was 13.5 per cent per annum.<br />
Now, the question is whether this<br />
interest r<strong>at</strong>e was sufficient to cover the costs. If no, the CBs might<br />
have to cross-subsidise to the farmers taking loan amounts less than<br />
Rs. 2 iakhs with interest income earned from lending to the credit<br />
limit of more than Rs. 2 lakhs by pumping more funds into the l<strong>at</strong>ter<br />
c<strong>at</strong>egory belonging to either <strong>agriculture</strong> or non-<strong>agriculture</strong>. This<br />
discussion raises the following questions:<br />
1. Are the interest r<strong>at</strong>es sufficient to cover the costs of lending?<br />
2. If no, is there cross-subsidis<strong>at</strong>ion? If yes, is it confined to<br />
<strong>agriculture</strong> or non-<strong>agriculture</strong>?<br />
3. Does credit subsidy reduce the supply of agricultural credit?<br />
The answer to the first question needs a discussion <strong>and</strong><br />
analysis on credit subsidy. Credit subsidy can be calcul<strong>at</strong>ed in two<br />
different ways. The first method consists of two components, namely,<br />
interest subsidy <strong>and</strong> default subsidy. Interest subsidy accrues to<br />
<strong>agriculture</strong> due to concessional r<strong>at</strong>e of interest being charged to this<br />
sector vis-a-vis the other sectors of the economy. Default subsidy22<br />
accrues to agricultural lending in the <strong>for</strong>m of bad debts. Credit<br />
subsidy to <strong>agriculture</strong> can be obtained by adding these two subsidies.<br />
The second method perceives credit subsidy as the difference between<br />
cost of supplying credit to agricultural sector (including defaults) <strong>and</strong><br />
r<strong>at</strong>e of interest received from agricultural sector only.<br />
" It is worth mentioning here th<strong>at</strong> default also oCCurs in non-agricultural sector<br />
lending <strong>and</strong> th<strong>at</strong> there<strong>for</strong>e. one has to take into account onl\' the additional<br />
default In credit to <strong>agriculture</strong> while calcul<strong>at</strong>ing default subsid\· .•<br />
66
Due to the practice of uni<strong>for</strong>m interest r<strong>at</strong>es on loan amounts<br />
less than Rs. 2 lakhs in the case of CBs, the interest subsidy may not<br />
exist in the case of this credit limit regardless of the purpose. So,<br />
according to the first method, the credit subsidy arises mainly due to<br />
the default subsidy. Importantly, due to difficulty in the availability of<br />
d<strong>at</strong>a on bad <strong>and</strong> doubtful debts, it may be difficult to estim<strong>at</strong>e the<br />
credit subsidy by applying the first method. In the present study,<br />
credit subsidy has been calcul<strong>at</strong>ed by applying the second method on<br />
the basis of certain assumptions mentioned <strong>at</strong> different places in the<br />
ensuing paragraphs.<br />
The Agricultural Credit Review Committee (ACRC) had<br />
envisaged three broad c.Htegories of C'osts in the agricultural credit<br />
system. These were financial costs 23 , transaction costs 2 4, <strong>and</strong> risk<br />
costs or costs of bad debts 25 . Table 3.12 provides the costs estim<strong>at</strong>ed<br />
by the committee <strong>for</strong> different financial institutions <strong>for</strong> the period<br />
1983-84 to 1985-86.<br />
Table 3.12: Estim<strong>at</strong>ed Lending Costs Per Rs.I00 Outst<strong>and</strong>ing<br />
Loan<br />
(in Rs.1<br />
In.tltutions Financial Transaction Risk Cost Total Cost<br />
Cost Cost<br />
PACS 9. 90 5.40 1. 00 16. 30<br />
LDB 6. 51 4.04 1. 00 11. 55<br />
RRB 7. 80 6. 90 1. 00 15. 70<br />
CB 7. 48 6. 00 1. 00 14. 48<br />
.<br />
Source: Khusro CommIttee, 1989, Chapter XVIII .<br />
13 A fmancial cost refers to actual costs of raising financial resources. It is computed<br />
as the interest on borrowing <strong>and</strong> deposits.<br />
14 Transaction costs are organis<strong>at</strong>ional costs <strong>for</strong> carrying out the day to dav<br />
institutional oper<strong>at</strong>ions such as staff salaries <strong>and</strong> allowances, bUilding rent,<br />
travel, printing <strong>and</strong> st<strong>at</strong>ionary, postage <strong>and</strong> telegram, audit <strong>and</strong> training, etc.<br />
15 R' IS k cost consIsts . of actual write-offs or reserve cre<strong>at</strong>ed <strong>for</strong> bad <strong>and</strong> doubtful<br />
debts.<br />
67
Gadgil (1994) argues th<strong>at</strong> the transaction costs In 1990s were<br />
higher than the above due to rising staff salaries (80 per cent of the<br />
transaction costs, according to Khusro Committee, was manpower<br />
rel<strong>at</strong>ed) <strong>and</strong> escal<strong>at</strong>ion in the cost of office rent, transport, st<strong>at</strong>ionary,<br />
postage, telephone charges, etc. This study, there<strong>for</strong>e, assumes th<strong>at</strong><br />
the transaction costs in 1990s were higher by one percentage point<br />
than the estim<strong>at</strong>es provided by Khusro Committee, <strong>and</strong> th<strong>at</strong> the risk<br />
cost was constant while calcul<strong>at</strong>ing the lending cost. Since our focus<br />
is on the credit extended by all SCBs (including RRBs), we have<br />
considered the average of financial <strong>and</strong> transaction costs as estim<strong>at</strong>ed<br />
by the Khusro Committee of both c<strong>at</strong>egories of banks in calcul<strong>at</strong>ing<br />
the cost of lending to agricultural sector. Furthermore, it is also<br />
assumed th<strong>at</strong> the cost of lending is the same <strong>for</strong> short <strong>and</strong> long-term<br />
agricultural credit. By taking all these assumptions into account, the<br />
lending costs <strong>for</strong> agricultural credit 26 have been calcul<strong>at</strong>ed <strong>for</strong> the<br />
study period in Table 3.13. Given these costs of lending, the interest<br />
income on lending to <strong>agriculture</strong> sector is estim<strong>at</strong>ed below to see the<br />
extent of credit subsidy.<br />
Table 3.13: Cost of Lending to Agricultural Sector Per Rs.I00<br />
o u tst an d' 1D~ C re d't 1 0 f C Bs Inc 1 u d' lDJ:! RRBs<br />
Year Average Average Average Total<br />
Financial Cost Transaction Cost Risk Cost Cost<br />
1981 to 1990 7. 64 6.45 1. 00 15. 09<br />
1991 to 2000 7.64 7. 45 1. 00 16. 09<br />
26 These costs, especially financial, were marginally lower than those calcul<strong>at</strong>ed bv<br />
Gadgil 11997). Using the d<strong>at</strong>a on structure-wise deposits in CBs as on March<br />
1993 <strong>and</strong> applying the January 1997 interest r<strong>at</strong>es on deposits Inil on current<br />
deposits, 4.5 per cent on savings bank deposits <strong>and</strong> 8- I 3 per cent on term<br />
deposits), he calcul<strong>at</strong>ed the weighted average annual cost of deposits <strong>at</strong> 7.90 per<br />
cent. If the cost of deposits as estim<strong>at</strong>ed by Gadgil had been considered as the<br />
finanCIal costs, the lending costs would have been more than wh<strong>at</strong> the study has<br />
calcubted.<br />
68
The d<strong>at</strong>a on the amount of agricultural loan outst<strong>and</strong>ing by<br />
SCBs (including RRB) <strong>at</strong> different interest r<strong>at</strong>es were used to estim<strong>at</strong>e<br />
the interest income on agricultural lending. These d<strong>at</strong>a rel<strong>at</strong>e to<br />
accounts with credit limit of over Rs 25,000 <strong>for</strong> the period 1981 to<br />
1998, <strong>and</strong> the credit limit of above Rs 2 lakhs <strong>for</strong> the years 1999 <strong>and</strong><br />
2000. Since the lending r<strong>at</strong>e was, by <strong>and</strong> large, fixed <strong>for</strong> the credit<br />
limit of less than Rs. 2 lakhs, the d<strong>at</strong>a were accordingly adjusted In<br />
calcul<strong>at</strong>ing the interest income on agricultural lending.<br />
The annual average interest income <strong>for</strong> Rs. 100 outst<strong>and</strong>ing credit to<br />
<strong>agriculture</strong> can be calcul<strong>at</strong>ed as:<br />
II<br />
Y (rml x X ml )<br />
m=1<br />
-- -------(1)<br />
Where,<br />
rmt = the mean of mth interest range <strong>for</strong> <strong>agriculture</strong> sector <strong>for</strong> the tth<br />
period<br />
Xmt = the outst<strong>and</strong>ing credit in mth interest range <strong>for</strong> <strong>agriculture</strong> <strong>for</strong><br />
the tth year<br />
X, = total outst<strong>and</strong>ing credit <strong>for</strong> <strong>agriculture</strong> <strong>for</strong> the tthyear<br />
Here, we define credit subsidy as the difference between cost of<br />
providing credit to <strong>agriculture</strong> <strong>and</strong> interest r<strong>at</strong>e earned on outst<strong>and</strong>ing<br />
agricultural advances adjusted <strong>for</strong> defaults. Thus, the credit subsidy<br />
(S,) <strong>for</strong> Rs 100 can be calcul<strong>at</strong>ed as:<br />
St = Ct- rt - - -- - -- - - -- - - - - - - (2)<br />
(where Ct is the cost of lending to <strong>agriculture</strong> sector).<br />
69
The resulting figure of S, gives the credit subsidy per Rs. 100 of<br />
outst<strong>and</strong>ing loan. Accordingly, total credit subsidy to <strong>agriculture</strong> (Lr)<br />
sector can be obtained as:<br />
Lr = (S, / 100) X, -- - - - - - - - - - - - - - - - (3)<br />
Based on the above model, credit subsidy on agricultural <strong>finance</strong> has<br />
been estim<strong>at</strong>ed in Table 3. 14.<br />
Table 3.14: Cost, Interest Income <strong>and</strong> Credit Subsidy to<br />
A ~grlCU . It ura IS ec t or<br />
For the Credit Limit (CL) of Total Agricultural Credit<br />
Year C, More Than Rs. 25,000 (including CL <strong>for</strong> < Rs. 25,000)<br />
r, 5, Lt (Rs. Crore) r, 5, Lt (Rs. Crore) .<br />
I 2 3 4 5 6 7 8<br />
1981 15. 09 13. 50 1. 59 41.69 13. 50 1. 59 77. 33<br />
1982 15. 09 13. 24 1. 85 54.62 13.26 1. 83 103. 19<br />
1983 15. 09 12. 45 2. 64 70. 10 13. 05 2. 04 125. 29<br />
1984 15. 09 11.99 3. 10 123. 98 12. 75 2. 31<br />
.00<br />
J.vv. ~v<br />
1985 15. 09 12. 00 3.09 117. 17 12. 86 2. 23 197. 35<br />
1986 15. 09 12. 06 3. 03 122. 67 12. 92 2. 17 219.27<br />
1987 15. 09 12. 16 2.93 146. 78 12. 95 2. 14 259. 20<br />
1988 15. 09 12. 20 2. 89 158. 70 12.97 2. 12 285. 92<br />
1989 15. 09 11. 37 3. 72 229. 94 12. 64 2. 45 374. 01<br />
1990 15. 09 12. 83 2. 26 154. 54 13. 22 1. 87 310.91<br />
1991 16. 09 13. 51 2. 58 214.63 13. 50 2. 59 481. 05<br />
1992 16. 09 14. 95 1. 14 103. 15 14. 15 1. 94 392.61<br />
1993 16. 09 15.71 O. 38 39. 66 14. 55 1. 54 339. 73<br />
1994 16. 09 15. 57 O. 52 55. 66 14. 47 1. 62 370. 54<br />
1995 16. 09 15. 43 O. 66 78.95 14. 43 1. 66 414. 14<br />
1996 16. 09 15. 85 O. 24 34.93 14. 69 1. 40 403. 33<br />
1997 16. 09 15. 86 O. 23 38. 54 14. 75 1. 34 423. 90<br />
1998 16. 09 15. 37 O. 72 136. 63 14. 51 1. 58 557. 15<br />
1999 16. 09 14. 45 1. 64 414. 00 14. 09 2. 00 817.79<br />
2000 16. 09 14. 22 1. 87 553. 08 13. 97 2. 12 967. 53<br />
..<br />
Note: As the cel1mg mterest r<strong>at</strong>e IS stIpul<strong>at</strong>ed <strong>at</strong> 13.5 per cent per annum <strong>for</strong> the<br />
credit limit of up to Rs. 2 1akhs <strong>for</strong> CBs, the same has been assumed as the<br />
maximum interest r<strong>at</strong>e while calcul<strong>at</strong>ing agricultural credit subsidy.<br />
""<br />
Column 7 in Table 3.14 shows th<strong>at</strong> the credit subsidy per<br />
Rs.I00 outst<strong>and</strong>ing loan to <strong>agriculture</strong> sector was more during prere<strong>for</strong>m<br />
period as compared to the re<strong>for</strong>m period. It was also true <strong>for</strong><br />
the credit limit of more than Rs.25,000 (see column 4). This reduction<br />
in credit subsidy during the re<strong>for</strong>m period can be <strong>at</strong>tributed to the<br />
70
interest r<strong>at</strong>e deregul<strong>at</strong>ion. The interest Income from agricultural<br />
lending <strong>for</strong> the credit limit of more than Rs.25,000 (column 3) was<br />
gre<strong>at</strong>er than the interest income <strong>for</strong> the credit limit of less than Rs.<br />
25,000 since the year 1991. However, the interest income from the<br />
<strong>for</strong>mer slab of credit limit also did not cover the costs of lending. This<br />
implies th<strong>at</strong> cross subsidis<strong>at</strong>ion within the agricultural sector is not<br />
possible, since the cost of providing service is more than the income.<br />
Thus, the possibility of cross-subsidy within the agricultural<br />
lending in India is ruled out. This is evident in Table 3.14 th<strong>at</strong><br />
lending costs in the agricultural sector as a whole were more than the<br />
income <strong>for</strong> the last two decades. The inference is, there<strong>for</strong>e, th<strong>at</strong><br />
agricultural lending in Innia needs_credit subsidy. The amount of<br />
credit subsidy to <strong>agriculture</strong> by all SCBs (including RRB) increased<br />
from Rs. 77.33 crares in 1981 to Rs. 967. 53 crares in 2000. Such a<br />
rapid increase in the amount of credit subsidy to <strong>agriculture</strong> implies<br />
th<strong>at</strong> banks had been pressurised to cross-subsidise agricultural sector<br />
from the income gener<strong>at</strong>ed by lending to the other sectors. This might<br />
have resulted in two responses from the banks: Alloc<strong>at</strong>ion of more<br />
loanable funds to non-agricultural sector <strong>and</strong>/ or disbursing less<br />
credit to <strong>agriculture</strong>. Has this really happened? The discussion also<br />
calls <strong>for</strong> analysis of the following questions: Is increasing lending r<strong>at</strong>e<br />
a solution to reduce the r<strong>at</strong>e of credit subsidy? To wh<strong>at</strong> extent the<br />
supply of agricultural credit is elastic to interest r<strong>at</strong>e change? These<br />
are analysed in section 3.7.<br />
Number of Rural Bank Branches <strong>and</strong> Agricultural Credit<br />
The other important aspect of agricultural credit system IS the<br />
availability of banking facilities <strong>at</strong> reasonable distance. In the wake of<br />
losses to rural bank branches, it was recommended to close down the<br />
71
loss-making branches or to merge with the other banks 27 As a result<br />
of this policy decision, there has been a marginal decline in the<br />
number of rural branches from 1994. In the Southern, Western <strong>and</strong><br />
Central Regions of the country, the r<strong>at</strong>e of decline was more<br />
pronounced (Table 3.15). A reduction in the number of bank branches<br />
has not taken place in semi-urban, urban <strong>and</strong> metro areas. The<br />
decline in the number of rural bank branches together with increasing<br />
popul<strong>at</strong>ion pressure may have resulted in the following: i) A reduction<br />
in the credit flow to <strong>agriculture</strong>; ii) loan dem<strong>and</strong> <strong>and</strong> deposit supply<br />
may have been adversely affected; iii) the growth of priv<strong>at</strong>e investment<br />
<strong>for</strong> agricultural development <strong>and</strong> financial deepening of the rural<br />
sector may have been severely affected; <strong>and</strong>, iv) the access to banking<br />
facility hy rural popul<strong>at</strong>ion may have come dO'Nn.<br />
Table 3.15: Region-wise Growth R<strong>at</strong>e of Rural Bank Branches<br />
(in per cent)<br />
Year Northern North Eastern Central Western Southern Total<br />
Region Eastern Region Region Region Region<br />
Region<br />
1981-91 5. 17 10. 01 7. 79 7. 37 5. 19 3. 84 6. 05<br />
1992-00 - 0.77 - 1. 12 - 0.64 -1. 36 -1. 32 -1. 50 -1. 13<br />
1981-00 1. 97 4. 34 3. 44 2. 63 1. 79 1. 05 2. 28<br />
Sources: Reserve Bank of IndIa (Bankmg St<strong>at</strong>IstIcs) from the year 1981 to 2000.<br />
Determinants of Supply of Agricultural Credit<br />
An analysis of the achievement of SCBs in the provisioning of<br />
agricultural credit reveals th<strong>at</strong> the banks did not even reach the set<br />
targets. Importantly, the proportion of credit to <strong>agriculture</strong> in the total<br />
net bank credit declined especially during the re<strong>for</strong>m period. Is<br />
agricultural lending not a profitable avenue <strong>for</strong> banks? Is the interest<br />
income from <strong>agriculture</strong> sector is less <strong>for</strong> the banks? We, there<strong>for</strong>e,<br />
examine the factors preventing banks from extending credit to<br />
21 In the case of RRB, the bank branches were merged with the sponsoring bank.
agricultural sector. However, this analysis has been done only <strong>for</strong><br />
credit flow to <strong>agriculture</strong> from scheduled commercial banks, <strong>and</strong> not<br />
from co-oper<strong>at</strong>ives <strong>for</strong> two reasons. First, the banking sector re<strong>for</strong>ms<br />
have hardly any impact on the financial p<strong>at</strong>tern of the Co-oper<strong>at</strong>ives.<br />
Second, with widespread practices of rescheduling of loans (even in<br />
the event of non-repayment), the d<strong>at</strong>a on <strong>finance</strong>s provided by cooper<strong>at</strong>ive<br />
credit institutions is unreliable. The a priori model on<br />
supply of credit to <strong>agriculture</strong> is specified with the following variables.<br />
(a) Investment in Securities<br />
In a regul<strong>at</strong>ed lending system, given the interest r<strong>at</strong>e <strong>and</strong> default<br />
risk, the bankers may be more interested in investing their funds<br />
in government <strong>and</strong> othp.r approved secl.lriti~s. Th~ increasing<br />
proportion of investment in securities out of total deposits may<br />
leave the banks with less loanable funds. It may adversely affect<br />
the channelis<strong>at</strong>ion of credit to different sectors of the economy, in<br />
general, <strong>and</strong> <strong>agriculture</strong>, in particular. This may also neg<strong>at</strong>ively<br />
affect the Credit-Deposit R<strong>at</strong>io. Thus, INVS is expected to have<br />
neg<strong>at</strong>ive associ<strong>at</strong>ion with credit flow to <strong>agriculture</strong>.<br />
(b) Rural Coverage of Banks<br />
DUring the post-n<strong>at</strong>ionalis<strong>at</strong>ion period, banks were directed by the<br />
RBI to give priority to rural <strong>and</strong> non-banked areas in the bankbranch<br />
expansion to enhance the credit availability to the needy.<br />
However, the problems of the FRBS, viz., mounting overdues, poor<br />
quality of lending <strong>and</strong> recalcitrant <strong>at</strong>titude among borrowers<br />
contributed to the cumul<strong>at</strong>ive loses, adversely affected the viability<br />
<strong>and</strong> efficiency of the banking system. During the re<strong>for</strong>m years, the<br />
banks were directed to close down their loss making branches or<br />
73
74<br />
merge them with other banks. Thus, closure of loss-making banks<br />
together with the increasing popul<strong>at</strong>ion pressure may have reduced<br />
the credit flow to <strong>agriculture</strong>, <strong>and</strong> hence, the variable of RBB is<br />
expected to have neg<strong>at</strong>ive associ<strong>at</strong>ion with credit flow to<br />
<strong>agriculture</strong>.<br />
(c) Lending R<strong>at</strong>e on Agricultural Credit<br />
From the supply side, interest r<strong>at</strong>e plays an important role in the<br />
flow of credit. If the interest income is gre<strong>at</strong>er or <strong>at</strong> least equal to<br />
the cost of lending, it may positively influence the financial<br />
institutions to increase the supply of agricultural credit. Thus, a<br />
higher lending r<strong>at</strong>e is expected to increase the supply of credit to<br />
equ<strong>at</strong>ion (1).<br />
(d) Credit Subsidy<br />
Credit subsidy is the difference between cost of providing credit to<br />
<strong>agriculture</strong> <strong>and</strong> interest r<strong>at</strong>e earned on outst<strong>and</strong>ing agricultural<br />
advances adjusted <strong>for</strong> defaults. Increase in the r<strong>at</strong>e of credit<br />
subsidy may reduce the supply of agricultural credit. Equ<strong>at</strong>ion (2)<br />
gives the details on the measurement of this variable.<br />
(e) Agricultural Credit Supplied by the Co-oper<strong>at</strong>ives<br />
An increase in the total agricultural credit supplied by the cooper<strong>at</strong>ive<br />
institutions may reduce the extent of credit supply by the<br />
commercial banks <strong>and</strong> RRB. The commercial banks, including the<br />
RRB, are expected to follow a policy of mutual substitutability with<br />
co-oper<strong>at</strong>ive institutions in the provisioning of agricultural credit.
The OLS method has been applied here to examine the impact of the<br />
above on the credit flow to <strong>agriculture</strong> by the SCBs. However, as per<br />
the Durbin W<strong>at</strong>son 'd'Test positive auto correl<strong>at</strong>ion was observed in<br />
the estim<strong>at</strong>ion. The Cocharine-Orentt method was applied to correct<br />
the same. The description expected sign <strong>and</strong> estim<strong>at</strong>ed results of the<br />
variables used in the analysis have been reported in the Table 3.16.<br />
Table 3.16: Description, Expected Sign <strong>and</strong> Coefficient of<br />
Variables Used in the Equ<strong>at</strong>ion<br />
[Deoendent variable = Prooortion of agricultural credit from total bank credit]<br />
Variable Description Expected Coefficient . t - values<br />
Sign<br />
Constant 26.82 ** 2. 86<br />
INVS<br />
Proportion of investment in<br />
government <strong>and</strong> other approved - - o. 16 ***<br />
securities from total bank deposits<br />
RBB Proportion of rural bank from total + 0.52 * I<br />
number of banks branches<br />
INTR Interest r<strong>at</strong>e per Rs. 100 + - 2. 44 *<br />
outst<strong>and</strong>ing credit<br />
CS Credit subsidy per Rs. 100 - -1.57***<br />
outst<strong>and</strong>ing loan<br />
ACSCOP Proportion of agricultural credit - O. 05<br />
extended by the Co-oper<strong>at</strong>ives<br />
R-sauared 0.97<br />
Durbin - W<strong>at</strong>son st<strong>at</strong> 2. 30<br />
Number of observ<strong>at</strong>ions 20<br />
Note: * 1 % level of SIgnIficance; ** 5 % level of SIgnIficance; *** 10 % level of<br />
significance<br />
-1. 86<br />
8. 83<br />
- 4. 74<br />
-1. 84<br />
1. 09<br />
As expected, most of the parameters have the expected sign<br />
except INTR <strong>and</strong> ACSCOP. The neg<strong>at</strong>ive <strong>and</strong> st<strong>at</strong>istically significant<br />
coefficient of INVS indic<strong>at</strong>es th<strong>at</strong> proportion of investment in<br />
government <strong>and</strong> other approved securities from total bank deposits<br />
was neg<strong>at</strong>ively associ<strong>at</strong>ed with the share of <strong>agriculture</strong> sector from net<br />
bank credit. An increase in the investment in securities by one per<br />
cent reduces the supply of agricultural credit by 0.16 per cent.<br />
Probably, the positive returns have been giving incentives to divert<br />
more funds on investment securities, <strong>and</strong> leaving the bank with less<br />
75
loanable funds. This, in turn, reduces the supply of credit to<br />
<strong>agriculture</strong> sector. Coefficient of RBB is positive <strong>and</strong> significant <strong>at</strong> 1<br />
per cent level, which implies th<strong>at</strong> improved banking coverage in rural<br />
areas steps up the supply of agricultural credit. The coefficient of INTR<br />
is neg<strong>at</strong>ive <strong>and</strong> significant, which is contradictory to the theoretical<br />
argument th<strong>at</strong> an increase in the lending r<strong>at</strong>e will increase the supply<br />
of agricultural credit. Hence, increasing the lending r<strong>at</strong>e may not be<br />
an important means to increase the supply of agricultural credit. It<br />
has been argued th<strong>at</strong> an increasing interest r<strong>at</strong>e or coll<strong>at</strong>eral<br />
requirement increases the risks of the bank's loan portfolio by either<br />
discouraging safer investor or by inducing borrowers to invest in<br />
riskier project <strong>and</strong> there<strong>for</strong>e, decreases the bank profit (Stiglitz <strong>and</strong><br />
Weiss 1981). With the deregulFltion of interest r<strong>at</strong>es in 1990s, the<br />
extent to which this would be beneficial to enhance the supply of<br />
agricultural credit is questionable.<br />
The neg<strong>at</strong>ive <strong>and</strong> significant coefficient of credit subsidy (CS)<br />
implies th<strong>at</strong> 1 per cent increase in credit subsidy reduces the supply<br />
of agricultural credit by 1.57 per cent. In this context, can we adopt<br />
increasing lending r<strong>at</strong>e as a means to reduce the r<strong>at</strong>e of credit<br />
subsidy? Since increasing the lending r<strong>at</strong>e itself reduces the supply of<br />
agricultural credit, this cannot be a sound approach to reduce the<br />
credit subsidy. As agricultural lending needs credit subsidy, the net<br />
interest income out of deployment of funds in the <strong>agriculture</strong> sector is<br />
neg<strong>at</strong>ive. Thus, the profit oriented norms probably encourage the<br />
bankers to release a less proportion of net bank credit to the<br />
<strong>agriculture</strong> sector.<br />
76
The positive coefficient of ACSCOP rejects the assumption th<strong>at</strong><br />
commercial banks are required to follow the policy of mutual<br />
substitutability with co-oper<strong>at</strong>ive institutions In the field of<br />
agricultural credit. Contrary to this, the positive coefficient implies the<br />
mutual complementary rel<strong>at</strong>ionship between the two sources of<br />
• agricultural credit. In other words, the commercial banks envisage the<br />
agricultural credit policy by strengthening the supply of credit where<br />
co-oper<strong>at</strong>ives are weak. This is also corrobor<strong>at</strong>ing with the findings<br />
th<strong>at</strong> of increasing share of commercial banks <strong>and</strong> RRB in the supply<br />
of total agricultural credit. However, this coefficient is surprisingly not<br />
significant.<br />
Conclusions<br />
This chapter analysed the trends in credit flow to <strong>agriculture</strong> by SCBs.<br />
The analysis brought out th<strong>at</strong> the proportion of credit flow to<br />
<strong>agriculture</strong> had significantly declined during the last one decade.<br />
Such a decline was more prominent during the re<strong>for</strong>m years. Across<br />
the bank groups also, a similar decline was observed. In the case of<br />
co-oper<strong>at</strong>ives the situ<strong>at</strong>ion was grimmer. More importantly, despite<br />
the fact th<strong>at</strong> the lending targets were fixed, direct <strong>and</strong> indirect <strong>finance</strong><br />
was clubbed, interest r<strong>at</strong>es were deregul<strong>at</strong>ed <strong>and</strong> lending procedures<br />
in the credit delivery system were simplified, the banks could not<br />
achieve the targets set in the case of agricultural lending.<br />
The analysis shows th<strong>at</strong> the number of agricultural accounts in<br />
the credit limit of Rs.25,OOO <strong>and</strong> the amount of credit in this range<br />
declined during the re<strong>for</strong>m period. The analysis also shows th<strong>at</strong>,<br />
within <strong>agriculture</strong>, banks provided larger quantum more funds to<br />
activities earning more interest income. This seemed to be more<br />
77
prominent after the deregul<strong>at</strong>ion of lending r<strong>at</strong>e to ultim<strong>at</strong>e borrowers.<br />
The better-off farmers had larger access to <strong>for</strong>mal credit as compared<br />
to small <strong>and</strong> marginal farmers. Importantly, despite the increasing<br />
consensus to extend credit facility to <strong>agriculture</strong>, in general, <strong>and</strong> small<br />
<strong>and</strong> marginal farmers, in particular, banks were unable to lend to<br />
those activities with high social return or those c<strong>at</strong>egory of<br />
creditworthy borrowers who had been traditionally marginalised in the<br />
credit market. This finding is also backed by Stiglitz's study in 1994.<br />
This raises the issue of wh<strong>at</strong> factors determine the supply of<br />
institutional credit, <strong>and</strong> access to institutional credit. While the first<br />
Issue is analysed in this chapter, the l<strong>at</strong>ter issue has been taken up<br />
<strong>for</strong> a detailed analysis in chapter VI with the help of household level<br />
d<strong>at</strong>a.<br />
Credit flow to <strong>agriculture</strong> was neg<strong>at</strong>ively associ<strong>at</strong>ed with<br />
Investment in government securities, credit subsidy <strong>and</strong> proportion of<br />
credit provided by the co-oper<strong>at</strong>ives. Credit supply to <strong>agriculture</strong> was<br />
positively associ<strong>at</strong>ed with rural bank branches. This implies the need<br />
to reconsider the policy suggestion of closing loss-making rural bank<br />
branches. If it is absolutely essential to close down the bank<br />
branches on consider<strong>at</strong>ions of profitability, altern<strong>at</strong>ives in terms of<br />
farmers' clubs, self-help groups, etc., it should be introduced, <strong>and</strong><br />
strengthened.<br />
The analysis shows th<strong>at</strong> increasing lending r<strong>at</strong>e reduces the<br />
credit supply to <strong>agriculture</strong> sector by institutional agencies. This<br />
leads to the policy implic<strong>at</strong>ion th<strong>at</strong> it may not be sound to increase the<br />
interest r<strong>at</strong>e. Besides, banks cannot use the interest r<strong>at</strong>e as screening<br />
de\ise due to adverse selection problem. This is due to the fact th<strong>at</strong><br />
78
orrowers, willing to pay high interest r<strong>at</strong>es, may be less worried<br />
about repayment of the loan. In this context, given the in<strong>for</strong>m<strong>at</strong>ion<br />
asymmetry, Stiglitz <strong>and</strong> Weiss (1981) shows th<strong>at</strong> a profit maximising<br />
bank will practice credit r<strong>at</strong>ioning <strong>and</strong> be reluctant to increase interest<br />
r<strong>at</strong>es in response to an excess dem<strong>and</strong>. Consequently, high-risk group<br />
of borrowers may be completely excluded from the market although<br />
their prospective investments offer a high-expected return. Since<br />
<strong>agriculture</strong> is a risky activity where farmers face shocks to their<br />
mcome, it appears th<strong>at</strong> bankers in India have been practising a tight<br />
credit r<strong>at</strong>ioning process to select a borrower. Given these problems<br />
one of the basic questions is th<strong>at</strong> wh<strong>at</strong> makes certain households to<br />
access institutional credit while others cannot? This issue has been<br />
taken up in gre<strong>at</strong> detail \~'hi!e making the household level analysis.<br />
The calcul<strong>at</strong>ions on credit subsidy show th<strong>at</strong> the total amount<br />
of credit was increasing, although the credit subsidy per Rs. 100 of<br />
outst<strong>and</strong>ing loan declined during the re<strong>for</strong>m period. It is also found<br />
th<strong>at</strong> credit subsidy adversely affected the supply of agricultural credit.<br />
It is also noticed th<strong>at</strong> increasing lending r<strong>at</strong>e could not be an<br />
appropri<strong>at</strong>e measure to reduce the credit subsidy, since it adversely<br />
affected the supply of agricultural credit. In this context, it can be<br />
suggested th<strong>at</strong> reduction in the cost of lending in terms of either<br />
fmancial cost or transaction cost or risk cost or by any combin<strong>at</strong>ions<br />
of these three should be the prime objective of the financial<br />
institutions to reduce the burden of credit subsidy. This can be made<br />
possible by better quality of credit delivery system (timely <strong>and</strong><br />
adequ<strong>at</strong>e) <strong>and</strong> prompt repayment of loans.<br />
79
Chapter 4<br />
INSTITUTIONAL CREDIT TO AGRICULTURE: STATE AND<br />
DISTRICT LEVEL ANALYSIS<br />
Introduction<br />
In Chapter III, it is noted th<strong>at</strong> the proportion of credit disbursed to<br />
"griculture to total net bank credit significantly declined during the<br />
period 1992-2000. Further, despite th<strong>at</strong> lending targets were fixed,<br />
direct <strong>and</strong> indirect <strong>finance</strong> was clubbed, interest r<strong>at</strong>es were<br />
deregul<strong>at</strong>ed <strong>and</strong> lending procedures were simplified, the institutional<br />
1gencies could not meet the targets fixed in the case of agricultural<br />
IL'rtding. The discussion on distribution of loan accounts <strong>and</strong><br />
n:lOunts by size class of l<strong>and</strong>holdings in Chapter III suggests th<strong>at</strong> the<br />
bt'tter-off among the farmers were having larger access to the<br />
mstitutional credit as compared to small <strong>and</strong> marginal farmers.<br />
1t~1portantly,<br />
despite the widespread consensus to extend credit facility<br />
t(l <strong>agriculture</strong>, in general, <strong>and</strong> small <strong>and</strong> marginal farmers, in<br />
particular, the banks could not <strong>finance</strong> this sector with high social<br />
;'('turns <strong>and</strong> cover those c<strong>at</strong>egory of borrowers who were marginalised<br />
:n 1 he <strong>for</strong>mal rural credit market. Chapter III also makes it clear th<strong>at</strong><br />
;il~<br />
ll1stitutionallending agencies were giving more importance to non<br />
,c;ncultural lending. Elsewhere, it is argued th<strong>at</strong> rel<strong>at</strong>ively backward<br />
, "~l'll1S had less access to institutional credit than the developed ones<br />
''
l!lfferences m the irrig<strong>at</strong>ion infrastructure, use of high-yielding<br />
larteties, fertiliser consumption, etc., is the decline in the credit 110\\·<br />
ll!1l<strong>for</strong>m across the st<strong>at</strong>es <strong>and</strong> districts? Does the access to<br />
Illstitutional credit vary by size classes of the l<strong>and</strong>holdings across the<br />
!"l'gions? Is there any vari<strong>at</strong>ion in the supply of agricultural credit per<br />
:\t·ctare of gross cropped area across the st<strong>at</strong>es <strong>and</strong> districts? Wh<strong>at</strong><br />
dre the activities (both <strong>agriculture</strong> <strong>and</strong> non-<strong>agriculture</strong>) <strong>for</strong> which<br />
Illstitutional credit has been disbursed? Wh<strong>at</strong> has determined the<br />
s,·ctoral distribution of institutional credit?<br />
R<strong>at</strong>ionale of St<strong>at</strong>e Selection <strong>and</strong> D<strong>at</strong>abase<br />
This chapter seeks to address the above questions by confining the<br />
.1:1alvsis to 14 major st<strong>at</strong>es. These st<strong>at</strong>~s Flrp· Andhra Pradesh, Bih3.r<br />
I undivided), Gujar<strong>at</strong>, Haryana, Karn<strong>at</strong>aka, Kerala, Madhya Pradesh<br />
IUlldivided), Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu,<br />
littar Pradesh (undivided) <strong>and</strong> West Bengal. The r<strong>at</strong>ionale <strong>for</strong> the<br />
selection of these st<strong>at</strong>es is as follows: the 14 st<strong>at</strong>es account <strong>for</strong> 93 per<br />
cent of the popul<strong>at</strong>ion <strong>and</strong> 91.5 per cent of the Net Domestic Product<br />
I\;DP) in the country (Rao et aZI999); second, these st<strong>at</strong>es accounted,<br />
lin an average, 84.7 per cent of the total deposits in Scheduled<br />
l. 'mmercial Banks (SCBs) including RRBs during the last twenty<br />
\[·"rs; <strong>and</strong> third, 95 per cent of the total agricultural credit provided<br />
1)\ seBs <strong>and</strong> RRBs went to these st<strong>at</strong>es 28 The hill st<strong>at</strong>es loc<strong>at</strong>ed in<br />
: :u:·1 h <strong>and</strong> north-eastern parts of India, considered as special c<strong>at</strong>egory<br />
SI,,·,l'S by the Planning Commission, have been excluded from the<br />
.iii.: lysis as there are significant differences between these st<strong>at</strong>es <strong>and</strong><br />
."i,C1s in terms of principal sources of income. The important sources<br />
: ;; •. ". d<strong>at</strong>a have been obtained from Banking St<strong>at</strong>istics pubilshed by the Rill.<br />
Sl
of income m the hill st<strong>at</strong>es are government activities, as there has<br />
hardly been any manufacturing base (Rao et al 1999).<br />
The district level analysis has been done <strong>for</strong> the st<strong>at</strong>e of Orissa<br />
because of its backward st<strong>at</strong>us. The Economic Survey of Orissa <strong>for</strong> the<br />
year 2000-01 notes with concern th<strong>at</strong> the Credit Deposit R<strong>at</strong>io 29 (CDR)<br />
m the st<strong>at</strong>e declined from 80.59 per cent in 1991 to 39.75 per cent in<br />
1999-2000, while per-bank branch popul<strong>at</strong>ion increased from 15,200<br />
to 16,300 during the same period. The reduced CDR may have<br />
adversely affected the credit flow to different sectors in the st<strong>at</strong>e<br />
economy. In this context, there is need to look into the actual flow of<br />
credit to different sectors in the st<strong>at</strong>e, in general, <strong>and</strong> to <strong>agriculture</strong>, in<br />
particular.<br />
The analysis in this Chapter is based on secondary d<strong>at</strong>a. For<br />
the analysis of trends in 14 major st<strong>at</strong>es, the d<strong>at</strong>a were collected from<br />
the Reports on Currency <strong>and</strong> Finance (RBI), Banking St<strong>at</strong>istics (RBI),<br />
Fertiliser St<strong>at</strong>istics (the Fertiliser Associ<strong>at</strong>ion of India), Indian<br />
Agricultural St<strong>at</strong>istics (Ministry of Agriculture, Government of India)<br />
<strong>and</strong> St<strong>at</strong>istical Abstract (Central St<strong>at</strong>istical Organis<strong>at</strong>ion, Department<br />
of St<strong>at</strong>istics <strong>and</strong> Programme Implement<strong>at</strong>ion, Government of India).<br />
For an analysis of trends in Orissa, d<strong>at</strong>a were collected from St<strong>at</strong>e<br />
Level Bankers' Committee Meetings (Agenda Notes) <strong>and</strong> Orissa<br />
Agricultural St<strong>at</strong>istics (Director<strong>at</strong>e of Agriculture <strong>and</strong> Food Production,<br />
Orissa, Bhubaneswar).<br />
29 The CDR in Orissa was well below the all India average of 57.05 per cent in 1999·<br />
2000. In th<strong>at</strong> year, the st<strong>at</strong>es with CDR higher than th<strong>at</strong> in Orissa were: Tamil<br />
l"adu (88.0%), Maharashtra (83.79%), Andhra Pradesh (63.60%), Karn<strong>at</strong>aka<br />
(61.01 %), Gujar<strong>at</strong> (49.85%), Madhya Pradesh (49.17%), Rajasthan (46.69%), West<br />
Bengal (45.17%) <strong>and</strong> Kerala (42.29%). This in<strong>for</strong>m<strong>at</strong>ion was collected from RBI<br />
(2000)<br />
82
St<strong>at</strong>e-wise Flow of Agricultural Credit<br />
Table 4.1 provides the growth r<strong>at</strong>es on agricultural credit <strong>for</strong> the<br />
period 1981-2000 in 14 major st<strong>at</strong>es. It also provides growth r<strong>at</strong>es <strong>for</strong><br />
credit to <strong>agriculture</strong> <strong>and</strong> total credit <strong>for</strong> two sub periods, viz., 1981-<br />
1991 <strong>and</strong> 1992-2000. Total credit (<strong>for</strong> <strong>agriculture</strong> <strong>and</strong> others) in all<br />
the 14 major st<strong>at</strong>es grew <strong>at</strong> the r<strong>at</strong>e of 15.3 per cent during 1981-<br />
2000. There have been temporal vari<strong>at</strong>ions; the growth r<strong>at</strong>e during<br />
the re<strong>for</strong>m period was higher than th<strong>at</strong> during the pre-re<strong>for</strong>m period.<br />
The p<strong>at</strong>tern of growth r<strong>at</strong>es in the case of credit to <strong>agriculture</strong><br />
\\'as, however, different. The credit to <strong>agriculture</strong> in 14 major st<strong>at</strong>es<br />
mcreased <strong>at</strong> an annual growth r<strong>at</strong>e of 12 per cent during the entire<br />
period. However, the growth r<strong>at</strong>l;' during the re<strong>for</strong>m period '.'fas less<br />
110.9 per cent) than th<strong>at</strong> during the pre-re<strong>for</strong>m period (15.2 per cent).<br />
This clearly shows th<strong>at</strong> the r<strong>at</strong>e <strong>at</strong> which credit was disbursed to<br />
<strong>agriculture</strong> slowed down during the re<strong>for</strong>m period.<br />
This p<strong>at</strong>tern can be observed m all the st<strong>at</strong>es, except Punjab<br />
<strong>and</strong> Maharashtra. A comparison of growth r<strong>at</strong>es of credit to<br />
dgriculture between pre- <strong>and</strong> re<strong>for</strong>m periods reveals th<strong>at</strong> most of the<br />
't<strong>at</strong>es registered higher growth r<strong>at</strong>es of credit flow to <strong>agriculture</strong><br />
'iuring the pre-re<strong>for</strong>m period as compared to the l<strong>at</strong>er period.<br />
83
Table 4.1: St<strong>at</strong>e-wise Annual Average Growth R<strong>at</strong>es (%) of<br />
outst<strong>and</strong>ing Credit by SCBs<br />
St<strong>at</strong>es 1981 - 1991 1992 - 2000 L-l_~81 ·2000 =:J<br />
_____ ~Agric_"Itu;-er ~TotaC --:-Agrlculture ~ 'fotal . Agriculture _ Total<br />
High Income St<strong>at</strong>es<br />
-----------r--------T"'- - -- --- - - ----------<br />
l,ular<strong>at</strong> . __ ' 14. 7 ' 16.~ --"- __ 7-,~._~ J6,Q _._<br />
1I";"an';' 14. 3 , 14.9: 9. 3 14. 7<br />
~ ________-t______---t______ "____ - - -;- ____ .. _<br />
\lriharas_htr"--___· __ I:3.:!l.. i 13,---5_~_ 13. 9n_~11l, 9 __<br />
!'unjab _ -.-----i--I()~ 2..---+_-'1:JLJ __ ---'~ 7 ___ " .14..c S. _ .. _<br />
l;roupTot"l~ 13. 0_--, .. 14._0_ ~._ 10. 2 _--,-..l7..:~~_<br />
12.4<br />
9. 9<br />
12. 2<br />
15. 4<br />
13. °<br />
16. 2<br />
9. 2 13. I<br />
11. ° IS. 5<br />
- -- - ------<br />
_____ ._ -:-_--:-::--::--"M:::: idd1e_!nco-",_e. Sta t.e~ ___ --=----c -c-c-<br />
,\ndhra Pradesh I 13. 5 _!---,1,-,7.:.--.9 I 12. 2 . IS. 3, 11. 4 15.9!<br />
Karn<strong>at</strong>aka 17. ° 16. 6 13.~-17.-7-!-13. 0-=::::15.]:<br />
Kerala I, 15.2 14.8 j 12.6 i 16. l' 12. 1 __ 14 .._1_,<br />
Temil Nad-"u.~_--+ ____ 1=7'-.. cc3_-+--cl-':c7'-.. cc6_t-i' ____ 1--=0-'-. --=3_-,-1 17. 2: 13. 2 16. 7<br />
West Bengal I 17.5 14.5 I 3.5 '11.5-1 10.1--13.:'3-- 1<br />
GrouI' Iotal , 15.9 16. 4_--.l __'1~__!_'5:_Lj=-::::12:-2--15-:'3:::::;<br />
Low Income St<strong>at</strong>es<br />
i3,har- ==-_---,---:'-::6:-;2:--,-----"";15 9 ----43--, -107-' --11 2_-=X3 . .§_J<br />
\hdh.:·a Pradesh; 19.2 20.8 I 12. 5-------l--c)!;~_!_._14'-L ___ I§:_3_<br />
Onssa I 15.9 20. 7! 9.9 i II. 5 I 10. I . li-,--:?--j<br />
Rd.ja~han i 16.1 lS8 1').2 15.6 12.7 l-r.:1<br />
, ---,<br />
Uttar Pradesh I 15. ° 16. 8 I 9.8 i II. 8 I 12. 8 14. 3<br />
,-"oupTotal ! 16.3 17.6, 10. ° I 13. ° , I 12.7 14. ?J<br />
~ll MilJor St<strong>at</strong>es 15.2 15.7 i 10.~9~c'_'---;I§. ...9...--E:-O-_-- IS. 3 '<br />
Source: Reserve Bank of India (various issues of Banking St<strong>at</strong>istics from 1981 to<br />
2UOOI·<br />
We have c<strong>at</strong>egorised the 14 major st<strong>at</strong>es into high, middle <strong>and</strong><br />
low-income groups on the basis of net st<strong>at</strong>e domestic product. A<br />
comparison of growth r<strong>at</strong>es across different c<strong>at</strong>egories of st<strong>at</strong>es shows<br />
th<strong>at</strong> the growth r<strong>at</strong>es of credit to <strong>agriculture</strong> in 1980s were higher <strong>for</strong><br />
!niddle <strong>and</strong> low-income st<strong>at</strong>es as compared to the high-income<br />
C dtegory of st<strong>at</strong>es (Table 4.1). In the case of st<strong>at</strong>es such as Bihar,<br />
;~ci]asthan,<br />
West Bengal, Kerala, Karn<strong>at</strong>aka, <strong>and</strong> Maharashtra, the<br />
t;r')\\'th r<strong>at</strong>e of credit to <strong>agriculture</strong> was higher than th<strong>at</strong> to all sectors<br />
(i U ring the period 1981-91.<br />
However, the growth r<strong>at</strong>es of agricultural credit were much<br />
b'lo\\' than those in the case of total credit <strong>for</strong> all the st<strong>at</strong>es during the<br />
P,rtod 1992·2000. The growth r<strong>at</strong>es of credit to all the sectors <strong>and</strong> to<br />
8-1
<strong>agriculture</strong> declined during this period in the case of middle <strong>and</strong> lowincome<br />
st<strong>at</strong>es. But the decline in growth r<strong>at</strong>es was steep in the case of<br />
agricultural credit, especially in the case of Bihar, West Bengal <strong>and</strong><br />
c,<br />
Gujar<strong>at</strong>. In the case of high income group st<strong>at</strong>es, although the growth<br />
r<strong>at</strong>e of credit to all sectors increased during 1991-2000, it decreased<br />
in the case of <strong>agriculture</strong>. Thus, growth r<strong>at</strong>es of agricultural credit<br />
were uneven across the sub-periods as well as across the st<strong>at</strong>es.<br />
Wh<strong>at</strong> are the trends in the proportion of credit to <strong>agriculture</strong><br />
from SeBs <strong>for</strong> all the st<strong>at</strong>es? Table 4.2 provides the proportions of<br />
credit to <strong>agriculture</strong> to total net bank credit <strong>for</strong> four five-year periods<br />
beginning with 1981-85. In 1980s, the proportion of farm credit to<br />
total net bank credit was around 18 per cent of the total credit in all<br />
the major st<strong>at</strong>es. Thus, the institutional agencies were meeting the<br />
target of 18 per cent fixed under the priority sector lending norms. In<br />
nine out of 14 st<strong>at</strong>es, the priority sector norms were met during the<br />
period 1981-85.<br />
The number of st<strong>at</strong>es meeting the priority sector<br />
norms increased to 10 during the period 1986-90. In general, all the<br />
low-income st<strong>at</strong>es, <strong>and</strong> most of the middle income st<strong>at</strong>es were meeting<br />
the norms in 1980s.<br />
There was perceptible change in the level of credit provided to<br />
<strong>agriculture</strong> during 1990s. First, the proportion of farm credit to total<br />
net bank credit in all the 14 major st<strong>at</strong>es declined from 14.7 per cent<br />
during 1991-95 to 11.7 during the period 1996-2000. However, the<br />
proportion of agricultural credit in the total bank credit progressively<br />
declined to about 11.7 per cent during the period 1996-2000. Such a<br />
decline was uni<strong>for</strong>m across the st<strong>at</strong>es. Nevertheless, the priority sector<br />
norms in rel<strong>at</strong>ion to agricultural lending were met in nine <strong>and</strong> eight<br />
85
86<br />
st<strong>at</strong>es during 1991-95 <strong>and</strong> 1996-2000, respectively. Further, the<br />
norms were met in all the low-income st<strong>at</strong>es <strong>and</strong> a few high <strong>and</strong><br />
middle-income st<strong>at</strong>es during 1996-2000. It has to be, however, noted<br />
th<strong>at</strong> if the proportion of net bank credit to <strong>agriculture</strong> in a particular<br />
st<strong>at</strong>e is more, th<strong>at</strong> does not necessarily mean th<strong>at</strong> credit per hectare of<br />
t.;ross cropped area is more. This implies th<strong>at</strong> on the basis of<br />
proportions of credit to <strong>agriculture</strong> it may be difficult to conclude th<strong>at</strong><br />
a particular st<strong>at</strong>e is better-off in terms of amount of credit to<br />
agricultural sector. There<strong>for</strong>e, the <strong>for</strong>mal credit available per hectare<br />
of gross cropped area can be a better indic<strong>at</strong>or to explain the<br />
agricultural credit situ<strong>at</strong>ion in a particular st<strong>at</strong>e. We have, there<strong>for</strong>e,<br />
taken the supply of credit per hectare of gross cropped area <strong>at</strong> the<br />
st<strong>at</strong>e level as the dependent variable in the<br />
contributing to vari<strong>at</strong>ions in the supply of credit to <strong>agriculture</strong> in<br />
Section 4.5.<br />
The trends in the proportion of credit to <strong>agriculture</strong> during the<br />
last two decades, thus, suggest th<strong>at</strong> the following factors have<br />
influenced the overall figures <strong>for</strong> 14 st<strong>at</strong>es. First, the low proportion<br />
of agricultural credit in the industrialised st<strong>at</strong>es of Maharashtra,<br />
Gujar<strong>at</strong>, West Bengal <strong>and</strong> Tamil Nadu has had substantial influence<br />
on the overall figures. In the case of West Bengal <strong>and</strong> Maharashtra,<br />
the priority sector norms were not met even during both pre-re<strong>for</strong>m<br />
periods. Second, the low proportion of agricultural credit could be<br />
<strong>at</strong>tributed to a low growth r<strong>at</strong>e of agricultural credit compared to the<br />
total credit in all the st<strong>at</strong>es especially during the re<strong>for</strong>m period. This<br />
shows th<strong>at</strong> bankers were giving priority to non-agricultural lending in<br />
almost all the st<strong>at</strong>es.
00<br />
Table 4.2: St<strong>at</strong>e-wise Agricultural Sector Lending (%) to Total<br />
Credit <strong>and</strong> Total Deposit<br />
St<strong>at</strong>es<br />
(II\lar<strong>at</strong><br />
ii. lr\-ana<br />
\1 ailarashtra<br />
nlab<br />
Qun Total<br />
:rlhra Pradesh<br />
l:-n<strong>at</strong>aka<br />
'rala<br />
Ta mll Nadu<br />
,'st Bengal<br />
; 11! 'oup Total<br />
8: har<br />
adhya Pradesh<br />
U nssa<br />
Ra Jasthan<br />
.tar Pradesh<br />
-uup Total<br />
, AI I ~laJor St<strong>at</strong>es<br />
Average <strong>for</strong> the<br />
Period of<br />
Average <strong>for</strong> the<br />
Period of<br />
1981-85 1986-90<br />
ACHC I ACHD ACHC ACHD<br />
High Income St<strong>at</strong>es<br />
15. 2 B. 0 14. 4 B. 4<br />
31. 3 29. 1 28. 5 22.7<br />
6. 4 5. 5 7.3 4.8<br />
33. 4 19.5 28. 3 12.6<br />
13. 0 9. 7 12.7 7.9<br />
Middle Income St<strong>at</strong>e.<br />
35. 7 25. 7 29.5 23. 1<br />
23. 2 18.4 24. 3 20.9<br />
17.5 11.5 lB.3 II. 8<br />
16.9 14.5 17.4 16. 3<br />
7. 1 3. 3 9. 7 4.8<br />
19.5 13. 0 19.6 14. I<br />
Low Income St<strong>at</strong>es<br />
24.5 9. 2 25. 7 8. 8<br />
Average <strong>for</strong><br />
the Period of<br />
I Average <strong>for</strong><br />
the Period of<br />
1991-95 1996-2000<br />
ACHC I ACHD I ACHC I ACBD<br />
14. 1 7. 6 9 9 5. 4<br />
25. 0 16. 0 19. 2 10. 4<br />
5. 0 3. 0 4. 1 3. 1<br />
22. B 10. 1 lB. 6 7. 6<br />
9.6 5. 6 7. 1 4.6<br />
22. 6 17. 5 19.7 14. I<br />
20. B 14. 6 16. 9 II. 6<br />
15. 8 7. 6 13. 5 5.9<br />
14. 1 12. 4 10. 7 9. B<br />
6. 5 3. 3 4. B 2. 2<br />
15. 6 10.4 13. 0 8. 4<br />
25. 7 9. 7 19. B 5. 4<br />
",.... ~<br />
~.t:.. J<br />
, 13.4 i 9. 5 10. I<br />
20. 7 13. 4 19.0 9. 0<br />
25. a 13.9 21. 3 10.5<br />
21. 8 9. 2 19.5 6. 3<br />
23. a 10. 9 19.8 7. 6<br />
14. 7 8. 6 II. 7 6. B<br />
~\,)tc. ACBe - Agncultural sector credit as a proportIon to net bank credit.<br />
ACBD = Agricultural sector credit as a proportion to total bank deposit.<br />
Source: Reserve Bank of India (various issues of Banking St<strong>at</strong>istics from the year 1981 to<br />
2000).<br />
Let US now turn our <strong>at</strong>tention to the discussion on trends in<br />
.\gricultural Sector Credit as a proportion to the total bank deposit<br />
l/leBD). This indic<strong>at</strong>es the extent to which the deposits mobilised in a<br />
Sidle were lent to agricultural sector. The key findings emerging from<br />
dll analysis of trends in ACBD in 14 st<strong>at</strong>es put together, <strong>and</strong> in<br />
IIldl\"ldual st<strong>at</strong>es are the following:<br />
• During the period 1981 to 2000, ACBD declined progressively in all<br />
l.~le<br />
14 major st<strong>at</strong>es taken together.<br />
• There was also a decline in ACBD in the individual st<strong>at</strong>es except in<br />
the case of a few st<strong>at</strong>es during 1986-90.<br />
87
88<br />
There were substantial inter-st<strong>at</strong>e differences in ACBD in one subperiod<br />
as well as between four sub-periods. The poorer st<strong>at</strong>es such<br />
as Bihar <strong>and</strong> Uttar Pradesh had lower ACBD all through the period<br />
of 1981-2000 <strong>and</strong> even during the period 1981-85. In<br />
agriculturally prosperous st<strong>at</strong>e of Haryana, the ACBD was high <strong>for</strong><br />
most part of the last two decades. The situ<strong>at</strong>ion in Bihar <strong>and</strong> Uttar<br />
Pradesh in terms of ACBD was even worse during the period 1996-<br />
2000. In Bihar, ACBD dropped from 9.2 to 5.4 per cent during the<br />
period 1981-2000, while in Uttar Pradesh it declined from 10.1 to<br />
6.3 per cent during the same period. Interestingly, among 14 major<br />
st<strong>at</strong>es, it was West Bengal, a middle income st<strong>at</strong>e, which had the<br />
distinction of having the lowest ACBD throughout the last two<br />
decades.<br />
The gap between proportion of agricultural credit to total net bank<br />
credit (ACBC) <strong>and</strong> ACBD was generally large in the poorer st<strong>at</strong>es as<br />
compared to the agriculturally prosperous st<strong>at</strong>es. For instance, the<br />
gap between these two was as high as 15.3 <strong>and</strong> 14.1 in Bihar <strong>and</strong><br />
Uttar Pradesh, respectively, as compared to only 2.2 in Haryana<br />
during the period 1981-1985.<br />
It can be also seen th<strong>at</strong> ACBD was less than ACBC in all the 14<br />
st<strong>at</strong>es during all time periods. A constant decline in the ACBD in<br />
all the major st<strong>at</strong>es indic<strong>at</strong>es th<strong>at</strong> banks have been diverting their<br />
funds to other than agricultural sector. Such a diversion seems to<br />
be more prominent in the backward st<strong>at</strong>es like Bihar, Uttar<br />
Pradesh, <strong>and</strong> West Bengal.<br />
The extent of diversion of funds out of deposits mobilised was<br />
equally high in developed st<strong>at</strong>es of Maharashtra, Kerala, <strong>and</strong>
Gujar<strong>at</strong>. This implies th<strong>at</strong> <strong>agriculture</strong> in a st<strong>at</strong>e belonging to a<br />
high-income c<strong>at</strong>egory need not necessarily receive higher priority in<br />
terms of alloc<strong>at</strong>ion of credit. Thus, the income st<strong>at</strong>us of the st<strong>at</strong>e<br />
(per capita income in this case) itself does not determine the supply<br />
of agricultural credit. We presume th<strong>at</strong> supply side factors<br />
determine the level of credit made available to agricultural sector.<br />
Such a presumption is borne out by the fact th<strong>at</strong> the high per<br />
capita income in a particular st<strong>at</strong>e need not necessarily be due to<br />
high agricultural income. The non-agricultural sectors may have<br />
played an important role in the level of per capita income. If this is<br />
the case, the bankers may give priority to non-agricultural sectors<br />
in their lending portfolio purely on the grounds of profitability.<br />
Since the proportion of agricultural credit to net b~.nk credit has<br />
been declining over a period of time, it can be suggested th<strong>at</strong> the<br />
bankers may not be considering lending to agricultural sector as<br />
profitable.<br />
In the all India level analysis, we found th<strong>at</strong> the proportion of<br />
investment in government <strong>and</strong> other approved securities from total<br />
bank deposits, interest r<strong>at</strong>e, <strong>and</strong> credit subsidy were the important<br />
itctors th<strong>at</strong> were adversely affecting the supply of agricultural credit.<br />
Smce the same type of d<strong>at</strong>a is not available <strong>at</strong> the st<strong>at</strong>e level, we have<br />
used st<strong>at</strong>e's characteristics 30 to examine the supply of agricultural<br />
credit.<br />
'.'<br />
30 I t includes the percentage of irrig<strong>at</strong>ed area to gross cropped area, area under<br />
commercial crops to gross cropped area, credit deposit r<strong>at</strong>io, <strong>and</strong> density of bank<br />
branches per 1,000 farmers.<br />
89
Distribution P<strong>at</strong>tern of Agricultural Credit<br />
The discussion on trends in the credit flow to <strong>agriculture</strong> with the help<br />
of growth <strong>and</strong> level of credit to <strong>agriculture</strong> leads us to the following<br />
conclusions. First, there was a rapid growth of credit to <strong>agriculture</strong> in<br />
(he 1980s. Such a rapid flow was generally <strong>at</strong>tributed to the supply<br />
Jed approach adopted by the <strong>for</strong>mal institutional agencies (Adams <strong>and</strong><br />
Vogel 1986; Gadgil 1994; Shajahan 1999; Kohli 1999; Shivamagi<br />
2000). Second, the fall-out of such an approach could be considered<br />
as the contributing factor <strong>for</strong> the decline in the credit flow to<br />
<strong>agriculture</strong> in the 1990s. The liter<strong>at</strong>ure suggests th<strong>at</strong> a preoccup<strong>at</strong>ion<br />
to achieve quantit<strong>at</strong>ive targets in 1980s ignoring the qualit<strong>at</strong>ive<br />
aspects resulted in high cost structure of oper<strong>at</strong>ion <strong>and</strong> mounting<br />
overdues within the banking system. This hec:ame a thre<strong>at</strong> to the<br />
VIability of the financial institutions. As noted earlier, the introduction<br />
of policies rel<strong>at</strong>ing to market-oriented <strong>and</strong> competitive financial<br />
system since 1991 aimed to improve the viability of the financial<br />
institutions. Although the target of agricultural credit was kept the<br />
same during the 1990s, there was a decline in the credit to<br />
<strong>agriculture</strong>. This, perhaps, could be because of credit r<strong>at</strong>ioning<br />
practices. As was found in the review of liter<strong>at</strong>ure in Chapter 2, the<br />
perceptions on risks involved in agricultural lending, the banks might<br />
be <strong>for</strong>ced to adopt price <strong>and</strong> non-price credit r<strong>at</strong>ioning to increase the<br />
efficiency <strong>and</strong> viability of financial institutions in the provisioning of<br />
agricultural credit. In order to see whether bankers have adopted price<br />
<strong>and</strong> non-price credit r<strong>at</strong>ioning in the alloc<strong>at</strong>ion of credit to <strong>agriculture</strong>,<br />
there is need to examine the access of credit to different c<strong>at</strong>egories of<br />
farmers. For this purpose, the d<strong>at</strong>a on the distribution of credit by<br />
dIfferent size-classes of l<strong>and</strong>holdings have been examined in this<br />
scctlon.<br />
90
Access to credit has been defined as the number of farmers<br />
obtaining <strong>for</strong>mal credit to total farmers in a st<strong>at</strong>e <strong>at</strong> a particular point<br />
of time. For the analysis of distribution of credit by size-classes of<br />
l<strong>and</strong>holdings, we have relied upon the d<strong>at</strong>a on oper<strong>at</strong>ional holdings<br />
provided in quinquenial agricultural census. As per the l<strong>at</strong>est<br />
published agricultural census d<strong>at</strong>a, st<strong>at</strong>e-wise number of oper<strong>at</strong>ional<br />
holdings are available only <strong>for</strong> the years 1980-81, 1985-86 <strong>and</strong> 1990-<br />
91. The d<strong>at</strong>a on the total number of holdings in each st<strong>at</strong>e <strong>for</strong> these<br />
time-points have been used to examine the access to credit (Direct<br />
Finance to Farmers) by different c<strong>at</strong>egories of farmers. However, <strong>for</strong><br />
the year 1996-97, the number of farmers (oper<strong>at</strong>ional holdings) has<br />
been calcul<strong>at</strong>ed by the extrapol<strong>at</strong>ion method 31 . Since st<strong>at</strong>e-wise<br />
number of accounts on direct fmance is available up to 1996-97, we<br />
have calcul<strong>at</strong>ed the number of farmers <strong>for</strong> the l<strong>at</strong>est year to examine<br />
the position of access to credit. The st<strong>at</strong>e-wise number of outst<strong>and</strong>ing<br />
loan accounts on direct <strong>finance</strong> has been taken into account <strong>for</strong> the<br />
analysis. The d<strong>at</strong>a on number of loan accounts have been obtained<br />
from the Reports on Currency <strong>and</strong> Finance, <strong>and</strong> number of farmers<br />
from Fertiliser St<strong>at</strong>istics.<br />
The distribution of agricultural credit <strong>at</strong> the all India level shows<br />
th<strong>at</strong> the farmers with more than 2 ha of oper<strong>at</strong>ional holding were<br />
having larger access to the <strong>for</strong>mal credit as compared to those with<br />
less than 2 ha (small <strong>and</strong> marginal farmers) (Table 4.3). The same<br />
:rend could also be observed <strong>at</strong> the st<strong>at</strong>e level. There were substantial<br />
lIlter-st<strong>at</strong>e differences in the access to <strong>for</strong>mal credit by the same<br />
, cltegory of farmers <strong>at</strong> one time point as well as between different time<br />
, .--------------------<br />
~<br />
The number of fanners in the current year (y,) = Yo (1 ... r) t, where Yo st<strong>and</strong>s <strong>for</strong><br />
number of farmers in the base year, r st<strong>and</strong>s <strong>for</strong> r<strong>at</strong>e of growth, t represents time<br />
penods, <strong>and</strong> r = (Yt/ Yo)'/' - 1.<br />
91
ihllnts. The access to <strong>for</strong>mal credit by the small <strong>and</strong> marginal farmers<br />
ilCld gone down in the year 1996-97 as compared to 1990-91 in all the<br />
,Lites except Gujar<strong>at</strong>. Among the st<strong>at</strong>es, the proportion of marginal<br />
,me! small farmers having access to institutional credit was the<br />
:li."hest in Punjab (26.7 per cent) In 1996-97 followed by Tamil Nadu<br />
,JlHI Andhra Pradesh. However, In the st<strong>at</strong>es like Bihar, Madhya<br />
Pradesh, Uttar Pradesh, Haryana, <strong>and</strong> Maharashtra only 5 to 6.7 per<br />
c,~nt<br />
of the marginal <strong>and</strong> small farmers were having access to <strong>for</strong>mal<br />
credit in the same year. For farmers with more than 2 ha. of<br />
(,ptT<strong>at</strong>ional holdings (medium <strong>and</strong> large), 63.2 per cent of them were<br />
we-essing <strong>for</strong>mal credit in Tamil Nadu followed by Kerala (45 %), <strong>and</strong><br />
Punjab (31.6 %) in 1996-97. The percentage of medium <strong>and</strong> large<br />
f8rmers having access to institutional credit was substantially less in<br />
the st<strong>at</strong>es like Madhya Pradesh, Rajasthan <strong>and</strong> Maharashtra. It can<br />
be. there<strong>for</strong>e, concluded th<strong>at</strong> even the same size of l<strong>and</strong>holdings were<br />
h,i\'ing uneven access to <strong>for</strong>mal credit across the st<strong>at</strong>es. This finding<br />
holds good <strong>for</strong> all sizes of farmers. In this context, it is necessary to<br />
examine wh<strong>at</strong> factors contribute to some fann households to access<br />
(annal credit, while others do not. Since this question cannot be<br />
111S\\cred with the help of st<strong>at</strong>e level analysis due to non-availability of<br />
ij,lid. this question is taken up <strong>for</strong> analysis <strong>at</strong> the household level.<br />
The outst<strong>and</strong>ing credit (direct <strong>finance</strong> 32 ) per loan account varies<br />
·.'.,;I,in <strong>and</strong> across different c<strong>at</strong>egories of st<strong>at</strong>es <strong>at</strong> one time point as<br />
Ilie direct <strong>finance</strong> covers both short-term <strong>and</strong> long-term loans. Short-term loans<br />
!::kluding crop loans) are given <strong>for</strong> the purchase of production inputs, such as,<br />
sPc·ds. fertiliser, pesticides, etc., <strong>and</strong> to meet the cost of cultiv<strong>at</strong>ion, which<br />
i::, 'eldes labour charges <strong>for</strong> carrying out agricultural oper<strong>at</strong>ions, irrig<strong>at</strong>ion<br />
'Cl..rgCS. etc. Term (medium/long) loans are granted <strong>for</strong> development purposes<br />
",,>, development of irrig<strong>at</strong>ion potential, purchase of tractors <strong>and</strong> other<br />
,"::cultural implements <strong>and</strong> machmery, improvement of l<strong>and</strong>, development of<br />
,\!.",t<strong>at</strong>lOns, construction of godowns <strong>and</strong> cold storages, purchase of pump<br />
v·:s oil engines, plough animals (bullocks). etc.
well as between different time points. The amount of credit per loan<br />
account was higher in the st<strong>at</strong>es belonging to high-income c<strong>at</strong>egory as<br />
compared to those in the middle <strong>and</strong> low-income c<strong>at</strong>egories. On an<br />
average, small <strong>and</strong> marginal farmers in Haryana obtained Rs.22,181<br />
of credit per loan account in 1996-97. On the other h<strong>and</strong>, farmers<br />
belonging to the same size of oper<strong>at</strong>ional holding in Orissa obtained<br />
only Rs.4,862 per loan account. Such vari<strong>at</strong>ions can be found even<br />
among medium <strong>and</strong> large farmers in so far as the amount of credit<br />
obtained per loan account across the st<strong>at</strong>es.<br />
Table 4.3: St<strong>at</strong>e-wise <strong>and</strong> Size Class-wise Access to Direct<br />
Finance by the Farmers<br />
_____ !inEer. cefl!L<br />
St<strong>at</strong>es i Up to 2 Hectares I Above 2 Hectares .. '<br />
~980-8111985-861199.q:91119J16-97 L!980-8111985-86,i990~9111996~~'[<br />
5. 6<br />
High Income St<strong>at</strong>es<br />
- - ---r<br />
13. 5-- 12.9 14. 1 i 6. 4<br />
7. 2 11. 6 11. 2 5. 0 11. 6<br />
3.6 7.4 9. 4 6. 7 5. 4<br />
21. 5 38. 0 41. 2 26. 7 22. 7<br />
5.6 11. 1 12. 0 8. 8 8. 0<br />
G uj,ar<strong>at</strong><br />
H aryana<br />
M aharashtra<br />
Pu njab<br />
G rouo Total<br />
_ ~ ___---,,--,~-=----.--=-~:;--Mr=',ddle Income St<strong>at</strong>es<br />
Andhra 16.0 24. 7 23. 3 20.1! 16. 3<br />
Pradesh<br />
Karn<strong>at</strong>aka 11.3 20.9 19.1 11.3 9.2<br />
Kerala 15.0 21.0 17.6 15.5 21.3<br />
Tamil Nadu 11. 8 19.6 25.8 20. 3 11. 7<br />
West Bengal 7. 4 12. 9 12. 0 10. 8 I 9. 2<br />
Grall]) Total 12.3 19.8 20. 1 16.3 12.6<br />
Low-InC"O-me St<strong>at</strong>es<br />
-<br />
Alh ar<br />
Ma dhya<br />
Pra desh<br />
3. 6 5.6<br />
4. 0 7. 7<br />
6. 7 5. 0 5. 7<br />
9. 3 5. 8 I 6. 0<br />
IB.4 14. 4 9. 7<br />
12.4 B. 2 4. 4<br />
6. 3 5. 2 11. 3<br />
I<br />
14. 4 I 17.5 I 10.6<br />
17.7 i 18. 7 11. 4<br />
10.7 I 12. 0 9. 1<br />
29. 7 , 42. 2 31. 6<br />
I 14.2 I 17.0<br />
i<br />
11. 8<br />
I<br />
.-----<br />
23_6 , 21. 9 i 24. 5 ~<br />
15.7 I<br />
51. 2 :<br />
24_ 5 :<br />
11. 5 I<br />
20. 5 I<br />
11. 0 I<br />
,<br />
7. 2<br />
,<br />
I<br />
I<br />
,<br />
I<br />
16.4 i<br />
45.0 I<br />
44.9 :<br />
12.4 I<br />
23.2 I<br />
11. 7 ,<br />
8. 0<br />
,<br />
,<br />
15. 8 '<br />
45. 0<br />
63. 2<br />
17. 1 '<br />
30. 5 -,<br />
11. 6<br />
7. 1<br />
Or lssa 8. 3 16. 2<br />
11. 7 I 11. 7<br />
,<br />
20. 2<br />
Raj asthan 3. 3 9. B<br />
6. 8 I 6.~ ___ 5. 0_<br />
,<br />
Cit ar<br />
3. 3 5. 5<br />
lB. 2<br />
I 21. 4 I IB.9<br />
Pra desh<br />
I ,<br />
:<br />
i --~.<br />
Gr oup Total 3. 8 6.9 B. 1 6. 2 7. I 10. 4 11. 3 I 10.3<br />
"ole: FIgures on the number of accounts <strong>for</strong> all the years have been gIven <strong>for</strong> the<br />
period July-June except <strong>for</strong> the year 1980-81 (April to March).<br />
Sources: 1) Reserve Bank of India (Report on Currency <strong>and</strong> Finance, Vol. 11, <strong>for</strong> the<br />
year 1982-83, 1987-88, 1992-93, <strong>and</strong> 1997-98).<br />
2) Fertiliser Associ<strong>at</strong>ion of India, New Delhi, 1999-2000 (Fertiliser<br />
St<strong>at</strong>istics)_<br />
93
8,557LlI,I<br />
Table 4.4: St<strong>at</strong>e-wise <strong>and</strong> Size Class-wise Outst<strong>and</strong>ing Credit<br />
(Direct Finance to Farmers) Per Loan Account<br />
St<strong>at</strong>es 1 . .,!1p to 2 Hectares ' Above 2He~'i;.~:tesl. --_.<br />
Gujar <strong>at</strong><br />
HaI}'a na<br />
~laha rashtra<br />
l'unja b<br />
GrollI'. Total<br />
-<br />
,\nd hra<br />
Pra desh<br />
Kar n<strong>at</strong>aka<br />
Ker ala<br />
Tam il Nadu<br />
We st8_enga1<br />
Gro up Total<br />
[19S0-S1 j19S5-S6 , 1999~9 ,!,;_1J196:97_19_80-S.b _l!I_S5-8~ L!i!lQ~91Jl9.96-97_<br />
3,145<br />
High Income St<strong>at</strong>es<br />
- -----<br />
48901 7, 1621 16,773: 9,3891 14,iI49117,4741 -2?~i2_~<br />
2,938 5,7821 10,8001 22,1811 17,779: 20,8221 39,0771 72,228<br />
I<br />
3,280 5,663 7823 1 13,118<br />
1<br />
~H,8 39' 33.330<br />
2,940 10,511 99271 21 7571 15,0671 18,.f=~ 28,3_ 63: 57,154<br />
3 121 6,526 8,349: 15,95~!I,7821 14,705 22,10241-:-681<br />
Middle Income St<strong>at</strong>es<br />
1,913 3,430 5,540 9,492'1 4,2181 7,073 11,332: 17,648<br />
I ,<br />
i<br />
2,226 3,989 6,503 15,8791 6,665' 10,011 15,8081 33,451<br />
1500 2645 5,095 8,897\ 7,425\ 10,695 16066\ 8,771<br />
1,860 :t.505 5552 12,891 1 6,280 9,097 12,649' 19,857<br />
1577 1922 2,859 6595\ 8430' 24,813 23,448 44,562<br />
1800 3,172 5,278 1O,675! 5611\ 9,526 13,655 21,341<br />
Low Income St<strong>at</strong>es<br />
1598 2581 3922 5550 6,688 6,951 20,315 26,471<br />
3,051 4,071 7,937 10,960 5,416 10,099: 21,358 1 36,429<br />
i<br />
1,359 2.,.877 2,875 4,862 1,664 4,070' 8,490 8,535<br />
2874 3430 5405 8969 8244 15,801 27,881 47,733<br />
1603 ~197 5327 8,436 7733 10,552 16,895 32,096<br />
1786 3136 4938 7481 63731 10,172 193821 31,023<br />
81ha r<br />
Mon hy;::t<br />
Prad esh<br />
Ons sa<br />
.RaJa sthan<br />
- -<br />
etta r Pradesh<br />
Gro \IP Total<br />
Source: Reserve Bank of IndIa (Report on Currency <strong>and</strong> Fmance, Vol. II, <strong>for</strong> the years<br />
1982-83, 1987-88, 1992-93, <strong>and</strong> 1997-98).<br />
One important finding from Tables 4.3 <strong>and</strong> 4.4 is th<strong>at</strong> while the<br />
percentage of farmers accessing <strong>for</strong>mal credit during 1990s was<br />
declining in most of the st<strong>at</strong>es, the loan amount per account kept on<br />
increasing. This implies th<strong>at</strong> there was concentr<strong>at</strong>ion of <strong>for</strong>mal loan in<br />
favour of a particular group of borrowers, <strong>and</strong> th<strong>at</strong> the banks<br />
practised both price <strong>and</strong> non-price credit r<strong>at</strong>ioning methods in the<br />
borrower selection <strong>and</strong> fix<strong>at</strong>ion of the credit limit. This is further<br />
corrobor<strong>at</strong>ed by the fact th<strong>at</strong> farmers within the same size-class of<br />
l<strong>and</strong>holding obtained substantially different loan amounts across the<br />
st<strong>at</strong>es. In this context, it is essential to examine wh<strong>at</strong> made some<br />
farmers to obtain more credit from <strong>for</strong>mal sector even when they fell<br />
under the same c<strong>at</strong>egory of holding. In other words, how did the<br />
94
95<br />
bankers fIx the credit limit <strong>for</strong> different c<strong>at</strong>egories of farmers? Since<br />
the d<strong>at</strong>a on characteristics of farmers accessing credit are not<br />
available <strong>at</strong> the st<strong>at</strong>e level, factors determining the amount of credit <strong>at</strong><br />
the household level have been taken up <strong>for</strong> discussion in Chapter VI.<br />
However, an <strong>at</strong>tempt has been made in this chapter to analyse<br />
the vari<strong>at</strong>ions in <strong>for</strong>mal credit per hectare of gross cropped area. At<br />
this stage, if we analyse the vari<strong>at</strong>ions of credit per loan account, then<br />
it may not represent the true position of agricultural credit In a<br />
particular st<strong>at</strong>e. Because, this kind of analysis <strong>at</strong> the st<strong>at</strong>e level<br />
explains the credit widening (percentage of farmers with access to<br />
direct fInance), <strong>and</strong> does not shed much light on farm households<br />
which are out of <strong>for</strong>mal credit market. Against this backdrop, credit<br />
per hectare of gross cropped area seems more relevant. Furthermore,<br />
credit per hectare of gross cropped area takes into account<br />
autom<strong>at</strong>ically the obtained amount of credit by the farmers. Thus,<br />
higher the percentage of farmers accessing <strong>for</strong>mal credit, higher will<br />
be the credit amount per hectare of gross cropped area.<br />
We have calcul<strong>at</strong>ed the amount of credit per hectare of gross<br />
cropped area in Table 4.5 to examine st<strong>at</strong>e-wise vari<strong>at</strong>ions. This<br />
analysis has been undertaken only <strong>for</strong> 1980-81, 1985-6 <strong>and</strong> 1990-91<br />
as the d<strong>at</strong>a on area under different size-classes of oper<strong>at</strong>ional holdings<br />
are available only <strong>for</strong> these time points. As in the case of the access<br />
<strong>and</strong> amount of credit obtained per loan account, there have been<br />
substantial inter-st<strong>at</strong>e differences in the amount of credit per hectare<br />
of oper<strong>at</strong>ional holding within <strong>and</strong> across different sizes of farmers<br />
(Table 4.5). Per hectare amount of credit obtained by farmers in lowincome<br />
c<strong>at</strong>egory st<strong>at</strong>es was less than th<strong>at</strong> obtained by the farmers<br />
from middle <strong>and</strong> high-income c<strong>at</strong>egory st<strong>at</strong>es. This holds good in the
96<br />
case of both c<strong>at</strong>egories of farmers <strong>at</strong> all time points. For instance, the<br />
,werage credit per hectare of oper<strong>at</strong>ional holding in low-income<br />
c<strong>at</strong>egory st<strong>at</strong>es was Rs 659 <strong>for</strong> the farmer with holding up to 2<br />
hectares in 1990-91, whereas, it was Rs 4,161 in the case of Punjab,<br />
the high income st<strong>at</strong>e. In the case of other middle <strong>and</strong> high-income<br />
c<strong>at</strong>egory st<strong>at</strong>es like Kerala, Tamil Nadu, Andhra Pradesh, <strong>and</strong><br />
Haryana also per hectare credit was sufficiently higher than th<strong>at</strong> of<br />
low-income c<strong>at</strong>egory st<strong>at</strong>es <strong>at</strong> one as well as different points of time<br />
even <strong>for</strong> the same size of holdings.<br />
Table 4.5: St<strong>at</strong>e-wise <strong>and</strong> Size Class-wise Outst<strong>and</strong>ing Credit<br />
Per Hectare of Oper<strong>at</strong>ional Holding<br />
__ ~ __-r______ ~~~~~~ ________.-____ ~ ____ ~~ __ ~inRupees)<br />
St<strong>at</strong>es f---,--=-cc~~",=to~2 He;,c~ta""ir,..e,:,s===_If-:-:=~A~b-:o,,-,v,:,e=2 Hectares. ____ '<br />
____'--==-"--"=--'----'1'-"9-'::8~5-86 I 1990·91 11980-811 1985-86 199.0_-9_1_'<br />
Htdl. Incoft'le Sta+es<br />
Guja r<strong>at</strong><br />
HaT} 'ana 1<br />
Mah arashtra I<br />
Purl) ab<br />
Grou LP Total<br />
Andh ra<br />
Prade sh<br />
Karna taka<br />
Kerala<br />
Tamil Nadu<br />
\\est Bengal<br />
Group Total<br />
I<br />
I<br />
- -<br />
181 6811 928'<br />
231 842 1,478'<br />
132 443 791;<br />
629 4,115 4,161 '<br />
189 768 1071·<br />
MIddle<br />
.<br />
Income St<strong>at</strong>es<br />
406 1,160 1,7851<br />
i<br />
282 933 1,411 i<br />
784 1,995 3,7971<br />
377 1227 2,6071<br />
183 383 524j<br />
358 1,024<br />
1<br />
1,769<br />
Low Income St<strong>at</strong>es<br />
120 287 549)<br />
147 382 888i<br />
J<br />
137 590 6771<br />
110 389 775,<br />
95 326 594'<br />
108' 408 606<br />
330 691 1,491-<br />
89 247 456 ,<br />
618 924 2,08'!J<br />
174 409 789,<br />
141 i 355 5651<br />
,<br />
,<br />
,<br />
- -<br />
1151 315 560'<br />
~<br />
3931 1,267 1,612<br />
1731 528 1,39§.; "<br />
222, 840 824,<br />
1501 428: 7291<br />
B,har<br />
88: 188' 609',<br />
~ladh ya<br />
52 128 319', 1<br />
Prade sh<br />
1<br />
Onss a<br />
431 125 279~<br />
-------.<<br />
liajas than<br />
--- -<br />
461 141 257<br />
Lltar Pradesh<br />
220 504 972<br />
G~ou p Total 114 358 659 81, 197 42-2'<br />
oj<br />
'/ote: D<strong>at</strong>a on area under oper<strong>at</strong>ional holdmgs has been collected from the FertilIser<br />
Associ<strong>at</strong>ion of India, New Delhi, 1999-2000 (Fertiliser St<strong>at</strong>istics), <strong>and</strong><br />
corresponding loan amount <strong>for</strong> these c<strong>at</strong>egories of farmers has been collected<br />
from the Reserve Bank India (Report on Currency <strong>and</strong> Finance, Vol-H) <strong>for</strong> the<br />
year 1982-83, 1987-88, <strong>and</strong> 1992-93.
Determinants of Credit Flow to Agriculture <strong>at</strong> the St<strong>at</strong>e Level<br />
It has been observed in Section 4.4 th<strong>at</strong> there were substantial inter<br />
~'c<strong>at</strong>c<br />
differences in credit per loan account as well as per hectare of<br />
,lper<strong>at</strong>ional holding <strong>at</strong> one <strong>and</strong> different time points even <strong>for</strong> the same<br />
Size-class of l<strong>and</strong>holdings across st<strong>at</strong>esc Wh<strong>at</strong> explains these<br />
differences? This section takes up this questionc Be<strong>for</strong>e we go into the<br />
details of the analysis, two aspects need to be mentionedc First, since<br />
the d<strong>at</strong>a on characteristics of households obtaining <strong>for</strong>mal credit are<br />
not available <strong>at</strong> the st<strong>at</strong>e <strong>levels</strong>, the analysis on vari<strong>at</strong>ions in credit<br />
availability per loan account is quite difficulL Second, due to<br />
c1\Cailability of d<strong>at</strong>a on oper<strong>at</strong>ional holdings, which is confined to only<br />
three time points, a rigorous analysis is difficultc There<strong>for</strong>e, an<br />
<strong>at</strong>tempt has been made in this section to ~xamine the factors 'Nhich<br />
,'on tribute to the vari<strong>at</strong>ions in the amount of credit per hectare of<br />
c;ross cropped area. Hence, credit per hectare of gross cropped area<br />
,eGA) is the dependent variable in the analysis. The a priori model on<br />
1 he determinants of supply of agricultural credit has been specified<br />
\\Cith the following variables.<br />
1:/) Percentage of Irrig<strong>at</strong>ed Area to Gross Cropped Area (AIR33)<br />
From the supply side, flow of credit can be said to be depending<br />
upon the lender's assessment as regards the repayment capacity of<br />
the borrower. It is assumed th<strong>at</strong> irrig<strong>at</strong>ion facility can increase the<br />
level of production <strong>and</strong> in turn, the repayment of the loan.<br />
There<strong>for</strong>e, the percentage of irrig<strong>at</strong>ed area to gross cropped area<br />
3- To calcul<strong>at</strong>e AIR we have taken d<strong>at</strong>a from Indian Agricultural St<strong>at</strong>istics<br />
(Department of Agriculture <strong>and</strong> Co·oper<strong>at</strong>ion, Ministry of Agriculture,<br />
Government of India) <strong>for</strong> the years 1980·81 to 1992·93c For the remaining years,<br />
the same d<strong>at</strong>a have been collected from Fertiliser St<strong>at</strong>istics (the Fertiliser<br />
cc\ssoCI<strong>at</strong>ion of India, New Delhi), <strong>and</strong> St<strong>at</strong>istical Abstract {Director of Economics<br />
iHld St<strong>at</strong>istics, Ministry of Agriculture)c<br />
97
has been specified as an important variable th<strong>at</strong> determines the<br />
supply of credit. This variable is expected to be positively<br />
associ<strong>at</strong>ed with credit per hectare of gross cropped area.<br />
(b) Percentage of Area under Commercial Crops to Gross Cropped Area<br />
(CCP)<br />
Higher the area under commercial crops34, higher will be the<br />
dem<strong>and</strong> <strong>for</strong> funds to meet the cost of production. Besides, the<br />
bankers may assume th<strong>at</strong> the commercial crop growers are safe<br />
borrowers in terms of repayment. Thus, an increase in the<br />
proportion of area under commercial crops to gross cropped area<br />
may positively influence the supply of agricultural credit.<br />
(e) Credit Deposit R<strong>at</strong>io (CDR)<br />
Deposit is one of the important sources of loanable funds. The<br />
volume of credit is assumed to be positively rel<strong>at</strong>ed with the level of<br />
deposits. The increase in the volume of deposits can enhance the<br />
volume of agricultural credit provided th<strong>at</strong> bankers perceive<br />
lending to <strong>agriculture</strong> as profitable. However, the CDR can increase<br />
due to either more flow of agricultural credit or non-agricultural<br />
credit or both. Hence, even if CDR Increases, this may not<br />
necessarily increase the supply of agricultural credit. Thus,<br />
increasing credit deposit r<strong>at</strong>io mayor may not lead to more supply<br />
of agricultural credit.<br />
34 It includes area under oilseeds (viz., groundnut, seasamum, rapeseed <strong>and</strong><br />
mustard oil, linseed, castorseed, nigerseed, safflower, sun-flower <strong>and</strong> soyabeen).<br />
cotton. Jute <strong>and</strong> mesta. tea, coffee. tobacco <strong>and</strong> sugarcane. These d<strong>at</strong>a have been<br />
collected from Indian Agricultural St<strong>at</strong>istics (1980-81 to 1992-93). <strong>and</strong> <strong>for</strong> the<br />
rest of the years from St<strong>at</strong>istical Abstract.<br />
98
(d) Density of Bank Branches per 1,000 Farmers (DBB)<br />
It is explained in the liter<strong>at</strong>ure th<strong>at</strong> the problem of mounting<br />
overdues, poor quality of lending <strong>and</strong> recalcitrant <strong>at</strong>titude of the<br />
borrowers contributed to the cumul<strong>at</strong>ive losses to <strong>for</strong>mal financial<br />
institutions during the pre-re<strong>for</strong>m years 35 . This adversely affected<br />
the viability <strong>and</strong> efficiency of the rural banking system. There<strong>for</strong>e,<br />
during the re<strong>for</strong>m years <strong>and</strong> especially after the financial year<br />
1993-94, the loss making bank branches were directed to close<br />
down or merge them with their sponsored bank branches. The d<strong>at</strong>a<br />
show th<strong>at</strong> only the rural bank branches have been so far closed<br />
down. Thus, with the increasing popUl<strong>at</strong>ion size, the access to<br />
banking facility by rural popul<strong>at</strong>ion might have come down. Hence,<br />
it is important to see the rel<strong>at</strong>ionship between banking facility <strong>and</strong><br />
provisioning of agricultural credit.<br />
Since we are trying to measure vari<strong>at</strong>ion in credit per hectare of<br />
gross cropped area across the st<strong>at</strong>es, we have taken into account the<br />
density of bank branches per thous<strong>and</strong> farmers. As per the l<strong>at</strong>est<br />
agricultural census, the number of farmers <strong>for</strong> each st<strong>at</strong>e is available<br />
only <strong>for</strong> the years 1980-81, 1985-86, <strong>and</strong> 1990-91. So, we have<br />
calcul<strong>at</strong>ed the number of farmers <strong>for</strong> the rest of the years by<br />
extrapol<strong>at</strong>ion method (see, footnote 5) by using 1980-81 <strong>and</strong> 1990-91<br />
figures, <strong>and</strong> calcul<strong>at</strong>ed the density of bank branches <strong>for</strong> thous<strong>and</strong><br />
farmers in each st<strong>at</strong>e.<br />
li For more detailed discussion on these issues, see Von Pischke, Adams <strong>and</strong><br />
Donald 1983; Bravennan <strong>and</strong> Guasch 1989; Khusro 1989; Rajasekhar <strong>and</strong><br />
Ylasulu 1990, Vyasulu <strong>and</strong> Rajasekhar 1991; Kah10n 1991.<br />
99
Model Specific<strong>at</strong>ion<br />
Thus, in the model, the dependent variable "credit per hectare of gross<br />
cropped area" (CGA) is a function of the explan<strong>at</strong>ory variables of AIR,<br />
CCP, DBB <strong>and</strong> CDR. Since different st<strong>at</strong>es have different<br />
characteristics, we have used panel regression method to assess the<br />
individual impact of explan<strong>at</strong>ory variables. Another reason <strong>for</strong> using<br />
the panel regression method has been to get gre<strong>at</strong>er flexibility in<br />
modelling differences in behaviour across individual st<strong>at</strong>es. The<br />
individual effect is assumed to be constant over time <strong>and</strong> specific to<br />
the individual st<strong>at</strong>es.<br />
Hence, differences across the st<strong>at</strong>es can be<br />
captured in differences in constant term 36 .<br />
In order to specify a<br />
Functional <strong>for</strong>m, two altern<strong>at</strong>ive functional <strong>for</strong>ms, viz., linear <strong>and</strong> loglinear<br />
models _have been compared <strong>for</strong> the pooled d<strong>at</strong>a.. Sargan's<br />
criterion has been used to choose between the linear <strong>and</strong> log-linear<br />
specific<strong>at</strong>ion. The Sargan's criteria is computed as:<br />
Where,<br />
g ~t<strong>and</strong>s <strong>for</strong> the geometric mean of the dependent variable of the linear<br />
model.<br />
,i\l st<strong>and</strong>s <strong>for</strong> the Residual sum of square of the linear model.<br />
\ is the Residual sum of square of the log-linear model, <strong>and</strong><br />
T represents the number of observ<strong>at</strong>ions.<br />
The result of Sargan's criterion is given below in Table 4.6.<br />
It IS possible to allow the slopes to vary across the st<strong>at</strong>es. However, it reqUIres<br />
considerable complexity in the calcul<strong>at</strong>ion.<br />
100
Table 4.6: Estim<strong>at</strong>ion Result of Sargan's Criterion<br />
g Ou<br />
°v<br />
T 5<br />
916. 18 404491026.8 O. 132415 280 (3331471)280<br />
According to Sargan's criterion, if '5' is less than one, the linear<br />
model is preferred <strong>and</strong> if it is gre<strong>at</strong>er than one, then the log-linear<br />
model is preferred. Since our estim<strong>at</strong>ion result shows th<strong>at</strong> '5' is<br />
gre<strong>at</strong>er than one, it indic<strong>at</strong>es log-linear as the correct functional <strong>for</strong>m.<br />
The basic framework <strong>for</strong> using the pooled regression model can<br />
be specified as<br />
Yit = ~ + /3' Kit + E it<br />
There are k regressors in XiI excluding the constant term. The<br />
individual effect, ai which is taken to be constant over time t <strong>and</strong><br />
specific to the individual cross-section unit i. As it st<strong>and</strong>s, this model<br />
is a classical regression model. If we take ai to be the same across all<br />
units, then ordinary least squares provides consistent <strong>and</strong> efficient<br />
estim<strong>at</strong>es of a <strong>and</strong> p. There are two basic frameworks used to<br />
generalise this model. The Fixed Effect approach <strong>and</strong> R<strong>and</strong>om Effect<br />
takes a, to be a group specific constant <strong>and</strong> group-specific disturbance<br />
term in the regression model, respectively. With this background, we<br />
have used Fixed <strong>and</strong>/ R<strong>and</strong>om Effect model to estim<strong>at</strong>e the pooled<br />
regression parameters. The estim<strong>at</strong>ed equ<strong>at</strong>ion is as follows:<br />
log (GCA);t '" aj + 131 log (AIR);! + 132 log (CCP);! + 133 log (DBB);! + 134 log<br />
(CDR);! + E it<br />
Based on the least square residuals, we obtain a Lagrange<br />
iVlultiplier (LM) Test st<strong>at</strong>istic of 495.54 which far exceeds the 95 per<br />
cent critical value <strong>for</strong> chi-square with one degree of freedom (3.84). At<br />
101
this point, we conclude th<strong>at</strong> the classical regression model with single<br />
constant term is inappropri<strong>at</strong>e <strong>for</strong> these d<strong>at</strong>a. Furthermore, the result<br />
of the LM test is to reject the null hypothesis in favour of the R<strong>and</strong>om<br />
Effect Model. But it is best to reserve judgement on th<strong>at</strong> because there<br />
is another competing specific<strong>at</strong>ion th<strong>at</strong> might induce these same<br />
results, the Fixed Effect model. Keeping the fundamental difference in<br />
the two approaches in mind, we have calcul<strong>at</strong>ed Hausman Test <strong>for</strong> the<br />
Fixed <strong>and</strong> R<strong>and</strong>om Effect regression. This is based on the parts of the<br />
coefficient vectors <strong>and</strong> the asymptotic covariance m<strong>at</strong>rices th<strong>at</strong><br />
correspond to the slopes in the model, th<strong>at</strong> is, ignoring the constant<br />
term (s). The test st<strong>at</strong>istics is 73.09. The critical value from the chisquare<br />
table value with four degrees of freedom is 9.48, which is less<br />
than the test value. The hypothesis t.~<strong>at</strong> the individual effects are<br />
uncorrel<strong>at</strong>ed with the other regressors in the model can be rejected.<br />
Hence, we would conclude th<strong>at</strong> of the two altern<strong>at</strong>ives we have<br />
considered the Fixed Effect Model as the better choice <strong>for</strong> the<br />
interpret<strong>at</strong>ion, which is shown in the Table 4.7.<br />
Table 4.7: DescriptioD, Expected Sign, aDd CoefficieDt of<br />
Variables iD the Log-Linear Model [Dependent Variable = eGA]<br />
Variables Expected Filled Effect Model R<strong>and</strong>om Effect Model<br />
Sign Coefficient t· value Coefficient t - value<br />
Constant - - 2.38 ' 2.12<br />
~ AIR + 2.85' 11.79 1.98 ' 10.36<br />
I CCP + 0.26 1.29 0.64 ' 4.01<br />
DBB + 1. 43' 6.98 1.22 ' 6.49<br />
I CDR + - - 0.71 ' - 4.13 - 0.87 ' - 5.25<br />
. Lagrange Multiplier Test = 495.54<br />
Fixed vs. R<strong>and</strong>om Effects (Hausman) a 73.09<br />
, No of observ<strong>at</strong>ions E 280<br />
:-Iote: • <strong>at</strong> I % level of Significance
103<br />
Findings <strong>and</strong> Discussion<br />
The determinants of supply of credit per hectare of gross cropped area<br />
(eGA) are estim<strong>at</strong>ed by Fixed Effect Model (Table 4.7). Since it is a loglog<br />
model, the coefficients can be interpreted as elasticity. In our fIxed<br />
effect model, the explan<strong>at</strong>ory variables such as area under irrig<strong>at</strong>ion<br />
as a percentage of gross cropped area (AIR) <strong>and</strong> bank branches per<br />
thous<strong>and</strong> farmers (DBB) have got positive sign as expected. Moreover,<br />
both of them are signifIcant <strong>at</strong> 1 per cent level. The positive <strong>and</strong><br />
st<strong>at</strong>istically significant coefficient of AIR indic<strong>at</strong>es th<strong>at</strong> 1 per cent<br />
increase in the irrig<strong>at</strong>ed area as a percentage of gross cropped area<br />
will lead to 2.85 per cent increase in the credit obtained per hectare of<br />
gross cropped area. This suggests th<strong>at</strong>, in any st<strong>at</strong>e, larger percentage<br />
of gross area irrig<strong>at</strong>ed to gross cropped area leads to a gre<strong>at</strong>er flow of<br />
agricultural credit by <strong>for</strong>mal fmancial institutions. Since irrig<strong>at</strong>ion<br />
facility reduces uncertainty of crops, bankers are probably giving<br />
priority to lend more in the irrig<strong>at</strong>ed belt. The positive <strong>and</strong> significant<br />
coefficient of DBB implies th<strong>at</strong> 1 per cent increase in the bank branch<br />
per thous<strong>and</strong> farmers will lead to 1.42 per cent increase in the credit<br />
per hectare of gross cropped area. Thus, given the policy of directed<br />
credit system, the st<strong>at</strong>es with higher DBB may be in a better position<br />
in terms of providing qualit<strong>at</strong>ive credit to the agricultural borrowers.<br />
During the re<strong>for</strong>m years the loss making bank branches were directed<br />
to close down or asked to merge with the sponsored banks. This<br />
happened only in the rural areas. As a consequence, the DBB might<br />
have come down, which, in tum, leading to reduced supply of<br />
agricultural credit.<br />
Though the variable CCP has an expected positive sign, it is not<br />
significant. The coefficient <strong>for</strong> the credit deposit r<strong>at</strong>io is neg<strong>at</strong>ive <strong>and</strong>
significant which means 1 per cent increase in the CDR leads to 0.71<br />
per cent decrease in the credit per hectare of gross cropped area. The<br />
neg<strong>at</strong>ive sign of CDR can be <strong>at</strong>tributed to perception among bankers<br />
th<strong>at</strong> loans to <strong>agriculture</strong> characterise high-risk. This suggests th<strong>at</strong><br />
even if we increase the CDR it may enhance the supply of credit<br />
outside the <strong>agriculture</strong> sector, which is considered by bankers to be a<br />
sector with better returns. Hence, as long as the bankers do not<br />
perceive lending to <strong>agriculture</strong> as profitable, increasing CDR itself is<br />
not enough <strong>for</strong> better provisioning of agricultural credit. On the whole,<br />
the farmers in the irrig<strong>at</strong>ed area or/<strong>and</strong> with high density of bank<br />
branches are most likely to benefit from institutional lending agencies.<br />
The intercepts of fixed effect model. <strong>for</strong> 14 st<strong>at</strong>es are glven In<br />
Table 4.8. This difference in intercepts can be <strong>at</strong>tributed to the unique<br />
fe<strong>at</strong>ures of each st<strong>at</strong>e. Although the evidence supports th<strong>at</strong> the Fixed<br />
Effect estim<strong>at</strong>es are generally held to be downward biased estim<strong>at</strong>es of<br />
the true effects, they are an improvement over cross-section d<strong>at</strong>a<br />
estim<strong>at</strong>es (Johnston <strong>and</strong> Oi Nardo 1997).<br />
Table 4.8: St<strong>at</strong>e Specific Intercepts of Fixed Effect Model<br />
! St<strong>at</strong>es Coefficient t - values<br />
IGular<strong>at</strong> - 0.78 - 0.66<br />
!Har\'ana - 2. 52 ••• - 1. 86<br />
~<br />
,Maharashtra 2. 16 ••• 1. 88<br />
,Punlab - 4. 41' - 3.40<br />
,Andhra Pradesh O. 20 0.15<br />
·Ka rna taka 1. 23 1. 03<br />
Kerala 3.58 • 3. 33<br />
\:ramil Nadu 0.03 0.02<br />
Illest Bengal 0.02 O. 02<br />
'R1har - 0.33 - 0.27<br />
·\l"dhya Pradesh 1. 01 O. 88<br />
.Onssa 0.47 O. 39<br />
PaJasthan - 0.23 - 0.20<br />
L' [tar Pradesh - 1. 70 - 1. 32<br />
. ,<br />
~Ole,<br />
<strong>at</strong> I % level of slgmficance, ••• <strong>at</strong> 10 % level of slgmficance<br />
104
credit Flow to Agriculture in Orissa<br />
The credit disbursed to agricultural sector in Orissa by SCBs<br />
(including RRBs) was Rs. 10,541.9 lakhs in 1991 <strong>and</strong> it had increased<br />
to Rs. 29,244.0 lakhs by 2000 <strong>at</strong> an annual growth r<strong>at</strong>e of 14.11 per<br />
cent. It is to be noted th<strong>at</strong> the share of agricultural credit from total<br />
bank credit has progressively declined from 55.5 per cent to 36.1 per<br />
cent during the same reference period (Table 4.9). Interestingly, this<br />
has been uni<strong>for</strong>m across CBs <strong>and</strong> RRBs. The r<strong>at</strong>e <strong>at</strong> which CBs<br />
disbursed credit to <strong>agriculture</strong> was about 54 per cent in 1991 <strong>and</strong> it<br />
increased to 59.8 per cent by the triennium ending with 1994. After<br />
this period, the r<strong>at</strong>e of credit disbursement to this sector gradually<br />
declined <strong>and</strong> reached to 36.5 per cent by the triennium ending with<br />
2000. In the case of RRBs, the disbursement r<strong>at</strong>e declined from 64.7<br />
per cent in 1991 to 35.4 per cent by 2000.<br />
Table 4.9: Share of Agricultural Credit (%) from Total Bank<br />
Cre d' It b )y E ac h G roup 0 fB an k<br />
Triennium Ending Commercial Regional Rural Total<br />
,,<br />
With Banks Banks<br />
1991' 54.0 64.7 55.5<br />
,<br />
1994 59.8 55.3 58.8<br />
I<br />
1997 50.2 41.8 47.6<br />
I 2000 36.5 35.4 36.1<br />
:-l<strong>at</strong>e: 1) * One year figure<br />
2) The figures are from disbursement loan amount.<br />
Source: UCO Bank (various issues of St<strong>at</strong>e Level Bankers' Committee Agenda Notes,<br />
Orissa starting from the year 1991 to 2000).<br />
The above raises the following issues. Why is th<strong>at</strong> the proportion<br />
of credit provided by both CBs <strong>and</strong> RRBs has been declining? Some of<br />
the bankers (<strong>at</strong> the ground level) are of the view th<strong>at</strong> since the retum<br />
on agricultural investment is highly uncertain <strong>and</strong> is affected by several<br />
jactors, <strong>and</strong> the probability of default r<strong>at</strong>e is more, banks are reluctant<br />
to extend their credit facility to <strong>agriculture</strong> sector. It is also argued th<strong>at</strong><br />
the failure of the commercial banks in extending credit facility to the<br />
\05
ural poor <strong>and</strong> especially to the farmers was <strong>at</strong>tributed mainly to their<br />
policy of coll<strong>at</strong>eral-based lending 37 (Shylendra 1996). The annual<br />
reports of one of the RRBs in the st<strong>at</strong>e note th<strong>at</strong> the bank has been<br />
trying to lend more of its funds to non-agricultural purposes<br />
particularly to those th<strong>at</strong> come under the non-priority c<strong>at</strong>egories. This<br />
was done mainly because the non-agricultural loans not only had<br />
better chances of recovery but also fetched rel<strong>at</strong>ively higher interest<br />
r<strong>at</strong>es. Elsewhere, it has been argued th<strong>at</strong> the increasing oper<strong>at</strong>ing<br />
costs <strong>and</strong> higher loans delinquency r<strong>at</strong>es compelled the bank to adopt<br />
such a str<strong>at</strong>egy (Shylendra 1995). The less supply of agricultural<br />
credit by RRB as a proportion to its total bank credit can also be<br />
<strong>at</strong>tributed to the policy of allowing the RRB to lend up to 60 per cent<br />
of their incremental lending to non-target groups (RB! 1995).<br />
From the disbursement figure one can suggest th<strong>at</strong> there is<br />
growing preference of lending to non-agricultural sector by both<br />
commercial <strong>and</strong> regional rural banks. This preference <strong>for</strong> nonagricultural<br />
loans can also be corrobor<strong>at</strong>ed by the d<strong>at</strong>a on targets <strong>and</strong><br />
achievement with respect to different sectors within the priority<br />
sectors lending. Sector-wise distribution of target <strong>and</strong> achievement of<br />
all scheduled commercial banks in Orissa in priority sectors under<br />
various annual credit plan during the period 1991-92 to 1999-2000<br />
has been presented in Table 4.10.<br />
Table 4.10 shows th<strong>at</strong> within the priority sectors lending more<br />
than 50 per cent of the targeted loan amounts were going to<br />
37 Von Pischke, Adams <strong>and</strong> Donald (1983) <strong>and</strong> others argue th<strong>at</strong> such a policy is the<br />
result of cheap interest r<strong>at</strong>es prescribed on farm loans. In order to sustain themselves<br />
financially the lenders adopt the credit r<strong>at</strong>ioning process by pursuing<br />
coll<strong>at</strong>eral based lending, which ultim<strong>at</strong>ely leads to the elimin<strong>at</strong>ion of small<br />
borrowers.<br />
106
<strong>agriculture</strong> sector up to the year 1994. After th<strong>at</strong>, the targeted loan<br />
amounts to this sector had progressively declined from 58.1 per cent<br />
to 44.2 per cent by the triennium ending with 2000. This can be<br />
<strong>at</strong>tributed to the declined trend of proportion<strong>at</strong>ely targeted loan<br />
amounts <strong>for</strong> crop loans <strong>and</strong> allied agricultural activities. Against the<br />
total target of priority sector lending, the proportions of achievement<br />
in the supply of all kinds of agricultural credit lies always well below<br />
the target. Furthennore, this achievement r<strong>at</strong>e under <strong>agriculture</strong><br />
sector has been declining since mid nineties. There<strong>for</strong>e, as far as<br />
agricultural credit flow is concerned, the perfonnance of scheduled<br />
commercial banks can be summarised as lower achievement of lower<br />
targets.<br />
Table 4.10: Broad Secto~se Distribution ~f Target <strong>and</strong><br />
Achievements under Annual Credit Plan of SCBs (includin~<br />
RRB)<br />
TrienniuJIl Crop A&rlcultural AIlled to ToW Small Services ToW<br />
Ending Lou Term Lou A&rlcalture Apiculture Scs1e<br />
With (ATlAl Industries<br />
Distribution of Targets %)<br />
1991 21.7 16.5 13.3 51.5 21.9 26.5 100<br />
r<br />
(23,960.72)<br />
1994 24.8 19.2 14.1 58.1 17.2 24.7 100<br />
I<br />
(23,747.46)<br />
1997 19.2 18.5 11.4 49.1 19.4 31.5 100<br />
1(43,807.10)<br />
2000 17.4 19.3 7.5 44.2 17.5 38.3 100<br />
I (76 906.58)<br />
Distribution of Achievement to Total Targets %}<br />
1991 17.9 16.3 9.8 44.0 6.6 28.7 79.3<br />
I 1994 22.3 15.9 8.9 47.0 12.1 20.8 79.9<br />
1997 22.1 14.1 10.9 47.1 13.6 38.2 98.9<br />
,<br />
2000 18.5 9.6 7.0 35.1 12.8 49.3 97.2<br />
Note: 11 Figures m parenthesIs represent total target amount (Rs. m Lakhsl <strong>for</strong> the<br />
above mentioned sectors in the Orissa st<strong>at</strong>e.<br />
21 • One year figure<br />
Source: veo Bank (various issues of St<strong>at</strong>e Level Bankers' Committee Agenda Notes,<br />
Orissa starting from the year 1991 to 2000).<br />
It is, however, clear th<strong>at</strong> banks show preference to lend to<br />
services in comparison to other sectors within the priority lending. The<br />
distribution of target <strong>and</strong> the r<strong>at</strong>e of achievement to this sector show<br />
107
108<br />
th<strong>at</strong> both have been increasing over a period of time. The proportion of<br />
targeted loan amounts <strong>for</strong> the service sector range from 24.7 per cent<br />
to 38.3 per cent, whereas, the achievement to total target vary from<br />
28.7 to 49.3 per cent. This shows th<strong>at</strong> the r<strong>at</strong>e of achievement is<br />
always more than the r<strong>at</strong>e of target in the case of service sector.<br />
Hence, the credit flow to service sector can be termed as higher<br />
achievement of lower targets. On the whole, the higher r<strong>at</strong>e of<br />
achievement by scheduled commercial banks (including RRB) m<br />
priority sectors lending (<strong>for</strong> instance, 99 per cent <strong>and</strong> 97 per cent in<br />
triennium ending with 1997 <strong>and</strong> 2000 respectively) can be <strong>at</strong>tributed<br />
to a higher r<strong>at</strong>e of achievement in service sector.<br />
The <strong>for</strong>egoing discussion suggests th<strong>at</strong> there is a decline in the<br />
proportion of credit flow to <strong>agriculture</strong> sector from the total credit<br />
disbursed. The dem<strong>and</strong> side factors have been emphasised <strong>for</strong> such a<br />
poor achievement in the supply of agricultural credit (Government of<br />
Orissa 2000-01). First, the number of proposals coming from farmers<br />
especially in the case of ATLs has been inadequ<strong>at</strong>e. Second, poor<br />
recovery of bank loans. Third, the infrastructure in rural areas is not<br />
adequ<strong>at</strong>ely developed. Fourth, the credit absorption capacity among<br />
the farmers in rural areas is very low. Fifth, banks do not have<br />
adequ<strong>at</strong>e manpower to meet the growing credit needs of the farmers. It<br />
is also argued th<strong>at</strong> the lower achievement in the case of ATLs can be<br />
<strong>at</strong>tributed to the policy decision th<strong>at</strong> no direct coll<strong>at</strong>eral security is<br />
needed <strong>for</strong> loans up to Rs. 50,000. This suggests th<strong>at</strong> the bankers<br />
seem to be adopting non-price credit mechanisms in the case of ATLs.<br />
Poor extension support, low irrig<strong>at</strong>ion coverage, untimely <strong>and</strong><br />
inadequ<strong>at</strong>e supply of inputs, <strong>and</strong> low level of fertiliser consumption
were identified as important constraints <strong>for</strong> a declining r<strong>at</strong>e of<br />
achievement in the case of production credit (NABARD 2001-02).<br />
In the case of small-scale industries also a similar kind of<br />
situ<strong>at</strong>ion can be observed like <strong>agriculture</strong>. The r<strong>at</strong>e of achievement is<br />
very poor compared to the given target <strong>for</strong> this sector. Factors like lack<br />
of adequ<strong>at</strong>e facilities <strong>for</strong> skill upgrad<strong>at</strong>ion, inadequ<strong>at</strong>e infrastructure<br />
facilities, lack of road communic<strong>at</strong>ion to rural areas, no marketing<br />
outlets <strong>for</strong> h<strong>and</strong>icrafts items, low level of people's awareness, no<br />
proper industrial survey, <strong>and</strong> absence of <strong>for</strong>ward <strong>and</strong> backward<br />
linkages were some of the important constraints <strong>at</strong>tributed to such a<br />
poor achievement in the supply of credit to the small-scale industrial<br />
sector (NABARD 2001-02).<br />
This suggests th<strong>at</strong> bankers, by <strong>and</strong> large, exclude supply side<br />
factors from their purview. Can the decline in the credit flow to<br />
<strong>agriculture</strong> be <strong>at</strong>tributed to profitability consider<strong>at</strong>ion getting reflected<br />
in the <strong>for</strong>m of price <strong>and</strong> non-price types of credit r<strong>at</strong>ioning in the<br />
situ<strong>at</strong>ion of interest r<strong>at</strong>e controls (in the case of commercial banks)<br />
<strong>and</strong> inability to have direct coll<strong>at</strong>eral security in the case of certain<br />
loans? If this is the case, there is a possibility of having a situ<strong>at</strong>ion<br />
where dem<strong>and</strong> exceeds the supply of agricultural credit. This raises<br />
another set of issues. In the case of which type of farmers <strong>and</strong><br />
activities, the credit is r<strong>at</strong>ioned? Is credit r<strong>at</strong>ioning leading to a<br />
situ<strong>at</strong>ion where this is confined to a particular type of borrowers?<br />
However, these questions have been addressed in the subsequent<br />
chapters.<br />
109
110<br />
District Level <strong>Analysis</strong> on Agricultural Credit Flow<br />
Prior to 1993, there were 13 districts in the st<strong>at</strong>e Orissa. In 1994, 17<br />
more districts were cre<strong>at</strong>ed from out of 10 districts. Thus, the total<br />
number of districts became 30. The bifurc<strong>at</strong>ion was done in such a<br />
manner th<strong>at</strong> one or more new districts were carved out of one of the<br />
older districts. Thus, it is possible <strong>for</strong> one to rework the d<strong>at</strong>a <strong>for</strong><br />
undivided districts. The same has been done in this study as well.<br />
There<strong>for</strong>e, the in<strong>for</strong>m<strong>at</strong>ion presented in this study rel<strong>at</strong>es to the 13<br />
undivided districts.<br />
There is considerable vari<strong>at</strong>ion across these districts in the<br />
<strong>levels</strong> of irrig<strong>at</strong>ion infrastructure, fertiliser consumption <strong>and</strong> area<br />
under HYVs. All these will have significant influence on the flow of<br />
credit to <strong>agriculture</strong>. After analysing the d<strong>at</strong>a on these variables <strong>for</strong><br />
each of the undivided districts, we have c<strong>at</strong>egorised the districts into<br />
three groups, viz., advanced, intermediary <strong>and</strong> backward districts. The<br />
dIstricts of Cuttack, Puri, Sambalpur <strong>and</strong> Ganjam come under the<br />
advanced group, while Baleswar, Bolangir, Dhenkanal <strong>and</strong> Koraput<br />
<strong>for</strong>m the intermediary group. Finally, the districts of Kalah<strong>and</strong>i,<br />
Keonjhar, Mayurbhanj, Phulbani <strong>and</strong> Sundargarh <strong>for</strong>m the backward<br />
group. Table 4.11 shows th<strong>at</strong> such a grouping is justified.<br />
The increased concentr<strong>at</strong>ion of development can be seen from<br />
the distribution of agricultural credit in Table 4.12. The advanced<br />
districts take a share, on an average, 58.68 per cent of the total<br />
outst<strong>and</strong>ing loans disbursed to <strong>agriculture</strong> sector during the period<br />
1981-85. This share ranges from 54.12 per cent to 60.05 per cent of<br />
total outst<strong>and</strong>ing credit <strong>for</strong> the remaining period mentioned in the<br />
table. For intermediary districts, the share of agricultural credit, on an<br />
average, vary within the range of 24.16 per cent to 26.38 per cent,
\\'hereas, these shares vary in between 14.95 per cent <strong>and</strong> 19.50 per<br />
cent <strong>for</strong> backward districts during the last two decades. Seen in terms<br />
of distribution of agricultural credit one can notice th<strong>at</strong> the advanced<br />
group of districts takes a lion share compared to intermediary <strong>and</strong><br />
backward districts. In this context, one can conclude th<strong>at</strong> the flow of<br />
credit to different regions is far from uni<strong>for</strong>m.<br />
Table 4.11: Some Selected Indic<strong>at</strong>ors of Sp<strong>at</strong>ial Distribution of<br />
Development<br />
Type of Districts<br />
% Share Irri,-<strong>at</strong>ion<br />
1987- 88 1994 - 95 1999 - 2000<br />
: Ad\'anced 58.4 54.0 51.4<br />
i;'termediarv 26.7 30.3 30.9<br />
'-S'ackward 14.9 15.7 17.7<br />
, All' 100 100 100<br />
(2,062.831 (2,468.33) (2,512.02)<br />
% Share of Area under High Yieldin Variety seeds<br />
,\d.'.'unced 49.4 48.4
Wh<strong>at</strong> are the trends in the share of agricultural credit from net<br />
bank credit of SCBs <strong>for</strong> all the districts? Table 4.13 shows th<strong>at</strong><br />
<strong>agriculture</strong> accounted <strong>for</strong> 19 per cent of the net bank credit <strong>for</strong> the<br />
period 1996-2000 <strong>for</strong> the st<strong>at</strong>e of Orissa as a whole <strong>and</strong> meeting the<br />
target fIxed under the priority sector lending. However, this share was,<br />
on an average, 31.3 per cent during the period 1981-85, <strong>and</strong> it<br />
declined to 20.7 per cent during 1991-95. This suggests th<strong>at</strong> the<br />
supply of agricultural credit as a proportion to net bank credit have<br />
been declining in the st<strong>at</strong>e of Orissa. This was uni<strong>for</strong>m across the<br />
districts. Nevertheless, the proportion of agricultural credit from net<br />
bank credit have been declining, still, the bank has achieved the fIxed<br />
target <strong>for</strong> all the intermediary <strong>and</strong> backward districts except<br />
Sundargarh, <strong>and</strong> also has achieved th.e target <strong>for</strong> Ganjam <strong>and</strong><br />
Sambalpur among the advanced districts. In the case of Sundargarh<br />
district, the achievement r<strong>at</strong>e of agricultural credit was far below the<br />
prescribed r<strong>at</strong>e during both pre <strong>and</strong> re<strong>for</strong>m years.<br />
During the period, 1981 to 2000, ACBD declined progressively<br />
<strong>for</strong> the st<strong>at</strong>e Orissa as a whole from 23.7 per cent <strong>for</strong> the years 1981-<br />
85 to 9 per cent during 1996-2000 (Table 4.13). However, the declined<br />
ACBD during 1980s <strong>for</strong> Orissa could be mainly <strong>at</strong>tributed to the<br />
declined trend of ACBD among the intermediary districts. This r<strong>at</strong>io<br />
declined uni<strong>for</strong>mly <strong>for</strong> the entire district in the st<strong>at</strong>e during 1990s.<br />
Table 4.13 shows th<strong>at</strong> there were substantial inter-district differences<br />
in ACBD both <strong>at</strong> one period of time as well as between four time<br />
periods. Importantly, <strong>for</strong> the backward districts like Sundargarh, only<br />
3.4 per cent of net bank deposit was going to <strong>agriculture</strong> sector as<br />
credit. Even in the advanced districts like Cuttack, Gunjam <strong>and</strong> Puri<br />
also, the ACBD varied between 6 to 8 per cent during 1996-2000.<br />
I I")
Since both ACBC <strong>and</strong> ACBD have been declining <strong>for</strong> all the districts<br />
during 1990s, this again confirms the result of all India <strong>and</strong> st<strong>at</strong>e level<br />
imalysis th<strong>at</strong> bankers were giving priority to non-agricultural lending.<br />
Table 4.13: District-wise Agricultural Sector Lending (%) to<br />
T otal Ban k C re d't 1 an d D eposlts .<br />
Districts<br />
c '\lttack<br />
.imjam<br />
p ;1;1<br />
S ambalpur<br />
G roup Total<br />
)aleswar<br />
B ()Iangir<br />
[ lhenkanal<br />
h ·uraput<br />
G roup Total<br />
·alah<strong>and</strong>i<br />
·ecmjhar<br />
!.'.'urbhanj<br />
lhulbani<br />
~t~lldargarh<br />
G . roup Total<br />
1981·85 1986·90<br />
ACBC ACBD ACBC ACBO<br />
29.1 24.1 20.0 20.4<br />
35.8 18.2 39.1 28.4<br />
29.0 20.6 19.0 18.9<br />
28.9 21.7 32.8 30.8<br />
29.8 21.5 23.4 22.3<br />
36.6 27.4 30.8 28.7<br />
53.2 97.4 44.1 75.4<br />
34.2 20.2 27.9 21.6<br />
41.3 49.1 35.8 41.6<br />
42.2 41.8 34.4 36.1<br />
46.1 67.2 41.9 65.4<br />
19.1 22.1 21.9 22.4<br />
31.6 29.7 25.7 24.9<br />
60.8 63.4 43.7 38.3<br />
9.3 5.1 12.7 7.9<br />
24.8 19.4 23.5 19.6<br />
31.3 23.7 25.3 23.2<br />
1991·95 1996-2~~<br />
ACBC ACBO ACBC ACBO<br />
16.8 11.4 [6.1 7.4<br />
29.6 15.4 22.8 7.9<br />
15.4 9.8 13.7 6.2<br />
22.1 14.9 21.5 12.7<br />
18.4 11.7 16.7 7.6<br />
24.8 22.2 20.5 13.8<br />
32.1 31.! 30.6 17.9<br />
27.4 14.6 26.2 10.2<br />
28.0 22.2 31.2 15.9<br />
27.4 20.9 25.8 13.7<br />
38.5 35.8 35.9 24.3<br />
25.5 18.2 19.5 10.1<br />
23.9 13.4 33.0 12.6<br />
35.3 24.2 32.4 18.6<br />
10.1 4.8 8.3 3.4<br />
21.2 12.3 20.7 9.6<br />
20.7 13.4 19.0 9.0<br />
A II Orissa<br />
\,lle: ACBC = Agncultural sector credIt as a proportIon to net bank credIt.<br />
ACBD = Agricultural sector credit as a proportion to total bank deposit.<br />
Source: RBI (various issues of Banking St<strong>at</strong>istics starting from the year 1981 to<br />
2000).<br />
As we have mentioned <strong>at</strong> the st<strong>at</strong>e level analysis th<strong>at</strong>, if more<br />
(less) proportion of net bank credit is disbursed to the <strong>agriculture</strong><br />
sector th<strong>at</strong> does not necessarily mean th<strong>at</strong> the per capita credit<br />
availability per hectare of gross cropped area is more (less) in th<strong>at</strong><br />
st<strong>at</strong>e. Since this proportion does not take into account the gross<br />
cropped area, it may be difficult to reach a conclusion on the basis of<br />
proportion of credit to <strong>agriculture</strong> to total net bank credit th<strong>at</strong> a<br />
particular st<strong>at</strong>e/district is better-off in terms of the availability of<br />
agricultural credit. The above proposition has been verified in Table<br />
-+14.<br />
J 13
Table 4.14. Type of District-wise Outst<strong>and</strong>ing Credit Per<br />
Hectare of Gross Cropped Area<br />
Jin Rupees)<br />
1<br />
Type of Average <strong>for</strong> the Average <strong>for</strong> the Average <strong>for</strong> the<br />
Districts Period 1986-90 Period 1991-95 Period 1996-00<br />
~ Advanced 683 771 1,249<br />
'Intermediary 342 423 747<br />
r Backward 263 338 671<br />
; All 458 537 925<br />
Source: Government of Orissa (various Issues of Onssa Agncu/tura/ St<strong>at</strong>zstzcs from<br />
1985-86 to 1999- 2000) <strong>and</strong> Reserve Bank of India (various issues of<br />
Banking St<strong>at</strong>istics from 1986 to 1999-2000).<br />
It can be seen from Table 4.14 th<strong>at</strong> the credit availability per<br />
hectare of gross cropped area varies across the regions <strong>and</strong> time<br />
periods. Importantly, the regions/districts where banks achieved their<br />
lending target to <strong>agriculture</strong> sector, the supply of credit per hectare of<br />
gross cropped area was less in most of those regions. For instance, in<br />
the advanced districts only 16.7 per cent of net bank credit was going<br />
to <strong>agriculture</strong> sector <strong>and</strong> credit per hectare of gross cropped area was<br />
Rs. 1,249 <strong>for</strong> the period 1996-2000 (Tables 4.13 <strong>and</strong> 4.14), whereas,<br />
in the case of intermediary <strong>and</strong> backward districts, the share of<br />
agricultural credit were 25.8 per cent <strong>and</strong> 20.7 per cent of net bank<br />
credit, <strong>and</strong> the credit available per hectare of gross cropped area were<br />
Rs. 747 <strong>and</strong> Rs. 671 respectively during the same reference period. It<br />
shows th<strong>at</strong> the per capita credit per hectare of gross cropped area in<br />
intermediary <strong>and</strong> backward districts were far below than the advanced<br />
districts. There<strong>for</strong>e, the <strong>for</strong>mal credit available per hectare of gross<br />
cropped area could be a better indic<strong>at</strong>or to examine the inter-districts<br />
vari<strong>at</strong>ions in the flow of agricultural credit.
Determinants of Supply of Agricultural Credit <strong>at</strong> the District<br />
Level<br />
To examine vari<strong>at</strong>ions in the availability of credit per hectare of gross<br />
lTopped area across the districts, we have used the same methodology<br />
th<strong>at</strong> we have adopted <strong>at</strong> the st<strong>at</strong>e level analysis. With the same<br />
ckfinition, both dependent <strong>and</strong> independent variables were specified,<br />
<strong>and</strong> by using the same functional <strong>for</strong>m<strong>at</strong> the fixed effect <strong>and</strong> r<strong>and</strong>om<br />
effect models have been estim<strong>at</strong>ed <strong>at</strong> the district level analysis 36 .<br />
Since the Langrange Multiplier Test st<strong>at</strong>istics of 42.91, which<br />
exceeds the 95 per cent critical value of chi-square with one degree of<br />
freedom (3.84), we conclude th<strong>at</strong> the classical regression model with<br />
'nITI~ ~onstant term l'~ in:::lnnT"('\nri-::ltp fn.,. th.:llC'A ~.-d·"" ~"-"\...."""-mo-e ,1.._<br />
SI Eo \. \.. -' - - '- -- -rr- -1"" .... _ .... - .................... " .... UULQ • .1 U.l Ll1\"'.l 1 " , Lile:<br />
Hausman Test st<strong>at</strong>istics of Fixed versus R<strong>and</strong>om Effects is 7.45,<br />
\\'hich is less than the chi-square table value (9.48) with four degrees<br />
of freedom. Thus, the hypothesis th<strong>at</strong> the individual effects are<br />
uncorrel<strong>at</strong>ed with the other regressors in the model can be accepted.<br />
There<strong>for</strong>e, out of two altern<strong>at</strong>ives we considered R<strong>and</strong>om Effect Model<br />
is the better choice <strong>for</strong> the interpret<strong>at</strong>ion, which is shown in Table<br />
~.15. Although the evidence supports th<strong>at</strong> the R<strong>and</strong>om Effect<br />
estim<strong>at</strong>es are generally held to be upwards-biased estim<strong>at</strong>es of the<br />
true effects, they are an improvement over cross-section d<strong>at</strong>a<br />
estim<strong>at</strong>es (Johnston <strong>and</strong> Oi Nardo 1997) .<br />
. SlIlce the specific<strong>at</strong>ion of variables (both dependent <strong>and</strong> independent). functional<br />
<strong>for</strong>m<strong>at</strong> <strong>and</strong> other details of methodology have been explained <strong>at</strong> the st<strong>at</strong>e level<br />
analysis, the similar set of explan<strong>at</strong>ion has not been given to avoid repetition <strong>at</strong><br />
the district level analysis.<br />
115
Table 4.15: Description, Expected Sign, <strong>and</strong> Coefficient of<br />
Variables in the Log-Linear Model [Dependent variable = CGA]<br />
-<br />
" Variables Expected Fixed Effect Model R<strong>and</strong>om Effect Model<br />
,<br />
Sign Coefficient t - value Coefficient<br />
i<br />
t - value<br />
, Constant -<br />
- 8.37' lO.41<br />
sl'lyice by other line departments, lack of timely availability of<br />
ltTlg<strong>at</strong>ion facility, untimely <strong>and</strong> inadequ<strong>at</strong>e supply of inputs, <strong>and</strong> low<br />
i,'\-ei of fertiliser consumption can be <strong>at</strong>tributed to this neg<strong>at</strong>ive<br />
dssoci<strong>at</strong>ion (NABARD 2001-02), As a result of this, the bankers may<br />
ill' adopting non-price credit r<strong>at</strong>ioning mechanism <strong>for</strong> commercial crop<br />
gmwers, Though the variable DBB has an expected positive sign, it is<br />
not significant.<br />
The coefficient of CDR is neg<strong>at</strong>ive <strong>and</strong> significant <strong>at</strong> 1 per cent<br />
level. This suggests th<strong>at</strong> one per cent increase in the CDR reduces the<br />
supply of agricultural credit by 6.85 per cent. This finding also<br />
support the result of the st<strong>at</strong>e level analysis th<strong>at</strong> increasing CDR itself<br />
is not enough <strong>for</strong> better provisioning of agricultural credit. On the<br />
\\hole, the farmers in the higher irrig<strong>at</strong>ed regions are most likely<br />
beneficiaries of agricultural credit. The fixed effect intercepts of 13<br />
districts, which are presented in Table 4.16, one can argue th<strong>at</strong> this<br />
difference in intercepts can be <strong>at</strong>tributed to the unique fe<strong>at</strong>ures of<br />
each district.<br />
Conclusions<br />
This chapter analysed the trends in the supply of agricultural credit<br />
')\- II1stitutional agencies in 14 major st<strong>at</strong>es, <strong>and</strong> across the districts in<br />
(lrissa st<strong>at</strong>e. It is found th<strong>at</strong> the growth r<strong>at</strong>e of agricultural credit was<br />
'l:gher during pre-re<strong>for</strong>m period compared to the re<strong>for</strong>m period m<br />
rnost of the st<strong>at</strong>es. It is also observed th<strong>at</strong> the growth r<strong>at</strong>e of<br />
clgncultural credit was uneven during the sub-periods as well as<br />
",TOSS the st<strong>at</strong>es. There were also substantial inter-st<strong>at</strong>e differences in<br />
.\c:ncuitural Credit as a proportion to total net Bank Credit (ACBC)<br />
"!lei Agricultural Credit as a proportion to Bank Deposits (ACBD) <strong>at</strong><br />
117
one point in time as well as during different time periods. An analysis<br />
of the ACBD demonstr<strong>at</strong>es th<strong>at</strong> since this has been declining <strong>for</strong> all<br />
the major st<strong>at</strong>es, it shows th<strong>at</strong> there was less mobilis<strong>at</strong>ion of deposits<br />
<strong>for</strong> agricultural lending by scheduled commercial banks. This was<br />
particularly the case in backward st<strong>at</strong>es like Bihar, Uttar Pradesh,<br />
<strong>and</strong> West Bengal.<br />
Most of the findings of the district level analysis were similar to<br />
th<strong>at</strong> of the st<strong>at</strong>e level analysis. Important similarities between the<br />
district <strong>and</strong> st<strong>at</strong>e level findings include the declining share of<br />
agricultural credit from net bank credit <strong>and</strong> uneven credit flow across<br />
the regions. The differences in the availability of credit per hectare of<br />
gross cropped area across the regions is another common finding in<br />
both st<strong>at</strong>e <strong>and</strong> district level analysis. This suggests th<strong>at</strong> the flow of<br />
agricultural credit follows similar p<strong>at</strong>terns <strong>at</strong> both st<strong>at</strong>e <strong>and</strong> district<br />
<strong>levels</strong>.<br />
With regard to the analysis of trends in credit flow in Orissa, it<br />
is found th<strong>at</strong> the r<strong>at</strong>e of credit disbursed to <strong>agriculture</strong> sector by SCBs<br />
was declining during 1990s. The analysis reveals th<strong>at</strong> as far as the<br />
disbursement of agricultural credit is concerned, the SCBs per<strong>for</strong>med<br />
poorly in so far as the achievement of targets is concerned. The views<br />
of bankers <strong>at</strong> the st<strong>at</strong>e <strong>and</strong> district <strong>levels</strong> have been examined to<br />
underst<strong>and</strong> the reasons <strong>for</strong> the failure to achieve the targets on<br />
agricultural sector. The qualit<strong>at</strong>ive in<strong>for</strong>m<strong>at</strong>ion (collected from bankers<br />
<strong>and</strong> NABARD reports) suggests th<strong>at</strong> the dem<strong>and</strong> side problems<br />
including poor recovery, inadequ<strong>at</strong>e infrastructure support <strong>and</strong> low<br />
credit absorption capacity of the agricultural borrowers are the main
,'onstraints In the supply of agricultural crediL This suggests th<strong>at</strong><br />
bankers, by <strong>and</strong> large, exclude supply side factors from their purview,<br />
The proportion of irrig<strong>at</strong>ed area to gross cropped area, <strong>and</strong><br />
density of bank branches per 1,000 farmers have been identified as<br />
the most important explan<strong>at</strong>ory variables <strong>for</strong> the vari<strong>at</strong>ions in the<br />
credit flow per hectare of gross cropped area. However, the neg<strong>at</strong>ive<br />
associ<strong>at</strong>ion between CDR <strong>and</strong> credit per hectare of gross cropped<br />
indic<strong>at</strong>es th<strong>at</strong> an increase in CDR need not necessarily ensure<br />
improved credit flow to <strong>agriculture</strong>. This will happen only when the<br />
bankers perceive the agricultural lending to be profitable, The factors<br />
like irrig<strong>at</strong>ion facility <strong>and</strong> CDR also behave in the similar way <strong>at</strong> the<br />
district levd analysis. Th~ implic<strong>at</strong>ion of this finding is th<strong>at</strong> <strong>for</strong> better<br />
provisioning of agricultural credit the increasing CDR should be<br />
backed by more irrig<strong>at</strong>ion facility <strong>and</strong> banking infrastructure.<br />
The analysis on access to <strong>for</strong>mal credit <strong>and</strong> the outst<strong>and</strong>ing<br />
loan amount per account reveal th<strong>at</strong> there are inter-st<strong>at</strong>e differences<br />
in the access to credit as well as the loan amount obtained by farm<br />
households even <strong>for</strong> the same size class of l<strong>and</strong>holding, In this<br />
context, the following questions can be raised. First, wh<strong>at</strong> makes some<br />
farmers to access <strong>for</strong>mal credit, while others do not? Second, how do<br />
bankers fix up the credit limit <strong>for</strong> different c<strong>at</strong>egories of farmers?<br />
These questions have been taken up in the sixth chapter.<br />
_-----'119
Chapter 5<br />
HOW DID MACRO POLICY OPERATE AT THE MICRO<br />
LEVEL? AN ANALYSIS OF CREDIT FLOW IN THE<br />
SELECTED BANK BRANCHES IN KALAHANDI DISTRICT,<br />
ORISSA<br />
Introduction<br />
The <strong>macro</strong>-level policies on agricultural <strong>finance</strong> have been primarily<br />
concerned with the level of credit flow, terms <strong>and</strong> conditions under<br />
which credit is made available, alloc<strong>at</strong>ion of loanable funds among<br />
sub-sectors (production <strong>and</strong> investment) within <strong>agriculture</strong> to achieve<br />
production efficiency <strong>and</strong> so on. The <strong>macro</strong> level policy also concerns<br />
with the provision of adequ<strong>at</strong>e <strong>and</strong> timely availability of credit to the<br />
needy farmers <strong>at</strong> a cheaper r<strong>at</strong>e. These policies, in general, give<br />
guidelines to the ground level institutional financing agencies having<br />
direct contact with the borrowers. Since institutional credit is a<br />
cheaper source <strong>for</strong> borrowing, most of the theoretical <strong>and</strong> empirical<br />
studies have put <strong>for</strong>ward the argument th<strong>at</strong> the dem<strong>and</strong> <strong>for</strong> credit far<br />
exceeds the supply (Kamajou 1980; Gonzalez-Vega 1984; Adams <strong>and</strong><br />
Vogel 1986; Kochar 1997; Swain 2002). There<strong>for</strong>e, many countries<br />
<strong>and</strong> financial institutions followed the supply-led approach to meet<br />
the dem<strong>and</strong> <strong>for</strong> credit. In the case of India, the supply-led approach in<br />
terms of directed lending was introduced to priority sectors, in<br />
general, <strong>and</strong> <strong>agriculture</strong>, in particular.<br />
As a consequence to the supply-led approach <strong>at</strong> cheaper r<strong>at</strong>e,<br />
<strong>for</strong>mal financial agencies began to face the problem of higher<br />
transaction costs on account of lending small amounts to large<br />
number of borrowers (McKinnon 1973; Shaw 1973; Anderson <strong>and</strong><br />
\\hamb<strong>at</strong>a 1985; Gadgi11986; S<strong>at</strong>ish <strong>and</strong> Swamin<strong>at</strong>h 1989; Desai <strong>and</strong>
121<br />
Namboodiri 1992). The disbursal of loans without asseSSIng the<br />
feasibility, viability of the project <strong>and</strong> entrepreneurial capacity of the<br />
borrowers leading to the problem of high overdues <strong>and</strong> the problem of<br />
recurring losses in the case of most of the rural <strong>for</strong>mal financial<br />
institutions were noticed in India during 1980s (Khusro 1989;<br />
Rajasekhar <strong>and</strong> Vyasulu 1990; Vyasulu <strong>and</strong> Rajasekhar 1991; Kahlon<br />
1991). This adversely affected the efficiency <strong>and</strong> viability of the rural<br />
<strong>for</strong>mal financial agencies.<br />
The Narasimham Committee (1991) recommended <strong>for</strong> a gradual<br />
reduction in the priority sector target from 40 to 10 per cent of the<br />
total bank credit. However, the RBI did not fully accept this<br />
recommend<strong>at</strong>ion on the grounds th<strong>at</strong> the redefined priority sectors<br />
certainly accounted <strong>for</strong> more than 10 per cent of the total credit.<br />
Further, the recommend<strong>at</strong>ion, if accepted, would put a severe squeeze<br />
on the sectors included in the priority lending. At the same time,<br />
various policy measures aimed <strong>at</strong> diluting the norms of priority sector<br />
lending were taken, so as to ensure its gradual phasing out in the<br />
long-run.<br />
On the whole, the str<strong>at</strong>egy followed by the RBI was to keep the<br />
same target in so far as priority sector was concerned <strong>and</strong> widened the<br />
,'overage of the priority sector, in general, <strong>and</strong> <strong>agriculture</strong>, In<br />
particular 39 . Since the coverage of the priority sector differed In<br />
different years in 1990s, it is necessary to analyse the share of these<br />
sectors in the total advance by public sector banks. Shajahan (1998)<br />
shows th<strong>at</strong> the share of priority sector lending had gone down after<br />
I he banking sector re<strong>for</strong>m. This declining share continued up to 1996-<br />
For more details on the widening coverage of <strong>agriculture</strong> sector, see 3.4 section of<br />
Chapter Ill. Also see, Shajahan (1998, 1999).
97. However, with the widening of the scope of priority sector by the<br />
RBI on a substantial scale during 1997-98 <strong>and</strong> 1998-99, the share of<br />
priority sector lending went up during these years <strong>and</strong> after (Shajahan<br />
1999). Thus, it appears th<strong>at</strong> banks alloc<strong>at</strong>ed more funds to the newly<br />
included sectors <strong>and</strong> activities in the priority sector to cover the<br />
shortfall in the priority sector lending. There<strong>for</strong>e, the extent to which<br />
the banks diverted advances from areas already in the priority sector<br />
to the newly included areas is an important aspect of priority sector<br />
lending, which needs to be analysed. In this chapter, an <strong>at</strong>tempt has<br />
been made to discuss the credit flow to the priority sector, in general,<br />
lI1d <strong>agriculture</strong>, in particular, with the help of d<strong>at</strong>a from four bank<br />
branches in Kalah<strong>and</strong>i district. The objectives of the chapter are to:<br />
1. find out the share of<br />
<strong>agriculture</strong>, in particular<br />
selected bank branches;<br />
• • • 1-1<br />
pnontj" sectors, in generaL, allY<br />
out of the total advances of the<br />
2. identify the activities (both <strong>agriculture</strong> <strong>and</strong> non-<strong>agriculture</strong><br />
which are coming under the priority sector) <strong>for</strong> which bankers<br />
give preference in disbursing advances <strong>and</strong> the reason <strong>for</strong> the<br />
same;<br />
3. underst<strong>and</strong> lending policies <strong>and</strong> practices In distributing the<br />
loans <strong>at</strong> the branch level; <strong>and</strong>,<br />
4. examine whether the policy of coll<strong>at</strong>eral based lending affects<br />
the flow of credit to <strong>agriculture</strong>.<br />
<strong>at</strong>abase<br />
!lis chapter seeks to address these questions by analysing the<br />
:ound level credit flow <strong>at</strong> bank branch level to different sectors, in<br />
'neral, <strong>and</strong> to <strong>agriculture</strong>, in particular. For the purpose of this<br />
··:ercise, the d<strong>at</strong>a on supply of credit from four different bank<br />
:,lI1ches of Kalah<strong>and</strong>i district <strong>for</strong> the period 1996-97 to 2000-01 have<br />
m extracted (two branches from advanced block <strong>and</strong> the other two
1"'<br />
from backward block based upon some important parameters). The<br />
dl'~ailed<br />
discussion rel<strong>at</strong>ing to the economic background of the<br />
sl'il'Ctcd district <strong>and</strong> blocks is provided below.<br />
Economic Background o/the Selected District <strong>and</strong> Blocks<br />
Tl:e Kalah<strong>and</strong>i district has drawn world-wide <strong>at</strong>tention <strong>for</strong> poverty,<br />
Illiteracy, underdevelopment, starv<strong>at</strong>ion de<strong>at</strong>hs, recurring drought <strong>and</strong><br />
so on. The Government of India, Government of Orissa, Reserve Bank<br />
of India <strong>and</strong> especially N<strong>at</strong>ional Bank <strong>for</strong> Agriculture <strong>and</strong> Rural<br />
De\'c!opment (NABARD) are seriously concerned about the economic<br />
dCl'elopment of the district. W<strong>at</strong>ershed development programme,<br />
promotion of self-help groups <strong>and</strong> linking them with banks <strong>and</strong><br />
?;ot,-iding financial assistance to the st<strong>at</strong>e government <strong>for</strong> the cre<strong>at</strong>ion<br />
of necessary infrastructure are some of the important steps<br />
, uI:dcrtaken by NABARD <strong>for</strong> the economic development of Kalah<strong>and</strong>i<br />
,dIstrict. Since availability of credit is a part of development process,<br />
f\alah<strong>and</strong>i district has been selected <strong>for</strong> this purpose.<br />
laj L<strong>and</strong> Utilis<strong>at</strong>ion<br />
Tc,pographically, Kalah<strong>and</strong>i district is loc<strong>at</strong>ed in the south-western<br />
iJdrt of Orissa. It has two distinct sub-regions: plains <strong>and</strong> hilly tracts.<br />
The total geographical area of the district spreads over 8,493 sq. kms.,<br />
(r)l1lpnsing of 2 sub-divisions <strong>and</strong> 13 blocks. The cultivable l<strong>and</strong> in<br />
"Ill' district falls in three distinct c<strong>at</strong>egories. They are high, medium<br />
,,':ld low l<strong>and</strong>s consisting of 54 per cent, 28 per cent <strong>and</strong> 18 per cent<br />
!I'spcctively of total cultivable l<strong>and</strong> of 393,550 hectares (NABARD<br />
.~IJlJ 1-02). Of the total cultivable area, 46.5 per cent is suitable <strong>for</strong><br />
'j"ddv <strong>and</strong> rest <strong>for</strong> other crops. The main crops grown in the district<br />
;,Il' paddy, minor cereals, pulses, oilseeds, sugarcane, cotton, fruits<br />
{"j Ol1lon.
Ill) L<strong>and</strong> Distribution<br />
The ownership structure <strong>and</strong> management of l<strong>and</strong> determine the st<strong>at</strong>e<br />
of agricultural prosperity <strong>and</strong> equity. A majority of the cultiv<strong>at</strong>ors in<br />
the district are marginal <strong>and</strong> small farmers. Around 40 per cent of the<br />
holdings in the district have oper<strong>at</strong>ed area less than one hectare,<br />
\lhile 48 per cent of the total number of holdings derive their<br />
sustenance from holdings ranging between one to four hectares.<br />
Roughly, 30 per cent of the total cultivable area is under the<br />
occup<strong>at</strong>ion of small <strong>and</strong> marginal farmers. Importantly, around 12 per<br />
cent of the total number of holdings are medium to large in size<br />
accounting <strong>for</strong> as much as 39 per cent of the total oper<strong>at</strong>ional area<br />
(Table 5.1).<br />
Table 5.1: Size Class-wise Number <strong>and</strong> Area under Oper<strong>at</strong>ional<br />
Hid' mgs<br />
s 0<br />
ize of L<strong>and</strong>holdings Kalah<strong>and</strong>i 1990·1991) Orissa 11990·1991)<br />
No. of Oper<strong>at</strong>ed No. of Oper<strong>at</strong>ed<br />
Holdings Area Holdings Area<br />
-<br />
U o I- 1. 0 (Marginal)<br />
lin '00) (in '00 hect) lin '00) (in '00 hect)<br />
647 (39.9) 369 (11. 7) 21,184 (53.7) 10,451 (19.7)<br />
01-2.0 (Small)<br />
425 (26.2) 588 (18.7) 10,353 (26.2) 14,262 (26.9)<br />
2 .01-4.0 (Semi-medium) 355 (21.9) 951 (30.2) 5,935 (15.0) 15,608 (29.5)<br />
4 01-10.0 (Medium) 175 (l0.8) 982 (31.2) 1,855 (4.7) 10,118 (19.1J_<br />
0.01- Above (Large)<br />
18 (Ll) 260 (8.2) 152 (004) 2,519 (4.8)<br />
T ()~al<br />
1,620 (100) 3,150 (100) 39,479 (100) 52,958 (100)<br />
\o[e: FIgures m parentheses refer to percentages from the correspondmg column<br />
",CIrce: Government of Orissa (1996).<br />
The inequality in the distribution of l<strong>and</strong> ownership in the<br />
dIstrict can be traced to nineteenth century l<strong>and</strong> revenue settlements,<br />
IlhICh led to the emergence of bipolar class structure. At the top of the<br />
Iural hierarchy were the gountias, village headmen who distributed<br />
:dlld <strong>for</strong> cultiv<strong>at</strong>ion <strong>and</strong> collected l<strong>and</strong> revenue <strong>for</strong> the St<strong>at</strong>e during the<br />
i~rl'-colonial period, <strong>and</strong> whose power was consolid<strong>at</strong>ed <strong>and</strong><br />
"~Itlmised<br />
by the colonial government. Although the gountia system<br />
'.is abolished in 1936, they were allowed to retain large extent of l<strong>and</strong><br />
124
<strong>for</strong> personal cultiv<strong>at</strong>ion (Das 1962). Over time, gountias came to wield<br />
cIa-larger influence over their villages, where they occupied the best<br />
l<strong>and</strong> <strong>and</strong> gained control over wastel<strong>and</strong> resources. The ceiling<br />
legisl<strong>at</strong>ion was largely unsuccessful in the redistribution of l<strong>and</strong> from<br />
the nch gountias to the poor l<strong>and</strong>less farmers. As a result, a small<br />
section, which is very well endowed with wealth, exercises control<br />
through credit, l<strong>and</strong> <strong>and</strong> labour markets over a large mass of<br />
peasantry, which has been unfavourably placed in so far as the access<br />
to productive assets like l<strong>and</strong>. The gountia system coupled with<br />
dependence of a large proportion of popul<strong>at</strong>ion on <strong>agriculture</strong> resulted<br />
in extreme inequality of l<strong>and</strong> ownership.<br />
Ie) Agrarian Conditions<br />
The normal rainfall in Kalah<strong>and</strong>i district is around 1,378 mms.<br />
However, it varied from as low as 1,045.5 mms to as high as 2,011.2<br />
mms between 1994 <strong>and</strong> 1999. The err<strong>at</strong>ic behaviour of the monsoon,<br />
uneven distribution of rainfall during the crop season coupled with<br />
occasional long dry spells <strong>at</strong> post-sowing or pre-productive stage<br />
caused extensive damage to the st<strong>and</strong>ing crops almost in every<br />
eli tcrn<strong>at</strong>ive year.<br />
In the context of uncertain rainfall, the artificial irrig<strong>at</strong>ion<br />
:xIiity assumed an important role. However, on an average, the<br />
percentage of irrig<strong>at</strong>ed area to gross cropped area continued to be<br />
oi!ound 18.5 per cent between 1995-96 <strong>and</strong> 1999-2000 (Table 5.2),<br />
"h'Ch is less than the st<strong>at</strong>e average. It shows th<strong>at</strong> around 81.5 per<br />
• ":n of the gross cropped area entirely depended upon rainfall in the<br />
Jii"rict. Out of the total irrig<strong>at</strong>ed area, around 55 per cent of the area<br />
L "Tig<strong>at</strong>ed by major <strong>and</strong> minor projects, <strong>and</strong> the rest by lift irrig<strong>at</strong>ion<br />
125
<strong>and</strong> ram dependent sources like tanks <strong>and</strong> dugwelJ. The irrig<strong>at</strong>ed<br />
areas under major <strong>and</strong> minor projects are confined to Jaip<strong>at</strong>na,<br />
Dharmagarh, Kalampur, Junagarh, <strong>and</strong> Bhawanip<strong>at</strong>na blocks. It is<br />
also mentioned th<strong>at</strong> the existing w<strong>at</strong>er harvesting structure in the<br />
district is found inadequ<strong>at</strong>e <strong>for</strong> irrig<strong>at</strong>ing the l<strong>and</strong> coming under the<br />
ayacut area because of low storage of w<strong>at</strong>er in the reservoir <strong>and</strong><br />
absence of l<strong>and</strong> levelling in the adjoining areas (St<strong>at</strong>e Bank of India<br />
2000-01). Consequently, the area under HYV as well as fertiliser<br />
consumption per hectare of gross cropped area in the district is lower<br />
than th<strong>at</strong> of the st<strong>at</strong>e average (Table 5.2).<br />
Table 5.2: Area under Irrig<strong>at</strong>ion, Fertiliser Consumption <strong>and</strong><br />
Area under HYV in Kalah<strong>and</strong>i District <strong>and</strong> Orissa<br />
Year K<strong>at</strong>ah<strong>and</strong>i Orissa<br />
Area Under Area Under Fertlliaer Area Under Area Under Fertiliser<br />
Irription HYVto Con.ump Irrig<strong>at</strong>ion to HYVto Consumpto<br />
Oro .. Oro .. -tlon Gro .. Oross tion<br />
Cropped Cropped Ka/laec Cropped Area Cropped K&/laec<br />
i Area-(%\ Area(%J -,%) Area-'%)<br />
1995-96 15.4 20.6 11 27.2 32.5 25<br />
1996-97 16.2 25.5 15 27.5 38.3 31<br />
1997-98 19.7 27.1 18 26.8 38.4 35<br />
: 1998-99 19.7 27.2 22 28.0 38.8 36<br />
1999-2000 22.0 29.3 28 29.5 42.0 42<br />
: Entire 18.5 25.7 - 27.8 37.8 -<br />
I Period<br />
Source: Government ofOnssa (1995-96,1996-97, 1997-98, 1998-99, <strong>and</strong> 1999-<br />
2000).<br />
(d\ Characteristics of Popul<strong>at</strong>ion <strong>and</strong> Their Occup<strong>at</strong>ional Distribution<br />
The total popul<strong>at</strong>ion in Kalah<strong>and</strong>i (excluding Nuapada sub-division of<br />
old Kalah<strong>and</strong>i) district was 11.31 lakhs in 1991 with the sex r<strong>at</strong>io of<br />
999 females per thous<strong>and</strong> males. Around 93 per cent of the total<br />
popul<strong>at</strong>ion stay in the rural areas. The percentages of male <strong>and</strong> female<br />
liter<strong>at</strong>es in the district were 31 <strong>and</strong> 8, while those <strong>for</strong> the st<strong>at</strong>e were<br />
47 <strong>and</strong> 21 respectively. The proportion of scheduled castes <strong>and</strong><br />
scheduled tribes popul<strong>at</strong>ion was high, around 46 per cent. According
to the 1991 census, the total number of workers in Kalah<strong>and</strong>i district<br />
was 4.26 lakh, constituting 37.67 per cent of the total popul<strong>at</strong>ion in<br />
the district. Of the 4.26 lakhs workers, a bulk of them were engaged in<br />
<strong>agriculture</strong>. The proportion of cultiv<strong>at</strong>ors in the total work<strong>for</strong>ce was 43<br />
per cent, whereas it was 41.1 per cent in the case of agricultural<br />
labourers (Table 5.3). Since 84 per cent of the total work<strong>for</strong>ce<br />
depended on <strong>agriculture</strong>, <strong>agriculture</strong> could be st<strong>at</strong>ed as the mainstay<br />
of the district's economy.<br />
.<br />
Table 5 3: Socio-Economic Fe<strong>at</strong>ures of Kalah<strong>and</strong>i District<br />
i Geographical area 8439 Sq.Kms. -<br />
I No. of blocks 13 -<br />
No. of villages 2,185 -<br />
I Total popul<strong>at</strong>ion 11.31 lakhs As per 1991 census<br />
. Total number of workers 4.261akhs - do -<br />
f Number of cultiv<strong>at</strong>ors 1.821akhs - do-<br />
1 '7C:: 1_1.1-_<br />
I Num~r of agricultural !.abourers ..... 'oJ U;'.IU.'~ - uui<br />
Length of surface roads 12524 Kms By 1996-97<br />
,_ No. of registered motor vehicles 17,429 Bv 1997-98<br />
i No. of allop<strong>at</strong>hic medical institutions 61 Bv 1996-97<br />
I No. livestock aid centers 129 - do -<br />
No. of livestock inspectors 121 - do -<br />
I No. of financial institutions' 92 Bv 2000-01<br />
Note: * Consists of co-oper<strong>at</strong>Ives, commercial <strong>and</strong> regIOnal TUral banks.<br />
Source: Government of Orissa (1996, 1997).<br />
re) Infrastructure Facilities<br />
Kalah<strong>and</strong>i is the most backward district as far as the availability of<br />
infrastructure facility is concerned. The surfaced roads 4o per 1,000<br />
square kms of geographical area was 1,475 kms in 1997-98. The<br />
condition of the existing roads is bad <strong>and</strong> poorly maintained. The<br />
number of registered motor vehicles per lakh of popul<strong>at</strong>ion (as per the<br />
1991 census) in the district was 1,541 in 1997-98. The number of<br />
buses running between district <strong>and</strong> block headquarters were hardly<br />
41l It includes n<strong>at</strong>ional highways, St<strong>at</strong>e highways, Major district roads, other district<br />
roads, <strong>for</strong>est roads, grama panchay<strong>at</strong> roads, classified village roads, P.S. Roads,<br />
village roads <strong>and</strong> urban roads.
sufficient. In the case of some interior villages, roads were not<br />
connected, <strong>and</strong> public transport system did not exist.<br />
The medical facilities are virtually absent in the villages, <strong>and</strong><br />
['I'en if they exist, the medical staff hardly stay in the villages. For any<br />
kmd of major or minor health problem one has to consult either the<br />
sub-divisional or district headquarter hospitals or priv<strong>at</strong>e doctors. For<br />
instance, the number of allop<strong>at</strong>hic medical institutions 41 per lakh of<br />
pupul<strong>at</strong>ion was 5.4 during 1996-97 in the district. The veterinary<br />
facilities are almost absent in the district. Out of 2,185 villages, only<br />
129 livestock aid centers with 121 livestock inspectors were there in<br />
the district by 1995-96. It shows th<strong>at</strong>, on an average, a single<br />
livestock inspector had to cover 18 vilIag('s. Importantly, cut<br />
total number of villages only 52.7 percentage of villages was electrified<br />
in the district by March 1997.<br />
There were 92 branches of various banks! financial institutions<br />
oper<strong>at</strong>ing in the district including 43 branches of Kalah<strong>and</strong>i Anchalika<br />
Gramya Bank, 35 commercial banks, 11 branches of central cooper<strong>at</strong>ive<br />
bank, 2 Agriculture <strong>and</strong> Rural Development bank, <strong>and</strong> one<br />
immch of Orissa St<strong>at</strong>e Financial Corpor<strong>at</strong>ion. It is noticed th<strong>at</strong> the<br />
number of people depending upon per branch was 13,600, whereas<br />
the average number of villages covered per bank branch was around<br />
24 111 the district by the year 2001-02 (NABARD 2001-02). This shows<br />
th<strong>at</strong> the average popul<strong>at</strong>ion per bank branch in the district was less<br />
thelD th<strong>at</strong> of St<strong>at</strong>e average, which was 16,300 during 1999-2000.<br />
I, ",,'Iudes district headquarters hospital, sub-divisional hospital, other hospitals,<br />
(ulilmunity health centres, Primary health centres, <strong>and</strong> Mobile health centres.
The existing marketing facilities are insufficient in the district.<br />
Because of poor transport <strong>and</strong> communic<strong>at</strong>ion facilities, a gre<strong>at</strong><br />
majority of the marginal <strong>and</strong> small farmers find it inconvenient <strong>and</strong><br />
unprofitable to sell their agricultural produce in the regul<strong>at</strong>ed markets<br />
loc<strong>at</strong>ed in the nearby urban or semi-urban localities. As a result, most<br />
of them sell their produce to the middleman or grain trader in their<br />
villages <strong>at</strong> much lower r<strong>at</strong>es than those prevailing in the regul<strong>at</strong>ed<br />
markets 42 •<br />
It must be emphasised, however, th<strong>at</strong> the economic<br />
backwardness is not uni<strong>for</strong>m in all parts of the district. When<br />
compared with the hilly tracts pursuing rain-fed <strong>agriculture</strong>, the areas<br />
possessing fl<strong>at</strong> <strong>and</strong> fertile paddy -fields receiving w<strong>at</strong>er from Indrav<strong>at</strong>i<br />
river (presently through a dam constructed across the river) permit a<br />
more advanced <strong>for</strong>m of <strong>agriculture</strong>. Of the 13 blocks in the district, six<br />
fall in the advanced region, while the rest in the backward region. The<br />
blocks of Jaip<strong>at</strong>na <strong>and</strong> Narla, on which the study is based, represent<br />
the advanced <strong>and</strong> backward regions, respectively, of Kalah<strong>and</strong>i<br />
district. The differences between the two blocks are evident from the<br />
following details. While the proportion of irrig<strong>at</strong>ed are to gross cropped<br />
area in Jaip<strong>at</strong>na varied between 50 to 58 per cent across the seasons,<br />
the corresponding figures <strong>for</strong> Narla block were 13 to 31 per cent.<br />
Similarly, the fertiliser consumption was only 6 kgs per hectare in<br />
Narla block as compared to the figure of 15 kgs <strong>for</strong> Jaip<strong>at</strong>na block.<br />
" For example, in most of the villages from where primary d<strong>at</strong>a were collected, the<br />
farmers sold their paddy within the range of Rs. 265 to Rs. 325 per bag (75 kg) in<br />
the village when the prevailing r<strong>at</strong>e <strong>at</strong> th<strong>at</strong> time was Rs. 380 in the year 200 \-02.<br />
The study made by Rajasekbar <strong>and</strong> Vyasulu (\993) in the Kalah<strong>and</strong>i district also<br />
mentions a similar kind of rmding. They notice th<strong>at</strong> in one of the sample villages<br />
loc<strong>at</strong>ed just 34 kms away from the district headquarter of Bhawanip<strong>at</strong>na, the<br />
farmer sold paddy <strong>for</strong> Rs. 125 per quintal in the village, while the prevailing r<strong>at</strong>e<br />
<strong>at</strong> th<strong>at</strong> time was Rs. 160.
These differences in agricultural inputs lead to vari<strong>at</strong>ions In the<br />
density of paddy cultiv<strong>at</strong>ion <strong>and</strong> paddy yield r<strong>at</strong>es. In Jaip<strong>at</strong>na block,<br />
paddy cultiv<strong>at</strong>ion was widespread (with almost 100 per cent in Kharif<br />
season), whereas in Narla it accounted <strong>for</strong> only about 61 per cent of<br />
the area during the same season 43 . The per hectare yield r<strong>at</strong>es <strong>for</strong><br />
paddy were 6 to 14 quintals in the backward <strong>and</strong> advanced blocks,<br />
respectively. There were also infrastructural differences - particularly<br />
with regard to communic<strong>at</strong>ions (measured in terms of the length of<br />
durable roads, <strong>and</strong> popul<strong>at</strong>ion covered by post office <strong>and</strong> banks), - as<br />
well as the number of industries <strong>and</strong> development of off-farm<br />
economic opportunities (Table 5.4).<br />
Although the two blocks in Kala..h.<strong>and</strong>i district differed in terms<br />
of resources, agricultural technology, cropping p<strong>at</strong>tern, yield r<strong>at</strong>es,<br />
communic<strong>at</strong>ions <strong>and</strong> industrial development, the agrarian structure<br />
was largely the same. In each block, there<strong>for</strong>e, it was the gountias <strong>and</strong><br />
large l<strong>and</strong>holders who owned considerable tracts of agricultural l<strong>and</strong>,<br />
having as a result control over credit <strong>and</strong> labour markets as well as<br />
local institutions. At the other end of the agrarian class structure, a<br />
large number of small <strong>and</strong> marginal farmers belonging mostly to the<br />
depressed castes depended on tiny l<strong>and</strong>holdings without much access<br />
to institutional credit. It was these smallholders who depended on the<br />
in<strong>for</strong>mal credit market loc<strong>at</strong>ed <strong>at</strong> both village <strong>and</strong> town <strong>levels</strong> <strong>for</strong> their<br />
production <strong>and</strong> consumption needs to a gre<strong>at</strong>er extent.<br />
" The other important crops in Narla block are cotton <strong>and</strong> banana.
Priority Sector Lending<br />
The proportion of credit to priority sector has exp<strong>and</strong>ed significantly<br />
over time in the selected bank branches in both the blocks. In<br />
Jaip<strong>at</strong>na block, although the share of priority sector had marginally<br />
declined from 89.47 to 87.72 per cent from total advance <strong>for</strong> the years<br />
1997 -98 to 1998-99, there was an overall increase in the share of<br />
priority sector in the total advance by 2000-01 (Table 5.5). For Narla<br />
block, it can be observed th<strong>at</strong> there was a continuous increase in the<br />
share of outst<strong>and</strong>ing credit to the priority sector <strong>and</strong> it went up from<br />
76.86 per cent in 1996-97 to 86.04 per cent in 2000-01.<br />
I<br />
,<br />
\<br />
I<br />
Table 5.5: Sector-wise Flow of Bank Credit<br />
(in per cent)<br />
1996- 1997- 1998- 1999- 2000- Annual<br />
Sectors 97 98 99 2000 01 Average<br />
Growth R<strong>at</strong>es<br />
Sample BaDb of Jaip<strong>at</strong>na Block<br />
Agriculture 42.83 37.87 27.83 21.69 18.82 09.69<br />
Other Priority Sector 46.65 50.37 60.00 72.78 76.07 56.40<br />
Total Priority Sector 89.47 88.24 87.72 94.47 94.89 39.28<br />
Non·Priority Sector 10.53 11.76 12.28 5.53 5.11 09.71<br />
I Total Advance<br />
; IRs. in Lakhs} 229.13 262.49 399.27 572.45 740.75 36.70<br />
Sample BaDb of Narla Block<br />
, Agriculture 48.91 41.78 37.53 40.07 46.83 11.69<br />
Other Priority Sector 27.94 36.22 40.76 41.73 39.20 22.79<br />
Total Priority Sector 76.86 78.00 78.29 81.79 86.04 16.27<br />
Non·Priority Sector 23.14 22.00 21.71 18.21 13.96 00.34<br />
I Total Advance<br />
, (Rs, in Lakhs) 87.93 108.94 126.42 134.63 146.59 13.13<br />
Source: Sample Bank Branches of Jlllp<strong>at</strong>na <strong>and</strong> Narla Block<br />
The total volume of outst<strong>and</strong>ing credit disbursed by the<br />
selected bank branches in Jaip<strong>at</strong>na block was Rs. 229.13 lakhs in<br />
1996-97 <strong>and</strong> it increased to Rs. 740.75 lakhs by 2000-01 <strong>at</strong> an<br />
annual growth (in nominal term) r<strong>at</strong>e of 36.70 per cent. In the case of<br />
Narla block, this growth r<strong>at</strong>e was only 16.27 per cent. In both the<br />
blocks, a higher growth r<strong>at</strong>e was not uni<strong>for</strong>m across different sectors<br />
(Table 5.5). Importantly, the higher growth r<strong>at</strong>e of outst<strong>and</strong>ing credit
to the total priority sector (TPS) in both the blocks could be <strong>at</strong>tributed<br />
to the higher growth r<strong>at</strong>e of credit in the other priority sector (OPS)<br />
consisting of small business firms (SBF), small-scale industries (SSI)<br />
<strong>and</strong> so on. The growth r<strong>at</strong>e of credit flow to <strong>agriculture</strong> was far below<br />
than the growth r<strong>at</strong>e of credit to the OPS, indic<strong>at</strong>ing th<strong>at</strong> the bankers<br />
were giving preference to non-agricultural activities. This situ<strong>at</strong>ion<br />
was more prominent in the advanced block like Jaip<strong>at</strong>na. It implies<br />
th<strong>at</strong> where there is scope to invest in non-<strong>agriculture</strong> sector, banks<br />
are reluctant to extend their credit facility to the agricultural sector. If<br />
we compare the growth r<strong>at</strong>e of credit to <strong>agriculture</strong> <strong>and</strong> OPS with the<br />
growth r<strong>at</strong>e of credit to TPS in the selected bank branches of both the<br />
blocks, Narla block has rel<strong>at</strong>ively less scope <strong>for</strong> the banks to deploy<br />
their funds_ in the OPS or non-farm activity. This is due to lower<br />
absorption capacity by the non-farm activity holder or less scope <strong>for</strong><br />
investment in SBF <strong>and</strong> or SSI. In this context, the bankers are of the<br />
view th<strong>at</strong> where there is scope, non-agricultural loans not only have<br />
better recoveries but also fetch rel<strong>at</strong>ively higher interest r<strong>at</strong>es'".<br />
From the <strong>for</strong>egoing discussion one can conclude th<strong>at</strong> the higher<br />
growth r<strong>at</strong>e of credit flow to the OPS has been taking place <strong>at</strong> the cost<br />
of credit going to <strong>agriculture</strong>. This preference of lending <strong>for</strong> nonagricultural<br />
activities can also be corrobor<strong>at</strong>ed by d<strong>at</strong>a on the share of<br />
agricultural credit from total advances. Table 5.5 shows th<strong>at</strong> the per<br />
cent share of advance to <strong>agriculture</strong> from net bank credit has declined<br />
from 42.83 per cent in 1996-97 to 18.82 per cent in 2000-01 in the<br />
case of Jaip<strong>at</strong>na block. Besides, there exists a higher gap between the<br />
growth r<strong>at</strong>e of credit to <strong>agriculture</strong> <strong>and</strong> total advance (Le. 27.01 per<br />
cent) <strong>for</strong> the same reference period. The same appears to be true in<br />
"' It has been argued th<strong>at</strong> the increasing oper<strong>at</strong>ing costs <strong>and</strong> higher loan<br />
delinquency r<strong>at</strong>es compel the banks to adopt such a str<strong>at</strong>egy (Shylendra \996)_
the case of credit going to <strong>agriculture</strong> in Narla block except <strong>for</strong> the<br />
years 1999-00 <strong>and</strong> 2000-01. Interestingly, although the volume is<br />
less, the proportion of credit going to <strong>agriculture</strong> from total advance in<br />
the backward block (Narla) is more than th<strong>at</strong> of advanced block<br />
(Jaip<strong>at</strong>na) in the last five years. This can be <strong>at</strong>tributed mainly to the<br />
non-availability of scope <strong>for</strong> deployment of funds in the OPS. Hence,<br />
the higher growth r<strong>at</strong>e of credit flow to the TPS <strong>and</strong> or total advance<br />
cannot be <strong>at</strong>tributed to an increase in agricultural <strong>finance</strong>.<br />
Notwithst<strong>and</strong>ing this, within the priority sector, there is a preference<br />
<strong>for</strong> non-<strong>agriculture</strong> sector by the bankers.<br />
Why is it th<strong>at</strong> the growth r<strong>at</strong>e of credit to <strong>agriculture</strong> is much<br />
below the growth r<strong>at</strong>e of credit to the TPS? To address this question, it<br />
is essential to review the policies rel<strong>at</strong>ing to the norms of priority<br />
sector lending. Fir<strong>at</strong>, direct <strong>and</strong> indirect c<strong>at</strong>egories of agricultural<br />
advances within the sub-target of 18 per cent of agricultural lending<br />
were clubbed in 1993-4 subject to the stipul<strong>at</strong>ion th<strong>at</strong> 'indirect'<br />
lending to <strong>agriculture</strong> must not exceed one-fourth of the agricultural<br />
target or 4.5 per cent of net bank credit. It had also been decided to<br />
include any indirect advance exceeding 4.5 per cent into the overall<br />
target of priority sector. Second, increasing the ceiling of credit limit<br />
to Rs. 5 lakhs <strong>for</strong> agricultural inputs supply <strong>and</strong> allied to <strong>agriculture</strong><br />
(like dairy, poultry, piggery <strong>and</strong> so on) <strong>and</strong> bringing them under the<br />
purview of indirect agricultural advances. This widened the scope of<br />
the priority sector, in general, <strong>and</strong> <strong>agriculture</strong>, in particular. Third,<br />
the extension of financial facility to even dealers in drip irrig<strong>at</strong>ion,<br />
sprinkler, <strong>and</strong> agricultural machinery was classified as 'indirect<br />
<strong>finance</strong> to <strong>agriculture</strong>'. Nevertheless, short-term advances to<br />
plant<strong>at</strong>ions of tea, coffee, rubber <strong>and</strong> spices, irrespective of the size of
the holdings were brought under the scope of direct agricultural<br />
advances.<br />
As a result of policies rel<strong>at</strong>ing to addition of sub-sectors into the<br />
priority sector lending, the scope of <strong>agriculture</strong> sector is much larger<br />
<strong>at</strong> present than wh<strong>at</strong> it was in the early 1990s. Consequently, the<br />
credit flow has to be channelised to new sub-sectors keeping the limit<br />
<strong>at</strong> 18 per cent. This has led to shrinkage of loans to the initial subsectors<br />
such as agricultural term loan <strong>and</strong> more specifically allied<br />
agricultural activities (Table 5.6).<br />
The broadening of priority sector besides <strong>agriculture</strong> with higher<br />
credit limit is other important factor <strong>for</strong> a high growt..1-J. r<strong>at</strong>e of credit<br />
flow to OPS <strong>and</strong>, in tum, to TPS. For instance, initially, SSI were those<br />
industries whose investment on plant <strong>and</strong> machinery did not exceed<br />
Rs.35 lakhs. In the case of ancillary units, the investment limit was<br />
Rs.45 lakhs. In May 1994, these limits were raised to Rs.60 lakhs <strong>and</strong><br />
Rs.75 lakhs respectively. According to the revised definition, all<br />
advances to SSls were to be tre<strong>at</strong>ed as priority sector lending. Besides,<br />
<strong>for</strong> small units 45 a target of 40 per cent of total credit to SSI was fixed.<br />
Furthermore, the existing ceiling limits on advances to OPS such as<br />
retail trade, small business enterprises, housing, professional <strong>and</strong><br />
self-employed persons under the purview of priority sector advance<br />
were also elev<strong>at</strong>ed. Thus, when the new areas were entered under the<br />
umbrella of priority sector lending, the scope of deployment of funds<br />
by bankers increased to a gre<strong>at</strong>er extent resulting in gre<strong>at</strong>er flow of<br />
credit to OPS <strong>and</strong> also TPS. This proposition can be substanti<strong>at</strong>ed<br />
4S Small units consist of cottage industries, khadi <strong>and</strong> village industries, artisans<br />
<strong>and</strong> tiny industries with investment in plant <strong>and</strong> machinery up to Rs.5 lakhs. For<br />
more detailed in<strong>for</strong>m<strong>at</strong>ion, see, RBI (1992-93, 1994).
from the sector-wise flow of outst<strong>and</strong>ing credit (Table 5.5) where nonagricultural<br />
purposes accounted <strong>for</strong> the highest share of total<br />
advances. In this context, it is necessary to examine the p<strong>at</strong>tern of<br />
agricultural lending.<br />
Agricultural Lending<br />
Agricultural loans are advanced <strong>for</strong> three broad purposes, VIZ., crop<br />
production (consisting of agricultural cash credit <strong>and</strong> agricultural gold<br />
loan), agricultural investment, <strong>and</strong> allied activities. The production<br />
credit is generally in the <strong>for</strong>m of short-term loans given <strong>for</strong> various<br />
seasonal agricultural oper<strong>at</strong>ions. The agricultural investment <strong>and</strong><br />
allied activities come under term loans given <strong>for</strong> the purposes like l<strong>and</strong><br />
development, minor irrig<strong>at</strong>ion, farm mechanis<strong>at</strong>ion, <strong>for</strong> the purchase<br />
of draft animals, <strong>and</strong> <strong>for</strong> pursuing activities like dairying, sheep <strong>and</strong><br />
go<strong>at</strong> rearing, etc.<br />
Coming to the flow of agricultural credit, Table 5.6 gives the<br />
purpose-wise share of credit going to <strong>agriculture</strong>. In the case of the<br />
selected bank branches in Jaip<strong>at</strong>na block, credit extended to<br />
<strong>agriculture</strong> was Rs. 98.13 lakhs in 1996-97 consisting of 42.83 per<br />
cent of total advances. By 2000-01, although the volume of bank<br />
credit to this sector had gone up to Rs.139.44 lakhs, its share from<br />
total advances had come down to 18.82 per cent. Interestingly, on an<br />
average, the volume of credit going to <strong>agriculture</strong> through the selected<br />
banks in Narla block was less than 50 per cent of the volume of credit<br />
going to this sector in Jaip<strong>at</strong>na block <strong>for</strong> the last five years. However,<br />
one can observe a rel<strong>at</strong>ively gre<strong>at</strong>er share of credit from total advances<br />
going to <strong>agriculture</strong> in the backward block (Narla) compared to<br />
advanced block (Jaip<strong>at</strong>na). This phenomenon is being noticed since<br />
1996-97 (Table 5.6). Notwithst<strong>and</strong>ing this, crop production <strong>and</strong>
agricultural term loans (ATL) accounted <strong>for</strong> the highest share of loans<br />
outst<strong>and</strong>ing in <strong>agriculture</strong> in both the areas.<br />
Table 5.6: Purpose-wise Distribution of Agricultural Credit<br />
from 1996-97 to 2000-01<br />
(in per cent)<br />
I Purpose 1996- 1997- 1998- 1999- 2000-<br />
97<br />
I<br />
98 99 2000 01<br />
Sample Banks of Jaip<strong>at</strong>na Block<br />
I<br />
I Agricultural Cash Credit-tAl 33.29 22.79 21.25 22.67 24.60<br />
~ Agricultural Gold loan-fBI 11.16 12.21 18.97 17.49 15.12<br />
Total Croo Loan fA+ BI 44.45 35.00 40.22 40.17 39.72<br />
Agricultural Term Loan 49.13 55.04 55.80 54.88 50.36<br />
Allied to Agriculture 06.42 09.96 03.98 04.95 09.92<br />
Total Advance (Rs. in Lakhsl 98.13 99.40 110.71 124.15 139.44<br />
I<br />
Sample Banks of Narla Block<br />
, Agricultural Cash Credit-fA) 20.41 19.67 18.12 21.06 29.18<br />
I Agricultural Gold Loan- (B) 14.65 16.39 13.57 19.50 17.31<br />
l10tal Crop Loan (A+BI 35.06 36.06 31.70 40.56 46.48<br />
I Agricultural Term Loan 36.39 38.15 38.57 31.02 31.87<br />
I Allied to Agriculture 28.55 25.80 29.74 28.42 21.65<br />
, Total Advance (Rs. in Lakhs) 43.01 45.51 45.51 47.45 53.94<br />
Source: Sample Bank Branches of JB1p<strong>at</strong>na <strong>and</strong> Narla Block<br />
Based on the above discussion on the credit going to <strong>agriculture</strong><br />
by banks in both the areas, one can raise an important question. Why<br />
is th<strong>at</strong> the proportion of credit flow to <strong>agriculture</strong> from net bank credit<br />
is rel<strong>at</strong>ively more in backward area as compared to the advanced one?<br />
Wh<strong>at</strong> accounts <strong>for</strong> a gre<strong>at</strong>er share of credit to crop production <strong>and</strong><br />
investment loans? From the lenders' perspective, one can argue th<strong>at</strong><br />
since better altern<strong>at</strong>ive opportunities are available in non-agricultural<br />
activities in advance areas, the deployment of funds to <strong>agriculture</strong><br />
may not be <strong>at</strong>tractive. Altern<strong>at</strong>ively, less opportunity <strong>for</strong> investment in<br />
non-<strong>agriculture</strong> sector may <strong>for</strong>ce the bankers to tum to <strong>agriculture</strong> <strong>for</strong><br />
investment. This argument seems to be true from a substantial low<br />
growth r<strong>at</strong>e of credit flow to OPS in the backward region compared to<br />
the advanced one rrable 5.5). Nevertheless, low (gre<strong>at</strong>er) share of<br />
credit going to <strong>agriculture</strong> from net bank credit may be due to low
[high) repayment r<strong>at</strong>e of loan by the borrower in the concerned sector.<br />
Hence, in order to explore more about the issues, it is essential to<br />
examine sector-wise recovery to dem<strong>and</strong>.<br />
Table 5.7: Sector-wise Recovery of Loan Amount to Dem<strong>and</strong><br />
(in per cent)<br />
1996-97 1997-98 1998-99 1999-2000 2000-01<br />
Sectors<br />
Jaip<strong>at</strong>na Block<br />
: Agrl. Loan 62.92 63.20 66.00 65.17 59.87<br />
· <strong>for</strong> Agrl 23.88 33.50 32.12 20.86 23.17<br />
-!ric_ulture 40.99 45.38 45.17 43.54 40.17<br />
)n-<strong>agriculture</strong> 69.79 78.51 80.73 69.93 71.62<br />
·:al 57.89 63.38 63.43 59.49 60.22<br />
Narla Block<br />
:-::1· Agrl. Loan 58.21 60.38 59.02 70.70 60.85<br />
· <strong>for</strong> Agrl 26.28 34.54 37.48 41.05 22.40<br />
lJ'iculture 40.75 51.44 52.85 62.28 49.40<br />
',:1-<strong>agriculture</strong> 67.37 54.71 50.00 63.79 70.18<br />
,._'tal 49.65 52.51 41.01 6271 , SS 7? ,<br />
S,)urce: Sample Bank Branches of Jalp<strong>at</strong>na <strong>and</strong> Narla Block<br />
Table 5.7 shows th<strong>at</strong> there is an improvement 111 terms of<br />
rel'overy to dem<strong>and</strong>, especially in non-<strong>agriculture</strong> sector in both the<br />
regions. The percentage of total recovery increased from 57.89 per<br />
cellt in 1996-97 to 60.22 per cent in 2000-01 in the selected bank<br />
brclnches of Jaip<strong>at</strong>na block. This can be <strong>at</strong>tributed to higher recovery<br />
rale 111 the non-agricultural sector compared to <strong>agriculture</strong>.<br />
Fl,nhermore, the percentage of recovery <strong>for</strong> the entire sector (both<br />
"gr:C'ulture <strong>and</strong> non-<strong>agriculture</strong>) to total dem<strong>and</strong> shows th<strong>at</strong> the r<strong>at</strong>e<br />
of repayment was more in the selected bank branches of Jaip<strong>at</strong>na<br />
b;,. k as compared to Narla Block except <strong>for</strong> the year 1999-00.<br />
HIJ\\TVer, in the l<strong>at</strong>ter block, the r<strong>at</strong>e of recovery of amount lent to<br />
agrll'ulture as a proportion to dem<strong>and</strong> was always higher than th<strong>at</strong> in<br />
thl' <strong>for</strong>mer block <strong>for</strong> the entire period. This high recovery r<strong>at</strong>e rna\' be<br />
,J:;,' of the important contributing factors <strong>for</strong> a gre<strong>at</strong>er share of credit<br />
gOlt:" to <strong>agriculture</strong> from total net bank credit in the case of Narla
lock. Based on the above discussion, one can raise the following<br />
questions. Wh<strong>at</strong> contributes to low recovery r<strong>at</strong>e in the agricultural<br />
sector in the advanced Jaip<strong>at</strong>na block? Is the low repayment more<br />
prevalent in short-term or term loans to <strong>agriculture</strong>?<br />
To underst<strong>and</strong> the questions addressed here, it is essential to<br />
examine the repayment r<strong>at</strong>e of both short-term <strong>and</strong> term loans <strong>for</strong><br />
<strong>agriculture</strong>. Table 5.7 shows th<strong>at</strong> there was high repayment r<strong>at</strong>e In<br />
short-term (ST) loans compared to long-term agricultural loans In<br />
both the blocks. However, there was a growing tendency in the<br />
repayment r<strong>at</strong>e in short-term agricultural loans <strong>for</strong> the period 1996-97<br />
to 1998-99 in the selected bank branches of both the regions. A<br />
ckclining tendency of repayment in ST !oa.'1S could be obser .... ed from<br />
the year 1999-00 onwards in both the areas. Interestingly, the low<br />
repayment r<strong>at</strong>e of long-term (LT) loans is a common phenomenon in<br />
both the blocks. This indic<strong>at</strong>es th<strong>at</strong> the low repayment r<strong>at</strong>e of<br />
agricultural loans as a whole in Jaip<strong>at</strong>na block could be <strong>at</strong>tributed to<br />
rel<strong>at</strong>ively poor repayment of term loans.<br />
Why is the repayment r<strong>at</strong>e of long-term agricultural loan so<br />
poor? Wh<strong>at</strong> may be the contributing factors <strong>for</strong> declining tendency of<br />
repayment <strong>for</strong> crop loans (ST loan)? To underst<strong>and</strong> the questions<br />
addressed here, one need to undertake a <strong>micro</strong>-level (households)<br />
analysis. In the context of the above issues, the farmers are of the<br />
opinion th<strong>at</strong> under <strong>finance</strong>, diversion, <strong>and</strong> misutilis<strong>at</strong>ion of funds are<br />
the major factors which adversely affect the repayment r<strong>at</strong>e.<br />
Taking into account the repayment r<strong>at</strong>e of both <strong>agriculture</strong> <strong>and</strong><br />
non-<strong>agriculture</strong> sectors, one can ask, whether the share of credit to<br />
139
<strong>agriculture</strong> <strong>for</strong>m total advance by banks is positively rel<strong>at</strong>ed with the<br />
interest income 46 on advance? Table 5.8 reveals th<strong>at</strong> the interest<br />
income on advance is more in the selected bank branches of the<br />
Jaip<strong>at</strong>na block <strong>for</strong> the last four years (1997-98 to 2000-011, where the<br />
share of credit going to <strong>agriculture</strong> has been decreasing continuously,<br />
<strong>and</strong> this share is less as compared to the counterpart region. In this<br />
context, one can arrive <strong>at</strong> a conclusion th<strong>at</strong> given the repayment r<strong>at</strong>e,<br />
interest income on advance is inversely rel<strong>at</strong>ed with the flow of credit<br />
going to <strong>agriculture</strong> sector.<br />
Table 5.8: Interest Income on Advance<br />
(in per cent)<br />
ParticuJara<br />
Years<br />
1996-97 1997-98 1998-99 1999-2000 2000·01<br />
--- -<br />
Selected Bal·lk Branchcs<br />
: of Jaip<strong>at</strong>na Block 6.16 9.65 8.89 9.23 10.94<br />
I Selected Bank Branches<br />
~arlaBlock<br />
7.37 7.74 8.84 8.91 8.38<br />
Source: Sample Bank Branches of J<strong>at</strong>p<strong>at</strong>na <strong>and</strong> Narla Block<br />
It can be inferred th<strong>at</strong> the credit norms rel<strong>at</strong>ing to profitability is<br />
one of the important contributing factors <strong>for</strong> lower credit flow to<br />
<strong>agriculture</strong>. Thus, if the interest income is gre<strong>at</strong>er than or <strong>at</strong> least<br />
equal to the cost of lending (wh<strong>at</strong> is termed as break-even level of<br />
interest4 7 ), this may positively influence the financial institutions to<br />
increase the supply of credit. However, default r<strong>at</strong>e plays an important<br />
role in determining the break-even level of interest r<strong>at</strong>e <strong>for</strong> a financial<br />
institution. Higher the default r<strong>at</strong>e, higher is the break-even interest<br />
r<strong>at</strong>e th<strong>at</strong> has to be charged. But, given the administr<strong>at</strong>ive interest<br />
"Income = (Interest Received on Advance I Total Advance by Bank) x 100.<br />
,; It implies the minimum needed lending r<strong>at</strong>e <strong>for</strong> the bank (i.e. Income from loan<br />
portfolio ~ Cost of lending). For more details, see, Anderson <strong>and</strong> Khamb<strong>at</strong>a<br />
(1985), Hulme <strong>and</strong> Morsely (1996) <strong>and</strong> S<strong>at</strong>ish <strong>and</strong> Gopalkrishna (1997).<br />
140
141<br />
r<strong>at</strong>e, banks cannot increase their lending r<strong>at</strong>es. There<strong>for</strong>e, banks will<br />
try to bring down the break-even condition of lending r<strong>at</strong>e to<br />
reasonable <strong>levels</strong> by reducing default r<strong>at</strong>e <strong>and</strong> the cost of lending. In<br />
our case, since the separ<strong>at</strong>e figure of interest income on only<br />
agricultural lending is not available <strong>at</strong> the branch level, we have taken<br />
interest income on total advance as the proxy variable to explain its<br />
rel<strong>at</strong>ion with the flow of credit to <strong>agriculture</strong>. It is observed th<strong>at</strong> <strong>for</strong> the<br />
bank branches where the interest income on advance is more (<strong>for</strong><br />
instance, the selected bank branches of Jaip<strong>at</strong>na Block), the share of<br />
credit going to <strong>agriculture</strong> out of total deployment is less <strong>and</strong> viceversa.<br />
Security Based Lending<br />
In general, bank loans are sanctioned on the basis of four different<br />
types of security. They are: l<strong>and</strong>, gold, deposits, <strong>and</strong> hypothec<strong>at</strong>ion of<br />
loan assets <strong>and</strong> personal security. The loan sanctioned with l<strong>and</strong> as<br />
security can be further sub-divided into (i) sanction of loan by<br />
mortgage, <strong>and</strong> (iiI loans by a charge over l<strong>and</strong>. Basically, the <strong>for</strong>mer<br />
type of security is needed <strong>for</strong> agricultural term loan like improvement<br />
of l<strong>and</strong>, purchase of agricultural implements, development of minor<br />
irrig<strong>at</strong>ion <strong>and</strong> so on. In the case of default of loans, which are<br />
sanctioned on the basis of mortgage type of security, the l<strong>and</strong> may be<br />
sold <strong>for</strong> recovering the dues. To meet the requirement of working<br />
capital in crop production the l<strong>at</strong>ter type of security is needed <strong>and</strong> the<br />
dues have to be recovered only out of the proceeds of the l<strong>and</strong>.<br />
However, the borrower has to produce the record of ownership right<br />
over the said l<strong>and</strong> to obtain loan against both c<strong>at</strong>egories of l<strong>and</strong><br />
security. In the case of loans with l<strong>and</strong> as security, the amount of<br />
loan obtained depends on the cost of the said project, value of l<strong>and</strong> if<br />
It is an investment loan, <strong>and</strong> the scale of <strong>finance</strong> if it is crop loan.
142<br />
Loan sanctioned on the basis of either gold or deposits as security can<br />
be tre<strong>at</strong>ed as dem<strong>and</strong> loan. The amount of loan sanctioned depends<br />
upon the market value of the gold ornaments subject to the maximum<br />
amount fixed per unit. In the case of default, the bank can auction the<br />
particular ornaments to recover the dues with advance notice to the<br />
borrower. On the other h<strong>and</strong>, any default of loan against deposit will<br />
be adjusted <strong>at</strong> the time of repayment. In the context of loan<br />
sanctioned against hypothec<strong>at</strong>ion of loan assets <strong>and</strong> personal<br />
security, no primary coll<strong>at</strong>eral is needed as explained above. This type<br />
of loan sanction helps the borrower who cannot af<strong>for</strong>d any primary<br />
coll<strong>at</strong>eral to access institutional credit <strong>and</strong> if the loan is sanctioned <strong>for</strong><br />
asset cre<strong>at</strong>ion, the same works as coll<strong>at</strong>eral <strong>for</strong> the bank till the loan<br />
is repaid. In the case of default, the hypothec<strong>at</strong>ed asset may be sold<br />
<strong>for</strong> repayment. In the case of loan against personal security, the<br />
borrower is expected to repay the loan on dem<strong>and</strong> by the banks. This<br />
type of loan basically plays a major role <strong>at</strong> the time of sanction in nonfarm<br />
activity.<br />
With this background, it may be necessary to know the<br />
distribution of agricultural credit by type of security. Since the return<br />
on agricultural investment is highly uncertain <strong>and</strong> affected by several<br />
factors, <strong>and</strong> the probability of default r<strong>at</strong>e is high, the financial<br />
institutions may be reluctant to extend credit facility to the<br />
agricultural sector. Thus, to minimise the lending risk, the bankers<br />
may prefer coll<strong>at</strong>eral based lending.
Table 5.9: Distribution of Agricultural Credit by Type of<br />
Security<br />
(in per cent)<br />
Type of Security 1996·97 1997·98 1998·99 1999· 2000·0il<br />
2000<br />
Sample Banks of Jaip<strong>at</strong>na Block<br />
L<strong>and</strong> 47.64 31.40 44.10 32.38 41.07<br />
· Gold 11.16 12.21 18.97 17.49 15.12<br />
· Hypothec<strong>at</strong>ion of Loan Assets 41.20 56.39 36.93 50.12 43.80<br />
· <strong>and</strong> Personal Security<br />
~otal Advance IRs. in Lakhs) 98.13 99.40 110.71 124.15 139.44<br />
,<br />
Sample Banks of Narla Block<br />
, L<strong>and</strong> 55.29 51.00 58.48 56.47 65.39<br />
, Gold 14.69 16.39 13.57 19.50 17.31<br />
Hypothec<strong>at</strong>ion of Loan Assets 30.02 22.61 27.95 24.03 17.31<br />
<strong>and</strong> Personal Security<br />
Total Advance (Rs. in Lakhs) 43.01 45.51 47.45 53.94 68.65<br />
Source: Sample Bank Branches of Jrup<strong>at</strong>na <strong>and</strong> Narla Block<br />
It may be noted from Table 5.9 th<strong>at</strong> a major percentage of total<br />
amounts of loan is given on the basis of security of l<strong>and</strong> <strong>and</strong> gold (in<br />
both the regions). However, the proportion of loans given on the basis<br />
of hypothec<strong>at</strong>ion of loan assets <strong>and</strong> personal security have also<br />
accounted <strong>for</strong> a significant share in the total outst<strong>and</strong>ing advance to<br />
<strong>agriculture</strong> in Jaip<strong>at</strong>na block. In the last five years (Le., from 1996-97<br />
to 2000-01), loan disbursed against hypothec<strong>at</strong>ed loan assets <strong>and</strong><br />
personal security ranged from 37 to 56 per cent of total loan<br />
outst<strong>and</strong>ing in the sample bank branches of Jaip<strong>at</strong>na block. Given the<br />
backwardness, the r<strong>at</strong>e of disbursement of loan against hypothec<strong>at</strong>ed<br />
loan assets <strong>and</strong> personal security is supposed to be more in the<br />
backward region like Narla. Surprisingly, the r<strong>at</strong>e of disbursement of<br />
loan against these securities vary from the range of as low as 17 per<br />
cent to as high as 30 per cent of total credit given <strong>for</strong> agricultural<br />
purposes in the sample bank branches of Narla block. It must be<br />
emphasised, however, th<strong>at</strong> the proportion of total agricultural credit<br />
disbursed against hypothec<strong>at</strong>ion of loan assets <strong>and</strong> personal security<br />
is less in the selected bank branches of backward block compared to
the advanced block (Table 5.9). Thus, is it true th<strong>at</strong> the bankers are<br />
really extending their credit facility <strong>at</strong> a significant r<strong>at</strong>e on the basis of<br />
hypothec<strong>at</strong>ion of loan assets <strong>and</strong> personal security in the service area<br />
of selected bank branches of advanced block?<br />
It is known th<strong>at</strong> a loan against hypothec<strong>at</strong>ion of assets <strong>and</strong><br />
personal security is supposed to be sanctioned without insisting on<br />
any coll<strong>at</strong>eral under various credit-based poverty allevi<strong>at</strong>ion schemes.<br />
Earlier, it has been argued th<strong>at</strong> the bank followed both direct <strong>and</strong><br />
indirect coll<strong>at</strong>eral based lending except in the case of poverty<br />
allevi<strong>at</strong>ion schemes under which it was compelled to lend without<br />
insisting on any coll<strong>at</strong>eral (Shylendra 1996). For instance, in many<br />
cases it is found th<strong>at</strong>, although, no coll<strong>at</strong>eral security except<br />
hypothec<strong>at</strong>ion of loan assets <strong>and</strong> personal security is to be considered<br />
on paper, <strong>for</strong> loans other than schem<strong>at</strong>ic fmance, in practice the<br />
banks are sanctioning such loans only to those borrowers who<br />
borrowed some secured loans by pledging l<strong>and</strong> or gold or maintaining<br />
some term deposit in the bank. Hence, borrowers' opinion may look<br />
more logical to underst<strong>and</strong> this problem.<br />
Following are some of the important problems of the borrowers<br />
th<strong>at</strong> have been observed in the field area of Kalah<strong>and</strong>i district who<br />
had taken loans under allied agricultural activities. First, under this<br />
c<strong>at</strong>egory of loans, the bankers kept <strong>at</strong> least some amount out of<br />
subsidy given (in some cases the whole subsidy amount) in the <strong>for</strong>m of<br />
deposit in the bank against the concerned borrower. It implies th<strong>at</strong>, in<br />
the case of default, the deposit amount is adjusted <strong>at</strong> the time of<br />
repayment. Altern<strong>at</strong>ively, in the worst situ<strong>at</strong>ion, the bank can recover<br />
<strong>at</strong> least part of total dues from the deposit amount of the concerned
orrower. Thus, one can deduce th<strong>at</strong> under <strong>finance</strong> is a common<br />
fe<strong>at</strong>ure in the case of loans th<strong>at</strong> fall under the c<strong>at</strong>egory of allied<br />
agricultural activities. Second, banks in general release the loan in<br />
more than one instalment either in the <strong>for</strong>m of cash or kind or both.<br />
Under this circumstance, if there is no substantial utilis<strong>at</strong>ion of<br />
released amount, the bankers stop releasing the balance amount of<br />
loan <strong>for</strong> the concerned project. On the other h<strong>and</strong>, this unutilised<br />
amount may be deposited in the bank by opening a new account<br />
against the concerned borrower. Hence, in the light of the abovementioned<br />
point, one can assume th<strong>at</strong> bankers always take up both<br />
direct <strong>and</strong> or indirect <strong>for</strong>m of coll<strong>at</strong>eral from the borrowers who fall<br />
under the c<strong>at</strong>egory of other than schem<strong>at</strong>ic <strong>finance</strong>.<br />
Coming back to the selected bank branches of Narla block,<br />
Table 5.9 shows the loan given on the basis of l<strong>and</strong> <strong>and</strong> gold security<br />
accounted <strong>for</strong> about <strong>at</strong> least 70 per cent of the total outst<strong>and</strong>ing loans<br />
during the period 1996-97 to 2000-01. This indic<strong>at</strong>es th<strong>at</strong> the flow of<br />
agricultural credit is largely governed by the security th<strong>at</strong> the stock of<br />
capital (Le., assets like l<strong>and</strong> or gold) offers to the financial institutions<br />
advancing credit r<strong>at</strong>her than by the factors influencing the dem<strong>and</strong> <strong>for</strong><br />
credit. One can conclude, there<strong>for</strong>e, th<strong>at</strong> to some extent coll<strong>at</strong>eral<br />
based lending affects the flow of institutional credit to the <strong>agriculture</strong><br />
sector.<br />
Inter-Regional Differences in Priority Sector Lending <strong>and</strong><br />
Deposits<br />
Table 5.10 shows th<strong>at</strong> during the period 1996 to 2001, priority sector<br />
credit as a proportion of total bank deposits (PSCBD) had gone up<br />
from 64.64 per cent in 1996 to 116.7 per cent in 2001 in Jaip<strong>at</strong>na<br />
, ..
'4"<br />
block. Surprisingly, PSCBD has always been less than th<strong>at</strong> of 'priority<br />
sector credit as a proportion of bank credit (PSCBC) except <strong>for</strong> the<br />
year 2000-01. However, the reverse is true in the case of Narla block<br />
except <strong>for</strong> the years 1999-2000 <strong>and</strong> 2000-01. This indic<strong>at</strong>es th<strong>at</strong> the<br />
per<strong>for</strong>mance of selected bank branches of Narla block in terms of<br />
mobilis<strong>at</strong>ion of deposits on priority sector lending was much better<br />
during the period 1996-97 to 1998-99 r<strong>at</strong>her than the period 1999-<br />
2000 to 2000-01. Thus, as long as PSCBD is gre<strong>at</strong>er than PSCBC, one<br />
can suggest th<strong>at</strong> there is better per<strong>for</strong>mance by banks so far as the<br />
mobilis<strong>at</strong>ion of deposits under the service area of the bank is<br />
concerned. On the contrary, if PSCBD is less than PSCBC, it implies<br />
th<strong>at</strong> there is less credit flow to priority sector out of loanable funds<br />
<strong>for</strong> institutional credit, if PSCBD is less than PSCBC of a particular<br />
bank branch, then any initi<strong>at</strong>ive measures by the bankers <strong>for</strong> a<br />
positive movement of the first r<strong>at</strong>io can facilit<strong>at</strong>e more supply of credit<br />
in the service areas.<br />
.<br />
Table 5.10: Proportion of Priority Sector Lending to Total<br />
Credit <strong>and</strong> Total De )Oalts<br />
, Sample 1996-97 1997-98 1998-99 1999-2000<br />
PSC·<br />
SO<br />
I Banks psc· PSC· PSC· psc. psc· PSC· PSC·<br />
BC BD BC BD BC BD BC<br />
I Jaip<strong>at</strong>na<br />
Block<br />
[Narla<br />
Block<br />
89.47<br />
76.86<br />
64.64<br />
105.30<br />
88.24<br />
78.01<br />
66.17<br />
92.49<br />
87.72<br />
78.29<br />
85.55<br />
81.56<br />
94.47<br />
81.79<br />
Note. PSCBC - Pnonty Sector Credlt as Proportlon of Bank Credlt<br />
PSCBD· Priority Sector Credit as Proportion of Bank Deposits<br />
Source: Sample Bank Branches of Jaip<strong>at</strong>na <strong>and</strong> Narla Block<br />
86.85<br />
76.27<br />
2000-01<br />
PSC· PSC·<br />
BC<br />
so<br />
94.89 116.70<br />
86.04 72.35<br />
During the period 1996-97 to 2000-01, loans to <strong>agriculture</strong><br />
sector by banks as a proportion of total bank deposits have been<br />
invariably declined in both the regions except a marginal improvement<br />
in the last year, i.e., 2000-01. In the case of Jaip<strong>at</strong>na block,<br />
agricultural credit as proportion of bank deposits (AGLCBD) was lower
to AGLCBC (Agricultural Credit as Proportion of Bank Credit) <strong>for</strong><br />
almost all the referred years except <strong>for</strong> the year 2000-01 .<br />
Furthermore, the r<strong>at</strong>io AGLCBD perpetually declined from 30.94 per<br />
cent in 1996-97 to 23.15 per cent in 2000-01. It is, there<strong>for</strong>e, one can<br />
say th<strong>at</strong> the amount of credit going to <strong>agriculture</strong> sector out of total<br />
deposits from the sample bank branches of Jaip<strong>at</strong>na block was not<br />
encouraging. It seems banks were diverting their loanable funds to<br />
non-agricultural sector. This finding can be corrobor<strong>at</strong>ed with a<br />
substantial high growth r<strong>at</strong>e of credit flow to other priority sectors<br />
(excluding <strong>agriculture</strong>) in Jaip<strong>at</strong>na block (Table 5.5).<br />
In so far as Narla block is concerned, the r<strong>at</strong>io AGLCBD was<br />
more than AGLCBC <strong>for</strong> the years 1996-97 to 1998 99 (Table 5.11).<br />
However, the reverse trend could be observed <strong>for</strong> the remaining years<br />
starting from 1999-2000 to 2000-01. The r<strong>at</strong>io AGLCBD declined from<br />
67.01 per cent <strong>for</strong> the year 1996-97 to 39.38 per cent by 2000-0l.<br />
This indic<strong>at</strong>es th<strong>at</strong> although the volume of deposits in the bank was<br />
increasing, this had not induced any stimul<strong>at</strong>ion in the flow of<br />
agricultural credit.<br />
Table 5.11: Proportion of Lending to Agriculture from Total<br />
C re d· It an d TID ota epOSl ·t S<br />
isamPle 1996-97 1997-98 1998-99 1999-00 2000-01<br />
Banks AGLC AGLC AGLC AGLC AGLC AGLC AGLC AGLC AGLC AGLC<br />
BC BD BC BD BC BD BC BD BC BD<br />
': .Jalp<strong>at</strong>na<br />
. Biock 42.83 30.94 37.87 28.40 27.83 27.04 21.69 19.94 18.82 23.15<br />
\arla Block<br />
48.91 67.01 41.78 49.53 37.53 39.10 40.07 37.36 46.83 39.38<br />
\ote. AGLCBC- Agncultural Credlt as Proporhon of Bank Credlt<br />
AGLCBD· Agricultural Credit as Proportion of Bank Deposits<br />
Source: Sample Bank Branches of Jaip<strong>at</strong>na <strong>and</strong> Narla Block.<br />
The key findings emerging from an analysis of priority sector<br />
lending <strong>and</strong> deposits (see Graph 1) <strong>at</strong> the bank branch <strong>levels</strong> of both<br />
lhe blocks are the following:
• The credit given to priority sector as a proportion of total bank<br />
credit <strong>and</strong> deposits have been increasing in the advanced block.<br />
• The PSCBD r<strong>at</strong>io in the service area of sample bank branches in<br />
the backward Narla block have been declining <strong>for</strong> the last five<br />
years, <strong>and</strong> it is less than the PSCBD r<strong>at</strong>io of Jaip<strong>at</strong>na block since<br />
1998-99. This indic<strong>at</strong>es th<strong>at</strong> bankers are having better opportunity<br />
to mobilise their funds raised by deposits on priority sector in the<br />
advanced region. The poor infrastructure <strong>and</strong> lack of scope <strong>for</strong> nonfarm<br />
activities can be <strong>at</strong>tributed to the poor absorption capacity of<br />
credit by the potential borrowers in the case of backward regions<br />
like Narla.<br />
• A comparison of PSCBC r<strong>at</strong>io between the bank branches of both<br />
the regions further confirm the argument th<strong>at</strong> bankers are having<br />
more scope <strong>for</strong> priority sector lending in the advanced region.<br />
Graph 1: PSCBD <strong>and</strong> PSCBC in the Sample Bank Branches of<br />
Jaip<strong>at</strong>na <strong>and</strong> Narla Block<br />
~~~ [<br />
PSCBO <strong>and</strong> PSCBC in the sample banI< branches of Jaip<strong>at</strong>na <strong>and</strong> Narla<br />
.-_________ BIOCk<br />
._u________ .~<br />
..?<br />
'--,<br />
~-".~-~--!<br />
1:~r=_~<br />
- ~..;;....;.~r"'"---'':'~-~:<br />
~--<br />
~ 70 ...:::;:,.;;;;;;;;;;;;;;;;;;;.........-::--------------<br />
u 60 --,- ---- - ________, -\<br />
Ii;<br />
Cl. 50 1----------------------------<br />
40 \----------.---------------.<br />
30 I<br />
,<br />
201---------------------------,<br />
10<br />
o<br />
1<br />
L-______________________________________ _<br />
1997 1998 1999<br />
Year<br />
*<br />
2000 2001<br />
__ PSCBDJ ..... -- PSCBCJ -..-PSCBDN PSCBCN<br />
Note: PSCBDJ: Priority sector credit as proportion to total bank deposits in<br />
sam pie bank branches of Jaip<strong>at</strong>na block.<br />
PSCBCJ: Priority sector credit as proportion of bank credit in sample<br />
bank branches of Jaip<strong>at</strong>na block.<br />
PSCBDN: Priority sector credit as proportion to total bank deposits in<br />
sampl~ bank branches of :-;arla block.<br />
PSCBCJ: Priority sector credit as proportion of bank credit in sample<br />
bank branches of Narla block.<br />
I-IS
However, an increasing or decreasing proportion of credit flow to<br />
priority sector out of total bank credit or deposits will not necessarily<br />
be accompanied by an increasing or decreasing share of credit to<br />
<strong>agriculture</strong> sector. Our analysis suggests th<strong>at</strong> although more <strong>and</strong><br />
more proportion of total bank credit is disbursed to priority sector as a<br />
whole over a period of time, the share of <strong>agriculture</strong> sector from net<br />
bank credit has been declining in both the regions. A comparison of<br />
AGLCBD <strong>and</strong> AGLCBC r<strong>at</strong>ios between two regions (Graph 2) put the<br />
following observ<strong>at</strong>ions:<br />
• The AGLCBD r<strong>at</strong>io is declining in the service area of sample bank<br />
branches <strong>for</strong> both the blocks over a period of time. Surprisingly,<br />
the AGLCBD r<strong>at</strong>ios in the bank branches of backward block were<br />
more than th<strong>at</strong> _ _" of _____ thp Rriv~nrprl ___ . _____ hlnr-lr __ ~ ___ ..................... fnr thp ~nt-;T"""" ......... ~ .." ...... ""o pv~&U"'" .... ~"'~ ..... ->t..UlLlll5<br />
+ ..... - ~ ...... --<br />
from 1996-97 to 2000-01. It implies th<strong>at</strong> the banks in the<br />
backward region were mobilising a higher proportion of their<br />
deposits <strong>for</strong> agricultural lending compared to the banks in the<br />
advanced region. This supports our previOUS finding of higher<br />
growth r<strong>at</strong>e of agricultural credit in the backward region compared<br />
to the advanced one.<br />
• A higher AGLCBC r<strong>at</strong>io of backward blocks indic<strong>at</strong>es th<strong>at</strong> branches<br />
were showing their interest to disburse a higher proportion of net<br />
bank credit to <strong>agriculture</strong> sector compared to the advanced one.<br />
Given the risk on agricultural lending, there<strong>for</strong>e, th<strong>at</strong> the coll<strong>at</strong>eral<br />
based lending policies were more prominent in the service areas of<br />
banks in the backward regions (see Table 5.9).<br />
149
Graph 2: AGLCBD <strong>and</strong> AGLCBC in the Sample Bank Branches<br />
of Jaip<strong>at</strong>na <strong>and</strong> NarIa Block<br />
-c:<br />
CII<br />
0<br />
"- 30<br />
CII<br />
a..<br />
20<br />
10<br />
•<br />
...<br />
0<br />
1997 1998 1999 2000 2001<br />
Year<br />
-+-AGLCBDJ -4-AGLCBCJ --.--.AGLCBDN<br />
AGLCBCN<br />
Note: AGLCBDJ: Agricultural credit as proportion to bank credit in sample<br />
bank branches of Jaip<strong>at</strong>na block<br />
AGLCBC: Agricultural credit as proportion to total bank credit in<br />
sample bank branches of Jaip<strong>at</strong>na block<br />
AGLCBDN: Agricultural credit as proportion to bank credit in sample<br />
bank branches of NarJa block<br />
AGLCBN: Agricultural credit as proportion to total bank credit in<br />
sample bank branches of NarJa block<br />
Conclusions<br />
This chapter concentr<strong>at</strong>ed on an analysis of the impact of broadening<br />
the coverage of priority sectors on credit flow to <strong>agriculture</strong> <strong>at</strong> the<br />
bank branch level in developed <strong>and</strong> backward blocks in the selected<br />
district. The key findings are th<strong>at</strong> the share of priority sector from<br />
total bank advance had increased in both the regions, whereas the<br />
share of credit flow to <strong>agriculture</strong> had declined during the same<br />
period. Thus, the higher growth r<strong>at</strong>e of credit to priority sector as a<br />
whole was due to a higher growth r<strong>at</strong>e of credit disbursed to sectors 48<br />
" Activities covered under this sector include (i) Transport oper<strong>at</strong>ors, (ii) Retail trade<br />
<strong>and</strong> Small Business, (iii) Professional <strong>and</strong> Self Employed, (iv) Educ<strong>at</strong>ional Loans,<br />
(v) Housing Loans, (I) Consumption loans (g) Small Scale Industries, <strong>and</strong> (h)<br />
Miscellaneous activities (NABARD 2001-02).
other than the <strong>agriculture</strong> within the priority sector. It indic<strong>at</strong>es th<strong>at</strong><br />
the bankers were giving preference to non-agricultural activities. This<br />
was widespread phenomenon in the service area of banks in the<br />
advanced region.<br />
It is observed th<strong>at</strong> the quantum of supply of agricultural credit<br />
(in absolute figures) in the service area of selected bank branches in<br />
the advanced region was almost two times of credit disbursed to this<br />
sector in the backward regions <strong>for</strong> the last five years. However, a<br />
rel<strong>at</strong>ively gre<strong>at</strong>er share of credit to <strong>agriculture</strong> from total advances was<br />
observed in the backward block comparee! to the advanced one. Two<br />
Important indic<strong>at</strong>ors, viz., interest income on advance <strong>and</strong> type of<br />
security-wise supply of agricultural credit was adopted in the analysis<br />
to examine this. A comparison between the two regions on interest<br />
income on total advance <strong>and</strong> the proportion of credit going to <strong>agriculture</strong><br />
from the total amount of loan was found to be inversely rel<strong>at</strong>ed. In<br />
other words, <strong>for</strong> the bank branches where the proportion of total bank<br />
credit was found more <strong>for</strong> <strong>agriculture</strong> sector, their interest income was<br />
found to be less <strong>and</strong> vice-versa. It is also observed th<strong>at</strong> the flow of<br />
ugricultural credit was largely governed by the coll<strong>at</strong>eral security (l<strong>and</strong><br />
or gold) th<strong>at</strong> the stock of capital offers to the financial institutions<br />
odvancing credit r<strong>at</strong>her than by the factors influencing the dem<strong>and</strong> <strong>for</strong><br />
credit. Not surprisingly, more the proportion of total advance <strong>for</strong><br />
awicultural credit, more prominent was the <strong>for</strong>m of coll<strong>at</strong>eral based<br />
lending.<br />
Inter-regional disparities in the flow of credit to the priority<br />
"·ctor, in general, <strong>and</strong> <strong>agriculture</strong>, in particular, as a proportion of the<br />
t'll,\l deposit in the bank is a common phenomenon in the
institutional credit markets. Any analysis of inter-regional differences<br />
in priority sector lending from net bank credit (PSCBC) <strong>and</strong> deposits<br />
(PSCBD), in general, <strong>and</strong> agricultural lending to total bank credit<br />
(AGLCBC) <strong>and</strong> deposits (AGLCBD), in particular, were undertaken <strong>for</strong><br />
both the regions. In a region, where PSCBD was gre<strong>at</strong>er than PSCBC,<br />
it indic<strong>at</strong>es a better per<strong>for</strong>mance of banks in the mobilis<strong>at</strong>ion of<br />
deposits from the concerned service area <strong>for</strong> priority sector lending.<br />
On the contrary, if PSCBD was less than PSCBC, it implied th<strong>at</strong> there<br />
was less credit flow to priority sector out of loanable funds gener<strong>at</strong>ed<br />
in the <strong>for</strong>m of the bank deposits. Hence, given the positive dem<strong>and</strong> <strong>for</strong><br />
institutional credit, if PSCBD was less than PSCBC in a particular<br />
bank branch, then any initi<strong>at</strong>ive by the bankers to step up the first<br />
r<strong>at</strong>io would result in more supply of credit in the service area.<br />
There<strong>for</strong>e, one can suggest th<strong>at</strong> since the quantum of credit disbursed<br />
to the priority sector is calcul<strong>at</strong>ed as a percentage of net bank credit<br />
disbursed, this may not reflect the actual <strong>and</strong> complete picture <strong>for</strong> the<br />
region where PSCBD is less than the PSCBC. Further, if PSCBD is less<br />
than PSCBC, bankers may not be achieving the sectoral targets. Hence,<br />
specific target based on deposit should be made <strong>for</strong> the service area of<br />
c'ach bank.<br />
Based on the interest income on advance <strong>and</strong> the lenders'<br />
expect<strong>at</strong>ion of return on agricultural lending, <strong>and</strong> the policy of<br />
coll<strong>at</strong>eral based lending, it is observed th<strong>at</strong> these factors affected the<br />
C
Chapter 6<br />
VARIATIONS IN THE FLOW OF CREDIT TO FARM<br />
HOUSEHOLDS: A MICRO LEVEL ANALYSIS<br />
Introduction<br />
Poor access to institutional credit by peasant farmers In India (<strong>and</strong><br />
elsewhere) is one of the important fe<strong>at</strong>ur~s in the <strong>for</strong>mal credit<br />
market. The empirical studies show th<strong>at</strong> <strong>for</strong>mal credit is accessed<br />
more by the well to do among the rural people <strong>and</strong> have seldom<br />
benefited the poorer farmers (Rao 1975; Lipton 1976; Adams <strong>and</strong><br />
Vogel 1986). It has also been shown th<strong>at</strong> the distribution of <strong>for</strong>mal<br />
sector credit has been unequal with respect to region, class, <strong>and</strong> caste<br />
(Ramach<strong>and</strong>ran <strong>and</strong> Swamin<strong>at</strong>han 2001). Thus, despite ma.Jor<br />
structural changes in credit institutions in terms of outreach <strong>and</strong><br />
directed credit policy system, the poor access to institutional credit<br />
has been an outst<strong>and</strong>ing problem <strong>for</strong> the gre<strong>at</strong> majority of farm<br />
households. In this context, an <strong>at</strong>tempt has been made to examine the<br />
disparities in the flow of credit to different c<strong>at</strong>egories of farmers <strong>and</strong><br />
analyse the factors th<strong>at</strong> contribute to these disparities.<br />
Flow of credit can be examined from two different angles. First,<br />
now of credit viewed from the supply side can be said to depend upon<br />
the security offered <strong>and</strong> the lender's assessment as regards the<br />
[cpayment capacity of the borrower. However, from the borrower's<br />
perspective it is the borrowing capacity'9 th<strong>at</strong> influences the access to<br />
fr)rmal credit. This suggests th<strong>at</strong> the actual flow of credit depends on<br />
Capacity to take a loan refers to the household's capacity to meet the <strong>for</strong>mal<br />
selection criteria <strong>and</strong> banker's additional expect<strong>at</strong>ion on repa~'ment capacity. In<br />
order to win over the lender's confidence, the borrower must be in a pO::)ltion to<br />
s<strong>at</strong>isfy the lender with some coll<strong>at</strong>eral both tangible <strong>and</strong> Intangible.
the factors governing both the supply <strong>and</strong> dem<strong>and</strong> <strong>for</strong> credit. S1l1ce<br />
access to <strong>for</strong>mal credit is not common to all farmers, it is necessary to<br />
analyse the factors th<strong>at</strong> account <strong>for</strong> vari<strong>at</strong>ions in the supply of<br />
agricultural credit, Even if some farmers are accessing <strong>for</strong>mal credit, it<br />
may not be sufficient to meet their requirement. If the disbursed loan<br />
amount is largely influenced by the supply-side factors, a larger gap<br />
between the supply <strong>and</strong> dem<strong>and</strong> <strong>for</strong> credit is the likely possibility.<br />
Furthermore, the magnitude of this gap may vary across different size<br />
classes of l<strong>and</strong>holdings. The issue of credit-gap across the size of<br />
l<strong>and</strong>holdings has been taken up in Chapter-VII. In this chapter, an<br />
<strong>at</strong>tempt has been made to examine the factors th<strong>at</strong> account <strong>for</strong><br />
vari<strong>at</strong>ions in the flow of credit <strong>at</strong> the household level. It is to be noted<br />
th<strong>at</strong> the vari<strong>at</strong>ions in the flow of institutional credit is possible in tenns<br />
of both access <strong>and</strong> amount obtained. Thus, the analysis of these issues<br />
is essential to underst<strong>and</strong> the agrarian credit market in the study<br />
area.<br />
N<strong>at</strong>ure of Credit Dem<strong>and</strong> of Different C<strong>at</strong>egories of Farmers<br />
The n<strong>at</strong>ure of credit needed by different c<strong>at</strong>egories of farmers can be<br />
explained from the <strong>micro</strong> level analysis on the flow of credit to<br />
"griculture. Broadly, farm households can be grouped under four<br />
. lasses. The first sub-c<strong>at</strong>egory includes marginal farmers (owning less<br />
than 2.5 acres of l<strong>and</strong>), who belongs to the bottom range in terms of<br />
:ncome <strong>and</strong> asset holdings. They are partly involved in seasonal<br />
'~riculture<br />
:~om<br />
both as labourers <strong>and</strong> cultiv<strong>at</strong>ors. Since the subsistence<br />
tiny holdings is difficult, they are involved as labourers in non<br />
:.Irm activities like <strong>for</strong>estry, mining, construction, transport, <strong>and</strong><br />
)ttage <strong>and</strong> small-scale industries. Inadequ<strong>at</strong>e income of this c<strong>at</strong>e~or\"<br />
: farmers compels them to go <strong>for</strong> consumption credit during the slack
months. They also need credit to meet contingent consumption,<br />
working capital, <strong>and</strong> to purchase small productive assets, which are<br />
important in providing supplementary income. This sub-group obtains<br />
credit basically under poverty allevi<strong>at</strong>ion scheme.<br />
The second sub-c<strong>at</strong>egory (owning between 2.51 <strong>and</strong> 5 acres of<br />
l<strong>and</strong>) includes small farmer households. Although <strong>agriculture</strong> is the<br />
main source of their livelihood, they derive a part of their income from<br />
wage employment in farm <strong>and</strong> non-farm activities. Even if this<br />
c<strong>at</strong>egory of farm households occasionally faces shortfalls to meet their<br />
consumption expenditure (including contingent consumption), they<br />
need credit mainly to meet the working capital needs of their<br />
production activities. Nevertheless, they also require additional credit<br />
to acquire agricultural assets such as livestock, small tools <strong>and</strong><br />
machines, pump set, bore wells <strong>and</strong> so on. Farmers under this subc<strong>at</strong>egory<br />
meet their credit needs partly by hypothec<strong>at</strong>ion of loan assets<br />
<strong>and</strong> personal security, <strong>and</strong> partly by providing coll<strong>at</strong>eral security like<br />
l<strong>and</strong>, gold, etc.<br />
Generally, the third <strong>and</strong> fourth subc<strong>at</strong>egories of farmers Iviz.,<br />
;nedium (owning 5.01-10 acres of l<strong>and</strong>) <strong>and</strong> large size (owning more<br />
chan 10 acres of l<strong>and</strong>) farmersJ fall under the affluent section of farm<br />
households. They go <strong>for</strong> commercial production of crops given their<br />
('eonomic st<strong>at</strong>us. Along with farm activity they also engage themselves<br />
Jrl allied <strong>and</strong> non-farm activities like animal husb<strong>and</strong>ry, fishery, farm<strong>for</strong>estry,<br />
agro-processing, manufacturing, trading, re-Iending, etc.<br />
C;lven the economic st<strong>at</strong>us, these c<strong>at</strong>egories of farmers have a steady<br />
li
It can be inferred from the <strong>for</strong>egoing discussion th<strong>at</strong> credit is<br />
necessary (may be in different magnitudes) <strong>for</strong> almost all the<br />
c<strong>at</strong>egories of farmers to meet their requirements as well as <strong>for</strong> their<br />
future economic development. This study has adopted the<br />
str<strong>at</strong>ific<strong>at</strong>ion discussed above to analyse the credit flow to different<br />
c<strong>at</strong>egories of farm households from the <strong>for</strong>mal financial institutions.<br />
Since issues on agricultural term loan <strong>and</strong> allied to <strong>agriculture</strong> had<br />
been discussed in chapters 4th <strong>and</strong> 5 th , in this chapter focus has been<br />
given to the production credit (short-term loan) given by the banks to<br />
meet the working capital needs of different c<strong>at</strong>egories of farmers.<br />
Sources of D<strong>at</strong>a <strong>and</strong> Econometric Methodology<br />
D<strong>at</strong>a Base <strong>and</strong> the R<strong>at</strong>ionale of Sample Selection<br />
As has been noted, there is a tendency <strong>for</strong> <strong>for</strong>mal credit to flow<br />
towards agriculturally more developed regions <strong>and</strong> to rel<strong>at</strong>ively larger<br />
farmers, leaving the backward regions <strong>and</strong> small farmers to the<br />
in<strong>for</strong>mal market. Accordingly, d<strong>at</strong>a from the service area of four<br />
different bank branches <strong>for</strong> two such regions have been collected to<br />
analyse the p<strong>at</strong>terns in access to <strong>for</strong>mal credit. In the present studv,<br />
the level of technologySO used has been considered as a proxy variable<br />
to define the advanced <strong>and</strong> backward regions. Based on this indic<strong>at</strong>or,<br />
the blocks of the Kalah<strong>and</strong>i district have been c<strong>at</strong>egorised into two<br />
clifferent groups, the two blocks - Jaip<strong>at</strong>na (from the advanced group)<br />
;1nd Narla (from the backward group) - have been r<strong>and</strong>omly selected.<br />
()ne CB <strong>and</strong> one RRB have been r<strong>and</strong>omly chosen from each block.<br />
From the service area of each bank, on the basis of the number of<br />
borrowers in the last three years, the villages have been grouped.<br />
ConsumptlOn of fertiliser per acre of gross cropped area has been usccl as prox:,<br />
!or the level of technology usecl.
Among these groups, in turn, one village group has been picked <strong>at</strong><br />
r<strong>and</strong>om, <strong>and</strong> a sample of fifty borrower households (th<strong>at</strong> is, a farmer<br />
who has borrowed <strong>at</strong> least once during the period 1999-2002) has<br />
been r<strong>and</strong>omly selected. In order to avoid the problem of under or<br />
overrepresent<strong>at</strong>ion, each group of villages has been chosen on the<br />
basis of having approxim<strong>at</strong>ely the same popul<strong>at</strong>ion size. Since peasant<br />
farmers in the research area rarely get crop loans during the Rabi<br />
session, the analysis is restricted to the Kharif crop <strong>for</strong> the year 2001-<br />
02. The per acre paid-out cost of production <strong>for</strong> all c<strong>at</strong>egories of<br />
farmers has been calcul<strong>at</strong>ed in rel<strong>at</strong>ion to the existing technology, so<br />
as to ascertain the extent of production costs met by <strong>for</strong>mal <strong>and</strong><br />
in<strong>for</strong>mal credit sources.<br />
Econometric Methodology<br />
The use of probability models IS conceptually preferable to<br />
conventional linear regression models when the dependent variable is<br />
dichotomous, because parameter estim<strong>at</strong>es from the <strong>for</strong>mer overcome<br />
most weaknesses of linear probability models. In other words, they<br />
provide parameter estim<strong>at</strong>es, which are asymptotically consistent <strong>and</strong><br />
efficient. In this chapter, a Pro bit model has been employed to study<br />
rhe determinants of access to credit. The general model is a binary<br />
choice model involving estim<strong>at</strong>ion of the probability of access to credit<br />
Iy) as a function of a vector of explan<strong>at</strong>ory variable (x). It is assumed<br />
th<strong>at</strong> there is an underlying response variable y" defined by the<br />
regression rel<strong>at</strong>ionship<br />
• 13' }' = x +u<br />
, "<br />
(1)<br />
In practice, y'j is unobservable, wh<strong>at</strong> we observe is a dummy variable<br />
!f defined by<br />
y= 1 if y',>O (access to credit)<br />
=0 othen.vise (not access to credit) (2)
From the above rel<strong>at</strong>ions, we get<br />
Prob (Yi= access to credit) = Prob (u;>-fJ'x;)<br />
= l-F(-fJ'x,} (3)<br />
where F is the cumul<strong>at</strong>ive distribution function <strong>for</strong> u. In this case, the<br />
observed values of y are just realis<strong>at</strong>ions of a binomial process with<br />
probabilities given by equ<strong>at</strong>ion (3) <strong>and</strong> varying from trial to trail<br />
(depending on xil. Hence the likelihood function is<br />
L = IT F(-/I'x, )IT[I-F(-/I'x,)] (4)<br />
),.0 yR"1<br />
Taking the logarithm of L <strong>and</strong> maximising with respect to p, which<br />
gives the ML estim<strong>at</strong>or of slope coefficient.<br />
Sample Selection Bias<br />
Basically, determinants of credit equ<strong>at</strong>ions are estim<strong>at</strong>ed using a subsample<br />
of farmers who have access to credit. Although this may lead<br />
to sample selection bias, Heckman (1979) developed a joint maximum<br />
likelihood procedure to correct this. The procedure involves estim<strong>at</strong>ing<br />
both the probability of access to credit <strong>and</strong> amount of credit obtained<br />
simultaneously. Since this approach requires identific<strong>at</strong>ion of the<br />
credit equ<strong>at</strong>ion, actual size of l<strong>and</strong>holding has been used as the<br />
appropri<strong>at</strong>e variable. For example, peasant farmers who have access<br />
to credit, however, are not a r<strong>and</strong>omly selected sample of all farmers<br />
in the popul<strong>at</strong>ion. Heckman (1979) developed a solution (two-step<br />
procedure) to this problem, <strong>and</strong> this solution variable (Inverse Mills<br />
R<strong>at</strong>io (IMR)) will be added as an explan<strong>at</strong>ory variable in the credit<br />
function to tackle the problem of selectivity bias. To <strong>for</strong>malise the<br />
above explan<strong>at</strong>ion, let the equ<strong>at</strong>ion th<strong>at</strong> determines the sample<br />
selection be<br />
[' , - r 'Z,+u;
<strong>and</strong> let the equ<strong>at</strong>ion of primary interest (determinants of credit) be<br />
The sample selection rule is th<strong>at</strong> y is observed only when I is gre<strong>at</strong>er<br />
than zero. Suppose, as well th<strong>at</strong> E <strong>and</strong> u have a bivari<strong>at</strong>e normal<br />
distribution with zero mean <strong>and</strong> correl<strong>at</strong>ion p, then we may write the<br />
model as<br />
EfYi I Yi is observed] = EfYi I ri >OJ<br />
= E[Yi I Ui > -r ' ZJ<br />
= fJ'Xi + E[Ci I Uj >-r 'ZJ<br />
= fJ'Xi.+p Ue A.i (au)<br />
=fJ'Xi + fJ~A.j (au)<br />
Where ex .. y' Z; / au<br />
<strong>and</strong> l(a.)<br />
;(y'Z,Iu,)<br />
",(y' Z,I u.)<br />
1j II; > 0 = ElY,II; > 0] + v,<br />
.. fJ' Xi + fJ1A., (a,) + V,<br />
Analysing the determinants of credit using the Ordinary Least<br />
Squares regression <strong>for</strong> farmers who had access to credit produces<br />
inconsistent estim<strong>at</strong>es of ~. We can view this problem as omitted<br />
variable. So, least squares regression of y on x <strong>and</strong> A. would produce<br />
consistent estim<strong>at</strong>es, but if A. is omitted, the specific<strong>at</strong>ion error of an<br />
omitted variable is committed. Based on this observ<strong>at</strong>ion, Heckman<br />
proposes a two stage procedures. In the first stage, the discrete choice<br />
model is estim<strong>at</strong>ed by Probit on the entire sample. Using the<br />
estim<strong>at</strong>es, the lambda has been estim<strong>at</strong>ed <strong>and</strong> included in the second<br />
stage estim<strong>at</strong>es of the structural rel<strong>at</strong>ionship on the selected sample<br />
of non-censored observ<strong>at</strong>ions.
Emerging P<strong>at</strong>terns in Rural Credit Market<br />
Of the 200 sample farm households, 86 per cent of them depended on<br />
credit (th<strong>at</strong> is, from both <strong>for</strong>mal <strong>and</strong> in<strong>for</strong>mal sources) to undertake<br />
agricultural production. However, only 56 per cent of the cultiv<strong>at</strong>ing<br />
households borrowed from <strong>for</strong>mal credit institutions during the<br />
reference year (Table 6.1). But, this proportion varied across the<br />
l<strong>and</strong>holding c<strong>at</strong>egories from as low as 19.4 per cent in the case of<br />
marginal farmers to as high as 81 per cent in the case of medium <strong>and</strong><br />
large size farmers. This underlines the degree to which the proportion<br />
of households borrowing from <strong>for</strong>mal institutions rose in conjunction<br />
with an increase in the size of l<strong>and</strong>holding. Table 6.1 also shows the<br />
extent to which farmers also depended on the in<strong>for</strong>mal credit market.<br />
il shows a positive associ<strong>at</strong>ion between SIZe of l<strong>and</strong>holding <strong>and</strong> the<br />
proportion of households depending on in<strong>for</strong>mal sector except the<br />
large size farmers. Importantly, the proportion of <strong>for</strong>mal borrowers<br />
who had additionally taken out in<strong>for</strong>mal loans also increased with<br />
respect to size of l<strong>and</strong>holding, again with the exception of the large<br />
farm c<strong>at</strong>egory. Based on in<strong>for</strong>m<strong>at</strong>ion contained in Table 6.1, the<br />
following inference can be drawn:<br />
(1) the credit r<strong>at</strong>ioning favours larger farm households th<strong>at</strong> are<br />
economically sound <strong>and</strong> in turn the access to <strong>for</strong>mal credit; <strong>and</strong><br />
(2) even if farmers who are accessing credit from <strong>for</strong>mal sources, the<br />
amount obtained is inadequ<strong>at</strong>e <strong>for</strong> their requirement, necessit<strong>at</strong>ing<br />
to depend on in<strong>for</strong>mal sector.
Table 6.1: Distribution of Borrowers br Farm Size 12001-02)<br />
Farm Size in Acres)<br />
0.01- 2.51 - 5.00 5.01 - 10.01 <strong>and</strong> Total I<br />
2.50 (Small) 10.00 Above I<br />
(Mare:inal1 (Medium) (Large) i<br />
All Households" 67 (33. 5) 50125.0) 47 123. 51 36118 0) 20011001 •<br />
.<br />
All Borrowers 42 48 47 35 172<br />
% to Total (62.7) (96. 0) (100) (97.21 (86.01<br />
Households<br />
Formal Borrowers 13 32 38 29 112<br />
% to Total (19.4) (64.0) (80.9) (80.6) (56.0)<br />
Households<br />
In<strong>for</strong>mal Borrowers 36 38 43 22 139<br />
% to Total (52.9) (77.6) (91. 5) (61. 1) 169.51<br />
. households<br />
No. of Formal 8 21 34 16 79<br />
! Borrower taken<br />
! In<strong>for</strong>mal Loan (57. 1\' (67.7\" 189. 5\" 155. 2)' (70. 5)'<br />
Note: 1) The figures In parenthesIs In row (U) are percentages of farm households In<br />
each c<strong>at</strong>egory from the total sample of 200.<br />
2) The figures in parenthesis in each cell are the percentages of farm<br />
households from the respective group total.<br />
3) The figures in parenthesis as indic<strong>at</strong>ed by (.) represent the percentages of<br />
households borrowing from <strong>for</strong>mal institutions wh<strong>at</strong> have also taken<br />
in<strong>for</strong>mal loans with respect to the farm size c<strong>at</strong>egory. This gives us the per<br />
cent of <strong>for</strong>mal borrowers in each farm size c<strong>at</strong>egory depending on in<strong>for</strong>mal<br />
credit market.<br />
Source: Field Survey<br />
,<br />
:<br />
,<br />
I<br />
,<br />
,<br />
i<br />
Table 6.2 indic<strong>at</strong>es the vari<strong>at</strong>ion In the share of total<br />
institutional credit among different c<strong>at</strong>egories of farmers. In the case<br />
of marginal farmers, who constituted 33.5 per cent of the total sample<br />
of farm households, obtained 4.2 per cent of the total credit<br />
disbursed. The medium c<strong>at</strong>egory farmers, consisting of 23.5 per cent<br />
of the sample households, obtained 30.4 per cent of total <strong>for</strong>mal<br />
credit. It is interesting to note th<strong>at</strong> 47.2 per cent of the funds made<br />
available through <strong>for</strong>mal credit had gone to the large size farmers.<br />
This shows th<strong>at</strong> a small proportion of the total farmers in the sample<br />
vJllage accessed loans from financial institutions (only 56 %), <strong>and</strong><br />
among these a small group consisting of medium <strong>and</strong> large sIze
I<br />
I<br />
farmers engrossed a lion's share of the net volume of credit disbursed.<br />
The above evidence confinns th<strong>at</strong> in Kalah<strong>and</strong>i district - as elsewhere<br />
in India - institutional credit tended to gravit<strong>at</strong>e towards the better-off<br />
fanners. These findings are also corrobor<strong>at</strong>ed by some of the earlier<br />
studies [see Lele 1981; Gonzalez-Vega 1984; Adams <strong>and</strong> Vogel 1986;<br />
Braveman <strong>and</strong> Guasch 1986; Egger 1986; Sarap 1990; <strong>and</strong> Basu<br />
1997).<br />
Table 6.2: Distribution of Loan by Farm Size in the Year 2001-<br />
02<br />
(in per cent)<br />
Farm Size (in Acres)<br />
0.01 - 2.50 2.51 - 5. 00 ' 5.01 - 10.00 10.01 <strong>and</strong><br />
(Marginal, (Small' (Medium, Above<br />
ILarge)<br />
I Proportion of Formal Loans 45. 5 68. 6 55. 3 72.5<br />
I to Total Loan Borrowed<br />
Proportion of Formal Credit<br />
obtained by the Group to 4. 2 18. 2 30. 4 47. 2<br />
Total Formal Credit<br />
Source: F,eld survey<br />
Hence, the undeniable expansion of institutional lending in the<br />
rural areas has failed to reach the marginal <strong>and</strong> small farmers.<br />
Notwithst<strong>and</strong>ing the policy of lending r<strong>at</strong>e deregul<strong>at</strong>ion 51 , <strong>and</strong> the<br />
measures suggested by Gupta Committee 52 [1998) aimed <strong>at</strong> improving<br />
the quality of credit delivery system in rural areas, CBs have failed to<br />
cover marginal <strong>and</strong> small farmers, in general, <strong>and</strong> to increase the<br />
credit flow to <strong>agriculture</strong> sector, in particular. This, in turn, raises a<br />
" Since the interest r<strong>at</strong>e charged was unable to cover the cost of lending (i.e.,<br />
financial, transaction <strong>and</strong> risk costs), lending r<strong>at</strong>e of RRB was deregul<strong>at</strong>ed <strong>for</strong> all<br />
sizes of credit limit from August 1996. Prior to this, lending r<strong>at</strong>es of CBs were also<br />
deregul<strong>at</strong>ed <strong>for</strong> credit limit of over Rs. 2 lakhs since August 1994.<br />
S2 The Gupta Committee was set up in 1998 52 to look into the quality of credit<br />
delivered by the banking system, to identify the constraints faced by CBs in<br />
increasing the flow of credit, introduce new product <strong>and</strong> services, <strong>and</strong> simplify<br />
procedures to enable rural borrowers to access adequ<strong>at</strong>e <strong>and</strong> timely agricultural<br />
credit from CBs.
<strong>at</strong>her obvious question: why do some farm households have access to<br />
institutional credit while others do not? This issue has been discussed<br />
in the subsequent section.<br />
Table 6.3 shows th<strong>at</strong> out of 200 sample households, only 48<br />
farmers had access to <strong>for</strong>mal credit to grow kharif crops <strong>for</strong> three<br />
times during the last three years. Of the 48 farmers, almost 68.5 per<br />
cent belonged to medium <strong>and</strong> large c<strong>at</strong>egories, while the rest belonged<br />
to marginal <strong>and</strong> small farmer c<strong>at</strong>egories. In the case of access to credit<br />
<strong>for</strong> two times during the reference period also, the number of medium<br />
<strong>and</strong> large size farmers were rel<strong>at</strong>ively more as compared to small <strong>and</strong><br />
marginal farmers. However, the frequency of one time credit obtained<br />
was more in the l<strong>at</strong>ter group of farmers than the <strong>for</strong>mer one. As can<br />
be seen from Table 6.3, the frequency of accessing <strong>for</strong>mal credit by<br />
small <strong>and</strong> marginal farmer was rel<strong>at</strong>ively less than the big size<br />
farmers. The number of times credit obtained is positively associ<strong>at</strong>ed<br />
with the size of l<strong>and</strong> holding.<br />
Table 6.3: L<strong>and</strong>holding-wise Number of Times Crop Loans<br />
(Kharif) Obtained by Farmers <strong>for</strong> the Period 1999 - 2000 to<br />
2001- 2002<br />
(in per cent)<br />
Size or No. or Farmers 3 Time. 2 Time. 1 Time<br />
L<strong>and</strong>holding; in the GrouL<br />
Up to S.OO Acres 117 15 12 45<br />
J31.2) (37.5) (60.81<br />
5.01 Acres <strong>and</strong> 83 33 20 29<br />
Above (68.8) (62.5) (39.2)<br />
Total 200 48 32 74<br />
jl001 (1001 (100)<br />
Note: The figures In parentheSIS are In percentage tenns. Because of poor irrig<strong>at</strong>ion<br />
facility. fanners hardly grew the Rabi crop. Poor support of agricultural<br />
extension seIVices restricts the fanner to go <strong>for</strong> high yielding variety of cash<br />
crop. Thus. bankers hardly provide any loan during Rabi season.<br />
Source: Field Survey
Table 6.4 reveals th<strong>at</strong> the loan amount per acre of gross cropped<br />
area varied across size class of l<strong>and</strong>holdings within <strong>and</strong> across the<br />
regions. The farmers in the advanced region obtained, on an average,<br />
Rs.l,249 per acre of gross cropped area, whereas it was only RS.915<br />
in the backward region. Based on the in<strong>for</strong>m<strong>at</strong>ion from Tables 6.3 <strong>and</strong><br />
6.4, it can be argued th<strong>at</strong> there was vari<strong>at</strong>ion in terms of both access<br />
to credit as well as amount of credit obtained from institutional<br />
sources. The contributing factors <strong>for</strong> these vari<strong>at</strong>ions have been<br />
discussed in the subsequent sections.<br />
Table 6.4: Supply of Credit (Crop Loan) Per Hectare of Gross<br />
Cropped Area<br />
(in Rupees\<br />
Size ClaD or Advanced Backward<br />
L<strong>and</strong>holdin&& (in Acres) Region Region<br />
0.01- 2. 50 475 435<br />
2.51 - 5. 00 1 193 1,176<br />
5.01 - 10.00 1308 865<br />
lO.OI <strong>and</strong> Above 1347 927<br />
L All Classes 1,249 915<br />
Source: Field survey<br />
I<br />
Factors Affecting Access to Formal Credit<br />
Since credit transaction necessarily involves a time gap between a<br />
point when the advance is made <strong>and</strong> a future point when credit is<br />
repaid with interest, anything may happen in-between these two time<br />
points. Examined from the lender's viewpoint, the act of borrowing is<br />
one, which carries both pre-contractual (<strong>at</strong> the point prior to credit is<br />
given), <strong>and</strong> post-contractual problems (<strong>at</strong> the point when credit is<br />
repaid). The <strong>for</strong>mer difficulties take the <strong>for</strong>m of adverse selection (i.e.,<br />
the fear of selecting a bad borrower), creditworthiness <strong>and</strong> screening<br />
of the borrower. In the l<strong>at</strong>ter case, a lender faces the problem of wilful<br />
<strong>and</strong> non-wilful default. Given these problems, wh<strong>at</strong> governs access to<br />
institutional credit by some peasant households but not others?
It should be stressed th<strong>at</strong> access to credit is influenced both by<br />
the farmer's capacity to take a loan <strong>and</strong> the lender's willingness to<br />
extend it. This exchange usually involves a signalling <strong>and</strong> screening<br />
procedure in order to communic<strong>at</strong>e in<strong>for</strong>m<strong>at</strong>ion about the riskiness of<br />
the loan (Petrick <strong>and</strong> L<strong>at</strong>ruffe 2003). In this context, the farmers'<br />
access to institutional credit is estim<strong>at</strong>ed by using a Probit Model<br />
where the dependent variable Yj is a dichotomous (1, 0) variable<br />
indic<strong>at</strong>ing whether the i-th farm household has access to credit or not.<br />
So, the dummy dependent variable = 1, if the farm household had<br />
access to a loan from <strong>for</strong>mal sources, <strong>and</strong> = 0, otherwise.<br />
It is assumed th<strong>at</strong> the access to agricultural credit is<br />
determined by a number of farm <strong>and</strong> household characteristics. Since<br />
loans are advanced to farmers-who-borrow on the basis of l<strong>and</strong> they<br />
own, the l<strong>at</strong>ter functions as coll<strong>at</strong>eral from the lender's point of view.<br />
Hence, the actual size of l<strong>and</strong> holding can be taken as one of the<br />
important factors governing access to institutional credit. The l<strong>and</strong><br />
quality also improves the !ann household's prospect of obtaining loan.<br />
Better the quality of l<strong>and</strong>, more likely the prospect of a farm<br />
household's access to a loan. Apart from l<strong>and</strong>, other valuable assets -<br />
particularly agriculturaI implements, <strong>and</strong> the proportion of non-farm<br />
income to total income can be used as an indic<strong>at</strong>or to judge the<br />
creditworthiness of the borrower. Indeed, bankers may prefer a<br />
borrower who has income sources apart from an agricultural one so<br />
as to minimise wh<strong>at</strong> they see as the risk of non-repayment. These two<br />
variables are expected to positively influence the access to credit. An<br />
assured source of irrig<strong>at</strong>ion th<strong>at</strong> added to the reliability of crop<br />
production <strong>and</strong> yield is similarly perceived by banks in a positive light,<br />
<strong>and</strong> thus as a contributory factor to borrower credit-worthiness. Thus,
the percentage of irrig<strong>at</strong>ed area to gross cropped area is expected to be<br />
positively associ<strong>at</strong>ed with access to <strong>for</strong>mal credit. Another issue is th<strong>at</strong><br />
the credit-disbursing officials may discrimin<strong>at</strong>e against lower caste<br />
<strong>and</strong> tribal households because they have fewer outside connections<br />
<strong>and</strong> higher caste decision-makers dominant in the credit institutions.<br />
Accordingly, the caste variable is expected to be neg<strong>at</strong>ively correl<strong>at</strong>ed<br />
with access to <strong>for</strong>mal credit facility. Conversely, <strong>for</strong>mal educ<strong>at</strong>ion may<br />
have a positive influence on access to credit. The definition <strong>and</strong><br />
descriptive st<strong>at</strong>istics of the variables used in the analysis are provided<br />
in Table 6.5.<br />
Table 6.5: Definition, Measurement, Descriptive St<strong>at</strong>istics,<br />
<strong>and</strong> EXl»ected Sign of Variables Used in the Probit Equ<strong>at</strong>ion<br />
All Farmers ~ar,,::~n~~& ! Medium &<br />
Variable Description Expeeted I:tmau :'lZe Large Size<br />
Sip<br />
Farmers farmers<br />
Mean Mean Mean<br />
Dep. Var Access to Credit -1; 0, 0.560 0.385 0.81<br />
• otherwise 10.50) (0.49) (0.40)<br />
ASLH Actual size of l<strong>and</strong>holding (in + ve 6.25 2.47 II. 58<br />
I LANDQ<br />
Acre~ (6.20) (I. 56) ~6. 3B)<br />
L<strong>and</strong> quality + ve 0.505 0.28 0.82<br />
- 1, <strong>for</strong> good l<strong>and</strong> quality • (0.50) (0.45) (0.39)<br />
- 0 otherwise<br />
IASSET Value of assets excluding + ye 1,547. 18 2,450.68 33,813.31<br />
l<strong>and</strong> (in Rupees) (47,362. 02) (3,260.52J J69,651.3~<br />
IEOFA Income excluding own farm + ve 35.64 47.79 lB. 50<br />
activity as proportion to total (32.11) (33. 17) (20.95)<br />
family income (in Rupeesl<br />
PIAGCA Percentage of irrig<strong>at</strong>ed area to + ye 22.92 16. 17 32.44<br />
~oss cr~d area 136.29L J32. I~ 139.70)<br />
CASTE Caste st<strong>at</strong>us - ye 0.38 0.49 O. 22<br />
-1 ,if the borrower belong to (0.49) (0. 50) (0.41)<br />
SC or ST<br />
= 0, otherwise<br />
EDU Educ<strong>at</strong>ional quaIific<strong>at</strong>ion of<br />
I the borrower + ye 0.21 0.08 0.40<br />
I<br />
- 1, <strong>for</strong> 10'" or more st<strong>and</strong>ard (0. 41) (0.27) (0.49)<br />
- 0, otherwise<br />
, Number of Observ<strong>at</strong>ions 200 117 B3<br />
~ote. 11) • L<strong>and</strong> particulars were collected from each <strong>and</strong> every farmer 10 terms a f a rea ( in<br />
Acres) under low, medium <strong>and</strong> high in the survey. It IS found th<strong>at</strong> the high l<strong>and</strong><br />
was completely rain fed <strong>and</strong> the probability of crop failure was more. In the case of<br />
low l<strong>and</strong> the possibility of crop failure was minimal. Under this assumption,. If the<br />
area under low l<strong>and</strong> was covering <strong>at</strong> least one third of total l<strong>and</strong> owned, It was<br />
considered as farmer having good quality l<strong>and</strong>.<br />
(2) Figures in parentheses indic<strong>at</strong>e St<strong>and</strong>ard Devi<strong>at</strong>ion.
Table 6.6: Access to Formal Credit: Pro bit Results<br />
IDummy Dependent Variable = I, if the farm household has access to credit: = O.<br />
Otherwisel<br />
r Variables All Farmers Marginal <strong>and</strong> Small Medium <strong>and</strong> Large<br />
I<br />
Size Farmers<br />
Size Farmers<br />
I Coefficient Marginal Coefficient<br />
1 Marginal Coefficient Marginal . i<br />
Effect Effect ._ Effect.J<br />
I Constant 0.33221' 0.19000 -0.0026 - 0.00091 - 0.08633 - 0.00056 \<br />
i<br />
12.12) 1- 0.01) (- 0 16)<br />
-<br />
! ASLH -0.03491 - 0.01149 0.1593 0.05544 - 0.06629 - 0.00043<br />
I 1- 0.92) (1.35\ . (-I. 5S\ i<br />
: LANDQ 0.75417' 0.24510 0.3192" I O. III 051 1.51138" 0.00981-<br />
(3.0S)<br />
11.98) i<br />
13.391 •<br />
ASSET 0.00005" 0.00001 0.00002'" 1 0000006 0.00007S'" j 0.00000 I<br />
(1.97) 11.671 \ 11.731 i<br />
: IEOFA -0.02IS8' - 0.00724 - 0.0257' - 0.00895 - 0.00304 I - 0.00002<br />
\ (-5.19) (- 3.93) (-1.62)<br />
PIAGCA 0.00321' 0.00105 O. 0062'" 0.00214 0.00381 0.00002<br />
.12.05) ( 1.67) {1.61)<br />
i CASTE - 0.10025 - 0.03323 0.0873 0.03036 - 0.40360'" - 0.00262<br />
,<br />
_(- 0.77) {0.29) {-I.S2)<br />
I EDU 0.32436*** n 'An"l " CI
The result shows th<strong>at</strong> ASLH is neg<strong>at</strong>ive but not significant. This<br />
IS contradictory to the earlier findings th<strong>at</strong> larger the size of l<strong>and</strong><br />
owned by the household, gre<strong>at</strong>er is the probability of its access to the<br />
<strong>for</strong>mal sector (Kochar 1997 <strong>and</strong> Swain 2002). The neg<strong>at</strong>ive sign in our<br />
study might be <strong>at</strong>tributed to uncertainty of crop income owing to poor<br />
infrastructure facility in the study area. Importantly, the quality of<br />
l<strong>and</strong> (LANDQ) has a positive <strong>and</strong> significant effect on the access to<br />
<strong>for</strong>mal credit. It is quite interesting to note th<strong>at</strong> the marginal effect of<br />
l<strong>and</strong> quality increases the likelihood of access to credit by about 24<br />
per cent. This implies th<strong>at</strong> it is not the size of l<strong>and</strong>holding but the<br />
quality of l<strong>and</strong>, which m<strong>at</strong>ters <strong>for</strong> the bankers in the selection of a<br />
borrower, <strong>and</strong> in tum, increases the probability of farmers to access<br />
institutional credit. This variable behaves in the similar direction <strong>for</strong><br />
different sub-groups of farm households.<br />
On the issue of non-l<strong>and</strong> resources, the coefficient of ASSET is<br />
positive <strong>and</strong> significant <strong>at</strong> 5 per cent level, which implies th<strong>at</strong> larger<br />
the value of asset excluding l<strong>and</strong>, higher the probability of access to<br />
<strong>for</strong>mal credit. Ceteris Paribus, if the farmer is well equipped bv<br />
agricultural implements, there is a possibility of getting more income<br />
from farm activity, which, in tum, provides an indic<strong>at</strong>ion of his (or<br />
her) credit worthiness as a borrower. From this it is possible to infer<br />
th<strong>at</strong> peasant farmers who dispose of less valuable non-l<strong>and</strong> assets may<br />
have a correspondingly poor access to institutional credit. A farmer who<br />
is having higher non-farm income as a proportion to total income is<br />
less likely to have access to credit. This is evident from the fact th<strong>at</strong><br />
IEOFA coefficient is neg<strong>at</strong>ive <strong>and</strong> highly significant. This result<br />
indic<strong>at</strong>es th<strong>at</strong> farmers with non-agricultural income may use it to<br />
meet their working capital requirements, <strong>and</strong> thus have no need to
approach a bank <strong>for</strong> a crop loan. Altern<strong>at</strong>ively, a bank may quite<br />
simply not have adequ<strong>at</strong>e in<strong>for</strong>m<strong>at</strong>ion about the sources <strong>and</strong> amount<br />
of non-farm income to judge the creditworthiness of the borrower. This<br />
suggests th<strong>at</strong> bankers prefer tangible coll<strong>at</strong>eral (like l<strong>and</strong>, quality of<br />
l<strong>and</strong> or other assets) to select the borrower.<br />
A better irrig<strong>at</strong>ion facility also improves the farm household's<br />
prospects of obtaining a loan from the banks. This explan<strong>at</strong>ion is<br />
confirmed by the positive <strong>and</strong> highly significant coefficient of PIAGCA.<br />
However, the coefficient of this variable is positive but not significant<br />
<strong>at</strong> the conventional level of significance <strong>for</strong> medium <strong>and</strong> large size<br />
farmers. As expected, scheduled caste <strong>and</strong> scheduled tribe farmers are<br />
less likely to access <strong>for</strong>mal credit whereas this coefficient is<br />
surprisingly not significant except <strong>for</strong> the group of medium <strong>and</strong> large<br />
size farmers. However, educ<strong>at</strong>ion increases the probability of access<br />
to credit, i.e., higher the <strong>for</strong>mal educ<strong>at</strong>ion, higher is the probability of<br />
access to credit (this coefficient is being positive <strong>and</strong> significant <strong>at</strong> a<br />
10 per cent level). In this context, it can be argued th<strong>at</strong> educ<strong>at</strong>ional<br />
<strong>at</strong>tainment gives better in<strong>for</strong>m<strong>at</strong>ion regarding the available banking<br />
facilities, <strong>and</strong> empowers the ability of farmers to approach a bank <strong>for</strong><br />
loan53. Nevertheless, this coefficient is neg<strong>at</strong>ive <strong>and</strong> not significant <strong>for</strong><br />
medium <strong>and</strong> large size farmers.<br />
Generally speaking, the results are quite in line with theoretical<br />
expect<strong>at</strong>ions <strong>and</strong> draw a plausible picture of the p<strong>at</strong>tern of farm<br />
household's credit access in Kalah<strong>and</strong>i district. The highly significant<br />
chi-square <strong>and</strong> Pseudo R-square (33 per cent) clearly shows th<strong>at</strong> the<br />
51 It is evident from the marginal effect th<strong>at</strong> a one per cent increase in educ<strong>at</strong>ional<br />
<strong>at</strong>tainment increases the likelihood of access to credit by some 10 per cent.
estim<strong>at</strong>ed model is having good fit. The model points to a high degree<br />
of r<strong>at</strong>ioning by the <strong>for</strong>mal sector. Evalu<strong>at</strong>ing the probability of access<br />
<strong>at</strong> the mean <strong>levels</strong> of the explan<strong>at</strong>ory variables, 74 per cent of the<br />
households, belonging to all the c<strong>at</strong>egories are credit r<strong>at</strong>ioned by the<br />
<strong>for</strong>mal sector 54 .<br />
Determinants of Supply of Agricultural Credit<br />
Directed agricultural credit system assumes th<strong>at</strong> all farm households<br />
would have a positive dem<strong>and</strong> <strong>for</strong> <strong>for</strong>mal credit <strong>and</strong> it is a cheaper<br />
source <strong>for</strong> borrowing. It is further assumed th<strong>at</strong> both revealed <strong>and</strong><br />
potential dem<strong>and</strong> <strong>for</strong> credit far exceeds the supply. On the basis of<br />
this assumption, many countries <strong>and</strong> financial institutions rely on<br />
supply-led approach to extend their credit facility. Irrespective of this<br />
approach, most theoretical <strong>and</strong> empirical studies argue th<strong>at</strong> dem<strong>and</strong><br />
far outweighs the supply of credit. This leads to a situ<strong>at</strong>ion where<br />
banks are compelled to adopt wide scale credit r<strong>at</strong>ioning.<br />
Credit r<strong>at</strong>ioning exists in two <strong>for</strong>ms, VIZ., price <strong>and</strong> non-price<br />
credit r<strong>at</strong>ioning. In the <strong>for</strong>mer case, the borrower is denied access to<br />
institutional credit regardless of whether or not he or she has fulfilled<br />
the stipul<strong>at</strong>ed terms <strong>and</strong> conditions. In the l<strong>at</strong>ter case, the farmer is<br />
able to borrow, but not as much as he or she wants or needs. The first<br />
type of credit r<strong>at</strong>ioning explains about vari<strong>at</strong>ions in the access to<br />
credit, i.e., wh<strong>at</strong> makes some farm households to access <strong>for</strong>mal credit<br />
<strong>and</strong> others not. The second type explains on vari<strong>at</strong>ions in the amount<br />
of credit flow from the <strong>for</strong>mal sector. Altern<strong>at</strong>ively, on wh<strong>at</strong> basis<br />
bankers determine the credit limit to the borrower? In our previous<br />
i; Based on similar assumptions as adopted in our model. Kochar (1997). <strong>and</strong> Swain<br />
12002) find th<strong>at</strong> 81 per cent <strong>and</strong> 71 per cent of the households in the respective<br />
studies were subject to credit r<strong>at</strong>ioning by the <strong>for</strong>mal sector.
model on access to credit (Probit Model), it was found th<strong>at</strong> the farm<br />
<strong>and</strong> household characteristics like quality of l<strong>and</strong>, value of non-l<strong>and</strong><br />
assets, the proportion of non-farm income, percentage of irrig<strong>at</strong>ed area<br />
to gross cropped area, <strong>and</strong> educ<strong>at</strong>ional qualific<strong>at</strong>ion of the borrower<br />
were the determining factors <strong>for</strong> accessing the <strong>for</strong>mal credit facility.<br />
The second model (OLS) in our household's level analysis<br />
specifies the factors th<strong>at</strong> determine the amount of credit given to the<br />
farmer borrower by the <strong>for</strong>mal sector. As was discussed, analysing<br />
the determinants of credit in terms of farmers who have received this<br />
is not a r<strong>and</strong>om selection of all the farmers in the popul<strong>at</strong>ion. Such a<br />
phenomenon leads to sample selection bias. In order to correct this<br />
problem of selectivity bias, Heckman two-step procedures have been<br />
used. In the first step, the Inverse Mills R<strong>at</strong>io (A) has been calcul<strong>at</strong>ed<br />
from the above Probit equ<strong>at</strong>ion, <strong>and</strong> in the second step this has been<br />
introduced as an additional explan<strong>at</strong>ory variable in the determinants<br />
of credit equ<strong>at</strong>ion. If the (/') variable is significant, the resultant<br />
equ<strong>at</strong>ion is unbiased (Heckman 1979). The second model, which deals<br />
with the amount of institutional credit lent, is set out in Table 6.7.<br />
The fact of credit flow - once access has been gained - can be<br />
looked <strong>at</strong> from two distinct viewpoints. From the supply side, the<br />
amount lent depends on the security offered <strong>and</strong> an assessment about<br />
the repayment capacity of the borrower. As noted, l<strong>and</strong> is an indic<strong>at</strong>or<br />
of the degree of security involved in the transaction, not least because<br />
in the eyes of a lender the higher the area under cultiv<strong>at</strong>ion the more<br />
likely it is th<strong>at</strong> the peasant farmer will gener<strong>at</strong>e sufficient output to<br />
repay the loan without difficulty. Given the self-<strong>finance</strong> capacity, the
oper<strong>at</strong>ed area 55 should be positively rel<strong>at</strong>ed to the dem<strong>and</strong> <strong>for</strong> credit,<br />
so the production surplus 56 can approxim<strong>at</strong>e most closely a capacity<br />
to repay. Because of the difficulty in calcul<strong>at</strong>ing the production<br />
surplus, the value of output by a farm household has been used to<br />
indic<strong>at</strong>e its creditworthiness. On the dem<strong>and</strong> side, the percentage of<br />
irrig<strong>at</strong>ed area to gross cropped area, expenditure on fertiliser <strong>and</strong><br />
pesticides, <strong>and</strong> the educ<strong>at</strong>ional qualific<strong>at</strong>ion of the borrower can all be<br />
expected to have a positive associ<strong>at</strong>ion with the flow of credit. Caste<br />
<strong>and</strong> the r<strong>at</strong>io of workers to family members, income excluding own<br />
farm activity can also influence the dem<strong>and</strong> <strong>for</strong> credit.<br />
Accordingly, it can be argued th<strong>at</strong> the actual flow of credit<br />
depends not only upon the factors governing the supply of credit but<br />
also on the factors influencing the dem<strong>and</strong> <strong>for</strong> it. Between different<br />
farm size-groups, disparities in the flow of credit can, there<strong>for</strong>e, be<br />
viewed in terms of the rel<strong>at</strong>ive strength of dem<strong>and</strong> <strong>and</strong> supply factors.<br />
In the financial situ<strong>at</strong>ion characterised by the absence of credit<br />
r<strong>at</strong>ioning, the factors influencing the dem<strong>and</strong> <strong>for</strong> credit will obviously<br />
determine the quantum of credit supply. But in the financial system,<br />
where credit r<strong>at</strong>ioning (either price or non-price) exists, the factors<br />
55 Oper<strong>at</strong>ed area = L<strong>and</strong> owned + Leased in - Leased out. In the case of a financial<br />
system where <strong>for</strong>mal creditors insist on coll<strong>at</strong>eral (ownership rights of the l<strong>and</strong>),<br />
the credit extended to the farmer can assume to be neg<strong>at</strong>ively influenced under<br />
the tenancy system. Given the poor irrig<strong>at</strong>ion facility <strong>and</strong> uncertainty of crops,<br />
share tenancy contract oper<strong>at</strong>es in the study area. In this type of contract. the<br />
gross output is divided equally between the l<strong>and</strong>lord <strong>and</strong> tenant after deduction<br />
of cost of production. Generally, the l<strong>and</strong>owner only bears the cost of production<br />
<strong>and</strong> l<strong>at</strong>er, he takes it out in terms of output from total production. In this type of<br />
tenancy system the tenant only invests his labour <strong>for</strong>ce <strong>and</strong> not responsible <strong>for</strong><br />
all aspects of cultiv<strong>at</strong>ion. In our total sample, we had 15 cases like this. To avoid<br />
double counting we have not included the area under share tenancy in the<br />
oper<strong>at</strong>ed area of the tenant farmer.<br />
56 It can be defined as the difference between total income from production <strong>and</strong><br />
expenses incurred by the farm.
influencing the dem<strong>and</strong> <strong>for</strong> credit cannot be considered as ultim<strong>at</strong>e<br />
determinants of its supply. It is, there<strong>for</strong>e, necessary to investig<strong>at</strong>e<br />
whether the dem<strong>and</strong> or supply side factors account <strong>for</strong> the flow of<br />
credit, a question addressed in Table 6.7.<br />
Table 6.7: Definition, Measurement, Descriptive St<strong>at</strong>istics <strong>and</strong><br />
Expected Sign of Variables used in the OLS Equ<strong>at</strong>ion<br />
All Marginal I Medium<br />
Farmers <strong>and</strong> Small <strong>and</strong> Large<br />
Expected<br />
Variable Description Size Size<br />
,<br />
Sign<br />
Farmers Farmer~<br />
Mean Mean Mean i<br />
, Dep. Amount of Credit given 11,653.17 6,497 15,116 I<br />
I Var. * to the farmers (in (10,972.91) (4,166.62) (12,673.89) I<br />
Rupees) I<br />
I<br />
: PIAGCA Percentage of irrig<strong>at</strong>ed + ve 31.68<br />
34.6,<br />
272~ I<br />
, area to gross cropped (38.81) (36.50) (40.27) !<br />
area<br />
CASTE Caste st<strong>at</strong>us - ve 0.28 0040 0.19 '<br />
= I, if the borrower (0.45) (0049) (0.401 •<br />
belongs to SC or ST<br />
i ,<br />
= 0, otherwise ,<br />
,EDU Educ<strong>at</strong>ional + ve 0.29 0.11 0.40'<br />
qualific<strong>at</strong>ion of the (0.45) (0.32) (0.49)<br />
borrower<br />
= 1, <strong>for</strong> lOth <strong>and</strong> or<br />
above<br />
= 0, otherwise I<br />
'INEOFA Income excluding own + ve 17,789.54 7,696 24.5691<br />
farm activity (in Rupees) (31,660.67) (15,912.02) (37,343.80) .<br />
WFM Workers to family - ve 0.43 0.49 0.39.<br />
members (r<strong>at</strong>io) (0.17) (0.18) (0.15)<br />
- 01\ Oper<strong>at</strong>ed areas (in + ve 8.02 3.88 10.81<br />
Acres) (6.65) (1.74) (7.26) 1<br />
c<br />
i<br />
:EXPFP Expenditure on fertiliser + ve 7,188.20 3,211 9,859<br />
I <strong>and</strong> pesticides (in (7,432.64) (2,268.92) (8,453.03<br />
L Rupees)<br />
,VAO Value of farm output + ve 43,947.21 16,767 62.202 I<br />
, produced in the year (43,309.81 ) (11,696.71) (47.132.37) i<br />
. (in Rupees)<br />
I~IR Inverse Mills R<strong>at</strong>io (I,) 0.4594 0.6411 0.2339 '<br />
~\umber of Observ<strong>at</strong>ions 112 45 67<br />
\ote: Figures m parenthesIs mdlc<strong>at</strong>e St<strong>and</strong>ard DeVi<strong>at</strong>IOn<br />
-
As we expected, most of the parameters have the expected sign<br />
<strong>and</strong> are significant (Table 6.8). The coefficient of PIAGCA is positive<br />
<strong>and</strong> highly significant, which implies th<strong>at</strong> a unit (one per cent)<br />
increases in proportion of irrig<strong>at</strong>ed area to gross cropped area, OIl an<br />
average, leads to an increase of 47.55 rupees (0.1292 per cent) in the<br />
amount of credit (<strong>for</strong> the entire sample). This variable also behaves in<br />
similar direction to marginal <strong>and</strong> small, <strong>and</strong> medium <strong>and</strong> large group<br />
of farmers. This is true <strong>and</strong> in con<strong>for</strong>mity with earlier studies th<strong>at</strong><br />
irrig<strong>at</strong>ion facility is an important factor to determine the amount of<br />
credit disbursed by the <strong>for</strong>mal lender. Non-Scheduled Caste <strong>and</strong><br />
Scheduled Tribe farmers enjoy more credit compared to Scheduled<br />
Caste <strong>and</strong> Scheduled Tribe (SC/ST) farmers. This reflects in the<br />
neg<strong>at</strong>ive <strong>and</strong> slgmticant coefficient of the variable CASTE. The positive<br />
<strong>and</strong> significant coefficient of human capital variable (EDU) clearly<br />
shows th<strong>at</strong> the farmers who has possessed a 10th st<strong>and</strong>ard level of<br />
educ<strong>at</strong>ion <strong>and</strong> above have obtained more credit compared to their less<br />
educ<strong>at</strong>ed counterparts.<br />
Not surprising is the link between expenditure on fertiliser <strong>and</strong><br />
pesticides, on the one h<strong>and</strong>, <strong>and</strong> the lender provision <strong>for</strong> more credit,<br />
on the other. Fieldwork in Kalah<strong>and</strong>i district confirms th<strong>at</strong> the per<br />
acre expenditure by large <strong>and</strong> medium sized farmers on these inputs<br />
was very high. This, in turn, not only raised agricultural productivity<br />
but also enhanced their creditworthiness. Each one per cent increase<br />
in EXPFP lead, on an average, to a 0.5329 per cent increase in the<br />
amount of credit (<strong>for</strong> the total sample).
Table 6.8: Determinants of Formal Credit: Selectivity<br />
Corrected OLS Result<br />
(Dependent Variable = Amount of Credit given to Farmers (in Rupees))<br />
c----.. ----.<br />
Coefficients<br />
- - ---- -----<br />
-- 1<br />
- --- .<br />
Variables All Farmers Marginal <strong>and</strong> Small . Medium <strong>and</strong> Large<br />
i<br />
Size Farmers I Size Farmers ,<br />
--- - c;-;I<br />
! Constant 1.844.540 3.578. 14 '" ) 683.31.<br />
,<br />
(0.701 (1. 80) (0. IILl<br />
PIAGCA 47. 548 ' O. 22 *** 74. 15' .<br />
(2.631 -
176<br />
per cent. The neg<strong>at</strong>ive <strong>and</strong> significant coefficient of OA <strong>for</strong> marginal<br />
<strong>and</strong> small farmers indic<strong>at</strong>es th<strong>at</strong> even if OA increased, it lead to less<br />
supply of credit. This can be explained by the fact th<strong>at</strong> the OA of most<br />
of the small <strong>and</strong> marginal farmers included l<strong>and</strong> leased in also. In the<br />
case of the financial system, where <strong>for</strong>mal creditors insisted on<br />
coll<strong>at</strong>eral (ownership rights of l<strong>and</strong>), credit extended to the farmer<br />
would, there<strong>for</strong>e, be neg<strong>at</strong>ively influenced under the tenancy system S7 .<br />
The coefficient of worker to household members (WFM) was positive<br />
<strong>and</strong> significant <strong>for</strong> marginal <strong>and</strong> small farmers. This indic<strong>at</strong>es th<strong>at</strong><br />
increase in WFM could lead to the supply of more credit. Bankers<br />
might have perceived th<strong>at</strong> the increase in the number of working<br />
members could provide more income through wage or any other<br />
economic activity (either farm or non-farm). Probably, this might<br />
enhance their creditworthiness. This argument can also be supported<br />
by the positive <strong>and</strong> significant coefficient of INEOFA <strong>for</strong> marginal <strong>and</strong><br />
small farmers.<br />
The result shows th<strong>at</strong> the Inverse Mills R<strong>at</strong>io (A) was positive<br />
(neg<strong>at</strong>ive <strong>for</strong> marginal <strong>and</strong> small farmers) <strong>and</strong> significant <strong>and</strong> the<br />
resultant equ<strong>at</strong>ion was unbiased. The R-square values were 0.69, 0.71<br />
<strong>and</strong> 0.66 <strong>for</strong> the estim<strong>at</strong>ed equ<strong>at</strong>ion of all sample farmers, marginal<br />
<strong>and</strong> small, <strong>and</strong> <strong>for</strong> medium <strong>and</strong> large size, respectively. This shows<br />
th<strong>at</strong> 69 per cent, 71 per cent, <strong>and</strong> 66 per cent of the vari<strong>at</strong>ions in the<br />
amount of credit obtained by all farmers, marginal <strong>and</strong> small, <strong>and</strong><br />
medium <strong>and</strong> large farmers, respectively have been explained by the<br />
included variables in these models. Further, the whole significance of<br />
" Out of 45 marginal <strong>and</strong> small farmers who had obtained loan from the <strong>for</strong>mal<br />
banking system, 42 per cent of them were cultiv<strong>at</strong>ing through fixed tenancy<br />
system.
the model was also highly significant <strong>at</strong> 1 per cent level, which<br />
rejected the hypothesis th<strong>at</strong> all the slope parameters are zero.<br />
Table 6.9: Determinants of Formal Credit: Tobit Results<br />
(Dependent Variable = Amount of Credit given to the Farmers (in RupeesJ]<br />
All Farmers Marginal <strong>and</strong> Small Medium <strong>and</strong> Large<br />
Variables Size Farmers Size Farmers<br />
Coefficient Marginal Coefficient Marginal Coefficient Marginal<br />
Effect Effect Effect<br />
Constant - 1,305.28 - 816.78 -5,319.94 -2,312.98 1,048.86 904.74<br />
PIAGCA 68.63' 42.94 25.14 ... 10.93 79.99 .. 69.00<br />
(3.40) (I.61l (2.25\<br />
CASTE -3,874.82" -2,424.67 -1,110.96 ,.. -483.02 - 6,936.21 ' -<br />
1- 2.50\ (-1.66) (-2.40) 5,983.17<br />
EDU 2,341.17 1,464.98 1,370.24 , •• 595.74 1,743.42 ,., 1,503.87<br />
(1.25\ (1.781 (1.64)<br />
INEOFA -0.001 - 0.007 -0.02 -001 0.01 0.01<br />
(- 0.04) (·0.641 (0.33)<br />
WFM -5,819.59 -3,641.60 1,359.97 , •• 591.28 - 4,891.05 -4,219.02<br />
1- 1.381 '1.84~ f- O.62i<br />
lOA 15.53 9.72 -327.73 -142.49 - 90.03 -77.66<br />
,<br />
(0.05) (-0. 63) (- 0.22\<br />
IEXPFP 0.87 • 0.55 2.16 • 0.94 0.75 ., 0.65<br />
12.99\ (4.321 (2.01)<br />
iVAO 0.062'" 0.04 0.13 ." 0.05 0.06 *** 0.05<br />
(1.61) /1.73) (1.83)<br />
'Sigma 8,659.41' 4,335.96 • 10,052.59 •<br />
,<br />
(14.28) (8.68) 111.13)<br />
, Log· -1,224.72 - 470.52 - 727.80<br />
I likelihood<br />
. R - squared 0.63 0.65 0.62<br />
I. Number of 200 117 83<br />
observ<strong>at</strong>ions<br />
Note: 1) FIgures In parentheses mdlc<strong>at</strong>e (-values<br />
2) '1% level significance; "5% level significance, '''10 % level<br />
3) Marginal Effect - Partial deriv<strong>at</strong>ive of expected value with respect to vector of<br />
characteristics. They are computed <strong>at</strong> the means of the explan<strong>at</strong>ory<br />
variables.<br />
The ordinary least square regression is inappropri<strong>at</strong>e when the<br />
dependent variable is discontinuous (Pindyck <strong>and</strong> Rubinfield 1997).<br />
Logit <strong>and</strong> Pro bit models are appropri<strong>at</strong>e when the dependent variable<br />
is discrete, usually taking two values, 0 or 1. These models are useful<br />
if the question is whether or not farmers have access to credit, but are<br />
mappropri<strong>at</strong>e when it is important to measure the amount of credit<br />
177
obtained. The Tobit Model h<strong>and</strong>les censored dependent variables<br />
(continuous between some lower <strong>and</strong> possibly upper bound) better<br />
<strong>and</strong>, hence, is superior to Logit <strong>and</strong> Probit (Pindyck <strong>and</strong> Rubinfield<br />
1997). The Tobit model has been, there<strong>for</strong>e, used <strong>and</strong> the results are<br />
presented in Table 6.9. The sign <strong>and</strong> significance level of the<br />
coefficients are almost the same as those discussed in the OLS model,<br />
except in the case of coefficients of lNEOFA <strong>and</strong> OA. The educ<strong>at</strong>ion<br />
variable is significant in OLS <strong>for</strong> all the three cases, whereas in Tobit<br />
equ<strong>at</strong>ion it is significant only in the case of marginal <strong>and</strong> small, <strong>and</strong><br />
<strong>for</strong> the group of medium <strong>and</strong> large size farmers. The Tobit results<br />
again confirm th<strong>at</strong> PIAGCA, VA~, EXPFP, CASTE are important<br />
variables in determining the amount of credit obtained. Further, the<br />
co-efficient of Sigma is highly significant <strong>at</strong> 1 per cent level, which<br />
confirms th<strong>at</strong> the results are unbiased.<br />
Conclusions<br />
The p<strong>at</strong>tern of <strong>for</strong>mal credit flow <strong>at</strong> farm <strong>levels</strong> shows th<strong>at</strong> the credit<br />
r<strong>at</strong>ioning goes in favour of large farm households, <strong>and</strong> the obtained<br />
amount is inadequ<strong>at</strong>e to meet their production expenditure <strong>for</strong> most of<br />
the farmer borrowers who had obtained credit. Since there is<br />
inadequ<strong>at</strong>e availability of <strong>for</strong>mal credit, the farmers tend to depend<br />
more on in<strong>for</strong>mal sector. It is clear th<strong>at</strong> fonnal lenders are not in a<br />
position to replace infonnal lenders to provide credit to agricultural<br />
borrowers, even with a widespread network of fonnal financial<br />
institutions, <strong>and</strong> the suggested measures by Gupta Committee aiming<br />
<strong>at</strong> improved quality of credit delivery system.<br />
The results on the determinants of access to <strong>for</strong>mal credit<br />
suggest th<strong>at</strong> several factors were inhibiting agricultural borrowers <strong>and</strong><br />
178
especially the marginal <strong>and</strong> small farmers from obtaining production<br />
credit, despite the presence of number of <strong>for</strong>mal credit institutions in<br />
the study area. Apparently, the mere existence of <strong>for</strong>mal credit<br />
institutions does not guarantee th<strong>at</strong> marginal <strong>and</strong> small farmers will<br />
benefit from them s8 . Thus, mere loc<strong>at</strong>ion of a bank branch in a village<br />
without restructuring its management to make it more broad-based<br />
with proper represent<strong>at</strong>ion of agricultural borrowers belonging to<br />
either lower castes or illiter<strong>at</strong>e or both (as noted by Sen, 1975;<br />
Gh<strong>at</strong>ak, 1977, 1983; Sarap, 1990) is not enough to ensure effective<br />
access of <strong>for</strong>mal credit to the rural borrowers.<br />
The farm, <strong>and</strong> household characteristics such as quality of l<strong>and</strong>,<br />
value of assets excludmg l<strong>and</strong>, irrig<strong>at</strong>ed area, <strong>and</strong> educ<strong>at</strong>ional<br />
qualific<strong>at</strong>ion of the borrower determined the access to <strong>for</strong>mal credit. It<br />
is quite interesting to note th<strong>at</strong> the quality of l<strong>and</strong> <strong>and</strong> value of output<br />
are found to be significant in determining the access to <strong>for</strong>mal credit<br />
<strong>and</strong> the amount obtained respectively, r<strong>at</strong>her than the size of<br />
l<strong>and</strong>holding. It seems th<strong>at</strong> bankers are giving preference to the safer<br />
borrower <strong>and</strong> leaving marginal <strong>and</strong> small farmers to the unorganised<br />
credit market. The above determinants of access to credit indic<strong>at</strong>e the<br />
creditworthiness of the agricultural borrowers. Thus, it is the bankers'<br />
assessment on the creditworthiness th<strong>at</strong> decides whether or not a<br />
farm household should have access to credit:. The factors like area<br />
under irrig<strong>at</strong>ion, value of agricultural output, expenditure on inputs<br />
(fertiliser <strong>and</strong> pesticides), caste <strong>and</strong> educ<strong>at</strong>ional qualific<strong>at</strong>ion of the<br />
borrower are the important variables th<strong>at</strong> determine the amount of<br />
credit obtained. On the whole, one can argue th<strong>at</strong> the asset-based<br />
" This finding also corrobor<strong>at</strong>es with Sarap's study in 1990. where field<br />
investig<strong>at</strong>ion was conducted during the year 1981-2 in six villages of Sambalpur<br />
district of Orissa st<strong>at</strong>e in India.<br />
179
lending policies coupled with the bankers' assessments on<br />
creditworthiness determines both access to credit <strong>and</strong> amount of<br />
credit obtained by the farmer borrowers.<br />
The estim<strong>at</strong>es also suggest a rel<strong>at</strong>ively high dem<strong>and</strong> <strong>for</strong> credit<br />
with fairly widespread credit r<strong>at</strong>ioning in Kalah<strong>and</strong>i district. This<br />
requires further development of credit programmes to support the<br />
credit requirement of different c<strong>at</strong>egories of farmers, <strong>and</strong> especially<br />
those belonging to marginal <strong>and</strong> small farmer c<strong>at</strong>egories.<br />
In the econometric specific<strong>at</strong>ion, we assume th<strong>at</strong> <strong>for</strong>mal<br />
borrowing is determined by bank decision on access to credit <strong>and</strong> has<br />
been estim<strong>at</strong>ed by using univari<strong>at</strong>e pro bit model. However, one can<br />
also generalise (a) where the probability of borrowing from the <strong>for</strong>mal<br />
sector is jointly determined by the bank decision on access as well as<br />
the farm household's dem<strong>and</strong> <strong>for</strong> loans, <strong>and</strong> (b) where the households<br />
may have zero dem<strong>and</strong> <strong>for</strong> <strong>for</strong>mal credit <strong>and</strong> they are free to choose<br />
between in<strong>for</strong>mal <strong>and</strong> <strong>for</strong>mal sector. This generalis<strong>at</strong>ion can be<br />
estim<strong>at</strong>ed using bivari<strong>at</strong>e Probit <strong>and</strong> Multinomial Legit model.<br />
Clearly, there is a need <strong>for</strong> further research <strong>and</strong> subsequent <strong>at</strong>tempts<br />
in this direction, which will hopefully allow us to explore these<br />
al tern<strong>at</strong>ives, in detail.
Chapter 7<br />
CREDIT DELIVERY SYSTEM, CREDIT-GAP AND COPING<br />
STRATEGY OF AGRICULTURAL BORROWERS<br />
Introduction<br />
An analysis of the determinants of access to <strong>for</strong>mal credit in our<br />
previous chapter showed th<strong>at</strong> several factors were inhibiting<br />
agricultural borrowers, in general, <strong>and</strong> marginal <strong>and</strong> small farmers, in<br />
particular, from obtaining production credit. The poor quality of l<strong>and</strong>,<br />
illiteracy <strong>and</strong> lower caste st<strong>at</strong>us had an adverse effect on the access of<br />
agricultural borrowers to <strong>for</strong>mal credit institutions. It is also found<br />
th<strong>at</strong> small proportions of the total number of farmers in rural areas<br />
were accessing credit from financial institutions, <strong>and</strong> out of th<strong>at</strong> a<br />
small group grabbed a large share of the net volume of credit<br />
disbursed. Importantly, the credit r<strong>at</strong>ioning goes in favour of large<br />
farmers. It is also reported by most of the farmers from the study area<br />
th<strong>at</strong> the amount obtained as loan was inadequ<strong>at</strong>e to meet their<br />
production costs. Furthermore, some of the farmer borrowers st<strong>at</strong>ed<br />
th<strong>at</strong> they had one or other problems while obtaining credit from<br />
<strong>for</strong>mal financial institutions. Some of these problems also contributed<br />
to the higher transaction costs <strong>and</strong> delay in the disbursement of<br />
credit.<br />
In this context, one can raise the following questions. Who are<br />
these agricultural borrowers who face problems in accessing <strong>for</strong>mal<br />
credit facility? Are these problems the same across various size of<br />
l<strong>and</strong>holdings? Which class of farmers face higher transaction costs<br />
while obtaining <strong>for</strong>mal loans? Since the obtained loan amount from<br />
<strong>for</strong>mal sources is inadequ<strong>at</strong>e, wh<strong>at</strong> is the magnitude of the credit-gap<br />
181
among farm households? Given the self-<strong>finance</strong> capacity, wh<strong>at</strong> is the<br />
coping str<strong>at</strong>egy of the farmers to meet their cost of cultiv<strong>at</strong>ion? To<br />
answer these questions both qualit<strong>at</strong>ive <strong>and</strong> quantit<strong>at</strong>ive d<strong>at</strong>a were<br />
collected from 200 r<strong>and</strong>omly selected borrowers from the service area<br />
of four different bank branches59.<br />
Credit Delivery System<br />
It is argued th<strong>at</strong> the disturbing trends in the rural credit delivery<br />
system can be <strong>at</strong>tributed to the poor quality of lending (Rajasekhar<br />
<strong>and</strong> Vyasulu 1990). The supply-led approach with poor quality of<br />
lending failed to provide the credit requirement of agricultural<br />
borrowers, on the one h<strong>and</strong>, <strong>and</strong> made agricultural lending<br />
un _ .• D.rn.fi.1t:::!h.1p, .. _ ___ _
Table 7.1 shows th<strong>at</strong> a majority of the borrowers had one or<br />
more problems on the credit delivery system. Such problems could be<br />
grouped broadly under two c<strong>at</strong>egories, viz., during <strong>and</strong> after obtaining<br />
loans. Problems in obtaining loans included complic<strong>at</strong>ed procedures,<br />
lack of previous experience, distant loc<strong>at</strong>ion of the bank, <strong>and</strong> bribe. As<br />
many as 56.5 per cent of the agricultural borrowers st<strong>at</strong>ed th<strong>at</strong> the<br />
bank procedures were complex. They faced serious problems in<br />
getting No Dues Certific<strong>at</strong>e (NDC) from the local financial institution.<br />
This seemed to be a widespread problem in the area where Cooper<strong>at</strong>ives,<br />
RRBs <strong>and</strong> Commercial Banks were working. As per the<br />
recommend<strong>at</strong>ion, importance should have been given to the credit<br />
st<strong>at</strong>us of the borrower r<strong>at</strong>her than to no dues certific<strong>at</strong>e, but still the<br />
borrowers were required to submit NDC while taking loans. The<br />
imposition of this requirement took more time <strong>and</strong> also posed problem<br />
to few borrowers. In spite of rapid expansion of the bank branches,<br />
since most of the borrowers (56 per cent) did not have previous<br />
experience of borrowing from the <strong>for</strong>mal sector, it aggrav<strong>at</strong>ed the<br />
situ<strong>at</strong>ion. Some of the borrowers especially those who wanted loan <strong>for</strong><br />
the purpose of allied activities st<strong>at</strong>ed th<strong>at</strong> the bank officials were<br />
indifferent to them. A general view among the borrowers of this kind<br />
was th<strong>at</strong> "unless one bribes the bank officials" they would not sanction<br />
the loan. Based on the in<strong>for</strong>m<strong>at</strong>ion, it is found th<strong>at</strong> 24 per cent of the<br />
borrowers gave bribe to the bank officials to get the loan. On the<br />
whole, most of them felt th<strong>at</strong> "it is better to obtain a loan from<br />
moneylender than to approach the bank 61 ".<br />
" Rajasekhar <strong>and</strong> Vyasulu (1990) also found a similar problem in their study 111 Pali<br />
district of Rajasthan.
Table 7.1: Problems Faced by the Farmer Borrowers in<br />
Obtaining Loans<br />
~ ~~~ _~ .. Proi>f~II1s-~-__ Y'es-lPe~cent= lio=-~Percel1t-:-::TotaJ ,<br />
I_~"~ .--~ -~-. Be<strong>for</strong>e Obtllinin.KLoan (~ i<br />
Coml'lic~te.dProcedure 113[ 56:-5'_87 -=-_43:--5:~- 2QO<br />
No P~e\lious_Experience 11~_~~_Q..~88 4±o.O ___ 200<br />
.[)i~tant Loc<strong>at</strong>ion of the Bankl 961 48. 01 1041 52.0 2001<br />
]Bribe ~ 4t3\._~4~1 152;76.01'-- 200\<br />
I=:-:-::-:-:--;~_~ __ ~A",f",te",r"--O~btaining!-oan lB.,.),---c-c_~_~<br />
[nac:l"8.ua.'-ite-,:,:Loc::an=~_~_--jI~--",-1~39",i,--~6~9;O-"c'5;:.;i~-:-.6;!-:1~i~_30. ~_. __ ~_200<br />
~IU~n~t~im~e~1~y~Lo~a~n~~ ____ ~I_,--9~8~\_~4~9~.~O~i~~1~0~2~1_~~51.0~_200J<br />
Source: Field Survey<br />
The agricultural borrowers also st<strong>at</strong>ed th<strong>at</strong>, the loan amounts<br />
were inadequ<strong>at</strong>e <strong>and</strong> untimely. About 69.5 per cent of the agricultural<br />
borrower out of the total sample felt th<strong>at</strong> the disbursed loan amount<br />
was inadequ<strong>at</strong>e <strong>and</strong> 49 per cent were of the view th<strong>at</strong> it was not<br />
available <strong>at</strong> the needed hour.<br />
Based on these findings one of the important questions th<strong>at</strong><br />
could be asked was who were these agricultural borrowers who faced<br />
problems in accessing <strong>for</strong>mal credit facility? Table 7.2 explains th<strong>at</strong><br />
these problems were uneven across different size of l<strong>and</strong>holdings.<br />
Importantly, most of these problems were rel<strong>at</strong>ed to marginal <strong>and</strong><br />
small farmers. Out of total sample about 80 per cent of the farmer<br />
borrowers, who belonged to marginal <strong>and</strong> small c<strong>at</strong>egories found th<strong>at</strong><br />
the <strong>for</strong>mal banking system was complic<strong>at</strong>ed. These c<strong>at</strong>egories of<br />
borrowers also narr<strong>at</strong>ed their poor experience with the institutional<br />
credit system. This indic<strong>at</strong>es how far our banking system is good<br />
enough in covering these borrowers. Bribing to the bank officials<br />
seems to be a widespread problem in the case of marginal c<strong>at</strong>egory<br />
farmers. A general feeling among the borrowers was th<strong>at</strong> « bribing is<br />
tile only means to obtain a loan <strong>for</strong> allied agricultural activities under<br />
the subsidy <strong>and</strong> or poverty allevi<strong>at</strong>ion schemes". The evidence shows
th<strong>at</strong> the creditworthiness, viability of the proposal, <strong>and</strong> the amount of<br />
cash disbursed were positively rel<strong>at</strong>ed with the amount of bribe, while<br />
the time taken to get the loan sanctioned was neg<strong>at</strong>ively rel<strong>at</strong>ed62.<br />
Table 7.2: Size Class of L<strong>and</strong>holding-wise Frequency<br />
Distribution of Problems Faced by the Farmer Borrowers<br />
~-T 0.01=-2:5012.51:5.00 -5:01-10_00 10_01 acres·<br />
Problems I Acr~s I Acres I Acres ,<strong>and</strong> Above. Total<br />
i-_________ -LtMarglll.o!lJ... JSmallJ _--' l.Med.iuml.....:.--..JLargeJ __'__ ___ .<br />
Be<strong>for</strong>e Obtaining Loan<br />
",C",o"m=plli",ca"-:t",eo-d=Pr-'.o"-,c""e"-d""u...,re,---+-----,,5,,,9...l(,,,!52,.,.-'".2i":4--'3,,,1,--(:\2~",-i~ 16 ! 14jf-7-(6:2j 113 (fOOL<br />
~I N"'o~P.!.r~ev"i~ou"'s~E~xp""'e""r-'.;'ie=:'::n":.ce~-+-----"5'-'c7--'!~!50~.~9J.!.1111....:3"-'.1 (27.7). 19 (17.QL__ 5...14 5Lil 2 (1"00)<br />
Distant Loc<strong>at</strong>ion of the 31 (32.3)1 31 (32.3)'1 23 (24.0) II (11.5) 96 (100)<br />
@ank i 1<br />
~B"",ri",b",-e _______..L-....:4,,,"--,2(But._3 (6~ 2""'(4"'"".2L ::-J._-=---_-----cl;-~c .:n: -'-::48(100)<br />
~~~~~~~----,-~Aft~e~r~O~b~ta~in~i~n~L~o~a~n~~~~_,~~~~ ___ _<br />
'lnade u<strong>at</strong>e Loan 41 29.5 34 24.5): 4l.i29.~ ___ 2:3.(16.~.139 (100)<br />
Untimely Loan 58 59.2: 19 19.4 16 16.3), 5~,ll_98(!OOl<br />
Note: Figures in pAre.nthe.~i~Lare_percentages of f3rm hou~ehold~ in each c<strong>at</strong>egory<br />
who have faced problems in obtaining agricultural loans.<br />
Source: Field Survey<br />
Bribing takes place in many <strong>for</strong>ms starting from the project<br />
initi<strong>at</strong>ion to sanction_ Even in the case of no direct bribing, the<br />
bankers manipul<strong>at</strong>e while buying the loan assets_ Hence, the above<br />
practice contradicts the recommend<strong>at</strong>ion made by the Gupta<br />
committee, which has preferred distribution of loan amount in cash.<br />
In this aspect, two important dimensions were derived from the<br />
discussion with the bankers <strong>and</strong> beneficiaries in the field areas. The<br />
"' Chaudhuri (1993) has gone into an indirect analysis of the effects of bribing on<br />
the delay in the disbursement of <strong>for</strong>mal credit. In a sample of 75 farmers from the<br />
two villages, 57 per cent of the fanners emphasised th<strong>at</strong> the delay in getting<br />
<strong>for</strong>mal credit could be reduced by increasing the bribe <strong>and</strong> the remaining 43 per<br />
cent did not respond. However, he mentioned th<strong>at</strong> a st<strong>at</strong>istical correl<strong>at</strong>ion<br />
analysis between the delay <strong>and</strong> the bribing r<strong>at</strong>e could not be done because the<br />
d<strong>at</strong>a on the l<strong>at</strong>ter could not be obtained from all the agricultural borrowers who<br />
had given bribe.<br />
There is empirical evidence <strong>for</strong> the delay in disbursing <strong>for</strong>mal credit. The dela)' is<br />
controlled by an official of the <strong>for</strong>mal credit agency, <strong>and</strong> it can be reduced by the<br />
farmer bribing the official (Chaudhuri <strong>and</strong> Gupta, 1996). In their theoretical<br />
model they found th<strong>at</strong>, in eqUilibrium. the official either would not take a bribe or<br />
would choose a bribing r<strong>at</strong>e such th<strong>at</strong> the effective interest r<strong>at</strong>e on <strong>for</strong>mal credit<br />
(incorpor<strong>at</strong>ing the bribe) would be equal to the interest r<strong>at</strong>e on in<strong>for</strong>mal credit.
ankers were of the view th<strong>at</strong> the probability of misuse of loans by the<br />
beneficiary was more in the case, where loans were disbursed in cash.<br />
They also argued th<strong>at</strong> in the case of misuse of loans, bank looses<br />
partially or completely the hypothec<strong>at</strong>ed loan asset th<strong>at</strong> work as<br />
coll<strong>at</strong>eral <strong>for</strong> the bank till the loan was repaid. However, the borrowers<br />
argued th<strong>at</strong> the kind components lead to distortion since their choice<br />
was restricted. In most of the cases, the bankers got the loan asset<br />
without considering the quality, <strong>and</strong> technical viability of the project<br />
with the given environment. The beneficiaries were of the opinion th<strong>at</strong><br />
this kind of problem was prominent in the case of small business,<br />
diary-firm, go<strong>at</strong> rearing, sheep rearing <strong>and</strong> so on. In this process, in<br />
order to disburse the loan amount in terms of cash, both the bank<br />
officials <strong>and</strong> beneficiaries got into bargaining. Bargaining between the<br />
lender <strong>and</strong> borrower brought the joint product called "bribe" by<br />
neglecting the very objective of the scheme <strong>and</strong> the concerned project.<br />
Th<strong>at</strong> obtaining a loan was a complic<strong>at</strong>ed <strong>and</strong> lengthy process<br />
was also evident from Table 7.3. About 60 per cent of the loans took<br />
more than two to eight months to get sanctioned in the case of<br />
marginal farmers 63 . It is observed th<strong>at</strong> the time taken <strong>for</strong> obtaining<br />
<strong>for</strong>mal short-term loan was inversely rel<strong>at</strong>ed to the size of l<strong>and</strong>holding.<br />
This finding also collabor<strong>at</strong>ed with the earlier study made by<br />
Rajasekhar <strong>and</strong> Vyasulu (1990). There is empirical evidence of delay<br />
in disbursing <strong>for</strong>mal credit. Sarap (1990) has found th<strong>at</strong> small <strong>and</strong><br />
marginal farmers also face substantial delay in getting <strong>for</strong>mal (shortterm)<br />
credit. The empirical analysis of Chaudhuri (1993), in the case<br />
of two selected villages of West Bengal pointed out th<strong>at</strong> farmers with<br />
OJ<br />
Around 80 per cent of these loans were <strong>for</strong> aUied agricultural activities. The<br />
disbursement ofiong term loans is more time consuming (see, George et aI1985).
less than 1.5 acres of l<strong>and</strong>holdings had to wait <strong>for</strong> nearly eight weeks<br />
to get loans from the d<strong>at</strong>e of applic<strong>at</strong>ion. This problem has also been<br />
observed by Bedbak (1986) who made a survey of a village of Sonepur<br />
subdivision of Orissa.<br />
Table 7.3: Time ~ent to get the Loan Sanctioned<br />
-- S~eClassof the --c Numb~_ ~r::.Da'y,! _ ~.en_tlo (iet .the LEan_Sanctioned _<br />
L<strong>and</strong>holdings (in Acres), 0 - 15. 15 - 30 30 - 60 , 60 <strong>and</strong> Above Total Farmers<br />
r~~~ Y~~I-~:I ~:~---6H+:::'--:g[ ~~b}<br />
5.01-10.00 42.6, 51. I, 4.3 .1.o..l.. __ }Oo.. (47)<br />
10.01 <strong>and</strong> Above 63. 9; 30. 6, 2.~ 2.81----__ 100.. [361.<br />
,All Classes 29. 51 4l. 5\ 6 . .Qt.. ___ 2LQ' __ 100 J200)<br />
Note: Figures in parentheses indic<strong>at</strong>e the number of farmers.<br />
Source: Field Survey<br />
The other important aspect of the <strong>for</strong>mal credit delivery system<br />
was lh<strong>at</strong> the obtained ioan amounts were inadequ<strong>at</strong>e. We have<br />
obtained in<strong>for</strong>m<strong>at</strong>ion on amount dem<strong>and</strong>ed <strong>and</strong> the amount<br />
sanctioned (short-term loans). The shortage of <strong>for</strong>mal credit was<br />
assumed to be the differential amount between loan dem<strong>and</strong>ed <strong>and</strong><br />
sanctioned. The distribution of loans on the basis of percentage of<br />
amount shortage 64 to amount sanctioned is presented in Table 7.4. It<br />
is observed th<strong>at</strong> the amount sanctioned was less than the amount<br />
dem<strong>and</strong>ed in the case of a majority of the farmers. However, only 44.8<br />
per cent of the large size farmers obtained the loan amount of wh<strong>at</strong><br />
they had asked <strong>for</strong>. In the case of other c<strong>at</strong>egories of farmers the<br />
amount sanctioned was well short of amount required. This suggests<br />
th<strong>at</strong> irrespective of the l<strong>and</strong>holdings, the sanctioned loan amounts<br />
were generally inadequ<strong>at</strong>e in the study area. It is also corrobor<strong>at</strong>ed<br />
with the finding of Table 7.1 wherein as many as 69.5 per cent of the<br />
"' The shortage amount is a proxy <strong>for</strong> the inadequ<strong>at</strong>e availability of <strong>for</strong>mal credit,<br />
<strong>and</strong> may not be tre<strong>at</strong>ed as the credit-gap. This is due to the fact th<strong>at</strong> the<br />
calcul<strong>at</strong>ion of credit-gap may not represent the shortage amount without<br />
considering his cost of production <strong>and</strong> self-<strong>finance</strong> capacity. The issue of creditgap<br />
has been discussed in the subsequent section.
farmer borrowers st<strong>at</strong>ed th<strong>at</strong> the loan amounts were inadequ<strong>at</strong>e In<br />
n<strong>at</strong>ure.<br />
Table 7.4: Shortage of Amount Sanctioned to Amount<br />
Dem<strong>and</strong>ed<br />
,- SiZe-Class ofth·e--,.---------P-e;centa-geofShortage---------- -<br />
,L<strong>and</strong>holdingsJin Acres) I 0% 1 - 25% I 26-=--50%~-AbOve 50% - Total No. of Farmers<br />
!0.()1-2.50 46. 2 23. II 15.41- --154--=--~_ 100- (13)<br />
2.51-5.00 ; 31. 3 34.4: 28. 11 6. 3<br />
10-"----1321<br />
'5.01-10.00 10. 5 47. 4 21. Ii 21 1<br />
100 P8L<br />
110.01 <strong>and</strong> Above 44. 8 13.8 3101 10.3'<br />
100 (29}<br />
All classes 29. 5 32. I 25.0, 13. 4<br />
100 (l12}<br />
Note. Figures m parenthesIs mdlc<strong>at</strong>e the number of farmers.<br />
Source: Field Survey<br />
This shows th<strong>at</strong> the <strong>for</strong>mal credit delivery system in the study<br />
area was poor in qUality. It was neither adequ<strong>at</strong>e nor timely <strong>for</strong> most<br />
of the agricultural borrowers. Thus, based on this in<strong>for</strong>m<strong>at</strong>ion it could<br />
be concluded th<strong>at</strong> the Gupta Committee recommend<strong>at</strong>ions had hardly<br />
improved the quality of credit delivery system in Kalah<strong>and</strong>i district of<br />
Orissa. The poor quality of credit delivery system, along with some<br />
other factors might have contributed to higher transaction costs. This<br />
is further discussed below.<br />
Borrowing Costs <strong>for</strong> Agricultural Credit<br />
The effective price from the borrowers' point of view was the real cost<br />
including interest payment <strong>and</strong> other transaction costs. To obtain a<br />
loan the farmer had to s<strong>at</strong>isfy certain terms <strong>and</strong> conditions th<strong>at</strong> were<br />
required by the lenders' credit delivery system, which resulted in the<br />
borrower transaction costs. The borrower transaction costs in the<br />
study included applic<strong>at</strong>ion fees, service fees, document<strong>at</strong>ion <strong>and</strong><br />
paper works, bribe to officer/ technician/ bank staff/ leader or<br />
middleman <strong>for</strong> negoti<strong>at</strong>ion, travel expenses incurred by the borrower,<br />
<strong>and</strong> the opportunity cost of the borrower's time spent to obtain the<br />
loan.
In the study area, it is found th<strong>at</strong> many small <strong>and</strong> new<br />
borrowers were required to visit the financial institutions <strong>at</strong> least five<br />
to six times to maintain <strong>for</strong>mality, withdraw a portion of the loan <strong>and</strong><br />
<strong>for</strong> repayment. The cost of time has become one of the important<br />
aspects of borrowing costs, particularly when transactions are<br />
contracted during the planting, weeding or harvesting seasons when<br />
the opportunity costs of the borrower's time is high (Sarap 1990;<br />
Adams <strong>and</strong> Vogel 1986; Adams <strong>and</strong> Nehman 1979). To avoid the<br />
complexity of calcul<strong>at</strong>ing the time cost of one day, it has been<br />
considered as equivalent to one day of wage labour <strong>and</strong> calcul<strong>at</strong>ed <strong>at</strong><br />
the wage r<strong>at</strong>e prevailing during the process of acquisition <strong>and</strong><br />
repayment of the loan. This process has been adopted to calcul<strong>at</strong>e the<br />
time cost of one day <strong>for</strong> the fact th<strong>at</strong> the possibility of getting wage<br />
employment is rel<strong>at</strong>ively high during these periods. Since the<br />
agricultural term loans (particularly, <strong>for</strong> allied agricultural activity)<br />
have been obtained by a small proportion of sample households in the<br />
study area, <strong>and</strong> in many cases it has been given under the poverty<br />
allevi<strong>at</strong>ion scheme, we are not considering the transaction costs<br />
rel<strong>at</strong>ing to term loans in the analysis.<br />
Table 7.5 brings out th<strong>at</strong> the average transaction cost (ATC)<br />
decreased with increase in the size of holding. It is interesting to note<br />
th<strong>at</strong> the average transaction cost as percentage to average amount of<br />
loan also decreased with respect to increasing size of l<strong>and</strong>holding <strong>and</strong><br />
loan size. The effective r<strong>at</strong>e of interest was much more <strong>for</strong> small <strong>and</strong><br />
marginal farmers compared to medium <strong>and</strong> large size farms. The<br />
effective r<strong>at</strong>e of interest <strong>for</strong> 100 rupees of loan was 20.55 per cent <strong>for</strong><br />
the marginal farmer, whereas, it was 14.22 per cent <strong>for</strong> the large size
farmer. This shows th<strong>at</strong> the effective r<strong>at</strong>e of interest was much higher<br />
than th<strong>at</strong> of the bank r<strong>at</strong>e of interest <strong>for</strong> marginal <strong>and</strong> small farmers.<br />
Table 7.5: Cost of Borrowing (Short·Term) from the Financial<br />
Institutions in the Study Area<br />
(Amounts in Rupees)<br />
Size of Average Average Interest Total ATe as G/o Effective R<strong>at</strong>e<br />
L<strong>and</strong>holding Amount Transaction Charges Cost of of Average of Interest <strong>for</strong><br />
(in Acres' of Loan Co<strong>at</strong> (ATe) <strong>for</strong> 12 Loans Amount of Rs.IOO of<br />
Months Loan Loan<br />
Up to 2.5 3,679 271 485 756 7. 37 20. 55<br />
12.51 - 5.00 7,909 269 1,046 1,314 3. 40 16. 62<br />
5.01- 10.0 11,752 234 1,542 1,776 1. 99 15. 12<br />
[10.01 <strong>and</strong> 20,926 241 2,735 2,976 1. 15 14. 22<br />
I Above<br />
. Average 11,373 252 1,493 1,745 2. 22 15. 34<br />
Source: Fleld Survey<br />
The cost of borrowing of institutional credit by farm households<br />
according to the size of t.l:!e loa..'1 in t..'1e study areas also reveals th<strong>at</strong><br />
the ATe as percentage of average borrowing cost (ABC) kept on<br />
decreasing with the increasing credit limit (Table 7.6). The ATe was<br />
34.1 per cent within the credit limit of up to Rs. 5,000, whereas, it<br />
drastically went down to 6.6 per cent <strong>for</strong> the credit limit of more than<br />
Rs. 20,000. Altern<strong>at</strong>ively, the average interest cost as percentage to<br />
average borrowing cost kept on increasing with the increasing size of<br />
the loan. The effective r<strong>at</strong>e of interest was much more <strong>for</strong> the lower<br />
size credit limit than the higher size of the loan. From Tables 7.5 <strong>and</strong><br />
7.6 it can be concluded th<strong>at</strong> the effective r<strong>at</strong>e of interest was inversely<br />
rel<strong>at</strong>ed with the size of holding <strong>and</strong> the credit limit. Based on the<br />
effective r<strong>at</strong>e of interest one can find th<strong>at</strong> the institutional credit is<br />
costly <strong>for</strong> marginal <strong>and</strong> small farmers than the medium <strong>and</strong> large size<br />
farmers. Thus, the higher transaction costs not only increases the<br />
effective r<strong>at</strong>e of interest but also deters small borrowers from<br />
approaching <strong>for</strong>mal institutions <strong>for</strong> credit (see, Adams <strong>and</strong> Nehman<br />
(979).<br />
'I'
Table 7.6: Cost of Borrowing of <strong>Institutional</strong> Credit by Farm<br />
Households According to the Size of Loan in the Study Area<br />
(Amount In Rupees)<br />
I<br />
Average Average ATe as % Average TC Per Loan Size Size of Borrow- of Average Interest Rs. I<br />
Loan ing Cost Borrowing Cost as 100<br />
Cost % or<br />
or ABC Loan<br />
Up to 5,000 3,690 722 34.1 65.9 6.7<br />
5,001- 10,000 7,800 1,253 18.4 8l.6 3.0<br />
10,001 - 15,000 13,792 1,956 10.6 89.4 l.5<br />
15,001- 20,000 19,279 2,854 9.4 90.6 1.4<br />
; 20,001 & Above 37,611 5,315 6.6 93.4 0.9<br />
Note: ATC - Average Transaction Cost<br />
Average Borrowing Cost = ATC + Average Interest Payment<br />
Source: Field Survey<br />
\<br />
Effective<br />
Interest<br />
R<strong>at</strong>e <strong>for</strong><br />
Rs. 100 of<br />
Loan<br />
19.6<br />
16.1<br />
14.2<br />
14.8<br />
14.1<br />
The Credit-Gap (CG)<br />
As we have noted earlier, borrowers st<strong>at</strong>ed th<strong>at</strong> the disbursed loan<br />
amounts were inadequ<strong>at</strong>e. If subsidised <strong>for</strong>mal credit is inadequ<strong>at</strong>e in<br />
supply, a market <strong>for</strong> in<strong>for</strong>mal credit is autom<strong>at</strong>ically cre<strong>at</strong>ed<br />
(Chaudhuri <strong>and</strong> Gupta 1996). Hence, this section is devoted to an<br />
analysis of the extent of credit-gap among farm households across size<br />
class of l<strong>and</strong>holdings.<br />
Table 7.7 demonstr<strong>at</strong>es the level of farm dependency on credit<br />
so as to meet the cost of production. Methodologically, this is based<br />
on the Cost A2 process65 (the method given by the Reports of the<br />
Commission <strong>for</strong> Agricultural Costs <strong>and</strong> Prices) to estim<strong>at</strong>e the cost of<br />
cultiv<strong>at</strong>ion. It can be seen th<strong>at</strong> per acre paid-out cost shows a positive<br />
associ<strong>at</strong>ion with the SIze of holding. Farm expenditure, <strong>and</strong> the<br />
corresponding credit this necessit<strong>at</strong>es, is of course depend upon<br />
6S Cost A2 z All actual expenses in cash <strong>and</strong> kind incurred in the production by the<br />
owner (Cost AI) + rent paid <strong>for</strong> leased-in l<strong>and</strong>. Since the objective of this study is<br />
not to highlight the cost of production, other methods which include imputed<br />
value of family labour, interest on value of owned capital assets (excluding l<strong>and</strong>).<br />
rental value of owned l<strong>and</strong> etc. have not been taken into account in the cost of<br />
production.
labour <strong>and</strong> technical input requirements (the extent to which labourpower<br />
employed is purchased, the use of fertiliser <strong>and</strong> pesticides,<br />
extent of mechanis<strong>at</strong>ion, <strong>and</strong> the type of crop grown).<br />
Table 7.7: Extent of Dependency on Credit Per Acre of Gross<br />
Cropped Area (2001-021<br />
Size of Holding Per Acre Paid- Level of Dependency on Credit<br />
(in Acres) Out Costs (in Per cent)<br />
(in Rs.) Total I Formal<br />
Advanced Region<br />
0.01- 2.50 1,823 64.95 26.04<br />
2.51 5.00 2,722 69.45 44.84<br />
5.01 10.00 3,543 68.36 35.92<br />
10.01 - Above 3,514 52.80 38.33<br />
Backward Region<br />
0.01- 2.50 1,662 58.66 26.19<br />
2.51 - 5.00 2,161 74.47 I 54.41<br />
S.Ul 10.00 2,242 64.01 38.60<br />
~ 10.01 - Above 2,622 48.91 35.34<br />
Source. Field survey<br />
i<br />
Not surprisingly, large size farmers depended less on credit to<br />
<strong>finance</strong> their production expenditure. This finding was also true <strong>for</strong><br />
marginal farmers when compared with small farmers. It is interesting<br />
to note th<strong>at</strong> among all the c<strong>at</strong>egories, only small farmers were covering<br />
a rel<strong>at</strong>ively higher proportion of their cost of production through<br />
<strong>for</strong>mal credit in both the regions of Kalah<strong>and</strong>i district. Although<br />
medium <strong>and</strong> large size farmers obtained higher absolute amounts of<br />
credit, the proportion of <strong>for</strong>mal credit in their overall production cost<br />
was small. In this connection, it must be emphasised th<strong>at</strong> while in<br />
absolute terms the flow of credit might indeed be positively associ<strong>at</strong>ed<br />
with the size of holding, it was inversely rel<strong>at</strong>ed as a proportion to the<br />
per acre cost of production in the study area. It seems, bankers were<br />
fixing a maximum credit limit irrespective of medium <strong>and</strong> large size<br />
farmers' production costs <strong>and</strong> the credit requirement.
A close observ<strong>at</strong>ion on the p<strong>at</strong>tern of credit flow reveals th<strong>at</strong><br />
these farmers in both the regions of Kalah<strong>and</strong>i district, managed to<br />
cover between 26 to 54 per cent of their total expenditure on<br />
agricultural production by means of <strong>for</strong>mal sources of credit. The<br />
<strong>for</strong>egoing analysis, there<strong>for</strong>e, suggests th<strong>at</strong> the flow of credit were<br />
insufficient to meet the production costs of peasant farmers engaged<br />
in cultiv<strong>at</strong>ion. To meet the remaining cost they turned either to self<strong>finance</strong><br />
(capital gener<strong>at</strong>ed from elsewhere in their total economic<br />
oper<strong>at</strong>ion or activity) or to borrowing from the in<strong>for</strong>mal market or both<br />
or may be remaining s<strong>at</strong>isfied with poor investment. In this context, it<br />
is essential to measure the magnitude of credit-gap.<br />
The credit-gap reJers to the unmet credit needs oj potential<br />
borrowers Jrom either Jormal or iri<strong>for</strong>mal or Jrom both the sectors with<br />
their respective term <strong>and</strong> conditions. The dem<strong>and</strong> <strong>for</strong> credit is assumed<br />
to be positively rel<strong>at</strong>ed with area under oper<strong>at</strong>ion <strong>and</strong> the requirement<br />
of working capital. In our analysis it is also assumed th<strong>at</strong> the<br />
maximum dem<strong>and</strong> <strong>for</strong> credit could be equal to the paid-out cost (C t *)<br />
given the self-<strong>finance</strong> capacity of the farmer. Thus, one can expect<br />
th<strong>at</strong> the obtained amount of credit (C t ) S; C t *. If C t < C t * holds good,<br />
then there is a possibility of credit-gap. Altern<strong>at</strong>ively, given the self<strong>finance</strong>,<br />
when the required amount of credit <strong>for</strong> the project is not<br />
disbursed to the concerned borrower by the above sources, then the<br />
question of credit-gap comes.<br />
In this section, the credit-gap has been analysed with respect to<br />
size of l<strong>and</strong>holding within <strong>and</strong> across the regions. The credit-gap per<br />
acre of gross cropped area has been calcul<strong>at</strong>ed in two different ways.<br />
~mce the <strong>for</strong>mal credit is not enough, farmer borrowers are depending
upon in<strong>for</strong>mal credit market. Thus, given the self-<strong>finance</strong> 66 <strong>and</strong> <strong>for</strong>mal<br />
credit the amount of in<strong>for</strong>mal credit taken per acre of gross cropped<br />
area can be tre<strong>at</strong>ed as the credit-gap. The calcul<strong>at</strong>ion of credit-gap on<br />
the basis of in<strong>for</strong>mal credit can be defined as the actual credit-gap. In<br />
the case of second method, credit-gap <strong>for</strong> each c<strong>at</strong>egory of farmers has<br />
been calcul<strong>at</strong>ed by taking the difference between the maximum paidout<br />
cost per acre of gross cropped area in the concerned region <strong>and</strong><br />
the actual paid-out cost. The second method seems to be more logical<br />
in the sense th<strong>at</strong>, ceteris paribus (viz., crop failure, pnces of<br />
agricultural product, clim<strong>at</strong>ic condition, risk factors, <strong>and</strong> so on), all<br />
c<strong>at</strong>egories of farmers would have been interested to invest to the<br />
extent of maximum paid-out cost per acre in the respective regions<br />
provided the required amount of credit would have been available to<br />
them. The measurement of credit-gap on the basis of second method<br />
can be st<strong>at</strong>ed as the rel<strong>at</strong>ive credit-gap. The issue of rel<strong>at</strong>ive creditgap<br />
seems to be more prominent in the case of farmers those who are<br />
remaining s<strong>at</strong>isfied with poor investment due to lack of availability of<br />
credit from either or both the credit markets. The amount of creditgap<br />
per acre of gross cropped area has been presented in Table 7.8.<br />
It can be seen from Table 7.8 th<strong>at</strong> the actual credit-gap was<br />
more <strong>for</strong> the medium size farmers in both the regions. This could be<br />
<strong>at</strong>tributed to the high cost of production with less self-<strong>finance</strong> capacity<br />
as compared to large size farmers. For the rest of c<strong>at</strong>egories of farmers<br />
the actual credit-gap was inversely rel<strong>at</strong>ed to the size of l<strong>and</strong>holdings.<br />
This could be mainly <strong>at</strong>tributed to a progressive self-<strong>finance</strong> capacity<br />
given the <strong>for</strong>mal credit. It can be seen from Table 7.8 th<strong>at</strong> the self<strong>finance</strong><br />
capacity per acre of gross cropped area shows a positive<br />
''', The self-<strong>finance</strong> capacity of a farmer can be defined as per acre paId-out cost of<br />
production less per acre <strong>for</strong>mal <strong>and</strong> in<strong>for</strong>mal credit
associ<strong>at</strong>ion with size classes of holding. But can we rely on this self<strong>finance</strong><br />
capacity of the farm households. The distribution of self<strong>finance</strong><br />
capacity is given below in Table 7.9.<br />
Table 7.8: L<strong>and</strong>holding-wise Credit-Gap<br />
i ~'::~;~::n;~ I pr~:~~;;~n I c;:::~~r i IC::~~::e~~~:;~r~U;nt~~~~~:es)~e::~:~~<br />
lin Acres) I PAr' er ere 0 A ere 0 r' ; Cropped Acre of I Per Acre of: Gap<br />
I<br />
Gross Gross I Area = Gros s Gross<br />
Cropped Cropped I<br />
Actual Cropp ed Cropped I<br />
Mea Mea I Credit-Gllp __ Are a~~ __ ~'!!l _______ _<br />
Adv,,-~ce~ R~i() n<br />
0.01 - 2.50 1823 475<br />
, 70,) __,__ 1,18<br />
2.51 - 5.00 2,722 1,193 I 670 __ ~_,86 3' 859 ' 822<br />
7 - --1-, 086 ~:- - -0 - ~<br />
5.01 - 10.00 3,544 1,308 , 1,149_~_~~5 -------- - - ----\.-- - - - - --<br />
10.01& above 3514 1,347 509 I ,85<br />
I<br />
I<br />
I<br />
I<br />
1~~6i9=-~~>Ii _<br />
~ ___ 1,6~8_~ _ 39_<br />
All classes 3,289 1,249 I 7~E>_ _2,(j05 1,284 255<br />
Backward ~io<br />
10.01 - 2.S0 1662 435 540 97<br />
2.51 - 5.00 2 161 1 176 434<br />
I<br />
1,6<br />
'5.01 - 10.00 2,242 865 570 1,4<br />
10.01 & above 2,622 927 356 +--l,~ ~<br />
IAlI classes 2,331 915 446 1,3<br />
Note: Sample SIZe - 200, Ie = In<strong>for</strong>mal credIt<br />
Source: Field Survey<br />
Table 7.9 explains th<strong>at</strong> there was less vari<strong>at</strong>ion in the self-<strong>finance</strong><br />
capacity <strong>at</strong> different <strong>levels</strong> <strong>for</strong> each c<strong>at</strong>egory of farmers in the<br />
advanced region. This implies th<strong>at</strong> the self-<strong>finance</strong> capacity was<br />
proportional to the cost of production. In the case of backward region<br />
it seems to be progressive with respect to size of l<strong>and</strong>holdings. Based<br />
on this argument one can rely on the self-<strong>finance</strong> capacity of the<br />
farmer as defined above while calcul<strong>at</strong>ing the credit-gap.
Table 7.9: Self-<strong>finance</strong> Capacity of Farmers Per Acre of Gross<br />
Cropped Area<br />
Size class of"'-- ':- (1% 1 - 25 o/~·: 26 - 50 % Above 50 % Total Farmers<br />
la."dilolciings (iIl!cres)~ _ -=-__ ___ ~ __ Advanced Region<br />
O.01~2.50___ 16.1 22.6 32.3' 29.0 100 (31)<br />
2.5L~_5.00 - ---~]238-~ 28.6 j-19.1 .1- 28.6 100 (21)<br />
5.01- 10.00 . 19.2-15.4 -_. 30.S -- 34.6 100 (26)<br />
_~~~~1~~~~ Abo"~~-~--f;~;(~;~:8 _~~f~l~ .~:.:.= ;~:~- -. ;gg i;;~)<br />
___ ~ _________---,__ B",ckwar~ gegion_<br />
~~~; : ;:~g i ~g:~-+--~~~ j=-_J~}---+=-'K~ -_ ;gg g~; -<br />
O.o=t __ ZJ~ __ 5_0.0 __ 1 _ 42<br />
5.01 - 10.00 I 0.0 ~L3 __ 42.9 __--1__ 23.8 100 (21)<br />
..CJ -=--r 100 (14)<br />
,10.Ol<strong>and</strong> Above<br />
All classes<br />
Note: Figures in parenthesis indic<strong>at</strong>e the number of farm households.<br />
Source: Field Survey<br />
LI4.0_ . ...J4,-0--,---..lO
collected on the coping str<strong>at</strong>egy of the farmer borrowers to meet their<br />
requirement. The distribution of borrowers (with access to <strong>for</strong>mal<br />
loans) by number of sources of borrowing shows th<strong>at</strong> about 70.5 per<br />
cent of farmers went <strong>for</strong> two or more sources in the unorganised<br />
sector to meet their cost of production (Table 7.10). This shows th<strong>at</strong><br />
how far our <strong>for</strong>mal financial systems were good enough to cover the<br />
credit needs of farmer borrowers.<br />
Table 7.10: Distribution of Borrowers by Number of Sources of<br />
Borrowing<br />
I Number of Sources I Marginal: §maU_ 1<br />
Medium.~ - Large<br />
_ (in per cent)<br />
All Farmers<br />
___.___ _ \"ith Access t()Form.al_Lo_ans<br />
___ ~I_<br />
I. 2<br />
46.2 31.3 10.5<br />
46.-2-'-53.1--65. 8- -<br />
44.8<br />
51. '7<br />
295<br />
56 3<br />
3 7.7 12.5 21.1 3.-;;4c--_12.5<br />
4 <strong>and</strong>. Abc' .. e "" I ') 1 " C O. 0 .L. 0<br />
r-_-_ -_"-"_-::-._T:o_tal<br />
___ -=ocI:O~J_t:~J~~L __ ~9t -r _l~~L<br />
Without Access to Formal Loans<br />
._- ~--- --'--- -_.-- . - --- ---<br />
_____ 0 __ ~1_47.3 . ._5~_...:...._
their access to in<strong>for</strong>mal credit market was also hi"hl\' ,., . rl'strlctcci'<br />
This market oper<strong>at</strong>es on the basis of personalised rel<strong>at</strong>ionship. \\'hil'!J<br />
means th<strong>at</strong> anyone who is prepared to pay the interest r<strong>at</strong>l' <strong>and</strong> meet<br />
the coll<strong>at</strong>eral requirements, IS not likelY to reeel\T a loan<br />
autom<strong>at</strong>ically from all lenders (see Basu 1997). Man~'<br />
risk-averse<br />
lenders might not pmvide credit to certain borrowers, or use ercdll<br />
limit, due to the problem of moral hazard <strong>and</strong> ad\'erse selection (see<br />
Stiglitz <strong>and</strong> Weiss, 1981). There<strong>for</strong>e, given the poor access 10<br />
institutional credit <strong>and</strong> self-<strong>finance</strong> capacity of small <strong>and</strong> marginal<br />
farmers, the restricted access to in<strong>for</strong>mal credit market also contributed<br />
to a larger amount of rel<strong>at</strong>ive credit-gap.<br />
Thus, to underst<strong>and</strong> the<br />
coping str<strong>at</strong>egy, an analysis on the terms <strong>and</strong> conditions in in<strong>for</strong>mal<br />
credIt market IS needed.<br />
Type of Contracts in In<strong>for</strong>mal Credit Market<br />
In a rural community, a farmer can mobilise the amount of working<br />
capital by offering coll<strong>at</strong>eral, coll<strong>at</strong>eral substitutes, personal security<br />
<strong>and</strong> personalised rel<strong>at</strong>ionship, <strong>and</strong> through third party guarantor. An<br />
important issue in this regard is th<strong>at</strong> credit is invariably r<strong>at</strong>ioned<br />
according to the ability of the borrowers to offer coll<strong>at</strong>eral (Sarap<br />
1991). The types of contracts in the in<strong>for</strong>mal credit market under<br />
different <strong>for</strong>ms of coll<strong>at</strong>eral security are further discussed below.<br />
(a) Contract with Coll<strong>at</strong>eral<br />
The lender's preference <strong>for</strong> an asset, as coll<strong>at</strong>eral. depends on<br />
the effective r<strong>at</strong>e of return he expects from the sale value of assets. in<br />
case of default of loan. Thus, higher the market value of a cull<strong>at</strong>l'f,d<br />
asset, higher will be loan amount to a borrower. Similarl\·. higher the<br />
" This finding also collabor<strong>at</strong>es \nth the earlier study mane by HaSLl I; (fll!!<br />
lOR
assets position of the borrowers (which tent<strong>at</strong>ively represent his credit<br />
worthiness), higher would be the amount of loan he can arrange (sec,<br />
Sarap 1991). In a loan transaction the requirement of coll<strong>at</strong>eral arises<br />
since it shifts the potential capital loss from the lender to the<br />
borrowers (Binswanger <strong>and</strong> Rosenzweig 1986).<br />
(bl Contract with Coll<strong>at</strong>eral Substitutes<br />
In the absence of marketable coll<strong>at</strong>eral, the borrower uses<br />
coll<strong>at</strong>eral substitutes or inferior coll<strong>at</strong>eral to mobilise the loans. In<br />
such deals, the lenders provide credit to the borrower against his<br />
commitment of future sale of labour service or crops to him. For this<br />
kind of contract, the borrower provides his labour services <strong>at</strong> the call<br />
of the iender <strong>at</strong> an agreed wage r<strong>at</strong>e or sell his crops to him <strong>at</strong> a predetermined<br />
price in a mutually agreed time to repay the loan (Bard han<br />
<strong>and</strong> Rudra 1978). Hence, in the case of without coll<strong>at</strong>eral, the farmer<br />
borrower can obtain credit from the interlocked credit market.<br />
However, different <strong>for</strong>ms of welfare loss of the borrower is<br />
inevitable in the interlocked credit contract since it allows the lender<br />
to extract full surplus <strong>at</strong>tributable to the inter-locked market<br />
(Bardhan 1984 <strong>and</strong> 1989; Gangopadhyay <strong>and</strong> Sengupta 1987;<br />
Gangopadhyay 1997). This extract in inter-locked credit market can<br />
be noticed usually in the <strong>for</strong>m of under valu<strong>at</strong>ion of labour services<br />
<strong>and</strong> output of the borrowers <strong>and</strong> overvalu<strong>at</strong>ion of inputs supplied by<br />
the lenders. Thus, given the worse access to organised credit market<br />
<strong>and</strong> self-<strong>finance</strong> capacity, if the dem<strong>and</strong> <strong>for</strong> additional liquidity to<br />
meet the working capital is rel<strong>at</strong>ively inelastic in n<strong>at</strong>ure, the borro\\'ers<br />
may st<strong>and</strong> <strong>at</strong> the receiving end of the bargaining process in the interlocked<br />
credit market. Altern<strong>at</strong>ively, the terms <strong>and</strong> conditions become
favourable to the lender. There<strong>for</strong>e, the degree of extraction Illa\' \'an<br />
from borrO\\'er to borrower depending upon the bargaining cap'tcit\<br />
between borrowers <strong>and</strong> lenders. The pre-determined exchange' rail' in<br />
the inter-locked credit contract <strong>and</strong> the extent of extraction has hcen<br />
discussed in the subsequent sub-section.<br />
c) With Personal Security <strong>and</strong>/or Third Partv Guarantor<br />
In the absence of acceptable coll<strong>at</strong>eral by the lender or<br />
interlinked deal, the borrowers mobilise credit through personal<br />
security or third party guarantor. In the <strong>for</strong>mer case, the lender may<br />
provide loans to those borrowers from whom he is sure of repaymeI1l<br />
or able to recover the loan through some implicit or explicit<br />
mcchanism 68 . Elsc:w-lLere, it. IS argued th<strong>at</strong> loan contract \\'ithout<br />
coll<strong>at</strong>eral increased with the raise in the st<strong>at</strong>us 69 of the borrowers<br />
(Sarap 1991). In such a case, the preference of the lender was based<br />
on caste, kinship connection, <strong>and</strong> the localities of the borrowers with<br />
which the lender may have some ties (see Bardhan <strong>and</strong> Rudra 1978).<br />
These connections <strong>and</strong> in<strong>for</strong>m<strong>at</strong>ion about the borrowers worked as a<br />
system of guarantee <strong>for</strong> the repayment of the loans. The l<strong>at</strong>ter case.<br />
the third party acted as a guarantor, exerted pressure/ influenced the<br />
borrower <strong>for</strong> repayment of the loans. Thus, the third part~· worked as<br />
peer monitor 70 in borrower selection as well as <strong>for</strong> the repayment of<br />
the loan.<br />
" This mechanism could be social sanctIOn against the defaulter or loss of luturc<br />
borro\\'ing from the same or other lcnders. For more dct<strong>at</strong>led discuSSiOll. see,<br />
Pl<strong>at</strong>teau <strong>and</strong> Abrahem (1987); Basu (1986,1989); Sarap 11991).<br />
, This st<strong>at</strong>us may be In the <strong>for</strong>m of l<strong>and</strong>holding, assets pOSItion. <strong>and</strong> other SlH'J()<br />
economic st<strong>at</strong>us.<br />
See, Stiglitz 11990),<br />
)()()
Interest R<strong>at</strong>e <strong>for</strong> Different <strong>for</strong>ms of Contracts in In<strong>for</strong>mal Credit<br />
Market<br />
The interest r<strong>at</strong>e in the in<strong>for</strong>mal credit market depends upon the kll1ci<br />
of contracts with or without coll<strong>at</strong>eral. Interestingly, the rdlt' "I'<br />
interest also varies across the quality <strong>and</strong> marketability of the<br />
coll<strong>at</strong>eraL In the case of loan contract with coll<strong>at</strong>eral, the kndcr<br />
generally aseertams the sale pnce of the piece of coll<strong>at</strong>eral assets<br />
be<strong>for</strong>e providing a loan. If a particular piece of coll<strong>at</strong>eral asset im·oh·es<br />
higher transaction costs while selling, then the interest r<strong>at</strong>es on loans<br />
taken by pledging such coll<strong>at</strong>eral were more. For instance, tIl(' cost<br />
involved in selling <strong>for</strong> an asset like old bicycle or utensils is very high<br />
than gold. There<strong>for</strong>e, the asset, which has either low resale value or<br />
involves high transaction costs in selling, the lender either prondes a<br />
very small amount of loan with higher interest r<strong>at</strong>e or may not accept<br />
the asset as security. Contrary to this, if the lender expects a high<br />
resale value of an asset (<strong>for</strong> example l<strong>and</strong> or gold) in future, then he<br />
may be willing to provide a higher size of loan. Thus, <strong>for</strong> poor quality<br />
of coll<strong>at</strong>eral assets the terms <strong>and</strong> conditions are more harsh to<br />
borrowers in terms of r<strong>at</strong>e of interest charged, under valu<strong>at</strong>ion of<br />
assets <strong>and</strong> dur<strong>at</strong>ion of the loan as compared to borrowing against gold<br />
or l<strong>and</strong> (see Basu 1989; Sarap 1990, 1991). For poor quality of<br />
coll<strong>at</strong>eral (say brass utensils) the interest r<strong>at</strong>e vary from 60 per cent to<br />
120 per cent, whereas <strong>for</strong> good quality of coll<strong>at</strong>eral like gold the<br />
interest r<strong>at</strong>e vary from 24 per cent to 48 per cent per annum.<br />
Generally, the loan contract with coll<strong>at</strong>eral substitutes<br />
(interlocked credit transaction) does not involve any interest r<strong>at</strong>c.<br />
However, under valu<strong>at</strong>ion of labour service <strong>and</strong> output or the<br />
borrowers <strong>and</strong> overvalu<strong>at</strong>ion of inputs supplied bv the lenders lS the<br />
201
common practice in this kind of credit transaction. The asyml11ctn' of<br />
in<strong>for</strong>m<strong>at</strong>ion, moral hazard <strong>and</strong> adverse selection problems along \\'ith<br />
the degree of risk involved in lending (<strong>for</strong> instance, crop failure in the<br />
case of credit-output interlocked transaction) insists the lender to fix<br />
up a low price <strong>for</strong> coll<strong>at</strong>eral substitutes. Hence, it is the r<strong>at</strong>e of return<br />
through low price <strong>for</strong> borrower's output in the interlocked credit<br />
transaction compens<strong>at</strong>es the interest income loss th<strong>at</strong> would have<br />
been received by the lender in altern<strong>at</strong>ive investment. Given this,<br />
credit (either cash or kind) can be interlocked \\'ith either labour or<br />
product markets where prices are predetermined.<br />
The interest r<strong>at</strong>e on loan transaction against personal security<br />
kind), volume of credit, the personal rel<strong>at</strong>ionship with the lender, <strong>and</strong><br />
the socio-economic st<strong>at</strong>us of the borrower. In this system, the<br />
borrowers repay the loans ll1 terms of either cash or kind <strong>at</strong> the<br />
interest r<strong>at</strong>es, which was frxed <strong>at</strong> the time of taking loan. For kind<br />
repayment, both the parties jointly determine the prices of the<br />
products <strong>at</strong> the time of repayment, given the present market situ<strong>at</strong>ion<br />
of the product <strong>and</strong> bargaining capacity of both the parties. It has been<br />
observed in the study areas th<strong>at</strong> the lender charges a rel<strong>at</strong>i\'Ch' low<br />
interest r<strong>at</strong>e <strong>for</strong> the kind component of loans 7 ) (say fertiliser or<br />
pesticides) than the cash component. Given the credil\\'orthiness of<br />
the borrower, the high competition among the fertiliser <strong>and</strong> pesticide<br />
traders in selling can be <strong>at</strong>tributed to the low interest r<strong>at</strong>e charged <strong>for</strong><br />
kind component of loan. The other type of kind component loan like<br />
paddy, the interest r<strong>at</strong>e charged is 50 per cent of the principal. The<br />
dur<strong>at</strong>ion of loan of this type is generally six months or less. Bor[i)wing<br />
"I For instance, farmers take fertiliser <strong>and</strong> pestlcicies as credit <strong>at</strong> some 1Il11";-CS' r;l~('<br />
from the shopkeeper, <strong>and</strong> they repa,\" it after haryest.<br />
202
203<br />
of paddy loan decreases with the rise in the st<strong>at</strong>us of the households<br />
(see, Sarap 1991). Since money has wide scope <strong>for</strong> in\,cstmt:nt, the<br />
lender charges a high interest r<strong>at</strong>e <strong>for</strong> the loan borrowed in cash. The<br />
farmer borrowers in the study areas st<strong>at</strong>ed th<strong>at</strong> the interest raIl' on<br />
kind component of loan varied from 48 per cent to 60 per cent,<br />
whereas it varied from 48 to 120 per cent <strong>for</strong> cash component of<br />
loans.<br />
Thus, under the type of contracts agreed upon by the borrowers<br />
<strong>and</strong> lenders the degree of variability in the level of interest r<strong>at</strong>e can be<br />
as high as 120 per cent or as low as zero per cent per annum (Rudra<br />
1982). Bhaduri (1977) argues th<strong>at</strong> usurious interest r<strong>at</strong>es are the<br />
result of monopoly power of the lender. Bottomley (1975) mentions<br />
th<strong>at</strong> high interest r<strong>at</strong>e reflects the risk of default faced by the lender in<br />
the rural credit market of the less developed countries. The other<br />
studies 72 claim th<strong>at</strong> the presence of interlocked contracts can explain<br />
the existence of a wide spectrum of interest r<strong>at</strong>es. On the whole, it is<br />
the kind of contracts with or without coll<strong>at</strong>eral th<strong>at</strong> determine the<br />
interest r<strong>at</strong>e in the in<strong>for</strong>mal credit market.<br />
With this background, it may be useful to analyse the degree of<br />
extraction, the number of loan contracts <strong>and</strong> the amount of loan<br />
borrowed against different <strong>for</strong>m of coll<strong>at</strong>eral <strong>and</strong> type of contracts in<br />
in<strong>for</strong>mal credit market being undertaken as coping str<strong>at</strong>egy to meet<br />
the cost of production.<br />
-2 For more detailed discussion, see, Brn.\'cman ann Srinl\"(lSan 119811, \11t1"d Ill)S?,I.<br />
<strong>and</strong> Basu (1983).
Borrowing Against Different Coll<strong>at</strong>eral as Coping Str<strong>at</strong>egy<br />
In the study area, interlocked credit <strong>and</strong> product transaction \\'
However, the details of income loss due to interlocked credit<br />
have been shown in Table 7.12. This has been estim<strong>at</strong>ed by obtainl11g<br />
the quantity sold <strong>at</strong> interlocked price as against the hypothetical<br />
scenario of selling the same quantity <strong>at</strong> the open market <strong>and</strong><br />
minimum support price (MSP). The second <strong>and</strong> third column of Table<br />
7.12 shows th<strong>at</strong> both interlocked <strong>and</strong> the open market price73 differed<br />
across the farmers with different size of l<strong>and</strong>holdings. It is seen th<strong>at</strong><br />
the medium <strong>and</strong> large size farmers had better bargain in fIXing not just<br />
the interlocked price but also in obtaining a favourable price in the open<br />
market. Poor bargaining capacity due to high intensity of credit<br />
compelled the marginal <strong>and</strong> small farmers to sell <strong>at</strong> low price in the<br />
interlocked credit market.<br />
Table 7.12. Regions & L<strong>and</strong>holding-wise Estim<strong>at</strong>ed Income<br />
Loss Per Bag of Selling Paddy due to Interlocked Credit<br />
Market in Kalah<strong>and</strong>i District, Orissa 2001-02\<br />
Size of Interlocked Open LPJ LP, , Income Loss Income Loss L<strong>and</strong>holding Price Market in Rs. in Rs. in Situ<strong>at</strong>ion in Situ<strong>at</strong>ion I<br />
(in Acres) In Ra/bac Price (A) fBI A B<br />
in R<strong>at</strong>bag _lin %) iin%l<br />
Advanced R
credit market - principally when substantial amounts of this<br />
commodity (acquired from smallholders <strong>at</strong> pre-determined low prices)<br />
are marketed simultaneously - it is less than th<strong>at</strong> of marginal <strong>and</strong><br />
small farmers. Table 7.12 confirms both th<strong>at</strong> medium <strong>and</strong> large<br />
farmers receive a higher price <strong>for</strong> their paddy in the open market than<br />
do marginal <strong>and</strong> small producers, <strong>and</strong> also th<strong>at</strong> the difference between<br />
the interlocked price <strong>and</strong> the minimum support price <strong>for</strong> this crop<br />
declines with respect to l<strong>and</strong>holding size. The magnitude of income<br />
loss, however, depends on the extent of dependency on in<strong>for</strong>mal credit<br />
sources to meet working capital <strong>and</strong> also on the quantity of paddy<br />
sold <strong>at</strong> the pre-determined price. Wh<strong>at</strong> this underlines is th<strong>at</strong> the<br />
supply of <strong>for</strong>mal credit is itself inadequ<strong>at</strong>e to meet the needs of<br />
peasant farmers in both regions of Kalah<strong>and</strong>i district. Thus, given the<br />
self-<strong>finance</strong>, adequ<strong>at</strong>e availability of <strong>for</strong>mal credit could have<br />
minimised the income loss of the farmers who had taken loan from<br />
interlocked credit market.<br />
It is found th<strong>at</strong> the in<strong>for</strong>mal credit with coll<strong>at</strong>eral substitutes<br />
was not the only way to meet the cost of production. The farmers had<br />
also mobilised credit through other coll<strong>at</strong>eral such as l<strong>and</strong>, gold, brass<br />
utensils, output, personal security, <strong>and</strong> third party guarantor. Loan<br />
transactions against these coll<strong>at</strong>erals have been shown in Table 7.13.<br />
Table 7.13 shows th<strong>at</strong> 37 per cent of the loans <strong>and</strong> 35 per cent<br />
of total loan amount was borrowed by small farmers by keeping farm<br />
output as coll<strong>at</strong>eral. In such cases of inter-linked markets, the r<strong>at</strong>e of<br />
extraction was more. Against output, the marginal size farmers \\Tre<br />
having 19 per cent of their total loan contracts consisting of 1 P, per<br />
cent of the total loan borrowed. Probably, low base of output
production \\·as inhibiting the marginal iarmers to approach ttw<br />
lenders against output as coll<strong>at</strong>eral. These percentages dccreased<br />
progressively <strong>for</strong> the medium <strong>and</strong> large size farmers as compared to<br />
small farmers since they could mobilise in<strong>for</strong>mal credit \,·ith<br />
altern<strong>at</strong>ive contracts <strong>at</strong> low interest r<strong>at</strong>e. Use of gold as coll<strong>at</strong>eral rose<br />
with the increase in the st<strong>at</strong>us of borrowers. Poorer farm households<br />
utilised brass utensils as coll<strong>at</strong>eral in the absence of other altern<strong>at</strong>i\·e<br />
assets, where under valu<strong>at</strong>ion of assets <strong>and</strong> r<strong>at</strong>e of interests were<br />
high. The marginal farmers were having 21 of their total loan<br />
contracts against brass utensils. Borrowing (cash/ kind) against<br />
without coll<strong>at</strong>eral, where the interest r<strong>at</strong>es were high, declined with<br />
the rise in the st<strong>at</strong>us of farm households. The decline was more<br />
pronounced in the case of large farmers possible due to their own<br />
surplus <strong>and</strong> their better access to <strong>for</strong>mal credit (see Sarap 1990).<br />
Table 7.13: Farm Size <strong>and</strong> Coll<strong>at</strong>eral-wise Percentage of Loan<br />
Contracts <strong>and</strong> Percentae:e of Loan (amountl Borrowed<br />
Type of No. of Loan Contracts (%) Amount of Loan (%<br />
Coll<strong>at</strong>eral Marginal Small Medium Large Marginal Small Medium Large<br />
Offered<br />
Farmers Farmers Farmers Farmers Farmers Farmers Farmers FaTmers<br />
L<strong>and</strong> - 1.5 - - 1.2<br />
Gold 10.0 26.3 37.9 48.3 134 33.8 41.7 46.2<br />
Brass utensils 21.4 1.8 . 10 1 1.3 - -<br />
Output 18.6 36.8 31.8 31.0 17.7 34.8 29.6 27.1<br />
Sub-total 50.0 64.9 71.2 79.3 41.2 69.9 72.6 73.3<br />
Personal 30.0 33.3 28.8 20.7 37.9 29.0 27.4 26. I<br />
Security lal<br />
Third party 20.0 1.8 - - 20.9 1.1 -<br />
Iguarantor -Ibl<br />
Without colla- 50.0 35. I 28.8 20.7 588 30.1 27.4 26.7<br />
teral (a+ bl<br />
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ](1(l<br />
T<br />
170) 157) (66) (29) 63,340" 110.700' 320.800' 234,05'.-i<br />
Note: I. F,gures in parentheses represent the total number of loan contracts b\ thf'<br />
respectl\'e size of farms.<br />
2. 'represents the total amount of in<strong>for</strong>mal credit by the respectl\'e f~nOl<br />
groups.<br />
3. (-) means th<strong>at</strong> there was no in\"oh"ement of a size group of farm hOllsehok~<br />
<strong>for</strong> borrowing against a particular coll<strong>at</strong>erai.<br />
Source: Field Surw\·<br />
I<br />
:
Besides, this c<strong>at</strong>egory of farmers was having alternali\'(' assets to<br />
mobilise loans from in<strong>for</strong>mal sector <strong>at</strong> cheaper r<strong>at</strong>e. The percentage oj"<br />
loan lamount; borrowed against personal seeuntv <strong>and</strong> third part\"<br />
guarantor <strong>for</strong> marginal <strong>and</strong> small farmers were 59 <strong>and</strong> 30 per cent<br />
respectively.<br />
On the whole, the composition of borrowing against different<br />
coll<strong>at</strong>er<strong>at</strong>es provided some characteristics of different borrowers in the<br />
sample. First, it shows th<strong>at</strong> the quality of coll<strong>at</strong>eral increased with the<br />
rise in the st<strong>at</strong>us of borrowers. Second, in the absence of altern<strong>at</strong>ive<br />
assets the small <strong>and</strong> marginal farmers were compelled to mobilise<br />
funds <strong>at</strong> higher r<strong>at</strong>e of interest from in<strong>for</strong>mal credit market.<br />
Conclusions<br />
The analysis on credit delivery system shows th<strong>at</strong> most of the<br />
agricultural borrowers faced one or the other problem during as well<br />
as after obtaining loans. It is also observed th<strong>at</strong> these problems were<br />
more prominent in the case of marginal <strong>and</strong> small farmers. The<br />
analysis on time taken to get a loan sanctioned shows an inverse<br />
rel<strong>at</strong>ionship with the size of l<strong>and</strong>holdings. Added to th<strong>at</strong>, the loan<br />
amounts were inadequ<strong>at</strong>e. This indic<strong>at</strong>es the strong practice of nonprice<br />
credit r<strong>at</strong>ioning in the provision of agricultural credit <strong>and</strong> in<br />
fixing the credit limit to agricultural borrowers. Since the <strong>for</strong>mal credit<br />
delivery system in the study area was found to be neither adequ<strong>at</strong>e<br />
nor timely, it could be argued th<strong>at</strong> the Gupta Committee<br />
recommend<strong>at</strong>ions have not been successful in improving the qualIty of<br />
credit delivery system in Kalah<strong>and</strong>i district of Orissa.<br />
')rL~
The analysis on borrO\\'ing costs <strong>for</strong> agricultural credit s!Jo\\'s<br />
th<strong>at</strong> the effectl\'e r<strong>at</strong>e of interest \\'as in\'L~rseh' rel<strong>at</strong>ed \nth the size u1<br />
l<strong>and</strong>holdings <strong>and</strong> the credit limit. Based on the effective r<strong>at</strong>e of<br />
interest one could find th<strong>at</strong> the institutional credit \\'as cost!\' fur<br />
marginal <strong>and</strong> small farmers than the medium <strong>and</strong> large size farmers,<br />
The terms <strong>and</strong> conditions of loan obtained against different<br />
coll<strong>at</strong>eral assets indic<strong>at</strong>e th<strong>at</strong> the terms of getting loan became more<br />
unfavourable with the decline in the quality of coll<strong>at</strong>eral assets<br />
provided by the borrowers, Given the n<strong>at</strong>ure of in<strong>for</strong>mal credit market<br />
<strong>and</strong> the effective mechanism of controls on borrowers, the lender was<br />
in a position to extract as much as possible through higher interest<br />
r<strong>at</strong>e charges <strong>and</strong> other terms <strong>and</strong> conditlOns of the loan,<br />
An ob\'ious policy implic<strong>at</strong>ion th<strong>at</strong> can be drawn from this<br />
analysis is th<strong>at</strong> any move by the government to reduce imperfection in<br />
the credit market will benefit the farmer. In order to reduce the credit·<br />
gap problem, a rethinking on the scale of <strong>finance</strong> is needed,<br />
Nevertheless, a separ<strong>at</strong>e scale of <strong>finance</strong> should be fixed <strong>for</strong> each<br />
service area of the concerned bank since the cost of production vanes<br />
across the regions, Improved quality of credit delivery system with<br />
adequ<strong>at</strong>e loan amount can reduce farmers' dependence on in<strong>for</strong>mal<br />
sector to meet the cost of production, <strong>and</strong> in turn, the degree of<br />
extraction in the <strong>for</strong>m of interest <strong>and</strong> others especially from small <strong>and</strong><br />
marginal farmers,
Chapter 8<br />
SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS<br />
Introduction<br />
A majority of the peasant cultiv<strong>at</strong>ors 111 India find borrO\\·ing<br />
necessary, as their own farm savings are inadequ<strong>at</strong>e <strong>for</strong> both<br />
financing their various agricultural activities, <strong>and</strong> in carrying out<br />
improvements in productivity of their agricultural oper<strong>at</strong>ions (Lipton<br />
1976; Donald 1976; Sarap 1990). The provision of <strong>for</strong>mal credit to<br />
<strong>agriculture</strong> has been, there<strong>for</strong>e, central to the concern of planners <strong>and</strong><br />
development economists 111 post-independent India. A number of<br />
policies have been made to instil social responsibility 111 the <strong>for</strong>mal<br />
financial institutions to extend credit to rural households, in general.<br />
<strong>and</strong> farm households, in particular. These policies have succeeded in<br />
establishing a vast network of financial institutions 111 the<br />
countryside, <strong>and</strong> helped to spread the banking culture among in rural<br />
areas. But, quantit<strong>at</strong>ive progress <strong>at</strong> the cost of quality (Shivamaggi<br />
2000), high cost structure of oper<strong>at</strong>ions in rural areas <strong>and</strong> mounting<br />
overdues became a thre<strong>at</strong> to the viability of the financial institutions.<br />
Consequently, the policy of competitive financial system was adopted<br />
from 1991 onwards in the provision of agricultural credit to impro\,
the access of farmers, especially sll1
Trends in the Credit Flow <strong>at</strong> AII-Illdia Leliel alld COlltributing Factors<br />
The third chapter, which analysed the trends in the suppl\ of<br />
agricultural credit by SCBs <strong>at</strong> the all India level, revealed th<strong>at</strong> the<br />
proportion of credit to <strong>agriculture</strong> to the net bank credit rapidly<br />
declined during the re<strong>for</strong>m period. The growth r<strong>at</strong>es of agricultuml<br />
credit were uneven across the sub-periods (pre- <strong>and</strong> re<strong>for</strong>m years) as<br />
well as across the bank groups. The supply of credit to this sector in<br />
both absolute <strong>and</strong> real terms grew <strong>at</strong> much faster r<strong>at</strong>e during the prere<strong>for</strong>m<br />
period as compared to the re<strong>for</strong>m period. Across the bank<br />
groups also, a similar p<strong>at</strong>tern could be observed. Further, the<br />
Scheduled Commercial Banks (SCBs) did not even reach the targets<br />
set by the government.<br />
As far as the factors determining the credit flow to <strong>agriculture</strong><br />
were concerned, the regression analysis showed th<strong>at</strong> credit flO\\, to<br />
<strong>agriculture</strong> <strong>at</strong> all-India level was adversely affected by investment ll1<br />
securities, credit subsidy, agricultural credit provided by co-oper<strong>at</strong>i\'es<br />
<strong>and</strong> interest r<strong>at</strong>e on lending, However, credit supply to <strong>agriculture</strong> \\'as<br />
positively associ<strong>at</strong>ed with number of rural bank branches,<br />
The better-off farmers had better access to <strong>for</strong>mal credit as<br />
compared to small <strong>and</strong> marginal farmers, Importantly, despite the<br />
increasing consensus to extend credit facility to <strong>agriculture</strong>, in<br />
general, <strong>and</strong> small <strong>and</strong> marginal farmers, in particular, banks were<br />
unable to lend to those activities with high social return or those<br />
c<strong>at</strong>egory of creditworthy borrowers who had been traditionall\'<br />
marginalised in the credit market.
Trends <strong>and</strong> Determinants of Credit FlolU to AgnclIilllrc ur 3lale <strong>and</strong><br />
District Level<br />
An analysis of trends in the supply of agricultural crCdlt \),. SCBs al<br />
the st<strong>at</strong>e <strong>and</strong> district level has been carried out in the fourth chapIn<br />
The r<strong>at</strong>e <strong>at</strong> which credit to <strong>agriculture</strong> was disbursed gr-cw <strong>at</strong> a rapid<br />
r<strong>at</strong>e during the pre-re<strong>for</strong>m period as compared to the re<strong>for</strong>m pniod in<br />
most of the st<strong>at</strong>es. These growth r<strong>at</strong>es were found to be unevcn both<br />
during the sub-periods <strong>and</strong> across the st<strong>at</strong>es. An anal\·sis of l\m<br />
indic<strong>at</strong>ors, viz., the proportion of agricultural credit to net bank cred,t.<br />
<strong>and</strong> total bank deposits, revealed th<strong>at</strong> there were substantial interst<strong>at</strong>e<br />
differences in these indic<strong>at</strong>ors within <strong>and</strong> across the su b<br />
periods. A decline in the proportion of agricultural credit to total bank<br />
deposits in all the major st<strong>at</strong>es implies th<strong>at</strong> the banks were diverting<br />
their funds raised in the <strong>for</strong>m of deposits to sectors other than<br />
<strong>agriculture</strong>. This is found to be more prominent in the back"'ard<br />
st<strong>at</strong>es of Bihar, Uttar Pradesh <strong>and</strong> West Bengal.<br />
An analysis on access to credit (i.e., the number of farmers<br />
obtaining <strong>for</strong>mal credit to total number of farmers <strong>at</strong> a particular point<br />
of time) showed th<strong>at</strong> there were substantial inter-st<strong>at</strong>e differences in<br />
the access to <strong>for</strong>mal credit by the same c<strong>at</strong>egory of farmers <strong>at</strong> different<br />
points of time. While the percentages of farmers accessing <strong>for</strong>mal<br />
credit declined during the study period in most of the sta tcs, the loan<br />
amount per account increased. This implies th<strong>at</strong> there was<br />
concentr<strong>at</strong>ion of <strong>for</strong>mal loans in fa\'our of a particular group of<br />
borrowers, <strong>and</strong> th<strong>at</strong> the banks practised both price <strong>and</strong> non-pnce<br />
credit r<strong>at</strong>ioning methods rn the borro\\'er selection <strong>and</strong> fixdlIon of the<br />
credit limit. The non-prrce r<strong>at</strong>ioning bccomcs c\'
class of l<strong>and</strong>holding obtained substantialh difkrent loan amounts<br />
across the st<strong>at</strong>es.<br />
It is observed th<strong>at</strong> most of the findings <strong>at</strong> the district ltTcI<br />
converged with the st<strong>at</strong>e level analysis. The notable similarities in the<br />
findings rel<strong>at</strong>ing to the st<strong>at</strong>e <strong>and</strong> district <strong>levels</strong> analysis were the<br />
declining share of agricultural credit from net bank credit. uneven<br />
credit flow across regions <strong>and</strong> the differences in the availability of<br />
credit per hectare of gross cropped area. This suggests th<strong>at</strong> the flow oi<br />
agricultural credit followed similar p<strong>at</strong>terns <strong>at</strong> both st<strong>at</strong>e <strong>and</strong> district<br />
<strong>levels</strong>.<br />
Higher (or lower) the proportion of net bank credit to the<br />
<strong>agriculture</strong> sector does not necessarily mean th<strong>at</strong> the per capita credit<br />
availability per hectare of gross cropped area was more (or less) in a<br />
particular st<strong>at</strong>e or district. Since the proportion of net bank credit<br />
does not take the gross cropped area into account, it might be difficult<br />
to draw a conclusion on whether or not a particular st<strong>at</strong>e or district<br />
was better off in terms of the availability of agricultural credit.<br />
There<strong>for</strong>e, credit (obtained from institutional agencies) per hectare of<br />
gross cropped area was used as an indic<strong>at</strong>or to measure the vari<strong>at</strong>ions<br />
in the supply of agricultural credit in the st<strong>at</strong>e <strong>and</strong> district level<br />
analvsis. Variables such as area under irrig<strong>at</strong>ion, area under<br />
commercial crops to gross cropped area, Credit Deposit R<strong>at</strong>io (CDR)<br />
<strong>and</strong> density of bank branches per 1,000 farmers were specified as<br />
determinants of credit per hectare of gross cropped area <strong>for</strong> the<br />
regression analysis <strong>at</strong> both st<strong>at</strong>e <strong>and</strong> district <strong>levels</strong>.
Since different st<strong>at</strong>es <strong>and</strong> districts have different ch"r;ll'lt',']stJ('s<br />
111 terms of irrig<strong>at</strong>ion facilit\', area under commercial em!,,,. lTcdil<br />
deposit r<strong>at</strong>io <strong>and</strong> density of bank branches, panel regression \IdS Liscci<br />
to assess the separ<strong>at</strong>e effect of these variables, Based on the<br />
Langrange Multiplier st<strong>at</strong>istics <strong>and</strong> Hausman specific<strong>at</strong>ion lest, the<br />
Fixed Effect Model over R<strong>and</strong>om Effect Model was preferred "t Stall'<br />
level analysis, On the other h<strong>and</strong>. R<strong>and</strong>om Effect Model ,,'as useo in<br />
the district level analysis,<br />
The proportion of irrig<strong>at</strong>ed area to gross cropped area <strong>and</strong> credit<br />
deposit r<strong>at</strong>io were found to be the most signifIcant explan<strong>at</strong>ory<br />
variables <strong>for</strong> the vari<strong>at</strong>ions in the credit flow per hectare of gross<br />
cropped area in 14 major st<strong>at</strong>es as well as districts within Orissa,<br />
While the rel<strong>at</strong>ionship between the credit per hectare of gross cropped<br />
area <strong>and</strong> the <strong>for</strong>mer was positive, th<strong>at</strong> with the l<strong>at</strong>ter \\'as negau\'l',<br />
Since assured irrig<strong>at</strong>ion reduced crop uncertainty, bankers were<br />
probably giving priority to lend more to farmers with irng<strong>at</strong>eo<br />
<strong>agriculture</strong>, Surprisingly, even when CDR increased, it reduccd the<br />
supply of credit. The neg<strong>at</strong>ive sign of CDR could be <strong>at</strong>tributed to<br />
perception among bankers th<strong>at</strong> loans to <strong>agriculture</strong> charactt'rised<br />
high-risk. The density of bank branches positivel" affected the credit<br />
flow per hectare of gross cropped area <strong>at</strong> the st<strong>at</strong>e level. Although, this<br />
variable had positive associ<strong>at</strong>ion <strong>at</strong> the district level, it \\'as not<br />
significant. The coeffIcient of area under commercial crops to gross<br />
cropped area was positive but not signifIcant <strong>at</strong> the st<strong>at</strong>e len'!.<br />
However, this variable was neg<strong>at</strong>ive <strong>and</strong> highl\' significant ,,\ t 111'<br />
district leve!. On the whole, the st<strong>at</strong>e <strong>and</strong> district InTI "',,,1\sls<br />
suggest th<strong>at</strong> <strong>for</strong> improved flo\\' of credit to <strong>agriculture</strong>, tl1
aimed <strong>at</strong> Skppll1g up of the CDR should be backed \)\ (hilS,' OJ)<br />
improving irrig<strong>at</strong>ion <strong>and</strong> banking infrastructure.<br />
Oper<strong>at</strong>ion of Macro Policy <strong>at</strong> the Micro Level: An AIlCilllSIS of Crcdlf Flou:<br />
in the Sample Bank Branches<br />
After 1991. the scope of the pnonty sector was broaclcned to lI1dudc<br />
activities, which were traditionally excluded from the pun'ie\\ of this<br />
sector. The fifth chapter has concentr<strong>at</strong>ed on an analysis of the<br />
impact of broadening the coverage of priority sectors on credit flo\\" to<br />
<strong>agriculture</strong> <strong>at</strong> the bank branch level in developed <strong>and</strong> backward<br />
blocks in Kalah<strong>and</strong>i district, Orissa. Based on the d<strong>at</strong>a <strong>for</strong> tlw last fin'<br />
years ending with 2000-01, the following results haye been arnved: (il<br />
The share of priority sector from total bank advance had 1l1creased 111<br />
both the regions, whereas the share of credit flow to <strong>agriculture</strong> had<br />
declined during the same period. (ii) The bankers were gIving<br />
preference to non-agricultural activities especially in the advanced<br />
region. Although the volume of disbursement of agricultural credit by<br />
the sample bank branches in the advanced region \vas more, rd<strong>at</strong>ively<br />
gre<strong>at</strong>er share of credit to <strong>agriculture</strong> from total advances was noticed<br />
<strong>for</strong> the sample bank branches of the backward region. The interest<br />
ll1come on total advance <strong>and</strong> type of securitY-\\'ise supply of<br />
agricultural credit were calcul<strong>at</strong>ed <strong>for</strong> both the regIOns <strong>for</strong><br />
corrobor<strong>at</strong>ing the above. It was found th<strong>at</strong> the interest income on<br />
total advances <strong>and</strong> the proportion of credit going to agnculture out of<br />
total loan were inversely rel<strong>at</strong>ed in both the regions. Further. the 110\\·<br />
of agricultural credit \\'as largely governed by the coll<strong>at</strong>eral sccurlt\<br />
(either l<strong>and</strong> or gold). Not surpnsingl~', larger the proportion of total<br />
advance <strong>for</strong> agricultural credit. more prominent \\'8S the colla tcral<br />
based lending.
These two findings had an impact on credit 10 the pn()rlt\<br />
sector. in general, <strong>and</strong> <strong>agriculture</strong>, in partlcular. as a proportl()11 ot<br />
(olal bank deposits. In the backward reglLln. the pmportllln ot pnurll \<br />
sector to lOtal deposits declined from 81.56 per cent 1I1 I q'Jl-l.ql) t(J<br />
72.35 per cent in 2000-01. In contrast, the same in the advanced<br />
region increased from 85.55 per cent to 116.70 per cent during the<br />
same period. Agricultural credit as proportion to total deposits<br />
declined from 27.04 per cent in 1998-99 to 23.15 pel' cent in 2000-01<br />
<strong>for</strong> the advanced region. A marginal Improvement of the same over the<br />
initial 39.10 per cent was observed Il1 the backward region during the<br />
same period. The policy of coll<strong>at</strong>eral based lending <strong>and</strong> expc'cted<br />
interest income on advances could be <strong>at</strong>tributed to these situ<strong>at</strong>ions.<br />
Factors Detennining the Access to <strong>Institutional</strong> Credit<br />
Empirical studies reveal th<strong>at</strong> the beneficiaries of rural credit extension<br />
policies <strong>and</strong> programmes were the rural well-to-do <strong>and</strong> not poor<br />
farmers (Rao 1975; Lipton 1976; Adams <strong>and</strong> Vogel 1986). Uther<br />
studies confirm this trend. These studies suggest th<strong>at</strong> only a small<br />
proportion of the total cultiv<strong>at</strong>ors in rural areas obtain loans from<br />
<strong>for</strong>mal financial institutions. Further, a small group among those<br />
with access to <strong>for</strong>mal credit monopolIsed the lIon's share of the net<br />
volume of credit disbursed (Lele 1981 ; Gonzalez-Vega 1984; Bra\'Cman<br />
<strong>and</strong> Guasch 1986; Egger 1986). Sarap (1990) argues th<strong>at</strong> a large gap<br />
existed between, on the one h<strong>and</strong>, the overall supply of credit to small<br />
<strong>and</strong> marginal farmers, <strong>and</strong> on the other, their need <strong>for</strong> thIS.<br />
Factors determining the access to institutional credit b\' tilt'<br />
farm household were analysed in the SIxth chapter. As dIscussed. the<br />
credit transaction depended not just on the need of the' f~'rm'T t()r "
loan, <strong>and</strong> the rel<strong>at</strong>ed need to meet the conditions gOH'fning 1 his<br />
borrowing, but also the lender's willingness to extend credit. In l his<br />
context, farmers' access to institutional credit was estim<strong>at</strong>ed b,· using<br />
the Probit Model where the dependent variable was a dichotomous<br />
variable indic<strong>at</strong>ing whether a particular farm household had access to<br />
credit or not. The assumption made by the Probit Model \\·as th<strong>at</strong> the<br />
probability of borrowing from the <strong>for</strong>mal sector sources was<br />
determined completely by the bank which decided whether a farm<br />
household would get a loan or not. This model also assumed th<strong>at</strong> all<br />
cultiv<strong>at</strong>ing households dem<strong>and</strong>ed institutional credit <strong>at</strong> the existing<br />
interest r<strong>at</strong>e, <strong>and</strong> th<strong>at</strong> the <strong>for</strong>mal sector was the cheapest source of<br />
credit <strong>for</strong> farmer borrowers.<br />
The analysis <strong>at</strong> the household level shows th<strong>at</strong> the farm <strong>and</strong><br />
household characteristics like quality of l<strong>and</strong>, value of non-l<strong>and</strong><br />
assets, irrig<strong>at</strong>ed area <strong>and</strong> educ<strong>at</strong>ional qualific<strong>at</strong>ions of the borrowers<br />
improve the prospects of a farm household's access to <strong>for</strong>mal loan,<br />
<strong>and</strong> hence, borrowing, The results also show th<strong>at</strong> the actual size of<br />
l<strong>and</strong>holding did not significantly influence the access, This finding<br />
contradicts the findings of some of the earlier studies th<strong>at</strong> larger the<br />
size of l<strong>and</strong> owned by the households, gre<strong>at</strong>er was the probabilitv of<br />
its access to the <strong>for</strong>mal sector (Kochar 1997; Swain 2002), The lower<br />
caste farmers (SCjST), <strong>and</strong> a farmer who had higher non-farm income<br />
as proportion to the total income were less likely to hm'e access to<br />
credit, as is evident from the neg<strong>at</strong>ive coefficient of these \'ariablcs,<br />
It is also evident from the sample of farm households of<br />
Kalah<strong>and</strong>i district th<strong>at</strong> even where farmers had access to <strong>for</strong>mal<br />
credit, the amount obtained \\·as inadequ<strong>at</strong>e <strong>for</strong> their f(:qll1rements.
This necessit<strong>at</strong>ed borrowing from in<strong>for</strong>mal sources. This e\'ic!encl'<br />
supports the argument th<strong>at</strong> the dem<strong>and</strong> <strong>for</strong> agricultural credit fm<br />
exceeded its supply, In this context, it is discussed in chapter VI th<strong>at</strong><br />
in a financial situ<strong>at</strong>ion characterised by the absence of C1'edit<br />
r<strong>at</strong>ioning, the factors influencing the dem<strong>and</strong> <strong>for</strong> credit would<br />
obviously determine the quantum of credit supply, It is also argued<br />
th<strong>at</strong> where credit r<strong>at</strong>ioning (either in the <strong>for</strong>m of price or non-price)<br />
existed, the factors influencing the dem<strong>and</strong> <strong>for</strong> credit could not be<br />
considered as the ultim<strong>at</strong>e determinants of its supply. It is, there<strong>for</strong>e,<br />
to identify which of these factors - dem<strong>and</strong> or supply, accounted <strong>for</strong><br />
the flow of institutional credit, the determinants were estim<strong>at</strong>ed.<br />
Since the <strong>for</strong>mal lenders gave importance to coll<strong>at</strong>eral security<br />
<strong>and</strong> repayment capacity of the borrower, area under oper<strong>at</strong>ion (OA)<br />
<strong>and</strong> value of farm output (VAO) were considered as suppb;-side<br />
factors. The percentage of irrig<strong>at</strong>ed area to gross cropped area<br />
(PIAGCA), expenditure on farm inputs like fertiliser <strong>and</strong> pesticides<br />
(INEOFA), educ<strong>at</strong>ional qualific<strong>at</strong>ion (EDU) <strong>and</strong> caste of the borrower<br />
(CASTE) <strong>and</strong> the r<strong>at</strong>io of workers to family members (WFM) were<br />
specified as dem<strong>and</strong>-side factors. As elabor<strong>at</strong>ed in this chapter, access<br />
to <strong>for</strong>mal credit in the case of certain farming was not r<strong>and</strong>om. In<br />
order to correct this problem of selectivity bias, the Inverse Mills R<strong>at</strong>io<br />
(IMR) was calcul<strong>at</strong>ed from the above Probit equ<strong>at</strong>ion <strong>and</strong> the same<br />
was introduced as an additional explan<strong>at</strong>ory variable in the equ<strong>at</strong>ion<br />
on the determinants of credit. The results show th<strong>at</strong> PIAGCA. SOU,<br />
WFM, EXPFP, INEOFA <strong>and</strong> VAO positively influenced the supph' of<br />
agricultural credit, whereas OA <strong>and</strong> CASTE adversely affected it.
Logit <strong>and</strong> Probit Models are useful if the qucstion is Wh"1 her or<br />
not there is access to credit. But they arc inappropri<strong>at</strong>e \\'hen 11 is<br />
important to measure the amount of credit obtained. The Tobil i\lllckl<br />
h<strong>and</strong>les censored dependent variables (continuous between some<br />
lower <strong>and</strong> possibly upper bound) better <strong>and</strong>, hence, is supnior to<br />
Logit <strong>and</strong> Probit. The Tobit results again confirm th<strong>at</strong> PIAC'CA. VAO.<br />
EXPFP, <strong>and</strong> CASTE were important variables in determining the<br />
amount of credit obtained.<br />
Credit Gap <strong>and</strong> Coping Str<strong>at</strong>egies<br />
Several factors were, thus, inhibiting agricultural borrO\\'ers, in<br />
general, <strong>and</strong> marginal <strong>and</strong> small farmers in particular, from obtaining<br />
production credit. It is observed th<strong>at</strong> the credIt r<strong>at</strong>ioning went in<br />
favour of large size farmers. Interestingly, not only a small fractIOn of<br />
total number of farmers had access to <strong>for</strong>mal credit, but some of them<br />
also reported th<strong>at</strong> they faced many problems while obtaining the<br />
credit. Some of these problems also contributed to the higher<br />
transaction costs <strong>and</strong> delay in the disbursement of credit. In this<br />
context, the quality of credit delivery system, the extent of credit-gap,<br />
<strong>and</strong> the coping str<strong>at</strong>egy adopted by the farmers in the study area were<br />
analysed in the seventh chapter.<br />
The problems faced by the farmers be<strong>for</strong>e <strong>and</strong> after obtaining<br />
loans have been used as indic<strong>at</strong>ors on the quality of the eXIsting credit<br />
delivery system. Important problems were complic<strong>at</strong>ed procedures,<br />
lack of previous experience, distant loc<strong>at</strong>ion of the bank <strong>and</strong> untlmcl\<br />
<strong>and</strong> inadequ<strong>at</strong>e loan. Of the 200 sample farmers, 56.5 per cem st<strong>at</strong>cd<br />
th<strong>at</strong> bank procedures were complex, 69.5 per ccnt felt t:1,,1 the
disbursl'd loan amount was inadequ<strong>at</strong>l' <strong>and</strong> 49 pl'r cent \\"l'rL' of the<br />
view thal loans were untimely.<br />
More importantly, the quality of <strong>for</strong>mal credit dC'liven system<br />
was particularly poor in the case of marginal <strong>and</strong> small farmers.<br />
Bribing the bank officIals was a widespread problem in the case of<br />
marginal farmers. A general feeling among the borrowers was th<strong>at</strong><br />
"bribing is the only means to obtain a loan <strong>for</strong> allied agricultural<br />
activities under the subsidy <strong>and</strong>/ or poverty allevi<strong>at</strong>ion sehemes". The<br />
evidence shows th<strong>at</strong> the creditworthiness, viability of the proposal.<br />
<strong>and</strong> the amount of cash disbursed were positively rel<strong>at</strong>ed with the<br />
amount of bribe, while the time taken to get the loan sanctioned was<br />
neg<strong>at</strong>ively rel<strong>at</strong>ed.<br />
Given th<strong>at</strong> the above would increase the transaction costs<br />
(Adams <strong>and</strong> Nehman 1979; Sarap 1990J., the borrowing costs incurred<br />
by farmers in obtaining short-term loans were worked out. The<br />
evidence shows th<strong>at</strong> the average transaction cost as a proportion to<br />
average borrowing cost was inversely rel<strong>at</strong>ed with the size of the loan,<br />
whereas, the average interest costs as a percentage of average<br />
borrowing costs was positively rel<strong>at</strong>ed with the size of the loan.<br />
The flow of <strong>for</strong>mal credit was insufficient to meet the production<br />
costs of peasant farmers engaged in culti\'<strong>at</strong>ion. To meet the<br />
remaining cost they turned either to self-<strong>finance</strong> or to borrowing from<br />
the in<strong>for</strong>mal market or both or remained s<strong>at</strong>isfied with poo;'<br />
investment. It was in this context, th<strong>at</strong> the credit-gap had b(TI1<br />
estim<strong>at</strong>ed by size classes of l<strong>and</strong>holdings within <strong>and</strong> across the<br />
regIOns.
The term "credit-gap" has been defined as the un met credit<br />
needs of potential borrowers from either <strong>for</strong>mal or in<strong>for</strong>mal or fmm<br />
both the sources with their respective terms <strong>and</strong> conditions. H()\\T\·"J".<br />
the actual <strong>and</strong> rel<strong>at</strong>ive credit-gap per acre of gross cropped arca has<br />
been worked out to assess the magnitude of shortage of funds to meet<br />
the cost of production, Given tbe self-<strong>finance</strong> <strong>and</strong> <strong>for</strong>mal credit the<br />
amount of in<strong>for</strong>mal credit taken per acre of gross cropped area \\'as<br />
termed as "actual credit-gap", wbereas, tbe differential amount<br />
between the maximum <strong>and</strong> the actual paid-out cost per acre of gross<br />
cropped area was defined as "rel<strong>at</strong>ive credit-gap". Since ll1CITaSe 111<br />
investment on crop production increased the level of production,<br />
ceteris paribus (viz" crop failure, clim<strong>at</strong>ic condition, pnces of<br />
agricultural product <strong>and</strong> so on), all c<strong>at</strong>egories of farmers \\'ould have<br />
been interested to invest to the extent of maximum paid-out cost per<br />
acre in the respective regions provided the required amount of credit<br />
was available to them, Thus, the l<strong>at</strong>ter method assumed to be more<br />
important in the sense th<strong>at</strong> it explained the situ<strong>at</strong>ion, where the<br />
peasant farmer remained s<strong>at</strong>isfied with poor investment due to lack of<br />
availability of credit from either or both the sources.<br />
It is noticed th<strong>at</strong> both actual <strong>and</strong> rel<strong>at</strong>ive credit-gaps were more<br />
111 the advanced region as compared to the backward region <strong>for</strong> all<br />
c<strong>at</strong>egories of farmers, Even if the obtained amount of <strong>for</strong>mal credit per<br />
acre of gross cropped area <strong>and</strong> self-<strong>finance</strong> capacity was more in the<br />
advanced region, still the extent of credit-gap \\'as more. Gi\Tn the<br />
self-<strong>finance</strong>, the higher credit-gap in the advanced region was<br />
<strong>at</strong>tributed to the higher cost of production. This indic<strong>at</strong>es th<strong>at</strong> the<br />
available scale of <strong>finance</strong> was inadequ<strong>at</strong>e <strong>and</strong> well below the actual<br />
cost of production,
As a coping str<strong>at</strong>eg:.·. farmers turned to in<strong>for</strong>mal credit market<br />
with some terms <strong>and</strong> conditions. It was analysed th<strong>at</strong> these contracts<br />
could be in terms of either coll<strong>at</strong>eral or coll<strong>at</strong>eral substltutcs or<br />
personal security or third party guarantor. The composition of<br />
borrowing against different types of coll<strong>at</strong>eral sho\\'s th<strong>at</strong> the quality of<br />
coll<strong>at</strong>eral increased with the rise in the st<strong>at</strong>us of borrowers. The terms<br />
<strong>and</strong> conditions of loan contract became unfavourable \\'ith the decline<br />
in the quality of coll<strong>at</strong>eral assets provided by the borrowers, <strong>and</strong> in<br />
turn, the extent of exploit<strong>at</strong>ion.<br />
Conclusions<br />
The overall conclusions emerging from the analysis of credit flow to<br />
<strong>agriculture</strong> both <strong>at</strong> the <strong>macro</strong> <strong>and</strong> <strong>micro</strong> <strong>levels</strong> are briefly provided<br />
below.<br />
• The analysis <strong>at</strong> the all India level shows th<strong>at</strong> the proportion of<br />
credit going to <strong>agriculture</strong> sector to net bank credit has been<br />
declining from 1991. A similar situ<strong>at</strong>ion was also found across the<br />
bank groups.<br />
• The credit in both absolute <strong>and</strong> real terms grew <strong>at</strong> much faster r<strong>at</strong>e<br />
during the period 1981-91 as compared to the period 1992-2000,<br />
in general, <strong>and</strong> across the financial institutions. in particular.<br />
• Despite the fix<strong>at</strong>ion of lending target, clubbing of direct <strong>and</strong><br />
indirect <strong>finance</strong>s, deregul<strong>at</strong>ion of interest r<strong>at</strong>es, reduction in the<br />
number of slabs in lending r<strong>at</strong>es <strong>and</strong> simplific<strong>at</strong>ion of credit<br />
delivery system, the banks could not achieve the targeted Clmoun t<br />
in the case of agricultural lending <strong>at</strong> the all India level. Although
the consensus was th<strong>at</strong> the credit to agriculturc should be stepped<br />
up, the banks did not find the agricultural sector profitable <strong>for</strong><br />
deploying larger proportion of their loanable funds.<br />
• The st<strong>at</strong>e-wise p<strong>at</strong>tern ll1 the agricultural lending shows th<strong>at</strong> the<br />
proportion of agricultural credit from net bank credit declined in<br />
most of the st<strong>at</strong>es during 1981-90. However, this decline was<br />
common <strong>for</strong> all the st<strong>at</strong>es during 1990s. The growth r<strong>at</strong>e of<br />
agricultural credit was higher during the pre-re<strong>for</strong>m period as<br />
compared to th<strong>at</strong> after the post-1991 period in most of the st<strong>at</strong>es.<br />
The growth r<strong>at</strong>e was found to be uneven during the sub-periods as<br />
well as across the st<strong>at</strong>es.<br />
• The distribution of loan accounts by size-class of l<strong>and</strong>holdings <strong>at</strong><br />
the all India <strong>and</strong> St<strong>at</strong>e <strong>levels</strong> shows th<strong>at</strong> better-off farmers had<br />
improved access to <strong>for</strong>mal credit as compared to small <strong>and</strong><br />
marginal farmers. The low percentage of farmers accessing <strong>for</strong>mal<br />
credit with more loan amount per account in most of the st<strong>at</strong>es<br />
shows a concentr<strong>at</strong>ion of <strong>for</strong>mal loans in favour of a particular<br />
group of borrowers. This also indic<strong>at</strong>es th<strong>at</strong> bankers adopted both<br />
price <strong>and</strong> non-price credit r<strong>at</strong>ioning technique in the borrower<br />
selection <strong>and</strong> fIx<strong>at</strong>ion of credit amount.<br />
• At the st<strong>at</strong>e level, irrig<strong>at</strong>ion <strong>and</strong> banking facility were two important<br />
factors th<strong>at</strong> determined the supply of credit per hectare of gross<br />
napped area.<br />
• The analysis on purpose-\\'Jse flo\\" of credit <strong>at</strong> the bank-branch 1e\"C1<br />
in Kalah<strong>and</strong>i district reveals th<strong>at</strong> bankers were giving preference \u
lend <strong>for</strong> non-agricultural activilies. The analysis
poor quality of the credit deliver.' system made the institutional<br />
~' ~ -<br />
credit expensive <strong>for</strong> the small <strong>and</strong> marginal farmers.<br />
• The poor quality of l<strong>and</strong>, illiteracy <strong>and</strong> lower caste st<strong>at</strong>us had an<br />
adverse effect on the access of agricultural borrowers to <strong>for</strong>mal<br />
credit institutions. However, the value of non-l<strong>and</strong> assets <strong>and</strong> area<br />
under irrig<strong>at</strong>ion improved the probability of farmer's access to<br />
<strong>for</strong>mal sector.<br />
• Irrig<strong>at</strong>ed area, value of agricultural output, expenditure on farm<br />
inputs <strong>and</strong> caste were important variables th<strong>at</strong> determined the<br />
amount of credit obtained.<br />
• The credit-gap was found to be higher in the advanced region due<br />
to higher cost of production. The magnitude of credit-gap was<br />
higher among small <strong>and</strong> marginal farmers.<br />
Implic<strong>at</strong>ions of the Study <strong>for</strong> Policy <strong>and</strong> Theory<br />
The analysis carried out in the study has the following implic<strong>at</strong>ions <strong>for</strong><br />
policy <strong>and</strong> theory.<br />
(a) It is noticed from the all India level analysis th<strong>at</strong> an increase in the<br />
lending r<strong>at</strong>e reduces the supply of agricultural credit. This result is<br />
quite contradictory to the theory, which shows the positi\"(~<br />
associ<strong>at</strong>ion between interest r<strong>at</strong>e <strong>and</strong> the supply of credit.<br />
There<strong>for</strong>e, increasing lending r<strong>at</strong>e may not be an important means<br />
to increase the supply of agricultural credit.
It is argued th<strong>at</strong> increasing interest r<strong>at</strong>e or coll<strong>at</strong>eral reqUIrement<br />
mcreases the risk of the bank's loan portfolio bv either<br />
discouraging safer investor or by inducing borrowers to invest in<br />
riskier projects <strong>and</strong> there<strong>for</strong>e, decreases the bank profit (Stiglitz<br />
<strong>and</strong> Weiss 1981; Besley 1994). A lender may thus be better off<br />
r<strong>at</strong>ioning access to credit <strong>at</strong> a lower interest r<strong>at</strong>e r<strong>at</strong>her than<br />
raising the interest r<strong>at</strong>e of agricultural credit.<br />
Elsewhere, it is also argued th<strong>at</strong> the borrowers were willing to pay<br />
higher interest r<strong>at</strong>es if they got adequ<strong>at</strong>e <strong>and</strong> timely loans<br />
(Rajasekhar <strong>and</strong> Vyasulu 1990; Gadgil 1994, 1997). But in our<br />
existing credit delivery system "th<strong>at</strong> is a big if'. The borrowers,<br />
willing to pay high interest r<strong>at</strong>e, may be less worried about<br />
repayment of the loan. In this context, given the asymmetric<br />
in<strong>for</strong>m<strong>at</strong>ion, Stiglitz <strong>and</strong> Weiss (1981) show th<strong>at</strong> a profit<br />
maximising bank will practice credit r<strong>at</strong>ioning <strong>and</strong> be reluctant to<br />
increase interest r<strong>at</strong>es in response to an excess dem<strong>and</strong>.<br />
(b) Our analysis shows the credit subsidy adversely affectmg the<br />
supply of agricultural credit. It is also noticed th<strong>at</strong> increasing<br />
lending r<strong>at</strong>e cannot be an appropri<strong>at</strong>e measure to reduce the credit<br />
subsidy since it also adversely affects the supply of agricultural<br />
credit. There<strong>for</strong>e, it can be suggested th<strong>at</strong> reduction in the cost of<br />
lending in terms of either financial cost or transaction cost or risk<br />
cost or by any combin<strong>at</strong>ions of these three should be the prime<br />
objective of the financial institutions to reduce the burden of credit<br />
subsidy. This can be made possible by better qualIty of credit<br />
delivery system (timely <strong>and</strong> adequ<strong>at</strong>e) <strong>and</strong> prompt repa\'ment of<br />
loans.
(c) The density of bank branches positively influence the suppl\' of<br />
<strong>for</strong>mal credit. The regression results show th<strong>at</strong> an increase in the<br />
rural bank branches by one per cent leads to 0.52 increase in the<br />
net bank credit <strong>at</strong> all India leveL This shows th<strong>at</strong> the polic.v of<br />
closing the loss-making bank branches is not really helpmg the<br />
cause of <strong>agriculture</strong>. Any further reduction in the number of bank<br />
branches may adversely effect the credit flow to <strong>agriculture</strong> sector.<br />
Hence, if the rural bank branches are to be closed under<br />
profitability consider<strong>at</strong>ion, importance should be given to<br />
altern<strong>at</strong>ive mechanisms like mcreasmg the number of staff 111<br />
neighbouring bank branches, simplific<strong>at</strong>ion of procedures in loan<br />
sanctioned, computeris<strong>at</strong>ion of bank branches, <strong>for</strong>m<strong>at</strong>ion of<br />
larmers' organis<strong>at</strong>ions, self-help groups <strong>and</strong> so on.<br />
(d) The decline in the proportion of agricultural credit to net bank<br />
credit has been alarming. The policy, in this context, should be a<br />
stipul<strong>at</strong>ion of linking credit with deposits r<strong>at</strong>her than stipul<strong>at</strong>ing<br />
the floor level as a proportion of net bank credit. This can also be<br />
supported by the findings of the bank branch level analysis.<br />
(e) As of now the practice is to monitor the credit flow to <strong>agriculture</strong> in<br />
terms of the proportion of credit to <strong>agriculture</strong> in total net bank<br />
credit. Our analysis shows th<strong>at</strong> this may not reflect the true<br />
picture in so far as credit flow to <strong>agriculture</strong> is concerned. Hence,<br />
given the positive dem<strong>and</strong> <strong>for</strong> institutional credit, specific target<br />
should be made in terms of proportion of credit to <strong>agriculture</strong> to<br />
total bank deposits.
(I) It is found th<strong>at</strong> the security value taken b\' thc bankcrs was much<br />
more than the loan amount given to thc farmers. A polin' change<br />
should be made to ensure th<strong>at</strong> the loan sanctioned IS<br />
commensur<strong>at</strong>e with the value of security.<br />
(g) At the household level, a rel<strong>at</strong>ively high dem<strong>and</strong> <strong>for</strong> credit was<br />
found with fairly large credit r<strong>at</strong>ioning. This implies th<strong>at</strong> there is<br />
need to develop credit programmes to support the credit needs of<br />
different c<strong>at</strong>egories of farmers, especially the marginal <strong>and</strong> small.<br />
Interestingly, the quality of l<strong>and</strong> <strong>and</strong> the value of output arc<br />
significant determinants of access to credit <strong>and</strong> amount of loan<br />
obtained respectively r<strong>at</strong>her than the size of l<strong>and</strong>. This calls <strong>for</strong><br />
pollcy <strong>and</strong> programme support in the <strong>for</strong>m of w<strong>at</strong>ershed, irrig<strong>at</strong>ion<br />
development, etc., to improve the quality of l<strong>and</strong>.<br />
(h) In order to reduce the credit-gap problem, there should be<br />
rethinking on the scale of <strong>finance</strong>. Nevertheless, a separ<strong>at</strong>e scale of<br />
<strong>finance</strong> should be fixed <strong>for</strong> each service area of the concerned bank<br />
since the cost of production varies across the regions.<br />
Banking sector re<strong>for</strong>ms were introduced to improve the quality<br />
<strong>and</strong> viability of the credit delivery system, so th<strong>at</strong> the credit flow to thc<br />
hitherto neglected sectors such as agricultural would bc stepped up.<br />
This study on institutional <strong>finance</strong> to <strong>agriculture</strong> <strong>at</strong> both <strong>macro</strong> <strong>and</strong><br />
<strong>micro</strong> <strong>levels</strong> found th<strong>at</strong> credit to <strong>agriculture</strong> had in fact declined <strong>and</strong><br />
the better-off farmers have not been adversely affected by this. Credil<br />
r<strong>at</strong>ioning is widely practised by bankers, <strong>and</strong> the small <strong>and</strong> marginal<br />
farmers have been worse hit. The small <strong>and</strong> marginal farmers, unable<br />
to obtain timely <strong>and</strong> adequ<strong>at</strong>e <strong>for</strong>mal credit, turn to in<strong>for</strong>mal sourn's.
<strong>and</strong>, in the process, are being subjected to an exploit<strong>at</strong>ion in the interlinked<br />
credit markets. The access to institutional credit <strong>for</strong> small <strong>and</strong><br />
marginal farmers, there<strong>for</strong>e, continues to be an outst<strong>and</strong>ing Issue<br />
notwithst<strong>and</strong>ing (or due to?) the recent banking sector re<strong>for</strong>ms.
231<br />
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