Report of the Expert Group on Agricultural Indebtedness

I. INTRODUCTION<strong>Expert</strong> <strong>Group</strong> CHAPTER on Agricultural 2IndebtednessAGRICULTURAL CREDIT IN INDIA2.1 Policy makers in India have long recognised <strong>the</strong> need to provide short and long terminstitutional credit to agriculture at reasonable rates for meeting farmers’ production needs. Thisrecognition came primarily as <strong>the</strong> moneylenders and o<strong>the</strong>r non-institutional sources chargedexorbitant rates <strong>of</strong> interest to farmers who <strong>of</strong>ten had to mortgage, and sometimes, sell <strong>the</strong>irlands to clear <strong>the</strong>ir debts.2.2 After independence, credit institutions serving <strong>the</strong> agricultural sector were developed inseveral phases. In <strong>the</strong> first phase from 1947 to 1969, cooperative agencies were <strong>the</strong> primaryvehicle that provided credit. During <strong>the</strong> second phase from 1969-75, a major development in <strong>the</strong>area <strong>of</strong> rural credit was <strong>the</strong> nationalisation <strong>of</strong> banks in 1969. The commercial banks were alsoassigned an important role in providing agricultural credit to supplement credit by cooperatives.The third phase, 1975-1990, saw <strong>the</strong> establishment <strong>of</strong> Regional Rural Banks (RRBs) in 1975 toprovide credit to small and marginal farmers and weaker sections <strong>of</strong> society. During this phase,introduction <strong>of</strong> <strong>the</strong> concept <strong>of</strong> priority sectors in 1985, whereby <strong>the</strong> banks were enjoined to lend18 per cent <strong>of</strong> <strong>the</strong>ir total credit to agriculture, was an important step for extending credit toagriculture. In <strong>the</strong> fourth phase, beginning with <strong>the</strong> financial sector reforms <strong>of</strong> <strong>the</strong> 1990s,emphasis shifted in favour <strong>of</strong> prudential regulations, and <strong>the</strong> focus on social banking got diluted.As a result, <strong>the</strong> share <strong>of</strong> agriculture in total bank credit <strong>of</strong> <strong>the</strong> scheduled commercial banks fellbelow <strong>the</strong> 18 per cent target. In recent years, in response to <strong>the</strong> agrarian crisis, <strong>the</strong>re have beena number <strong>of</strong> initiatives to expand credit to agriculture such as <strong>the</strong> doubling <strong>of</strong> credit within threeyears, <strong>the</strong> issue <strong>of</strong> Kisan Credit Cards (KCCs), <strong>the</strong> introduction <strong>of</strong> institutional agencies such asagency banking and extension <strong>of</strong> <strong>the</strong> model <strong>of</strong> Self-Help <strong>Group</strong>s (SHGs) to farmers, <strong>the</strong>revitalisation <strong>of</strong> <strong>the</strong> cooperative credit structure and <strong>the</strong> Government’s acceptance <strong>of</strong> <strong>the</strong> principle<strong>of</strong> inclusive banking.2.3 Institutional credit expanded rapidly in <strong>the</strong> post bank nationalisation period from Rs.1, 675crore in 1975-76 to Rs.1,80,486 crore in 2005-06 (Table 2.1) and <strong>the</strong> rate <strong>of</strong> growth was evenhigher than <strong>the</strong> growth rate <strong>of</strong> Gross Domestic Product (GDP) originating in agriculture. Despitethis growth, <strong>the</strong> credit needs <strong>of</strong> agriculture have not been met fully and an overwhelming number<strong>of</strong> farm households have not been able to borrow from institutional sources.2.4 There has been a major shift in <strong>the</strong> relative importance <strong>of</strong> short-term and medium andlong-term credit to agriculture. While short-term credit has remained <strong>the</strong> dominant component <strong>of</strong>total credit, its relative importance declined from 70.3 per cent in 1975-76 to 58.1 per cent in2005-06. Even more striking, <strong>the</strong> relative importance <strong>of</strong> cooperative and commercial bank creditto agriculture was reversed (Figure 2.1). During 1975-76 to 2005-06, <strong>the</strong> share <strong>of</strong> cooperativesin total credit to agriculture declined from 69.5 per cent to 21.8 per cent, whereas <strong>the</strong> share <strong>of</strong>scheduled commercial banks increased from 24.2 per cent to 69.5 per cent.35