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Credit needs of the agricultural sector

A woman on her farm, tending to her crops.

70% of the total workforce in the agricultural sector in India comprise of small and marginal farmers.

In an agrarian country like India, where agriculture provides 60% of the total employment, why do the farmers battle for credit on an ongoing basis, and now, more so because of the lockdown due to Covid-19 pandemic. 70% of these are small and marginal farmers and credit has always been a challenge for these communities.

In general, farming communities have always found it difficult to access loans from the banks due to various reasons. Mounting debts, failing crops and farmer suicide have been a regular at news every now and again. How is the farming sector coping? What about small and marginal farmers? Why are they suffering? Here is an insight into the credit needs of one of India’s biggest economic sectors and what we are doing to help and support them through our Rangde India campaign.

Problems in financing farmers:

Agricultural financing has been complex in nature. It is difficult to anticipate the risk and there is always the looming threat of loan waiver that makes it even more difficult for the deserving communities to get access to the credit that they need.

  1. No loan without security or guarantee:

Formal credit institutions do not provide farmers with credit unless security or guarantee in exchange for the loan is produced. This is difficult for a small or marginal farmer to produce as they lack access to assets and other sources of security, thereby, denying them an opportunity to borrow from a formal source

  1. Inadequacy in assessing credit needs of the farmers:

Very often, the need of the farmer is not accurately assessed. For a small or a marginal farmer, this means that they are either burdened with a loan that they cannot afford or that they don’t receive enough credit to meet their farming needs.

  1. Time consuming procedure:

Availability of time alone is very important for the growth of the agricultural sector. However, the process of applying for a formal source of credit is tedious, complex and time consuming. The farmers often have to let go of a day’s wage or spend a lot of money to travel long distances to apply for this loan. The need of the farmers however, is urgent. farmers need adequate finance to carry out operations but also timely ones so that the productivity is not affected.

  1. High costs of transaction:

Applying for a formal credit comes at an additional cost. While the interest rate of a formal credit is much lower than what they would have to pay for an informal source of credit, when combined with the costs of filing and processing the applications, a considerable burden is added on the farmer. While Kisan credit cards have been introduced to provide timely and hassle free loans, the actual reach of the scheme in remote parts of the countries has been below par.

  1. Larger farmers are more likely to receive loans:

According to an article in The Scroll, while credit flow to the agricultural sector has increased over the years, the share of small loans have decreased tremendously. Formal sources of credit are more inclined to provide loans to larger farmers for equipment and machinery as compared to the loans sought by small farmers for crop cultivation, land tilling and irrigation. A Study conducted by Dr Vinod Sen and H.R. Prajapati claims that 88% of the small and marginal farmers that they spoke to, found it “inconvenient to borrow from formal sources and were often humiliated as they approached banks for loans.” Therefore, these farmers are yet again left vulnerable as most of the government initiatives go on to benefit the larger farmers.

A woman harvests leaves from plants into a bucket

Despite new schemes being introduced everyday, the recovery rate remains at 40-60%..

These problems of accessibility to credit have been compounded by the pandemic crisis. Every year the government increases its lending to the farmers. Just short- term loans in the farming sector have increased from 51% in 2000 to 75% in 2018 due to the government’s interest subvention schemes. However, how much of it actually goes to the small and marginal farmers is an important question. There is an ever-widening gap between agricultural credit and agricultural growth. Even before the pandemic struck, the farmers were facing the brunt of failed Rabi crops. This, when added to the effects of the lockdown has made farming community credit starved. Access to affordable credit is very important to procure input goods for the upcoming kharif season. Another important aspect is storage and marketing. The farmers find it difficult to find the right storage units at the right cost and therefore sell the products at low prices. This in turn, affects both their income and need for credit. In spite of the efforts by the government, continued lockdown and restrictions have had a great effect on agriculture in terms of procurement, harvest, and market fluctuations.

The farming community is in dire need of funds to meet both their costs, for Rabi sales and for the upcoming kharif sowing. With new schemes being introduced everyday, the recovery rate is still stuck at 40-60%. While we are at a cross road trying to find ways of increasing cash flow to farmers, yet at a reasonable cost, there is a need to find something dynamic to help us close the gap in supply and demand of the sector.

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