Credit availability in agriculture is of prime importance for improving productivity & sustainability in this sector. Farmers (especially small & marginal ones) depend hugely on credit from government sources to achieve sustainability. Our government’s efforts in this direction have been noteworthy, but unfortunately more or less ineffective. The Finance minister has set aside an ambitious amount of money as credit to the agriculture sector in Budget 2015-16 of Rs. 8.5 lakh crores. While this amount is in tandem with the credit requirement of this sector, its uneven availability poses a problem. This newsletter indicates how small & marginal farmers are sidelined in the process of large farmers receiving most of the credit. While processes are evolving with government’s efforts like Jan Dhan Yojana that aims to provide finance & credit access to one and all, we still have a long way to go. We conclude by considering solutions, both short & long term that have the potential to reduce the risk faced by a farmer, as well as improve the farmer’s reach of credit.

1. RISK MANAGEMENT & CREDIT IN AGRICULTURE
INDUSTRY OUTLOOK
•The credit system for the agricultural sector in our
country is underdeveloped, with a majority of farmers
relying heavily on credit to meet their expenses during
crop cycle.
•Despite enormous achievement in disbursement of credit
by the govt., only 37% of the total farmers have access to
institutional credit.
The result is that most farmers rely on unofficial sources
of credit, like, local money lenders.
•For small scale farmers who are equipped with little
capital, availability of credit is most crucial, if they are to
raise their productivity.
•Moreover, while growth in credit disbursement has
been a robust 17% in the last 5 years, the increase in
number of farmers having credit cover is just 4%.
700000
730765
0
200000
400000
600000
800000
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Target vs. achievement in credit flow to agriculture (Rs crores)
Target Achievement
High levels of credit disbursement…
Key Results of NSSO 59th Round Survey
51.4% of farmer households are financially excluded from both formal/ informal sources.
Overall, 63% of farmer households have no access to formal sources of credit.
Across regions, financial exclusion is more acute in Central, Eastern and North-Eastern regions.
 All three regions together accounted for 64% of all financially excluded farmer households in the country.
Overall indebtedness to formal sources of finance of these three regions accounted for only 19.6%
…Imbalanced by low penetration levels
RECENT INITIATVES…
Source: NABARD
60%
40%
% Accounts opened under Jan Dhan
Yojana Scheme [upto Feb’15]
Rural
Urban
71%
69%
58%
59%
56%
50%
Region-wise % Rural accounts of total
accounts
Region-wise % Rural accounts opened to
total accounts
West
North
South
Central
East
North-East
The recently launched Jan Dhan Yojana Scheme correctly targets financial inclusion to ensure access of financial
services to non-bankable people, in an affordable manner.
From the above charts it is visible that providing access to financial services in rural India has been priority of the
government.
Where financial exclusion of farmers was most acute – Central, East & North-East – now have one of the highest
number of rural accounts of the total number of accounts opened.
This will greatly relieve the farmers to have access to the continually increasing amount of credit disbursed by the
government.

2. RISK MANAGEMENT & CREDIT IN AGRICULTURE
COMMERCIAL BANK, THE ONLY THRIVING LENDER…
60% 65% 70% 69% 71% 76% 75% 74% 72% 71%
31% 25% 22% 21% 19% 15% 16% 16% 17% 18%
9% 10% 8% 10% 10% 9% 9% 9% 11% 10%
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Share of Rural, commercial & co-operative banks in lending to
agriculture sector
Commerical banks CCB RRB
Over the last one year, lending to agriculture has
increased at 19% per annum whereas growth rate of agri-
GDP is around 4%.
As a result agricultural debt to nominal Agri-GDP has
rocketed from 40% in FY2000 to 80% today.
Total outstanding agricultural debt today is 7.5 trillion,
whereas India has 200 million hectares of gross cropped
land. Therefore average agricultural debt per hectare is
Rs. 38,000.
This is very high an estimate of expenditure per hectare.
Actual expenditure per hectare of cropped land is
calculated at Rs. 23000/Hectare.
Thus there is excess credit being rolled out by the
government, and indicates where the excess liquidity in
the economy is being pushed to.
This questions the purpose of credit disbursed - to what
extent it contributes to asset building in agriculture.
…RESPONSIBLE FOR CREDIT FLOW TO AGRICULTURE
Source: NABARD; Economic Times
The Diminishing Role of RRBs & CCBs…
The share of credit disbursement by co-operative banks
has been on a declining trend in the past decade.
It has almost halved from 31% to 18% since 2003.
Only 29% of the total credit disbursed by CCBs goes to
small & marginal farmers.
The credit gap therefore has widened and this is what
had primarily led to establishment of Regional Rural
Banks.
REGIONAL RURAL BANKS
Status: Today credit disbursed by RRBs hardly comprises
10% of total advances to agri sector.
Purpose: First established in 1975, RRBs grant loans &
advances to small & marginal farmers, agricultural
laborers, rural artisans etc.
Long-term objective: Devised to aid the development
of agricultural & other rural activities through
providing credit at an interest rate lower than the
market rates.
Reasons for limited success:
Present in Limited Geographical Areas: Specifically
where a co-operative bank is not present.
Constraints on Deposit Mobilization: Excluding the
richer sections of the society in providing direct
financial assistance.
Ill-trained Personnel: Difficulty in identifying potential
small borrower.
The govt. therefore needs to re-think the role of
RRBs & CCBs in light of new banking licenses.
44%
27%
11%
19%
27%
22%
9%
19% 20%
5.1% 4.2% 5.8%
0.1% 0.8%
8.6%
5.0%
1.4%
4.7%
-10%
10%
30%
50%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Credit flow growth rate vs. Agri GDP growth rate
% growth rate of Credit flow to agriculture Agri GDP growth rate

3. RISK MANAGEMENT & CREDIT IN AGRICULTURE
CREDIT DISBURSEMENT & FARMER WELFARE
•Credit requirement has been growing rapidly in agriculture.
•According to the 12th Five Year Plan set by the Planning Commission, - “Assuming agriculture growth of 4%, the
size of credit requirement in the 12th Plan period translates to about double the flow in the 11th Plan at Rs 8
lakh-crore, as against the level of Rs 4.75 lakh-crore achieved during 2010-11.”
•Disbursement of credit has increased in accordance with its requirement. As according to an RBI report, credit
disbursement to farmers increased by a colossal 755% from 2000 to 2010.
•However, the amount of credit disbursed seems to be skewed in favor of medium & large farmers
•The stark reality is represented in the below graph.
27%
28%
46%
Credit disbursed by commercial banks to
farmers ( In Rs Billion)
Small & Marginal
Farmer
Medium Farmer
Large farmer
84%
15%
1%
Estimated number of farm households (Lakh)
[2013]
Small & Marginal
Farmer
Medium Farmer
Large farmer
1% of the total farmers received the biggest chunk of credit from commercial banks [46%]
•This indicates how credit disbursement is tilted in favor of the large farmer, whereas 84% of our country’s total
farmers - the small & marginal farmers, receive only 27% of the credit disbursed by commercial banks.
•A report by the Ministry of Finance states that despite the increase in farm credit by over 2.5 times in past five
years, less than 6% of the total institutional credit is made available to small and marginal farmers.
•Moreover, despite receiving lower credit, the incidence of indebtedness is much higher in small and marginal
farmers:
61.0%
18.9%
12.5%
6.4%
1.2%
0%
20%
40%
60%
80%
Marginal Small Semi-medium Medium Large
Incidence of indebtedness basis size of land
possessed
KEY CONCLUSIONS
1. Institutional credit is not accessible to small and marginal farmers of our country; Majority farmers
have limited resources at their disposal.
2. High incidence of indebtedness is indicative of farmers having little or no disposable income for re-
investment in their farms.
3. Since credit is indispensible to the farmer in meeting crop cycle requirement, to prevent risk of default,
the farmer uses low-quality input, resulting in low yield crop, and this forces him into a vicious cycle of
risking default.
Source: agriculture statistics at a
glance,2013; indiaagristat.com
Source: agriculture statistics at a
glance; 2013; BCG report

4. RISK MANAGEMENT & CREDIT IN AGRICULTURE
LESSONS TO LEARN
Improving reach and end-use of credit: Self Help Groups
Defraying Risk: Rework Weather-based Crop Insurance Scheme
 Under Weather Based schemes, farmers are given an insurance cover for
weather-related risks based on their location. The scheme covers farmers for
weather-related risks like rainfall, humidity, temperature etc.
Private banks like ICICI & HDFC who have ventured into this field, have to
tie up with the State govt. in order to provide insurance to farmers.
40% of the premium is paid by the state govt., while another 40% is paid
by the central govt. & the remaining, by the farmer.
Why the scheme needs to be re-worked
Only farmers who have taken a loan from formal channels are compulsorily
registered under this scheme. As indicated earlier, 73% of the farmers have no
access to formal sources of credit, therefore, a measly 25% of the total farmer
population is benefitted from this scheme.
2%
21%
77%
Response of farmers on location
of weather Station in India
Satisfied
Partly
Statisfied
Not
Satisfied
SHG-Bank linkage programme was started with the objective of extending banking to the poor, who mainly comprise
the marginal farmers, landless laborers, and others engaged in small businesses.
Thus it is expected that the program is more prevalent in places where poverty is higher.
However, that is not the case. [As seen in chart above]. Most regions with high incidence of poverty, have lower
spread of SHGs.
Given this, it cannot be expected for SHG banks to have had any significant impact on poverty reduction at a macro
level.
A study by RBI also notes that the states where the SHG spread is better are also the States where the poverty ratio is
lower.
The SHG Bank Linkage has its impact on poverty alleviation through group effort, which emanates from their own
savings and timely credit from various institutional agencies.
 According to a study by NABARD, out of those below poverty line in the pre-SHG situation, 15 per cent moved above
poverty line.
SHGs therefore can play a much larger role in availability of credit to farmers if prioritized & implemented correctly
by the government.
0%
10%
20%
30%
40%
50%
Northern North Eastern Eastern Central Western Southern
Spread of SHGs in terms of the poor in India [2011]
Share of Total poor Share of total SHGs
Source: Report on WBCIS, Ministry of Agriculture;
Insurance officers, ICICI Lombard
Source: RBI
A complex and lengthy procedure created by the govt. that links loanees with this insurance scheme, is responsible for
exclusion of farmers. E.g. A farmer who has applied for a loan in May, and owing to the time-taking procedure, could not
get the loan approved before June, gets automatically excluded from the insurance scheme meant for the period of June to
September.
This scheme has coverage basis the distance from the farmers. This causes uneven availability of the scheme
benefits.[Chart on the right indicates the dissatisfaction of the farmers regarding the location of the weather station]
It does not cover for unexpected weather disruptions like hailstorms. E.g. Farmers who suffered due to the recent
hailstorm that hit parts of the country, destroying a sizeable proportion of the Rabi crop, have not benefitted from this
particular scheme.
For further comments & queries, please feel free to contact me at:
aparna.tiwari@godrejagrovet.com
Aparna Tiwari
Economist – Business Development & Strategy