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Farm Lending: Rise of Kisan Credit Card Bad Loans

Last updated on March 11th, 2025 Posted on March 11, 2025 by NEXT IAS Current Affairs Team  230

Syllabus: GS3/Agriculture; Economy

Context

  • Recent data reveals that bad loans under the Kisan Credit Card (KCC) scheme have surged by 42% over the past four years, highlighting the financial stress in the agricultural sector.

Understanding Kisan Credit Card (KCC) Scheme (1998)

  • About: It is designed to provide short-term credit to farmers for agricultural and allied activities, based on the recommendations of the R.V. Gupta Committee.
eligibilty-for-kisan-credit-card
  • Features:
    • Issued by commercial banks, cooperative banks, and regional rural banks.
    • Covers crop production needs (seeds, fertilizers, pesticides, etc.).
    • Includes working capital for allied activities like dairy, poultry, and fisheries.
    • Can be used for farm machinery, irrigation, and post-harvest expenses.
      • A KCC loan is classified as NPA if unpaid within three years of disbursal.
  • Working of KCC Scheme:
Working-of-KCC-Scheme
About Non-Performing Assets (NPAs)
– These refer to loans or advances for which the principal or interest payment remains overdue for more than 90 days.
Types
– Substandard Assets: NPA for less than or equal to 12 months.
– Doubtful Assets: NPA for more than 12 months.
– Loss Assets: Unrecoverable loans, identified by the bank or RBI.
RBI Guidelines For Agricultural Loans (as NPAs)
– Short-term crop loans are considered NPAs if payment is overdue for two crop seasons.
– Long-term agricultural loans become NPAs if overdue for one crop season.

Current Trends in Agricultural NPAs

  • According to data from the RBI, the outstanding NPAs in KCC accounts of scheduled commercial banks (excluding regional rural banks) increased from ₹68,547 crore at the end of March 2021 to ₹97,543 crore by December 2024.
  • It underscores the growing challenges faced by farmers in repaying their loans.
kcc-revolving-cash-credit-facility-offered-to-farmers

Major Causes of Rising NPAs in Agriculture

  • Unpredictable Weather and Climate Change: Erratic rainfall, frequent droughts, floods, and changing weather patterns directly impact crop yields, making it difficult for farmers to repay loans.
    • With limited insurance coverage, crop failures lead to defaults on agricultural credit.
  • Low Farm Income and Market Volatility: Despite government support, farmers often struggle with low productivity and unremunerative prices.
    • Market price fluctuations, lack of assured MSP for all crops, and inadequate procurement mechanisms contribute to financial distress.
  • Loan Waiver Schemes and Moral Hazard: State and central governments frequently announce loan waivers as a relief measure, encouraging willful defaults.
    • Farmers often anticipate future waivers, leading to poor repayment discipline.
  • Inadequate Risk Management by Banks: Banks are sanctioning loans without sound risk assessment.
  • Structural Weakness in Agricultural Finance: Small and marginal farmers, who form 86% of India’s farming community, have limited access to institutional credit.
    • Dependence on informal moneylenders results in debt traps and an inability to repay formal loans.
  • Delay in Crop Insurance Settlements: Pradhan Mantri Fasal Bima Yojana (PMFBY) has faced delays in claim settlements, leaving farmers unable to repay loans.

Implications of Rising Agricultural NPAs

  • Stress on Banking System: High NPAs reduce the ability of banks to extend fresh loans, impacting overall agricultural credit growth.
    • RRBs and Cooperative Banks, which primarily cater to farmers, suffer from financial instability.
  • Increased Fiscal Burden: The government often compensates banks for loan waivers, straining fiscal resources and diverting funds from productive rural investments.
  • Economic and Social Distress: Indebtedness is a key reason behind farmer suicides, particularly in states like Maharashtra, Karnataka, and Punjab.
    • Rising NPAs lead to rural distress, impacting employment and food security.
  • Credit Crunch for Genuine Farmers: Due to higher default rates, banks tighten credit norms, making it difficult for genuine, creditworthy farmers to access loans.

Measures to Address Rising Agricultural NPAs

  • Strengthening Crop Insurance and Risk Mitigation: Faster claim settlements under PMFBY and expansion of insurance coverage can reduce financial distress.
    • Promoting climate-resilient farming and crop diversification can mitigate weather-related risks.
  • Improving Credit Discipline: Restricting loan waivers to genuinely distressed farmers and ensuring targeted relief can prevent willful defaults.
    • Encouraging timely repayment incentives, such as interest rate discounts, can improve repayment behavior.
  • Enhancing Institutional Credit Access:Expanding Kisan Credit Card (KCC) coverage to all small and marginal farmers.
    • Strengthening Farmer Producer Organizations (FPOs) to ensure collective bargaining for better credit access.
    • Online application through banks’ websites & Common Service Centers (CSCs).
    • Integration with PM-KISAN and Aadhar for easier verification.
  • Strengthening Bank Supervision and Credit Monitoring: Implementing technology-driven loan tracking to identify early signs of distress.
    • Increasing financial literacy programs to educate farmers on loan management and risk mitigation.
  • Encouraging Diversification and Value-Addition: Promoting agribusiness, food processing, and non-farm activitie
    • Strengthening supply chains and storage infrastructure to minimize post-harvest losses.

Source: IE

 
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