Strengthening Rural Growth with Enhanced Agricultural Credit

Syllabus: GS3/ Economy/ Agriculture/ Inclusive Growth

Context

• The Union Finance Minister urged rural banks to enhance agricultural credit disbursement to meet the evolving financial needs of New Rural India, while reviewing the performance of Karnataka Grameena Bank (KaGB) in Ballari.

Agriculture Credit in India

• Sources of Agricultural Credit: Public sector banks (like the State Bank of India), regional rural banks (RRBs), cooperatives, and NABARD (National Bank for Agriculture and Rural Development) provide most formal agricultural credit.
• Types of Agricultural Credit:
  • Short-term Credit: Used for financing working capital needs like seeds, fertilizers, and pesticides.
  • Medium and Long-term Credit: Used for purchasing equipment, irrigation systems, and land development.

Need for a Push in Agricultural Credit

• Rising Input Costs: The cost of seeds, fertilisers, machinery, and irrigation has increased significantly, creating a need for enhanced and timely access to affordable credit for farmers.
• Diversification of Rural Economy: Modern rural India is moving beyond traditional farming to allied sectors like dairy, fisheries, food processing, and agri-tech startups — all requiring greater financial support.
• Inadequate Access for Small and Marginal Farmers: Nearly 85% of Indian farmers are small and marginal, and many depend on informal lenders charging high interest rates, highlighting the need to expand formal credit penetration.
• Support for FPOs and MSMEs: Farmer Producer Organisations (FPOs) and rural MSMEs require working capital to strengthen supply chains and enhance value addition, demanding active participation from rural banks.
• Climate and Technological Shifts: Climate-resilient agriculture, mechanisation, and adoption of digital agri-solutions necessitate financial backing, making credit accessibility a vital enabler of transformation.

Government Measures to Boost Agricultural Credit

• The Kisan Credit Card (KCC) scheme is designed to provide farmers with adequate and timely credit to meet their diverse financial needs.
• Priority Sector Lending (PSL): Banks are mandated to lend 18% of Adjusted Net Bank Credit (ANBC) to agriculture, ensuring steady credit flow to the sector.
• Interest Subvention Scheme (ISS): Offers concessional loans to farmers, especially during calamities or delayed crop seasons, improving liquidity in rural areas.
• NABARD Refinance Support: The National Bank for Agriculture and Rural Development (NABARD) provides low-cost refinance to rural financial institutions for agricultural and rural development projects.
• Formation of FPOs: The government has targeted the formation of 10,000 FPOs, supported by NABARD and Small Farmers’ Agribusiness Consortium (SFAC), to enhance farmers’ collective bargaining power and improve access to credit.
• Digital Initiatives: Schemes like Digital KCC, Agristack, and Jan Dhan- Aadhaar -Mobile (JAM) integration are simplifying loan disbursement and reducing leakages.

Challenges in Agricultural Credit

• Regional Disparities: Credit distribution remains uneven — Southern and Western States receive a major share, while Eastern and Northeastern regions remain under-served.
• Dependence on Short-Term Loans: The majority of agricultural credit is short-term, limiting investment in long-term infrastructure like irrigation, storage, and mechanisation.
• Exclusion of Tenant Farmers and Landless Labourers: Lack of formal land titles prevents millions from accessing institutional credit.
• Rising NPAs in Rural Banks: Loan defaults and poor recovery rates strain the financial health of Regional Rural Banks (RRBs) and cooperative institutions.
• Inefficient Credit Delivery: Bureaucratic procedures, delayed disbursement, and inadequate credit assessment restrict the effectiveness of schemes.

Way Ahead

• Strengthen Rural Financial Institutions: Empower Regional Rural Banks and cooperative banks with capital support, digital infrastructure, and risk management frameworks.
• Promote Credit for Allied Activities: Expand lending to sectors like dairy, fisheries, food processing, and renewable energy in rural areas to diversify income.
• Inclusion of Tenant and Women Farmers: Facilitate access through Joint Liability Groups (JLGs) and Self-Help Groups (SHGs) to bring excluded segments under formal credit.
• Integrate Technology: Use AI-based credit scoring, satellite data, and digital records to improve loan targeting and reduce fraud.
• Policy Synchronisation: Coordinate efforts of the Finance Ministry, NABARD, and state governments to ensure effective credit outreach and reduce regional disparities.

Source: BS