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Viable agri-finance

Viable agri-finance

​​State Bank of India Agri Business Unit Chief General Manager S. Adikesavan explores agri-finance in India. The views are personal and do not reflect those of the bank.


The following story appears in the April 2018 edition of WSBI-ESBG News & Views magazine.



BRUSSELS, 30 April 2018

If food security and sustainability of employment in the primary sector are the objectives of development, agri-finance would definitely occupy centre-stage in any discussion regarding these two issues.

Agri-finance assumes added significance in the case of developing countries where the farm sector and allied activities still provide more than 50% of the total jobs in the economy. A thriving farm sector supported by a formal credit delivery system is a sine qua non for the stability of any developing country, especially in large tracts of Asia, Africa and South America.

It is accepted that formalized credit delivery systems through the bank and other institutional channels substantially reduce finance costs for farmers and others engaged in allied activities like dairy, poultry, fisheries and animal husbandry.

The Indian experience in farm credit has been quite instructive and the Government sector banking system in the country has played a major role in building up a mass-banking structure which has helped, to a large extent, in enabling farmers access credit at relatively lower costs. Regulatory intervention has also helped.

All Indian banks, including those which are privately-owned, are mandated by the Reserve Bank of India (India’s banking regulator) to deploy 18 per cent of their total loans for agriculture. There are penalties for non-achievement which makes it obligatory for banks to put the shortfall amounts in low-yielding, statesponsored Rural Infrastructure Funds.

Even though there has been growth in absolute terms, agri-finance has not been without its share of problems. The Indian farm sector has become a hot potato recently with everyone acknowledging that there is distress and problems galore across the board on the fields, mainly triggered by lack of remunerative prices for farm produce.

The Indian government has recognized this challenge and has taken a series of steps to mitigate stress in the farm sector. These initiatives have been led by the prime minister himself and in the second week of February, Narendra Modi, outlined a four-point agenda for agri reforms: reducing cultivation costs, ensuring profitable prices, processing farm waste and creating non-farm sources of income.

Of these, the first two are of immediate relevance. Cultivation costs need to be reduced and for this, efficient water, fertilizer and nutrient usage is the key. As more and more farmers understand that modern methods of irrigation using drip and sprinklers are just as efficient as traditional water-guzzling methods, the Indian farm sector is likely to gain in costs. “More crop per drop” has found a resonance among Indian farmers and this will enable them also not to be at the mercy of the monsoons. Prime Minister Modi has also announced that one of his government’s targets was to see that 99 irrigation schemes stuck for 25 to 30 years were completed within fresh deadlines. About 50% of these would be completed by this year. The government has earmarked 80,000 crores (US$12.5 billion) for this, he added.

In a sense, India is facing its 1991-moment in the farm sector – 1991 being the year in which major structural reforms were made in the Indian economy – and indications are that new steps required to deal with farm distress will be taken up on a war-footing. Agriculture in India is a “State” subject (there are 29 States in the Indian Union) and therefore greater coordination between the central and state governments is required to put in place the proposed reforms. ​

If costs are brought down, the next step will be to ensure that farmers get remunerative prices soon after harvest. The government has a scheme of minimum support prices for many agri-commodities but at the implementation stage, there are practical difficulties. In the process, many small and marginal farmers, who do not have storage facilities or the ability to hold on to produce are forced to sell in the market when prices are low, sometimes at a loss.

Creation of an efficient market structure and provision of storage facilities are essential elements of the agriculture value chain that will ensure that farming remains a viable and sustainable option.

It is indeed a fact that agriculture has not received public investments over the last several years commensurate with its requirement. The winds of apathy sown over the last nearly four decades are being reaped now in the form of whirlwinds of protests by the poor farmers, most of whom face extreme hardships.

The crisis in the farm sector has not yet hit mainstream India home as total food grains production at about 273 million tonnes last year and burgeoning surplus stocks have led to few consumers feeling the pain that exists on India’s fields.

Agri-finance, per se, is not a major issue in India. In fact, it could be even argued that the formal system of agricultural credit is a model for developing countries with finance at very affordable costs being provided to farmers across the country. Interest subsidies are provided by the Indian government and some of the state governments. In fact, the effective interest rate on farm loans in some States is zero.

Marketing and storage/infrastructure facilities along with modernization of farming practices (less use of water/efficient use of fertilizers/nutrients) are indeed the enablers urgently required in India.

To most perceptive observers, the time has come for a refocusing of national attention on this most important sector of our economy. It is heartening that the Modi government has committed itself to this crucial area. In India, agriculture cries out for 1991-like overhauling.



Sustainable development