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Resource centre on India's rural distress
 
 

Targeted lending to farmers a must -Gopa Kumaran Nair and Nirupam Mehrotra
-The Financial Express

In a column in The Financial Express, ("Time to tweak priority-sector lending", goo.gl/6O8AOL, February 6), the author made a case for "tweaking" priority-sector lending (PSL) norms which largely stipulate that the commercial banks direct credit towards certain vulnerable sectors and target population. Specifically, the article argued for revisiting the sectoral targets and cited a reduction in the share of agriculture sector in GDP as a valid reason for resetting the current minimum 18% lending norm for agriculture. The reader is left in no doubt after reading the column that the author wants a reduction in the sectoral target for agriculture and avoid the compulsion of depositing the balance in Rural Infrastructure Development Fund (RIDF).

Although the share of agriculture in GDP has reduced, it is imperative to recognise that around half of the country's population is still dependent on agriculture for livelihood. While fixing PSL targets, the share in employment and the poor resource base of the farming community cannot be neglected or ignored as the very objective of priority-sector lending is to put in place a policy-driven instrument which ensures that credit needs of people dependent on these sectors are adequately addressed. The underlying assumption is that, left to the vagaries of private informal markets, these sectors (and the dependent population) would be deprived of the minimum entitled access to resources, including credit. The latest key indicators of ‘Debt and Investment in India', published by NSSO, show that around 46% of our cultivator households (HHs) are indebted (as on June 30, 2012). Around 64% of the indebted amount of these cultivator households was sourced from the formal banking system. Although the share of formal agencies in the indebted amount has improved over the years, it is important to note that even during 1981, formal banking sources had a share of 63%.

The growth history of the country illustrates the strong positive influence of the performance of the agricultural sector on the achievement of other sectors of the economy. The vagaries of climate always had larger say on the growth performance of the farm sector than any other determinant, warranting the need for weather-proofing the sector. There is an urgent need to accentuate capital formation in agriculture to accelerate and sustain Indian agriculture's growth. Unfortunately, the sector's share in the total capital formation in the economy is meagre. The dominance of private sector (averaging around 80%) in capital formation in agriculture and the weak resource base also necessitates the role of formal banking in providing necessary support in lending to the sector. To feed the growing population of the country, and in view of the limited scope for area expansion, the only plausible route is productivity enhancement through technology adoption. Any change in the current PSL norms should be to increase the resources for lending to the sector to meet the demands of technology enhancement.

Some are of the opinion that banks are reluctant lenders when it comes to agriculture due to the threat of rising NPAs. No doubt, NPAs have increased across various sectors, but to single out agriculture may not be fair and doesn't stand up to empirical evidence vis-a-vis other sectors. For example, NPAs of agriculture sector, though increased from 3.3% (March 2011) to 4.4% (March 2014), have marginally reduced between March 2013 (4.7%) and March 2014 (4.4%). NPAs in medium and small enterprises have increased at a higher pace, from 3.6% to 5.2%, during the period. In the case of the non-priority sectors, NPAs have doubled from 1.8% (March 2011) to 4.0% (March 2014). Thus, to argue that non-attainment of PSL targets in agriculture is linked to NPAs may not be a defensible stand in light of the trends in NPAs across sectors.

Interestingly, public sector banks (PSBs) have largely fulfilled the overall PSL target of 40% (of adjusted net bank credit, or ANBC), but have not been able to achieve the sub-sectoral target of 18% laid down for agriculture. The achievement for PSL (overall) target for PSBs was 42.8% (2005), 41.6% (2010), slipping to 36.2% in 2013, and stands at almost 40.0% for 2014. But with regard to agriculture, PSBs are struggling to achieve the mandated norm of 18%. Way back in 2007, the Expert Group on Agricultural Indebtedness (with professor R Radhakrishna as its chairman) had estimated a substantial gap in reaching the 18% target between FY04 and FY06. The share of agriculture in ANBC, which was 15.3% in March 2005, improved marginally, but hovered around 16% during the 2012-14 period. In view of the low level of credit-access for the cultivators (read in conjunction with a low level of attainment of agricultural lending target), it may not be prudent to effect any change in the agriculture portion of the PSL as it could prove counter-productive for the sector.

The current PSL guidelines also further mandate that any shortfall in the agriculture sub-target needs to become part of the RIDF (perhaps the only penal measure for not achieving the targeted lending target). The dispensation of RIDF has ensured that funds which rightfully should have flowed to the agriculture sector in the first place get another chance to flow back to the sector, albeit not through the direct lending route. No one can contest the fact that investment in rural infrastructure is as important as direct lending to enhance the performance of the agriculture sector. Various studies have indicated the positive multiplier effect in terms of income, employment generation and poverty reduction that the activities funded out of RIDF have been able to achieve. Thus, any dilution of the sub-sectoral PSL norm for agriculture would suit the banks as it provides them an avenue to reduce their lending to the sector. It is, therefore, advisable to have a permanent sub-limit in the ANBC (2%, to begin with) in addition to the stipulation of 18% set apart for agriculture, fully dedicated for infrastructure creation for agriculture.

The authors are with the department of economic analysis and research, NABARD. Views are personal.