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    Institutional Credit to Agricultural sector of India

    Jan 1, 1970 12:00 AM 10 min read

    "Farmers don't just work till the sun goes down. They work till the job gets done"

    Objective: To examine the progress of Cooperative banks in supplying credit to the Agricultural sector of India.

    History: It all started with professional lenders who use to give credit to farmers at a high-interest rate. In 1904, British India govt has taken steps to enter into this credit area. RBI entered by passing an Act 1934, Large-scale credit was available with reasonable rates of interest at easy terms, both in terms of granting loans and recovery of them.

    •1935: The Reserve Bank of India as the Central bank of the country took lead in making credit available to agriculture through these banks by laying down suitable policies.
    •1969: 14 major nationalized banks. After nationalization, it was made mandatory for these banks to provide finance to agriculture as a priority sector. These banks undertook special programs of branch expansion and created a network of banking services throughout the country and started financing agriculture on large scale. Let us understand the classification of loans. They are as follows:

    1) Short term: Meeting annual recurring purchase like seeds, fertilizers, pesticides etc. Expected to pay: After harvest and time limit: 1 year
    2) Medium term: Comparatively longer-lived assets such as machinery, diesel engine, wells, irrigation structure, threshers, shelters, crushers etc. Time limit: 15 months to 5 years.
    3) Long-term: long-life assets such as heavy machinery, land and its reclamation, an erection of farm buildings, construction of permanent-drainage or irrigation system, etc. Time limit: Above 5 years to 15 or even 20 years.

    Crop loan (Short term loan) is having the major share till date. Lenders have classified their credit ability as Institutional credit and non institutional credit where in Institutional credit: 48% share is for commercial banks, 46% for cooperative banks. Lets understand the role of cooperative banks in India. Co-operative banks are the banks whose main objective is to provide financial assistance to economically weaker sections of the society. Such banks are registered under the Cooperative Societies Act. From my analysis, Short term loans (STL) issued are growing at a CAGR of 29% and loans outstanding are growing at a CAGR of 27%; Long term loans (LTL) issued are growing at a CAGR of 18.3% with loans outstanding at 17.1%. Let's understand the reasons.

    Farmers are facing with three main problems such as Changing climate, Water storage and debt (high interest rate by Non-institutional credit lenders). There are many reasons. From 2012 on wards, Soil degradation is affecting the major parts of cultivation in India. Out of 630 districts in India, more than 50% of districts are affected with excess rainfall and productivity of rice and wheat have decreased. The number of cultivators have decreased from 102 million to 89 million and majorly the external factors have hampered by increasing the prices of commodities. Loan burden on farmers have increased and majorly short term credit have decreased the Agri GDP of India.

    I have forecasted the STL & LTL for next 5 years to understand the grey area where the cooperative banks should look into.

    I have interpreted the relationship between Agri GDP, Short term credit and Long term credit with correlation and Two way ANOVA methods to understand which has affected the most and that is Short term loans. Short terms loans are inversely proportional to Agri GDP of India. So, I have provided a solution to Co-operative banks and farmers to reduce the burden of Short term loans. This solution will help 2 parties to get revenue and its a win-win situation.

    Solution provided: Collaboration of Cooperative banks (CB) with Agri input startups where the CB suggest the farmers to take the service and these startups will work together to get revenue and pay back the debt of the farmer to CB. These are few startups that a CB can collaborate with: For example,

    These startups will work closely with farmer in documentation, development and finally getting them a desired output and repay back the loans of the farmer.