Transforming farm loans Editorial 1st Dec’19 FinancialExpress
Headline : Transforming farm loans Editorial 1st Dec’19 FinancialExpress
Importance of crop loans in India:
- Crop loan is a lifeline for over 145 million farmers in India.
- Every year, millions of farmers and thousands of bank branches go through a intense process of granting crop loans delivered through Kisan Credit Cards.
- Banks disbursed Rs 12.5 lakh crore worth farm loans (majority as crop loans) during 2018-19.
Efforts to encourage crop loans:
- The Centre provides interest subvention on crop loans up to Rs 3 lakh, and with additional incentive for timely repayment, effective interest rate works out to affordable 4%.
- Banks are also mandated to secure crop insurance cover for farmers, who have to pay a minimal premium.
Still many farmers unable to access loans:
- Despite these measures to make crop loans affordable, only 61% of farmers have accessed institutional loans (NAFIS 2016-17).
- Manual crop loaning processes is a big reason for that: Due to predominantly manual crop loaning processes in banks, there are substantial direct and indirect costs inflicted on farmers, including:
- Loss of precious time and potential wage opportunities
- Expenses on visits to banks/other offices
- Legal expenses on verification of land records/documentation
- Processing fee levied by some banks
Banks still do not like these loans much:
- Yet, this massive loan segment continues to be treated as a necessary evil by banks, rather than mainstreaming as a commercial proposition like retail loans.
- Denial or delay in crop loans forces farmers to borrow from informal sources, on adverse terms.
Farm loan waivers across states:
- Undue glorification of farm loans through politically-motivated loan waivers is common.
- While the central government has resisted announcing farm loan waivers, this fiscal prudence was not replicated during the several assembly elections held since 2014.
- Political parties have been promising loan waivers as their main electoral strategy. Subsequently, the elected state governments announced farm loan waivers aggregating a whopping Rs 2.4 lakh crores.
Loan waivers cause systemic damage:
- Irrational loan waivers cause systemic damage where:
- Farmers tend to postpone repayments
- NPAs rise in banks that show reluctance in extending new loans
- State governments resort to fiscally-imprudent acts such as higher market borrowings
- Curtailing expenditure on capital investments and welfare programmes to fund waivers
- Not surprisingly, agricultural NPAs crossed Rs 1 lakh crore mark in July 2019, their proportion to total outstanding agri-loans rose from 9.6% in July 2018 to 11.0% in July 2019, and states that implemented waivers ended up in bad fiscal math.
Issues with issuing subsidised crop loans:
- Today, subsidised crop loans are a necessity for farmers.
- But there are issues relating to:
- Accurate targeting
- Skewed distribution across states
- Exclusions, adverse selection
- Actual impact in terms of incremental farm productivity/output, etc.
- Correct diagnosis and mitigation of crop loan issues can be possible only through analysis of credible micro data and trends on farm credit.
Difficulties in tracking actual progress on loans to agriculture:
- Within the priority sector norms for agriculture, banks are required to provide 8% loans to small and marginal farmers.
- The presence of women and lessee farmers, who also need credit, is steadily growing in India.
- But, with existing manual loan operations and related data, it becomes difficult to track actual progress on these parameters.
Need a paradigm shift to make crop loans work better for all stakeholders:
- This calls for a paradigm shift in approach to adopt disruptive fintech ideas for making crop loans work better for farmers, banks, governments.
Some transformative ideas towards achieving this:
- Loan process automation:
- Crop loans should continue to be delivered to farmers based on a well-evolved methodology comprising crop-wise acreage, crop seasonality, district-wise scale of finance etc.
- However, we need to make crop loan delivery simple, transparent and efficient through process automation to allow timely, hassle-free, cost-effective credit access to farmers.
- Banks must make crop loans a serious and competitive business:
- Banks must start seeing crop loans as multi-billion worth banking opportunity with 145 million aspirational rural customers, having cross-selling opportunities.
- Banks need to act proactively and disruptively to make crop loaning a serious and competitive business, like retail loans.
- National Agriculture Calamity Fund (NACF):
- To safeguard financial interests of farmers in the event of a natural calamity or market adversity, the government may create a ‘National Agriculture Calamity Fund (NACF)’ within a credible national-level agency.
- Mandatory annual contributions to NACF by the central/state governments may be facilitated by the Finance Commission in its resource-sharing formula. States granting loan waivers outside the NACF mechanism may be disincentivised in devolution of the formula.
- Seamless integration between crop loaning and insurance processes:
- There is a need to make crop insurance a preferred choice of farmers, insurance firms and banks.
- To achieve seamless integration between crop loaning and insurance processes, refinements are needed such as:
- Early remittance of premium collected by banks to insurance firms
- Timely payment of premium subsidy by state/central governments
- Use of advanced remote-sensing and digital technologies for timely and trustworthy conduct of crop cutting experiments at farmer level
- Building effective grievance mechanism, etc.
- Big data analytics:
- With numerous data points involved in crop loan operation for 145 million farmers, the segment is a mammoth big data game.
- in the absence of digitisation, banks, governments and other stakeholders are deprived of power of data analytics for making informed decisions on policies, products, processes, cross-selling opportunities, etc.
- Therefore, there is an urgent need to adopt modern financial technology in crop loaning.
- National Data Platform on Farmers (NDPF):
- Creating a robust ‘National Data Platform on Farmers (NDPF)’ to warehouse data on individual farmers, covering their demographics, land records etc. is the need of the hour.
- NDPF may be promoted as a joint venture of central/state governments, financial institutions and other stakeholders.
- Farmer-level risk assessment:
- Banks do not systematically factor structured risk assessed at farmer level in their crop loaning decisions.
- With farmer-level micro data on NDPF, it will be possible to evolve appropriate risk-assessment models and generate a ‘Farmer Rating and Credit Score (FRCS)‘.
- Crop loan eligibility for a farmer, worked out using usual standard criteria, may be further moderated, based on his/her score.
- Such a risk-based lending approach would help in promoting judicious borrowing by farmers and responsible lending by banks.
- National Crop Loaning Portal (NCLP):
- A standardised ‘National Crop Loaning Portal (NCLP)’ may be developed under the aegis of Indian Banks’ Association (IBA) as a fully digitised end-to-end solution for crop loaning.
- Farmers may be given access for making online loan application, tracking and viewing loan transaction details.
- The proposed NACF and NDPF could prove to be major steps towards promoting cooperative federalism in Indian agriculture.
- Loan process automation would enable banks to easily outsource basic loan processes to other agencies.
- Data-driven, digital and score-based approaches to crop loaning would help liberate farm loans from the crutches of political patronage.
- The adoption of a digital and score-based retailing approach to crop loans would enable banks to position this segment as their growth driver, like retail loans, and gradually make it immune to syndromes such as loan waivers.
GS Paper III: Economy