Agricultural Credit and its effects on small farmer indebtedness

It is no secret that most farmers in India are in a vicious debt trap. Their cash returns from agriculture are barely enough to service their debt. The average farmer’s household’s income worked out to Rs. 2,115 per month, leaving more that 48% farmers indebted. Since 1997 more than 1, 50,000 farmers have been driven to commit suicide.

As the interest piles up, farmers find that they are just not able to see the problem abating. Thus every now and then the government is forced to announce a waiver of loans to farmers. Yet only a few of the desperate farmers benefit from such a move which puts a huge burden on the exchequer.

In the Union Budget of 2008, the finance minister announced a bank loan waiver of nearly Rs. 71,000 crore, a decision taken in the background of the increasing farmers suicides in the country. However this did not actually bring down the incidence of suicides, except for having the salutary effect of postponing the inevitable. On the other hand, they end up benefiting those farmers who have been defaulters. So, credit with Self Help Groups (SHGs), which actually constitute the poorest segment among farmers, do not generally benefit much from such loan waiver exercises as SHGs ensure regular re-payment by members through peer pressure and have low levels of default.

Most of the loans which are waived are long terms loans taken by the better off farmers, for purchasing machinery, tractors, pump as opposed to short term crop related loans, which are generally tied to the harvest. Farmers owning more than two hectares of land were given 25% waiver, if they repaid the 75% over the next 18 months. This has now been extended for a further 6 months, in view of the late arrival of monsoon in 2009.

Further the waiver only applies to formal loans, whereas a large part of the smaller farmers have debt to informal moneylenders at high interest rates.

Politically, such largesse from the public exchequer is justified in the name of the poor, and does help spruce up the image of the party in power at the time of elections.

The loan waivers generally help the banks who have made these loans pretty up their balance sheets.

Economically, these waivers have the effect of actually slowing down credit off take in the agricultural sector. For example, this year (2008-2009) after the loan waiver, the credit off take has gone down 50% in Vidarbha, a region of the highest farmer suicides in previous years. In 2007-08, nationalised banks lent Rs 4, 400 crore and cooperative banks lent Rs 4, 800 crore as crop loan in Maharashtra. The figure for 2008-09 is only Rs 4,400 crore, or just 50% of the previous year (Cf. Jaideep HARDIKAR).

The purist among the neo-liberals argue that such waivers would reward the defaulter, thus threatening the very basis of the credit market. Yet the same section have no other prescription than increased finance and investment in agriculture. Thus to solve the problem of debt, the solution proposed involves more credit. For example the loan waiver of Budget 2008 was followed up in the next budget by raising the credit flow to agriculture by 13.25 percent from 2.87 to Rs. 3.25 lakh crore rupees.

Extent & Nature of Farmers’ Indebtedness

The National Sample Survey Organisation (NSSO) one of the most reliable and exhaustive surveys in the country surveyed the extent of indebtedness among farmers in its 59th round of surveys as far back as 2003.

The survey indicated that nearly half (48.6%) of farmer households were indebted and 61 person of them were small farmers holding less that one hectare. Of the total outstanding amount, 41.6 per cent was taken for purposes other than the farm related activities. 30.6 per cent of the total loan was for capital expenditure purposes and 27.8 per cent was for current expenditure in farm related activities. The other important fact was the 42.3 percent of the outstanding amounts are from informal sources like moneylenders and traders.

In fact, our field observations have shown that the largest segment of outstanding is to traders of pesticides, fertilisers and other farm inputs. This, when considered with observations of the Radhakrishna Expert Group on Agricultural indebtedness, indicates a way out of at least the 27 percent spent on current farm expenditure.

The official View

An Expert Group on Agricultural Indebtedness under the chairmanship of Shri. R. Radhakrishna was formed. In its report in July, 2007, it estimated that in 2003 non-institutional channels accounted for Rs. 48,000 crore of farmers’ debt out of which Rs. 18,000 crore was availed of at an interest rate of 30 per cent per annum or more.

It said that the cropping pattern in India is highly skewed in favour of cash crops in recent years which invite more investment in agriculture. For cash crops, there is need for long term loans, but short term credit dominates the farm credit structure, accounting for more than 75 per cent of the total.

The committee observes that public sector investment in agriculture which accounts for about one third of the total investment has been declining in the recent years and it is the private investment which is playing a major role. It observes that cooperatives are a major source of capital formation, and it has large amounts of unutilised resources. These can be used more effectively, given better policy environment in the context of decentralized planning and Panchayati Raj or local government (Cf. Mani K.P.).

The Expert Committee on Rural Credit felt that the small and marginally are being disadvantageously placed in accessing technology, credit and support and that a more integrated view is needed to assess the credit needs of such households rather than financing a single activity. This report recommended Contract farming for Small and Marginal Farmers for access to Credit. Contract farming promises to provide linkages between the ‘farm and the market.’ This facilitates accelerated technology transfer, capital inflow and assured market for crop production.

The Group, among other things recommended inclusion of financially excluded, particularly the small borrower households, and adoption of risk mitigating measures for agriculture.

It has proposed setting up of the Price Risk Mitigation Fund to compensate farmers in extreme situation of price collapse in case of plantation and other crops not covered by MSP. Another important recommendation of the commission was the introduction of a cyclical credit system of treating crop loan as a weather cycle related intervention rather than an annual feature.

In the official economic survey 2007-2008, the government indicated that it would consider various options to addressing the issue of agricultural indebtedness.

It is slowly being recognised that short term credit needs of a farmer differ from the long term ones. These requirements include maintenance of tractor/farm implements, allied activities like dairy, poultry, cost of feed, annual repairs, fuel, etc. Very often, these two lines of credit are needed simultaneously.

Short term production needs of the farmers are met by local moneylenders who extract high interest from them. As it is informal, work needs to be done in this line to directly deliver cheap credit to farmers. Since agricultural activity is long term in nature credit based on assets is given and these schemes are generally niche market, preserved for the privileged class of farmers wherein access is denied to the small and marginal farmers. Innovation is required in such schemes as those who are in need of credit usually end up being losers. They are forced to take bridge loans and repaying them becomes a problem because of the debt trap that they are already in.

Indebtedness or overhang of debt has been both due to the exogenous factors such as weather induced crop uncertainties and endogenous reasons such as the consumption needs of the farmers that have taken precedence over the repayment obligations. For many farmers this could be genuine as incomes from agriculture may not have been sufficient to generate a surplus.

The World Bank/World Food Programme Solution – More Credit

The main logic of the international development bosses led by World Bank is that it is difficult for poor households to invest, buy inputs including seeds and fertilizers, and cope with shocks, such as the death of an animal, a sick child or high food prices, without access to credit and insurance. The bank feels that the low-income farmers have to sell part of their crop during harvest time at low prices because they need cash and cannot get it from banks and that they are likely to buy back the same staple food at high prices a few months later, when their stocks run out. In India the low income farmer is also generally forced to sell his crop at low prices because he is servicing debt in the first place.

Innovating to adapt to a changing environment

The World Food Programme builds its logic on the belief that farmers do not invest in increasing their production because of the risk that they will not obtain a return on their investment through sale of their produce. Therefore the programme buys the produce using what it calls several “innovative mechanisms including forward contracts, warehouse receipt programs and support to value added, local food processing. In a warehouse receipt system, farmers store food in registered warehouses in return for receipts, which, when backed by legal provisions, can serve as collateral for a loan from a financial institution.”

Discrediting Credit

The reality remains very clear that farmer is just not able to derive sufficient income to pay for the incurring costs. Basically the problem is that agricultural debt can be mitigated only when the income from agriculture is able to take care of the cost of inputs for which the loan has been taken. The inputs include cost of seeds, fertilizers, pesticides, diesel, power etc; costs of assets (tractors, pump sets, implements); costs of labour and cost of debt servicing. Farmers are not able to meet these costs particularly those of debt servicing.

Is there a way out? A recommendation from the Centre for sustainable agriculture has been to change to the more traditional forms of agriculture. They started the NPM – non-pesticidal management movement. Without using pesticides farmers are able to get better returns from the land, and avoid debt or the need for credit for these inputs. In the film ‘Seeding the Knowledge Revolution’, the CSA shows how farmers from 24 villages are now debt free.