PRAGOTI

"By creating an exclusively profit oriented banking sector through deregulation and drastically cutting the expenditure on agriculture government is crushing the farmer from all sides. Even the occasional relief of debt waiver and suspension announced by government workers against farmers as banks show reluctance in further lending to farmers who have received relief." An article on the murderous compromise in rural credit and agriculture by Srujana Bodapati.

Noted journalist P. Sainath recently reported the case of the suicide of Ramchandra Raut, a Vidarbha farmer, who left a carefully composed suicide note on a Rs. 100 stamp paper addressing it to the President and the Prime minister of India among others (see The Hindu, May 6^th 2010). He wrote of his distress upon being harassed for the repayment of loans by banks after two successive crop failures, despite the government’s instructions to the banking sector to go slow on loan recovery in areas hit by crop failure and drought.  In most cases of suicides by farmers in rural India, their inability to repay the heavy debts incurred from money lenders and the banking sector has played the most significant role. Rather than eliminating the exploitative structure of moneylending in rural areas, banks, in fact, have aided to strengthen the tendency of informalisation, particularly in the context of high costs of cultivation and extreme price volatility. The blame for the failure of banking sector in providing sufficient and affordable credit to farmers goes to successive governments that have been pushing with much enthusiasm financial sector deregulation, especially in the banking sector. Dismantling and diluting the statutory provisions meant for ensuring the sufficient flow of credit to agriculture, as part of deregulation, has taken a serious toll on bank credit to farmers.

Following the nationalisation of banking sector it was made mandatory for all scheduled commercial banks to lend 18% percent of their total credit to agriculture. Disbursing small amounts of credit to lakhs of farmers involves more operational expenses for banks than granting large sized loans to few companies. While the operational expenses are large for agricultural loans, for obvious reasons interests rates can not be as high as the interest rates charged on loans to industry and commerce. With surplus from cultivation just enough for subsistence most of the farmers cannot pay high interest rates. Even the rich farmers cannot be charged the interest rates which an entrepreneur can easily pay. Consequently, high operational expenses and low interest rates together with the uncertainty in agriculture due to drought, floods, crop failure, price uncertainty etc. make banks reluctant to lend to farmers. One can be certain that very little credit would have gone to agriculture if banks were given complete freedom in allocating credit and if there was no provision for compulsory allocation of certain share of bank credit to agriculture.

Now, even as prime minister and finance minister issue facile statements urging banks to increase credit supply to agriculture and RBI harps on the many steps taken to ensure this, the mandatory 18% credit to agriculture is being deliberately watered down. The tampering of agricultural credit began from 1990 itself and now it picked up pace. To begin with, the concept of indirect agricultural credit was introduced allowing banks to divert agricultural credit away from farmers. Banks were permitted to disburse 25% percent of total agricultural credit as indirect agricultural credit. Loans to fertilizer and other input traders, dealers in agricultural equipments, arthias (commission agents), non-baking finance companies for on lending to agriculture, businessmen for construction of cold storages and hire purchases schemes in agricultural machinery are some of the categories that are now considered as indirect loans to agriculture. It is a cause for alarm that entities receiving this indirect agricultural credit also undertake considerable money lending in the rural areas. For example fertilizer and pesticide traders and arthias undertake money lending at very high interest rates to farmers, especially the poorest of them, in most of the regions. What is even more alarming is that RBI is aware of this. In fact, RBI states that these loans are extended to them ‘for working capital requirements on account of credit extended to farmers for supply of inputs’. Now, one may ask, what is the rationale in extending credit to traders, dealers and agents so that they can re lend to farmers at killing rates instead of lending directly to farmers? Similarly, lending to non bank financial companies for on lending to agriculture would again mean higher interest rates to farmers as such companies have reputation of extracting exploitative interest rates out of customers.

Even within the so called direct agricultural credit (75% of total agricultural credit), which is meant to be given directly to farmers, sundry loans that do not involve credit to farmers are being included. To mention  a few, loans up to Rs. 10 lakhs against ware house receipts, loans to agriclinics and agribusinesses centres, loans up to Rs 1 crore to farmers and one third of loans of above Rs. 1 crore to farmers are now considered direct loans to agriculture. Now, who are these farmers that can take Rs. 10 lakh loans against ware house receipts and need Rs 1 crore to do farming? Very few farmers have access to warehouse facilities and even when there is access farmers tend to sell their produce immediately after harvesting to repay loans and meet household expenses. Only very rich farmers can afford to stock up their produce in anticipation of a better price. As a result this provision is used by banks mainly to finance food grain traders holding up stocks in ware houses. Now this is a god send to banks hungry for profits, especially the private sector ones. They can meet the agricultural credit quotas while making tidy profits by lending to traders who are willing to pay high interest rates. What do banks care if these loans go in to food grain speculation by traders? One does not need a great deal of imagination either to come to the obvious conclusion that Rs. 1 crore and above agricultural loans are not really going to farmers. These loans are meant to finance corporate farming and even worse these loans are being diverted to real estate speculation. In metropolitan cities realtors who buy up large swaths of agricultural land in the outskirts for speculation, by virtue of owning land, can be considered farmers if the banks want to. It is an open secret that some banks divert considerable amounts of credit in to real estate in the name of direct agricultural credit. No one is suggesting that banks should deny credit to traders, agriclinics and agribusinesses and other activities but diverting credit meant for farmers to these activities is downright criminal. As a result of this diversion at present 15% of the total agricultural credit goes to loans above Rs. 25 crores, 25% goes to loans above Rs 1. Crore and 33% goes to loans above Rs. 10 lakhs. In all this very little goes to farmers.

A discussion on the dismal state of agricultural credit will not be complete without mentioning the role of private sector banks in this. Private sector banks, especially the ones established after liberalisation, have the worst record in agricultural credit. They barely manage to meet the agricultural credit targets every year. Even then they manage to disburse more than half of their agricultural credit in metropolitan areas. One need not wonder how they manage to find farmers in metros. Thanks to the changed definitions of agricultural credit, the dynamic new private sector banks like ICICI give most their agricultural credit to commodity traders and processors, corporate in agricultural sector, agribusinesses, suppliers and vendors of corporates, micro finance institutions and medium enterprises in agriculture linked businesses. Private sector banks have been lobbying and pressurising RBI, with the support of finance ministry, in to changing the norms governing agricultural credit. For their convenience, RBI has been allowing IBPCs (Inter Bank Participatory Certificates) and securitised credit to be considered as agricultural credit. As a result private sector banks and foreign banks have been buying agricultural credit (in the form of securities and IBPC) from non bank finance companies, public sector banks, regional rural banks for very short periods, just in time for reporting, so they can account it as agricultural credit disbursed by themselves. This scheme does not really ensure any additional flow of credit to agriculture but relieves these banks of the responsibility to lend directly to farmers.

Apart from their own reluctance in lending to farmers, the presence of private sector banks created a situation where the public sector banks view the responsibility of agricultural credit as a milestone around their necks. As part of the financial liberalisation policies, Indian government in the early 90s removed all the restriction on the entry of private sector in to banking, apparently to promote competition and efficiency in this sector. This move definitely increased the competition in the banking sector with private sector banks increasing their market share aggressively in the last 15 years, though it is debatable whether it improved efficiency in banking. Till liberalisation, for all practical purposes, public sector had monopoly in banking. As discussed before the operational expenses in agricultural credit are high while it can only pay low interest rates. It is also inevitable that in the times of draught and natural calamities banks incur losses in agricultural credit. But due to their extensive national presence and monopoly public sector banks were able to cross subsidise rural credit when necessary from the incomes earned from credit to other more profitable sectors. The aggressive entry of private sector banks made cross subsidisation difficult for public sector banks. On one hand they have been losing considerable amount of profitable business to private sector banks with their aggressive tactics. On the other hand there has been a sharp reduction of interest rates charged on lending to big corporates and other profitable customers. In order to earn noninterest incomes in the form of substantial fees and commissions by providing various non credit services like offering guarantees, endorsements, underwriting of equity issues etc to big corporate public, private and foreign banks have been out competing each other in offering very cheap credit (even less than 6%) to corporate so as to get their accounts. Such a situation clearly reduces the scope for cross subsidisation for public sector banks. With the private sector banks showing complete reluctance in opening branches in rural areas and lending to agriculture, the onus of providing credit to this sector still remained fully on the shoulder of public sector banks due to the nature of their ownership. With the pressure of being profitable while competing with private sector banks and the responsibility of providing sufficient agricultural credit at reasonable interest rates, the public sector banks are stuck between a rock and the hard place. Something has to give in this situation and what is giving is the agricultural credit, with public sector banks too canvassing for relaxation in the agricultural credit norms.

In their anxiety to withdraw from agricultural credit a view seemed to have taken root in the finance ministry and among banks themselves that money lenders are no more the exploitative elements in the villages that pry on small, marginal farmers and agricultural labourers' need for credit and charge atrocious interest rates, but benevolent village fellows who are efficient credit providers in the country side. In the eyes of policy makers, charging exploitative interest rates by this parasitic class has become a more scientific 'appropriate pricing' and constant harassment and humiliation for repayment have assumed the new identity of 'efficient recovery'. They seemed to have succumbed to the convenient thinking that the nature of money lender has changed in the past couple of decades and now he is not the villain portrayed in ‘Mother India’ any more. If the exploitation by money lender has come down to certain extent it is due to the counteracting presence of banking sector in agriculture. The main purpose behind mandatory 18% credit is to loosen the grip money lenders and other exploitative informal credit structures on farmers by providing adequate bank credit. The withdrawal of banks through back door amendments such as the ones mentioned earlier defeats this purpose as farmers are being pushed back in to the clutches of money lenders, the new breed of finance companies and private micro finance institutions which charge interest rates a money lender would be proud of.

For some time RBI has been articulating vague arguments to the effect that while agriculture is of vital importance to the nation supporting it is the responsibility of the government and it cannot shifted on to the banking sector. Accordingly, banking should be run like any other business with maximisation of the profits as the objective and considerations of social responsibility should left to the government. It is undoubtedly true that it is the responsibility of the governments to ensure the viability of agriculture by reducing various risks faced by farmers. Indian state has been shirking this responsibility for quite some time. Public investments in irrigation, research and development of suitable crop varieties etc. have become thin with every passing year. Extension services that provided valuable advice and directions to farmers are dismantled and farmers are falling prey to the interests of seed and pesticide companies. Cash crops are actively encouraged without bare minimum of price support. This coupled with increasing exposure to international markets permitted by liberalisation policies is playing havoc with the lives of farmers. Either there is draught or floods or crop failure due to pest attacks and if everything goes well and there is bumper crop, a fall in international prices make sure that farmers suffer. With the state not putting a single penny in to agricultural infrastructure, farmers have to depend on credit to lay tube wells and buy expensive pesticides and seeds from MNCs. No doubt, reduction of these various uncertainties and risks faced by farmers through public investments and suitable policies (as opposed to the unsuitable policies implemented at present) would make agricultural credit more profitable and attractive to banks. But the neglect of agriculture by government is being used as an excuse for banking sector to do the same. With the banks pointing fingers towards government and government showing empty hands farmers are being abandoned.

When done properly, adapting to the needs and specific requirements of farmers, providing credit to agriculture can cover operating and interest costs and provides decent profits. But it can never satisfy the greed that banks are encouraged to exhibit by the maniacal votaries of financial sector deregulation. How can marginal, small and middle farmers, forever uncertain, compete with the profits banks can make out of credit cards, car loans and housing loans to salaried and business class, lending to real estate, loans to exporters, commission and fees from corporates and investments in stock markets? It is shameful that while Reliance, Tatas and other corporate are getting bank credit at dirt cheap interest rates of 6 percent and less, which is used for profiteering through investments in stocks and securities banks crib at every available occasion on the loss of revenues in lending to agriculture even at 11 to 13 percent of interest rates and RBI mollifies them by regularly coming out with new circulars expanding the definition of agricultural credit, killing the flow of bank credit to farmers slowly but steadily.

By creating an exclusively profit oriented banking sector through deregulation and drastically cutting the expenditure on agriculture government is crushing the farmer from all sides. Even the occasional relief of debt waiver and suspension announced by government workers against farmers as banks show reluctance in further lending to farmers who have received relief.

This year the restrictions (not above prime lending rate) on interest rates charged on loans up to Rs. 2 lakhs in agriculture were removed, permitting banks to charge as they wish. This would substantially increase the interest costs to farmers. There are also suggestions from various banks, especially foreign and private sector banks, and some official committees that banks be allowed to buy ‘priority sector certificates’ from non financial companies, regional rural banks and other financial institutions (there are even suggestions of buying these certificates from certified money lenders), to meet the 18% credit requirement without the need to give credit directly to farmers. If this suggestion is accepted it will not be long before the concept of directed credit to agriculture is abandoned altogether. It is sad that in times when farmers have a need for more bank credit than what is being given right now, they are forced fight for preserving the status quo.

Such situation cannot continue for long without severely crippling agriculture. This makes it imperative that financial sector deregulation be vigorously resisted. A decentralised polity along with considerable presence of organised left and its fierce opposition to financial sector reforms has so far slowed down the momentum of the reform to a limited extent. With the UPA government bent upon continuing the course not seeming to have learnt anything from the global financial crisis, there is a need for stronger and broader political resistance if it has to be stopped at all.