Agriculture Finance inIndia:Issues and Challenges Submitted By:Pratibha Mishra (16020242030)MBA Agribusiness 2016-18 Symbiosis Institute ofInternational Business Under the guidance ofDr. Nisha Bharti (SIIB, Pune) Contents 1. Acknowledgement. 3 2. Introduction. 4 3.
Nature and scope: 5 4. Review of Literature. 6 5. Objective. 8 6. Hypothesis.
9 7. Methodology. 9 8. Data collection and interpretation. 9 Table 6.1. Problem faced by marginal and small farmers (Rank wise) 9 Table 6.
2. Problem faced by medium farmers (Rank wise) 10 Table 6.3.
Problem faced by big farmers (Rank wise) 10 Table 6.4. Total Agricultural Advances (in crores) 10 9.
Conclusions and findings. 11 10. Appendix.
11 1. Acknowledgement The project on “Agriculture Finance: Issues andchallenges”would not have seen the light of the day without the accompanying individualsand their extremely valuable support and participation.It is indeed amoment of immense gratification for me to express my deepest gratitude to Mrs. Asmita Chitnis, Director ofSymbiosis Institute of International Business and Dr.Nisha Bharti for providing me with an opportunity to carry out this projectand for her guidance and encouragement, to study and help me create thisreport.Regardless of their bustlingcalendar they generally discovered time to guide me all through.
I amadditionally thankful to them for resting trust in my capacities and giving methe opportunity. Thank You! 2. Introduction Agriculture plays a vital role in the overallgrowth of the Indian economy.
More than 72% of the Indian population isdirectly or indirectly dependent on the agriculture. Agriculture Finance is oneof the important inputs of the agriculture. So, to boost the Indian economy andcontribute more to the GDP, it is important to enhance the condition of theagricultural finance. This report would cover a brief of all the challenges andissues faced by the rural people and the farmers of India in order to avail theagricultural credit and the loans.With the progress of the Indian economy,exceptionally after the focus is on the attainment of sustainable progress,there must be an attempt to include maximum number of participation from allthe sections of the society. But the lack of awareness and commercial literacyamong the rural population of the state is affecting the development of theeconomy as rural population does not have access to formal credit. So, toovercome such barriers, the banking sector came up with some technologicalinnovations such as automated teller mechanisms (ATM), credit and debit cards,internet banking, etc. Nevertheless introduction of such banking technologieshas brought a change in the country, rural population is still unaware of theseadjustments and is excluded from formal banking.
Measures such as SHG-bank linkage program, useof business facilitators and correspondents, easing of Know Your Customer (KYC)norms, electronic benefit transfer, separate plan for urban financialinclusion, use of mobile technology, bank branches and ATMs, opening andencouraging ‘no-frill-accounts’ and emphasis on financial literacy have playeda significant role for increasing the use of formal sources for availing loan/credit. Measures taken by the government include, opening customer service centres,credit counselling centres, Kisan Credit Card, Mahatma Gandhi National RuralEmployment Guarantee Scheme and Aadhar Scheme.Agricultural credit needs can be classified inthree categories:1. Short term2. Medium term3. Long termShort term needs varies between 3 months to 15months it is seasonal and for purchasing of seeds, fertilizers, pesticides andpayment of wages and operational expenses.
This type of need is mostly requiredby all farmers. Medium term needs varies between 15 months to5 years for the purchase of cattle, small agricultural implements, repairs andconstructional wells etc.Long term needs are required for the permanentimprovement on lands , digging tube wells, purchase of larger agriculturalimplements and machinery like tractor, harvesters etc and repayment of olddebts . The period of such credit extends beyond 5 years. Commercial banksprovide two types of loan i.
e. crop loan and investment loan. Crop loan is ashort term loan, stands due for repayment immediately after the harvesting ofthe crop whereas investment loan is a long term loan required for the purposesof capital formation on land.Sources of agricultural creditsThe various sources of agricultural credit canbe classified in two groups.1) Non Institutional Agencies2) Institutional AgenciesNon institutional agencies include the localvillage money lender and their agents andlandlords. Institutional agencies includescooperatives societies, commercial banks regionalrural banks and NABARD3. Nature and scope: Agricultural finance is studied at both micro and macro level.
Macro finance deals with different sources of raising funds for agriculture asa whole in the economy. It is also concerned with the lending procedure, rules,regulations, monitoring and controlling of different agricultural creditinstitutions. Hence macro-finance is related to financing of agriculture at anaggregate level. Micro-finance refers to financial management of the individualfarm business units. And it is concerned with the study as to how the individualfarmer considers various sources of credit, quantum of credit to be borrowedfrom each source and how he allocates the same among the alternative uses within the farm. It is also concerned with the future use of funds. Therefore, macro-finance deals withthe aspects relating to total credit needs of the agricultural sector, theterms and conditions under which the credit is available and the method of useof total credit for the development of agriculture, while micro-finance refersto the financial management of individual farm business.
Creditneeds in Agriculture: Agricultural credit is oneof the most crucial inputs in all agricultural development programmes. For along time, the major source of agricultural credit was private moneylenders.But this source of credit was inadequate, highly expensive and exploitative. Tocurtail this, a multi-agency approach consisting of cooperatives, commercialbanks ands regional rural banks credit has been adopted to provide cheaper,timely and adequate credit to farmers. The financial requirementsof the Indian farmers are for, 1.
Buying agriculturalinputs like seeds, fertilizers, plant protection chemicals, feed and fodder for cattle etc. 2. Supporting theirfamilies in those years when the crops have not been good. 3.
Buying additional land,to make improvements on the existing land, to clear old debt and purchasecostly agricultural machinery. 4. Increasing the farmefficiency as against limiting resources i.e. hiring of irrigation waterlifting devices, labour and machinery.4. Review of Literature RBI (2005) proposed financial inclusion basedon the business facilitators, adapting the Brazilian success story in India. In2005, efforts were made by RBI for enabling banking services to reach the ruralareas through credit facilities.
Kamath (2008) attempted to understand theimpact of Micro-Finance Institution (MFI) loans on daily household cash flowsby analysing cash inflow and outflow patterns of borrowers of MFI and comparingwith non-MFI households. MFI was proved to be the most important and easy moneylending platform for the rural population.Kannan, E (2011), Researcher discovered thatthe disbursement of credit across established origins had a great impact onimproving agricultural productivity.
Though, it points at its inadequacy andthereby urges for widening its coverage both in terms of the number of creditand the coverage of more marginal and small farmers.CRISIL (2013) measured the extent of financialinclusion in India in the form of an index. It makes use of the non-monetaryaggregates for calculating financial inclusion. The parameters used by theCRISIL Inclusix took into account the number of individuals having access tovarious financial services rather than focusing on the loan amount. The threeparameters of the index were branch, deposit and credit penetration. Theseparameters were updated annually and based on the availability of data, additionalservices such as insurance and microfinance were added. The key findings of thereport were as follows: one in two Indians has a savings account and only onein seven Indians has access to banking credit.
RBI (2014a) focused on the provision of financialServices to the small businesses and low income households. Among the mainmotives of the committee included designing principles for maximum financialinclusion and financial deepening and also framing policies for monitoring theprogress in the development of financial inclusion in India. Thus, in order toachieve the goal of maximum financial inclusion and increased access tofinancial inclusion the committee proposed the following measures: provision offull-service electronic bank account; distribution of Electronic Payment AccessPoints for easy deposit and withdrawal facilities; provision of creditproducts, investment and deposit products, insurance and risk managementproducts by formal institutions. The main findings of the report highlightedthe following key issues. First, the majority of the small businesses wereoperating without the help of formal financial institutions.
Second, more thanhalf of the rural and urban population did not have access to bank account.Third, savings in terms of GDP have declined in 2011-12. To address theseissues, the Committee recommended that each individual should have UniversalElectronic Bank Account while registering for an Aadhar card. The committeealso proposed for setting up of payments banks with the purpose of providingpayments services and deposit products to small businesses and low incomehouseholds. Also banks should purchase portfolio insurance which will help inmanaging their credit exposures. Further, the Committee recommended for settingup of a State Finance Regulatory Commission where all the state level financialregulators will work together.
For the interest of the bank account holders,the committee recommended for the creation of Financial Redress Agency (FRA)for customer grievance redress across all financial products and services whichwould coordinate with the respective regulator. RBI (2014b) presented a report to studyvarious challenges and evaluate alternatives in the domain of technology thatcan help large scale expansion of mobile banking across the country. The reportdivided the challenges into 2 broad categories – Customer enrolment relatedissues and Technical issues. Customer enrolment related issues include mobilenumber registration, M-PIN (mobile pin) generation process, concerns relatingto security as a factor affecting on-boarding of customers, education of bank’sstaff and customer education.
On the other hand, technical issues includeaccess channels for transactions, cumbersome transaction process, andcoordination with MNOs (Mobile Network Operators) in a mobile bankingeco-system. The report has a detailed comparison of four channels of mobilebanking – SMS (Short Message Service), USSD (Unstructured Supplementary ServiceData), IVRS (Interactive Voice Response System) and Mobile Banking Application,and evaluates each one of them based on accessibility, security and usability.To resolve the different problems identified, the report suggests to develop acommon mobile application, using SMS and GPRS channels, for all banks andtelecom operators.
The aforementioned application should enable the user toperform basic mobile banking operations such as enquiring his/her account balance,transfer and remittance of money. The application is expected to be developedin such a way that it provides a simple menu driven, interactive interface tothe user. Such an application can be developed by combined efforts of telecomoperators and banks. The application can be embedded on all new SIM cards, sothat any person buying a new card has a preinstalled application. For customersalready using SIM cards, the application can be transferred “over the air”(OTA) using a dynamic STK (SIM Application Tool Kit) facility.Siddharth Mishra (2014), the researcherstudies that trend of agricultural finance by commercial banks: A case study ofUnion Bank of India, Bank of Baroda and State Bank of India. This study isbased on secondary data. The researcher evaluate that the performance of UBIhas not been satisfactory as the agricultural advances.
The advances given byBOB and SBI had increased, during the study period.Seena P. C. (2015) this paper describes themanagement of agricultural credit in India and the impact of various bankingsector reforms on agriculture. She concluded that performance of agriculturalcredit in India reveals that though the overall flow of institutional credithas increased over the years, there are several gaps in the system likeinadequate provision of credit to small and marginal farmers, limited depositmobilization and heavy dependence on borrowed funds .Efforts are required toaddress and rectify these issues. Banking sector reforms like fixing prudentialnorms, reduced SLR, CRR, banking diversification all affect the Indianagricultural sector.
Various studies conducted and numeroussuggestions were sought to bring effectiveness in the working and operations offinancial institutions. Narsimham Committee (1991) emphasized on capitaladequacy and liquidity, Padamanabhan Committee (1995) suggested CAMEL rating(in the form of ratios) to evaluate financial and operational efficiency,Tarapore Committee (1997) talked about Non-performing assets and asset quality,Kannan Committee (1998) opined about working capital and lending methods, Baselcommittee (1998 and revised in 2001) recommended capital adequacy norms andrisk management measures. Kapoor Committee (1998) recommended for creditdelivery system and credit guarantee and Verma Committee (1999) recommendedseven parameters (ratios) to judge financial performance and several othercommittees constituted by Reserve Bank of India to bring reforms in the bankingsector by emphasizing on the improvement in the financial health of the banks.Experts suggested various tools and techniques for effective analysis andinterpretation of the financial and operational aspects of the financialinstitutions specifically banks. These have focus on the analysis of financialviability and credit worthiness of money lending institutions with a view topredict corporate failures and incipient incidence of bankruptcy among theseinstitutions. 5. Objective a) The objective of the study is to study aboutthe challenges and issues faced by the rural India and the farmers for thecredit facilities and to understand the agricultural finance in Indiab) Banks are providing rural credit in lesserinterest rates but, small farmers are unable to access them because of theinflexibility and delay, high transaction cost, borrower-unfriendly proceduresetcc) RBI has also included SHGs under the prioritysector lending.
The overall objective would be to analyze the problems faced bythe rural population and give the proper solutions in order to improve theircondition. The objective would also to study the disbursement activities andprocess of achieving the target by the Banks and the MFIs.6. HypothesisThe hypothesis of the dissertation would be tocheck whether there is a significant difference in the agricultural credit andfinancing system by the actions taken by the government and the financialinstitutions.7.
MethodologyThe study will be based on both primarysecondary research. The primary data has been collected from the rural areasnear to Pune. The secondary data has been obtained from the concerned banksthrough the annual publications, relevant records and the documents. The datahas also been collected from the Ministry of agriculture, Census 2011, articlesand research papers etc.8. Datacollection and interpretationData are analyzed in three categories A.Problems of marginal and small farmers B.problems of medium farmers C.
problems of big farmers. Almost all marginal and small farmersresponded about problems and there high rank problems are – high rate ofinterest on loan, lack of financial knowledge about bank products and plans andcumbersome process of getting loans and lack of security and collateral.Medium farmers face problems such ascumbersome process of getting loan, lack of financial knowledge and high rateof interest. Sometime bank staffs are also not cooperative.Large farmers also face these problems butless than the small and marginal farmers.
Table 6.1. Problemfaced by marginal and small farmers (Rank wise) High rate of interest on loan I Lack of financial knowledge II Cumbersome process of getting loan III Bank staff is not cooperative IV Lack of security of collateral V Fear factor about recovery process VI Table 6.2. Problemfaced by medium farmers (Rank wise) Cumbersome process of getting loan I High rate of interest on loan II Lack of financial knowledge III Bank staff is not cooperative IV Fear factor about recovery process V Table 6.3.
Problemfaced by big farmers (Rank wise) Cumbersome process of getting loan I Bank staff is not cooperative II Lack of entrepreneurship in agriculture sector III High rate of interest on loan IV Loan amount is not sufficient V Table6.4. Total Agricultural Advances (in crores) Year Total agricultural advances (Rs) Total Agricultural Advances (%) Variations 2009-2010 14139 100 2010-2011 18309 129.49 29.49 2011-2012 19790 139.97 39.
97 2012-2013 18848 133.3 33.3 2013-2014 24658 174.4 74.4 2014-2015 35387 250.
28 150.28 2015-2016 35957 254.31 154.31 9.
Conclusionsand findings The abovetable and figure represents the trend percentages of total agriculture advancesby CentralBank ofIndia for the period 2009-10 to 2014-15. Here, for the calculation of trend percentagestatement, the initial year 2009-10 has been consider as base year. In case oftotal agriculture advance100% inthe base year (2009-10). Which is increased to 254.31% in the year 2015-16. So,from this data, it can be summarised that agricultural advances increased154.
31% during this period. It indicated that bank should try to provide moreadvances to agriculture sector.It can beconcluded that the Government is taking apt actions for the growth of Indianeconomy and so it is helping rural population to grow more. 10. Appendix Questionnaire on Agriculture finance: Issuesand challenges 1. QuestionnaireNo. 2.
Name 3. Location Check all that apply. Rural Urban 4. Address 5. Gender Mark only one oval. M F Other: 6. Age Mark only one oval.
18-25 25-35 35-45 45 andabove https://docs.google.com/forms/d/1KDL7cdSp1eFqzBDMsYG6NMuGHaEUGQFa4vJIGCD73Bc/edit 1/3 Questionnaire on Agriculture finance: Issuesand challenges 7. Education Mark only one oval. Illiterate SSC HSC Graduate Postgraduate 8. How muchland do you own? 9. Any landon lease/ rent? Checkall that apply. Yes No 10.
If yes,how much? 11. No. ofdependents 12. Earningmembers in family 13.
Kind ofcrops/livestocks 14. Anyloan? Mark only one oval. Yes No 15. If yes,how much and from where? 16. Reasonfor loan? https://docs.google.com/forms/d/1KDL7cdSp1eFqzBDMsYG6NMuGHaEUGQFa4vJIGCD73Bc/edit 2/3 Questionnaire on Agriculture finance: Issuesand challenges 17. Are youable to pay loan on time? Mark only one oval.
Yes No 18. Mode ofrepayment? Markonly one oval. Yearly Halfyearly Quarterly 19. What isyour opinion regarding behavior of bank executives and employees? Cooperative Non-cooperative Rude Negligence 20. Barriersfor savings Lack ofcash Lack ofknowledge Badproductivity Don’ttrust the financial institution 21.
Problemsfaced by the rural population Highinterest rate Lack of knowledge Cumbersomeprocess of getting loan Bankstaffs not cooperative Lack ofsecurity/ collateral Fear ofrecovery THANK YOU