Agriculture finance: The success story of Kisan Credit Cards and the way forward
In the Union Budget of 1998-99, the then Finance Minister Yashwant Sinha announced the issuance of Kisan Credit Cards (KCC) to farmers, with the National Bank for Agriculture and Rural Development being asked to formulate a “model scheme” for uniform adoption by Indian banks. The product was introduced in August 1998 and turned out to be an instant hit with farmers. The KCC mode of financing not only helped accelerate farm credit flows, but also resulted in significant changes in their composition and the shares of different institutional lending agencies.
Right till the early 1980s, well over two-thirds of short-term or production credit to farmers for meeting cultivation expenses of crops was financed through cooperative banks. While agricultural lending by scheduled commercial banks (SCB) did go up after the nationalisation drives of 1969 and 1980 – the establishment of regional rural banks (RRB) from 1975 gave a further boost – their focus, however, was largely on credit for investment purposes such as installation/purchase of tube-wells, tractors and dairy, poultry or horticulture-related infrastructure. Even as late as 1998-99, 52 per cent of production credit to agriculture was accounted for by cooperatives, with the corresponding shares of SCBs and RRBs at 37.5 per cent and 10.5 per cent, respectively.
But all this changed with KCC.The KCC account of farmers is similar to a revolving cash credit facility that traders and other businessmen have traditionally availed from banks. While farmers earlier had to apply for a loan for every cropping season, KCC did away with seasonal appraisal. A card once issued was valid for three years – it was raised to five years in 2001 – and farmers now had the freedom to make any number of drawals and repayments within the sanctioned credit limit. They just had to repay the borrowed amount with interest within 12 months. Moreover, even this money needed to be deposited with banks for only 24 hours before it could be withdrawn afresh.
In 2006, the Centre announced an interest subvention of 2 per cent to banks on KCC loans of up to Rs 3 lakh at 7 per cent per annum interest. In 2008, an additional 3 per cent subvention was provided to farmers making prompt repayments; the effective interest paid by them, hence, worked to 4 per cent. In 2012, the KCC scheme’s scope was widened to include post-harvest and produce marketing expenses, working capital for maintenance of farm assets and consumption requirements of farmer households. The credit limit was also allowed to be raised by 10 per cent annually for five years. Further adding to operational ease was the issuance of RuPay debit cards to KCC holders, enabling them to make withdrawals from ATMs.
An indicator of the scheme’s sheer attractiveness to farmers is that the total number of KCCs issued reached around five crore by March 2005 and 15 crore as on March 2017. Even if the operational accounts may be only about nine crore, they still cover 65 per cent of India’s estimated 13.83 crore agricultural holdings. An even better measure of success is provided by the accompanying chart, showing a quantum jump in production credit to agriculture after 1998-99. This – alongside an increase in SCBs’ share in production credit to 68 per cent in 2013-14 and that of cooperatives falling to below 20 per cent (RRBs made up the balance 12 per cent) – is clearly linked to the inception of the KCC scheme.
If KCC has been a major factor behind SCBs’ expanding their short-term farm credit operations – a segment that was hitherto dominated by cooperatives – it has also provided an avenue for the entry of private sector banks. In a study conducted by the Centre for Research in Rural and Industrial Development (CRRID), based on a 2016 survey of 103 farmers in Punjab and Haryana, we found private banks gaining market share in KCC-based lending at the expense of public sector banks (PSB), especially after 2012-13. That, in turn, has had to do with farmers’ preference for banks which provide higher credit limits and better customer service. Private sector banks were wooing farmers by offering credit limits anywhere between Rs 100,000 and 300,000 per acre, as against Rs 60,000-80,000 by PSBs. The credit limits sanctioned were not just way above the actual costs of cultivation; banks were considering even the leased-in lands of farmers for determining scale of finance.
It raises a logical question: If sanctioned limits are much more than cultivation expense requirements, where is all this KCC credit going? Our survey findings revealed some 63 per cent of farmers using their KCC limits to finance farm investments, as opposed to only production credit for seasonal agricultural operations. The lower rate of interest and less cumbersome operational formalities, in relation to normal investment loans, meant that farmers were diverting KCC loans to fund purchase of tractors, pump-sets and poly-houses. If this wasn’t enough, 12 per cent farmers utilised these even for non-farm investments, 23 per cent for marriage of children, 10 per cent each for building new houses and for children’s education, and 6 per cent for sending family members abroad.
That brings us to the other aspect, which is of declining farm credit for investment, captured in the same chart showing a spike in production credit after 1998-99. The fall in investment credit – notwithstanding the plethora of capital subsidy schemes for dairy, poultry, cold storage, godown facilities, etc – should be a matter of concern. Stagnant farm sector productivity resulting from lack of finance for investment purposes could, in fact, be an important reason for the agrarian crisis stalking the country today.
The success of the KCC scheme in pushing short-term farm production credit – some of which is obviously getting diverted elsewhere – points to the need for a similar robust and flexible product for investment loans. There’s no reason why the government and banks together cannot formulate a scheme, wherein farmers can easily access loans with KCC-like terms and conditions that will induce them to also make productivity-enhancing investments.
Source - The Indian Express