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Q 37- Small farmers must have access to financing at acceptable rates of interest in order to diversify their crops or increase their income. Examine the reasons for subsidised credit's low transmissibility among small and marginal farmers. What steps mu

Paper & Topic: GS IIIà Issues related to direct and indirect farm subsidies and minimum support prices


  • Model Answer:


  • Introduction:


  • Farmers on the offensive would indicate that agriculture reforms have retaken centre stage in the thoughts of lawmakers and policymakers alike.
  • Small farmers need access to loans at acceptable rates of interest in order to diversify their crops or increase their income.


  • Body:


  • Agriculture finance has expanded by 500 percent in the last decade, yet just 20 percent of the 12.56 crore small and marginal farmers have access to it.
  • Despite an increase in agri-credit, non-banking financial companies, or NBFCs, still finance 95 percent of tractors and other agri-implements sold in the country at an interest rate of 18 percent; banks' long-term loans rate of interest for purchasing the same is 11 percent.


  • The share of institutional loans rises with the amount of land owned, according to the Situation Assessment Survey of Agricultural Households conducted by the National Sample Survey Office (NSSO), Ministry of Statistics and Programme Implementation, indicating that big farmers and agri-business companies get the majority of subsidised agri-credit.


  • Associated Facts:


  • In 2019, the RBI's internal working committee discovered a number of irregularities.
  • It was discovered that credit disbursement to the farm sector in some states was larger than their agriculture gross domestic product (GDP), and that the ratio of crop loans disbursed to input requirements was highly unequally distributed. Kerala (326%), Andhra Pradesh (254%), Tamil Nadu (245%), Punjab (231%), and Telangana (231%) are some examples (210 percent).
  • Only 42.2 percent of agricultural loans given in 2016-17 went to small and marginal farmers, according to a report presented by the RBI in answer to questions from the Parliamentary Standing Committee on Agriculture.
  • The RBI has also inquired about agricultural households with the smallest land holdings (less than two hectares) receiving just approximately 15% of the subsidised outstanding loan from institutional sources (bank, co-operative society).
  • Households with the largest amount of land (more than two hectares) receive 79 percent of the subsidised institutional credit, which has an interest rate of 4 percent to 7 percent.
  • According to the Agriculture Census of 2015-16, the country's total number of small and marginal farmer families was 12.56 crore. Small and marginal holdings account for 86.1 percent of all holdings.


  • Causes:


  • Loans are taken out by larger farmers.
  • In terms of financial access, some farmers, particularly those who are larger and closer to urban areas, are over-represented. In terms of priority sector lending mandates, the goal is not to reach out to a specific type of farmer. As a result, the programme is not targeted. " The costs are enormous."
  • Small farmers are refinanced with subsidised credit at a rate of 4 percent to 7 percent interest, and on the free market at a rate of up to 36 percent interest.
  • Banks prefer to lend in places where the cost of borrowing is lower, such as those near urban centres, or to farmers who have a better credit rating. That is, medium-sized and large-scale farmers.
  • Banks in the public sector are under pressure.
  • Agriculture credit is mostly provided by public sector banks, with 12 of the 23 private sector banks for which data is available failing to fulfil the 18 percent lending objective for the agricultural sector in 2017.


  • Credit risk in agriculture:


  • The lack of awareness of the sub-sectoral target groups, particularly agriculture and the small and medium sector, as well as weaker portions, is a problem with priority sector loans.
  • It is tough to recover in the Agriculture PSL industry.


  • Steps to take:


  • Rather than heavily subsidising loans, empower small and marginal farmers by providing them with direct income support on a per-hectare basis.
  • Streamlining the agri-credit system to make greater crop loans to farmer producer organisations (FPOs) or small farmer FPOs against commodity stocks a win-win paradigm for agricultural growth'.
  • With mobile phone coverage among agricultural households in India reaching 89.1%, aggressive efforts to improve institutional credit delivery through technology-driven solutions have the potential to minimise the extent of farm households' financial exclusion.
  • Reforming the land leasing framework and establishing a national-level organisation to build consensus among states and the federal government on agriculture loan reforms to close the gap and reach the greatest number of small and marginal farmers are two further stages.
  • The diversion of loans can be halted if bank authorities keep a close eye on how the loans are used.
  • Similarly, instead of being required to give agricultural funding, private sector banks may choose to lend housing credit in metropolitan regions.
  • The government may rely on specialised institutions like the National Bank for Agriculture and Rural Development (Nabard) to meet sectoral lending goals while also ensuring structural reforms in these industries to make financing more sustainable.
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