These agri-credit problems are well documented and so are their solutions requiring political will and fiscal discipline. Both these factors are missing and, no wonder, the agriculture sector is yet to take off.

The sector needs around Rs750 billion annually, but the formal sector has been providing Rs100 billion. The rest Rs650 billion comes from middlemen, who, at times, charge up to 30-35 per cent profit — impacting fiscal viability of farming.

Agriculture production demands seed, diesel, fertiliser, water, management and pesticides. All these items need credit support because farming suffers from credit crunch.

The sector needs around Rs50 billion for seed purchases, Rs130 billion for around two billion litres of diesel that it consumes to run farm implements and tube-wells, Rs200 billion for fertiliser, Rs20 billion for farm mechanisation, Rs35-40 billion for electricity bills to run tube-wells, Rs10 billion for canal irrigation and Rs20-25 billion for pesticides purchase. Livestock — a vital sub-sector of agriculture — also needs Rs250 billion credit. Credit needs of forestry and fisheries are in addition to those Rs750 billion.

So, to begin with, the banks have to spare more money for the sector, and do so at an affordable price. Interest rates, jacked up recently, may render the sector non-viable. The government needs to almost triple the amount immediately in order to take care of farming needs.

The complexity of credit distribution mechanism stems from three sources i.e. definition of agriculture loans, its structural mechanism that exclude 3.8 million farmers’ families — almost 20 per cent of total farming sector and the bank’s credit policy.

The formal sector spares around Rs200 billion for the so-called agriculture credit. Out of this amount, almost 50 per cent goes to agro-industry — rice sellers, ginning factories, cold storages and big livestock farmers — that does not directly contribute to farm production. The commercial banks are allowed to show them as agriculture credit. The sooner the State Bank moves to define the dichotomy, the better it would be.

The agriculture sector is left with Rs100 billion, or around 14 per cent of its total requirements. The rest 86 per cent comes from middlemen. The middlemen charge profit or interest up to 35 per cent besides holding the entire crop hostage, which they sell to recover their money. It puts farmers in double jeopardy. On the one hand, they pay as much as three per cent per month and on the other they lose control over their crop.

Thus the system ensures rural poverty. Add these 35 per cent to up to heavy post-harvest losses that all perishable commodities suffer and the reasons behind farmers’ poverty are not hard to decipher. The government needs to move in quickly and take the banking sector to rural areas, especially to small farmers. A network of cold storages needs to be set up to store perishable items.

Whereas cities and tehsil headquarters are teeming with bank branches, the rural areas are almost devoid of them. Profit driven banking sector ignores social responsibility for less developed areas.

Apart from structural problems, the loan disbursement also suffers from some procedural hiccups — issuance of passbooks, revenue record of agriculture land, collateral for loans etc. So far, it has been a duty of farmers to get the passbook from local revenue officer (patwari), who charges around Rs20,000 per book if farmers are to be believed. Without the book, the banks do not lend money. The absence of passbook leaves out over 3.8 million families that own less than five acres as they can neither pay the graft nor have access to banks. These families own around nine million acres. Thus the credit mechanism leaves out these farming families.

The government would do better if revenue officials are asked to issue passbooks to all landholders in their areas of jurisdiction instead of waiting for farmers to come to them. By doing this, the government could equip farmers with basic document for loan application. Together with forcing banks to start operations in rural areas, the government could kick start economy of these 3.8 million rural poor.

The production index unit (PIU), which forms the basis of the loan eligibility, also needs to be revised. For the last 20 years, the PIU value has been kept constant. It includes natural factors of production like land fertility, accessibility and water availability. On the basis of these factors, productivity of a piece of land is determined, which, in turn, fixes loan values. Despite some improvement in farm mechanisation, the PIU value has not changed during the last two decades.

With agriculture land prices shooting up during the last five years, it is unfair to farmers to keep this value at around 10 per cent of 20- year-old land price. The government needs to reassess the PIU value system so that farmers could have easy access to bigger amounts.

Unless the government moves on all these five fronts — sparing more money, definition of agri-loan, providing better access to small farmers, making issuance of passbooks duty of revenue officials and redefining of PIU — it would be hard for agriculture credit to fall in line and jumpstart the sector.