CREDIT is a vital input of agricultural production irrespective of the fact whether it is obtained from formal or informal sources.

Although informal sources still meet a substantial portion, the farmers’ dependence on credit is increasing for production particularly because of rising cost of inputs.

The agriculture sector has been under-served by institutional credit and has remained neglected. The institutional or formal credit forms only 30 per cent of the total credit needs of this sector. The rest is provided by the informal sector i.e. money lenders, landlords and arthis etc. at exorbitant rates of interest.

While the commercial banks mobilise more than 20 per cent of their deposits from rural areas, their advances have remained focused mainly on urban areas. According to a study, the ratio of advances to deposits of commercial banks in rural areas is hardly 13 per cent whereas in urban areas it is more than 60 per cent.

In FY 2006, the share of agriculture in total advances of the banks was 6.4 per cent which reduced further to 6.1 per cent in FY 2007, whereas the share of manufacturing, commerce and trade has remained more than 44 per cent and 8.4 per cent respectively.

The number of clients of commercial banks has stagnated. In 1991-92, the total clients of commercial banks were 2,48,000 which increased only marginally to 2,55,000 in 1999-2000. The total number of farms is 5.07 million and if it is assumed that 75 per cent of them are the potential borrowers, the number comes to around 3.8 million.

However, the number of actual borrowers, including those of the ZTBL and co-operative banks etc. is 7,19,116. This number relates to a 12-month period. During this time, two complete crop cycles i.e. Rabi and Kharif takes place. As nearly 80 per cent of the agricultural loans are production loans i.e. payable at the end of each crop cycle, it appears quite probable that figures include a significant amount of double counting. It is a difficult exercise to reach at the figure net of double accounting, as per a rough estimate, made in a study, it has been assumed that at least 50 per cent of borrowers in Rabi would also borrow in Kharif. Thus the figure of the actual borrowers comes near 5,77,000 which is hardly 15 per cent of the total borrowers.

The farmers are ready to pay much higher rate of interest on loans obtained from informal sources than the banks but the banks are reluctant to make advances to them. Apart from this, the banks charge higher interest rates on farm loans than on loans to manufacturing and commerce etc. on the basis of high administrative and transaction cost and high risk of default.

A recent report of the State Bank states that bank earnings are higher in case of spread on consumer financing based on KIBOR plus 376 basic points followed by agricultural financing. The spread on commercial and corporate lending is low.

The central bank and the government are advising these banks to extend the credit to rural sector specially agriculture. In the past commercial banks preferred to pay penalties rather than meet the mandatory credit targets for agriculture. The banks are mostly urban-oriented and have very little expertise in the field of agricultural credit. They are more inclined to make advances to business and industry.

But this argument has now become outdated especially in the case of major commercial banks as they have the experience of more than 50 years of working in the rural areas and extending credit to farmers. Thus they must be well acquainted with the conditions and the borrowing culture of these areas. Another reason cited is the low recovery and the increasing ratio of NPLs in the farm sector. It must be admitted that defaults are not exclusive to agriculture, industry or business.

Most of the agricultural loans have also been given to big landlords. A survey of the Punjab Economic Research Institute shows that out of the total sample 35 per cent of the loans were proxy loans and seven per cent of the remaining 65 per cent were family loans.

Similarly, another study indicated that in the rural areas the branch managers of various banks usually maintain a diary in which they make entries such as Mr X availed Rs5 million in 650 cases and Mr Y availed Rs10 million in 1,000 cases etc. There has been no problem in recovery of loans as is evident from loans given by NRSP and Khushhali Bank in which the rate of recovery is about 100 per cent in spite of the fact that the rate of return on these loans is more than 20 per cent. The banks should review their lending policy.

At present, the scope of these loans has been widened by including other economic activities of the rural areas such as agri-business and cottage industry etc. and it has been given the name of rural finance. The smooth and efficient availability of the credit for farm production is the prerequisite for the balanced growth of the economy.