Date: 21/01/2023

Relevance: GS-3: E-technology in aid of farmers; Issues related to direct and indirect farm subsidies and minimum support prices;

Key Phrases: Skewed Regional Distribution in credit, Cropping intensity, Oil Palm Mission, One District One Product, Value Chain Financing, FPO Based Financing

Why in News?

• The efforts of the various stakeholders have resulted in agriculture credit growing at a commendable rate in recent years. However, a better regional distribution of agriculture credit is necessary.

Status of Investment In Agriculture:

• The investment rate in agriculture (ratio of gross capital formation in agriculture to GDP-Agri) stood at 12 percent in 2000-2001 which increased to 18 percent in 2011-12, and presently stands at 15.9 percent in 2020-21.
• Private sector investment constitutes almost 80 percent of the capital formation in agriculture and bank credit is the major driver.
• The South, which accounts for 18 percent of the Gross Cropped Area (GCA), takes up almost 45 percent of the total agriculture credit disbursed in the country.
• On the other hand, Central, Eastern, and North-East regions account for 43 percent of the Gross Cropped Area but utilize only 22 percent of agriculture credit.
• Cropping intensity, indicative of the potential demand for credit, is now higher in Eastern and Central regions and the share of agriculture credit in the N-E region rose from 0.2 percent (2000-2001) and currently stands at around 0.75 percent.
• This region has immense potential for the development of horticulture and opens doors for increasing our engagement with the Far East.

Factors Responsible For Skewed Regional Distribution In Credit:

• Better infrastructure and law and order boost confidence among banks to lend higher amounts.
• While deciding the location of branches, banks prefer areas with availability of irrigation and reliable rainfall patterns that keep floods and drought at bay.
• Naturally, such locations support low-risk agriculture and higher repayment rates.

Linkage Of Edible Oil And Agricultural Credit:

• Currently, India imports 50 percent of edible oil to meet domestic demand.
• To reduce dependence on imported edible oil, the government has recently taken initiatives such as the Oil Palm Mission that envisages increasing the area under cultivation.
• It also benefits the farmers as bringing additional land under oil palm production would increase the demand for credit for cultivation and processing.

Linkage of Production Systems And Agricultural Credit For Value Chain Financing:

• Initiatives like ODOP (One District One Product) will link production systems to markets and fit into the frame of value chain financing.
• The current agriculture credit dispensation is largely individual based, and value chain financing will pave the way for efficient cash flow where risk is shared across the commodity value chain.

Digitization of agriculture credit:

• Digitisation of agriculture credit has huge potential for value creation and expansion of credit if both production and marketing systems can be linked.
• The digitization efforts on the agricultural marketing front such as the e-NAM aim to bring about transparency and efficiency in commodities. Such innovation will not only lead to the expansion of credit but also bring about efficiency gains.

Bridging gaps through FPO-based financing:

• Currently, the agriculture credit landscape is heavily tilted towards the production side, and marketing and post-harvest requirements are relatively credit-starved (including the product landscape).
• Digitisation along with FPO-based financing can quickly bridge this gap.
• FPOs can be the critical drivers of value chains with banks and NBFC financing the chain.
• The credit guarantee fund support for FPO financing is a timely valve that can boost credit flow for FPOs.

Changing financial inclusion landscape via Fintech-based credit dispersal:

• Start-ups are increasingly and efficiently targeting and delivering digital products to the agriculture sector through phygital means.
• The success of UPI and its fast-paced adoption across geographies, be it rural or urban, has eliminated doubts about the mass adoption of technology.
  • NBFCs can help reach the last mile as they have been using technology intensively as compared to traditional rural financial sector entities.
  • The gross advances of NBFC grew at a CAGR of 15.7 percent for the period 2016 to 2020. During the same period, the advances of the NBFC sector to agriculture and allied activities grew by 12 percent.
  • The share of agriculture and related activities in the total gross advances of the NBFC sector has fluctuated between 2.38 percent (2017 and 2018) and 3.06 percent (2019).
• Digital lending is already changing the financial inclusion landscape.
• Thus, fintech-based credit inclusion has huge potential and can be the most effective catalyst to meet the credit needs of rural areas.

Conclusion:

• Innovations in Agri credit systems by institutions are patchy despite the potential.
• Measures such as mass loan waivers and interest rate subventions for short-term credit disbursement inhibit innovation.
  • An alternate channel like reconfigured Direct Benefit Transfer (DBT) can deliver subsidies to farmers while restructuring/write-off should be an ad hoc option.
• The efforts such as digital DBT, UPI for payments, and expanding the digital payment system infrastructure, have definitely increased the digital presence in the rural economy.
• It is time to leverage these interventions and weave a web of digital products to penetrate the agriculture credit system riding on technology so that it moves to a better system both in terms of expansion and efficiency of credit delivery.

Source: The Hindu BL

Mains Question:

Q. The efforts of the various stakeholders have resulted in agriculture credit growing at a commendable rate in recent years. However, a better regional distribution of agriculture credit is necessary. Critically examine. (150 words).