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Agricultural lending – a Commercial Viable Profitable Business Proposition

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Introduction:

Agriculture is a great Indian culture. Agriculture is backbone of our country. Nearly 70% of Indian population lives in Rural India. There are about 625000 villages in India. Approximately 65% of the people depend on Agriculture. Contribution to Gross Domestic Product (GDP) from agriculture is 14%. Nearly 60% of the people get employment from the agricultural sector. Despite that India is struggling to achieve the growth rate under Agriculture. In 12th five year plan, the growth rate under agriculture is fixed as 4%, but so far the achievement is 1.1%. Though Indian agriculture is full of vagaries of monsoon, institutional credit towards agriculture is an important factor now and need of the hour. Serious alternative avenues of supporting the farmers financially to be looked into not only to harvest the factors of production viz., land, labour, capital and Management in an efficient way which enables Agriculture production and productivity for a country but, to maintain qualitative profitable business proposition for a banks .

Trend under Agricultural lending:

No one can deny that public Sector Banks (PSBs) dominated in extending agricultural credit since beginning. Here is the position of agricultural advances (in crores) of various PSBs.

Sl No Bank’s name March 2015 June 2015 Sept 2015 Dec 2015 Growth over March (%)
1 Andhra bank 19892 20273 20889 21992 10.55
2 Bank of Baroda 37403 39502 35596 34825 Negative
3 Bank of India 43183 45949 43261 45230 4.74
4 Bank of Maharashtra 15521 15345 NA NA NA
5 Canara Bank 58868 60924 63541 65061 10.52
6 Central Bank Of India 35957 35370 36500 35955 Negative
7 Corporation  Bank 19675 24819 24675 25439 29.29
8 Dena bank 12312 14223 14655 15254 23.89
9 Indian Bank 23679 23237 22119 NA NA
10 Indian Overseas Bank 29236 30370 27864 26903 Negative
11 Punjab National Bank 60006 57314 58091 60132 0.20
12 State Bank Of India 158048 115813 118419 121102 Negative
13 Syndicate Bank 26205 25713 24920 25888 Negative
14 Union Bank of India 31584 36209 36158 36926 16.91
15 Vijaya Bank 7546 7734 12502 12859 70.40

 

The above table clearly indicates that public sector banks are not in a position to improve their growth under agricultural lending and banks having large customer base like State bank of India, Bank of Baroda, Central Bank of India, and Indian Overseas Bank are registered negative growth. Reasons may be due to one or the other; the banks should understand agricultural lending is also one of the viable, profitable business propositions for the banks in the present context of profitability and capital adequacy norms.

Challenges under Agricultural Lending:

  • Climate change (El Nino Effect) – Many parts of the country registered drought consecutively for the second and third years and more over some parts faced flooding due to heavy rain which created loss of crops to farmers.
  • Out of 148 million hectares of cultivable land in India, only 40% of the same is coming under irrigated category and agriculture in remaining parts purely depends on the rainfall
  • India does not have adequate storage structure for storing the harvested produce and selling the same for an optimized price. Hence, farmers are going for distressed selling and getting very low price. Due to this, farmers lacks interest towards agriculture and start migrating to urban centres seeking alternate employment
  • Young India towards agriculture needs a lot of motivation
  • Nearly 80% of the farmers in India comes under marginal and small category, not in a position to carry out high tech intensive farming
  • Improper marketing system for the farmers and getting good optimum profitable price of harvested produce
  • Crop loan waiver scheme announcement by central and State Government earlier affected the financial discipline and repayment ethics among the farmers community expecting the same in future
  • Strong mindset of the bankers that financing to agriculture sector increase Non Performing Assets (NPA)
  • Non availability of labours for doing agricultural inter cultural operations/practices due to 100 days employment schemes or under opportunity under MGNREGA launched by Government of India
  • Poor infrastructural facilities for connecting rural villages into nearby semi urban and urban centres
  • Absence of need based delivery models among the public sector banks when comparing to private sector banks like Axis bank, ICICI bank etc

Support from Policy Guidelines:

  • Reserve bank of India (RBI) guidelines on the latest priority sector guidelines removed the distinction of direct and indirect agriculture activities. However, insisting that benchmark of 13.5% of ANBC (Adjusted Net Bank Credit) under direct agriculture
  • Understanding the importance of finance to marginal and small farmers, RBI stipulated bench mark of 8% of ANBC for marginal and small farmers. Because, 80% of the farmers in India are coming under marginal and small farmers category and 80% of the Indian agriculture production comes from land holdings of marginal and small farmers only
  • Finance to Food and agro processing units earlier classified under Micro Small and Medium Enterprises (MSMEs), now comes under Agriculture up to an aggregate sanctioned limit of Rs.100 crore per borrower from the banking system
  • Outstanding deposits under RIDF (Rural Infrastructure Development Fund) with NABARD on account of shortfall under agriculture now comes under Agriculture ancillary activities
  • Flexibility in assessment of quantum of loan based on the concept of scale of finance over and above the limit fixed by DLTC (District Level Technical Committee)
  • Irrespective of crops, uniform crop insurance premium for the seasons announced under Pradhan mantra Fasal Bima Yojana (PMFBJ) i.e 2% for Kharif, 1.5% for Rabi and 5% for commercial, plantation and other high value crops integrated with other micro insurance schemes launched under PMJDY (Prime Minister Jan Dhan Yojana)

Support from Government of India – Budget (2016-17):

Agriculture and farmers’ welfare: 

  • Look to double the farmers income by 2020
  • Target of agricultural credit raised to an all-time high of Rs.900000 crore
  • Government will reorient interventions in farming sector, we need to optimally utilize water resources
  • 5 lakh hectares will be brought under irrigation under irrigation under the Pradhan Mantri Krishi Sichai Yojana
  • 15,000 crore allocated for interest subvention for agriculture loans
  • A dedicated irrigation fund with Rs.20,000 crore under National Bank for Agriculture and Rural Development (NABARD)
  • Major programme for sustainable groundwater management
  • Government to set apart Rs. 412 crore to encourage organic farming
  • Access to market is critical for farmers
  • Implementing Pradhan Mantri Gram Sadak Yojana as never before–to be allocated Rs.19,000 crore in FY17 ; Rs 27,000 crore in total–to advance completion target to 2019 from 2022
  • To support farmers after calamities, special focus has been given to ensure timely flow of credit, target is Rs 9 lakh crore in FY17
  • We have to ensure benefit of Minimum Support Price (MSP) reaches all parts of country. Remaining states will be encouraged to take up decentralized procurement, effective arrangement of pulse procurement
  • E-market portal for connecting breeders and farmers
  • Visible rise in yield of honey.90% of domestic honey is now exported
  • Allocation of Rs 35,984 Crore for farm sector
  • Government to allow 100% Foreign Direct Investment (FDI)through Foreign Investment Promotion Mode (FIPB) route in the marketing of food products produced and marketed in India
  • 87,765 Crore allocated for rural development
  • Digital literacy scheme to be launched to cover 60 million additional rural households
  • Government to develop 300 ‘rurban’ clusters
  • Government to spend Rs.850 crore in a few years on animal husbandry, cattle and livestock breeding
  • 19,000 crore allocated for Pradhan Mantri Gramin Sadak Yojana in 2016-17; in all, Rs.27,000 crore after state contribution
  • Five lakh acres of land to be brought under organic farming in three years under Krishi Vikas Yojana
  • 89 irrigation projects to be fast-tracked.

Ways and means of seeing agricultural lending as viable profitable commercial business proposition with examples:

  • Bankers should create awareness to the farmers community that “change is inevitable” like as below
  • Traditional farming to technical modern agriculture
  • Subsistence farming to sustainable farming
  • Mono cropping to multiple cropping
  • Exposure to e-market availability for getting assured prices
  • Reaping the benefits of contract farming (Win-Win situation)

 

  • NPA Percentage under Agriculture: Bankers mindset of financing to agricultural activities increases NPA portfolio is totally a myth. It is to be changed by suitable efforts at all level. As per the presentation made by S S Mundra, Deputy Governer in first CII Banking Summit, that contrary to popular perception, stress relatively much less in priority sector and restructuring mostly in large accounts.
Sector Mar 2013 (%) Mar 2014 (%) Mar 2015 (%) Sept 2015 (%)
Agriculture 8.2 7.4 7.5 7.9
Micro Industry 10.2 10.0 10.5 12.3
Small Industry 13.2 13.3 14.8 16.8
Medium Industry 20.2 23.6 27.0 31.5
Large Industry 16.3 19.0 23.0 23.7

 

The banks should concentrate on financing new good viable high value agri. Proposals so as to reduce the percentage of NPA under agricultural advances.

  • Average income earned by the Agricultural loan portfolio at par with other advances: Banks should concentrate financing for investment credit rather than production credit under agriculture. Big ticket advances like agri. infrastructure facility, food and agro processing units, agri. allied activities, and high tech integrated precision farming earns very good income to bank at par with other type of advances made by the bank.

Example: Mr. Sadananda, (of Tapsihalli village of Dodbellapur taluk of Bangalore, Karnataka State) a marginal farmer having nearly 2.40 acres of rainfed land earning average income of Rs. 10 lacs to 12 lacs on a conservative approach due to integrated, hi-tech and precision farming.

Example: Mr.Umesh hailing from Kalya village of Magadi taluk of Ramnagara District, Karnataka having 2.50 acres has earned nearly Rs. 240000/- from his vegetable produce during the last three seasons and earned net annual income of Rs. 480000/-(Successful Farming)

Example: Mr. Yogi Sahani in Jagdispur village, Darbhanga doing fish seed production sector of aquaculture generates a gross income of Rs. 50 lakh a year from sale of carp spawns, fry and fingerlings alone.(Better Profit Margin)

Example: A small farmer, Saroja from Deverayanapatna village in Tumkur Taluk, with two acres earned a gross profit of Rs. 3.25 lakhs in 150 days. The cost of cultivation is Rs. 60000/- per acre leaving a net profit of Rs. 2.65 lakhs (Tomato Poly mulching)

Example: Mr.Bhaskar Reddy, a progressive farmer from Kizhmaruvathur village in Kancheepuram district turned from paddy cultivation to brinjal, water melon, and vegetable nursery could earn a net income of Rs. 6.00 lakh a year.

Example: Mr. S Thinakarasamy from kooliyankadu village of pudukottai district of TamilNadu started commercial propagation of nursery and earned a net profit of Rs. 714750/- every year.

Example: Mr. C R Radhakrishnan of Kuratahalli in Chintamani taluk of Karnataka earns Rs. 60000/- per day from poultry farming alone.

The above examples clearly indicate that financing the farmers for the profitable agriculture business activity definitely not only increases their net surplus income but for the banks it will be a commercial viable profitable stable sustainable qualitative asset portfolio.

 

  • Public Private Partnership Model: Great scope available in Pune and Nasik regions can be exploited with formation of implementable area specific scheme on the activities like floriculture, horticulture, dairy farming, poly-houses and other allied activities. Good scope for implementing public private partnership (PPP) model.

Source: Bank of Maharashtra overdrive on hi-tech agriculture- Banking Frontier Feb, 2015

  • Agricultural Consultancy Services (ACS):
  • It was established in the year 1988 as a specialized cell of Canara Bank, consisting of professionally qualified personnel for appraising agro-based projects and to provide consultancy.
  • It is the first ever Consultancy Cell for Agriculture & Allied Activities in the entire banking sector in India.
  • With a view to become more proactive, identify & explore every opportunity and become a role model for next generation PSBs in India by way of innovating new products/ideas/schemes, Agricultural Consultancy Services was renamed as “AGRICULTURAL INNOVATION CENTRE” with effect from January 2014.
  • The Division, since inception, has handled more than 1500 projects involving an outlay of more than Rs. 7000 crores in the sectors like Floriculture, Mushroom, Dairy, Poultry, Plantation Projects, Food Processing, Bio-technology, Cold Storage, Fisheries, etc. which included public issue appraisals also. The appraisal reports of this innovative arm of the Bank are accepted by all the major Banks and Financial Institutions.
  • Agricultural Innovation Centre (AIC) today, is one of the premier consultancy outfits in the country and is a “One-Stop-Shop” for all the agricultural entrepreneurs looking for investment in agriculture and related projects, and has carved out a distinct name for itself in the market.
  • Suitable customer need based focused delivery model: Delivery model integrating Backward and forward linkages of agricultural farming should be designed with the integration of input suppliers, technical, financial, infrastructural skills, and marketing arrangements etc like contract farming, bipartite or tripartite arrangement so as to create win – win model of agricultural finance
  • Cross selling within the agriculture: First, farmers are very much interested in availing only crop loan that too up to Rs. 3.00 lacs just to avail the subvention benefit even though they are eligible for more than Rs. 3.00 lacs requirement based on their land holdings.

Secondly, bankers failing in ascertaining entire need of a particular farmer and thereby other products under agriculture can be given to the needy farmers.

This is totally due to lack of knowledge at both levels. Branch Managers and other officers handling agricultural advances should market the features of other agricultural products in an effective manner and should be implemented.

  • Suggestions as per the report of the advisory committee on the flow of credit to Agriculture in 2004 is to be strictly implemented by the banks in India
  • Inculcating marketing mindset:

All bankers should have a mindset that they are all directly and indirectly marketing employees without which banking cannot have a profitable business. They should understand that marketing is in and out of our business. Executives/Officers from controlling offices, while visiting to branches staff meeting can be conducted and this issue can be addressed.

  • Proactive strategy :

Creating awareness and canvassing the applications from the farmers one month before the agricultural season starts so as to process well within the time or exactly the season starts for timely credit delivery. This is very important in Agricultural advances.

  • Horizontal communication:

All the staff members are in a position to guide the customers/farmers with respect to all products of our bank including agricultural products. For this, Branch Managers & other offcierss should conduct fortnightly meeting in their branch just for updating of products of our bank to other staff members.

  • Coordination with NABARD/NHB/other Govt. Department:

Branch Managers/ officers handling agricultural lending portfolio should be in a position to maintain very good relationship and liaison for linking the needy eligible farmers to various government sponsored schemes for implementing various agricultural related projects, various value chain concepts, contract farming etc. Support from respective controlling offices is also very important.

  • Formation of Area specific Schemes by the banks to the farmers and involving them in reaping the benefits out of the scheme thereby realization of disadvantages of availing credit from informal sources to be increased to a large extent.

Conclusions:

Bankers should see Agricultural lending as a preferred sector finance rather than last resort avenue. It should be seen as a business opportunity rather than a compliance function by all the banks and financial institutions. Support given by the way of policy guidelines and Budget allocations are to be utilized in a positive profitable way of contributing more to the nation from agricultural sector. Rather than discouraging and de-motivating the farmers, role of bankers lies in linking them into a viable agriculture business model and deliver the financial support not only increases stable bank’s growth but make the country  a prosperous one. “Let us have a strong trust that growth in agriculture solves all other problems of a nation”. “Let us salute to the farmers and support them to connect physically, electronically and knowledge wise so as to attain economically connected India”.

About the Author

U Sethupitchai
Chief Manager (Faculty),
Union Bank of India,
Staff College, Kalkere post,
Bannerghatta Road, Bangalore – 560083
Office No- 080-22639036 Mobile- 7204701395
Email: (Office): [email protected]
Email: Personal: [email protected]

Working as chief manager (faculty), Discipline In-charge: Rural and Agri. Business Department at Union Bank Staff College, Bengaluru. Joined the bank on 10.04.1997 as Rural Development officer.Faculty since July 2011. Qualifications include: M.Sc. (Ag), CAIIB, MBA (HR), various certificate courses from IIBF, Diploma in Home loan finance, Diploma in international banking and Continuous Professional Development (CPD) course from IIBF.

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