Regional Inequality in the Flow of Institutional Credit to Agriculture

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Access to institutional credit by farmers assumes special significance in India, for a number of reasons. First, institutional credit can play a significant role in saving the farming community from the clutches of private money-lenders who charge exorbitantly high rates of interest and keep them perpetually indebted. Second, small and marginal farmers in India have hardly any investible surplus of their own and therefore, inadequate supply of institutional credit is likely to constrain input use as well as investment in agriculture and consequently agricultural productivity growth. The supply of institutional credit to agriculture has substantially increased in the recent years. But still farmers in some regions lack access to institutional credit which affects their well-beings. This article analyses regional inequality in the flow of institutional credit to agriculture and makes a case for greater supply of institutional credit to deprived regions.

The supply of direct institutional credit increased from Rs. 253966 crore in 2007-08 to Rs. 1065755 crore in 2016-17. As of 2014-15, north eastern region, comprising Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim shared only 0.53 percent of the total institutional credit in the country, while eastern India, comprising Bihar, Jharkhand, Odisha and West Bengal had only 9.5 percent share in the total institutional credit. It would be further seen from Table 1 that seven states including Tamil Nadu (11.9 percent), Andhra Pradesh (10.0 percent), Karnataka (7.1 percent), Kerala (6.8 percent), Punjab (8.6 percent), Haryana (4.8 percent) and Uttar Pradesh (8.6 percent) accounted for 58 percent of the total institutional credit in the country. The states in eastern and north-eastern regions have relatively higher share in the total cropped area and much lesser share in credit.
The flow of institutional credit per operational holdings as well as area operated also show wide regional variations. It was highest in the northern region and the lowest in north-eastern region. It would also be seen from Table 1 that the average per holding credit flow as of 2014-15, was Rs. 57320 in the country as a whole and was as low as Rs. 24485 in the eastern region. The average credit flow per operational holding in Bihar and Jharkhand was only Rs. 12899 and Rs. 9297 respectively. Similarly, the average credit per hectare in the country was Rs. 52550, but it was much less than the national average at Rs. 40229 in the eastern region. The per hectare credit availability was as low as Rs. 7956 in Jharkhand. The north-eastern region had accessed institutional credit of Rs. 8352 per hectare only. The co-efficient of inter-state variation in the flow of institutional credit to agriculture per hectare increased over time from 120 percent in 1995-96 to 201 in 2014-15.

State/ UTsShare in Credit (%)Credit Flow  (Rs.)
per Holdingper Hectare
New Delhi1.8197328387104166
North Eastern Region0.53108178352
West Bengal4.415140467889
Madhya Pradesh5.574782930009
Uttar Pradesh8.593001341882
Andhra Pradesh9.995903359906
Tamil Nadu11.86124605162895
All India1005732052550
Table 1: Inter-state variation in the flow of institutional credit to agriculture (as of 2014-15)

The relatively higher access to institutional credit in Punjab, Haryana and Tamil Nadu can be explained by the higher proportion of irrigated area, but the relatively low proportion of irrigated area and higher access to credit by farmers in Himachal Pradesh would be explained by the predominance of high value plantation and horticultural crops which demand and absorb more credit per hectare. The relatively high proportion of irrigated area and low access to institutional credit by farmers in Bihar and West Bengal would presumably be explained by the nature of high risk in agriculture due to floods, drought etc., as well as managerial inefficiency on the part of the banks and co-operatives.
It may also be noted in this context that the credit-deposit ratio in the eastern region is one of the lowest in the country. As of 2012, it was only 50.0, against 90.1 in the northern region, 116.2 in the southern region and 83.1 in the western region. Within the eastern region, it was as low as 29.1 in Bihar, 33.6 in Jharkhand, 46.9 in Odisha and 62.9 in West Bengal. There is no reason why the locally mobilized deposits cannot be utilized locally for loans to promote input use and investment in agriculture. Besides, the eastern region shared about 17.0 percent of India’s agricultural GDP, but accessed only 9.5 percent of institutional credit.

This poses a big question whether credit absorption capacity of a State has anything to do with its present access to institutional credit. The eastern region certainly deserves a better deal. In addition, the eastern region has relatively higher level of agricultural diversification than the southern region, but lower access to institutional credit per hectare as well as per cultivator. The higher level of agricultural diversification would sustain only with increased institutional credit supply. Moreover, the average area as well as number of cultivators serviced by a bank centre in the eastern region is more than that in the southern region. So, there is scope for increasing the number of bank branches and increasing the flow of bank credit for agriculture, in the eastern region. The states of Jharkhand and Bihar require special attention in this regard. Also, the co-operative institutions are extremely weak in Jharkhand in this context. The share of eastern region is lower in both production as well as investment credit, although investment credit particularly in Jharkhand, Bihar and Odisha suffered most. There should be efforts to strengthen the co-operative credit institutions and increase the co-operative credit flow for agriculture. As of 2014-15, Jharkhand shared only 0.5 percent and Odisha 1.2 percent of the total ground level credit flow for agriculture in the country, against Andhra Pradesh sharing 12.6 percent and Tamil Nadu sharing 12.1 percent of the total co-operative credit flow to agriculture.

Farmers in the eastern region, especially the small and marginal farmers, tenants and women farmers depend heavily on non-institutional sources of credit, pay high rates of interest on loans and remain in perpetual debt trap. The strengthening of institutional credit to these vulnerable groups would not only help increase agricultural productivity, but also reduce poverty. One of the key constraints for tenant farmers to access institutional credit is the lack of written lease agreement as tenancy laws are highly restrictive and most of the tenants cultivate land on informal basis. Similarly, most women farmers do not have any recorded land ownership right in their names and therefore, fail to obtain institutional credit as land paper is the main source of collateral used. Legalization of land leasing and ensuring women’s land ownership right would go a long way to help improve the institutional credit access by tenant and women farmers. The eastern region has huge untapped potentials for yield improvement in food crops as well as for agricultural diversification and value addition. An increased supply of both production and investment credit can convert the region from food deficit to food surplus and the major supplier of fruits, vegetables, milk and also processed food in the country.

To conclude, increased supply of institutional credit to deprived regions, especially eastern and north-eastern regions would help improve agricultural productivity growth and also reduce poverty. More particularly, small and marginal farmers, tenant farmers and women farmers deserve a better deal in terms of access to institutional credit.


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