Mahesh Kumar Jain: Rural and agriculture finance - critical input to
achieve inclusive and sustainable development
Speech by Mr Mahesh Kumar Jain, Deputy Governor of the Reserve Bank of India, at the 6th
World Congress on "Rural and agricultural finance", jointly hosted by Asia-Pacific Rural and
Agricultural Credit Association (APRACA), National Bank for Agriculture and Rural Development
(NABARD) and Ministry of Agriculture Farmers Welfare and Cooperation, Government of India,
New Delhi, 13 November 2019.
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1. Mr Senarath Bandara, Chairman, APRACA (Asia Pacific Rural and Agricultural Credit
Association), Dr Harsh Kumar Bhanwala, Chairman National Bank for Agriculture and Rural
Development (NABARD) and Vice-Chairman, APRACA, Dr Prasun Kumar Das, Secretary
General, APRACA, all other dignitaries present here, ladies and gentlemen, good afternoon!
2. At the outset, I would like to thank APRACA and NABARD for inviting me to give the
valedictory address to the participants visiting from different countries here at the 6th World
Congress. I would like to congratulate the organisers for having chosen the theme, i.e., 'Rural
and Agriculture Finance: Critical Input to Achieve Inclusive and Sustainable Development' with
the aim of getting insights into the global best approaches to rural and agricultural finance. The
topics of the business sessions are befitting the overarching objective of this forum for
deliberating on policy priorities in developing sustainable and viable financial services to support
and help in achieving the Sustainable Development Goals (SDGs) of the United Nations.
Needless to say, all the topics resonate strongly with the development agenda of the
Government and financial inclusion strategy of the Reserve Bank of India (RBI). We have been
pursuing the goal of financial inclusion for a long time to ensure that access to formal finance
becomes a greater enabler to achieve economic wellbeing of all sections of the economy. It is
indeed a great pleasure for me to share my views on this subject.
3. The RBI's financial inclusion efforts can be traced back to the 1960s when the focus was on
channelizing of credit to the neglected sectors of the economy and weaker sections of the
population. While the Government of India nationalized banking operations of few commercial
banks in two tranches in 1969 and 1980; RBI took initiatives like laying down priority sector
lending requirements for banks, formulation of the Lead Bank Scheme, establishment of
Regional Rural Banks (RRBs-1975-76), Service Area Approach (1989), Self-Help Group-Bank
Linkage Programme (1989-90), setting up of Local Area Banks and of late, Small Finance
Banks and Payment Banks, all aimed at making available banking services to all. All these
developments brought in a sea change in the flow of institutional credit to the rural population,
including population dependant on agriculture. Gradually the country moved towards a
multiagency approach to meet the credit needs of the rural areas including farmers.
4. I am sure all distinguished panellists, international and local participants and the organisers
have had fruitful discussions and deliberations during the last two days and have been able to
draw upon actionable points for formulating strategies and the way forward.
Sustainable Development Goals
5. The sustainable development framework, adopted by the global community consists of 17
SDGs and 169 targets, to be achieved by 2030. While Goal 2 of the SDGs includes targets on
agricultural productivity and sustainability, yet agriculture is also critical to achieve many other
SDGs relating to hunger, malnutrition, climate change, gender equality, natural resources
protection and jobs. Hence, to attain the SDGs of ending poverty and bringing in inclusive
growth, policy measures related to agriculture need to be closely integrated with the SDG
targets. Further, the policies should focus on a combination of resource efficient methods,
dynamic cropping patterns, farming that is adaptive and responsive to climate change and
intensive use of Information & Communication Technology (ICT). Against this backdrop, let me
dwell upon the Indian agriculture sector and the existing institutional framework for providing
credit to the farming community.
A brief on Indian Agriculture
6. Agriculture plays a significant role in the Indian economy and provides employment and
livelihood to a large section of the Indian population. Approximately 44% (as per ILO estimate of
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2018) of the working population is employed in agriculture and allied sector . However, the
contribution of agriculture to GDP has been declining from 52% in the 1950s to 30% in the
1990s and further below 20% from 2010 onwards as per data from Ministry of Statistics and
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Programme Implementation (MoSPI) . In 2018-19, the share of Agriculture & Allied Gross Value
Added (GVA) in overall GVA was 16% (Ministry of Agriculture and Farmers' Welfare (MoA&FW)
Annual Report 2018-19). Economic Survey 2018-19 suggests that the growth rate in GVA (at
2011-12 prices) over past five-six years has been higher for livestocks, fishing and aquaculture
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as compared to crops . Allied activities contribute approximately 40% to agricultural output,
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whereas only 6-7% of agricultural credit flows towards allied activities . One important
characteristic of Indian agriculture is that it is mainly small holders' farming with an average
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landholding size of 1.08 hectares . The small and marginal farmers account for 86 per cent of
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all holdings and 47 percent of the operated area . They contribute more than 50% of the total
agricultural and allied output. In smallholder farming, it remains a challenge to raise agricultural
productivity and farmers' incomes. It requires appropriate solutions starting with easy access to
modern inputs and then selling the produce in most remunerative markets. Institutional credit at
reasonable cost all along the value chain is one such catalytic instrument that can facilitate the
process by converting many subsistence farmers into vibrant commercial farmers. They can
then diversify their agricultural operations in growing high value crops like fruits and vegetables,
and engage in allied activities, like dairy, poultry, fishery, honey, beekeeping, etc. Allied has
huge potential, which can be capitalised by improving credit flow towards it and by encouraging
farmers to move towards allied activities.
7. From time to time, Government has given various policy thrusts, as a result of which, the
Indian agriculture sector has not only become self-sufficient but has emerged as a net exporter
of several commodities like rice, marine products, cotton, etc. Some of the important initiatives
taken by the Government include the implementation of Interest Subvention Scheme (ISS) for
providing credit for crop production at reduced interest rate, Soil Health Cards (SHC) for
improving agricultural productivity, Pradhan Mantri Krishi Sinchai Yojana (PMKSY) to ensure
irrigation facilities, Pradhan Mantri Fasal Bima Yojana (PMFBY), for providing a safety net
against natural calamities and National Agriculture Market Scheme (e-NAM) for providing better
price discovery through transparent auction process. There is also a renewed focus on allied
activities to aid income of farmers.
8. Despite these initiatives, there are several challenges confronting Indian agriculture such as
diminishing and degrading natural resources, rapidly growing demand for food (not just for
quantity but also for quality), stagnating farm incomes, fragmented land holdings and
unprecedented climate change, which need to be tackled for long term sustainability and
viability of Indian agriculture.
What has been the role of institutional credit in Indian agriculture?
9. Banks in India have made commendable progress in terms of scale and outreach of formal
credit to the agriculture sector. From ₹31.71 billion in 1981, the outstanding advances to
agriculture and allied activities have grown significantly to ₹13694.56 billion in 2017-18 (16 per
cent of total bank credit). The long-term trend in institutional agricultural credit revealed that over
time, significant progress has been achieved in terms of scale. Agricultural credit as a
percentage to Agriculture GDP increased from 10% in 1970s to 52% by 2018, which shows
that banks have made significant progress in lending to agriculture. In India, scheduled
commercial banks (79%) are the major players in supplying credit to agriculture sector followed
by rural cooperative banks (15%), regional rural banks (5%) and micro finance institutions (1%).
Small finance banks set up with the objective of deepening financial inclusion have started their
operations recently. They would be catering to small and marginal farmers, low income
households, small businesses and other unorganised entities.
Challenges in agriculture financing
10. Despite the impressive growth in formal agricultural credit, there are still several challenges
that need to be tackled. Data on the average loan taken by agricultural households, as per the
NABARD's Financial Inclusion Survey Report 2016-17, indicated that 72% of the credit
requirement was met from institutional sources and 28% from non-institutional sources. The
report further states that out of the total agricultural households, approximately 30 percent still
avail credit from non-institutional sources. The problem of financial exclusion gets aggravated
due to lack of legal framework for landless cultivators as the absence of documentary evidence
becomes a major hindrance for extending credit to this segment of the farming community,
who take up cultivation work on oral lease. Further, the analysis of state wise flow of institutional
agricultural credit has revealed uneven distribution of credit amongst states compared to their
corresponding share in overall output. To a certain extent, such regional disparity is on account
of variation in credit absorption capacity of these regions. Funds like Rural Infrastructure
Development Fund (RIDF) have been created out of priority sector lending shortfall of banks
and established with NABARD with the underlying philosophy of lending to state governments to
facilitate creation of enabling rural infrastructure to deepen the credit absorption capacity in rural
areas.
11. An analysis of sanctions from RIDF indicates that states with higher credit flow made higher
demands for resources under the fund. On the contrary, states with lower credit flow were
lagging in borrowing funds from RIDF. Thus, the least developed states which are already
credit starved are getting lower share of funds from the RIDF. This highlights the need to break
this vicious cycle and think of certain measures by which funds can be earmarked to the most
backward/ credit starved regions to ensure speedier development of the most backward areas
in the country. We may also have to think of ways to incentivise banks to lend in these
backward areas so that both demand and supply side issues are addressed. These issues and
challenges impinge on the efficiency, inclusiveness and sustainability of the agricultural credit
system, which is a matter of concern.
Internal Working Group set up by RBI
12. Considering this, RBI had set up an Internal Working Group (IWG) in February 2019, to
understand the issues and recommend workable solutions to address the constraints. The
IWG based on extensive data analysis and research held extensive consultations and
deliberations with experts and practitioners in the field and submitted its report in September
2019.
13. The recommendations of the IWG include building up of an enabling ecosystem through
digitisation of land records, reforming of land leasing framework, creation of a national level
agency to build consensus among the state governments and central government with regard
to agriculture-related policy reforms and innovative digital solutions to bridge the information gap
between the banks and farmers for expediting the credit delivery process. Other policy
interventions recommended are- suitable modifications in the Priority Sector Lending guidelines
applicable to all banks and strengthening of credit delivery channels through Kisan Credit
Cards, Self-Help Group Bank Linkage Programme, Farmer Producers Organisations, in a
manner to make them more effective and efficient in ensuring credit flow to the credit starved
regions of the country, as also to the excluded segments of the farming community. RBI would
be initiating necessary steps for implementing these recommendations as these would go a
long way in ensuring the long-term sustainability and viability of the Indian agriculture sector.
Financial Inclusion
14. Financial Inclusion (FI) is a policy thrust area for RBI and as a result of the various
initiatives, tremendous progress has been made in the domain of financial inclusion since the
country set out in mission mode about 10 years ago. Further, with the launch of Pradhan Mantri
Jan Dhan Yojana (PMJDY), almost every household has been brought under the fold of formal
financial system. Both in terms of deposit accounts and credit products there has been a
steady improvement over the years. RBI has initiated setting up a National Strategy for
Financial Inclusion with the objective of making financial products and services available,
accessible, and affordable to all citizens in a safe and transparent manner to support inclusive
and resilient multi-stakeholder led growth. The strategic pillars of the financial inclusion strategy
would include universal access to financial services, providing basic bouquet of financial
services, access to livelihood and skill development, financial literacy and education, customer
protection and grievance redressal. The FI strategy aims for sustainable financial inclusion by
leveraging technology and adopting a multi-stakeholder approach.
15. The key highlights of the FI strategy is enhancing digital infrastructure in the country through
better networking of bank branches, Business Correspondent agents, Micro ATMs, PoS
terminals and Internet connectivity facilitating a move towards digital onboarding of customers.
This would encourage adoption and acceptance of digital payments and promote efficiency and
transparency through digital transactions. The strategy adopted has a customer centric
approach, accompanied by appropriate efforts towards financial literacy and awareness drive.
Finally, for building of trust and confidence of the new entrants to the formal financial system
the strategy focusses on customer grievance and protection framework. The implementation of
the national level financial inclusion strategy would be successful by effective coordination of all
the stakeholders and encouraging decentralized approach by creating a forum to actively
involve Gram Panchayats/Civil Society/NGOs to accelerate financial Inclusion. We have come
a long way in delivering financial services to hitherto excluded sections and segments of our
vast country. Going forward, the FI strategy would focus on deepening the reach, usage and
sustainability of financial inclusion.
Technology - A key driver for sustainable agriculture
16. Technology has powered Indian agriculture time and again by helping overcome productivity
stagnation, strengthening market linkages, and enhancing farm management. Globally, it has
been established that technology adoption modernizes farmers' production practices and leads
to uniform annual returns for farmers, reduced risk of crop failure, and increased yields. Hence,
at the macro level, the agricultural development policies should focus on leveraging technology
with the goals of (i) achieving high growth by raising productivity (ii) inclusiveness by improving
coverage of lagging regions, small and marginal farmers, landless/tenant/oral lessee and
women farmers, and (iii) sustainability of agriculture.
17. I feel that new age technological solutions in the form of product, service or application by
agri-start-ups can build up a smart agriculture value chain that will enhance the sustainability of
agriculture. Agri-start-ups may focus on some key areas such as supply chain, infrastructure
development, finance related solutions, farm data analytics and information platforms. In my
opinion, agri-start-ups can succeed and can be scaled up only in a conducive ecosystem,
which is possible if agri-business industry comes forward and deepens its engagement with
agri-start-ups.
Conclusion
18. I would like to summarise that in the past, Indian agriculture faced a formidable challenge to
grow more food. Today, we are a food surplus country and a net exporter of many agriculture
and allied products. This requires the government policies related to agriculture to be shifted
from that of managing food scarcity to managing food surplus. Today, agriculture in India faces
an even more demanding challenge: to grow agri-produce sustainably, inclusively and
responsibly. This can be achieved when all the stakeholders align their policies and actions
towards the SDGs. As far as financing of agriculture is concerned, going forward, banks will
have to integrate 'sustainability' into their business strategy and decision-making processes in
order to support environmentally responsible and sustainable projects in the agriculture sector.
For this, banks will have to undertake innovative agricultural financing models so that
environment friendly and sustainable projects can be supported. With this, I conclude and wish
you all the best.
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1 data.worldbank.org/indicator/SL.AGR.EMPL.ZS
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2 Various reports of MoSPI
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3 Economic Survey 2018-19, Volume II, Chapter 7 'Agriculture and Food Management'
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4 RBI Report of the Internal Working Group to Review Agricultural Credit, 2019
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5 Agriculture Census 2015-16
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6 Agriculture Census 2015-16