agricultural financing: a challenge for banking sector in · pdf file ·...

Primax International Journal of Commerce and Management Research (A Peer reviewed International Journal)

Print ISSN: 2321-3604 Impact Factor: 3.532 Online ISSN:2321-3612

Vol. No.4 , Issue No.1 April- June 2016

AGRICULTURAL FINANCING: A CHALLENGE FOR BANKING SECTOR IN INDIA

Dr. Kirti Ranjan Swain1 Dr. Niranjan Nayak 2

Abstract

The role and performance of commercial banks that provide agricultural finance; the challenges faced by these commercial banks; and identify the problems faced by farmers in getting agricultural finance. On the basis of this micro-level study, some new ideas and changes are suggested for macro planning. This research paper is designed as descriptive and qualitative forms. Primary data are collected through questionnaires from the sample area. For the purpose of our study, secondary data from various sources like committee reports, RBI bulletin etc. are collected. A sample unit of 80 farmers (borrowers) from Rajgangpur block, Sundergarh District of Odisha in India, financed by UCO Bank, Rajgangpur, was collected and this unit was further stratified into small, medium, and big farmers in the ratio of 3 : 2 : 1. Data was collected from the farmers through questionnaires and were asked to answer their problems in order of preference. Collected data are classified, tabulated and result is presented in the tabular form. The results of this present study have revealed that there is a significant relationship between commercial banks and agriculture sector. Agricultural financing to rural farmers is affected as a consequence of fear factors for recovery of loans in due time. There was limited time for conducting the study and collecting responses. The study comprised of a small sample size of 80 respondents from Rajgangpur block. The study was limited to a single rural branch of UCO Bank. The results of the study may not be applicable to the whole country as it was limited to the Rajgangpur block only. The aim of this paper is to highlight the challenges in agricultural financing faced by commercial banks at the block level. The present study involving UCO Bank, Rajgangpur block, Sundergarh District, Odisha paves the way for future studies of similar nature in other regions of the country and on a much larger scale. Keywords:Agricultural credit, Agricultural financing, Commercial banks, Financial inclusion, National income

Introduction

In the present world agriculture is considered as a major source of livelihood and the majority of people living in rural areas in developing countries like India. A key challenge for the majority of farmers is - access to finance. Lack of access to finance is a key impediment to farmers in improving the efficiency of their productions and adopting the better technologies. In India there is an immense need for proper agricultural credit as the economic condition of Indian farmers are very poor. From the very beginning the prime source of agricultural credit in India was money lenders. After independence, the Govt. adopted the institutional credit approach through various agencies like co-operatives, commercial banks, regional rural banks etc. to provide adequate credit to farmers, at a cheaper rate of interest. In the Indian economy, agriculture contributes one-third of the national income. Sixty percent of the export directly or indirectly originates from agriculture sector. About 60% populations engage in agriculture in India and contribute 18% of GDP, whereas the developed countries get only 2% of their GDP from agriculture.

1 .Associate Professor, Indian Institute for Production Management, Odisha. 2 .Director, Associate Professor, Indian Institute for Production Management, Odisha.




The role of commercial banks in financing to the agricultural sector has been very small. In the field of agricultural credit, the commercial banks share was as low as 0.9% in 1951-52 and 28% in 1981-82. The Reserve Bank of India, being the Central Bank of the country does not provide finance directly to the farmer, but it provides the facility of agricultural credit through State Cooperative Banks. The Reserve Bank of India provides two types of financial assistance to the State Cooperative banks i.e. Short-Term credit, and Rediscounting Facilities. Both these facilities are provided at a concessional rate of two per cent below the bank rate. Short-term loans are granted by the Reserve Bank of India to the State Cooperative Banks for seasonal agricultural operations and marketing of crops. The Reserve Bank of India also undertakes research investigations and surveys relating to rural finance as well as valuable advice to the Central and State Governments and to the State Cooperative Banks on matters relating to rural finance. With this aim in view, the Reserve Bank of India has set up a separate Agricultural Credit Department whose functions are- To maintain the expert staff for studying all the problems of agricultural credit and to provide

expert advice to the Central and State Governments, State Cooperative Banks and other banking organizations.

To finance the movement of agricultural crops and other agricultural operations through the medium of State Cooperative Banks and other agencies of rural credit.

Commercial banking system is playing an important role in forecasting the future framework of institutional finance in agricultural sector. The uncertain character of Indian agriculture, small amounts of individual loans, inadequate security for loans, difficulty in recovery of loans from farmers and lack of business experience of working with rural sector, are some of the factors which discouraged the commercial banks from taking interest in agricultural finance. Agricultural credit basically depends upon the different needs such as short term needs varies between 3 months to 15 months and for purchasing of seeds, fertilizers, pesticides and payment of wages and operational expenses. This type of need is mostly required by all farmers. Medium term needs varies between 15 months to 05 years for the purchase of cattle, small agricultural implements, repairs and constructional wells etc. Long term needs are required for the permanent improvement on lands , digging tube wells, purchase of larger agricultural implements and machinery like tractor, harvesters etc and repayment of old debts . In India, commercial banks provide two types of loan i.e. crop loan and investment loan. Crop loan is the nature of short term loan, which stands due for repayment immediately after the harvesting of the crop whereas investment loan is a long term loan required for the purposes of capital formation on land. Objectives of the Study The aim of the study can be subsumed under the following specific objectives: 1) To study the present institutional agricultural credit setup in India. 2. To study the role and performance of commercial banks financing to agricultural sector in India.




3. To identify the problems faced by farmers in getting agricultural finance by commercial bank (UCO Bank) Rajgngapur Block, Sundergarh district Odisha. 4. On the basis of micro level study, suggest some new ideas and changes for macro planning. Research Design and Methodology Primary data are collected through questionnaire from sample area. Purposive discussion with bank staff was conducted regarding problems and remedial measures. Secondary data from various committees’ reports, RBI bulletin are collected from our research point of view. The sample size of 80 respondents is taken from the Rajgangpur region, western part of Odisha, India. In this 58 or 72.5 % are male and 22 or 27.5 are female. The target respondents of research are not well educated so they are provided questionnaire in their own language. This unit is further stratified in small, medium and big farmers in the ratio of 3:2:1. Weightage is given according to their numbers in universe (total).Borrower farmers through questionnaires were asked about some problems mentioned in questionnaires to answer with preference order. Collected data are classified and tabulated and result is presented in tabular form. Literature Review According to the United Nations, Food and Agricultural Organization production year book, agriculture was defined to include cereals, starchy roots, sugar, edible oil, crops, nuts, fruits, vegetables, wine, cocoa, tea, coffee, livestock and livestock products. Also included in the group are industrial oil seeds, tobacco, fiber, vegetable and rubber. Further to knowing the subject agriculture, Anyanwu et a1 (1979) defined agriculture as the cultivation of the land for the purpose of producing food for man, feed for animals and fiber or raw materials for industries. Maftau (2003) argues that bank credit helps in reactivating, expanding and modernizing all types of agricultural enterprise, which are considered economically feasible and desirable to the achievement of stated economic goals of self-sufficiency in agricultural production. In this context, bank credit provides incentives to adopt new technologies that would have been more slowly accepted (Eyo, 2008 and Olokyo, 2011). Credit to the agricultural sector could take the form of an overdraft, short, medium, or long-term credit, depending on the purpose and gestation period of the project (Muftau, 2003). The major challenges to real sector financing from banks in India have been identified as unfavorable macroeconomic environment, cumbersome documentation process, inadequate long-term finances, lack of data base on borrowers and poor infrastructure (Anyanwu, 2010). Technological changes Fastest agriculture growth depends on the technological changes. Technical efficiency, inputs improvements, funds and better infrastructure and farmer capabilities are revolution factors in agriculture achieved by the technological changes (Evenson, 2002). Biotechnology has been great impact on agriculture of developed countries and least impression under developed countries. Technology can reduce poverty level by direct way (welfare and adoption innovation in production) and indirect way (food price, employment and wages) (Janvry & Sadoulet, 2001).




Irrigation system Irrigation should be managed because monitoring of irrigation has positive effects on soil fertility otherwise irrigation has adverse effect on soil (Getaneh, Deressa & Negassa, 2007). Excess of irrigation has negative effect; soil solution migrates and accumulated minerals enhanced ion exchanges which provide acidification (Muller & Rogasik, 1991).Potential evaporation, temperature and annual rainfall 160mm per year makes agriculture without irrigation (Ensink, Munir & Aslam, 2002). Agriculture sector and Credit In 1992 Adams & Fitchett defined credit standing means what the financial position of that person and how much strong his previous record to repay the debt. The reason of avoid interest base loans also religious believes. About agriculture sector its famous is that as cash constraint. Historically, financial institutions are not willing to lend to small farmers due to their inability to provide security pledged as a guarantee for the repayment of loan, higher default risk and transactions cost which are high associated with small loans. Effective use of loan Effective use of loan actually means loan use where in an agriculture sector for the betterment and development of this sector. And also helpful in increase export and earnings. Credit is necessary for non-farm and it is categories in short, medium and long term loan. Short term for

livestock feeding and for expenditure of veterinary. Medium and long use for livestock product shelter, poultry and tools etc. Owens, et al., 2003 defined the different variables used due to increase in advance technology, increase in production, and betterment for live stock. Rise in agricultural production can be helpful increase incomes, decrease in poverty and also play a vital role in other development (Birkhaeuser, et al., 1991). Adediran and Obasan (2010) have argued that in advanced and developing countries, productivity growth tends to be higher in agriculture than manufacturing, but in terms of output growth manufacturing continues to outperform agriculture. Agricultural Credit Setup in India In India, agricultural credit is disbursed through multi-agency network system which is consisting of Commercial Banks (CBs), Regional Rural Banks (RRBs) and Cooperatives. There are approximately 1,21,225 million village level Primary Agricultural Credit Societies (PACS), 371 District Central Cooperative Banks (DCCBs) with 13,327 branches and 31 State Cooperative Banks (SCBs) with 1028 branches providing primarily short-term and medium term agricultural credit in the country. The long term cooperative structure consists of 19 State Cooperative Agriculture and Rural Development Banks (SCARDBs) and 755 Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) with 1219 branches and 689 branches respectively, which are catering to the requirement of investment credit. Besides,




there are 45,957 rural and semi-urban branches of Commercial Banks, 14,462 branches of RRBs and more than 7 million micro finance institutions. March 31, 2014, the Indian banking system purveying agricultural credit comprised 31 state co-operative banks, 370 district central co-operative banks, 94,647 Primary Agricultural Credit Societies, 20 State Cooperative Agricultural and Rural Development Banks, 697 Primary Cooperative Agricultural and Rural Development Banks, 26 Public Sector Banks [PSBs], 82 Regional Rural Banks, 04 Local Area Banks, 13 old private sector banks and 08 new private sector banks. Policy makers have realized that banking system in India should grow in size and sophistication to meet the challenges of an emerging economy and extend the geographic coverage of banks to improve rural households’ access to banking services. The RBI has considered licensing a limited number of new private banks since a larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of services. Agricultural finance and RBI efforts In the developing economy like India, the Reserve Bank of India takes vital role for the financing to agricultural sector. It not only regulates bank finance, but deliberately promotes development of finance. It has made special efforts in catering to the growing financial needs of agriculture, industry and export sectors of the country. Agriculture is the king-pin of India’s economy. The agricultural finance is the prerequisite of agricultural growth and development. The Reserve Bank of India has been paying specific attention to promoting agricultural finance. In fact, the Reserve Bank of India Act, 1934 did assign to the Reserve Bank the responsibility of developing an institutional credit system for the agricultural sector in the country. As such, the Agricultural Credit Department of the Bank was constituted along with the establishment of the Reserve Bank in April 1935, whose main task was to develop co-operative credit movement in agricultural finance. The Reserve Bank of India then established the National Agricultural Credit (Long-Term Operations) Fund in February 1956, to enable the Bank to provide long-term loans and advances to Land Development Banks and the State Governments for participating in the share capital of co-operative banks and credit societies. Later on, it was renamed as the National Rural Credit (Long-term Operations) Fund, as its finance extended besides agriculture to others in rural areas. Similarly, another Fund called the National Agricultural (Stabilization) Fund was constituted by the bank in June 1956, for the purpose of granting medium-term loans to State Co-operative Banks (SCBs) when, on account of drought, famines, etc., they are not in a position to repay their short-term debts to the bank.




Chart 1: The flow of financial assistance of the Reserve Bank.

Agriculture Credit: A Case Study On UCO Bank

Agriculture is the backbone of Indian Economy and keeping in view the specific requirements of

customers, UCO bank has introduced a range of products to the framers at attractive rates of

interests. UCO bank basically provides the tractor /power tiller loan, short term loan to cold,

storage units Gramin Bhandaran Yojna(GBY), Kisan Credit Card (KCC),Uco Kisan Bhoomi

Vridhi (UKBV), Uco Kisan Tatkal Scheme, Uco Kisan all purpose term loan scheme, Uco

Mahila Utthan(UMU) ,Uco General Credit Card(UGCC), Scheme for solar irrigation pump set,

etc. towards agriculture finance to the farmers.

Problems Faced By UCO Bank:

The commercial banks (Uco Bank) are guided by RBI through identification of targets and achievements for agricultural sector. The banks are expected to provide both direct and indirect loans. The agricultural credit is normally provided for crop loans and term loans. Basically UCO bank, Rajgangpur block, Sundergarh District, Odisha are facing the following problems in the field of financing towards agricultural loan The identification of documents with framers for sanctioning the loan is an identical problem

to the banks. The banks are not able to check the proper utilization of credit. The greatest problems of the banking sector is the repayment of loans Due to failure of crops, the banks also face the problem of collection of financing amount

from the loan providers. As the bank is based on the rural area, some of the staff of the banks are not able in adjust

them self to stay. They reside in nearby towns for the some of facilities like children education.




After 2008, recovery performance in case of agriculture loan in poor because of debt relief waiver scheme 2008.

Due to the backward areas, the Uco Bank face most of the farmers are Illiteracy. Problems Faced By Farmers

No doubt commercial banks are important sources of agricultural credit to the farmers. The primary need of the farmers is timely supply of credit. The study is an attempt to know the problems of farmers in getting loans from UCO Bank in Rajngapur Block, Sundargarh Dist. Odisha. The Problems are given below. In farmers have to face the numbers of problems, One them being great difficulty in getting

credit because of the peculiar nature of agricultural credit. Bank is giving the preference to big farmers so, small and marginal farmers are not able to

get the high amount, because land size is small, and repayment capacity is less. The continuous and constant natural calamities, the agricultural production is very low. So,

the repayment capacity of the farmers is very less. Transaction cost of loan is very high. The rate of interest is high. For this research study, a sample of 80 farmers was selected randomly and spread over the 9 villages of undivided Rajgngapur Block, Sundergarh district Odisha. Problems of the farmers focus on attention on the inherent weakness of the adequate and timely supply of credit is one of the essential conditions for improving agricultural practices. Table-1 shows that the general difficulties being faced by the borrowing in the Uco bank for obtained the loans. The problems are presented in the table, Table1: Difficulties faced by farmers

Sl.No Problems Commercial Bank (UCO Bank) No. of Farmers %

01 Cumbersome process of getting loan 75 93.75 02 Exploitations of middlemen 65 81.25 03 Lack of suitable security for the loan 50 62.50 04 Non availability of sufficient loan 70 87.50 05 Lack of financial knowledge 70 87.50 06 High rate of interest 65 81.25 07 Lack of awareness regarding the loan details 64 80 08 Low subsidy 47 58.75 09 Non cooperation of staffs 38 47.50 10 Other 55 68.75

Source: field survey

The above table shows that farmers are faced with many problems in getting the loans in the




UCO bank, Rajngapur Block, Sundarghard district, Odisha. The UCO bank highest no of farmers i.e 93.75% are faced the cumbersome process of getting the loans, subsequently 87.50%, 81.25%, 80% and 68.75% farmers are faced the non availability of sufficient loan, exploitations of middlemen, lack of awareness regarding the loan details and fear factors about recovery process etc. respectively. Analysis & Interpretation of Data Data received through questionnaire are analyzed and the researcher divides the data into three categories. i) Problems of marginal and small farmer’s ii) Problems of medium farmer’s iii) problems of big farmers. Almost all marginal and small farmers responded about problems. The problems are – high rate of interest on loan, lack of financial knowledge about bank products cumbersome process of getting loans. Medium farmers responded there problems rank wise as cumbersome process of getting loan, lack of financial knowledge and high rate of interest. Bank staff is not cooperative it is also reported by this group. Responded top problems of big farmers are as – cumbersome process of getting loan, bank staff is not cooperative, lack of financial knowledge and high interest rate. Some common problems faced by all the three groups of farmers are cumbersome process of getting loan, high rate of interest and bank staff is not cooperative. Table 2(a) Problem faced by marginal and small farmers (Rank wise)

Cumbersome process of getting loan I Lack of financial knowledge II High rate of interest on loan III Non cooperation of staffs IV Fear factor about recovery process V

Table 2(b) Problem faced by medium farmers (Rank wise) Cumbersome process of getting loan I High rate of interest II Lack of financial knowledge III Non cooperation of staffs IV Fear factor about recovery process V

Table 2(c) Problem faced by big farmers (Rank wise) Cumbersome process of getting loan I Non cooperation of staffs II Lack of financial knowledge III High rate of interest IV Loan amount is not sufficient V

Suggestions and Conclusion

There are many studies are in vogue at macro level on agricultural finance but study at micro

level about problems faced by farmers is out of vogue and need of the time for realistic approach.




The present study is an attempt in this regard and will serve a base for future policy makers.

Policy makers should simplify the procedure of agriculture credit, interest rate for marginal and

small farmers should be reduced and about problem of lack of cooperation by bank staff.

Recovery process of loan must be elastic and based on reality. Fear factor about recovery process

of bank amongst rural framers should be reduced through educational awareness and guide. After

the survey, we conclude that some farmers have limited knowledge about agriculture financing

and a few don’t have how known about banking agriculture financing because they still adopting

the landlord system in which farmers get loan. Banks should have to adopt effective marketing

techniques to aware and attract the farmers towards agricultural financing. Because majority of

farmers are villagers and uneducated so they have less knowledge about products and services

offered by commercial banks for agriculture sector.

References: 1. Akhavein, J.D., Berger, A.N., Humphrey, D.B. (1997): “The Effects of Megamergers on

Efficiency and Prices: Evidence from a Bank Profit Function”, Finance and Economic

Discussion Series 9, Board of Governors of the Federal Reserve System.

2. Bikker, J.A., Hu, H. (2002): “Cyclical Patterns in Profits, Provisioning and Lending of Banks

and Procyclicality of the New Basel Capital Requirements”, BNL Quarterly Review, 221,

pp.143-175.

3. Devaraja T S.,(1999): “Working of District Central Co-operative Bank, Hassan Karnataka:

An Analysis” Indian Co-operative Review, VOL.XXXVI, No.3, pp. 39-44.

4. Devaraja T S., (1999): “Role of Agricultural Development Branch (State Bank of Mysore) in

Financing Agriculture –A Study”, Land Bank Journal, Vol XXIV No.8, pp.56-67.

5. Devaraja T S., (1999): “Performance Evaluation of Sharada Mahila Cooperative Bank Ltd.,

in Mysore City of Karnataka”, Maharastra Cooperative, Quarterly, Vol. XXXIV. No. 13, pp.

45- 53.

6. Devaraja T S., (1999):” Working of District Cooperative Central Bank, Hassan, Karnataka-

An Econometric Evaluation”, The Maharastra Co-operative Quarterly, Vol. LXXXIII, No.2,

pp.28-34.




7. Devaraja T S., (2003):” A Study of Indirect Financing by Regional Rural Banks (RRBs) in

Karnataka – An Economic Analysis”, Agricultural Marketing, Vol. XLVI. No.3, pp.98-103.

8. Goddard, J., Molyneux, P., Wilson, J.O.S. (2004): “The Profitability of European Banks: A

Cross-Sectional and Dynamic Panel Analysis”, Manchester School 72 (3),pp.363- 381.

9. Misra & puri, “Indian Economy”, Himalaya Publishing House Mumbai 2010, pp. 375-377

10. Mohan Rakesh, “Agricultural credit in India”, Economic & political weekly, March ,2006.

11. Nitin Bhatt and Thorat Y. S. P. (2004): “India’s Regional Rural Banks: The Institutional

Dimension of Reforms”, National Bank News Review, NABARD, April- September.

agricultural financing: a challenge for banking sector in · pdf file ·...

Documents