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    Evaluating the Kisan Credit Card Scheme Areendam Chandaa

    Working Paper 12/0345 May 2012

  • Evaluating the Kisan Credit Card Scheme: Some Results for Bihar and India

    A Report prepared for the International Growth Centre, Patna and London.�

    Areendam Chanda Louisiana State University

    March, 2012


    The Kisan Credit Card Scheme was introduced in India in 1998- 99 has since become a agship program providing access to short term credit in the agricultural sector. According to the Government of India, over a 100 million cards had been issued cumulatively by March 2011. Using data from 2004-05 to 2009-10, the paper critically examines the determinants of KCC lending across states in India and districts in Bi- har. We also examine the e¤ects of the scheme on agricultural growth and yields. Our results suggest that states with initially better ac- cess to agricultural credit show sbsequently greater amounts of KCC lending. However, Bihar and other BIMARU states also show faster adoption rates that cannot be explained by their recent growth ac- celerations. Within Bihar, we see that districts with initially greater lending in KCC continue to to pull further away from other districts while in terms of account holders there is evidence of convergence. Fi- nally, we do not see any evidence of KCC lending on state or district level agricultural productivity. JEL Classication: Q14, Q0, O41, O47 Keywords: Agricultural Growth, Financial Markets, Short Term

    Credit, India.

    �Corresponding author: achanda@lsu.edu. I am indebted to the very able research assistance of Pronay Sarkar and Ting Wang.


  • 1 Introduction

    In the study of economic growth, the role of nancial intermediation has been always at centre stage. Well functioning nancial markets, by lowering costs of conducting transactions, ensure capital is allocated to projects that yield the highest returns and therefore enhances growth rates. In the context of new growth theory, early contributions such as Jovanovic and Greenwood (1990), Galor and Zeira (1993), and Banerjee and Newman (1993) have laid down the theoretical foundations of the role of credit market imperfections on growth via various channels. The empirical importance of nancial mar- kets in economic growth was further solidied in a series of papers including, but not limited to, King and Levine (1993), Levine, Loayza, and Beck (2000) and Beck, Loayza and Levine (2000). Since the beginning of independence, the importance of access to adequate credit has also been at the center piece of policy making in India. The country has been characterized by a large agricultural sector as well as a large small-scale industrial sector, taken to- gether which continue to form the bulk of employment. Providing access to credit for these sectors has been a key driver of banking sector policy and formed the intellectual basis for bank nationalization and various priority sector lending schemes.

    This paper examines the impact of one important nancial policy inter- vention aimed at addressing this problem- the Kisan (farmer) Credit Card (KCC) scheme on state level per capita incomes and agricultural produc- tivity. The KCC scheme was introduced by the government of India in the 1998-99 budget to displace a tangled web of other short term agricul- tural credit schemes that had become increasingly burdensome and inade- quate. Samantara (2010) notes that the earlier system was characterized by a multiple-product, multiple agency systemthat varied based on the particular crop, input needs, season, size of borrowing, etc. What may have seemed like an array of choices, essentially involved a farmer having to make multiple loan applications for di¤erent stages and needs of the farming process..The KCC scheme was introduced to move away from the maze of ine¢ ciency towards a more consolidated system where the borrowers were subject to fewer parameters and given more freedom to use the credit. It is in essence, a revolving credit line as opposed to the older system of demand loans.

    By 2004, the Reserve Bank of India, noting the increasing popularity of the KCC scheme, expanded its ambit to cover investment needs of the farmers as well as consumption credit needs in addition to traditional crop


  • loans.1 The KCC scheme has now been around for more than a decade and has become a core element of the government of Indias recent push for nancial inclusion, especially in rural areas. By March 2011, cumulatively more than a 100 million KCC accounts had been issued. Indeed, annual targets by commercial, rural and cooperative banks are set so that eventually 100% of eligible farmers are covered by the scheme. Given the dominant role that this scheme has come to play, it makes sense to ask whether this has had any e¤ect on agricultural growth. That is precisely what we try to do in this paper. In the rst half of the paper, we focus on inter-state e¤ects of the KCC scheme and the achievement of Bihar relative to other states. This part of the study can be divided into two parts, a) an examination of the determinants of kcc adoption rates across states, and b) the e¤ects on state level agricultural productivity, food grain yields and also overall state GDP per capita. We undertake both ordinary least squares to gauge the medium term e¤ects and xed e¤ects to estimate more short term e¤ects. Furthermore, since the paper is concerned with Bihar, we ask whether Bihar was any di¤erent compared to other states in terms of adoption of the KCC scheme.

    In the second half of the paper, we move the focus to districts in Bihar where we repeat the two exercises. At the district level it is more di¢ cult to obtain reliable measures of sectoral output or even total value added. Though we do use some limited data at our disposal, most of the analysis examines the impact on agricultural yields. We also share some thoughts on the scheme based on our discussions with government o¢ cials and bankers we met with during the research project.

    Before describing the data and our ndings, we rst discuss the KCC scheme in a little bit more detail and the relevant literature. We also briey survey the already large literature on nancial development and economic growth in India.

    1.1 Background on the Kisan Credit Card Scheme

    As noted the KCC scheme was introduced in 1998-99. While the scheme centers around a revolving credit line facility, it is not really a credit card in the traditional sense While some banks in other states do issue credit cards, we are not aware of any bank in Bihar that actually issues one2 The

    1See RBI (2004) 2While the government of India forges ahead with plans for introducing ATM facilities

    for these non-existent cards, most of the facilities, at least in Bihar, are still very much based on the concept of branch-banking.


  • key features that are supposed to make the scheme user friendly include a) no collateral requirements, b) less stringent monitoring of actual use of loans, and c) easy renewal after three years for borrowers in good standing. We expand on these briey. One of the key advantages (and a stated goal) is to make credit available without burdensome requirements. In keeping with this, farmers do not need to provide a security deposit to qualify for the loan. They can qualify for the minimum amount upon producing docu- mentation of land possession (in Bihar, this is usually the Land Posession Certicate). The amount varies from bank to bank, and also depends on the scale of nance - a formula based on the crop and size of landhold- ing. Nevertheless for comercial banks, the amount usually stands at INR 50,0000. Cooperative banks and regional rural banks will usually lend at lower amounts. Borrowers are eligible to borrow larger amounts but need to provide collateral. Once the loan is approved, the borrower is free to borrow up to the maximum amount at an annual interest rate, currently at seven percent (xed by the Reserve Bank of India). However, timely re- payment is rewarded by lowering the interest rate by two percentage points. Even though there is no compulsion to borrow the entire amount lump sum, Samantara (2010) notes that it is the norm. Once the money is borrowed there is no monitoring of the actual use. This is a major di¤erence between the KCC scheme and all other previous crop loans where farmers had to produce receipts to actually get the loans and the bank made payments directly to the supplier instead. Nevertheless, it opens up the possibility of using the funds for purely consumption purposes, and also for arbitrage gains. Indeed, discussions with bank o¢ cials indicate there is anecdotal evi- dence that this is the case. The low interest rate (lower than recent ination rates in India) create ample opportunity for such abuse. If this were indeed the case, then one should not be surprised to see higher consumption growth rates instead of higher agricultural productivity. Finally, if a borrower is in good standing, then the loan can be renewed for another three years. Some banks have now raised the validity to ve years and have raised the minimum non-collateral amount to 100,000 rupees.3 The scheme is implemented by commercial banks, regional rural banks and cooperative banks. Commercial banks are the