evaluating the kisan credit card scheme

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  • Working paper

    Evaluating the Kisan Credit Card Scheme

    Areendam Chanda

    May 2012

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

    A Report prepared for the International GrowthCentre, Patna and London.!

    Areendam ChandaLouisiana 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 termcredit 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 thedeterminants of KCC lending across states in India and districts in Bi-har. We also examine the eects of the scheme on agricultural growthand yields. Our results suggest that states with initially better ac-cess to agricultural credit show sbsequently greater amounts of KCClending. However, Bihar and other BIMARU states also show fasteradoption rates that cannot be explained by their recent growth ac-celerations. Within Bihar, we see that districts with initially greaterlending in KCC continue to to pull further away from other districtswhile in terms of account holders there is evidence of convergence. Fi-nally, we do not see any evidence of KCC lending on state or districtlevel agricultural productivity.JEL Classication: Q14, Q0, O41, O47Keywords: Agricultural Growth, Financial Markets, Short Term

    Credit, India.

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


  • 1 Introduction

    In the study of economic growth, the role of nancial intermediation hasbeen always at centre stage. Well functioning nancial markets, by loweringcosts of conducting transactions, ensure capital is allocated to projects thatyield the highest returns and therefore enhances growth rates. In the contextof new growth theory, early contributions such as Jovanovic and Greenwood(1990), Galor and Zeira (1993), and Banerjee and Newman (1993) have laiddown the theoretical foundations of the role of credit market imperfectionson 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 pieceof policy making in India. The country has been characterized by a largeagricultural sector as well as a large small-scale industrial sector, taken to-gether which continue to form the bulk of employment. Providing access tocredit for these sectors has been a key driver of banking sector policy andformed the intellectual basis for bank nationalization and various prioritysector 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 inthe 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 characterizedby a multiple-product, multiple agency system that varied based on theparticular crop, input needs, season, size of borrowing, etc. What mayhave seemed like an array of choices, essentially involved a farmer having tomake multiple loan applications for dierent stages and needs of the farmingprocess..The KCC scheme was introduced to move away from the maze ofineciency towards a more consolidated system where the borrowers weresubject to fewer parameters and given more freedom to use the credit. It isin essence, a revolving credit line as opposed to the older system of demandloans.

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


  • loans.1 The KCC scheme has now been around for more than a decadeand has become a core element of the government of Indias recent push fornancial inclusion, especially in rural areas. By March 2011, cumulativelymore than a 100 million KCC accounts had been issued. Indeed, annualtargets by commercial, rural and cooperative banks are set so that eventually100% of eligible farmers are covered by the scheme. Given the dominant rolethat this scheme has come to play, it makes sense to ask whether this hashad any eect on agricultural growth. That is precisely what we try to doin this paper. In the rst half of the paper, we focus on inter-state eectsof 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 ofthe determinants of kcc adoption rates across states, and b) the eects onstate level agricultural productivity, food grain yields and also overall stateGDP per capita. We undertake both ordinary least squares to gauge themedium term eects and xed eects to estimate more short term eects.Furthermore, since the paper is concerned with Bihar, we ask whether Biharwas any dierent compared to other states in terms of adoption of the KCCscheme.

    In the second half of the paper, we move the focus to districts in Biharwhere we repeat the two exercises. At the district level it is more dicultto obtain reliable measures of sectoral output or even total value added.Though we do use some limited data at our disposal, most of the analysisexamines the impact on agricultural yields. We also share some thoughts onthe scheme based on our discussions with government ocials and bankerswe met with during the research project.

    Before describing the data and our ndings, we rst discuss the KCCscheme in a little bit more detail and the relevant literature. We also brieysurvey the already large literature on nancial development and economicgrowth in India.

    1.1 Background on the Kisan Credit Card Scheme

    As noted the KCC scheme was introduced in 1998-99. While the schemecenters around a revolving credit line facility, it is not really a credit cardin the traditional sense While some banks in other states do issue creditcards, 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 muchbased on the concept of branch-banking.


  • key features that are supposed to make the scheme user friendly includea) no collateral requirements, b) less stringent monitoring of actual use ofloans, 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 keepingwith this, farmers do not need to provide a security deposit to qualify forthe loan. They can qualify for the minimum amount upon producing docu-mentation of land possession (in Bihar, this is usually the Land PosessionCerticate). The amount varies from bank to bank, and also depends onthe scale of nance - a formula based on the crop and size of landhold-ing. Nevertheless for comercial banks, the amount usually stands at INR50,0000. Cooperative banks and regional rural banks will usually lend atlower amounts. Borrowers are eligible to borrow larger amounts but needto provide collateral. Once the loan is approved, the borrower is free toborrow up to the maximum amount at an annual interest rate, currentlyat 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 borrowedthere is no monitoring of the actual use. This is a major dierence betweenthe KCC scheme and all other previous crop loans where farmers had toproduce receipts to actually get the loans and the bank made paymentsdirectly to the supplier instead. Nevertheless, it opens up the possibilityof using the funds for purely consumption purposes, and also for arbitragegains. Indeed, discussions with bank ocials indicate there is anecdotal evi-dence that this is the case. The low interest rate (lower than recent inationrates in India) create ample opportunity for such abuse. If this were indeedthe case, then one should not be surprised to see higher consumption growthrates instead of higher agricultural productivity. Finally, if a borrower is ingood standing, then the loan can be renewed for another three years. Somebanks have now raised the validity to ve years and have raised the minimumnon-collateral amount to 100,000 rupees.3 The scheme is implemented bycommercial banks, regional rural banks and cooperative banks. Commercialbanks are the largest lenders though regional rural banks and cooperativebanks play an important role in many states. Nationally, cooperative bankshave become less important over time and tend to lend lower amounts.

    3What we have listed is a brief overview of the scheme.Specic details can be viewed on the NABARD website athttp://nabard.org/development&promotional/kisancreditcardmore.asp#.


  • There is hardly any doubt that, KCC is the single largest governmentscheme to introduce short term unsecured credit across the agricultural sec-tor. In fact, our perception is that as far as short term unsecured credit isconcerned, this is probably the most ambitious schem


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