Agriculture - Institutional credit is displacing the moneylender

In this concluding (for now) piece on Agriculture, we look at Agriculture credit. One of the things we repeatedly hear from policymakers is the need to push more Institutional credit to Agriculture. In the budget speech, every finance minister refers to increasing the flow of Institutional credit to Agriculture and lays down a target of credit to be disbursed by commercial banks – with a thumping of desks from the treasury benches. The logic being that Agriculture as a sector is plagued with informal credit from money lenders, often at usurious rates of interest. Thus, replacing this informal credit with cheaper institutional credit will alleviate the financial situation of farmers who are otherwise at the mercy of the moneylender.

The good news is that this has happened! Over the past three decades, direct institutional credit (Commercial Banks and Cooperatives) to agriculture has increased more than fifty times – from Rs300bn in 1991 to Rs15,000bn as of 2021. The output from the agriculture sector has increased by less than half of this (23x) during this period. Thus, in both absolute and relative (to output) flow of institutional credit to agriculture has increased massively. Outstanding Institutional credit is now at over 40% of agriculture GDP, more than two times of what it was in the 1990s.

The question is, has this worked as anticipated? And the limited data suggests that it has. The share of informal borrowing in agricultural households has fallen – from 40% in 2013 to 30% in 2019.

So, the limited objective of replacing informal lending with formal, less usurious lending has been met. But the broader question of whether more credit in agriculture has resulted in better outcomes for agricultural households remains open. But we will leave that for another day.