At last count, the gross value added (GVA) from agriculture, forestry and fisheries, which make up the primary sector of our economy, was estimated at 39.80 lakh crore, according to figures released by the Department of Statistics and Program Implementation on May 31. In this category, forestry is a segment that has a small share compared to the other two.
This number also does not include the contribution of the food processing industry, which would include activities such as dairy, ready-to-eat products, processed/packaged foods, juices/beverages and the like, which can be categorized as part of the agricultural value chain that form the forward links and through to the consumer pass.
According to a 2021 KPMG report, the output of India’s food processing sector itself in 2020 was around US$263 billion (ca GVA and food processing sector and the figures need to be tempered by excluding some intersectional data. The total GVA of agriculture , related activities, fishing and food processing at around 45 lakh crore would be a safe assumption.
Good performance
That the Indian agricultural sector has performed extremely well despite Covid and has been an outlier in all quarters for the past two years, posting growth of around 3/4 percent is widely acknowledged. For this reason, despite a global increase in food prices, there is enough food in India for everyone and the supply of rice/wheat through the public distribution system continues unabated. It is worth noting that the FAO’s World Food Price Index tracks a basket of food. at its highest level since the Index was created in 1990.
The availability of credit for agriculture and related activities was facilitated by commercial banks and cooperatives. Total outstanding loans for agricultural/related activities as of March 2022 is estimated at around 22 lakh crore, combining loans from commercial banks, regional rural banks, cooperatives and small financial banks.
So there is one prima facie Gap of ₹23 lakh crore between output value and credit employed in agriculture. While the entire gap may not be available for financing due to the availability of internal credit among themselves between stakeholders (such as farmers who get fertilizers on credit/procurers or arthias advance payments to farmers, etc.) there is definitely scope for further credit support for what can be broadly described as the entire agricultural value chain – from farm to fork, so to speak.
Even from the existing credit support for the agricultural sector, it is estimated that the share of institutional credit has now only reached a level of about 70 percent (RBI’s Internal Working Group Report 2019). If the country needs to modernize farming practices and improve credit flow to all segments of the farming value chain, there is an urgent need for a systemic credit accelerator in the farming segment.
Attempts are currently being made to achieve acceleration through follow-up action by the Ministry of Finance and the Ministry of Agriculture, but unless systemic conditions are put in place, such efforts will not yield sustainable results.
In this context, the availability of a sectoral omnibus credit guarantee system becomes important. India’s MSME sector has benefited greatly from the popular CGTMSE scheme administered by SIDBI under which all loans to the MSME segment are backed by a loan guarantee up to ₹2 crore.
This benefits both the borrower and the lender. No collateral needs to be offered for loans up to ₹2 crore and lender borrowing costs are also drastically reduced due to the availability of the CGTMSE Guarantee Scheme. Since the credit risk weight for guaranteed loans under the Basel standards is zero, the returns for banks on such loans are also higher.
Two important lessons
An analysis of the CGTMSE experience and independent international studies (ADB Brief No. 167, March 2021) provides two relevant lessons: we can reasonably hope to leverage the corpus of a loan guarantee fund up to 10/12 times, and the corpus fund can be managed medium to long term without erosion, even after claim payments. (see table for CGTMSE income/expense data).
There are currently three loan guarantee schemes in the Indian agricultural sector. The Small Farmers Agribusiness Consortium (SFAC) under the Ministry of Agriculture has a guarantee scheme called Nabsanrakshan for bank loans to Farmer Producer Companies (FPCs), while NABARD recently introduced a guarantee scheme for loans to Farmer Producer Organizations (FPOs).
For the uninitiated, FPC is a corporation under the Companies Act 2013 and a class of FPOs which could also have other legal status such as company/trust/cooperative etc. Loans under the Agri Infra Fund scheme, part of the Atmanirbhar package have been covered up to ₹2 crore under the CGTSME scheme
But all other loans, including the ubiquitous KCC loans (which account for 50 percent of outstanding farm loans), have no loan guarantee umbrella. Omnibus credit guarantee coverage for all agricultural value chain loans up to ₹2 crore (including KCCs, possibly with lower claims coverage) may be the next big step in agricultural credit in the country.
It will reinvigorate institutional farm lending across the board. It will even help tenants/tenant farmers get bank loans. This will help ease the cost of borrowing for banks even at a time when the government has mandated banks to lend KCCs at 7 per cent on loans up to 3 lakh.
Millions of leasehold farmers who do not have access to loans because they do not own land can also be “financially included”. With loan guarantee coverage, it would also be possible to structure loans to them, subject to certain caveats.
A corpus fund of ₹10,000 crore would be good enough to start with. Contribution can come from the government (let’s say 75 percent), commercial banks (15 percent) and NABARD (10 percent). Assuming a rule of thumb of 10/12 leverage for such programs and an average receivables coverage of say 70/75 percent, it can cover incremental loans of around 1.5 lakh crore.
The corpus contribution can also be incremental, and since Nabsanrakshan has a structure, the launch of this omnibus credit guarantee for the agricultural segment (covering the entire value chain) can be done effortlessly.
The author is a leading public sector bank manager. The views are personal
Published on
June 05, 2022
Comments are closed.