Opinion

A credit guarantee for all cultivators, akin to CGTSME for MSMEs and covering KCC loans, will help tenant farmers as well

At last count, the gross value added (GVA) through agriculture, forestry and fishing constituting the primary sector of our economy was estimated at ₹39.80-lakh crore, as per the figures released by the Ministry of Statistics and Programme Implementation on May 31. In this category, forestry is a segment which has a minor share compared to the other two.

This figure also does not include the contribution of the food processing industry which would include activities like dairy products, ready-to-eat items, processed/packaged food, juices/beverages and the like which can be categorised as part of the agricultural value chain, constituting the forward linkages, reaching up to the consumer.

According to a KPMG report of 2021, the output of the Indian food processing sector itself was around $263 billion (₹20-lakh crore approximately) in 2020. It is of course to be noted that there could be overlaps between what is classified under agriculture GVA and the food processing sector and the figures need to be moderated by excluding some inter-sectional data. The total GVA of agriculture, allied activities, fisheries and food processing at about ₹45-lakh crore would be a safe assumption.

Performing well

That the Indian agricultural sector has been performing extremely well despite Covid and has been an outlier in recording growth of around 3/4 per cent during all quarters in the last two years is widely acknowledged. This is the reason why, despite a global spike in food prices, there is enough food for everyone in India and delivery of rice/wheat through the public distribution system continues unabated. It is worth noting that the World Food Price Index of the FAO, which tracks a basket of food items. is at its highest level since the Index was constructed in 1990.

Credit availability for agriculture and allied activities has been facilitated by commercial banks and the cooperatives. The total of outstanding loans for agri/allied activities as of March 2022 is estimated at about ₹22-lakh crore, summing up the loans from commercial banks, regional rural banks, cooperatives and small finance banks.

Thus there is a prima facie gap of ₹23-lakh crore between output value and credit deployed in agriculture. While the entire gap may not be available for funding because of the availability of internal credit inter se among stakeholders (like farmers getting fertilisers on credit/procurers or arthias giving advance money to farmers, etc) there is definitely a scope for further credit support to what can be broadly termed the entire agri value chain — from farm to fork — as it were.

Even out of the existing credit support available for the agricultural sector it is estimated that the share of institutional credit has reached a level of about only 70 per cent now (RBI’s Internal Working Group Report 2019). If the country has to modernise agricultural practices and enhance the flow of credit to all segments of the agri value chain, there is a pressing need for a systemic credit accelerator in the agricultural segment.

Right now, the acceleration is sought to be provided by follow-up by the Department of Finance and the Ministry of Agriculture, but unless systemic enablers are provided such efforts will not lead to sustained results.

It is in this context that the availability of an omnibus sectoral credit guarantee scheme becomes important. India’s MSME sector has benefited greatly through the popular CGTMSE scheme administered by SIDBI under which all loans to the MSME segment up to ₹2 crore are covered by a credit guarantee.

This benefits both the borrower and the lender. No collateral security needs to be offered for loans up to ₹2 crore and the credit cost for lenders also comes down drastically because of the availability of the CGTMSE guarantee scheme. Furthermore, the credit risk weightage for guaranteed loans being zero as per Basel norms, the returns to banks from such loans are also higher.

Two key lessons

An analysis of the CGTMSE experience and independent international studies (ADB Brief No 167, March 2021) yields two relevant lessons: we can reasonably hope to leverage the corpus of a credit guarantee fund up to 10/12 times and the corpus fund can be managed without any erosion in the medium-to-long term, even after claim payouts. ( see Table for income/expenditure data of CGTMSE).

At present, there are three credit guarantee schemes in India’s 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 had recently introduced a guarantee scheme for loans to Farmer Producer Organisations (FPOs).

For the uninitiated, FPC is a corporate entity under the Companies Act, 2013 and is one class of FPOs, which could have any other legal status, like society/trust/cooperative, etc. Loans under the Agri Infra Fund scheme, part of the Atmanirbhar package, have been covered under the CGTSME scheme up to ₹2 crore

But all other loans including the ubiquitous KCC loans (which constitute 50 per cent of the outstanding agri loans) do not have any credit guarantee umbrella. An omnibus credit guarantee cover for all agri value chain loans up to ₹2 crore (including KCCs, may be with a lower claim coverage) can be the next big step in agri credit in the country.

It will infuse new vigour to institutional agri lending across the board. It will help even tenant/leasehold farmers get bank loans. It will help mitigate credit costs to banks that too at a time when the Government has mandated banks to lend KCCs at 7 per cent, for loans up to ₹3 lakh.

Also, millions of tenant farmers who do not get any loans as they do not have land ownership can be “included financially”. With a credit guarantee cover, it would be possible to structure loans to them too, with certain caveats.

For a start, a corpus fund of ₹10,000 crore would be good enough. The contribution can come from the Government (say 75 per cent), commercial banks (15 per cent) and NABARD (10 per cent). Going by rule-of-thumb leverage of 10/12 for such schemes and an average claim cover of, say, 70/75 per cent, it can cover incremental loans of about ₹1.5-lakh crore.

The corpus contribution can come in stages too and as Nabsanrakshan has a structure in place, the rollout of this omnibus credit guarantee for the agri segment (covering the entire value chain) can be effortlessly executed.

The writer is a top public sector bank executive. The views are personal

Published on June 05, 2022