chapter-9 problems of agriculture...

CHAPTER-9

PROBLEMS OF

AGRICULTURE

FINANCE

163

It is said that a farmer is born in debt, lives in debt and ultimately

dies in debt. The most worrisome feature of the rural economy is the

burden of debt which has been on the rise despite six decades of planned

development. But at the same time, borrowing is the dire necessity for the

farmers in general and marginal and small farmers in particular. There is

no denying the fact that agriculture is the backbone of our rural economy.

To sustain, to stimulate and to strengthen its smooth functioning, it

requires regular supply of sufficient agricultural credit with reasonability

of interest. However, it is blamed that financing of agriculture is plagued

with a number of problems such as the problem of over dues,

unsatisfactory credit conditions, increasing malpractices and corrupt

credit culture etc.

The study shows that a number of problems are faced by the

farmers in availing finance for agriculture. Similarly, the banks are also

experiencing many problems in the efficient and effective distribution of

agricultural finance. These problems have been discussed as under:

9.1. PROBLEMS FACED BY THE FARMERS

On the basis of the study conducted, the farmers, who are covered

under the study, are confronting the following problems:

9.1.1. No Loan without Surety/Security

The banks do not disburse any loan to the farmers without surety

and security. The farmers find it very difficult to arrange satisfactory

security as well as surety to the bank. Security for loans may be in the

form of hypothecation of assets owned by them. But the farmers do not

possess many assets except the land which they find it hard to offer as a

security. It becomes a big hurdle in obtaining loan from the bank. As a

result, many marginal and small farmers do not get the facility of

agriculture loan and remain bereft of the benefits of agricultural

development.

As for as the third party guarantee is concerned, banks generally

demand the guarantee of the rich and influential persons. The small and

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marginal farmers confront a number of problems in relation to a

guarantor. Even if some farmers are able to arrange some surety, the

person offering guarantee demands compensation for standing as a

surety. A poor farmer does not have money to pay him. As a result, he

faces humiliation and feels dejected with the whole system.

It is also to be noted that the financial capacity and integrity of the

farmer is verified from different quarters before sanctioning any loan to

him. These may include the village Sarpanch, some large farmers of the

area or neighbours of the farmers etc. They may or may not back the

credentials of the concerned farmer. The loan disbursement gets halted if

the banks receive negative information about the proposed borrower. The

issue here is that the information so obtained may not be true and may

suffer from personal biases and grudges of the concerned person against

the proposed borrower

9.1.2. Corrupt Practices of Patwaries, Agents and Bank Officials

It is said that money makes the mare go. The overall system has

been so polluted that the total process comes to a standstill till you grease

the palm of the various persons involved in the sanctioning of the loan.

The farmers need many papers and documents in order to process their

loan. It becomes a herculean task to get landholding and other revenue

records from Patwaries and other officials of the revenue department. The

corrupt practices of patwaries and other officials of the revenue

department hinder the loan process.

Similarly, many bank officials and other agents involved in the loan

process create many hurdles and demand their fee to resolve the

procedural issues. The poor farmers find it very difficult to meet the ever

growing demands of many persons. As a result, they are unable to get the

loans and waste their time and energy without any positive result.

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9.1.3. Credit Inadequacy

The banks have not been making a fair assessment of the credit

needs of the farmers. It results in the shortage of finance and there arises

inadequacy of credit. It is pertinent to note that if sufficient funding is not

available, it will not serve the desired purpose. Moreover, the delay in

disbursement also leads to many problems. It has been found in the study

that some of the farmers who received inadequate amount of credit used it

for some other purpose. Inadequate credit may be due to improper

estimate of requirement of borrowers or may be due to arrears of past

loans due to various unforeseen contingencies.

9.1.4. High Transaction Costs

The farmers have to incur many other costs in addition to the

interest they pay on the loan. These may include loss of wage earning

days, revenue stamps, letter of guarantees, cost of photographs, loan

agreement and other unidentified charges being incurred at various stages

to expedite the sanction of loans etc. These high transaction costs hamper

the spirit of the farmers for getting loans.

The information relating to the number of trips made and money

spent by the borrower farmers in connection with getting loans was

ascertained from the sample farmers and the same has been given in

Table 9.1. Information included the number of trips and money spent by

the borrower starting from the stage of application form collection, filling

up the form, procurement of required documents, obtaining

guarantee/witness, registration fee, lawyer’s fee, submission of application

form, answering of objections/queries, collection of sanctioned loan, bribe

demanded by / paid to the bank officials/ agents, etc.

As per the study conducted, a farmer has to make 5.4 trips in

Patiala district and 6.4 trips in Fatehgarh Sahib District on an average to

the bank for the purpose of availing a loan. Similarly, a farmer has to

incur Rs. 2750 in Patiala District and Rs. 2960 in Fatehgarh Sahib

District on an average for the purpose of availing a loan from the bank.

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Table: 9.1

Transaction Costs of Borrowing across Sample Farmers from

Institutional Sources: (Per Sample Farmer)

Particulars Region

Patiala Fatehgarh

Sahib

Overall

Average No. of trips made to

acquire loan

5.4 6.4 5.9

Average amount of Money

spent

Rs. 2750 Rs. 2960 Rs. 2855

9.1.5. Ambiguous Terms and Conditions

Most of the farmers are illiterate. They are ignorant about the

various rules, terms and conditions of the banking institutions regarding

agricultural finance. They rely upon the information given to them by

bank officials and other agents involved in the process. They simply do not

understand the jugglery of finance terminology. Many of them even do not

know the interest rates, the amount of subsidy, the different schemes and

the repayment schedule etc. They simply put their thumb impressions on

the required documents where they are told to do. Sometimes, the

orthodox farmers are under the impression that once a person gets a loan,

it can be re-payed only by selling the land. The lack of clarity of banking

system and ambiguous terms and conditions stop them from deriving the

benefits of agricultural finance.

9.1.6. Complicated and Time-Consuming Procedure

The loan process is considered complicated and time consuming.

The farmers require crop loans during the particular seasons. If they do

not get the credit in time, it will not serve the desired purpose. The delay

in processing the loan is a common problem felt by the farmers. Similarly,

if the farmers require term loan for buying certain assets, it is also

required in time. Otherwise, if the asset is bought after the work has been

done, the asset will remain idle till its next use. The farmers also complain

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about the complications in the loan process. These complications may

relate to the procedural complications and behavioural complications.

9.1.7. More Beneficial to Large Farmers:

The farmers normally get term loans to buy agricultural equipments

and farm machinery. They also get loans to add to their existing

landholdings. However, the heavy terms loans for such facilities are

availed in most of the aces by large farmers because of their better access

to the banks. The marginal, small and even medium farmers do not take

up the courage to opt for such loans. They also do not have the required

guarantee and resources to avail the facility of such loans. It is felt that

the facility of heavy term loans is more beneficial to large farmers and they

derive the maximum benefits from the banking facilities.

9.1.8. Stress of Repayment

It is said that getting a loan is difficult but its repayment in time is

more difficult. The small and marginal farmers live under pressure of

repayment of the loan. They are expected to repay the loan immediately

after the harvest. Sometimes, they do not get fair price after harvest. But

due to hard conditions of repayment, they have to sell the crop without

any bargain regarding price. It creates a problem in their minds whether

to go for such loans or not.

9.1.9. Corruption in DRDA Office

District Rural Development Agency (DRDA) is considered at par with

other government departments. This office is expected to play the growth

oriented role for the farmers. It sanctions loan-cum-subsidy to the

farmers. However, it is felt by the farmers that the files in the department

do not move till the wheels of corruption are attached to them

9.1.10. High Rates of Interest

The farmers feel that the rates of interest charged by banks on loans

are quite high in comparison to the returns expected by them on their

yield. The subsidies on the loans are also decreasing day by day. High

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rates of interest prove to be a bottleneck in the repayment of debt by the

farmers to the banks.

9.1.11. Less Branches of Banks in Villages

Although, over the years, the branch network of commercial banks

has increased manifold, still there are many villages in which there is no

branch of any commercial bank. The banks in most of the cases prefer to

open their new branches in the urban and semi-urban areas or large

villages. Non presence of commercial banks at village level also forces the

farmers to avail credit facilities from non-institutional sources. The loan

from non-institutional sources creates a vicious circle of a never ending

loan process. They always remain in debt till they leave this world. The

less number of branches has led to lesser banking habits among the rural

folk of the state.

9.1.12. Unapproachable for Tenants and Small Farmers

Due to formal procedure of availing credit facilities from institutional

sources, tenants and small farmers are unable to avail the credit facilities

from commercial banks. They are unable to meet the necessary basic

requirements of the commercial banks for availing credit facilities.

Thus, in spite of significant increase in institutional lending, the

malpractices prevailing in the system make the borrowing more

cumbersome and costly to a farmer. Therefore, the farmers have to resort

to non institutional sources to get the loan.

The various responses of farmers in relation to various problems

faced by them while availing loan from commercial banks as enunciated

by them can be summarized in the following table:

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Table 9.2

Problems faced by the Farmers in Availing Institutional Credit in

Punjab: [Percentage of Farmers (Multiple Responses)]

Sr.

No.

Problems Type of Farmers

Marginal Small Semi-

Medium

&

Medium

Large

1 No loan without surety/

security

35.5 25.6 14.7 12.8

2 Corrupt Practices of

Patwaries, Agents and

Bank officials

24.3 32.4 29.7 32.7

3 Credit Inadequacy 19.4 29.4 28.4 27.4

4 High Transaction costs 25.4 34.4 32.4 34.2

5 Ambiguous Terms and

conditions

27.3 26.7 17.3 28.2

6 Complicated and Time

Consuming Procedure

42.2 38.5 33.4 39.6

7 More Beneficial to Large

Farmers

34.3 33.3 27.5 0.0

8 Stress of Repayment 26.7 31.9 25.4 25.6

9 Corruption in DRDA Office 23.4 21.4 28.9 29.1

10 High Rate of Interest 24.3 29.6 22.6 15.2

11 Less Branches of Banks in

Villages

26.6 33.9 21.4 12.3

12 Unapproachable for

Tenants and Small farmers

27.4 26.4 11.2 1.2

13 No Problem at All 4.5 3.2 5.6 4.7

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9.2 RANKING OF PROBLEMS ACCORDING TO THE CATEGORIES OF

THE FARMERS

Data received through questionnaires has been further analyzed in

following four categories:

A. Problems of marginal farmers

B. Problems of small farmers

C. Problems of semi-medium & medium farmers

D. Problems of big farmers.

9.2.1. Problems of Marginal Farmers

Almost all marginal farmers responded about problems and their

high rank problems are – complicated and time consuming procedure,

denial of loan due to unavailability of security, lack of funds available to

them as large share of funds available are procured by the big farmers etc.

Different problems faced by the marginal farmers have been shown rank-

wise in the following table:

Table 9.3

Problem Faced by Marginal Farmers (Rank-wise)

Sr. No. Nature of Problem Rank

1 Complicated and time consuming procedure I

2 No loan without surety/ security II

3 More beneficial to large farmers III

4 Unapproachable for tenants and small farmers IV

5 Ambiguous terms and conditions V

6 Stress of repayment VI

7 Less branches of banks in villages VII

8 High rate of interest VIII

9 High Transaction costs IX

10 Corrupt practices of Patwaries, Agents and Bank

officials

X

11 Corruption in DRDA office XI

12 Credit inadequacy XII

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9.2.2. Problems of Small Farmers

There are various problems which are being faced by the small

farmers. Their high rank problems are – complicated and time consuming

process of availing loan, high transaction cost, more institutional loan to

big farmers, lack of availability of banking facility at village level etc.

Different problems faced by the small farmers in availing bank loan facility

are summarized rank-wise in the following table:

Table 9.4

Problem Faced by Small Farmers (Rank-wise)

9.2.3. Problems of Semi-Medium & Medium Farmers

Semi-Medium & Medium farmers registered their problems rank-

wise as cumbersome process of getting loan, high transaction cost,

corrupt practices of Patwaries, agents and bank official, corruption in

DRDA officials etc. The various problems faced by the medium farmers

have been shown rank-wise in the following table:



2 High Transaction costs II

3 More beneficial to large farmers II

4 Less branches of banks in villages IV

5 Corrupt practices of Patwaries, Agents and

Bank officials

V


7 High rate of interest VII

8 Credit inadequacy VIII

9 Ambiguous terms and conditions IX

10 Unapproachable for tenants and small farmers X

11 No loan without surety/ security XI

12 Corruption in DRDA office XII

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Table 9.5:

Problem Faced by Semi-Medium & Medium Farmers (Rank-wise)





officials

III

4 Corruption in DRDA office IV

5 Credit inadequacy V

6 More beneficial to large farmers VI

7 Stress of repayment VII


9 Less branches of banks in villages IX

10 Ambiguous terms and conditions X

11 No loan without surety/ security XI

12 Unapproachable for tenants and small farmers XII

9.2.4. Problems of Large Farmers

Responded top problems of large farmers are – cumbersome process

of getting loan, high transaction cost, corrupt practices of Patwaries and

other officials, credit inadequacy etc. Various problems faced by the

farmers have been listed, rank-wise, in the following table:

Table 9.6

Problem Faced by Large Farmers (Rank-wise)





officials

III

4 Corruption in DRDA office IV

5 Ambiguous terms and conditions V


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7 Credit inadequacy VII


9 No loan without surety/ security IX

10 Less branches of banks in villages X

11 Unapproachable for tenants and small farmers XI

12 More beneficial to large farmers XII

Some common problems faced by all the four groups of farmers are

cumbersome process of getting loan, high rate of interest and the defective

role of officials concerned at the concerned bank and at revenue office etc.

9.2.5: Comparison of Ranks Given to the Various Problems Faced by

the Farmers

Different categories of farmers gave different ranks to the problems

faced by them as per their perception. The following table compares the

ranks given by them and rank correlation among them has been

calculated.

Table 9.7

Comparison of Ranks given to the Various Problems Faced by the

Farmers

Sr.

No.

Nature of Problem Marginal

farmers

Small Semi-

Medium

&

Medium

Large

1 Complicated and time consuming

procedure

1 1 1 1

2 No loan without surety/ security 2 11 11 9

3 More beneficial to large farmers 3 3 6 12

4 Unapproachable for tenants and

small farmers

4 10 12 11

5 Ambiguous terms and conditions 5 9 10 5

6 Stress of repayment 6 6 7 6

7 Less branches of banks in villages 7 4 9 10

8 High rate of interest 8 7 8 8

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9 High Transaction costs 9 2 2 2

10 Corrupt practices of Patwaries,

Agents and Bank officials

10 5 3 3

11 Corruption in DRDA office 11 12 4 4

12 Credit inadequacy 12 8 5 7

Values of Correlation: R12 = 0.182, R23 = 0.587, R34 = 0.748, R41 = -0.258

R24 = 0.273, R13 = -0.328

The above table signifies that the ranks given by the different

categories of farmers to the various problems in raising finance for

agriculture are different. All the farmers agree that to get agricultural

finance is complicated and time consuming procedure. Marginal farmers

find it very difficult to arrange the surety or security for getting the loan.

The negative correlation between marginal farmers and large farmers

shows that there is a difference in the perception about the problems of

agriculture finance. The value of correlation between marginal farmers

and semi-medium/medium farmers is also negative and signifies that the

problems of marginal farmers differ from the problems of semi-

medium/medium farmers. The value of correlation between small and

medium farmers is very moderate which signifies the commonality of some

of the problems in both the categories. Most of the farmers in the analysis

also think that transaction costs to get credit are also very high. The value

of correlation between medium and large farmers is quite high which

signifies that they think alike on the problems.

9.3. PROBLEMS FACED BY THE BANKS

The banks experience a number of difficulties and problems in the

efficient and effective administration of agriculture financing. The

interactions and discussions with the branch managers of the banks

under study reveals the following major problems faced by them:

9.3.1. Increasing Demand for Agriculture Credit

Due to the technological upgradation on the agricultural front, the

credit need of the agricultural sector is on the rise. To meet the rising

credit demand of agricultural sector is an enormous task, and

responsibility will have to be borne by the formal financial institutions,

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mainly the co-operatives and commercial banks. As resources available to

commercial banks in the agricultural sector are limited, it is important

that every commercial bank attempts to make optimum use of its limited

resources in this sector. It is not possible to meet the requirements in

proportion to the demand.

9.3.2. Slow Disbursement of Subsidies by DRDA

The government sanctions subsidies under its various schemes

through District Rural Development Agency. The BDO of the concerned

area sends the application of the borrower to the bank with his certificate

regarding availability of amount for the purpose of subsidy. The banks

then forward the case to DRDA for sanction of subsidy to the borrower.

Generally the officials of DRDA delay the loan case of the borrowers owing

to their vested interests. Under such circumstances, the banks cannot

sanction and disburse the amount unless it is intimated by the DRDA that

the said borrower has been sanctioned the required amount of subsidy for

the purchase of assets.

9.3.3. Problem of Over Dues

The problem of mounting over dues has become a major cause of

concern for the banking institutions. The amount of recoverable loans

from the farming sector has been piling up day by day. The interaction of

the researcher with branch managers regarding this major issue revealed

the following causes for poor recovery of loans:

1. The farming activities are largely dependent on the mercy of Almighty

God in our country. Nature plays havoc with the farmers almost every

year. Natural calamities like floods or droughts ruin the crops of the

farmers and they are left with very little produce. It affects their

repaying capacity and as a result, the recovery of loans becomes a

tough task.

2. It is very common among the farmers that they use the amount of

loan for domestic or leisure purposes. Sometimes, they spend the

loan money on social functions, litigation, sickness and other such

purposes. It leads to reduction in the revenue and ultimately affects

their capacity to repay the loan.

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3. The cumbersome procedure of disbursement of loans, high time

taken by DRDA in releasing the subsidies and other procedural

formalities sometimes defeat the very purpose of the loan. As a result,

the loan obtained after the desired time is used for some other

purpose.

4. The farmers are illiterate and ignorant about the financial

management practices. They do not know how to make the optimum

use of the loan taken. They simply take the loan as their own money

and many times use it on wasteful items. They also do not maintain

any account of the loan taken by them. Basically, they do not

understand the cost of the loaned capital. It results in non-recovery

of loans.

5. There is a crisis of character and attitude in the people of the

country. Most of the people have developed an attitude of willful

default because they feel that the loan taken by them is the money of

the government and it is not meant to be repaid. There have been

situations when because of political considerations, the respective

governments waived off the loans of the farmers. As a result, people

have developed the feeling that the governments will again waive off

the loans and they simply go on waiting for that time.

6. Crop failure or lesser production due to shortage of fertilizers,

pesticides, good variety of seeds also compels farmers not to repay

loans. Lesser production causes lesser income and lesser capacity of

the farmers to meet their financial obligations.

7. There is a cut throat competition among different financial

institutions. They offer different lucrative schemes to the people for

credit which induce them to have multiple credit facilities from

different institutions. It puts a great liability on them to repay

installments of these multiple loans. It results in difficulty for them to

repay all the installments at the same time. So, they become

defaulters.

8. Rural poverty and indebtedness, decreasing size of holdings,

unemployment and disguised unemployment contribute a lot to the

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miserable plight of the farmers. Their income from agriculture is

hardly sufficient to meet even their day to day expenditure on food,

clothing and shelter. It results in the over dues piling up.

9. Our system of finance is also affected by politics. The cooperatives

normally issue loan money only to those big farmers, who have some

political connections. Small farmers lag behind them. They fail to get

credit. In the absence of credit, they are unable to purchase desirable

inputs and other farm material. Absence of modern inputs further

lowers their income and lessens their paying capacity of loan.

10. The banks do not have effective follow up system for the recovery of

loans. The recovery of loans also gets affected by political

interference.

9.3.4. Unhealthy Competition & Lack of Coordination

With the emergence of many private sector banks, there is an

unhealthy competition among various financial institutions. There are

many hidden costs charged particularly by the private banks. It has led to

the erosion of confidence of the common people in the banking system.

Moreover, there is lack of co-ordination between various agencies working

for rural development.

9.3.5. Procedural Issues

Illiteracy is the biggest hurdle in the development of the farming

community. The borrowers have to submit many documents and papers to

be obtained from different agencies for getting finance for agriculture

operations. They find it very difficult and sometimes simply get fed up with

the system and say no to loans. The concept of paperless office is still a

dream for the institutions.

9.3.6. Political Interference

Politics is still a dirty game and the influential politicians pressurize

the banking institutions in rural areas to give loans or extend moratorium

facilities to a particular group of farmers. In small villages ridden with

political and communal factionalism, commercial bank personnel are

bound to come under undesirable pressure which forces the institutions

to sacrifice the norms of sound creditability of farmers.

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9.3.7. Absence of Proper Control Mechanism

There is no effective control mechanism to check the diversion of

funds to purposes for which the loan is not granted. It has become very

common among the borrowers to siphon off the money for unproductive

purposes. It results in the lowering of the repayment capacity of the

borrower.

8.3.8. Inadequate Staff

The bank managers also complained about the shortage of staff to

implement the various schemes of banks effectively. They feel

handicapped by non-availability of adequate and competent staff,

particularly the field staff, at their branches.

9.3.9. Higher Transaction Cost

In recent years, the rural branches of commercial banks in general

and branches of RRB in particular, have been under severe financial

strain on account of higher transaction cost involved in handling of a large

number of small size loan accounts and somewhat lower interest income

as a result of concessional rates of interest on small size loans.

9.3.10. Lower Cash Deposit to total Deposit Ratio

The lower proportion of current deposits in total deposits of rural

branches has also placed them at a disadvantage with regard to the cost

of resources.

9.4. Summary of the Findings

The study reveals that although the institutional credit for

agriculture has increased rapidly in recent years in Punjab, it still lags

behind the productive needs of the Punjab farmers. They have to resort to

non-institutional sources to meet part of their productive as well as un-

productive needs. There are several irritating bureaucratic and other

hassles in obtaining an institutional credit. In spite of significant increase

in institutional lending, the mal-practices prevailing in the system make

the lending more cumbersome and costly. Therefore, it is high time to

address these inadequacies of the institutional sources.

chapter-9 problems of agriculture...

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