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Failing Farmers on access to Financial Services

A major barrier to access to bank accounts and loans is the inability of marginal, landless labourers and women to procure evidence of cultivation of their farm land to avail loans

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When 260 million workers in India depend on farming as a source of income, it necessitates a keen attention to why the agriculture sector remains to fail its workers of quality life. Among the many reasons identified, limited access to adequate and timely credit has played a vital role in determining this imbalance.

Access to financial services such as loans, savings accounts, remittances and insurance are crucial to achieve higher agricultural productivity. More importantly, it allows for their livelihood diversification, improved food security and overall profitability from farming.

Over the years, the agriculture sector has seen some progress in this area, especially when it comes to credit. Credit to farmers has grown substantially from 2006 to 2014. Statistics show an 11 percent increase in the number of bank accounts opened and a 22 percent increase in the loan amount taken. Moreover, small agricultural loans (up to $3,000) account for over 41% of the agriculture credit and borrowing by rural households has increased significantly (44% of outstanding cash loans) from non-institutional sources. Since 2004, the government has committed to vigorously increase investment in formal credit services and public schemes such as the Kissan Credit Card (KCC). Private players too have come forward to provide credit to the agricultural community.

Despite this, a significant proportion of small and marginalised farmers as well as rural women in India fail to receive adequate financial support. 43 percent of agricultural workers in general and 50 percent of female workers still do not have bank accounts.

The blame here lies not in the volume of financial credit, but in the access, availability and adoption of these services. Financial inclusion has failed in the country for a number of reasons, many of them inter-dependant and interlinked.

A major barrier to access to bank accounts and loans is the inability of marginal, landless labourers and women to procure evidence of cultivation of their farm land to avail loans. Schemes such as the KCC struggle to reach their objective at the last mile due to poor programme design or are used for financial consumption versus cultivation. Moreover, the lack of a viable and affordable crop insurance system exposes agricultural workers to the burden of income shocks and natural disasters.

Although formal rural credit institutions have made striding efforts in providing financial services to farmers, the inadequacies in infrastructure as well as growing exclusion of low-income households in market spaces have severed the access to these facilities. This tangible exclusion not only blocks the benefits of market forces but also obstructs the farmer's means to own small land holdings further deterring their potential to accumulate wealth. As a result, a large number of farmers still depend on informal sources such as money-lenders that often pull them deeper into the cycle of debt.

This is worrying for a number of reasons. Firstly, there is a real and immediate need for farmers to have access to additional financial resources to maintain profitability that affects their livelihoods. A study conducted by the NSSO in 2014 revealed that a single farming household earned a monthly average of INR 6,426 with an expenditure of INR 6,223 leaving a mere INR 203 for other activities. Moreover, other external factors such as shifting market trends and an emergence of new farming technologies (to name a few) have added an additional burden to farming households making it almost impossible to sustain themselves on an agricultural income alone.

With credit, farmers are given the option to add to their financial resources to better facilitate growth in business, as well as makeup for losses incurred. Credit also becomes imperative with the increase in demands of consumption and the personal aspirations of farming households. Farming families are now keen (and rightly so) to imbed themselves in emerging environments of technological access as well as improved quality of education and mobility through marriage. All this weighs heavily on farmers to spend more, despite the low returns through cultivation.

In December 2013, a report released by the Committee o Comprehensive Financial Services looked at the necessity to integrate rural credit systems for small business and low-income households in India. The report calls for inclusion through a comprehensive plan that allows for the adequate and even spread of financial institutions and services across the country with a defined percentage of credit contributing to GDP at various levels of the economy. The focus here is to offer avenues for this through access to formal bank accounts (hence credit) and incentivise banks to take initiative in providing sufficient access to formal credit as well as support to the beneficiary on financial protection issues.

Similarly, reforms undertaken by the Reserve bank of India as stated in the Report of the Committee on Medium-term Path on Financial Inclusion in December 2015 focus on ensuring better service delivery at the last-mile by adopting a localised technology-driven efforts in integrating low-income households to banking systems. More government-aided efforts include the introduction of short-term loans, Kisan Credit Cards and the Pradhan Mantri Jan Dhan Yojana (PMJDY). Both schemes are commitments by the government to provide affordable and timely credit to farmers. They do this by facilitating the acquisition of bank accounts to reach formal credit and other financial benefits such as insurance and pensions. Besides, the government seal adds assurance to farmers to legitimise their access to these services.

Despite this, farmers circumvent formal credit structures to opt for short-term informal credit. Nearly 26% of outstanding loans taken have reported to be from professional money lenders. Recent research on the psycho-social behaviour of farming households points to three key reasons for this to happen - the first being the immediacy of short-term informal loans. The urgent need of farmers pushes them to choose the fastest, nearest option. The second comes from the psychological barriers inherent in rural households. A large proportion of the farming community sees banks as a place to save large amounts and hence are hesitant to reach out for their services. Thirdly, as credit is often used to meet immediate needs, the farmer is reluctant of the uncertainty of availing loans from private banks and other institutions.

So What Next?
Considering the growing need of farming households to avail additional financial resources, and the existence of government-aided schemes and policies to encourage greater financial inclusion, the obvious next step would be to make optimum use of the facilities available.

The fact that it is important to bring financial resources to the farmers in a pragmatic, sustainable way presents a two-pronged approach to bridging the financial deficit. The first is a greater push by government bodies, both at the Centre and state, to align access of public and private financial services. Although this is not a new goal in the country, stronger efforts in systemising this process and tracking its progress at each level (with a focus on the last mile) can work to bring the benefit to the citizen. The second important step is to put emphasis on building awareness on the functionality of financial inclusion programmes and spaces for information exchange and redressal (if any). It is evident that awareness of government aided schemes, as well as fiscal literacy on interacting with banks (including the risks), can act as a strong step to bridge the deficit faced by farmers.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Dr Purvi Mehta-Bhatt

Trained as an agriculture biotechnologist, Purvi has over 18 years of experience working on developmental projects spanning, working with farmers organizations to high-level policy impact and technology transfers across Asia and Africa. She has proven track record, expertise and interest in bringing synergies among the sub-sectors of agriculture (crop and livestock) and across sectors (agriculture, health, nutrition and overall rural development). Before joining the foundation, she worked with the CGIAR.

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Dr Pawan Bakhshi

Pawan is the India country lead for Financial Services for the Poor program at the Bill & Melinda Gates Foundation. He focusses on how to efficiently and effectively deliver digital financial services to the poor which can be scaled to national levels while partnering with the Government, Regulators and Private sector players. Recently he was a part of RBIs Committee on Medium-term Path on Financial Inclusion and also a speaker at the high profile Delhi Economics Conclave hosted by the Ministry of Finance.

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