Agro Money

Role of Commercial Banks

The commercial banks form the core of the organized banking system and constitute quantitatively the most important group of financial intermediaries in the country, comprising both scheduled and non-scheduled banks. Deposits paid up capital and borrowings from the Reserve Bank of India form the resources of the commercial banks. The short term and medium term credit needs of both industry and agriculture are met by the commercial banks and they also help finance developmental plans by investing funds in the government securities.

Initially, the commercial banks were concentrating only on the financing of the trade and industry. In the beginning, Commercial Banks (CBs) were not interested in financing agricultural operations and confined themselves largely to financing trade and exports. The All India Rural Credit Review Committee (1969) therefore suggested enhancing the role of the CBs in providing agricultural credit. Further, under the Social Control Policy introduced in 1967 and subsequently the nationalisation of 14 major CBs in 1969 (followed by another six banks in 1980), CBs have been given a special responsibility to set up their advances for agricultural and allied activities in the country.

With the nationalization of the banks, they are now actively involved in the disbursement of agricultural credit. On account of the branch licensing policy adopted by the RBI, the rural branches of the commercial banks account for a large percentage of the total network and the Agricultural Development Branches, Gram Vikas Kendras and Rural Service Centers were set up to cater exclusively to the needs of agriculture and the allied activities. Under the 'Lead Bank Scheme' all districts were allotted to commercial banks that were entrusted with the responsibility of preparing credit plans for their lead districts. The 'Village Adoption Scheme' was formulated by commercial banks to carry out leading operations in contributing significantly to the development of agriculture.
Bank credit is available to the farmers in the form of short-term credit for financing crop production programmes and in the form of medium-term/long-term credit for financing capital investment in agriculture and allied activities like land development including purchase of land, minor irrigation, farm mechanization, dairy development, poultry, animal husbandry, fisheries, plantation, and horticulture. Loans are also available for storage, processing and marketing of agricultural produce.

Banks have been favouring indirect rather than direct finance to agriculture. Finance to dealers, commission agents, NBFCs and SEBs, and investment in bonds earmarked for the priority sector have gained more priority than basic agricultural finance.
Banks are parking the funds in priority sector bonds or contributing to the RIDF of Nabard or SIDBI deposits in reaching the statutory norm of 40 per cent of net bank credit to the priority sector. Undoubtedly this indirect finance will improve the infrastructure facilities in rural areas and create new services.

But the farmer has no purchasing power to buy these services. It is more important to support the basic economic activity of the farmer. Banks have to adopt modern tools and techniques in estimation of risks in agriculture. Agriculture is always exposed to an uncontrolled environment, unlike other production activities. The market for agricultural output will be perpetual because everyone needs food to live. The risks farmer faces are much higher than those for other producers. In the absence of a suitable and comprehensive public policy, such risks lead either to under-production or mispricing of output. The practice of increasing the minimum support price has to be re-examined as it results in to large procurement of foodgrains by the public sector agencies and can distort the price formation mechanism.

The main aim should be to increase the risk-adjusted rate of return on investment in agriculture. The rupee borrowed by a farmer should give as high a rate of return as that borrowed by either Reliance or Infosys or any other well-rated company. Banks should understand that agriculture is a way of life for the farmer and is only subsequently transformed into a business. It cannot simplistically be compared with exposures to industrial and other retail advances. There is, therefore, need to look beyond mandatory targets. Designing new strategies and leveraging existing infrastructure, quantification of credit risk and activating a package of financial services is essential in improving the farm credit system and increasing agricultural output.