Priority Sector Lending in Agriculture in India

This article will discuss the Priority Sector Lending in Agriculture norms of Reserve Bank of India. Agriculture is a very important part of India. It plays an important role in India’s economy. Agriculture and allied activities are a major contributor to India’s Gross Domestic Product (GDP). By allied activities is meant livestock, forestry and fishery, and together with agriculture they contribute around 17% of GDP, and is the largest employer in India’s economy. Some important statistics related to agriculture are as below:

  1. India is the largest producer, consumer and exporter of spices and spice products.
  2. India is the second largest fruit producer in the world.
  3. India ranks third in farm and agriculture outputs.
  4. Agricultural export constitutes 10 per cent of the country’s exports and is the fourth-largest exported principal commodity.

History of Priority Sector Lending in India

The aim of of priority sector lending program is to ensure that adequate credit is available to some of the vulnerable sectors of the economy like agriculture. The evolution of India’s PSL policy is given below.

  • 1968 – Because of the importance of agriculture to India’s economy, the National Credit Council emphasised that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries.
  • 1971 – A report is submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank.
  • 1972 – The concept of Priority Sector is formalised.
  • 1974 – Banks are advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 percent by March 1979.
  • 1985 – The Dr. K S Krishnaswamy Committee report banks were advised to achieve the target of priority sector lending at 40 percent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector.
  • 2005 – Recommendations made by the Internal Working Group of the RBI (Chairman: Shri C. S. Murthy).
  • 2007 – Guidelines revised based on C. S. Murthy recommendations.
  • 2008 to Present – Malegam Committee to to study issues and concerns in the Micro Finance institutions (MFI) sector.

Guidelines for Priority Sector Lending in Agriculture in India

As per latest Priority Sector Lending Guidelines issued by Reserve Bank of India, Banks have to allocate 40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, towards Priority Sector Lending. As of 2015, gross bank credit of banking sector in India was Rs 61 lakh crore, and thus Priority Sector lending potential is close to Rs 25 lakh crores.

Of this amount, Banks have to allocate 18 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure towards agriculture, whichever is higher. In this context the activities covered under agriculture are classified under three sub-categories viz. Farm credit (which includes short-term crop loans and medium/long-term credit to farmers) , Agriculture infrastructure and Ancillary activities. Agricultural Priority Sector lending size is therefore potentially more than Rs 10 lakh crore.

Of this amount, Banks have to allocate 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., 7 per cent by March 2016 and 8 per cent by March 2017. In other words close to Rs 4 lakh crore is being earmarked for small and marginal farmers.

Who are Small and Marginal Farmers in India?

As per Reserve Bank of India, the apex Banking body and regulatory authority of India, Small and Marginal Farmers are:

  • Farmers with landholding of up to 1 hectare (Marginal Farmers). Farmers with a landholding of more than 1 hectare and up to 2 hectares (Small Farmers).
  • Landless agricultural labourers, tenant farmers, oral lessees and share-croppers, whose share of landholding is within the limits prescribed for small and marginal farmers.
  • Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual Small and Marginal farmers directly engaged in Agriculture and Allied Activities, provided banks maintain disaggregated data of such loans.
  • Loans to farmers’ producer companies of individual farmers, and co-operatives of farmers directly engaged in Agriculture and Allied Activities, where the membership of Small and Marginal Farmers is not less than 75 per cent by number and whose land-holding share is also not less than 75 per cent of the total land-holding.

What is Adjusted Net Bank Credit (ANBC)?

ANBC denotes the outstanding Bank Credit in India minus bills rediscounted with RBI and other approved Financial Institutions plus permitted non SLR investments in Held to Maturity (HTM) category plus investments in other categories, which are eligible to be treated as part of priority sector lending (eg. investments in securitised assets).

ANBC = Bank Credit in India – Bills Rediscounted with RBI and other approved Financial Institutions + Investments in Non-SLR categories under HTM category + other investments eligible to be treated as priority sector

Categories eligible under Priority Sector Lending in Agriculture

Farm credit

  • Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data of such loans] and Proprietorship firms of farmers, directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture. This will include:
    • Crop loans to farmers, which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities.
    • Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and developmental loans for allied activities.)
    • Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce.
    • Loans to farmers up to ₹50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.
    • Loans to distressed farmers indebted to non-institutional lenders.
    • Loans to farmers under the Kisan Credit Card Scheme.
    • Loans to small and marginal farmers for purchase of land for agricultural purposes.
  • Loans to corporate farmers, farmers’ producer organizations/companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up to an aggregate limit of ₹2 crore per borrower. This will include:
    • Crop loans to farmers which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities.
    • Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and developmental loans for allied activities.)
    • Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce.
    • Loans up to ₹50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.

Agriculture infrastructure

  • Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective of their location.
  • Soil conservation and watershed development.
  • Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and vermi composting. For the above loans, an aggregate sanctioned limit of ₹100 crore per borrower from the banking system, will apply.

Ancillary activities

  • Loans up to ₹5 crore to co-operative societies of farmers for disposing of the produce of members.
  • Loans for setting up of Agriclinics and Agribusiness Centres.
  • Loans for Food and Agro-processing up to an aggregate sanctioned limit of ₹100 crore per borrower from the banking system.
  • Loans to Custom Service Units managed by individuals, institutions or organizations who maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and undertake farm work for farmers on contract basis.
  • Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture.
  • Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the conditions specified in paragraph 19 of these Master Directions.
  • Outstanding deposits under RIDF and other eligible funds with NABARD on account of priority sector shortfall.

Conclusion

Various factors have contributed towards the growth in the agriculture sector in India as below:

  1. growth in household income,
  2. growth in consumption,
  3. expansion in the food processing sector,
  4. increase in agricultural exports,
  5. rising private participation in Indian agriculture,
  6. growing organic farming,
  7. use of information technology,
  8. Government of India measures like:
    1. 2.85 million hectares to be brought under irrigation
    2. Rs 287,000 crore (US$ 42.11 billion) grant in aid to be given to gram panchayats and municipalities
    3. 100 per cent village electrification targeted by May 01, 2018
    4. 99 major and medium irrigation projects, slated to be completed by 2019
    5. soil health card scheme
    6. Paramparagat Krishi Vikas Yojana
    7. Pradhanmantri Gram Sinchai Yojana
    8. creation of a unified national agriculture market to boost the incomes of farmers

Farmers are our anna-daata or giver of food. The revised PSL norms will surely help the farmers and agricultural sector and give a big push to Indian economy.

References

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A Few Last Words

Before making any investment decision, please contact your financial adviser.

I have provided this article for educational purpose only.

I hope you found this article on Priority Sector Lending in Agriculture in India useful. If you have something to add please leave a comment in the post. Please feel free to contact me.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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