Report of the Commission on Public Investment, Rural Credit and Insurance
Table of Contents
- PUBLIC INVESTMENT
- RURAL CREDIT
- Impact of financial liberalisation on rural banking
- Social and development banking ceased to be the official policy of the Government of India
- The expansion of public-sector rural banking was ended, and rural branches of commercial banks were actually shut down.
- The credit-deposit ratios of rural commercial bank branches fell sharply between 1991 and 2004.
- Inter-State inequalities in rural banking increased, and regions where banking has historically been underdeveloped suffered the worst (Table 4).
- Priority-sector advances fell, and, with that, so did the shares of credit to agriculture, to cultivators owning two hectares or less, and to Dalit and Adivasi households (Table 5).
- The share of informal-sector credit in the principal borrowed by rural households is very high, and increased over the liberalisation phase.
- The share of cooperative credit fell sharply over the liberalisation period.
- Tenant farmers have little or no access to formal credit.
- Changes after 2004
- Impact of financial liberalisation on rural banking
- CROP INSURANCE
The basis for agricultural and rural development in a less-developed country like India, where the broad mass of the rural population is poor and engaged either in manual labour or small-scale peasant production, is public investment. When the state withdraws from investment in, for example, rural infrastructure, production and extension, it robs the countryside of the means of all-round development, and private investment itself shrinks.
Fiscal contraction is at the core of policies of liberalisation, and public investment in the countryside has been severely affected. The decline in public investment in agriculture started in the 1980s and accelerated further in the 1990s. By the end of 1990s, public investment in agriculture and allied activities was only about 1.6 per cent of agricultural GDP and about 6.6 per cent of total gross capital formation in the public sector. Although there has been a small revival in recent years, the volume is still too small to provide the countryside with the foundations for growth and the means of improving the livelihoods of the rural working people.
|Year||As a proportion of gross capital formation in all activities|
Source: Thulasamma (2002), EPW Research Foundation (2002), Agricultural Statistics at a Glance (2007, 2008) and National Account Statistics (2008).
Impact of financial liberalisation on rural banking
Rural households need credit for a variety of reasons. They need credit to meet short-term requirements of working capital and for long-term investment in agriculture and other income-bearing activities. Agricultural and non-agricultural activities in rural areas typically are seasonal, and households need credit to smoothen out seasonal fluctuations in earnings and expenditure. Rural households, particularly those vulnerable to what appear to others to be minor shocks with respect to income and expenditure, need credit as an insurance against risk. In a society that has no law of free, compulsory and universal school education, no arrangements for free and universal preventive and curative health care, a weak system for the public distribution of food and very few general social security programmes, rural households need credit for different types of consumption. These include expenditure on food, housing, health and education. In the Indian context, another important purpose of borrowing is to meet expenses on a variety of social obligations and rituals.
If these credit needs of rural households are to be met, households require access to credit institutions that provide them a range of financial services, credit at reasonable rates of interest, and loans that are unencumbered by extra-economic provisions and obligations.
Financial liberalisation, which is a crucial component of the programmes of globalisation and liberalisation that are being imposed on the people of less-developed countries, seeks to reverse these objectives. The demand that financial markets be liberalized quickly is high on the agenda of imperialism; in India as well, advocates of economic “reform” see financial liberalisation as being essential to structural adjustment. Financial liberalisation represented a clear and explicit reversal of the earlier policy of social and development banking, such as it was, and contributed in no small way to the extreme deprivation and distress of which the rural poor have been victims since the early 1990s.
The main features of rural credit in the post liberalisation phase are the following.
Social and development banking ceased to be the official policy of the Government of India
The policy objectives of liberalisation are contained in the Report of the Committee on the Financial System, a Committee appointed by the Reserve Bank of India, which called for “a vibrant and competitive financial system…to sustain the ongoing reform in the structural aspects of the economy.” The Committee said that redistribution of income and wealth is not an objective of the credit system, and, accordingly, that “directed credit programmes should be phased out.” It also recommended that interest rates be deregulated, that capital adequacy norms be changed (to “compete with banks globally”), that branch licensing policy be revoked, that a new institutional structure that is “market-driven and based on profitability” be created, and that the part played by private Indian and foreign banks be enlarged.
The summary data are in Table 2.
Note: As has been pointed out by Ramakumar (2009), bank branches were classified into rural, semi-urban and urban until 1994 using the 1981 Census, between 1994 and 2005 using the 1991 Census, and from 2006 onwards using the 2001 Census. He shows that, because of these revisions in the classification of branches, the numbers are not strictly comparable across these sub-periods. However, despite this problem, the overall trends – of increase in number of rural branches until 1994 and a decline thereafter – are clearly seen in the data.
Source: Ramakumar (2009), and Banking Statistics and Basic Statistical Returns of Scheduled Commercial Banks in India, various issues.
The credit-deposit ratios of rural commercial bank branches fell sharply between 1991 and 2004.
Source: Banking Statistics and Basic Statistical Returns of Scheduled Commercial Banks in India, Reserve Bank of India, various issues.
|Jammu & Kashmir||33||15||15||54|
|Bihar and jharkhand||48||37||20||39|
|Madhya Pradesh and Chhattisgarh||69||50||39||62|
|Uttar Pradesh and Uttaranchal||47||32||26||45|
Source: Banking Statistics and Basic Statistical Returns of Scheduled Commercial Banks in India,/ Reserve Bank of India, various issues./
Source: /Statistical Tables Relating to Banks in India,/ Reserve Bank of India, various issues.
The table below gives the share of credit taken by households from the formal and informal sectors by households surveyed by the Foundation for Agrarian Studies and others in different parts of the country. It shows great variation in the share of the informal sector in the debt portfolio of households, but with a substantial presence of the informal sector in certain areas.
|Village, District, State, section of the population, year of survey||Formal sector||Informal sector|
|Baghra, Giridih district, Jharkhand, all households, 2003-04||28||72|
|Birdhana, Fatehabad district, Haryana, landless worker households, 2003||8||92|
|Dhamar, Rohtak district, Haryana, landless worker households, 2003||12||88|
|Ananthavaram, Guntur district, Andhra Pradesh, all households, 2005||36||64|
|Bukkacherla, Anantapur district, Andhra Pradesh, all households, 2005||39||61|
|Kothapalle, Karimnagar district, Andhra Pradesh, all households, 2005||22||78|
|Warwat Khanderao, Buldhana district, Maharashtra, all households, 2007||80||20|
|Nimshirgaon, Kolhapur district, Maharashtra, all households, 2007||94||6|
|Dungariya, Udaipur district, Rajasthan, all households, 2007||10||90|
|25F Gulabewala, Sri Ganganagar district, Rajasthan, all households, 2007||73||27|
Source: Contributions to Ramachandran and Swaminathan (2005) and data from the Foundation for Agrarian Studies
The share of cooperative credit fell sharply over the liberalisation period.
Budget documents of the Government of India indicate that, of the formal sources of credit to agriculture, the share of cooperatives fell from about 62 per cent in 1992-93 to about 14 per cent in 2008-09 (see Table 7).
Tenant farmers have little or no access to formal credit.
In areas of the country where there are significant tracts of land under unregistered tenancy, and important section of cultivators – that is, the tenant-peasants – are unable to gain access to sources of formal credit. An important example comes from south coastal Andhra Pradesh, where in many villages, 60 to 80 per cent of net sown area is under tenancy, and an estimated 25 lakh households have leased in land. Most of them are poor peasants and manual workers, and also belong to Dalit and other socially underprivileged groups. The Report of the Commission on Farmers’ Welfare appointed by the Government of Andhra Pradesh recommended that all tenant farmers be issued identity cards in order to qualify for receiving credit from commercial banks.
|Regional Rural Banks||831||1381||2460||4854||6070||7581||12404||15223||20435||25312||25852|
Source: Budget documents, Government of India
Changes after 2004
By the mid-2000s, the disastrous consequences of the regime of unfettered liberalisation – that is, of running a banking system in a less-developed country on purely “market principles” – were clear. It is widely recognised that the verdict in the parliamentary election of 2004, in which the Bharatiya Janata Party was handed out a comprehensive defeat, was a verdict against agrarian distress, in which rural indebtedness played a major role.
The first major change to occur after 2004 was an increase in the aggregate supply of credit to rural areas. While there was a partial recovery in provision of formal-sector credit to rural areas after 2001, an expansion in provision of rural credit, and a change from the earlier policy of withdrawal of formal-sector banking from rural areas, took place after 2004. It is noteworthy that, by 2008, the credit-deposit ratios of rural branches of scheduled commercial banks went back to the level of 1991. The share of agriculture and allied activities in total public investment also started to increase in 2004-05.
A second important feature of post-2004 policy was the official waiver of formal-sector loans to farmers. The Agricultural Debt Waiver and Debt Relief Scheme covered outstanding loans taken from scheduled commercial banks, regional rural banks and cooperative credit institutions. Under this scheme, all outstanding loans of farmers with landholdings smaller than 2 hectares were waived. Other farmers, that is, those with landholdings of more than 2 hectares, were given a 25 per cent rebate on their loans. According the figures reported in the Union Budget of 2009-10, the total debt waiver and debt relief amounted to Rs. 653 billion and covered 3.68 crore farmers. Although the loan waiver did not cover loans to farmers from the informal sector (and failed to cover one section of cultivators), there is little doubt that the scheme had an immediate impact on agricultural incomes among a substantial section of cultivators.
This policy change with respect to rural credit and public investment was made possible because of the space opened up as a result of the dependence of the Government that came to power in 2004 on the political parties of the Left for its survival. The Left identified the collapse of rural credit and the decline in public investment as major causes of rural distress, and campaigned actively for expanding the provision of formal-sector credit to rural areas and public investment in agriculture.
While the present period has been different in important respects from the decade that preceded it, there has been no return by the Government of India to the principles and policy framework of social and development banking. Banking policy continues to be guided by the policies of financial liberalisation. A conspicuous feature of such continuity is the unabated process of closure of rural branches of commercial banks.
A second feature of continuity is the bias in rural banking policy against small cultivators and the rural poor. Over this period, the scope of priority sector and indirect agricultural credit was expanded by including additional activities within their purview, thus effectively diverting rural credit away from poor cultivators, and towards companies, corporate bodies and large farmers.
The bias towards companies, corporate bodies and large farmers is evident from Table 8, which shows that while the share of agricultural advances of loans under Rs 25,000 fell from 49.6 per cent in 1985 to 13.3 per cent in 2006, the share of loans of Rs 10 crores and above increased from 3 per cent to 21.1 per cent over the same period.
|Credit limit size class of loans (Rs)||Share of amount outstanding in total amount outstanding (%)|
|Less than 25,000||49.6||58.7||52||35.2||23.6||17.8||13.3|
|25,000 to 2 lakh||35.3||23.9||26.0||32.4||34.4||34.1||31.4|
|2 lakh to 10 lakh||4.3||5.1||11.7||14||17.9||19.7|
|10 lakh to 1 crore||7.4||7.6||7.6||6.6||6.3||6.4||6.1|
|1 crore to 10 crore||4.6||4.2||5.6||6.7||7.4||8.0||8.5|
|10 crore to 25 crore||3.0||1.3||3.5||1.7||4.0||3.3||4.3|
|Above 25 crore||5.7||10.4||12.6||16.8|
Source: “Basic Statistical Returns”, RBI
The Commission on Agricultural Credit and Crop Insurance appointed by the 31st Conference of the All-India Kisan Sabha observed that:
While recognizing that self-help groups, if created and managed democratically, bring a measure of relief to the working people, particularly to women, and while recognizing that these associations have, in specific conditions, encouraged self-reliance among their members, it is quite clear that microcredit is no substitute for the provision of production and consumption credit by formal-sector institutions. Micro-credit – which typically involves high transactions costs, which in turn are often transferred to borrowers as high interest rates – should not be posed as a substitute for, or an alternative to, a strong and vibrant formal rural banking system. It is not an instrument for mobilising large-scale funds for scientific and technical change in the countryside, and it does not and cannot supplant the informal sector or overcome the historical imperfections of rural credit markets. NGO-controlled micro reach of the rural banking system. There are also problems of accountability involved here: NGO-controlled micro-credit projects in India cannot hope to achieve the spread and reach of the rural banking system. There are also problems of accountability involved here: NGO-controlled micro-credit organizations are often not subject or open to public scrutiny.
An important and exemplary feature of the recent past has been the initiative of the LDF Government in Kerala to pass the Kerala Farmers’ Debt Relief Commission Act of 2006, the first of its kind in the country. The statutory Commission under the Act was formed in 2007. The Commission eceived 4,13,000 applications, of which 1 lakh have been verified. The Commission has advised that Rs 31 crore be given as relief.
Kerala also has an advanced cooperative sector, with societies that provide a wide range of loans, including crop, education, and medical loans, and loans for a range of non-farm productive ativities. There are 4,500 agricultural credit societies in the State, which collected Rs 52,000 crores as deposits and gave Rs 3,300 crores as loans (of which Rs 2000 crores were agricultural loans and of which Rs 100 crores were given for the cultivation of paddy). Interest-free loans were also given. There are 2 lakh Kudumbasree units (consisting mainly of women members). They collected Rs 1270 crores of deposits, and disbursed loans for the cultivation of paddy, vegetables, and banana, and for the cultivation of other crops.
In West Bengal, there have been important gains with respect to the particpation of the rural working people in cooperatives and with respect to the formation of Self-Help Groups (SHGs). Out of approximately 67 lakh cultivator households, 35 lakh households are members of cooperative societies. Credit has been provided to 17 lakh households. In West Bengal, 8 lakh SHGs with approximately 80 lakh members were organised among small, marginal, and asset-less poor households. A substantial proportion of the members of the SHGs are from Scheduled Caste, Scheduled Tribe and Muslim households, and 90 per cent are women. The recovery rate from SHGs is approximately 95 per cent.
In Tripura, even before the Government of India announced the loan waiver scheme, the Government of Tripura took an important step towards bringing relief to indebted kisans. It made an arrangement with local bank officials for a one-time settlement of outstanding loans. By this arrangement, farmers who had taken loans of Rs 25,000 and less for agricultural purposes from banks and cooperatives before 2004 and had defaulted had the outstanding interest payments and 40 per cent of the principal waived. The Government of Tripura also paid Rs 7.5 crore to help cooperatives clear their outstanding dues.
- The Government must reaffirm the commitment of the state to the policy of social and development banking, and reaffirm the part played by the credit system in redistribution and poverty alleviation. The basic aim of the formal banking system in the rural areas should be to ensure that all the credit requirements of peasants, agricultural workers and other sections of the rural working people are met.
- Peasants should be allowed to open bank accounts with a zero balance, and the “no-dues” condition for peasants must be abolished. Peasants’ land should not be sold as a method of loan recovery.
- Since 1991, commercial banks have closed down thousands of rural bank branches. This trend must be reversed and the norm of having one rural bank branch for every 15,000 persons must be fulfilled. Commercial banks must also provide adequate staff strength in rural branches, including specialised officers such as Agricultural Officers.
- Priority sector norms – 40 per cent to the priority sector and 18 per cent to agriculture – must be enforced. The redefinition of the priority sector that was pushed by means of successive amendments after 1991 must be reversed.
- Interest rates on agricultural loans should be brought down to four per cent per annum, as recommended by the National Commission on Farmers. Special loan-cum-subsidy schemes must be introduced on a large scale for all landless and poor peasant households, Dalit and scheduled tribe households, and other vulnerable sections of the population.
- The interest rates for SHGs should be fixed at 4 per cent. Banks should minimise red tape when reviewing the up-gradation of SHG loans.
- Kisan Credit Cards (KCC) must be issued to every peasant on demand without delay. The credit limit of the KCC should be the value of land against which the card is issued. KCC should be introduced in co-operative banks.
- Co-operative credit institutions should be revived on a participatory and democratic basis, and adequate budgetary provision should be made to revitalise this sector. Linkages between banks and cooperative credit institutions need to be strengthened. Cooperative credit institutions should be encouraged to mobilise saving deposits, and to implement State-sponsored credit-based development programmes.
- All tenant farmers should be recognized on the basis of gram sabha deliberations and issued identity cards, on the basis of which, in turn, tenant farmers should be made eligible for credit from formal sources. According to Reserve Bank of India guidelines, crop loans do not require further guarantees, and credit must thus be provided to all eligible tenant farmers.
The Kisan Sabha shall build powerful mass movements to achieve these demands.
On the subject of crop insurance, the 31st Conference of the All-India Kisan Sabha pointed out the following:
There are several risks in crop production that cannot be controlled by the cultivator. There are weather-related risks, such as from variations in rainfall or natural disasters like sudden frost, hailstorm, or flooding. There are also market risks, arising from fluctuations in prices. The cultivator, particularly one operating a small amount of land in a poor agricultural region, has very limited capacity to cope with such risks and the associated fluctuations in output and incomes. A landlord or rich farmer is able to spread risk over time and space as he can use stored grains or rely on savings during bad years. He can diversify his crop production across different plots and can also diversify income by engaging in other activities. The major role played by insurance programmes is the indemnification (protection) of producers who might adversely be affected by natural phenomena. An insurance market is based on large numbers, where the incidence of risk is distributed over individuals. A special problem with agriculture, however, is that good or bad weather may affect the entire population in an area.
The insurance agencies offer insurance policies to different crops and in different regions on the basis of assessment of risk. Given high levels of risk in agriculture on account of dependence on weather, vulnerabilities to natural disasters, plant diseases and pests, the actuarial rates of premia are high. It is therefore imperative that premia to be paid by farmers for availing crop insurance schemes are kept low through substantial public support to keep the. Consequently, as in many developed countries, it has become necessary for public agencies in India to provide all-risk agricultural insurance as a matter of public policy. Participation of private insurance companies remains marginal.
The principal benefits from crop insurance are as follows.
- It absorbs the shock of crop failure by providing a cushion that assures the peasant a minimum protection against natural calamities. It provides a right to seek compensation in the event of crop failure.
- Crop insurance protects the peasant’s investment in crop production and thus improves their risk-bearing capacity. Crop insurance facilitates the adoption of improved technologies, and encourages higher investment, resulting in higher agricultural production.
- Crop insurance reduces the risk of farmers becoming defaulters of institutional credit. The reimbursement of indemnities in the case of crop failure enables peasants to repay their debts and maintain credit lines with formal financial institutions.
- Instability in prices and yields may not present serious problems in countries where expenditure on food accounts for a relatively small proportion of household budgets. However, more serious problems occur in countries where much of the population has low incomes and it is more difficult for consumers to cope with high food prices.
- Even if price support or other mechanisms of price stabilisation are available, crop insurance is necessary to meet the risks of losses in crop output.
There are mainly two types of agricultural insurance schemes.
First, the National Agricultural Insurance Scheme (NAIS), introduced in 1999 after revamping the Comprehensive Crop Insurance Scheme, provides insurance against shortfall in crop yields. The scheme, implemented by the Agricultural Insurance Company of India Limited, provides for indemnity against shortfall in the average yield at the district level from the threshold yield. In case of seasonal food crops and oilseeds, farmers pay a subsidised premium (2.5-3.5 per cent of insured sum). In case of small and marginal farmers growing these crops, 10 per cent of the premium (reduced from 50 per cent in 2005-06) is provided by the government. In case of annual and horticultural crops, farmers pay the actuarial rates as premium. Since the premium rates for the food crops and oilseeds are kept low, the total amount of claims made by farmers growing these crops is higher than the premium collected from them. This difference is paid to the Agricultural Insurance Company of India by the government as a subsidy. The burden of this subsidy is shared equally between the Central and the State governments.
Secondly, weather insurance schemes provide insurance against deviation of weather from the normal weather pattern. Pilot schemes for weather-based insurance have been tried since 2003-04. In 2007-08, weather-based insurance schemes were launched in selected areas in a few States and for a few crops.
Most of these schemes, in particular NAIS, are operated by the Agricultural Insurance Company of India Ltd. Some weather-based schemes, are also offered by private insurance companies like ICICI Lombard and IFFCO-TOKIO.
Existing insurance schemes do not provide effective insurance against risk. Effective implementation of insurance against shortfall in yields requires collection of detailed benchmark and year-by-year data on yields at the level of panchayats and villages. Effective implementation of weather-based insurance schemes requires accurate, regular and disaggregated data on weather-related variables like rainfall, temperature and incidence of frost. Progress in establishment of systems of collection of such data has been tardy.
In absence of adequate data, weather-based schemes are available only is selected pockets in the country. NAIS provides insurance only when the average yield of a district as a whole falls below the threshold for the district. Since there are large variations in agro-climatic, soil and topological conditions within the districts, farmers mainly face risks that are localised. A number of problems like pest attacks and crop diseases usually affect individual farmers severely but seldom bring down average district-level yields significantly. As a result, NAIS, in its present design, does not address this need.
It may be noted that the area covered under the National Agricultural Insurance Scheme has remained limited to about 11 per cent of gross cropped area. Although similar data for weather-based schemes are not yet available, the area under these schemes is expected to be minuscule.
There are three main reasons for low coverage.
First, only selected districts and crops have been notified in each State for coverage under NAIS. Weather-based insurance is offered only in a few States, and within them, in very selected pockets. The subsidy (that is, excess of claims over premia) provided under NAIS is equally shared by the Central and the State governments. Since States have to bear a substantial burden of this subsidy, most States, in particular, fiscally weak States have notified only very selected areas and crops for coverage under NIAS. As a result, most farmers remain outside the coverage of NAIS. Also, for the same reason, while a few rich States claim a substantial share in the Central subsidy, very little of the Central subsidy goes towards supporting farmers in a majority of States. Similarly
Secondly, as discussed above, in its present form, NAIS does not provide insurance against localised risk. As a result, voluntary enrolment by farmers to NAIS is very limited. About 75 per cent of area covered by NAIS is covered through compulsory registration for farmers who avail crop loans.
Thirdly, since no subsidy is provided to farmers growing horticultural and plantation crops, a large section of small growers of these crops find the cost of insurance too high.
- The first task is to expand the coverage of this scheme to make it accessible to all farmers and to cover all crops, including horticultural and plantation crops. All farmers, including sharecroppers, should be included and the definition of “farmer” should be amended accordingly.
- The Government must introduce a law on crop insurance, as is the case with life insurance.
- Weather-based insurance schemes should also be extended to the entire country and farmers should be allowed to choose between the two types of schemes.
- Compensation must be paid to farmers when the Government declares any area to be affected by flood, drought or other natural calamities. Crop loss due to a calamity of any kind, including fire, drought, pest attacks and destruction by wild animals should be compensated by insurance benefits.
- The current principles for calculating compensation should be revised. In particular, the unit for insurance should be provided on the basis of data on yield and weather collected at the level of the village so that the calculation of the threshold yield and indemnity levels is sensitive to local conditions.
- For achieving the above (item 3), government should immediately establish systems of village-level collection of data on crop yields and weather.
- The 50 per cent subsidy on the premium on crop insurance for small and marginal farmers must be reintroduced.
- The premium rates paid by the cultivator should not exceed 3 per cent for any crop. Where the rate is higher, the balance should be met through a subsidy provided to the insurance company by the government.
- The mid-term appraisal of the Tenth Plan has recommended that “since actuarial premia are likely to be high for regions with low and erratic rainfall, a special budgetary subsidy might be necessary for these regions.” We demand that indemnity levels, and threshold yields and other yardsticks be amended to safeguard the interests of peasants in dryland cultivation.
- The amount insured may be flexible, in that farmers may choose to insure any amount up to a specified limit per crop per season.
- Insurance companies must be allowed to increase staff substantially so as to be able to cater to the requirements of rural customers.