A notable challenge regarding agricultural credit is the potential for misuse or misallocation of funds. Agricultural loans is being diverted towards unproductive sectors
The agricultural sector, which historically accounted for approximately one-third of the gross domestic product, currently faces a discouraging scenario with regards to investment.
The dwindling productivity of arable land can be attributed to the increasing number of young individuals seeking employment opportunities abroad. Even when land is cultivated, it primarily serves subsistence purposes and contributes insignificantly to the national output, resulting in limited investment prospects for the agricultural sector.
Sustaining continuous economic growth in a country necessitates the strengthening and efficient functioning of its real sectors, namely agriculture, tourism, water resources and the service sector. Unfortunately, the contribution of the agricultural sector has been declining steadily year after year. In 2005, agriculture accounted for 36.64 percent of the gross domestic product, but by 2022, this figure had plummeted to a mere 23 percent. Despite the sector's immense potential, the lack of technical skill development and commercialisation highlights the need for investment opportunities in this domain.
Banks often cite increased risk as the primary reason for the limited growth of agricultural investment.
Loan consumption possibilities are low, and debt recovery poses significant challenges. Currently, the central bank has prioritised a directed loan programme for investment, clearly stipulating that loans should be granted to the productive sector in a formal manner. Despite this directive, banks exhibit indifference towards investing in the agricultural sector, citing risk and concerns regarding credit consumption suitability. The annual budget and monetary policy align their objectives to concentrate investment in the real sector, boost domestic production, generate employment, curtail imports and encourage investments in small enterprises.
To enhance the effectiveness of the agricultural credit programme, it is crucial to establish coordination between the banking sector, agricultural experts and technical skill development programmes. In an effort to elevate farmers' in-come levels, the government has allocated subsidies amounting to approximately Rs 1.5 billion this year. Although these subsidies are intended for commercial agriculture and business projects, doubts remain regarding their alignment with the intended objectives. One issue lies in the selection of projects eligible for grants. As projects are primarily present-ed on paper, there lacks a clear blueprint for on-site monitoring and evaluating their effectiveness. The government has directly subsidized the commercial production and marketing of agricultural products with comparative advantages.
However, determining which specific area or food item qualifies for these subsidies presents a challenge.
The current system of distributing subsidies without conducting a needs assessment implies that proposals have been made for farmers to engage in commercial dairy and meat-related businesses until the end of December. Comparatively, the effectiveness of agricultural loans from banks might be hindered within the same market where farmers are accustomed to subsidies. Furthermore, the influence of imitation remains prevalent in rural areas, where farmers eagerly pursue subsidies and even expect interest waivers.
Promoting financial inclusion is crucial for fostering entrepreneurship in agriculture and facilitating commercial farming practices.
Inclusion here doesn't mean number game. It is essential to establish coordination between the banking sector, commercial agriculture and business projects to provide farmers with practical knowledge about loan acquisition, loan utilisation, payment methods and transactions through bank accounts. This will enable farmers to gain insights into enhancing business efficiency, familiarise themselves with banking practices, and understand the role of the agricultural sector in the financial domain.
Presently, there is a pressing need to align the government's allocated agricultural budget with the banking system. Banking experts emphasise that sustained investment in the agricultural sector hinges on commercialisation and technological advancements.
Regrettably, the government's focus has primarily been on agricultural production, neglecting marketing strategies and the incorporation of technology.
The challenges surrounding agricultural loans with banks can be attributed to irregular collection practices and difficulties encountered during the loan application process.
Primarily, farmers highlight the complexity of the loan disbursal process imposed by banks. Requirements such as land proximity to roads for mortgage, business registration, detailed business plan, village or local body recommendations, consent from neighbours and age limitations for mortgage owners or aspiring business owners pose significant obstacles.
A notable challenge regarding agricultural credit is the potential for misuse or misallocation of funds.
With the surge in real estate and stock trading activities, a significant portion of the agricultural loans is being diverted towards unproductive sectors, such as land speculation, real estate purchases, stocks and precious metals like gold and silver.
The government's initiatives to promote youth engagement in agricultural businesses have encountered several obstacles.
Limited access to financial institutions for farmers, complexities surrounding mortgages, intricate loan procedures and banks' reluctance to consider projects as collateral have contributed to the lack of success in achieving the intended milestones.
From a recovery standpoint, if investments are directed towards unproductive sectors, the overall focus shifts away from the real sectors of the economy.
This growing inclination towards unproductive sectors hinders progress in agriculture.
A version of this article appears in the print on July 20, 2023, of The Himalayan Times.
