Agricultural Finance: An Overview

Agricultural Finance: Jaiib Paper 1 (Module B), Unit -11

Dear bankers,

As we all know that  is Agricultural Finance for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Agricultural Finance (Unit-11),FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

 

♦Agricultural Finance

  • India’s Economic is basically an agricultural economy. Nearly 70% of our population depend upon agriculture.

Short term Loans

  • Loans repayable up to 18 months are termed as short loans. This Includes: Crop loan and the limits sanctioned through Kisan Credit Cards scheme for raising crops, loan against gold ornaments for agricultural purposes.

Medium/ Long Term Loan

  • The Period of credit under this category is more than 30 months. This Includes loan for the purpose of minor irrigation, farm/land development, farm mechanization, plantation, horticulture, dairy farming, sheep/goat raring, piggery and poultry etc.

Crop loan

  • Crop loan is a short term advance that is given to the farmers and agriculturists by banks and co-operative societies. The loan amount can be used to purchase improved seeds, fertilizers, machinery etc. The crop loans are provided as agriculture is a priority sector.

♦Revised Scheme for Issue of Kisan Credit Card (KCC)

  • The Kisan Credit Card (KCC) scheme was launched in 1998 with the aim of providing short-term formal credit to farmers. Owner cultivators as well as tenant farmers can avail loans to meet their agricultural needs under this scheme at attractive rates of interest. The government has also simplified the application process to increase interest among farmers. Repayment is also simplified and dependent on the harvesting season, reducing the farmers’ debt burden.

Longer Repayment Period for Kisan Credit Card (KCC) Loans

  • Most of the banks in India which offer the Kisan Credit Card (KCC) loans are looking for a longer loan repayment tenure for the loans. This has been suggested as the agriculture sector is under significant pressure. The cycle of the loans provided under the Kisan Credit Card scheme has been proposed to be increased to 36 or 48 months from the 12 months. This was proposed at the state level bankers’ consultancy meet in West Bengal.
  • In addition to the enhancement of the loan repayment tenure, the banks have also proposed that the farmers should be allowed to avail extra loans even after failing to repay the previous loan. However, in order to do that, they should service the interest. Public sector banks have started a 3-stage consultation process recently on the basis of the directions passed by the Department of Finacial Services.
  • The main focus of the consultation process would be to discuss 9 important issues. These include credit offered to MSMEs and agriculture sectors, digital banking, direct transfer of benefits, and education loans. The previous meeting was an intra-bank meet. However, this time the meeting will be an inter-bank meet at a state level.

Features of Kisan Credit Cards

  • Credit to meet the financial requirements of agricultural and other allied activities.
  • Ancillary credit for crop production and other contingencies.
  • Investment credit for agricultural requirements such as dairy animals, pump sets etc.
  • Produce marketing loans.
  • Post-harvest expenses.
  • Insurance coverage for Kisan Credit Card holders, including asset insurance and personal accident insurance scheme (PAIS).
  • All farmers who are eligible for the Kisan Credit Card will be issued a smart card cum debit card in addition to the Kisan Credit Card.
  • The facility of revolving credit is available for any amount of withdrawals and repayments made within the credit limit. However, instalments of the amount withdrawn have to be repaid within 12 months.
  • Based on the annual review, banks will determine the validity of the existing credit card.
  • Credit limits can be increased at the issuing bank’s discretion to accommodate for changes in cropping pattern, increase in operating costs, etc. as an incentive for good record on credit card usage.
  • Conversion/rescheduling of loans also permissible in case of damage to crops due to natural calamities.
  • According to the RBI, the fixing of Kisan Credit Card interest rates as well as credit limits can be set by the respective issuing bank. The average interest rate applicable ranges from 9-14% p.a.
  • In addition, there are certain subsidies and schemes that the government offers farmers with regard to the interest rate. These would depend on the repayment history and general credit history of the cardholder.

Benefits of Kisan Credit Cards

  • Flexible repayment options and hassle-free disbursement procedure.
  • Single credit facility/ term loan for all agricultural and ancillary requirements.
  • Assistance in the purchase of fertilizers, seeds, etc. as well as in availing cash discounts from merchants/ dealers.
  • Credit is available for a period of up to 3 years and repayment can be made once the harvest season in over.
  • Minimal documentation and maximum flexibility offered for withdrawal of the required funds from the issuing bank.
  • Funds can be withdrawn from any of the bank’s branches across the country.

Eligible for a Kisan Credit Card Loan Scheme?

  • Are an individual farmer who is an owner-cultivator.
  • Belong to a group and are joint borrowers. The group has to be owner-cultivators.
  • Are a sharecropper, tenant farmer, or an oral lessee.
  • Are a self-help group (SHG) or joint liability group (JLG) of sharecroppers, farmers, tenant farmers, etc.

Eligible beneficiaries under this scheme under fisheries and animal husbandry are:

Inland Fisheries and Aquaculture: Fish farmers, fishers, SHGs, JLGs, and women groups. As a beneficiary, you must own or lease any activity related to fisheries. This includes owning or leasing a pond, an open water body, a tank, or a hatchery among others.

  • Marine Fisheries: You own a registered boat or any other type of fishing vessel and you have the necessary license or permissions for fishing in estuaries or the sea.
  • Poultry: Individual farmers or joint borrowers, SHGs, JLGs, and tenant farmers of sheep, rabbits, goats, pigs, birds, poultry, and have sheds they have owned, rented, or leased.
  • Dairy: Farmers, dairy farmers, SHGs, JLGs, and tenant farmers who own, lease, or rent sheds.

Scale of finance in KCC

Based on the type of farming you undertake, the KCC limit varies.

  • For single-crop farmers: Sacel of finance for the crop (decided by the District Level Technical Committee) x area cultivated + 10% of limit towards post-harvest or household consumption + 20% towardsrepairs and maintenance of the farm + crop insurance.
  • The limit for each successive year will be increased by 10%.
  • Farmers with multiple crops: The same pattern is followed as for single-crop farmers.
  • Marginal farmers: Up to Rs.50,000.

What security should be provided at the time of application?

At the time of application, the following security is to be provided:

  • For card limits up to Rs.1 lakh – Hypothecation of crops as per prevailing RBI guidelines.
  • For card limits up to Rs.3 lakh – Hypothecation of crops, additional collateral security at the issuing bank’s discretion.

Insurance under Kisan Credit Card Scheme

  • The Kisan Credit Card provides for personal accident insurance which farmers can opt for. Farmers will receive coverage of up to Rs.50,000 in the event of death and Rs.25,000 in the event of an accident resulting in disability. The premiums payable would be decided by the bank in conjunction with the insurance provider.
  • This coverage is optional and farmers who choose to opt for it should meet the eligibility criteria as ascertained by the bank and insurance provider.

♦Selected Activities Under Agricultural Finance

Agricultural Term Loan

  • Purpose: Agricultural Term Loans (ATL) aims to rejuvenate poor Indian Farmers who always becomes prey of local money lenders. RBI and NABARD regulate agricultural loans and providing refinance to banking institutions (commercial, rural, cooperative etc.) on reasonable terms. It helps to deregulate rate of interest and increased flow of credit to the agriculture sector.
  • Note: Banks gives agricultural term loans in the form of direct finance to cultivators to create assets facilitating crop production / income generation. Repayments span not less than 3 years and not exceeding 15 years. Activities broadly covered are land development, minor irrigation, farm mechanization, plantation and horticulture, dairying, poultry, sericulture, dry land, waste land development schemes, etc.
  • Eligibility: All categories of farmers-small / medium-and agricultural labourers are eligible for agricultural term loans, provided they have necessary experience in the activity and the required land area.

Land Development

  • Purpose: Credit for land development project, in the form of direct finance to cultivators, for better productivity. Loan under this head cover various activities like land clearance (removal of bushes, tress, etc).
  • Eligibility: All farmer owning agricultural land are eligible.

Minor Irrigation

  • Water conservation and water harvesting
  • Drought proofing including afforestation and tree plantation
  • Irrigation canals including micro and minor irrigation works
  • Provision of irrigation facilities, plantation, horticulture, etc.
  • Renovation of traditional water bodies, including desilting of tanks
  • Flood control and protection works, including drainage in water-logged areas.

Farm Mechanisation

  • Mechanised agriculture is the process of using agricultural machinery to mechanise the work of agriculture, greatly increasing farm worker productivity. In modern times, powered machinery has replaced many farm jobs formerly carried out by manual labour or by working animals such as oxen, horses and mules.
  • The entire history of agriculture contains many examples of the use of tools, such as the hoe and the plough. The ongoing integration of machines since the Industrial Revolution however has allowed farming to become much less labour-intensives.

Financial to Horticulture

  • Purpose: Loans for development of fruit orchards like mango, chikoo, guava, grapes etc. as well as short-term fruit crops (banana, pineapple etc), flower in open and green house (rose, carnation, jasmine etc) and vegetable crop (potato, tomato, peas etc) are financed.

Poultry farming

  • Poultry farming is the form of animal husbandry which raises domesticated birds such as chickens, ducks, turkeys and geese to produce meat or eggs for food.

Dairy farming

  • Dairy farming is a class of agriculture for long-term production of milk, which is processed (either on the farm or at a dairy plant, either of which may be called a dairy) for eventual sale of a dairy product.

Vermi Culture (Vermicompost)

  • Vermicompost is the product of the decomposition process using various species of worms, usually red wigglers, white worms, and other earthworms, to create a mixture of decomposing vegetable or food waste, bedding materials, and vermicast. Vermicast is the end-product of the breakdown of organic matter by earthworms.

♦Minimum Support Price

  • Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). MSP is price fixed by Government of India to protect the producer – farmers – against excessive fall in price during bumper production years.
  • The minimum support prices are a guarantee price for their produce from the Government. The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

Crops covered

Government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane. The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops. In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively. The list of crops are as follows.

  • Cereals (7) – paddy, wheat, barley, jowar, bajra, maize and ragi
  • Pulses (5) – gram, arhar/tur, moong, urad and lentil
  • Oilseeds (8) – groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed
  • Raw cotton
  • Raw jute
  • Copra
  • De-husked coconut
  • Sugarcane (Fair and remunerative price)
  • Virginia flu cured (VFC) tobacco

♦National Agricultural Insurance Scheme

  • National Agricultural Insurance Scheme (NAIS) was introduced by the Government of India to provide insurance coverage and financial subsidy to the farmers in the event of crop losses suffered on account of natural calamities, pests and diseases. This scheme aims to help stabilise farm incomes, particularly in disaster years.

Eligibility Criteria

This scheme is applicable to all farmers including both the farmers-loanee and non-loanee farmers irrespective of their size of holding. This National Agricultural Insurance Scheme covers the following groups of farmers listed below:

  • Based on compulsory form, all farmers including sharecroppers and tenant farmers growing the notified crops in the notified areas and availing Seasonal Agricultural Operations (SAO) loans from Financial Institutions (i.e.) Loanee Farmers.
  • Based on voluntary form, all other farmers growing notified crops (i.e., Non-Loanee farmers) are eligible to opt for the Scheme.

Features of the Scheme

The below following are some of the main features and benefits of applying for a National Agricultural Insurance Scheme.

  • Corps Covered
  • Food crops (Cereals, Millets and Pulses)
  • Oilseeds
  • Sugarcane, Cotton and Potato

Limit of Coverage

  • At the option of insured farmers, the SI may extend to the value of the threshold yield of the insured crop. Further, a farmer may also ensure his crop beyond the threshold yield value level upto 150% of average yield value of notified area on premium payment at commercial rates.

Premium Rates

  • A premium subsidy of 50% applies to the small and Marginal farmers to be shared equally by the Indian Government and State/ UT Government. The premium bonus will be phased out in a period of 3 to 5 years, subject to analysis of the financial results and the reply of the farmers at the end of the 1st year of the implementation of the Scheme.

The below tabulated are the premium rates of the crops:

Season Crops Premium Rates
Kharif

 

Bajra and Oilseeds

Other crops (cereals, other millets and pulses)

3.5% of Sum Insured or Actuarial rate, whichever is less

2.5% of Sum Insured or Actuarial rate, whichever is less

Rabi

 

Wheat

Other crops (other cereals, millets, pulses and oilseeds)

1.5% of SI or Actuarial rate, whichever is less

2.0% of Sum Insured or Actuarial rate, whichever is less

Kharif and Rabi

 

Annual Commercial / annual Horticultural crops Actuarial rates

 

Note: The actuarial rates would be applied at District/ Region/ State level at the option of the State Government/ UT.

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