RBI Increases Collateral-Free Agricultural Loan Limit

Syllabus: GS3/Economy; Agriculture

Context

• In a significant move to bolster the agricultural sector, the Reserve Bank of India (RBI) has announced an increase in the collateral-free agricultural loan limit from ₹1.6 lakh to ₹2 lakh per borrower, effective from January 1, 2025.
  • Banks are instructed to implement the revised guidelines expeditiously and provide widespread publicity to ensure maximum outreach.

Agricultural Credit to Farmers

• According to the Economic Survey 2023-24, Agricultural credit in India was 1.5 times increased from Rs 13.3 lakh crore in FY21 to Rs 20.7 lakh crore in FY24.
• It provides farmers with the necessary financial resources to invest in their farms, improve productivity, and ensure food security. 

Importance of Agricultural Credit

• Enhancing Productivity: Access to credit allows farmers to purchase high-quality seeds, fertilizers, and modern equipment, leading to increased agricultural productivity.
  • It is particularly beneficial for small and marginal farmers, who constitute over 86% of the agricultural sector.
• Risk Management: Credit facilities help farmers manage risks associated with crop failures, natural disasters, and market fluctuations.
• Sustainable Farming: Financial support enables farmers to adopt sustainable farming practices and invest in long-term agricultural projects.

Institutional Framework/Initiatives for Credit Flow to Agriculture Sector

• National Bank for Agriculture and Rural Development (NABARD): Established in 1982, NABARD is the apex development bank responsible for promoting and regulating credit and other facilities for agriculture and rural development.
  • It provides refinance support to rural financial institutions and implements various development programs.
• Primary Agricultural Credit Societies (PACS): These are grassroots-level cooperative institutions that provide short-term and medium-term credit to farmers.
  • PACS are crucial in ensuring that credit reaches small and marginal farmers.
• Kisan Credit Card (KCC): It aims to provide farmers with timely access to credit for their cultivation needs.
  • It covers expenses related to crop production, post-harvest activities, and maintenance of farm assets.
• Pradhan Mantri Fasal Bima Yojana (PMFBY): It helps farmers mitigate the risks associated with crop failure due to natural calamities.
  • It ensures that farmers can repay their loans even in adverse conditions.
• Interest Subvention Scheme: It provides short-term crop loans at subsidized interest rates.
  • Farmers can avail loans up to ₹3 lakh at an interest rate of 7%, with an additional 3% subvention for timely repayment.

Challenges and Solutions

• Access to Credit: Small and marginal farmers often face difficulties in accessing institutional credit due to lack of collateral and complex loan procedures.
  • Simplifying the loan application process and enhancing financial literacy can help address this issue.
• High Indebtedness: Many farmers rely on non-institutional sources of credit, such as moneylenders, which charge exorbitant interest rates.
  • Strengthening the reach of institutional credit and promoting financial inclusion are essential to reduce farmers’ dependence on informal lenders.
  • Enhancing financial literacy among farmers to make them aware of the available credit facilities.
• Climate Risks: Agriculture in India is highly vulnerable to climate change and extreme weather events.
  • Expanding the coverage of crop insurance schemes and promoting climate-resilient farming practices can help mitigate these risks.

Source: PIB