DEVELOPMENT THEORY AND EXPERIENCE

RESEARCH PROJECT
CREDIT EXPANSION IN THE AGRICULTURAL SECTOR
MADHYA PRADESH

Submitted by:
Roopala Saxena
B.A honours Economics
3rd Year
15/153030
 INTRODUCTION
Madhya Pradesh is primarily an agricultural state, with almost 70 per cent of its workforce
engaged in agriculture, much above the all-India average of 55 per cent. In 2015, Madhya
Pradesh contributed over 8 million metric tons (MMT) of wheat to the central procurement
pool. This was the second highest procurement of wheat by any state that year and even higher
than that of Haryana, traditionally the second highest contributor after Punjab. The event
capped a remarkable period of eight years, which saw Madhya Pradesh emerge as the state
with the highest growth rate in agriculture. Long clubbed with the so called BIMARU group of
poor northern, central and eastern states, MP successfully broke ranks to set a scorching pace
of growth, which has been unparalleled in the past quarter century. Understanding the factors
with regards to credit that helped to drive this growth at this level of development is the main
objective of this project.
Madhya Pradesh spans over 30.8 million hectares of land and comprises around 6.0 per cent of
India’s population. Unlike other states where the share of agriculture in GDP has been falling,
MP has undergone a reverse structural change after 2010-11. Between 2003-04 and 2010-11,
the share of agriculture in GDP declined from 29.8 per cent to 22.5 percent (2004-05 prices),
which reflected the national trend. However, after 2010-11, the share of agriculture in GDP has
increased from 22.5 to 30.0 per cent (2004-05 prices) in 2014-15. Not only has the importance
of the sector in the overall economy of MP increased but the sector has also performed
significantly better than other states in the country. The agricultural GDP of Madhya Pradesh
increased at 9.7 per cent per annum during 2005-06 to 2014-15, surpassing even record holder
Gujarat’s 7.7 per cent. The last five years have been even more spectacular: agricultural GDP
increased at 14.2 per cent per annum. All this has been made possible due to the concerted
efforts of the government and better resource development and credit facilities.

LAND UTILISATION
Prior to the bifurcation of MP in 2000-01, the total geographical area of the state was 44.3
million hectares. Out of this, an area of 13.5 million hectares was earmarked for Chhattisgarh,
leaving MP with an area of 30.8 million hectares. From Figure 3, it can be observed that half of
the state’s geographical area is under cultivation, representing net sown area. Further,
analysing land use over a period of time shows that the pattern of land use in MP has
undergone only a small change since the early 2000s. The area under forests has remained
virtually the same, while the net sown area has increased marginally from 47.7 per cent (14.7
million hectares) of the geographical area in TE 2002-03 to 50.0 per cent in TE 2014-15 (15.4
million hectares) and area unavailable for cultivation increased from 10.6 per cent of
geographical area to 11.3 per cent of geographical area. Further, fallow land registered a
decline from 4.6 per cent (1.5 million hectares) to 2.8 per cent (0.9 million hectares) in the
same period, while other non- cultivable land such as permanent pastures, grazing land,
miscellaneous tree crops and groves, and culturable waste land declined marginally from 8.8
per cent to 7.7 per cent. The fallow land and cultivable lands together form the agricultural
potential of the state and can be brought under cultivation by the use of technology and
irrigation.

AGRICULTURAL CREDIT
Credit is crucial to agriculture, especially in a country like India where most farmers sow on
small lands and hardly have huge chunks of capital available at hand. The credit market of the
state of Madhya Pradesh in the agricultural sector has seen an extensive growth in the last
decade. To create an efficient agricultural production base, farmers at the bottom of the
agriculture value chain require well-timed working and investment capital. For example,
farmers require timely working capital during the production season to buy inputs and hire
labour and investment capital for farm equipment, buildings, storage facilities and transport.
The inability to access finance at the right time can adversely affect the quantity and quality of
output, ability to diversify production to stay competitive and to increase the farmer’s share in
the final value of the product (UNCTAD, 2004). However, banks are usually reluctant to finance
agriculture due to commercial and systemic risks (or covariant risks, due to natural calamities,
pests and diseases) associated with it, which could result in large scale losses. From a bank’s
perspective, demand-side constraints (e.g., repayment capacity, poor credit track record) and
supply-side constraints (e.g., lack of information on the borrower, high transaction costs)
further widen the agricultural financing gap (Subbarao, 2012). In order to address this financing
gap and to meet the financing needs of farmers, the MP state government initiated a zero per
cent interest rate scheme for the short term loans in 2012-13 through state owned co-
operative banks. As on 2014-15, MP had one state co-operative bank (MPSCB), 38 district
central cooperative Bank (DCCB), one state co-operative agriculture and rural development
bank (MPSCARDB), and 38 district co-operative agriculture and rural development banks
(DCARDBs). Further, it has 37 commercial banks and three regional rural banks (RRB). These
banks have around 5,949 branches in the state (2012-13). Moreover, 4,530 primary agriculture
credit societies (PACS) are also operational in the state.
As per the norm, while a farmer gets a crop loan at 0 per cent interest rate, the co-operative
bank actually charge 11 percent interest, but 6 per cent of this is subsidised by the state
government and remaining 5 per cent by the National Bank for Agriculture and Rural
Development (NABARD). Before 2006-07, the interest rate chargeable to farmers was 16 to 17
per cent; it was reduced to 7 per cent in 2006-07, 5 per cent in 2008-09, 3 per cent in 2011-12
and finally to 0 per cent in 2012-13 (Figure 32). Consequently, disbursement of crop loans
increased from Rs.33.3 billion in 2006-017 to Rs.112.1 billion in 2013-14. In 2012-13, interest
subsidy of Rs.3.3 billion was made available to co-operative institutions by 38 the state
government for around 30 million farmers. Further, a provision of Rs 5 billion was made in the
departmental budget for interest subsidy in the year 2013-14
Additionally, the centrally sponsored kisan credit card (KCC) scheme provides agricultural;
credit to farmers at an interest rate of 7 per cent through commercial banks, co-operative
banks and RRBs. Under this scheme, all farmers including small and marginal farmers, share
croppers, oral lessees and tenant farmers are eligible for KCCs. Banks assess a farmer’s
eligibility on the basis of the cultivable land in their own names. This is a severe limitations for
landless agriculture labourers, who often farm on leased land.

A COMPARATIVE STUDY BASED ON CREDIT

RELATED DATA
The following study is based on NSSO data for the state of Madhya Pradesh and aims to look at
the scope of credit expansion and the various sources of credit available to the farmers in the
state.

NATURE OF LOAN AVAILABLE

AMOUNT
NATURE OF LOAN OUTSTANDING
hereditary loan 1 3292632
loan contracted in cash -2 71294004
loan contracted in kind -3 5436506
loan contracted partly in cash and partly in kind – 4 2369130

SOURCE: NSSO DATA(IN Rs.)

There are basically four kind of natures of loan undertaken by farmers. In the context of
Madhya Pradesh, they fall mainly into 4 categories:
1. HEREDITARY LOAN: The loan that a farmer inherits from his forefathers. This kind of
loan is of the most destructive nature, since it doesn’t lead to any value addition in the
available pool of resources but is only an extra liability. It clearly shows the agricultural
farmers’ inability to get out of the vicious cycle of debt trap.
2. LOAN CONTRACTED IN CASH: This is the most common kind of loan taken by farmers
since the liquidity of cash makes it the best form of credit to purchase inputs etc.
 3. LOAN CONTRACTED IN KIND: This can included capital goods used in the process of
agriculture or inputs which are loaned out to farmers.
4. LOAN CONTRACTED PARTLY IN CASH PARTLY IN KIND: This includes an amalgamation of
cash and goods/inputs in kind that act as credit for the farmers.

ANALYSIS OF AVAILABLE DATA

NATURE OF LOAN

7% 4%
hereditary loan 1
3%

loan contracted in cash -2

loan contracted in kind -3

loan contracted partly in

86%
cash and partly in kind - 4

Thus, it is pretty evident that loan contracted in cash accounts for the highest amount
undertaken by those farmers in Madhya Pradesh. This shows that the highest amount
outstanding is also of the same and hence farmers face a huge difficulty in repaying back
this form of loan. They take huge amounts of loan in cash to meet the liquid needs of
production. However as the amount grows, it becomes more and more difficult to repay it
back.

SOURCES OF LOAN
SOURCE OF LOAN VALUE
government – 1 2098770
co-operative society-2 14658030
bank -3 38608928
employer/landlord – 4 901200
agricultural/ professional money lender -5 16859768
shopkeeper/trader -6 3219710
relatives/friends -7 4896150
others -9 1149716
SOURCE: NSSO DATA(IN Rs.)
Sources of loan can belong from both the formal and the informal sector. The formal sector
includes loans from government institutions, cooperatives and banks. The informal sector
includes those sources like employer/landlords, money lenders, relatives/friends,
shopkeepers/traders or others. Credit undertaken from the informal sector shows clear
problems in the institutional reforms undertaken to tackle credit expansion.
Following cumulative data is also available:
AMOUNT
KIND OF SECTOR OUTSTANDING
Formal 55365728
Informal 27026544
SOURCE: NSSO DATA (IN Rs.)

ANALYSIS OF AVAILABLE DATA

ALL SOURCES OF LOAN

SOURCE OF LOAN
government - 1
6%
1% co-operative society-2
3%
4% 18% bank -3

20% employer/landlord – 4

agricultural/ professional
1% money lender -5
shopkeeper/trader -6
47%
relatives/friends -7

others -9

Thus, this clearly shows that the highest amount of farmers have been availing loan from the
banks. This signifies the rapid development in the functioning of rural banks that made it easier
for mostly poor farmers to start availing loans from banks. However, the repayment rates in
Madhya Pradesh aren’t necessarily high. Hence, the amount outstanding in case of banks is the
highest. On the contrary, it is followed by moneylenders as the second highest source of loan.
This shows that this state has a large number of landless farmers who have to depend on the
exploitative moneylenders due to non-accessibility to the formal sector or majorly lack of
collateral. The third most preferred source are the cooperative societies, showing
organizational growth in the farmers’ collectivized cooperatives in M.P. These are followed by
other sources which do not account for huge amounts but do show diversification in the
sources of loan preferred.

DIVISION BETWEEN FORMAL & INFORMAL SECTOR CREDIT

SECTOR WISE DIVISION OF

OUTSTANDING LOAN AMOUNT

Formal Informal
33%

67%

This more or less turns out to be good news for the farmers since it shows that formal sector
accounts for the higher share of loan undertaken by the farmers. However, it also goes on to
show the continuous inability of farmers to go ahead and repay back this loan. Hence,
outstanding amounts too are higher in the formal sector. This shows that there’s a need to
empower the situation of those farmers in Madhya Pradesh, not only in case of availability of
loans but also in ensuring that they develop the capacity to repay those and numbers of
defaulters go down.

SOURCE WISE ANALYSIS OF NATURE OF LOAN

COMPOSITION OF HEREDITARY LOANS
HEREDITARY LOAN COMPOSITION VALUE
government - 1 55000
co-operative society-2 1085654
bank -3 1062728
employer/landlord – 4 8000
agricultural/ professional money lender -5 827250
shopkeeper/trader -6 37500
relatives/friends -7 48500
others -9 168000
SOURCE: NSSO DATA (IN Rs.)
 COMPOSITION OF HEREDITARY
LOANS
1200000

1000000

800000

600000

400000

200000

Thus, hereditary loans are mostly sourced from cooperatives or banks.

COMPOSITION OF LOANS CONTRACTED IN CASH

AMOUNT
CASH LOAN COMPOSITION OUTSTANDING
government - 1 1978370
co-operative society-2 10884131
bank -3 35755700
employer/landlord – 4 880700
agricultural/ professional money lender -5 15549498
shopkeeper/trader -6 1285080
relatives/friends -7 4163730
others -9 796795
SOURCE: NSSO DATA (IN Rs.)
 COMPOSITION OF LOANS
CONTRACTED IN CASH
40000000

35000000

30000000

25000000

20000000

15000000

10000000

5000000

There’s a sharp feature in the differentiation of cash based loans. It is mostly sourced from
banks with a sharp increase, followed by money lenders. But the difference is huge. Hence, it
shows that banks are mostly preferred.

COMPOSITION LOANS CONTRACTED IN KIND

AMOUNT
KIND LOAN COMPOSITION OUTSTANDING
government – 1 17000
co-operative society-2 1348245
bank -3 1682500
employer/landlord – 4 2500
agricultural/ professional money lender -5 454900
shopkeeper/trader -6 1712440
relatives/friends -7 34000
others -9 184921
SOURCE: NSSO DATA (IN Rs.)
 COMPOSITION OF LOANS
CONTRACTED IN KIND
1800000

1600000

1400000

1200000

1000000

800000

600000

400000

200000

Loans in kind are sourced from a much diversified background, with slight differences. The
highest source of kind based loans are shopkeepers/traders which are of immediate help to the
farmers. This is followed by banks and cooperatives. The other sources are highly miniscule.

COMPOSITION OF LOANS CONTRACTED PARTLY IN CASH, PARTLY IN KIND

PARTLY CASH & PARTLY KIND LOAN COMPOSITION AMOUNT OUTSTANDING
government - 1 48400
co-operative society-2 1340000
bank -3 108000
employer/landlord – 4 10000
agricultural/ professional money lender -5 28120
shopkeeper/trader -6 184690
relatives/friends -7 649920
others -9 0
SOURCE: NSSO DATA (IN Rs.)
 COMPOSITION OF LOANS
CONTRACTED PARTLY IN CASH &
PARTLY IN KIND
1400000

1200000

1000000

800000

600000

400000

200000

This kind of loan is mostly sourced from the cooperative societies in Madhya Pradesh. Almost
half of that amount is sourced from relatives and friends. All the other sources are really
smaller in magnitude in this case. This is the least preferred kind of loan, therefore it doesn’t
account of as much outstanding amount as the other loans.

CONCLUSION
This study clearly shows that the expansion of credit has happened in the past few years in
Madhya Pradesh. More and more availability of formal sector credit is a good sign. However,
the high outstanding loan amounts of the formal sector highlight the problem of the farmers’
inability to repay back the loans. Farmers clearly prefer loans in cash, which account for the
highest amount of credit undertaken. But the amounts of hereditary loans are also high,
showing the rising liability on farmers.
A large number of farmers are still dependent upon the regressive sources of credit, from the
informal sector. This means that M.P still has to bring in large number of reforms to even
ensure that the problem of accessibility of credit also gets tackled and situations of these
farmers improve.