Abstract
The book Rural Finance and Financial Inclusion while focusing on policies, initiatives and institutions encapsulates various aspects of agricultural finance and rural credit. It also focuses on microfinance, agricultural value chain finance and ICT-enabled financial services in the Indian context.
In Chapter 1, the author discusses, along with complexities and challenges in the arena of agriculture and rural finance, the various phases in the Indian agriculture since the independence. Initially after the independence, the agricultural productivity was low. Widespread droughts led to severe food crises which resorted to huge food imports. The import and use of dwarf and high-yielding varieties of wheat and rice led to the green revolution. Use of modified and hybrid seeds, improvement in agri-education, application of modern technology and spread of base of scientific community led to India’s food self-sufficiency by the 1970s. The setting up of the Food Corporation of India and the Agricultural Prices Commission and strong policy push for the flow of institutional credit, incremental irrigation potential and availability of good quality inputs paved the way for more prosperity for the Indian farmers. The economic reforms of 1991 boosted the exports of agricultural products as India became a food surplus nation during 1980s and 1990s.
Further, the author argues that the entry of the private players led to land acquisitions, contract farming practises and creation of super markets which put the marginal farmers under tremendous pressure. In the meanwhile, owing to the easy access of supply, changed tastes and preferences, there was structural shift in the food consumption pattern. The National Agricultural Policy of 2000 brought in some regulation on private sector participation. However, the fragmentation of landholdings, diseconomies of intensive farming, low product price discovery in the markets and the diminishing returns witnessed by the sector pushed many farmers to commit suicide. Stiff competition from big players such as supermarkets, wholesalers and aggregators rendered the small businesses unprofitable. The use of chemicals and fertilisers, non-remunerative prices and exploitation by big traders became the new normal.
The government focussed on supporting the agricultural research and addressed the issues in human resource development, the post-harvest management, the warehousing, the agri-logistics management, credit delivery to the sector and marketing. However, the country saw widespread farmer agitations after 2016 due to lack of remunerative prices, lack of market linkage and lack of assured markets. The challenges that are yet to be tackled include non-timely access to finance, policy lags on development of agricultural finance markets, lack of infrastructure development for storage, transportation, logistics and warehousing, and lack of insurance for the crop of the marginal farmer. The incumbent government has addressed some of the above issues.
Chapter 2 of the book spotlights on the rural credit institutions. These rural credit institutions are crucial in helping the farmers in receiving the timely and necessary financial assistance. The RBI provides various frameworks and standards for both the private and the public cooperative banks and the NBFCs to follow when lending money. After the independence, India’s five-year plans emphasised on growth in agriculture sector as it provided primary job possibilities to millions of people. The government established various committees to create effective policies, carried out numerous surveys to develop better minimum support price for the crops and worked with Agricultural Produce Market Committees and National Bank for Agriculture and Rural Development (NABARD) to reform credit institutions and RRBs. As the leading provider of rural financing, NABARD focuses primarily on agriculture and other related sectors that it supports. The duties of NABARD are not just restricted to credit but also include non-credit duties including creating policies, gathering data and processing it. The author corroborates that rural credit delivery is a multifaceted strategy because it involves numerous stakeholders. A rural area today has access to a wide range of financing facilities as per the data provided by the National Statistics Office and the India Rural Development Reports. The banks and agricultural lenders now account for the majority of rural loans.
Chapter 3 of the book highlights the various policies in the arena of financial inclusion and rural credit. The successive governments since independence have placed a major emphasis on the financial inclusion of oppressed farmers in rural areas. The government periodically established various organisations and financial credit firms in support of this by framing several policies. The author provides a conceptual overview of the flow of institutional credit through various channels. These include lead bank priority sector banking, Kisan Credit Card, SHG Bank Linkage and loan waivers, including interest waivers and full loan waivers for farmers who are severely affected by droughts and excessive, unrelenting rain. The government has recently launched a number of projects, including the Pradhan Mantri Jan Dhan Yojna, Aadhar seeding, Kisan Sanman Yojana and small financing banks.
In Chapter 4, the emerging aspects in the agricultural value chain finance and how it supports the marginalised groups in India are discussed. The three major concepts of value chain, value chain analysis and value chain finance are highlighted. Value chain refers to the set of actors (input suppliers, farmers, producer groups, local traders and processors, exporters, wholesalers, bank and non-bank entities, MFIs, community groups and organisations, co-operatives and associations, technical and business trainers, specialised service providers and the agencies that help in getting government certifications and grades) and the sequence of value-adding activities in moving the product from producers to consumers (farm to fork). Value chain analysis is a careful assessment of the players and factors affecting the performance of an industry, and identifying and addressing the critical and constraint areas to achieve efficiency, productivity and competitiveness. Value chain finance aims to alleviate the constraints to growth and chain efficiency. It involves the financial service and product flow within and to the chain, either through the chain participants or externally.
Value chains may be of two types—tight value chains and loose value chains. A case of contract farming or food marketing company is an example of tight value chain where producers have very less options to sell their products outside the closed market (the FMCG company). Export commodities, highly perishable commodities and those entering commercial processing are included in the tight value chains. On the contrary, open marketed crops fall under the loose value chains. Value chain finance can be divided into two types—internal value chain finance and external value chain finance. Internal value chain finance involves the flow of finance through the chain regardless of the presence of financial institutions. The participants further down the value chain (normally the ‘lead firm’) normally borrow from a financial institution and provide loans through credit to small holders, with or without the involvement of formal financial service providers. In the external value chain finance, the participants receive finance from outside the chain from either a bank or a financial institution.
Further in the chapter, the author has examined the paradigm shifts in the agricultural economy, which is slowly graduating from a production-oriented to a market-oriented economy. Demand and market-driven models, market connectivity to farm produce, changing food consumption patterns, rising food prices, product quality, traceability and safety and product diversity are some of the factors which have become important. Allied agricultural sectors such as fisheries, poultry and animal husbandry have received a great deal of policy attention. The sector is poised for growth with planned investments by government across the value chain, from the collective models such as farmer producer organisations, farmer clubs, self-help groups, contract farming and e-commerce. As a result of the digital revolution and the opportunities presented by the post-Covid-19 technological upheaval in rural and semi-urban areas, the Fintech enterprises are now present in every corner of the country and are able to realise their full potential. The author also explains product-linked financing, receivable financing, risk reduction and structured financing to coordinate harvest and marketing stages.
Chapter 5 on microfinance in India discusses many institutional forms of support. Various group models and associations exist where people and self-help organisations obtain loans and use them for their growth, causing the economy to flourish with the win-win principle. Different types of models, such as the intermediary model, community model and individual models, are described along with their methods for credit repayment and loan application. Microfinance institutions are receiving regulatory frameworks, money from the major banks and support for joint-lending initiatives in accordance with the recommendations of the RBI’s Malegam committee. The author opines that the lending of NBFCs is constrained by their lending cap and the proportionate asset holding required to operate the business. Microfinance institutions are conscious of self-governance to reach as many consumers as possible with trust and mutual dependency on development; it has been noticed and idea has been applied due to the importance given to corporate governance today.
Chapter 6 highlights the Information and Communication Technology (ICT)-enabled financial services and how ICT is enabling the access and usage of financial services such as savings, remittances, credit, insurance, pensions and financial advisory. Mobile phone penetration, better internet connectivity, nationwide implementation of biometric identification and the new generation tech-enabled innovations along with digitisation of banking processes have enabled the users to adopt technology. The emerging technologies such as data analytics, blockchain, P2P platforms, artificial intelligence, app-based solutions and machine learning have disrupted the banking space. Compared to traditional banking processes, money transfers are now completed in just a few seconds through IMPS, NEFT, RTGS, ECS, POS, micro-ATMs, mobile banking and the newest UPI-enabled services.
Many factors such as penetration of smartphones, better internet connectivity, Aadhaar-based identification, secure payment infrastructure, inter-operability of various platforms and instruments, adequate supervisory guidelines, correspondent banking models, mobile applications and a national agenda of digitisation contributed to the growth of Fintech sector in India. The Start-Up India initiative of the Government of India launched in 2016 and associated support such as 80% cost waivers for patents of startups, tax rebates for merchants whose digital transaction volume is more than 50%, exemption on capital gains tax for unlisted companies in first two years, exemption on income tax of startups for first three years of operation and withdrawal of surcharge on digital payment for government services were pivotal in boosting the startup movement. The RBI focused on the need for data privacy, customer protection and enforcement of cyber laws. Indian Fintech industry raised $2.7 billion worth of investments in the year 2020. Strong regulation in the areas of cyber security, data sharing and Fintech operations are warranted. The focus will soon change from ‘access’ to financial services to ‘usage’ of financial services by the Indian masses.
Dr K. K. Tripathy and Dr Anshu Singh have beautifully synthesised the various issues of agricultural finance, rural development through microfinance, financial inclusion of rural credit institutions and how the ICT has played a significant role in achieving the same. The book fulfils the purpose to understand the current policy milestones already achieved and focuses on the emerging paradigm shifts that may warrant change in policies in the future. The book provides a coherent understanding of the connect between rural finance and financial inclusion. If we were to criticise the book, we may say that some of the aspects could have been explained using data visualisation. However, the book deserves a word of praise for its contextual clarity and comprehensive coverage.