Ind. Jn. of Agri.Econ. Vol.65, No.4, Oct.-Dec. 2010 Credit Absorption Capacity of Farmers in Gyanendra Mani and Vivek K. Sinha* I INTRODUCTION AND OBJECTIVES The policy on agricultural credit in India has been guided mainly by the considerations of ensuring an adequate and timely availability of credit at reasonable rates through the expansion of the institutional framework, its outreach and scale as also by way of directed lending. Over time, significant progress has been made in terms of the scale and outreach of the institutional structure, particularly by commercial banks, for credit flow to the agricultural sector. However, despite all these efforts, more than 40 per cent of the rural households in India are yet to be brought under the institutional fold of banking (All India Debt and Investment Survey and NSSO). The Agricultural Credit Policy during the post-nationalisation (of banks) period laid greater emphasis on augmenting credit flow at the ground level through credit planning, adoption of region-specific strategies, rationalisation of lending policies and procedures and bringing down the cost of borrowing. Bank credit has been made available to the farmers in the form of short-term credit for financing crop production programmes and also in the form of medium-term/long term credit for financing capital investment in agriculture and allied activities like land development including purchase of land, minor irrigation, farm mechanisation, dairy development, poultry, animal husbandry, fisheries, plantation, and horticulture. This policy of having two formats for credit support gave the choice to farmers/ rural people to avail credit as per his requirement and convenience both in terms of availability and repayment of loans. The various efforts made by financial institutions to upscale credit disbursement to the rural segment were basically aimed at managing the supply side factor and improving credit delivery systems. Most of the time, these actions did not take into account the demand side constraints defining the upper ceiling/cap on the amount of total credit which can be absorbed by a rural farmer. It has been observed that the demand for financial resources vary from region to region, activity to activity, borrower to borrower, etc., making agricultural financing to an individual a unique case. Studies propose that the increase in ground level credit flow to a particular sector, activity or to a geographical area should take into account the credit *Faculty Members, Bankers Institute of Rural Development, Lucknow 226 012 ( ). The views expressed in this paper are those of the authors and do not necessarily reflect the views of the organisation they belong to. The authors are grateful to the referee of the Journal for providing constructive and valuable comments on this paper.
678 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS absorption capacity of the farmers/entrepreneurs in order to ensure the optimum use of financial resources. The excess disbursement of credit/withdrawal by farmers over and above the actual requirement results in a decline in the marginal productivity of credit, particularly when a loan is given for productive purposes, since a portion of the surplus amount withdrawn would be diverted to satisfy the other consumption needs of the farmers. The credit absorption capacity of those engaged in the agricultural sector has also been observed to be determined by the size class of the farmers (marginal, small, medium and large), the nature of activity and the production cycle being observed in it, particularly in case of non-farm sector activities. Conceptually, the credit absorption capacity can be viewed from a supply as well as demand perspective. The supply perspective can be analysed from the angle of the financing agency or the credit deploying agency which sanction and disburse credit for some investment as well as the production activity after assessing the total credit requirement for the activity/unit also keeping in view the repaying capacity of the borrowers. In India, the assessment of the credit requirement of the borrower/ appraisal of activity is generally done by the financing agency for all the proposed units seeking financial assistance for establishing medium term/long term investment activity. However, in the case of production credit, financing agencies do not assess the credit requirement for each and every farmer seeking production credit from the financing agency/banks. As a practice, the average cost of production per unit of land for the district as whole is worked out for different crops grown in the district and same is converted into scale of finance which is used as the norm for financing of production credit till it is revised again after one year or so. Further, the bankers/ financing agencies generally avoid sanction of loan for medium term/long term investment activity unless they satisfy themselves that the financed activity/unit would generate sufficient income to liquidate the bank loan. The loan amount may vary from borrower to borrower depending upon the size of unit, techno-economic parameters and also the entrepreneurial skill of the borrowers. Whereas in the case of production credit, the crop-wise scale of finance is multiplied with the existing cropping pattern and the total credit requirement is assessed keeping in view the size of the agricultural land holding of the farmer. The assessment of the entrepreneurial/ technical knowledge base of an individual farmer is generally assumed to be the same within the geographical boundary of a district while assessing the production credit requirement. It has also been observed that any demand by the farmers to raise the credit limit over and above the credit limit estimated by the financing agencies based on the scale of finance and cropping pattern is not accepted. This approach does not take into account the demand for credit by the individual farmer. Since this approach is based on the average level of credit sanctioned and disbursed by the financing agency, the average credit flow per unit of activity in the case of term loans and the average credit disbursed per unit of land in the case of production credit can be taken
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 679 as a proxy to the Credit Absorption Capacity of the entrepreneur (investment activity) or the farmer (production credit). The demand perspective of the credit absorption capacity of a borrower for a particular activity is analysed keeping in view the demand for credit for establishing a unit by availing an investment loan (medium term and long term) or cultivating agricultural land by availing production credit. This approach to assess the credit absorption capacity takes into account the actual demand for credit assessed on the basis of the actual requirement of credit of the entrepreneur/farmer for investment or production activity. The approach of an individual has generally been found entirely different during assessing the credit requirement for investment activity than that for assessing credit for production purpose. The borrower is very particular about the viability aspect of the unit and he does not avail loan unless he is satisfied that the unit would generate a sufficient income leaving a predetermined level of margin after servicing the debt. Whereas the production credit by the borrower/farmer is generally availed for meeting the expenses for the cultivation of agricultural land as well as to meet some genuine consumption requirement. The demand for credit for agricultural production by the farmers is not always based on viability criteria as majority of the farmers, particularly the marginal and small farmers (operating on less than 2 hectares of land) practice subsistence farming. Therefore, any assessment of their credit requirement has to take into account the quantum of loan availed by him, income from other sources, repayment of loan and the cash required for meeting the family expenses. In a normal course, a farmers tries hard to meet his expenses with the available sources of income including the credit availed for production purposes. A farmer is generally not able to isolate the income from other sources and the production credit availed by him. He pools all the cash into a common basket and tries to meet all the cash requirements out of this fund. A farmer requires credit for meeting his investment credit needs (mostly for agriculture and allied activities), short term credit for crop production and also some additional credit to satisfy the consumption and social needs essential for family sustenance. The decision to sanction medium/long term credit to a farmer primarily depends on the viability conditions and the assessment of credit absorption for a particular investment activity is constrained by the unit cost, i.e., the borrower is supposed to get loans equal/close to the amount fixed as unit cost of the investment activity, if the project is found viable. Therefore, analysis of the credit absorption capacity of the farmers in the present study was made by taking into account the credit required for short term crop production and credit/fund required for meeting the consumption needs ignoring the long term credit requirement for establishing an investment unit. It was assumed that a farmer tries to balance the following equation in a normal situation to support his livelihood on a sustainable basis: Short term credit availed for crop production and consumption purpose + income from farm activity + income from other sources <=> Repayment of principle and interest + cash required to meet the expenses of the family.
680 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS II DATA AND METHODOLOGY The present study was undertaken to assess the credit absorption capacity of the farmers in rural areas and to find out the factors determining the credit absorption capacity of the borrowers. The districts of from the Western Region (most developed), from the Eastern Region (average developed) and from the Bundelkhand region (most backward) were selected in order to give due representation to regional variations in credit absorption capacity in the state of. All the three agencies, viz., commercial banks, regional rural banks and cooperative banks were covered in the present study. A total of 300 farmers (100 in each of the selected districts) who have availed KCC were interviewed for the purpose. The name of the branches to be covered during the field visits was decided in consultation with the Lead District Managers, controlling offices and the AGM (DD), NABARD of both the selected districts in order to get a representative sample. The farmers were selected randomly from the ledger (KCC) of the selected bank branches. The views of the branch managers of the bank branches visited were taken in respect of the implementation of various schemes aimed at increasing ground level credit to the agricultural sector. Farm Business Characteristics Some important socio-economic features of the farm business of the sample borrowers are: (a) 52 per cent of the sample borrowers were engaged in farming activity without any other source of income. Around 42 per cent farmers owned a cow or buffalo as an additional engagement but the majority of these farmers use milk for home consumption only, (b) Farmers with higher literacy levels were adopting modern agronomic practices, (c) The average size of families in the, and districts was 6.53, 6.75 and 6.24 respectively as compared to the state average of 5.6, (d) The marginal (<2.5 acres), small (>2.5-5.0 acres), medium (>5.0-10.0 acres) and large (>10 acres) farmers accounted for 25.7 per cent, 39.7 per cent, 32.3 per cent and 2.3 per cent respectively of the total sample (e) In district, paddy and wheat dominate the respective seasons covering about two-third area of the sample borrowers. In district, urd and til are the main crops in the kharif season covering more than 60 per cent of the kharif area whereas wheat is the main crop in the rabi season covering about 52 to 62 per cent of the total area of the sample farmers. In district, paddy and wheat crops together account for 77.6 per cent of gross cropped area of the district, (f) The comparison of cost of cultivation of various crops have been found to be varying from district to district basically on account of variation in agro-climatic conditions, soil types, input use levels, other agronomic/management practices, (g) The input use level are different even for the same crop in the selected districts due to the crop mix
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 681 of the districts, availability of assured irrigation, tractor ownership and use of highyielding varieties of various crops, (h) the variation in the input level in the districts that clearly reflected in terms of yield of various crops sown on the sample farms and the yield rates of various crops in and districts are better than those in district, (i) the average farm gate prices of different crops received by the sample borrowers indicate that the prices realised by the farmers for various foodgrain and non-foodgrain commodities were higher than the minimum support prices announced by the Government during 2007-08, (j) The difference in the gross value of output of various crops among various districts is on account of yield differentials as well as cost of cultivation. Category-wise Availment of Credit III RESULTS AND DISCUSSION The category-wise analysis of loan availed by the farmers indicates that marginal and small farmers have been given more credit per acre of land as compared to the medium and large farmers. However, the differences in credit availed by different categories of farmers are not very high. The average amount of loan availed by farmers have been found to be higher that the scale of finance fixed in the district in case of all categories of farmers. This is on account of the following reasons: (a) the farmers have withdrawn the money, repaid and then withdrawn again within the sanctioned limit and therefore, the total cash withdrawal from the KCC account by the farmers is more than the sanctioned amount, (b) the farmers often declare crops with a higher scale of finance than the one actually cultivated, for availing higher credit limits. Average Cost of Cultivation The average cost of cultivation in terms of actual cash expenses which the farmers are genuinely and necessarily spending for cultivating crops, has been arrived at by taking into account the expenditures made on operational activities (e.g., field preparation, sowing, inter-culture operation, irrigation, application of manure, fertiliser and pesticides, harvesting, threshing, transportation of produce from field to home, etc.) and the cost of material (manure, seed, fertiliser, pesticides, etc.) purchased by the farmers. However, the imputed value of family labour has not been included in the above cost as the farmers do not make any payment towards this cost variable. Further, only that portion of seed cost is included in the above model which was purchased by the farmers and this was ascertained by determining the quantum of total seed purchased by him during the reference period of the study. It was also observed that none of the farmers had purchased farm yard manure (FYM) from the
682 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS market and they had applied only home produced FYM in their fields, hence, the cost of FYM was also excluded from the above Cost of Cultivation (cash expenses) concept. It may be observed from Table 1 that the average cash expenses varies a lot from district to district, e.g., the average cash expenses in and districts are only 35 per cent and 64 per cent respectively than that in district. This difference is on account of cropping pattern (crops like sugarcane in ), the use of more inputs per acre, wage rate differential from district to district. However, the engagement of family labour per acre has been observed to be more in district as compared to the other two districts. TABLE 1. AVERAGE CASH EXPENSES AND IMPUTED VALUE OF FAMILY LABOUR Average cash expenses per acre on sample farm (weighted averages) (Rs. /acre) Imputed value of family labour per acre Category of farmers (9) (6) (7) (8) Marginal 7042 2735 4824 4904 2406 1778 2415 2240 Small 6893 2596 5108 4835 2371 1352 2078 1931 Medium 7896 2650 4732 4866 1521 1408 1788 1571 Large 8060 2486 4922 3883 799 812 1070 851 Distt average 7480 2619 4874 4788 1862 1340 1936 1696 Net Returns The issue of sustainability of the farm lands has been analysed for various land categories and although all the farm land categories (marginal to large) have shown a positive net return over the cost of cultivation (both Cost A1 and Cost C), the cash surplus left after repaying bank dues is not sufficient to take care of the entire consumption needs of all the categories of farmers. The net return over cash expenses have been worked out to see whether the surplus generated in the farm sector by various categories of farmers (marginal, small, medium and large) is sufficient to service the bank loan and meet all the family expenses during the year (Table 2) and further, the net returns have also been calculated over cash expenses plus imputed value of family labour in order to analyse the sustainability of rural family who depend only on farm income even if the entire agricultural operations are performed by hiring agricultural labour (Table 2). The average gross income per holding and the average net return were found to vary a lot from district to district indicating that the credit absorption capacity needs to be assessed very carefully.
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 683 TABLE 2. NET RETURN OVER (CASH EXPENSES+IMPUTED VALUE OF FAMILY LABOUR) Net return over cash expenses per acre on sample farm (Rs./acre) Net return over (cash expenses + imputed value of family labour) per acre Category of farmers (9) (6) (7) (8) Marginal 9849.9 4833.5 12076.1 9463.7 7443.7 3055.9 9661.3 7224.2 Small 11825.3 5670.7 11948.4 9861.6 9454.1 4318.9 9870.6 7930.9 Medium 11395.3 5756.7 16391.2 11036.5 9874.5 4349.0 14603.1 9465.2 Large 10588.1 6312.3 14716.7 8429.5 9788.9 5500.5 13646.5 7578.7 Total sample 11349.8 5739.9 14335.3 10324.3 9487.9 4399.8 12399.0 8628.3 Cash Surplus vis-à-vis Net Return It is pertinent to understand the level of actual credit utilised for crops and the net surplus (income) generated from the farm to meet the family consumption expenditure of various categories of farmers (Table 3). The analysis made in Section A on the Pattern of Short Term Credit flow to Various Categories of Farmers and Section B on the Gross Return and Net Return can be used for arriving at the amount of surplus (income) left with the farmers for taking care of the other needs of the family (Tables 3, 4 and 5). It is assumed that a farmer tries to balance the following equation in a normal situation to support his livelihood on a sustainable basis: Short term credit availed for crop production and consumption purpose +Net income (over cash expenses) from farm activity + Income from other sources <=> Repayment of principle and interest + Cash required to meet the expenses of family Here an attempt is made to estimate the actual amount of net income (cash) that is left after repaying the bank dues (Tables 3, 4 and 5). TABLE 3. SHORT TERM CREDIT AVAILED PER HOLDING AND TOTAL NET RETURN OVER CASH EXPENSES Short term credit availed per holding Total net return over cash expenses Category of farmers (9) (6) (7) (8) Marginal 22,279 13,160 17,009 17,823 32,694 16,280 46,567 33,589 Small 50,999 34,498 38,883 42,588 74,489 44,291 99,567 72,332 Medium 90,889 56,253 82,250 76,413 152,807 83,701 284,033 163,933 Large 155,866 149,977 162,536 165,056 198,101 215,444 487,574 244,214 Distt. average 57,612 47,529 44,281 51,060 91,251 59,552 140,519 96,053
684 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS TABLE 4. CASH SURPLUS ON DIFFERENT FARM CATEGORIES (NET RETURN OVER CASH EXPENSES) Total cash inflow per family Category of farmers Marginal 14,946 38,825 3,167 17,046 Small 15,926 7,088 48,177 18,305 Medium 94,804 22,481 226,316 104,696 Large 128,955 145,041 428,369 174,958 Distt. average 35,338 2,597 87,843 40,758 TABLE 5. CASH SURPLUS ESTIMATES TAKING INTO ACCOUNT COST A1 AND COST C CONCEPTS Category Cash surplus (based on net return over Cost A1) Cash surplus (based on net return over Cost C) of farmers (6) (7) (8) (9) Marginal -16498-40230 -13342-22027 -31356-49385 -28733-35470 Small 9980-8617 32854 12627-28649 -28426-3503 -20281 Medium 80201 3807 177461 80613 12697-36985 105515 21335 Large 109920 95005 342888 137179 21474 14358 223032 46572 Distt. average 27447-7184 63683 28528-15418 -34847 22670-9232 Credit Absorption Capacity of Farmers The total credit absorption capacity of farmers can be divided into three sublimits, viz., (i) credit absorption capacity of short term credit, (ii) credit absorption capacity of consumption loan and (iii) credit absorption capacity of investment credit. It is also important that these sub-limits have to be assessed in a particular sequence because, on most of the occasions, a farmer will first try to mobilise resources for carrying out crop production activities (short term). However, his consumption needs are of continuous nature and therefore require cash/credit on permanent basis. For the purpose, he may approach a lender for consumption loan for meeting out his family consumption expenditures during non-harvesting season. It has been observed that only those farmers venture into investment activity who have been able to manage their short term credit needs and also feel comfortable on the family sustenance front. The first two loans (production and consumption) are for sustenance and livelihood support of the family and the investment loan is generally for establishing a long term profit. The farmers generally harvest two crops in a year and receive income after sale of the commodities. However, his consumption needs are of continuous nature and therefore require cash/credit on a permanent basis. For the purpose, he may approach a lender for a consumption loan for meeting out his family consumption expenditures during the non-harvesting season. Although the Cost A1 concept of the cost of production has been found to be closer to the credit actually being absorbed by a farmer but it includes some notional expenditure items like depreciation on implements and the interest on working capital needed to be deducted from Cost A1 in order to estimate the credit absorption
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 685 capacity. Further, the cost of all inputs whether purchased or home based have to be incorporated although in the case of arriving at the actual cash expenses, the cost of purchased inputs were included. The imputed value of family labour is also required to be added to the Cost A1 (less depreciation on implements and interest on working capital) since this much quantum of labour is also used for production of crops. Finally the production cost which is necessary for and would be actually used (whether purchased or available at home) for raising the crops would include the following components: Credit to be actually absorbed = Modified Cost A1 (Operation Charges + Material Cost + Land Revenue/ Cess/taxes) + Imputed Value of Family Labour The credit absorption capacity of the farmers has been arrived at by adding 10 per cent additional credit over and above the modified production to take care of any increase in production cost on account of the increase in input cost, hiring charges of machineries (tractor, pumpsets, etc), increase in the wage rate, etc. after the sanction of limit and before the revision of limit (Tables 6 and 7). It has also been found that this cost is well within the gross income generated on the entire holding of the farmers. This modified cost + contingency is the credit absorption capacity of the farmers which indicates that, on an average, a farmer falling under a particular land category would require credit/cash to this extent for growing crops in the state of. Category of farmers TABLE 6. MODIFIED COST A1: BASIS FOR CREDIT ABSORPTION CAPACITY Modified cost A1= (Cost A1- depreciation on implements interest on working capital) Modified production cost=(modified cost A1+imputed value of family labour) (9) (6) (7) (8) Marginal 7193 3014 7264 6099 9599 4792 9678 8339 Small 7539 2654 6748 5661 9910 4006 8826 7620 Medium 8669 3797 7353 6416 10190 5205 9141 7986 Large 8761 3815 7303 5238 9560 4627 8373 6087 Distt.average 8146 3425 7140 6062 10008 4765 9076 7765 The credit absorption capacity per farm per annum of marginal, small, medium and large farmers (Table 7) has been estimated at Rs. 32,563/-, Rs. 62,362/-, Rs. 1,31,853/-, and Rs. 1,98,049/- respectively. The average credit absorption capacity of a farmer across the land category in has been found to be Rs. 80,379/-. The farmers falling under various sub-categories (except the marginal farmers) can productively employ the above mentioned amount for crop production and generate sufficient income even to take care of their consumption needs. The marginal farmers need to generate an additional income of Rs. 21,303/- to satisfy family consumption
TABLE 7. CREDIT ABSORPTION CAPACITY OF FARMERS (STATE -300 SAMPLE) Category Average land holding (acre) Gross cropped area (acre) Modified production cost (state average) per holding (Rs.) Modified production cost + 10 per cent contingency= productive credit absorption Net income over paid-out cost A1 per acre (6) Total net income over paidout cost A1 per holding (7) Interest payment if cash expenses become credit limit (8) Net income left after servicing of loan (9) Family consumption expenditure (NSSO) (10) Max credit limit for consumption that can be serviced (11) Consumption loan to be repaid (including interest) (12) Marginal 1.33 3.55 29,603 32,563 8,553 30,364 2,279 28,084 49387 26,247 28,084 Nil Total cash left for saving (equity for investment loan) (13) Small 2.84 7.44 56,693 62,362 11,098 82,569 4,365 78,204 51046 51046 54,619 23,585 Medium 6.18 15.01 119,866 131,853 11,305 169,692 9,230 160,462 53888 53888 57,660 102,802 Large 15.7 29.58 180,045 198,049 12,561 371,563 13,863 357,700 57702 57702 61,741 295,959 Distt average 5.43 9.41 73,071 80,379 11,065 104,119 5,627 98,492 51721 51721 55,341 43,151
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 687 needs from some other sources including wage labour. The estimate of maximum credit for consumption purpose for the various farm categories have been arrived at by taking into account the net surplus left with the farmers after servicing the short term credit loan. The total credit left for saving for various class categories have been estimated and the small, medium and large farmers are able to generate a surplus over and above the amount required for the servicing of production loan and consumption loan (equivalent to the consumption needs estimated by the NSSO). Factors Affecting Credit Absorption Capacity of Farmers Micro Level Perspective This section tries to determine the factors which may influence the credit absorption capacity of the farmers at the micro-level. As already discussed, the credit absorption capacity may vary from region to region, class/category to category of farmers, quality of land, entrepreneurial skill of the farmer, etc. In the present study, it has to be assumed that at the micro-level, the credit absorption capacity of the farmers is influenced by the total holding of land, irrigated land, education of the farmer, availability of family labour, yield index of the crops being grown by the farmers and other income. It has also been assumed that all these factors have a positive impact on the credit absorption capacity of the farmers. In order to measure the extent of impact of the above parameters on the credit absorption capacity of the farmers, a functional relationship in the form of a linear regression equation Y= a + b 1 X 1 + b 2 X 2 +... + b n X n was estimated. The credit absorption capacity was estimated in the form of (i) Crop loan availed (short term credit limit sanctioned) per acre of land and (ii) total short term credit sanctioned to the farmers. The analysis was performed by using data on all the sample farmers (300 farmers). The estimates of the coefficient of the selected parameters and the standard error of the respective coefficients significance obtained from the regression analysis are presented in Table 8. Effect on Crop Loan Sanctioned Per Acre to the Farmers It may be observed from Table 8 that the six factors, viz., total land holding of the farmers (acre), irrigated area (acre), education level of the farmers (Standard passed from 0 to 17; graduates=15, post graduates=17), average family labour, composite yield index of crops grown by the farmers and the income of farmers from other sources in rupees/annum together explained about 20 per cent of the total variation in the crop loan per acre availed by the farmers. The coefficient of land holding factor shows a negative sign which means the sanction of the short term credit limit to the farmers is not in the same proportion to all the categories of the farmers and generally the medium and large farmers do not get or do not avail the entire eligible credit limit based on the size of the holding. The banks also hesitate to
688 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS TABLE 8. ESTIMATES OF COEFFICIENTS AFFECTING CREDIT ABSORPTION CAPACITY OF FARMERS Value of coefficient Significant at (t-test) Parameters Standard Error A. Effect on crop loan per acre (Dependent Variable): R-Square = 19.4 per cent 1. Constant 3577.21 4688.59 2. Land holding (acre) (-)368.41 123.95 1 per cent 3. Irrigated land holding (acre) 404.61 134.57 1 per cent 4. Education level (Std passed) 13.41 71.16 5. Available family labour (No.) (-)121.42 198.37 6. Yield index of crops grown by farmers 36.40 13.29 1 per cent 7. Other income (Rs./annum) 0.29 0.08 1 per cent B. Effect on credit limit sanctioned to farmers: R-Square = 56.7 per cent 1. Constant (-)46492.57 26602.12 10 per cent 2. Land holding (acre) 7154.12 703.26 5 per cent 3. Irrigated land holding (acre) 1504.11 763.50 1 per cent 4. Education level (Std passed) 316.59 403.74 5. Available family labour (No.) 2285.94 1125.49 5 per cent 6. Yield Index of crops grown by farmers 263.36 75.44 1 per cent 7. Other income (Rs./annum) 1.19 0.43 1 per cent sanction the crop limit beyond a limit. It was observed that a large size holding was more in case of undivided families and more number of family members were available for working in their own fields. Since farmers with more hands were given/had availed less loan per acre of holding, this factor showed a negative relationship with the crop loan per acre. The other factors like size of the irrigated land, level of education, crop yield index and the level of other income have also shown the expected sign as all these four factors have shown a positive bearing on the credit absorption capacity of the farmers (crop loan per acre). However, the coefficients of the factors of the education level of the farmers and the availability of family labour turned out to be non-significant. Effect on Total Credit Limit Sanctioned to the Farmers The effect of the above mentioned six factors on another measure of credit absorption capacity (total credit limit sanctioned to the farmers) was also estimated through the linear regression equation. It was found that, except for the education level of the farmers, all the other five factors were positively affecting the credit absorption capacity of the farmers. These results were on the expected lines. The yield index was taken as a representative of a group of factors like the use of agricultural inputs (increased input use leads to better yield) and the quality of land. The results show that a better yield level induces the farmers to invest more (short term credit) in agricultural production. Similarly, an increased level of irrigation facility leads to higher cropping intensity which in turn leads to higher requirement of credit for the cultivation of crops. The increased income of the farmers from other sources increases the equity status of the farmers which gives confidence to the
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 689 farmers to avail more credit and also increases the confidence of the bankers from the repayment point of view. Macro Level Perspective In order to determine the set of factors having some impact on the credit absorption capacity at the macro level, the data on a number of parameters were collected and analysed keeping in view some a-priori assumptions. For the purpose, the following set of factors were analysed to examine their impact on the credit absorption capacity of the farmers in the state of : (i) Gross irrigated area as percentage of gross sown area (per cent), (ii) Cropping intensity in the district, (iii) Yield of foodgrains in the district, (iv) Per cent area (of gross sown area) under commercial crops, (v) Composite index of development of land use (Department of Planning, Government of ) (vi) Composite index of development (developed by Department of Planning, Government of based on 26 indicators). In order to examine the impact of the above mentioned factors, data on the above parameters from all the 70 districts of for the years 2004-05 and 2005-06 were collected and analysed. The data on the ground level credit flow of crop loan (assumed as credit absorption capacity) for all the 70 districts of for the same years were also collected. The data for two years, viz., 2004-05 and 2005-06 were collected in order to capture not only the cross-sectional effect but also the temporal effect, if any, of these factors on the credit absorption capacity. The data on the above variable/parameters were taken from the 'Planning Atlas ' (2006 and 2007), the State Planning Division, the Planning Department, the Government of, Lucknow. Both the linear and double log function were fitted to establish the relationship between the explanatory and the dependent variable as discussed above. For the purpose, the functional relationship in form of (i) linear regression equation Y= a + b 1 X 1 + b 2 X 2 +... + b n X n and Double-Log Function ln Y= a + b 1 ln X 1 + b 2 ln X 2 +... + b n ln X n were tried, where Y is the Total crop loan disbursed in the district and the Xs are the independent variables as mentioned above. Keeping in view the significance level, the sign of the coefficients and the R 2, the best fit equations have been retained. The R 2 in both the forms of double-log function and linear equation function was almost the same (50.1 in case of linear and 50.2 in case of double-log function). The estimates of the coefficient and standard error of the coefficient along with the level of significance of the infrastructure parameters affecting the district economy are given in Table 9.
690 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS (A) TABLE 9. ESTIMATES OF COEFFICIENTS AFFECTING THE CREDIT ABSORPTION CAPACITY OF THE FARMERS Value of coefficient Standard error Significant at (t-test) Parameters Effect on ground level credit flow/ crop loan to districts: Linear Equation, R-Square = 50.11 per cent 1. Constant (-)25358.46 6589.88 1 per cent 2. Per cent of gross irrigated area to gross sown area 29.96 46.24 3. Average yield of foodgrains (qtl/ ha) 272.19 183.37 10 per cent 4. Per cent of area under commercial crops 242.09 53.35 1 per cent 5. Composite Index of development of land use 377.16 138.33 1 per cent 6. Cropping intensity (-)47.33 56.17 (B) Effect on the ground level credit flow/ crop loan to districts: Double-log equation, R-square = 50.18 per cent 1. Constant (-)2.607 0.53 1 per cent 2. Per of gross irrigated area to gross sown area 0.137 0.209 3. Average yield of foodgrains (qtl/ ha) 0.243 0.257 4. Per cent of area under commercial crops 0.471 0.081 1 per cent 5. Composite index of development of land use 2.424 0.866 1 per cent 6. Cropping intensity (-)0.321 0.615 It may be seen from the above Table that at the macro level, the percentage of area under commercial crops and the composite index of the development of land use have a very strong bearing on the credit absorption capacity of the farmers in the district which appears to be very logical. The increase in the area under commercial crops induces credit absorption, for the simple reason that the cost of cultivation is comparatively high as compared to the traditional crops. Similarly, better land quality or improvement in land development also induces farmers to invest more in short term credit. The average yield of foodgrains (qtl/ha) is found to be the next important factor inducing a higher use of inputs and thereby encouraging more credit. The per cent of gross irrigated area as a percent of gross sown area has also been found to affect the credit absorption capacity although the coefficient has not been significant. The increase in cropping intensity has not been found to affect significantly the credit off-take in the district, rather, the sign has been found to be negative. In order to get an explanation to the inverse relation between cropping intensity and the credit flow in the district, we need to look at the pattern of agricultural development in the various economic regions of the state. Role of Banks in Increasing Credit Absorption The study reveals that except marginal farmers, all the other categories of farmers can easily be given some more credit even without any increase in the present socioeconomic status of the farmers or any technological breakthrough in the field of seed technology or agronomical practices or improvement in rural infrastructure. It has also been observed that the medium and large farmers are not utilising/not given the full eligibility as per the scale of finance. The bankers themselves have to assume the
CREDIT ABSORPTION CAPACITY OF FARMERS IN UTTAR PRADESH 691 role of an extension worker in order to make farmers aware of the various government schemes, particularly the incentive based schemes, which will help them to expand/diversify their credit flow base in rural areas. The best way would be to promote the Farmers Club and use them as their extended arms. The other ways through which banks can contribute in increasing the credit absorption capacity are (a) financing under the Central Government Scheme of the "Establishment of Agri- Clinics and Agri-Business by the Agriculture Graduates", (b) encourage farmers, preferably marginal, small and tribal to take up innovative projects adopting proven technologies developed by research institutions, corporate houses, NGOs and progressive farmers/entrepreneurs under the Scheme for Capacity Building for the Adoption of Technology being implemented by NABARD, (c) facilitate in capital formation in agriculture through term financing in minor irrigation and land development activities and (d) encourage farmers to take up the cultivation of commercial crops under a project approach. Other Measures to Increase Credit Absorption Capacity There is an immediate need to adopt an area specific strategy to increase the credit absorption. It is also suggested that a common platform of bankers and the research institutions should be established so that some innovative and bankable products can be developed jointly for improving the credit off-take in a particular region. Since the marginal farmers are not able to meet their family consumption needs and also they do not have much equity to take up larger investment activities, it would be appropriate to give them a composite loan comprising short term credit plus allied activities like dairy, poultry, sheep, goat, piggery, etc. to enable them to meet their entire family needs after servicing bank loans. There are certain land related issues which need to be addressed in order to make agriculture sustainable on a long term basis, e.g., (a) avoid transfer of a good quality of land going to non-agricultural uses. Some countries have resorted to a policy of agricultural zoning for this purpose and this policy seems to be quite relevant in the Indian context especially in those areas/ districts having high agricultural productivity (b) There is increasing land degradation because of natural and human-induced factors. Much of the land has become unusable owing to land degradation, salinisation or water logging. There is no transparent policy to make this land available to the agro-industry. Village Panchayats may be encouraged to identify unusable, saline or waterlogged land, which can be reclaimed through the help of landless farmers for cultivation, afforestation and plantation crops. (c) Consolidation of land holdings enables economies of scale, high allocative efficiency and increased private investment in activities like modernisation/installation/digging of tube wells and pump sets, purchase of tractors, use of better/higher levels of inputs, etc., to become more viable. (d) Out of the total 242.01 lakh hectares of the total geographical area, 120.44 lakh hectares are facing various land degradation problems
692 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS and this land needs to be put under various conservation and reclamation measures in order to enhance the agricultural productivity in the state. (e) Land tenancy exists to a considerable extent in agriculture with beneficial effects on productivity and growth in most of the cases which underlines the need for according full legal status to tenancy as a general class of land tenure by protecting the interest of both the owners and the tenants. Received January 2010. Revision accepted November 2010.