Kisan Credit Card programme: Expanded access to credit or expansion of credit

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Relevance and use of the article in UPSC prelims and mains examination: Dear aspirants, social welfare is one of the primary objective of government. So was KCC introduced to solve the financial problems of Common kisan but now it seems that the The welfare implications of this policy remain ambiguous. Let’s see in the article that Kisan Credit Card programme – a key reform in agricultural lending in India – has been operational for almost 20 years now. However, there is little empirical evidence of its impact on intended beneficiaries.The programme has had significant positive impact on agricultural production and technology adoption. It is likely that the channel is enhanced borrowing ability of the already unconstrained, rather than expanded access to credit.

Introduction:

  • The Kisan Credit Card (KCC) programme was introduced in India in 1998 and continues amidst much fanfare even today. Policymakers over the last decade and a half seem to have taken a liking to this programme, and it has been widely recognised as a massive reform in agricultural lending in the country. However, there is little evidence on the success of the programme and its effects on intended beneficiaries, that is, farmers and rural households.

Kisan Credit Cards: Background

  • The programme was first announced in the budget speech of the then Finance Minister of India in 1998, and took as a result of the combined endeavours of the government, Reserve Bank of India (RBI), and National Bank for Agriculture and Rural Development (NABARD). Within a year of inception, close to four million KCCs were issued. A couple of years into the programme, KCCs constituted around 71% of the total production credit, and around Rs. 50 billion worth of loans had been disbursed.

Changes then and now:

  • The programme has undergone several changes and the current structure is completely different from that in its debut year.
  • Initially, it was just meant to be a credit line with a bank where farmers had to visit a bank branch to withdraw cash and use it at their discretion; hence, the term ‘credit card’ was a misnomer in some sense.
  • Eventually, it graduated into a full-fledged credit card with features such as ATM withdrawal and the ability to swipe at the point-of-sale.
  • The idea was to give out these cards to farmers all over the country with the objectives of providing easier access to credit via simpler eligibility norms, more flexible credit via looser monitoring criteria, and cheaper credit via lower interest rates.
  • Apparently, the policy aimed to ease credit constraints for poor farmers as well as expand credit resources for the already unconstrained.
  • The multi-agency approach of borrowing and lending in agriculture led to farmers getting caught up in the rungs of bureaucracy.
  • The key thing to note is that KCCs are formal bank loans, as is the nature of any credit card debt. Banks can exercise discretion vis-à-vis the variety of KCC product they offer. We should therefore regard KCC loans as a differentiated product.
  • Usually, as long as farmers have title to about an acre of irrigated land, they are eligible for loans up to Rs. 50,000 without collateral; the credit lines can be much higher with collaterals.
  • The cards are usually valid for three years with the possibility of renewal upon successful repayment of loans. Being essentially a credit card, this new form of crop loan for farmers do not have a formal monitoring procedure and banks are happy to renew the cards as long as there is no default.
  • Recent reports suggest high rates of default on KCCs, and the fact that these are becoming a major source of non-performing assets (NPAs) for banks.

Impact on production and technology adoption in agriculture

  • Certain institutional features of the implementation of the programme to estimate the effects of potential exposure to KCC on a host of outcomes, including rice production and technology adoption .The idea is that the interaction of these three factors captures the intensity of exposure to the programme.
  • It is possible that some of the inputs that accelerate production were not being used due to credit constraints, and KCC relaxed those constraints. As supportive evidence for this, area cropped under high-yielding variety (HYV) of seeds increased substantially more in areas exposed to the programme.

Impact on borrowing patterns

  • Households in high-exposure areas are not any different from those in low-exposure areas in terms of their likelihood to borrow, total amount of borrowing, or choice of creditor (banks/others). This suggests that KCCs did not lead to new access to credit and the number of loans decreased by over one loan per household in the last five years.
  • Households exposed to KCCs get fewer but larger loans they borrow in bulk with total number of loans reducing and loan sizes increasing.

Suggestions and Conclusion:

  • Increased exposure to KCCs seems to have led to large increases in agricultural production and technology adoption.
  • This indicates that the large effects seen in agriculture may not be driven by the relaxation of credit constraints and expanded access to credit due to KCC, but through some other channel. One such channel could be an expansion of credit. Households already having access to credit from banks, providing further evidence in favor of ‘expansion’ of credit and against ‘access’ to credit.
  • The welfare implications of this policy remain ambiguous and depend on whether ‘access’ to credit should be prioritised over ‘expansion’ of credit.
  • Irrespective of the channel, the programme led to large increases in agricultural production, and hence overall improvement in the economy of the sector. This leads us to speculate about another possible channel – an increase in risk tolerance of the farmers.
  • If farmers view KCCs as insurance against income shocks, they may increase investments and as a result, have higher output, even though this increase in investment does not show up as an increase in the likelihood of borrowing. It is just that farmers are now less compelled to save up for shocks as KCCs can help smooth out consumption.
Question for prelims:
Consider the following statements:
  • The Kisan Credit Card (KCC) programme was introduced in India in 1998.
  • This card allows the farmers to have cash credit facilities without going through time-consuming bank credit screening processes repeatedly.
  • Repayment can be rescheduled if there is a bad crop season, and extensions are offered for up to four years.
Which of the following statement is/ are correct:
  • 1 and 2
  • 1 and 3
  • 1,2 and 3
  • None of the above is correct
Question for Mains:
Discuss the objectives behind launch of KCC scheme for farmers. Does this scheme fulfilled its objectives or seems that the The welfare implications of this policy remain ambiguous.
Suggested points:
  • Discuss the objectives behind introduction of KCC.
  • Define the policy in brief.
  • Pros and cons of the scheme.
  • Why this policy Fails to meet its welfare objectives.
  • Does Changing scenario needs change in the policy.
  • Suggetions.
  • Conclusion.

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