‘Agriculture is the backbone of the Indian Economy.’
This phrase has been quoted in numerous articles, speeches, and discussions historically in modern India. Perhaps, it rightly is the correct statement. Agriculture and allied activities accounted for 17.5% of GDP and employed 46% of the country’s total workforce in 2012–13. For a developing country like India, where 66% of the total population still lives in rural India, these figures are significant.
However, there is another aspect to the phrase. The traditional basic needs approach has described food (including water), clothing, and shelter as the immediate basic needs. Thus, in this context with some tweaks made, agriculture is not just the backbone of any economy, rather the backbone of the entire human civilization.
India To be a major force to cater to the future food security needs of the Globe. The global human population in 2015 was 7.3 billion which shall rise to 9.1 billion by 2050. Indian population will rise to 1.3 billion by 2025. India has arable land of approximately 150 million hectares which makes it the second-largest country in terms of arable land after the United States of America. More than 100 million hectares is used for growing principal crops in India. To meet the food supply and food security needs of the world, India will have to develop ways and means to provide good quality food, increase production and at the same time solve its problem of poverty and economic inequality. Thus, India is going to be a dominant force, and rather an important contributor to the stability and wellbeing of the human civilization in the immediate future.
Credit Lending in India: Priority, Problems, and Opportunities
The next question that should come to our mind now is, ‘Are we taking the right steps to develop our agricultural ecosystem to meet these needs?’ Considering our area under agriculture is not growing to grow by a large value, we shall need to improve our farming practices, incorporate good quality Agri inputs, increase irrigation, move towards mechanization and improve our logistics and supply chain of agricultural goods through efficient storage and transportation facilities. This shall mean relying heavily on new technologies. To attain this, the major constraint that India will face is the problem of efficient credit lending.
Farmers in rural India have traditionally relied on money lenders for credit. Socially, even with exorbitant interest rates, farmers feel comfortable borrowing credit from them since they belong to the same village and know each other in person. Another aspect is the lack of bank branches in many regions, which leaves farmers with money lenders as the only solution.
Due to these high rates and the hassles faced by high delinquency with institutional money lenders, there is prejudice and lack of faith surrounding credit in some farmers.
Agricultural lending is not only an issue for farmers, but also for banks in India. 1/3rd of the country is prone to droughts and 1/6th is prone to floods. Farming is India is heavily dependent on monsoons. Around 35% of agricultural land in India is reliably irrigated. The general tendency amongst farmers in India is to borrow credit from both banks and money lenders, in which case, they prefer paying money lenders first over banks. The lack of lending history, crop history, income and performance history, and land records make credit lending in India makes agricultural lending a bit risky affair. Banks must allocate 18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure towards agriculture. This makes portfolio risk management an important concern for banks.
There are around 30,000 commercial bank branches in India. These have around 77 million credit accounts of which 39 million accounts belonging to small and marginal landholders (less than 2 hectares). Of the total agricultural credit size, almost 70% are crop loans and 23% are equipment loans. Even with these figures, Indian banks are far off from penetrating rural India. Considering all these problems, agriculture lending in India has improved significantly. The policies of the Indian Government which revolve around digitizing the process and introduction of Aadhar has helped the banks in creating reliable history for a farmer and thus reducing the farmer onboarding inefficiencies.
Presently, only 40- 45% of agriculture in India is mechanized. The government is pushing for farm machinery subsidization through schemes like Central Sector Plan Scheme etc. The percentage of agricultural workers to the total workforce in India will decline to 25% by 2050. This implies, with increased migration to urban areas and urbanization of many regions in India, the probability of an increase in the average landholding is high. This figure presently stands at 1.1 hectares compared to 14 to 17 hectares for developed regions like the US and UK.
The increased landholding per farm and reduced available labor will increase the use of machinery, agricultural inputs to manage farm activities and production. This creates a huge opportunity for commercial banks in the future. However, to effectively tap this huge demand, banks will have to adopt new technologies, increase efficiencies in their existing processes which shall eventually lead to optimized interest rates and a better risk portfolio.
The areas where banks will need to focus to create an efficient banking process for the future are-
Easy Access to Banks
This means banks will either have to increase the number of branches or create unique ‘Point of Contacts’ for individual borrowers. Presently, mobile internet penetration in India is as low as 18% (as per the Internet and Mobile Association of India). However, with the Government pushing for digitalization, it will work in favor of banks to create better access through apps and call centers, as the users increase.
Reducing the lead time — between the loan application and sanction of loan.
Accurate customer knowledge is the most important data point for banks. It shall not only lead to reduced lead time but also help in optimizing interest rates, reducing NPAs. The data required along with the present data collected by banks to create a good farmer profile includes KYC, Digital Land Records, Historical Farming Practice, Historical Yield and Income, Sowing and Harvesting Data, Efficient Collection Cycle. To reduce NPAs and improve the balance sheet, it is very important for banks to have a timely collection cycle.
How Earth Observation Satellites (EOS) Data can fill the present data gaps?
Earth Observation Satellites have been circling around the earth for almost the past 40 years. They have been collecting data that so far has not optimally been used in any activity except by government organizations. The increase in the number of satellites and reduced manufacturing and operational costs implies this satellite data, which earlier found major applications in military surveillance, is now affordable and can be commercialized.
Satellites can provide historical region-specific, crop-specific data. Combining this data with the existing technologies of improved computing abilities, cloud servers, machine learning, deep learning, and AI, can help provide great insights and patterns which previously were not possible due to the lack of the right technology.
This data can help banks in better underwriting, efficient, and targeted customer acquisition and collection cycles. As per the Basel II Capital Accords, agriculture now is to be treated as a retail exposure and the corporate credit risk portfolio models cannot be applied to agriculture. Satellite data provides an opportunity for a transparent and efficient creation of credit risk models for agriculture and thus a better agriculture credit risk portfolio.
Thus, to tap future food security needs, India will have to start adopting technology in the agriculture sector. The major driver for this adoption is going to be an efficient credit lending system by the financial institutions. Thus, it is the right time for banks to start incorporating and experimenting with newly available technologies, which they feel can be easily integrated into their system and processes for a future that lies just a couple of decades from now.
[Written by Sarvesh Kurane, VP of Marketing at SatSure. This article was originally published in The SatSure’s Newsletter]