Answer: 

Introduction:

The Government of India has mandated agriculture and primary sector lending as priority lending and has increased fund allocation to it over the years. However, according to the RBI study only around 3% of the credit offtake reserved for the primary sector is taken by small and medium farmers and biggest beneficiary of the expanded credit are large farmers and agriculture-based industries.

Body:

Reasons why banks are not able to finance agriculture:

• Lack of documents: Most of the small and marginal farmers do not have any documents for KYC while KYC is a basic requirement for banks to provide loans. Cooperative societies already have every detail of the farmers and hence do not ask for complex documentation.
• Unpredictability of agriculture: When the crops fail due to lack of assured irrigation and failure of monsoons, the resultant dispossession and suicides causes high distress in rural society. Dispossession is done by banks for loan recovery while cooperative societies try to figure out other ways for recovery.
• Local money lenders are highly accessible: Green revolution techniques require increased capital expenditure and its adoption needs investments. This makes small farmers dependent upon local money lenders for loans. Even though they charge high interest rates, they are highly accessible and often lend without any collateral.
• Banks do not earn much: Agricultural credit does not lead to huge financial gains for banks and most institutions do not provide adequate services to their clients. There is also a risk of farm waivers which makes it difficult for banks to recover.

In villages cooperative society can be an ideal way to disburse increasing amounts of loans reserved for the primary sector as they have grass roots in the community and can enable them in better targeted coverage and better loan recovery.

Technology can act as an enabling factor as Banks can now enroll and service rural customers without opening physical banks through e-banking and Bank correspondents. These bank accounts opened could be seeded by Aadhar number for targeted subsidies, DBT, etc. Moreover, technology reduces transaction costs of banks making expansion of rural banking viable.

Conclusion:

Village society needs a financing system which takes into consideration the local needs and conditions. While formal banking is desired in villages, the banks must take initiatives to make tailor-made products for rural credit. Technology can act as the biggest tool for this purpose.

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