Cooperative Credit for Agriculture Sector : Some Issues from RBI Report

The ‘Report on Trends and Progress of Banking in India, 2024-25’ has been published by Reserve Bank of India (RBI) recently. Happily, the Report has devoted a full chapter on various aspects of the Cooperative Banks that includes the Urban Cooperative Banks (UCBs) and the Rural Credit Cooperatives (RCCs). Our focus in this write up is on the RCCs. RBI has highlighted several good features in the growth of RCCs; some of these are persistent growth of all financial parameters like the deposits, advances, investments etc., increased Credit Deposit Ratio, improved capital adequacy, better asset quality with positive improvement in the status of NPAs and consequent fall in provisioning requirements leading to the continued profitability of the system as a whole. However, the disquieting features are no less than the laurels achieved by these cooperatives. The rate of growth of deposits of the system as a whole has reduced as compared to that in the last year. The rate of growth of credit has ben more than that of the deposits but it has been less than that in the last year. The dependence on the borrowings and refinance has increased to quite an extent due to fall in growth rate of deposits. Despite a fall in provisioning, net profits of RCCs declined as operating expenses increased, and growth in interest expended outpaced the growth in interest income. However, the most concerning observation in the Report is that the market share of the RCCs in the agricultural sector has reduced persistently over the years to a mere 09.00% in the year 2024-25. This has to be seen in the context that the growth rate of the agricultural credit dispensed by other institutions has been much higher than that of the RCCs and the RCCs are losing their once-upon-a-time status fast as the prime financial institutions of farmers. This is a serious issue for large scale / high level deliberations by all stakeholders.

In retrospect, the Rural Financial Cooperatives evolved as the credit dispensing agencies for agriculture sector, providing loans in small amounts to the farmers for their short-term crop production purposes and, in due course of time, for long term investments on the farmers’ fields. These institutions served the agriculture sector appreciably well as these were the only agencies for farmers till 1960’s or even in 1970’s until the advent of commercial banks on the agricultural canvass for the reason that the cooperative institutions were not adequate to take care of the increasing demands of agricultural sector and other rural credit. Later on, more institutions like the Regional Rural Banks, Local Area Banks, Small Finance Banks, Payment Banks, Microfinance Institutions (MFIs) came into being; these institutions have had a salient impact on enhancing multi-fold the flow of rural credit and these newly emerging institutions, along with the commercial banks to a large measure, far surpassed the growth rate of their agricultural credit dispensation as compared to that of the cooperative credit institutions.

The cooperative credit institutions had a dichotomy of structure with the Short-Term Cooperative Credit System (STCCS) and the Long-Term Cooperative Credit System (LTCCS). In the historical backdrop, the two types of cooperatives evolved as two separate institutional monoliths that could not actualise the policy-makers’ dream of integrated flow of agricultural credit and, over a period of time, the LTCCS has fallen, to a large extent, into dormancy with the result that the STCCS has reduced to dispense largely the short-term credit alone. The cooperative system has virtually failed to recognise that with the growth and widening of the scope of agricultural sector, the demands of farmers are more variegated today and much above the short-term credit needs. The agricultural processes have become more diversified and the agricultural scenario is dominated by the gradual but greater adoption of new and emerging technologies. Ever-increasing emphasis on deployment of various factors of productivity on the farm land shall encourage farmers for adopting various crop-efficiency measures for land improvement, modernising the irrigation systems, just-in-time arrangement of inputs, use of farm machines, crop-practices implements, electrification, harvesting systems, storage and marketing infrastructure, primary processing etc. at individual and collective levels. The processes like organic agriculture, hydroponics, multi-layered agriculture, controlled condition agriculture and various other specialised technologies shall be widely adopted by the farmers. The share of production of vegetables, fruits, aromatic flowers, and medicinal crops as also rearing of livestock like dairy, poultry, piggery, goat and sheep rearing, fisheries etc. is growing tangentially as a part of the mainstream agricultural production. Local ground level investments in organic farming, custom-hire services, post-harvest technologies, aggregation and segregation centres, packing houses, primary processing of the surplus / non-marketable portion of the agricultural produce as near the farm gate level as possible, local storage systems, regional level large storage capacities along with the related digital-based inventory management systems, fast modes of transportation, farming and post-harvest value chains including the cold-chains etc. are likely to grow multi-fold. The agriculture in India will also witness the use of precision technologies including the use of mobile / digital-app based and GPS enabled crop information systems, weather forecasting, remote-sensing and other space technologies, artificial intelligence, block-chains and various other technologies. The multipurpose use of drones is poised to revolutionise the agriculture sector. These technologies shall encourage emergence of a massive start-up culture in agriculture sector apart from the Farmers’ Producer Organisations (FPOs). At the same time, the effective communication and transport systems are required for improving the individual’s personal and agricultural efficiency. A substantially large amount of investment credit is needed to meet these emerging demands. The RCCs are not yet prepared to meet these demands. Further, the farmers today approach the institutions where they get all their demands satisfied, whether short-term or long-term investment credit apart from various other banking services under one roof and with a much faster processing speed. The RCCs are not yet prepared to meet these demands under one roof. As a result, the RCCs are losing fast their customers in favour of other lending institutions having their presence on the rural financial space.  

There are several issues in the capacity development, capability building and competence evolution in the RCCs. The capacities of the human resource in the RCCs are confined to the small short-term loans and, largely, they are not in a position to take business decisions on the diversified credit portfolio and supervise it; hence, they tend to avoid business diversification of any kind. The financial capabilities of these institutions are also getting limited by and by. The growth of their deposit portfolio has ben decelerating over the years. As a result, their dependence on borrowings and refinance support is increasing to quite an extent and such resources are costly as compared to the deposits; accordingly, the cost of funds of RCCs is increasing gradually without a compensatory increase in earnings on resources thus having a telling effect on their profitability and viability. As per the RBI Report under reckoning, deposits constituted only 53.9 per cent during FY 2024-25; in contrast, the share of borrowings increased to 33.9 per cent. RBI has also noted that during 2023-24, growth in total resources of PACS decelerated to 9.8 per cent from 14.2 per cent a year ago. Furthermore, the borrowing capacity of the RCCs is also on the path of deceleration due to the fact that the capital funds of the RCCs (that are required to meet the prescribed capital to borrowing ratio) have not grown in the recent past commensurate with the increase in demand for the agricultural credit. Hence, due to the paucity of lending resources, the RCCs will not be able to have any quantum jump in their agricultural credit disbursal. These few indicators lead to a focus on the limiting financial capabilities of RCCs that will have a further negative impact on the market share of RCCs in agriculture sector in near future as compared to other financial institutions providing rural credit. Therefore, it is imperative that the RCCs should, without any further delay, take appropriate initiatives to adopt universal banking systems by and by through appropriate strengthening of their operations, systems and procedures.

Competence of the RCCs to gain a substantial pie in the rural financial space is also getting limited in comparison to their competitors in rural finance, thus allowing the latter to snatch the current and the potential customers and consequent loss in the market share. Their competence in digital banking is far from satisfactory. RBI has recorded in its Report under reference that in rural India, 46% of the population consists of wireless phone subscribers and 54% are active internet users. Further, more than half of FinTech consumers are from semi-urban and rural India and more than a third of digital payment users are from rural areas. Thus, there is vast potential for furthering digital penetration. Hence, the future credit customers in rural areas will be those having adequate competence for digital banking and they will obviously approach the institutions providing them digital banking facilities without the need for their visits to the brick & mortar branches. However, the competence and preparedness of the RCCs in respect of mobile telephone based and internet-based banking is largely at a very primitive stage, notwithstanding a few islands of excellence in the whole system. The RCCs face not only the limitations of the financial resources to adopt the technological advancements at par with their competitors but also inadequate access to the evolving technologies despite so much emphasis along with grants by Government of India for this purpose. NABARD and Government of India have now taken an initiative of setting up a Shared Services Entity, named Sahkar Sarathi Private Limited (SSPL) wherein the RCCs are required to join and avail of the shared services in banking technologies. However, the response of the RCCs to this initiative is at a lukewarm stage as of now. If the RCCs miss the bus now, the potential for the Fintech-based banking will be a far cry for them.

The public image of the RCCs as banking business entities is eroding fast on account of their current state of affairs. Not many new aspirants in rural credit sector are willing to adopt cooperatives as their banking partners. Their doors are also getting virtually closed with the passage of time for the current and emerging high-value agricultural customers who are bound to approach the commercial banks and other financial entities for their funding requirements for the reason that the RCCs are not in readiness to accept and assess their Projects requiring integrated finance, both for short-term / working capital and the capital investments. How to retain good borrowers and attract new borrowers would call for a strong strategy implementation by the RCCs put together to improve their public image. New business relationships have to be evolved by them while retaining the current clientele. Offering modern-day banking practices to the customers as also for improving upon their own internal strengths cannot be postponed by them any more.

The change in the RCCs required to gain a substantial amount of rural financial space cannot be feasible without the much-required governance reforms at all levels as also appropriate and on-going human resource development. Certain strong decisions have to be taken internally by all RCCs with due support of the cooperative leadership and the government machinery whatsoever it be, for breaking the current inertia and encouraging higher efficiency with future ready competence in the human resource at all levels.

RBI has rightly observed in its Report that technology adoption, business diversification and improving operational efficiency will be important for supporting sustainable growth of the co-operative sector. The rural financial cooperatives have to rise and realise that their past glories in the agricultural credit sector can be regained in future not without persistent efforts, willingness to take tough decisions and an inner strength to compete for the customer services.