Pre-budget wish list: Set up Credit Guarantee Fund for agri loans, says SBI

The SBI report said that this fund is expected to boost fresh agriculture credit multiple times

A research report by the State Bank of India (SBI) has called for setting up of a comprehensive Credit Guarantee Fund for agriculture and allied sectors to ensure coverage of all fresh farm loans with a capital outlay of Rs 11,320 crore over five years.

Run by a trust, the guarantee fund should cover Agriculture Value Chain Financing to work as credit accelerator, the SBI report said ahead of the tabling of Union Budget 2024-25.

The SBI report claimed that this fund is expected to boost fresh agriculture credit multiple times. It would create an institutional framework for enhancing demand for milk in mid-day meals for children and could provide an additional income stream for 15.8 million farmers.

The proposed fund could look at limit up to Rs two crore for agriculture and allied lending and Rs five crore for Farmer Producer Organisations (FPO) to accelerate fund flow.

The credit to agriculture and allied activities increased 3.5 times by March 2024 hitting Rs 20.7 trillion, against Rs six trillion in FY14, standing at 37 per cent of the output in the Agriculture and allied sectors.

“We must re-engineer the agri value chain financing, with a nudge towards collectivisation. The Reserve Bank of India could take a lead in this. It is an irony that the agri value chain has not been defined in the agri dictionary in India. This is must to provide adequate bank finance,” Soumya Kanti Ghosh, Group Chief Economic Adviser, said in the report.  

The opinion expressed is of SBI’s Research Team and not necessarily reflect those of the bank or its subsidiaries.

The report said that agriculture machinery/implements should be brought under the agriculture value chain (AVC). The financing for aggregation or procurement of farm produce to FPO and Farmer Producer Companies (FPCs) should also be covered under AVC.

The limit for collateral free loan under Kisan Credit Cards should be revised upwards to Rs three lakh to give benefit to small and marginal farmers. The regulatory limit under Warehouse Receipt Financing for FPOs/FPCs should be enhanced upwards from Rs 75 lakh, SBI report added.

The SBI report made a case for unconventional yet rewarding big bang approaches. A Livelihood Credit Card (LCC) encompassing a multi-purpose loan covering a rural household’s entire activities for ease of doing KCC could further reinvigorate rural demand.

There was a need to change the dynamics of the KCC ‘review & renewal’ mechanism with repayment of ‘interest alone’ being the criteria for renewal while simultaneously deepening use of technology by banks, it added.