Kisan credit card programme: Expanded access to credit or expansion of credit?

The welfare implications of this policy remain ambiguous

A farmer harvests cotton in his field at Rangpurda village in Gujarat

A farmer harvests cotton in his field at Rangpurda village in Gujarat

Somdeep Chatterjee
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 very little empirical evidence on the success of the programme and its impact on intended beneficiaries, that is, farmers and rural households. My recent study seeks to bridge this gap in research on this policy.

The programme was first announced in the budget speech of the then Finance Minister of India in 1998 and took shape 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 (Planning Commission of India, 2002). 

Initially, KCC 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. In recent years, it has 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 options for the already unconstrained. 

In a NABARD report, Samantara (2010) points out how prior to KCC, the multi-agency approach of borrowing and lending in agriculture led to farmers getting caught up in the rungs of bureaucracy. In the only other evaluation of KCC that I know of, Areendam Chanda in his 2012 International Growth Centre (IGC) working paper, analyses post-1998 data and finds no evidence of any impact of this policy on state- or district-level agricultural productivity.

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. The cards are usually valid for three years, with the possibility of renewal upon successful repayment of loans. Repayment cycles usually aligned with crop cycles (one year for most crops; 18 months for sugarcane). 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. So, while these cards were possibly intended to relax constraints on borrowing for poor farmers to enable them to enhance agricultural productivity by making requisite investments, in practice, they may alter their consumption expenditures only. In line with these apprehensions, recent media 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

I compare average rice production and technology adoption before and after the implementation of the programme; in districts with a high concentration of bank branches as of 1998 to the ones with low concentration of bank branches; in states where the ruling party/coalition was a part of the ruling coalition at the Centre at the time to those where this was not the case. The idea is that the interaction of these factors captures the intensity of potential exposure to the programme. 

Using district-level data from 1986-2011, I find that rice production increased by almost 88,000 tonnes more (close to 33% of average production in the economy) in high-exposure areas vis-à-vis low-exposure areas. It is possible that prior to KCC, some of the inputs that accelerate production were not being used due to credit constraints, and KCC relaxed those constraints. As supportive evidence, I find that area cropped under high-yielding variety (HYV) of seeds increased substantially more in areas exposed to the programme. 

Impact on borrowing patterns

I supplement the above by analysing India Human Development Survey (IHDS), 2005 data, and find that households in high-exposure areas are not any different from those in low-exposure areas in terms of likelihood to borrow, total amount of borrowing, or choice of creditor (banks/others). This suggests that KCCs perhaps did not lead to new access to credit. Households exposed to KCCs got fewer but larger loans. Hence, while it is unlikely that KCC led to relaxation of credit constraints, it is plausible that already unconstrained households having access to credit substituted other sources of borrowing with this cheaper alternative; they began to borrow in bulk, with total number of loans reducing and loan sizes increasing. Along these lines, I also find that the above effects are magnified for households already having access to credit from banks, providing further evidence in favor of ‘expansion’ of credit and against ‘access’ to credit. 

Concluding thoughts
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 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, if required.

Published with permission from Ideas for India (, an economics and policy portal. Read the original article here

First Published: Nov 03 2016 | 1:39 PM IST

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