Earlier this week @Mari and I were discussing why farmers are often prone to debt traps. Why is it that all around us we see distress due to obtaining credit (especially for the small and marginal farmers)?
And we were quite interested to understand various perspectives and hence we reached out to Mr Madhu Chandan (CEO, Organic Mandya) and Mr Shashi Kumar (Founder, Akshaykalpa). Noting their thoughts here.
Perspective 1 - Mr Madhu Chandan
Supply chain, unpredictable nature of crop yields, price fluctuations are the least of the problems farmers face, the fundamental problem is unique and most of us don’t realize this. Modern education has snatched away sustenance from our Farmers, back in the day Farmers always remained as producers which meant they not only produced food grains but also that never spent a single dime on the following:
Marriage (marriages were conducted in front of a temple/religious place or their houses) - Today conducting a marriage has become a matter of prestige, on average even a poor farmer spends 15 - 25 Lacs. If you consider 2 marriages per family they would spend about 30-50 Lacs. Most Farmers sell their lands or take loans for this.
Education - back in the day most of the farmers went towards farming and studied in free Government Schools. Today even the poorest of the Farmer wants to send their kids to private schools, just because the Government Schools in Karnataka teaches in Kannada medium and the parents feel that their kids won’t be able to compete with the English medium kids. Each year the Farmer spends about Rs 50,000 per child and 99% of them have 2 kids and they would need about Rs 1,00,000. So they end up paying an average of 25 Lacs until the Kid completes the college degree, for 2 kids it comes up to about 50 Lacs.
Health - back in the day organic fresh foods grown for consumption meant that the immune system was great. 1 in 1000 farmers had to see a doctor and for free of cost (in return for the service offered by the doctor, Farmer used to give some Paddy or Ragi). But today due to the chemicals in foods, the quality of food has deteriorated, and they end up paying Doctor fee + Lab Tests / Scanning Fee (every doctor recommends Lab Tests & Scanning) + Medicine. A survey on this subject in a village called Keelara found out that on average farmers spend about Rs 75,000 - Rs 1,50,000 per annum on health-related expenses.
Farmers have become Consumers - Today’s Farmer buys all the household items from the market - Soaps, Hair Oil, Shampoo, Beauty Creams, Tooth Paste, Washing Utensils, Meat, Snack, Greens-Vegetables-Fruits, Pulses, Grains, Cooking Gas, etc. All these things were produced at homes for free. For example:
Soaps = Soapnut powder
Hair Oil = Homemade Castor Oil or Coconut Oil (Castor Seeds/Coconuts were grown at their farms)
Tooth Paste = Neem Sticks or Activated Charcoal or Salt
Washing Utensils = Lemon from their backyard or activated charcoal from their wood fire cooking area or tamarind from their farm
Meat = Farmers used to rear goats, sheep & chicken at their homes
Beauty Creams = Turmeric paste or butter from the milk
Greens-Vegetables-Fruits = Grown in their backyard
Pulses & Grains = They used to grow (multi-cropping), today’s Farmer has become mono-cropping commercial Farmer and in Mandya, he mostly grows one type of crop - Sugarcane or Paddy.
Cooking Gas = They used to cook their meals using firewood which was available from their farmlands, today cooking gas costs about Rs 700 per month.
Farm Inputs - Today’s Farmers buys and uses Chemical Fertilizers, Pesticides, Growth Hormones, etc. Back in the days, they used to prepare all farming inputs from their cattle for free.
Most of our Farmers are marginal Farmers which means they hold less than 3 acres of land and on top of it the mono-cropping practices like Sugarcane, Paddy, Wheat, Arecanut, Coconut, is not helping the situation. On average, per acre income from these crops is about Rs 80,000 - Rs 1,00,000 per annum and if you take out the farming input and labour expenses they would roughly earn about 25K-35K per annum.
If I am a Farmer with 2 Acres, with 2 kids - In a year I would be spending about 1 Lac for education, 75K on Health Expenses, 1.2 Lacs for consumption, and if I have to save for their marriages I would have to save 1 Lac per year (total expense of 3.95 Lacs per annum) and my income from 2 acres is about Rs 70,000 (best case scenario). Now we see why farmers fall into a debt trap. Most of us think that Farmers have become poor because of low yield or they not getting good prices for their products but that’s not the reason, the above reasons have made them poor and they will continue to become poor if we don’t address this on time.
Perspective 2 - Mr Shashi Kumar
Direct Credit to the sector (important to note) has many challenges. That too, when lending to farmers from commercial banks has led to defaults. For example, commercial banks lending to cow (one cow/two cow) purchase programs have a 90% default rate.
The above makes most commercial banks and financial institutions (NBFCs, Small Finance Banks, etc.) take the indirect lending route through procurement institutions/agencies (sugar is a great example) as a preferred choice, and while microfinance institutions continue to lend in the SHG and JLG models (or some hybrid models), and helps in livelihoods, not beyond that.
Why are Farmers in Debt Trap?
Performing Asset Creation
Credit for asset creation that performs and generates cash is abysmal; for example, development loans have a longer horizon and are intended to cushion farmers to invest in asset creation. For instance, by hedging around the farm and bunding or construction of shed, he/she can avail a development loan at a very cheap rate, as low as 7%. But he has other cash requirements like hand loans, manages the family, son’s education, bike petrol, etc. And generally, more than 50% of the development loan gets diverted. Hence the asset never got created, so he compromises on the future cash flows and gets into to typical debt trap to borrow again and again.
Credit card Misuse
Credit Card facility gets used for non-agricultural purposes and the farmer never puts money back into his account, gets into defaults.
Above borrowing gets out of hand when commercial banks refuse to lend after default and farmers start borrowing at a higher rate from local lenders and get into a big trap.
Where is the problem?
The farmer never believed (never will believe) in asset creation models, as it has long gestation to pay back, and his immediate cash requirements supersede the long-term asset creation. Also, his perception of long-term asset creation is subjective. For example, he would prefer to dig a borewell and irrigate his coconut garden rather than bunding and trenching to avoid rainwater runoff. In the first case, he switches on the borewell and sees rea water every day, but in the second case, what is gone after rain, what next?
Agri value chain providers – selling many unwanted things, starting from pesticides to equipment, and sales network is very strong for farmers to ignore. Unrealistic imaginations on what farmer needs and develop products to take away farmer profits.
Procurement Companies – Sell a lot of things. For example, why do companies sell feeds to farmers? Why are they NOT teaching farmers to grow feed and fodder themselves and ration balance? External input-based farming takes away 50% of the profits for the farmers.
Financial institutions’ inability to work with Farmers. Financing is one problem, post that it needs tight monitoring and control till the farmer understands that money borrowed for agriculture purpose need to be used for the stated purpose.
Failure of Extension/Out Reach Programs – We need to go to the farmer, work with him, and understand his problem from end to end. Unfortunately, knee jerk reaction and solutions like using chemicals are short-term and with long term pains.
Market linkages – Linking to farmers on what market needs and guarantee that their entire production will be purchased at a given pre-agreed price is essential. He needs to be shielded from market fluctuations.
Is there a light at the end of the tunnel?
Linking farmers’ produce to market requirements – both quantity and quality is very crucial. He should never be exposed to market fluctuations.
Upstream procurement companies/institutions should work with him and build substantial extension and outreach programs that link Credit, Market, Productivity, and farmer profits in the key.
Credit facility to be extended to support immediate cash flows only. That way, the farmer sees immediate results of money in his hand from the Credit he has availed from the bank; Upstream procurement companies should encourage farmers to invest their surplus cash in asset creation and avoid the debt trap.