Now Reading: Centre asks banks to standardise contract-farming loans in 6-12 months
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Centre asks banks to standardise contract-farming loans in 6-12 months
The government has asked public sector banks and the Indian Banks' Association to develop a standard loan product and uniform documentation for contract farming within 6-12 months. The framework envisages a model tripartite agreement among farmer, buyer and bank, with buyer payments routed through an escrow account. Lending decisions would be based on the reliability of the buyer's purchase agreement rather than collateral, and dispute resolution would reference state contract-farming legislation.
The proposals aim to strengthen India's farm-to-fork value chain, addressing gaps where only 7% of perishables are processed compared to 23% in China and 65% in the US. About 86% of operational landholdings are small and marginal, limiting investment in machinery and quality inputs. The country loses food worth approximately Rs 1.53 trillion annually, with horticultural produce accounting for nearly 50 million tonnes of post-harvest losses.
Other proposals include exploring credit guarantee mechanisms for agricultural value-chain financing and supporting district-level custom hiring centres for farm equipment. Financing for such centres is proposed as an MSME term loan appraised on projected utilisation across the crop calendar. Mint's queries to the IBA, 12 PSBs, NABARD and two ministries remained unanswered.
Indian Opinion Analysis
Standardising contract-farming loans addresses a core bottleneck: small and marginal farmers, who hold 86% of operational land, lack the collateral banks demand, while processors and aggregators need assured supply. The escrow-based payment waterfall mimics the model used in infrastructure and real estate financing, shifting risk assessment from the farmer's land title to the buyer's creditworthiness. If implemented, this could unlock credit for the 240 million workers in agriculture, but the six-to-twelve-month timeline is ambitious: the IBA must reconcile divergent state contract-farming laws and the Reserve Bank of India's priority sector lending norms. The key signal to watch is whether the framework includes a standard credit guarantee cover, without which banks may still reject applications from first-stage processors lacking fixed assets.
Source: livemint.com
This story was synthesised by AI from the source linked above. Methodology and corrections.
