The Economic Survey for 2023-24 revealed a concerning reality: India’s agricultural sector, which contributes 17.7 per cent to the Gross Value Added (GVA), has been stagnating due to erratic weather patterns and uneven monsoon distribution. This highlights a troubling fact—agriculture is lagging behind in growth compared to the manufacturing and services sectors, which is not good news. With many farmers already operating on razor-thin margins, this trend threatens their livelihoods and underscores the urgent need for strategic interventions. Without swift action, the sustainability of farming incomes is at risk, casting doubt on the future of agriculture for millions.

Implications of declining agricultural GVA

The decline in agricultural GVA signals mounting challenges for farmers in generating stable incomes, directly impacting the lives of millions. As agricultural productivity falls, many farmers increasingly depend on loans to sustain operations, buy equipment, and cover daily expenses. However, a decreasing GVA suggests that loan repayment will become more difficult, potentially trapping farmers in cycles of debt and financial instability.

Compounding this issue is the rise in agri-lending. While banks and financial institutions have expanded their agricultural loan portfolios, this surge brings its own challenges. The relationship between increasing agricultural lending and declining GVA creates a double-edged sword for both financial institutions and farmers. Financial support is essential for the sector, but it also requires stringent monitoring and risk management to protect both lenders and borrowers.

Rising lending and need for stricter monitoring

There has been rapid growth in agri-lending. According to RBI data, agricultural lending grew by 20.1 per cent in FY24, up from 15.4 per cent the previous year. Given this expansion, stricter monitoring mechanisms are crucial to ensure that loans are utilized effectively and that borrowers can repay. As agricultural incomes become increasingly uncertain, lenders must proactively identify potential risks within their agri-loan portfolios. This involves developing robust systems for evaluating collateral and continuously monitoring loans to mitigate the risk of defaults. The rising agri-lending and declining GVA make it essential for financial institutions to remain vigilant and adaptable, prepared to respond to evolving challenges within the agricultural landscape.

The double-edged sword of agri-lending

The simultaneous decline in agricultural GVA and the rise in agri-lending creates an unstable situation. While access to credit is essential for farmers to invest in improved practices, technology, and equipment, inadequate income increases the risk of loan defaults. This scenario puts financial institutions under strain, potentially leading to higher non-performing assets (NPAs) and threatening the overall stability of the banking sector. The challenge lies in striking a balance between supporting farmers through increased lending and ensuring the stability of the financial ecosystem. Lenders must develop strategies that not only promote agricultural financing but also include safeguards to mitigate the risks posed by the vulnerabilities of the agricultural sector.

Mitigating challenges – strategies for sustainable lending

To address the concerns surrounding agricultural financing, financial institutions and policymakers must adopt proactive strategies. Digitised land records can enhance transparency, streamline collateral verification, and speed up loan approvals. Additionally, implementing advanced monitoring systems using data analytics will help lenders track loan portfolios more effectively, identifying risks before they escalate.

Partnerships with fintech firms can leverage AI and machine learning to improve operational efficiency, while providing farmers with financial education empowers them to make informed borrowing decisions, ultimately enhancing repayment rates.

In this context, fintechs play a crucial role in reshaping agri-lending. By offering innovative solutions focused on digitization, data analytics, and real-time monitoring, fintechs help financial institutions navigate the complexities of agricultural lending. For example, fintechs provide advanced data-driven tools that assess creditworthiness and monitor loan performance, enabling lenders to make informed decisions while ensuring farmers have access to critical resources. As the agricultural sector adapts to changing GVA and lending dynamics, collaboration between fintechs and financial institutions will be essential to create a robust ecosystem that benefits both farmers and lenders, while maintaining responsible lending practices.

The author is Co-founder & CEO of AdvaRisk