Critical Credit: Why is Northeast seeing low institutional credit absorption?

In the Union Budget 2024, Finance Minister Nirmala Sitharaman announced an increase in the Kisan Credit Card (KCC) loan limit from ₹3 lakh to ₹5 lakh, aiming to expand institutional credit access for farmers. Since its launch in 1998, the KCC has played a key role in providing short-term, low-interest credit to farmers across India.

The short-term loans are given for a production period of 18 months and as working capital to small and marginal farmers, as opposed to term loans, which are given for a production period above 18 months.

Nationally, agricultural credit has grown significantly, with over ₹1,44,673 crores disbursed between 2014 and 2024. Yet, this expansion has been uneven. While the North, West, and Central regions have seen high KCC adoption—covering 86% of farmers as per the 2015–16 Agriculture Census—the uptake in the eastern and northeastern states remains low.

The North East Region (NER) presents a unique case. Despite having 3.8% of India’s population and 2.8% of its gross cropped area, it accounts for just 0.6% of total KCC loans. The usual reasons cited are difficult terrain, weak banking infrastructure, and unclear land records. But there may be another factor—cultural mismatch. Unlike much of India, where patriarchal structures often dictate land ownership and financial decisions, many communities in the Seven Sisters follow matrilineal or communal landholding traditions.

As Nobel Laureates Abhijit Banerjee and Esther Duflo (2010), in their article “Giving Credit Where it is Due?”, have indicated, effective credit models must align with local socio-economic structures. Yet, the prevailing system seems to assume that every farmer is a landowning male with a neat stack of documents—a notion that does not quite fit a region where grandmothers often hold more economic authority than land registry offices.

This disconnect raises the question: are formal banking systems simply unprepared for a credit landscape that does not fit into their patriarchal blueprints? Financial institutions are designed for individual landowners pledging collateral, not for societies where land is inherited through maternal lineage and decisions are often community-driven.

The paperwork-heavy process banks rely on might be efficient in the Gangetic plains, but in a region where informal networks have long been the primary financial safety net, it can feel as out of place as a fixed deposit scheme at a village barter market.

Further, as the economist duo Banerjee and Duflo (2010) have remarked, institutional credit in the agriculture sector is going to be an interesting field to watch out for, because financial inclusion is not just about disbursing loans but ensuring they actually serve the people they are meant for.

This article will explore why institutional credit uptake in the Northeast remains low despite national-level efforts and whether new approaches—digitization, policy shifts, or localized financial models—can bridge the gap.

Digitization of the Modified Interest Subvention Scheme (MISS) was introduced to streamline agricultural credit disbursement and reduce delays. In theory, it should have improved access for remote regions like the Northeast.

However, implementation challenges have kept the benefits uneven. Banks and financial institutions struggle with incomplete land records, and many farmers—especially in tribal areas—lack the formal documentation required for loan approvals. The push for digital tracking also assumes reliable internet connectivity, which remains inconsistent in several NER states. As a result, while the system has worked well in more connected parts of the country, the Northeast has seen limited gains.

Adding to the challenge is the mismatch between policy targets and ground realities. While national-level credit flow has increased, reports indicate that in NER, actual loan disbursement under various agricultural credit schemes falls far short of allocations.

For example, in FY 23–24, a total of ₹1,950 crores was allocated to the region, but only ₹25.51 crores were actually disbursed. Further, high non-performing asset (NPA) rates—ranging from 15% of KCC in Sikkim to 48% in Meghalaya—have made banks hesitant to lend, creating a cycle where credit access remains limited and farmers turn to informal sources.

Institutional hesitancy is also reinforced by land ownership patterns. Large parts of the Northeast follow customary landholding systems, where land is communally owned or inherited through matrilineal traditions.

Since many of these holdings are not formally recorded, they do not meet collateral requirements for loans. This leaves a significant portion of the region’s farmers outside the institutional credit net. Unless policies account for these variations, financial inclusion will remain an uphill task.

Alternative models of agricultural credit, by emphasizing the role of flexible, community-driven financial systems in supporting small farmers, could offer solutions. Adapting such models to the Northeast—where cooperative structures already exist in various traditional forms—could help bridge the gap between policy frameworks and local realities.

The impact of this disconnect is evident in budget utilization trends. Reports analyzing budget disbursed and actual expenditure made by DA&FW show (chart).

Source: Department of Agriculture and Farmer’s Welfare (2024)

In FY 2023–24, the budget estimate for the Modified Interest Subvention Scheme (MISS) stood at ₹1,950 crore. However, only ₹25.51 crore was released by the Government of India (GoI), of which a mere ₹1.31 crore was utilized—leaving ₹1,924.49 crore surrendered.

The trend continued in FY 2024–25, with an allocation of ₹1,900 crore, out of which just ₹22.24 crore was released and ₹1.17 crore utilized, while ₹1,877.76 crore remained unspent. In financial planning terms, this is akin to stocking up on fertilizer but never actually using it—except in this case, the fields in question are the credit-starved farming communities of the Northeast.

Despite constituting 3.8% of India’s population and having 2.8% of the gross cropped area, the North East Region (NER) accounts for only 0.6% of KCC loans. PM-Kisan beneficiary coverage is similarly low at just 0.74%.

The challenge is compounded by alarmingly high Non-Performing Asset (NPA) rates, ranging from 15% in Sikkim to 48% in Meghalaya. If these figures suggest that the formal credit system in the region has not quite taken off, it is because—well, it has not. Unlike other parts of the country, where financial institutions actively promote schemes, here the formal credit system seems more of a well-kept secret than a widely adopted initiative.

Several structural issues have been identified by think tanks as barriers to institutional credit. The most prominent is the lack of a formal land tenure system, making it difficult for banks to secure collateral.

While mechanisms such as Land Possession Certificates (LPCs), a letter of comfort or a letter from local tribal groups, or endorsements from farmer’s clubs have been proposed, their adoption remains inconsistent. Local governments have been directed to issue ownership or possession certificates based on cadastral surveys where conferring transferable rights proves difficult, but progress has been slow.

Aadhaar-based authentication has also introduced new complications. Until 2022, NER was exempt from Aadhaar linkage requirements under RBI rules. However, this exemption has been lifted, meaning that farmers must now upload Aadhaar details to access KCC loans and modified interest subvention.

The GoI argues that this move is necessary to prevent duplication and multiple accounts per farmer. While this rationale may hold merit, in practice, it has created a bottleneck—many farmers in the region, previously not required to have Aadhaar for such schemes, now face documentation hurdles that delay or block their access to credit.

This raises legal questions as well: Section 7 of the Aadhaar Act states that benefits cannot be denied due to lack of an Aadhaar number, and any scheme making linkage mandatory must formally notify the public. As of now, there is no evidence of such a notification in any public forum.

Instead of actively expanding outreach programs and improving delivery mechanisms for the MISS—which could provide much-needed credit access in the Northeast—the scheme is now following in the footsteps of PMFBY by seeking a waiver on the mandatory utilization of funds in the region.

Under existing RBI guidelines, 10% of the total MISS budget is earmarked for NER. However, proposals are now in the pipeline to exempt this requirement, citing the argument that MISS is a “demand-driven” scheme.

On paper, demand-driven policies sound efficient, but in practice, they often function like self-fulfilling prophecies: when no effort is made to generate awareness or facilitate access, naturally, demand remains low.

The exemption proposal raises concerns about the central government’s commitment to improving credit access for small and marginal farmers in NER. The very purpose of MISS is to empower those excluded from formal financial institutions and to provide an alternative to informal, arbitrary moneylending networks, which often operate on exploitative terms.

Redirecting the 10% allocation away from the Northeast signals a lack of urgency in addressing financial exclusion in a region where land and resources are frequently targeted for extraction by large state and private projects.

The argument that fund utilization in NER is “not feasible” reflects a broader pattern: policies remain static unless political pressure or voter numbers push them up the priority list. Unfortunately, farmers in the Northeast—despite their critical role in biodiversity conservation, sustainable agriculture, and regional food security—have yet to receive the sustained institutional attention that their counterparts in other regions often take for granted.

NITI Aayog has called on the implementing department to produce reports explaining the large-scale surrender of funds from the Northeast.

This suggests that proposals to exempt the region from the mandatory 10% allocation may have been based more on statistical assumptions than on actual ground-level investigations. If land tenure issues are indeed a major obstacle, as various studies indicate, a targeted approach focusing on Self-Help Groups (SHGs) and Joint Liability Groups (JLGs) could offer a solution—allowing for community-based collaterals rather than relying solely on individual land ownership.

Interministerial recommendations from the Department of Economic Affairs (DEA) and the Ministry of Development of North Eastern Region (DoNER) have also questioned the rationale behind the exemption proposal.

Both agencies have emphasized the need to strengthen financial institutions in the Northeast—improving infrastructure, increasing resources, expanding outreach efforts, and incentivizing timely loan repayments. Rather than a blanket exemption, DoNER has expressed its concern over the proposed flexibility clause to divert its usage towards the general category if the assigned budget remains unutilized. It is keen on ensuring that the mandate is left intact so that the region’s rightful share of funds is not abandoned.

Community-based lending mechanisms need further support. Facilitating SHGs and JLGs in accessing credit through collective guarantees, rather than placing the burden on individual borrowers, would be a practical step forward. NABARD already offers grant support to institutions that connect SHGs to banks for credit access—an avenue that could be expanded rather than continually debating whether demand exists.

Additionally, the cooperative banking system in the region requires strengthening. Primary Agricultural Credit Societies (PACS) serve as a crucial link between farmers and financial institutions at the village level, providing a more accessible and locally driven credit mechanism.

With the right institutional backing, PACS could play a larger role in ensuring that farmers receive the financial support they need—without navigating the bureaucratic maze of commercial banking.

The persistent underutilization and surrender of allocated funds in the Northeast highlight systemic gaps in credit accessibility rather than a lack of demand.

Structural issues—such as land tenure complexities, weak financial infrastructure, and poor investments in outreach, training, and mobilization—have hindered effective implementation of schemes like MISS. However, rather than exempting the region from mandated allocations, efforts should focus on targeted solutions: strengthening financial institutions, expanding SHG- and JLG-based lending, and reinforcing cooperative credit systems like Primary Agriculture Credit Societies (PACS).

Inter-ministerial bodies have rightly called for deeper investigation and a more flexible approach instead of blanket waivers.

The way forward lies in improving outreach, easing documentation barriers, and ensuring financial inclusion mechanisms are tailored to the region’s unique socio-economic landscape. Sustainable credit access in the Northeast will not come from reduced commitments but from a more thoughtful, region-specific implementation of existing policies.

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