Agricultural Credit in India

Agriculture credit is an important prerequisite for agricultural growth.

Rural credit system assumes importance because for most of the Indian rural families, savings are inadequate to finance farming and other economic activities.

Types of Agriculture Credit—

[a] Short-Term Loans—

It refers to the loans required for meeting the short-term requirements of the cultivators.

These loans are generally for a period not exceeding and repaid after the harvest.

Short term loans are provided for a period of less than 15 months.

For example loans required for the purchase of fertilizers, HYV seed, for meeting expense on religious or social ceremonies etc.

[b] Medium-Term Loans—

These loans are for a period up to 5 years.

These are the financial requirements to make improvements on land, buying cattle or agricultural equipment, digging up of canals etc.

[c] Long-Term Loans—

These loans are for a period of more than 5 years and are generally required to buy additional land or tractor or making permanent improvements on land.


Source of Agricultural Credit in India—

There are two broad sources of agricultural credit in India—

[1] Non-Institutional Sources

[2] Institutional Sources

Non-Institutional Sources— The non-institutional finance forms an important source of rural credit in India, constituting around 40 percent of total credit in India.

[a] Money-Lenders

[b] Other Private Sources

[c] Traders, landlords and commission agents


[2] Institutional Sources

National Bank for Agriculture and Rural Development (NABARD) is an apex institution established in 1982 for rural credit in India.

It doesn’t directly finance farmers and other rural people. It grants assistance to them through the institutions described as follows:

 [A] Rural Co-Operative Credit Institutions

Rural Credit cooperatives are the oldest and most extensive form of rural institutional financing in India.

The major thrust of these cooperatives in the area of agricultural credit is the prevention of exploitation of the peasants by moneylenders.

Primary Agricultural Credit Societies (PACS)—

These are organized at the village level.

These societies generally advance loans only for productive purposes.

The main objective of a PACS is to raise capital for the purpose of giving loans and supporting the essential activities of the members such as supply of agricultural inputs at cheap price, improving irrigation on land owned by members, encourage various income-augmenting activities such as horticulture, animal husbandry, poultry etc. In India, around 99.5 percent of villages are covered by PACs.

District Central Cooperative Banks—

These cooperatives are organized at the district level.

The PACS are affiliated to the District Central Co-operative Banks (DCCBs).

DCCBs coordinate the activities of district central financing agencies, organize credit for PACs and carry out banking business.

State Co-Operative Banks—

The DCCBs are affiliated to State Co-operative Banks (SCBs), which coordinate the activities of DCCBs, organize provision of finance for credit worthy farmers, carry out banking business and act as leader of the Co-operatives in the States.


[B] Commercial Banks—

Commercial Banks (CBs) provide rural credit by establishing their branches in the rural areas.

The share of commercial banks in rural credit was very meager till 1969.

The All India Rural Credit Review Committee (1969) recommended multi agency approach to the rural and especially agricultural credit. It suggested the increasing role of the CBs in providing agricultural credit.

Further, under the Social Control Policy introduced in 1967 and subsequently the nationalization of 14 major CBs in 1969 (followed by another six banks in 1980), CBs have been given a special responsibility to set up their advances for agricultural and allied activities in the country.

The major expansion of rural branches took place and CBs introduced Lead Bank scheme and district credit plans for rural areas.

Banks were asked to lend 18 percent of their total advances to agriculture within the quota of 40 percent of priority sector lending.

This expansion of rural credit remained till the late 1980s.

However, during late 80’s, CBs suffered huge losses due to waiving of agricultural loans by the government.

The financial liberalization process with the adoption of Narasimham Committee report in 1993 has necessitated the banks to focus on profitability and adopt prudential norms.

The proportion of bank credit to rural areas especially small borrowers has come down steadily.


[C] Regional Rural Banks (RRBs)—

RRBs are the specialised banks established under RRB Act, 1976 to cater to the needs of the rural poor.

RRBs are set-up as rural-oriented commercial banks with the low cost profile of cooperatives but with the professional discipline and modern outlook of commercial banks.

Increased coverage of districts by RRBs makes them an important segment of the Rural Financial Institutions (RFI).

The branch network of RRBs in the rural area form around 43 per cent of the total rural branches of commercial banks.

A large number of branches of RRBs were opened in the un-banked or under-banked areas providing services to the interior and far-flung areas of the country.

RRBs primarily cover small and marginal farmers, landless laborers, rural artisans, small traders and other weaker sections of the rural community.

In recent years Government has initiated reform process to improve the functioning of RRBs.


Trends in Agricultural Credit—

Increasing dependence on institutional Credit.

Over time, the flow of credit to agriculture and rural sector has expanded impressively.