The major policy towards agricultural credit has been its progressive institutionalisation with following objectives–
- timely and increased flow of credit to the farming sector;
- reduction and gradual elimination of money lender from the rural scene;
- making available credit facilities to all the regions of the country to reduce regional imbalances; and
- provision of larger credit support to areas covered by special programmes like pulses development project.
Need for Finance
- Types of finance/credit that Indian agriculture requires may be classified based on two factors–
- Based on Time– It is of three types– short term, medium term and long term.
- Short term finance/loan is usually required for current activities of production such as purchase of seeds, fertilisers, feed and fodder, marketing of agricultural produce, payment of wages, taxes, rents and a variety of consumption and unproductive purposes.
- These loans are of a period upto 15 months and are usually repaid fully out of current income of farmers.
- Medium term loans are usually required for purchase of cattle, improvement of land, repair of wells and implements etc.
- These loans are for a period extending from 15 months to five years and repayment, along with interest, is also spread over a period extending up to five years.
- These loans are usually provided by money lenders, relatives of farmers, cooperative societies and commercial banks.
- Long term loans are used for activities which contribute to agricultural production for many years such as reclaiming new lands, digging tubewells, purchase of machines like tractors, harvesters, etc. and repayment of old debts.
- These loans are for a period of more than five years and may be as long as 15-20 years or more and their repayment is also spread over a long period. These loans are usually provided by land development banks (LDBs).
- Based on Purpose– It is classified into three types – productive, consumption needs and unproductive. Productive need loans include those which directly affect agricultural productivity.
- Such loans are used for purchase of seeds, fertilisers, manures, machines, livestock, digging wells, payment of wages etc.
- Consumption loans include loans during drought, flood, between marketing of produce and harvest of next crop, etc. for consumption needs. Unproductive purposes loans include loans for litigation, marriages, social ceremonies etc.
- Both consumption and unproductive purposes loans are not provided by institutional agencies and hence farmers seek assistance from money lenders. Both these types of loans are difficult to repay because they do not contribute to any productivity of farmer.
Sources and Finance
Sources of agricultural finance may be–
- Comprises money lenders, relatives, traders, commission agents and landlords.
Institutional Sources– Comprises
- scheduled commercial banks, and
- regional rural banks (RRBs).
- State governments also provide 'taccavi loans' to farmers besides extending financial support to State Co-operative Banks (SCBs) and Land Development Banks (LDBs). Primary Agricultural Credit Societies (PACs) provide mainly short and medium-term loans and LDBs long-term loans.
- Commercial banks, including RRBs, provide both short and medium-term loans for agriculture and allied activities.
- National Bank for Agriculture and Rural Development (NABARD), the apex institution at the national level for agricultural credit, provides refinance to the above mentioned agencies.
- The Reserve Bank of India as the Central Bank of the country gives overall direction to rural credit and financial support to NABARD for its functioning.
Co-Operative Credit Societies
- Co-operative movement was initiated in India in 1904 through the establishment of co-operative credit societies.
- These societies, formed to relieve the rural people of indebtedness and promote thrift, are the cheapest and best source of rural credit.
- The co-operatives in India have a three tier structure—
- lowest tier– Primary Agricultural Credit Societies (PACs) at village level;
- middle tier– District Central Co-operative Banks (DCCBs) at district level; and
- uppermost tier– State Co-operative Banks (SCBs) at state level. These societies usually provide loans for productive purposes.
- The SCBs advance loans to DCCBs, which in turn provide loans to PACs which are in direct contact with farmers. SCBs also provide link between the RBI and the money market.
National Co-Operative Bank of India
- In 1993, National Co-Operative Bank of India (NCBI), recommended by Khurso Committee, was registered under Multi-State Co-operative Societies.
- The bank, owned and operated by co-operative credit societies, serves as a national apex institution for all co-operatives and primarily provides leadership in the area of banking operations to the state apexes.
- Besides mobilising deposits at all-India level which the state systems are not in a position to do, it does all types of banking business including foreign exchange, makes loans and advances, acts as an apex co-operative bank at national level and provides leadership in all matters of co-operative interests, including development and promotional activities.
- It also functions as a national data clearing centre for the co-operative system.
Land Development Banks
- Land Development Banks (LDBs) were set up for providing long term credit for:
- effecting permanent improvements in land (e.g. making wasteland fit for cultivation, digging wells or tubewells etc.);
- purchasing agricultural implements; and
- repaying old debts. Starting with pure land mortgage banking in 1919, the LDBs have now become agricultural and rural development banks and their role and participation in providing assistance has increased.
- LDBs now also grant credit for fulfilling needs of rural cottage industries and small enterprises in rural areas; i.e., non-farm activities.
- The loans by LDBs are generally granted against security of agricultural properties. The LDB's structure is non-uniform in the country.
- It generally consists of the central land development banks (generally one for each state) and primary land development banks (PLDBs).
- The share of commercial banks in rural credit was only 0.9% in 1951-52 and 0.7% in 1961-62. This shows that commercial banks remained indifferent to the credit needs of farmers. It was partly to remedy this state of affairs that 14 major commercial banks were nationalised in 1969.
- This was followed by nationalisation of six more banks in 1980.
- Commercial banks now extend credit to agriculture both directly and indirectly.
- Direct credit is extended to farmers through providing advances for the distribution of fertilisers, other inputs etc. and also through financing primary agricultural credit societies.
- Financing of investment in agriculture is among the major farm credit activities of banks.
- Banks also provide credit for infrastructure such as to units providing services for warehousing, processing, marketing, transporting and repairing of tractors etc.
- For rural lending the banks have now adopted a new strategy called 'service area approach'.
- They sponsor RRBs to extend credit to small and marginal farmers and rural artisans to save them from the clutches of money lenders. The commercial banks are financing the integrated rural development programme (IRDP) running throughout the country.
- These banks are participating in Small Farmers Development Agencies (SFDA) scheme set up to identify small farmers and ensure that inputs, services and credit needs are provided to them.
Regional Rural Banks
- Regional rural banks (RRBs) were first set up in 1975.
- The main objective of RRBs is supplementing the efforts of commercial banks and co-operatives in extending credit and other facilities to weaker sections of the rural community– small and marginal farmers, agricultural labourers, artisans and other rural residents of small means– so as to develop agriculture, trade, commerce, industry and other productive activities in the rural areas.
- NABARD has the responsibility for establishment of RRBs, laying down policies, overseeing their performance, providing refinance facilities and attending to their problems.
- RRBs though basically scheduled commercial banks, differ from the latter in following respects:
- area of RRB is limited to specified region comprising one or two districts of a state;
- RRBs grant direct loans only to small and marginal farmers. agricultural labourers, rural artisans etc;
- lending rates of RRBs are less than the prevailing rates of cooperative societies in any particular state; and
- sponsoring banks and RBI provide many subsidies and concessions such as managerial and financial assistance to RRBs and lower rates of interest on RRB's borrowing from sponsor banks.
Most of these have arisen from the concept as well as structure of RRBs–
- Multi-agency control has contributed to non-uniformity in the functioning of RRBs. It has resulted in lack of support from state government and lack of proper monitoring by sponsor banks;
- Inherent in the concept of RRB is the constraint of restricted area of operation and restricted clientele i.e. specific target groups;
- Lack of proper systems and procedures which could have avoided or minimised the scope for overdues right from the start;
- Urban and pro-rich bias seems to prevail in the RRB staff poor— which has not evoked confidence in the rural
- Organisational problems get compounded by the unplanned and unwise growth of these banks under pressure from the state government.
Recovery (of loan) position of RRBs is bad. The various causes of poor recovery are– defective loaning policies;
- weak monitoring and supervision;
- apathy towards recovery;
- failure to link lending with development and to ensure proper end use of land;
- political interference;
- willful defaults;
- droughts and floods; and
- lack of legal and administrative support from State governments in loan recovery.
Non-Viability due to Mounting Losses
The causes for this are—
- RRBs are so structured as to confine their lending to weaker sections where interest earned on loans is lowest;
- Lead margins coupled with cost of servicing a large number of small accounts, add to the losses;
- In the absence of loans which could yield higher returns, RRBs do not have any scope of cross subsidisation;
- Opening of RRB branches year after year has added to overhead costs without proportionate increase in income;
- Non-availability of competent and trained staff;
- Economic environment of many of the RRBs branches is not satisfactory.
- The National Bank for Agriculture and Rural Development (NABARD), set up in July 1982, took over from RBI all its functions as an apex body, in the field of rural credit. NABARD is now the apex bank for rural credit.
- The Agricultural Refinance and Development Corporation (ARDC), set up in 1963 to meet the long-term credit needs of the rural areas, has also been merged with NABARD in 1982.
- The authorised share capital of NABARD is Rs. 500 crores and paid up capital is Rs 100 crores (contributed equally by RBI and GOI).
NABARD plays a dual role— as an apex institution (inherited this role from RBI) and as a refinance institution (inherited this role from ARDC) providing refinance facilities to all banks and financial institutions lending to agriculture and rural development.
The main functions of NABARD are–
- As an apex body looks after rural credit requirement.
- Has authority to oversee the functioning of the cooperative sector through its agricultural credit department.
- Provides short term (upto 18 months) credit to SCBs for seasonal agricultural operations (crop loans), marketing of crops, purchase and distribution of fertilisers and working capital requirements of Cooperative Sugar Factories.
- Provides medium-term credit (18 months to 7 years) to SCBs and RRBs for approved agricultural purposes, purchase of shares of processing societies and conversion of short-term loans into medium-term loans in areas affected by natural calamities.
- Provides medium and long-term credit (not exceeding 25 years) for investments in agriculture under schematic lending to SCBs, LDBs (now known as State Co-operative Agricultural and Rural Development Banks), RRBs and commercial banks.
- Provides long-term assistance in the form of loans to state governments (not exceeding 20 years) for contribution to share capital of cooperative credit institutions.
- Inspection of district and state cooperative banks and RRBs.
- Maintains a research and development fund for promoting research in agriculture and rural development.
- Maintains a Rural Infrastructure Development Fund (RIDF), set up in 1995, for quicker completion of ongoing rural infrastructure projects.
- The National Bank is performing the various functions smoothly and efficiently. Like ARDC, NABARD has vigorously continued its efforts in promoting investments in agricultural sector in less developed/under-banked states.
- It is strengthening and reorganising the cooperative structure in the country.
- It has formulated a set of guidelines for planning the future development of reorganised societies in a phased manner. It is also working towards an effective integration of cooperative credit institutions.
- It is constantly reviewing the rehabilitation programme of those Central Cooperative Banks (CCBs) who have been identified as weak and who were being helped to rehabilitate themselves.
- It is also helping in rehabilitating as well as improving the organisation of State Development Bank and Primary Land Development Banks.
- NABARD does not deal directly with farmers and other rural people but grants assistance to them through cooperative banks, RRBs, etc.
- It maintains two funds: National Rural Credit (Long-term operations) Fund and National Rural Credit (Stabilisation) Fund. Central and State Governments contribute to the funds.