UNIT 2 – AGRICULTURAL FINANCE

AGRICULTURAL FINANCE
Agricultural finance refers to the financial products and services that support the agricultural
sector. This includes loans, credit, insurance, and other financial products that help farmers and
agricultural businesses manage risk, invest in new technologies, and expand their operations.

Agricultural finance is essential for the growth and development of the agricultural sector, as it
provides farmers with the capital they need to purchase equipment, seed, and other inputs, as
well as to pay for labor and other operating expenses. Agricultural finance also plays a critical
role in managing risk, as it enables farmers to hedge against price fluctuations, weather events,
and other factors that can impact their crop yields and profitability.

In addition to traditional banking and lending services, there are also specialized agricultural
finance institutions and programs that cater specifically to the needs of farmers and rural
communities. These may include government-backed loan programs, agricultural cooperatives,
and microfinance organizations that provide small loans to farmers and rural entrepreneurs.

Overall, agricultural finance is a key driver of economic growth and development in rural areas,
helping to support the livelihoods of millions of farmers and agricultural workers around the
world.

AGRICULTURAL FINANCE IN INDIA

Agricultural finance in India plays a crucial role in supporting the country's vast agricultural
sector, which employs more than half of the population and accounts for a significant share of
GDP. The Indian government has implemented several policies and programs aimed at
providing farmers with access to affordable credit and other financial services.

The primary source of agricultural finance in India is the formal banking system, including
nationalized banks, regional rural banks, and cooperative banks. These institutions provide a
range of credit products, including crop loans, term loans for agricultural infrastructure
development, and loans for the purchase of farm machinery and equipment. The government
also operates several agricultural credit schemes, such as the Kisan Credit Card scheme, which
provides short-term loans to farmers at subsidized interest rates.

In addition to formal banking institutions, there are also specialized agricultural finance
institutions in India, such as the National Bank for Agriculture and Rural Development
(NABARD), which provides refinancing facilities to banks and other financial institutions that
lend to agriculture and rural development sectors. NABARD also operates a number of direct
lending programs for agriculture, including the Dairy Entrepreneurship Development Scheme
and the Micro Irrigation Fund.

Microfinance institutions (MFIs) have also emerged as an important source of agricultural

finance in India, providing small loans to farmers and rural entrepreneurs who may not have
access to traditional banking services. The government has established several MFI-focused
programs, such as the Rural Infrastructure Development Fund, which provides low-cost loans
to MFIs for lending to rural borrowers.
Overall, while there are still challenges to providing adequate agricultural finance in India, the
government and private sector have made significant efforts to improve access to credit and
other financial services for farmers and rural communities.

CLASSIFICATION OF AGRICULTURAL FINANCE ON BASIS OF TIME

Agricultural finance can be classified on the basis of time into two categories: short-term and
long-term financing.

Short-term financing refers to the credit facilities that are provided for a period of up to one
year. These credit facilities are used for meeting the working capital requirements of farmers,
such as purchasing seeds, fertilizers, pesticides, and other inputs. Short-term financing is usually
provided by commercial banks, cooperative banks, and regional rural banks. Crop loans, cash
credit, and overdraft facilities are some of the examples of short-term agricultural finance.

Long-term financing, on the other hand, refers to the credit facilities that are provided for a
period exceeding one year. These credit facilities are used for long-term investments in
agriculture, such as the purchase of land, construction of farm buildings, installation of irrigation
systems, and purchase of farm machinery and equipment. Long-term financing is usually
provided by specialized agricultural finance institutions, such as NABARD and agricultural
development banks. Term loans and leasing are some of the examples of long-term agricultural
finance.

The classification of agricultural finance on the basis of time is important as it helps farmers to
choose the most appropriate source of finance for their specific needs. Short-term financing is
more suitable for meeting immediate working capital requirements, while long-term financing
is more appropriate for long-term investments in agriculture.

CLASSIFICATION OF AGRICULTURAL FINANCE ON BASIS OF PURPOSE

Agricultural finance can also be classified on the basis of purpose into three categories:
production finance, investment finance, and consumption finance.

1. Production finance: Production finance is the credit facilities provided to farmers for
meeting their short-term working capital requirements. This type of finance is used for
purchasing inputs such as seeds, fertilizers, pesticides, and other materials needed for
crop production. Production finance helps farmers to manage the cost of production and
ensure timely cultivation, harvest, and sale of crops.
2. Investment finance: Investment finance is the credit facilities provided to farmers for
making long-term investments in agriculture. This type of finance is used for purchasing
land, constructing farm buildings, installing irrigation systems, and purchasing farm
machinery and equipment. Investment finance helps farmers to modernize their farming
practices, increase productivity, and improve their overall agricultural infrastructure.
3. Consumption finance: Consumption finance is the credit facilities provided to farmers for
meeting their personal and household expenses. This type of finance is used to meet
expenses such as education, healthcare, housing, and other household needs.
 Consumption finance helps to improve the living standards of farmers and their families,
thereby contributing to overall rural development.

The classification of agricultural finance on the basis of purpose helps to identify the specific
needs of farmers and provide them with the most appropriate type of finance. By providing
production, investment, and consumption finance, agricultural finance institutions can support
farmers at every stage of the agricultural cycle, from production to consumption.

CLASSIFICATION OF AGRICULTURAL FINANCE ON BASIS OF SECURITY

Agricultural finance can also be classified on the basis of security into two categories: secured
and unsecured financing.

1. Secured financing: Secured financing is provided against some form of collateral, such as
land, crops, or farm machinery. Collateral provides security to the lender in case of default
by the borrower. The value of the collateral must be equal to or higher than the value of
the loan. Secured financing is typically offered at lower interest rates compared to
unsecured financing because the collateral provides security to the lender. However, if
the borrower defaults on the loan, the lender has the right to seize and sell the collateral
to recover the outstanding loan amount.
2. Unsecured financing: Unsecured financing does not require any collateral, and is provided
solely on the basis of the borrower's creditworthiness. Unsecured financing is typically
offered at higher interest rates compared to secured financing because the lender bears
a higher level of risk in case of default by the borrower. Unsecured financing is usually
offered for smaller loan amounts, and is more suitable for short-term financing needs.

The classification of agricultural finance on the basis of security helps to identify the level of risk
associated with the loan, and the corresponding interest rates charged by the lender. Borrowers
with higher levels of collateral can access secured financing at lower interest rates, while those
without collateral can still access financing through unsecured financing options. Agricultural
finance institutions can use this classification to design loan products that meet the specific
needs of farmers and rural entrepreneurs.

AGRICULTURAL ADVANCES
Agricultural advances refer to the credit facilities provided to farmers and other stakeholders in
the agriculture sector for meeting their various financial requirements. These advances are
typically provided by banks, cooperative societies, and other specialized agricultural finance
institutions.

Agricultural advances can be classified into three categories:

1. Crop loans: Crop loans are short-term advances provided to farmers for meeting their
immediate working capital requirements for crop cultivation. These loans are used for
purchasing seeds, fertilizers, pesticides, and other inputs, as well as for meeting labor and
other cultivation expenses. Crop loans are usually provided for a period of up to one year
and are secured against the crops produced by the farmer.
 2. Term loans: Term loans are long-term advances provided to farmers for making capital
investments in agriculture. These loans are used for purchasing land, constructing farm
buildings, installing irrigation systems, and purchasing farm machinery and equipment.
Term loans are usually provided for a period of three to five years and are secured against
the assets created using the loan proceeds.
3. Allied agriculture loans: Allied agriculture loans are advances provided to stakeholders
engaged in allied agricultural activities such as livestock rearing, fisheries, poultry
farming, and other similar activities. These loans are used for meeting working capital
and investment requirements related to these activities.

Agricultural advances play a critical role in supporting the development of the agriculture sector
by providing farmers and other stakeholders with the necessary financial resources to invest in
their operations. These advances help to improve agricultural productivity, increase incomes,
and contribute to overall rural development.

SELF LIQUIDATING LOANS IN AGRICULTURAL FINANCE

Self-liquidating loans are a type of financing option in agricultural finance that are designed to
be repaid from the proceeds generated by the agricultural activity for which the loan was
provided. In other words, the loan is expected to be repaid from the revenue generated by the
farming or agricultural operation, which acts as collateral for the loan.

Self-liquidating loans are typically short-term loans provided for specific purposes such as crop
cultivation, livestock rearing, or poultry farming. The repayment schedule for self-liquidating
loans is usually linked to the harvesting or marketing of the crops or other agricultural products
produced using the loan proceeds.

One of the advantages of self-liquidating loans is that they reduce the risk for both the borrower
and the lender. Since the loan is repaid from the revenue generated by the agricultural activity,
the lender is assured of timely repayment of the loan, while the borrower is not burdened with
the need to generate additional revenue for repayment.

In agricultural finance, self-liquidating loans are particularly useful for small and marginal
farmers who may not have collateral to offer as security for traditional loans. They allow these
farmers to access credit based on the potential of their crops or other agricultural products,
rather than on their ability to provide collateral.

Overall, self-liquidating loans are a useful financing option in agricultural finance as they provide
an efficient means of financing agricultural activities while minimizing the risk for both
borrowers and lenders.

PARTIALLY LIQUIDATING LOANS IN AGRICULTURAL FINANCE

Partially liquidating loans are a type of financing option in agricultural finance that involve
partial repayment of the principal amount during the loan term, while the remaining amount is
repaid at the end of the loan term. This type of loan is also referred to as a partially amortizing
loan.
Partially liquidating loans are useful for farmers who have uneven cash flows due to the seasonal
nature of their agricultural activities. With partially liquidating loans, the farmer can make
partial repayments of the loan principal during the good season when they have cash inflows
from their agricultural activities, and repay the remaining loan balance at the end of the loan
term when they have fewer cash inflows.

Partially liquidating loans typically have a longer loan term than fully amortizing loans, and the
repayment schedule is structured to coincide with the cash flows generated by the farming
operation. This type of loan is particularly useful for farmers who require financing for long-
term capital investments such as land acquisition, irrigation systems, or farm machinery.

One of the advantages of partially liquidating loans is that they provide flexibility to farmers in
terms of loan repayment. Farmers can choose to repay the loan partially or fully depending on
their cash flow situation, without incurring prepayment penalties.

Overall, partially liquidating loans are a useful financing option in agricultural finance as they
provide flexibility and convenience to farmers who require financing for long-term capital
investments while allowing for uneven cash flows due to the seasonal nature of agricultural
activities.

LENDER CLASSIFICATION IN AGRICULTURAL FINANCE

Lender classification in agricultural finance can be based on various factors such as the legal
form of the lending institution, the type of services offered, and the ownership structure. Here
are some of the commonly used classifications of lenders in agricultural finance:

1. Formal sector lenders: These are institutions that are registered and regulated by
government agencies. Formal sector lenders include commercial banks, cooperative
banks, and rural credit institutions that provide a range of agricultural credit services.
2. Informal sector lenders: These are non-bank financial institutions, moneylenders, and
other informal sources of credit that provide finance to farmers and other stakeholders
in the agricultural sector. They typically operate outside the regulatory framework and
provide credit at higher interest rates than formal sector lenders.
3. Agricultural finance institutions: These are specialized financial institutions that focus
solely on providing finance to the agriculture sector. They may be owned by the
government, private entities, or cooperatives.
4. Development finance institutions: These are institutions that provide long-term credit
and technical assistance to promote economic development in the agriculture sector.
They are typically owned by the government or international organizations and provide
concessional credit to farmers and other stakeholders in the agriculture sector.
5. Microfinance institutions: These are institutions that provide small loans to farmers and
other stakeholders in the agriculture sector. They typically focus on providing credit to
small and marginal farmers who are excluded from formal sector credit due to lack of
collateral or credit history.

In conclusion, lender classification in agricultural finance is an important consideration for

farmers and other stakeholders in the agriculture sector. Understanding the different types of
lenders and their services can help borrowers make informed decisions about their credit needs
and choose the right lender for their specific requirements.

BORROWER CLASSIFICATION IN AGRICULTURAL FINANCE

Borrower classification in agricultural finance refers to the categorization of farmers and other
stakeholders in the agriculture sector based on various factors such as their size,
creditworthiness, and the purpose of their loan. Here are some of the commonly used
classifications of borrowers in agricultural finance:

1. Small and marginal farmers: These are farmers who own or cultivate small landholdings,
typically less than two hectares. They may have limited access to formal sector credit and
may require specialized credit services such as microfinance or self-help groups.
2. Medium and large farmers: These are farmers who own or cultivate larger landholdings
and have relatively better access to formal sector credit. They may require credit for
various purposes such as crop cultivation, farm machinery, or irrigation systems.
3. Agribusinesses: These are businesses that engage in the production, processing, and
marketing of agricultural products. They may require credit for various purposes such as
working capital, machinery, or infrastructure.
4. Cooperatives: These are organizations owned and operated by farmers and other
stakeholders in the agriculture sector. They may require credit for various purposes such
as marketing, processing, or input supply.
5. Rural entrepreneurs: These are individuals or businesses engaged in non-agricultural
activities in rural areas. They may require credit for various purposes such as starting or
expanding their business, or investing in infrastructure.

In conclusion, borrower classification in agricultural finance is an important consideration for

lenders and other stakeholders in the agriculture sector. Understanding the different types of
borrowers and their credit needs can help lenders design appropriate credit products and
services and ensure effective delivery of credit to farmers and other stakeholders in the
agriculture sector.

NON INSTITUTIONAL CREDIT SOURCE IN AGRICULTURAL FINANCE

Non-institutional credit sources in agricultural finance refer to sources of credit that are outside
the formal financial sector and include non-banking financial institutions, moneylenders, and
other informal sources of credit. These sources of credit play a crucial role in providing finance
to farmers and other stakeholders in the agriculture sector, especially in areas where formal
sector credit is not easily accessible.

Here are some of the non-institutional credit sources in agricultural finance:

1. Moneylenders: These are individuals who lend money to farmers and other stakeholders
in the agriculture sector. They typically operate outside the regulatory framework and
charge higher interest rates than formal sector lenders.
 2. Input suppliers: These are businesses that supply inputs such as seeds, fertilizers, and
pesticides to farmers on credit. Input suppliers may also provide technical assistance and
advice to farmers.
3. Traders and commission agents: These are businesses that buy agricultural products from
farmers and provide credit to farmers for inputs and other expenses. They may also
provide storage facilities and transportation services.
4. Self-help groups: These are groups of farmers who pool their resources and provide credit
to members based on their creditworthiness and repayment capacity. Self-help groups
may also provide training and capacity-building services to members.
5. Microfinance institutions: These are institutions that provide small loans to farmers and
other stakeholders in the agriculture sector. Microfinance institutions typically focus on
providing credit to small and marginal farmers who are excluded from formal sector
credit due to lack of collateral or credit history.

In conclusion, non-institutional credit sources in agricultural finance play an important role in

providing finance to farmers and other stakeholders in the agriculture sector, especially in areas
where formal sector credit is not easily accessible. However, non-institutional credit sources
may charge higher interest rates and may not provide the same level of protection and support
as formal sector lenders. It is important for borrowers to understand the risks and benefits
associated with different sources of credit and make informed decisions about their credit
needs.

INSTITUTIONAL CREDIT SOURCE IN AGRICULTURAL FINANCE

Institutional credit sources in agricultural finance refer to sources of credit that are part of the
formal financial sector and include banks, non-banking financial institutions, and other financial
institutions that are regulated by the central bank or other regulatory bodies. Institutional credit
sources play a crucial role in providing finance to farmers and other stakeholders in the
agriculture sector, especially in areas where non-institutional credit sources are not easily
accessible or may charge higher interest rates.

Here are some of the institutional credit sources in agricultural finance:

1. Commercial banks: These are banks that offer a range of financial products and services,
including agricultural loans. Commercial banks may provide loans for crop cultivation,
farm machinery, irrigation systems, and other purposes.
2. Regional rural banks: These are banks that operate in rural areas and focus on providing
credit to farmers and other stakeholders in the agriculture sector. Regional rural banks
may provide loans for various purposes such as crop cultivation, farm machinery, or
working capital.
3. Cooperative banks: These are banks that are owned and operated by farmers and other
stakeholders in the agriculture sector. Cooperative banks may provide loans for various
purposes such as crop cultivation, marketing, or input supply.
4. Non-banking financial companies: These are financial institutions that provide credit and
other financial services but do not hold a banking license. Non-banking financial
 companies may provide loans for various purposes such as working capital, machinery,
or infrastructure.
5. Agricultural finance corporations: These are specialized institutions that focus exclusively
on providing credit to farmers and other stakeholders in the agriculture sector.
Agricultural finance corporations may provide loans for various purposes such as crop
cultivation, irrigation systems, or marketing.

In conclusion, institutional credit sources in agricultural finance play an important role in

providing finance to farmers and other stakeholders in the agriculture sector. These sources of
credit are regulated and may offer lower interest rates and other benefits compared to non-
institutional credit sources. However, borrowers may be required to meet certain eligibility
criteria and provide collateral or other forms of security to access institutional credit.

CROP LOAN
Crop loan is a type of short-term loan provided by banks and other financial institutions to
farmers to finance their crop cultivation activities. Crop loans are usually granted for a period
of one agricultural season and are used to meet the expenses related to crop cultivation, such
as buying seeds, fertilizers, pesticides, and other inputs, paying for labor and other operational
costs, and meeting other contingencies that may arise during the crop cycle.

Crop loans are a crucial source of finance for farmers as they provide them with the necessary
funds to undertake crop cultivation activities and improve their agricultural productivity. These
loans help farmers to increase their yield and income, which in turn contributes to the overall
growth and development of the agriculture sector.

Crop loans are typically secured loans, and the crops grown using the loan funds serve as
collateral for the loan. The loan amount is determined based on the crop cultivation plan,
expected yield, and other factors such as the farmer's creditworthiness, repayment history, and
collateral value. The interest rate on crop loans is usually lower than that of other types of loans
as they are considered to be priority sector lending by banks and are often subsidized by the
government.

Crop loans may be provided by different financial institutions such as commercial banks,
regional rural banks, cooperative banks, and other financial institutions. To obtain a crop loan,
farmers are required to provide certain documents such as land ownership papers, crop
cultivation plan, and other relevant documents. The repayment period for crop loans is typically
linked to the crop cycle and may range from a few months to one year, depending on the crop
and the loan amount.

In conclusion, crop loans are a vital source of finance for farmers, particularly small and marginal
farmers who may not have access to other sources of credit. These loans enable farmers to
undertake crop cultivation activities and improve their agricultural productivity, which in turn
contributes to the overall growth and development of the agriculture sector.

TERM LOAN IN AGRICULTURAL FINANCE

Term loans in agricultural finance are long-term loans provided by banks and other financial
institutions to farmers and other stakeholders in the agriculture sector. These loans are typically
used to finance capital investments in agriculture, such as land purchase, farm machinery,
irrigation systems, and other infrastructure projects.

Unlike crop loans, which are short-term and linked to a single crop cycle, term loans are typically
provided for a longer duration, usually ranging from three to twenty years, depending on the
nature of the investment and the repayment capacity of the borrower. The interest rate on term
loans may be fixed or floating and is typically higher than that of crop loans due to the longer
repayment period.

Term loans in agricultural finance may be provided by various financial institutions, including
commercial banks, regional rural banks, cooperative banks, and other specialized agricultural
finance institutions. The loan amount may be determined based on the project cost, repayment
capacity, and the value of the collateral provided by the borrower.

To obtain a term loan, borrowers are required to submit a detailed project report that outlines
the project's scope, costs, and expected returns. The project report should also include a
financial analysis that demonstrates the borrower's repayment capacity and the project's
viability.

In conclusion, term loans in agricultural finance play a crucial role in financing long-term capital
investments in agriculture, such as land purchase, farm machinery, and irrigation systems.
These loans are typically provided for a longer duration than crop loans and are intended to
support the borrower's long-term growth and development in the agriculture sector. However,
borrowers should carefully evaluate their repayment capacity before taking on term loans and
should ensure that the project is financially viable before applying for a loan.

LOAN FOR ANIMAL HUSBANDARY

A loan for animal husbandry is a type of loan provided by banks and other financial institutions
to farmers and other stakeholders engaged in animal husbandry activities. This loan is used to
finance various activities related to animal husbandry, including the purchase of livestock,
construction of animal sheds and other infrastructure, procurement of animal feed and other
inputs, and other operational expenses.

The loan amount for animal husbandry may vary depending on the nature of the activity, the
borrower's creditworthiness, and the value of the collateral provided. The loan is typically
secured by the livestock, animal feed, and other assets financed by the loan.

Animal husbandry loans may be provided by various financial institutions, including commercial
banks, regional rural banks, cooperative banks, and other specialized agricultural finance
institutions. The interest rate on these loans may be fixed or floating and may vary depending
on the borrower's creditworthiness and the nature of the activity.

To obtain an animal husbandry loan, borrowers are required to provide certain documents such
as land ownership papers, livestock insurance, and other relevant documents. The repayment
period for animal husbandry loans may vary depending on the nature of the activity and the
loan amount, but it is typically linked to the animal husbandry cycle.

In conclusion, animal husbandry loans play a crucial role in financing various activities related
to animal husbandry, including the purchase of livestock, construction of animal sheds and
other infrastructure, and procurement of animal feed and other inputs. These loans are typically
secured by the assets financed by the loan and may be provided by various financial institutions.
However, borrowers should carefully evaluate their repayment capacity before taking on an
animal husbandry loan and should ensure that the activity is financially viable before applying
for a loan.

WEAKNESS IN RURAL CREDIT STRUCTURE

The rural credit structure in many countries, including India, has several weaknesses that need
to be addressed. Some of the weaknesses in the rural credit structure are:

1. Limited reach: The rural credit structure does not cover all the rural areas, and many rural
households do not have access to formal credit. This limits the ability of rural households
to invest in agriculture and other productive activities.
2. High transaction costs: The transaction costs associated with rural credit are often high,
making it difficult for small borrowers to access credit. This is due to the limited number
of financial institutions operating in rural areas and the high costs associated with
reaching remote areas.
3. Lack of collateral: Many rural households do not have sufficient collateral to secure loans,
making it difficult for them to access credit. This is particularly true for women and
marginalized communities, who often lack access to land and other assets.
4. Seasonal nature of agriculture: Agriculture is a seasonal activity, and farmers often
require credit at specific times of the year. However, the rural credit structure is not
designed to meet these specific needs, resulting in inadequate credit supply at crucial
times.
5. Informal credit sources: In many rural areas, informal credit sources such as
moneylenders and traders are more accessible and provide credit at higher interest rates
than formal credit sources. This leads to a vicious cycle of debt for many rural households.
6. Lack of financial literacy: Many rural households lack financial literacy and are not aware
of the various credit products available to them. This results in a lack of demand for
formal credit and limits the ability of financial institutions to reach rural households.

In conclusion, the rural credit structure has several weaknesses that need to be addressed to
ensure that rural households have access to formal credit. Improving the reach of formal credit,
reducing transaction costs, addressing collateral requirements, providing credit at the right
time, and increasing financial literacy are some of the ways in which the rural credit structure
can be strengthened.

NATIONAL AGRICULTURAL INSURANCE SCHEME

The National Agricultural Insurance Scheme (NAIS) is a crop insurance scheme implemented by
the Government of India to provide insurance coverage and financial support to farmers in the
event of crop losses due to natural calamities or other unforeseen events. The scheme is aimed
at mitigating the risk faced by farmers and reducing the vulnerability of agricultural activities to
natural disasters and other uncertainties.

Under the NAIS, farmers can insure their crops against various perils such as drought, flood,
pest attacks, cyclones, and other natural calamities. The scheme covers all food crops, oilseeds,
and horticultural crops. Farmers who take insurance coverage under the NAIS pay a nominal
premium, and in the event of crop loss, they receive compensation based on the extent of
damage to their crops.

The NAIS is implemented by the Agriculture Insurance Company of India (AIC), which is a public
sector company formed specifically for the purpose of implementing crop insurance schemes.
The AIC works with various state governments and other stakeholders to implement the scheme
and ensure that farmers receive timely compensation in the event of crop loss.

The NAIS has several benefits for farmers, including reducing the risk of crop loss, providing
financial support in the event of crop loss, and improving the overall financial stability of
agricultural activities. The scheme has also helped to improve the confidence of farmers in
taking up agricultural activities and has increased their ability to invest in farming activities.

In conclusion, the National Agricultural Insurance Scheme is a crop insurance scheme

implemented by the Government of India to provide insurance coverage and financial support
to farmers in the event of crop losses due to natural calamities or other unforeseen events. The
scheme has several benefits for farmers and plays an important role in reducing the
vulnerability of agricultural activities to natural disasters and other uncertainties.