Lect 4 Agriculture Credit

Agriculture Credit
➢ The word “Credit” is derived from a Latin word “Credo”, meaning “I Believe”. The Latin verb “credere” means
“to repose confidence in”. Note that borrowing is a function of ability to command capital or services currently with
a promise to repay it in future i.e. obtaining certain amounts of money as loan to be rapid as specified in the
Agreement between the concerned parties
➢ Credit is obtaining control over the use of money at the present time in exchange for a promise to repay it at some
future time. Credit is also defined as a device for facilitating the temporary transfer of purchasing power from those
who have surpluses of it to those who are in need of it.
➢ Agricultural credit is considered as one of the most basic inputs for conducting all agricultural development
programmed. In India, there is an immense need for proper agricultural credit as Indian farmers are very poor. From
the very beginning, the prime source of agricultural credit in India was moneylenders.

➢ After independence, the Government adopted the institutional credit approach through various agencies like co-
operatives, commercial banks, regional rural banks etc. to provide adequate credit to farmers, at a cheaper rate of
interest. Moreover, with growing modernization of agriculture during the post-green revolution period, the
requirement of agricultural credit has increased further in recent years
➢
About 52 percent of the agricultural households in the country were estimated to be indebted. At all India level,
about 60 percent of the outstanding loans were taken from institutional sources which included Government (2.1
percent), Co-operative society (14.8 percent) and Banks (42.9 percent)
 TYPES OF AGRICULTURAL CREDIT

• Considering the period and purpose of the credit requirement of the farmers of the
country, agricultural credit in India can be classified into three major types
• Short term credit: The Indian farmers require credit to meet their short term needs
viz., purchasing seeds, fertilizers, paying wages to hired workers etc. for a period of less
than 15 months. Such loans are generally repaid after harvest.
• Medium-term credit: This type of credit includes credit requirement of farmers for a
medium period ranging between 15 months and 5 years and it is required for purchasing
cattle, pumping sets, other agricultural implements etc. Medium-term credits are
normally larger in size than short term credit.
• Long term credit: Farmers also require finance for a long period of more than 5 years
just for the purpose of buying additional land or for making any permanent
improvement on land like the sinking of wells, reclamation of land, horticulture etc.
Thus, the long term credit requires sufficient time for the repayment of such loan.
 SOURCES OF AGRICULTURAL CREDIT

• In India, agricultural credit are being advanced by different sources. The short term and
medium term loan requirements of Indian farmers are mostly met by moneylenders, co-
operative credit societies and Government. But the long-term loan requirements of the Indian
farmers are also met by moneylenders, land development banks and the Government.

• Nowadays, the long term and short term credit needs of these institutions are also being met by
National Bank for Agricultural and Rural Development (NABARD).

• Sources of agricultural credit can be broadly classified into institutional and non-institutional
sources. Non-Institutional sources include moneylenders, traders and commission agents,
relatives and landlords, but institutional sources include co-operatives, commercial banks
including the SBI Group, RBI and NABARD.
 NABARD
• National Bank for Agriculture and Rural Development is an apex development financial institution in India that focuses on
providing financial and technical assistance to the agricultural and rural sectors. Established on July 12, 1982, NABARD's
primary objective is to promote sustainable and equitable agricultural and rural development in the country.
• The main objectives of National Bank for Agriculture and Rural Development has been provided below:
• Promotion of Agriculture and Rural Development: NABARD aims to accelerate agricultural production and rural development
by providing financial support, promoting institutional development, and implementing various development schemes.
• Facilitating Credit for Agriculture: It plays a crucial role in channeling credit to the agriculture sector. It refinances commercial
banks, regional rural banks, and other financial institutions to provide loans for agricultural and rural development activities.
• Institutional Development: It focuses on strengthening and developing rural financial institutions to improve their efficiency
and outreach. It provides assistance for capacity building, training, and technology adoption to enhance the functioning of
cooperative banks, regional rural banks, and microfinance institutions.
• Promoting Rural Infrastructure Development: Nabard Bank supports the development of rural infrastructure by providing
financial assistance for irrigation projects, rural roads, rural markets, and other agricultural infrastructure facilities. It aims to
improve connectivity and access to markets for farmers and rural communities.
• Promoting Sustainable Agriculture: It encourages the adoption of sustainable agricultural practices and technologies to enhance
productivity, conserve natural resources, and promote climate resilience. It supports projects related to organic farming,
watershed management, renewable energy, and agricultural research and development.
• Rural Innovation: National Bank for Agriculture and Rural Development promotes innovation and entrepreneurship in rural
areas. It provides funding and support for rural startups, agri-businesses, and rural artisans to encourage economic
diversification and employment generation.
• Financial Inclusion: It actively works towards promoting financial inclusion in rural areas. It supports initiatives to provide
banking services, credit, and insurance products to underserved sections of the rural population, including small farmers, rural
women, and marginalized communities
• Institutional Sources
• The main motive of institutional credit is to assist the farmers in raising their agricultural productivity
and maximising their income. The following are some of the important institutional sources of
agricultural credit in India.
• (i) Co-operative Credit Societies: The cheapest and the best source of rural credit in India is definitely
the co-operative finance. In India the active primary agricultural credit societies (PACS) cover nearly 86
per cent of the Indian villages and account for nearly 36 per cent of the total rural population of the
country.
• (ii) Government: Another important source of agricultural credit is the Government of our country.
These loans are known as taccavi loans and are lend by the Government during emergency or distress
like famine, flood etc. The rate of interest charged against such loan is as low as 6 per cent. During 1990-
91, the state Governments had advanced nearly Rs 350 crore as a short-term loan to agriculture. But the
taccavi loan failed to become very much popular due to official red-tapism and corruption.
• (iii) Land Development Banks: Land development banks are advancing long term co-operative credit
for 15-20 years to the farmers against the mortgage of their lands for its permanent improvement,
purchasing agricultural implements and for repaying old debts. The number of state land development
banks (SLDBs) increased from 5 in 1950-51 to 19 as on June 1986 which again consisted of 2447
Primary Land Development Banks (PLDBs) branches.
• (iv) Commercial Banks: In the initial period, the commercial banks of our country have played
a marginal role in advancing rural credit. In 1950-51, only 1 per cent of the agricultural credit
was advanced by the commercial banks. But after the nationalization of commercial banks in
1969, the commercial banks started to extend financial support both directly and indirectly and
also for both short and medium periods. With the help of “village adoption scheme” and service
area approach the commercial banks started to meet the credit and other requirements of the
farmers. They also sponsored various regional rural banks for extending credit to small and
marginal farmers and rural artisans just to save them from the clutches of village money lenders
• .Till 1969, direct advances by the commercial banks were restricted to only Rs 44 crore. But as
on March 2007 the amount of loan has increased to Rs 1,40,382 crore. During 2006-2007
commercial banks along with Regional Rural Banks extended nearly 79.1 per cent of the total
institutional farm credit in our country.
 Non-Institutional Sources
• Money Lenders :These moneylenders were supplying a major portion of agricultural credit (69.7 per cent in 1951-
52) and indulged into malpractice like manipulation of accounts and charged exorbitant rate of interest on their
loan- often 24 per cent and over.
• Due to all these factors the share of moneylenders in total farm credit has declined sharply from 69.7 per cent in
1951-52 to 36.1 per cent in 1971 and then to only 16.1 per cent in 1981 and then to 7.0 per cent in 1995-96.
• (ii) Traders and Commission agents:Traders and commission agents are also advancing loan to the agriculturist for
productive purposes before the maturity of crops and then force the farmers to sell their crops at very low prices
and charge heavy commission. This type of loans is mostly advanced for cash crops.The share of these traders in
farm credit increased gradually from 5.5 per cent in 1951-52 to 8.8 per cent in 1961- 62 and then sharply declined
to 5.0 per cent in 1996. Thus its importance has been declining in recent years.
• (iii) Relatives:Cultivators are also normally borrowing fund from their own relatives in times of their crisis both in
terms of cash or kind. These loans are a kind of informal loans and carry no interest and are normally returned
after harvest.The importance of this source of farm credit is also declining as its share of agricultural credit has
already declined from 14.2 per cent in 1951-52 to 8.7 per cent in 1981 and then to 3.0 per cent in 1995-96.
• (iv) Landlords:In India, small as well as marginal farmers and tenants are also taking loan from the landlords for
meeting their financial requirements. This source has been following all the ill-practices followed by money-
lenders, traders etc.Sometimes landless workers are even forced to work as a bonded labour. The share of this
source to rural credit has increased from 3.3 per cent in 1951-52 to 14.5 per cent in 1961-62 and then sharply
declined to 8.8 per cent in 1981 and then to 10.0 per cent in 1995-96.Thus, the non-institutional sources of farm
credit have been facing serious loopholes like exorbitant rate of interest, loan for unproductive purposes, non-
repayment of loan etc.
 Special Agricultural Credit Plan
The public sector banks have been formulating Special Agricultural Credit Plans (SACP) since 1994-95 with a view to
achieving distinct and marked improvement in the flow of credit to agriculture. Under SACP, the banks are required to fix
self-set targets for achievement during the financial year The SACP mechanism was also made applicable to private sector
banks from the year 2005- 06.
The Kisan Credit Card Yojana helps farmers acquire short-term loans to meet their farming expenses. Card issuing banks
decide the credit limit based on cultivated crops, maintenance expenses, and the financial margin. A credit limit of ₹10,000
to ₹50,000 is offered to marginal farmers.
• The Kisan Credit Card Yojana is exempted from standard credit card interest rates. The cardholder can avail of interest
rates ranging between 2% to 7%. In addition, farmers can repay their loans based on the harvesting period of the crops
for which they receive the loan. Following are the other important benefits of Kisan Credit Cards.
• The banks offer ATM cum credit cards that they can also use to withdraw funds from ATMs and acquire funds on
credit.
• The card offers a convenient repayment period of up to 12 months to easily pay off the loan amount.
• Based on the repayment history, the credit limits can also be increased. Farmers with decent repayment records can
apply for a higher credit limit to cope with the inflating and farming expenses.
• The scheme allows farmers to reschedule their repayments if their crops are damaged due to unforeseen events and
natural calamities. In such cases, they get the flexibility to repay their loans only after successful harvesting.
• The credit card is valid for three years without any requirements of annual fee or membership charges.
• As a Kisan Credit Card holder, you also get insurance benefits of up to ₹50,000 due to accidental death, permanent
disabilities, and other financial losses arising from accidents.
Interest subvention relief to farmers
The Central Government provides interest subvention to all farmers, for short term crop loan,upto one
year, for loan upto Rs. 3 lakh borrowed by them. Under this scheme, the farmers can avail concessional
crop loans of upto Rs.3 lakh at 7 per cent rate of interest. It also provides for an additional subvention of 3
per cent for prompt repayment within a period of one year from the date of advance. The scheme will help
farmers to avail short term crop loans up to Rs. 3 lakh payable within one year at only 4 per cent per
annum. In case farmers do not repay the short term crop loan in time they would be eligible for interest
subvention of 2% as against 5%

Pursuant to the announcement made by the Union Finance Minister in the Budget Speech for the year
2006-07, commercial banks were advised to grant relief of two percentage points in the interest rate on
the principal amount up to Rs.1 lakh on each crop loan granted by banks during kharif and rabi of 2005-
06, and credit the relief so granted to the borrower’s account before March 31, 2006. Public sector banks,
Regional Rural Banks and rural cooperative credit institutions were advised that with effect from kharif
2006-07, the Government would provide interest rate subvention of 2 per cent per annum to them in
respect of short-term production credit up to Rs. 3 lakh provided to farmers. Government of India had
provided Rs. 1,100 crore for reimbursing the claims submitted by banks in this regard
Agricultural debt waiver and debt relief scheme, 2008
A scheme of agricultural debt waiver and debt relief for farmers with the total value of
overdue loans being waived estimated at Rs. 50,000 crore and a one-time settlement
(OTS) relief on the overdue loans at Rs. 10,000 crore was announced in the Union
Budget, 2008-09, for implementation by all scheduled commercial banks, besides RRBs
and cooperative credit institutions. The modalities of the scheme were finalized by the
Government of India in consultation with RBI and NABARD, and the same was notified
on May 23, 2008. The scheme covered direct agricultural loans extended to “marginal
and small farmers” and “other farmers” by SCBs, RRBs, cooperative credit institutions
(including urban cooperative banks) and local area banks. Accordingly, the Reserve Bank
advised all the concerned banks to take necessary action towards implementation of the
scheme at the earliest. NABARD had issued similar guidelines to RRBs and rural
cooperatives.
Agricultural debt waiver and debt relief scheme, 2008
Critical agro-climatic variations such as erratic rainfall distribution over time and space and increase in the frequency and
severity of droughts, floods and cyclones and rising temperatures, have been causes of uncertainty and risk resulting in losses in
agricultural production and of livestock population in India.
The National Agricultural Insurance Scheme (NAIS) for crops was implemented from rabi 1999-2000 season with the objective
of providing a comprehensive insurance solution to the farmers in the event of failure of any of the notified crops as a result of
natural calamities, pests and diseases. The scheme is available to all the farmers (both loanee and non-loanee) irrespective of their
size of holding and operates on the basis of “Area Approach,” wherein a particular area, viz., tehsil or block or nyaya panchayat
or gram panchayat etc is treated as unit of insurance instead of individual farm holdings. It envisages coverage of all the food
crops (cereals, millets and pulses), oilseeds and other annual commercial/horticultural crops in respect of which past yield data
are available for an adequate number of years.
At present, 10 per cent subsidy in premium is available to small and marginal farmers, which is to be shared equally by the
Centre and State Governments.
Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) have been launched by the Government of India to help the
farmers financially by providing agricultural loans. Under this welfare scheme, 'Direct Agricultural Loans' comprising short term
Production Loans for agricultural and allied activities.
Marginal Loan 50,000 , Small 50000 and Other Above 50000
Pilot scheme for weather-based crop insurance
.As announced in the Union Budget for 2007-08, the Weather Based Crop
Insurance Scheme (WBCIS) is being implemented in the selected areas for selected
crops on a pilot basis w.e.f. kharif 2007. WBCIS intends to provide insurance
protection to farmers against adverse weather incidence, such as deficit and excess
rainfall which are deemed to impact adversely the crop production. It has the
advantage to settle the claims within the shortest possible time. The WBCIS is
based on actuarial rates of premium but to make the scheme attractive, premium
actually charged from farmers has been restricted to “at par” with NAIS. The
Agriculture Insurance Company of India Ltd. (AIC) has implemented the pilot
WBCIS in Karnataka during kharif 2007 season, covering eight rain-fed crops,
insuring 43,790 farmers and crops on nearly 50,000 ha for a sum insured of Rs. 53
crore.
Micro Finance
The term “microfinancing” was first used in the 1970s during the development
of Grameen Bank of Bangladesh, which was founded by the microfinance pioneer,
Muhammad Yunus. In 1976, Yunus institutionalized the approaches of
microfinance, along with the foundation of Grameen Bank in Bangladesh.
Microfinance is a banking service provided to low-income individuals or groups
who otherwise would have no other access to financial services. Microfinance
allows people to take on reasonable small business loans safely, in a manner that
is consistent with ethical lending practices.
RBI issued comprehensive guidelines to banks in February 2000 for mainstreaming
micro credit and enhancing the outreach of micro credit providers. The guidelines,
inter alia, stipulated that micro credit extended by banks to individual borrowers
directly or through any intermediary would henceforth be reckoned as part of their
priority sector lending. However, no particular model was prescribed for micro
finance and banks were given freedom to formulate their own model[s] or choose
any conduit/ intermediary for extending micro credit.
Evaluation of self-help groups
Self-help groups are informal groups of people who come together to address their
common problems. While self-help might imply a focus on the individual, one
important characteristic of self-help groups is the idea of mutual support – people
helping each other.
Pursuant to the announcement made in the annual policy statement of the RBI, for
the year 2007-08, all regional offices (ROs) of the Reserve Bank were advised to
undertake an evaluation of the SHG-Bank Linkage Programme. This was intended
to ascertain the degree of transparency in maintaining the accounts by the SHGs
and their adherence to well accepted best practices. The evaluation of SHGs carried
out by the ROs is reported to be completed