DESIGNED AND DEVELOPED UNDER THE AEGIS OF

NAHEP Component-2 Project “Investments In ICAR Leadership In Agricultural Higher Education”

Division of Computer Applications
ICAR-Indian Agricultural Statistics Research Institute
 Course Details

Course Code AG12

Course Name Agricultural Finance & Cooperation

Lesson 2 Agricultural credit: meaning, definition, classification

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professional judgement. Statement of fact and opinions expressed are those of the presenter individually and are
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Created by

Name Role University

Acharya N.G. Ranga Agricultural University,

Saddikuti Hyma Jyothi Content Creator
Guntur

Sher-e-Kashmir University of Agricultural

Dr. Sudhakar Dwivedi Course Reviewer
Sciences and Technology of Jammu ,Jammu

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Credit needs in Agriculture:
 Agricultural credit is one of the most crucial
inputs in all agricultural development
programmes.
 For a long time, the major source of agricultural
credit was private moneylenders. But this source
of credit was inadequate, highly expensive and
exploitative.
 To curtail this, a multi-agency approach
consisting of cooperatives, commercial banks
and regional rural banks credit has been adopted
to provide cheaper, timely and adequate credit to
farmers.
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Credit:
 The word “credit” comes from the Latin word
“Credo” which means “I believe”. Hence
credit is based up on belief, confidence, trust
and faith. Credit is otherwise called as loan.
Definition:
 Credit / loan is certain amount of money
provided for certain purpose on certain
conditions with some interest, which can be
repaid sooner (or) later.
 According to Professor Galbraith credit is the
“temporary transfer of asset from one who has
to other who has not” •5
The financial requirements of the Indian
farmers are for,
1. Buying agricultural inputs like seeds, fertilizers,
plant protection chemicals, feed and fodder for
cattle etc.
2. Supporting their families in those years when the
crops have not been good i.e. poor harvest years.
3. Buying additional land, to make improvements on
the existing land, to clear old debt and purchase
costly agricultural machinery.
4. Increasing the farm efficiency as against limiting
resources i.e. hiring of irrigation water lifting
devices, labor and machinery.

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***Classification of credit
1. Based on time: This classification is based on the
repayment period of the loan. It is
sub-divided in to 3 types
a) Short–termloans:
 These loans are to be repaid within a period of 6 to 18
months. All crop loans are said to be short–term
loans, but the length of the repayment period varies
according to the duration of crop.
 The farmers require this type of credit to meet the
expenses of the ongoing agricultural operations on
the farm like sowing, fertilizer application, plant
protection measures, payment of wages to casual
labourers etc. The borrower is supposed to repay the
loan from the sale proceeds of the crops raised. •7
b) Medium – term loans: Here the repayment period varies
from 18 months to 5years. These loans are required by the
farmers for bringing about some improvements on his farm
by way of purchasing implements, electric motors,milch
cattle, sheep and goat, etc. The relatively longer period of
repayment ofthese loans is due to their partially-liquidating
nature.
c) Long – term loans: These loans fall due for repayment
over a long time ranging from 5 years to more than 20 years
or even more. These loans together withmedium terms
loans are called investment loans or term loans. These loans
are meant for permanent improvements like levelling and
reclamation of land, construction of farm buildings,
purchase of tractors, raising of orchards etc. Since these
activities require large capital, a longer period is required to
repay these loans due to their non - liquidating nature.
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2. Based on Purpose: Based on purpose, credit is sub-
divided in to 4 types.
a) Production loans: These loans refer to the credit
given to the farmers for crop production and are
intended to increase the production of crops. They are
also called as ***seasonal agricultural operations
(SAO) loans or short – term loans or crop loans. These
loans are repayable with in a period ranging from 6 to
18months in lumpsum.
b) Investment loans: These are loans given for
purchase of equipment the productivity of which is
distributed over more than one year. Loans given for
tractors, pumpsets, tube wells, etc. Both MT and LT
loans put together are called as investment loans/
Term loans.
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c) Marketing loans:
 These loans are meant to help the farmers in
overcoming the distress/ forced sales and to market
the produce in a better way.
 Regulated markets and commercial banks, based on
the warehouse receipt are lending in the form of
marketing loans by advancing 75 per cent of the value
of the produce.
 These loans help the farmers to clear off their debts
and dispose the produce at remunerative prices.

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d) Consumption loans:
Any loan advanced for some purpose other than
production is broadly categorized as consumption loan.
These loans seem to be unproductive but indirectly assist
in more productive use of the crop loans i.e. without
diverting them to other purposes.
Consumption loans are not very widely advanced and
restricted to the areas which are hit by natural calamities.
These loans are extended based on group guarantee
basis with a maximum of three members. The loan is to
be repaid within 5 crop seasons or 2.5 years whichever is
less.
The branch manager is vested with the discretionary
power of sanctioning these loans up to Rs. 5000 in each
individual case. The rate of interest is around 11 per cent.
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 3. Based on security:
 The loan transactions between lender and borrower are
governed by confidence and this assumption is confined
to private lending to some extent, but the institutional
financial agencies do have their own procedural
formalities on credit transactions. Therefore it is essential
to classify the loans under this category into two sub-
categories viz., secured and unsecured loans.
 Secured loans: Loans advanced against some security by
the borrower are termed as secured loans. Various forms
of securities are offered in obtaining the loans and they
are of following types.
 Unsecured loans: Just based on the confidence between
the borrower and lender, the loan transactions take place.
No security is kept against the loan amount.
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Secured loans:
I. Personal security: Under this, borrower himself
stands as the guarantor. Loan is advanced on the
farmer’s promissory note. Third party guarantee
may or may not be insisted upon (i.e. based on the
understanding between the lender and the
borrower)
II. Collateral Security: Here the property is pledged
to secure a loan. The movable properties of the
individuals like LIC bonds, fixed deposit bonds,
warehouse receipts, machinery, livestock etc, are
offered as security.
III. Chattel loans: Here credit is obtained from
pawn-brokers by pledging movable properties such
as jewellery, utensils made of various metals, etc. •13
IV. Mortgage: As against to collateral security, immovable
properties are presented for security purpose For example,
land, farm buildings, etc. The person who is creating the
charge of mortgage is called mortgagor (borrower) and the
person in whose favour it is created is known as the
mortgagee (banker). Mortgages are of two types
a) Simple mortgage: When the mortgaged property is
ancestrally inherited property of borrower then simple
mortgage holds good. Here, the farmer borrower has to
register his property in the name of the banking institution
as a security for the loan he obtains. The registration
charges are to be borne by the borrower.
b) Equitable mortgage: When the mortgaged property is
self-acquired property of the borrower, then equitable
mortgage is applicable. In this no such registration is
required, because the ownership rights are clearly specified
in the title deeds in the name of farmer-borrower. •14
V. Hypothecated loans: Borrower has ownership right
on his movable and the banker has legal right to take a
possession of property to sale on default (or) a right to
sue the owner to bring the property to sale and for
realization of the amount due. The person who creates
the charge of hypothecation is called as hypothecator
(borrower) and the person in whose favor it is created is
known as hypothecate (bank) and the property, which is
denoted as hypothecated property. This happens in the
case of tractor loans, machinery loans etc.
a) Key loans : The agricultural produce of the farmer -
borrower will be kept under the control of lending
institutions and the loan is advanced to the farmer .
This helps the farmer from not resorting to distress
sales.

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b) Open loans: Here only the physical possession of the
purchased machinery rests with the borrower, but the
legal ownership remains with the lending institution
till the loan is repaid.
4. Lender’s classification: Credit is also classified on
the basis of lender such as
a) Institutional credit: Here are loans are advanced by
the institutional agencies like co-operatives,
commercial banks. Ex: Co-operative loans and
commercial bank loans.
b) Non-institutional credit : Here the individual
persons will lend the loans Ex: Loans given by
professional and agricultural money lenders, traders,
commission agents, relatives, friends, etc.
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5. Borrower’s classification: The credit is also
classified on the basis of type of borrower. This
classification has equity considerations.
a) Based on the business activity like farmers, dairy
farmers, poultry farmers, pisiculture farmers, rural
artisans etc.b) Based on size of the farm:
agricultural labourers, marginal farmers, small
farmers , medium farmers , large farmers ,
 c) Based on location hill farmers (or) tribal farmers.

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6. Based on liquidity: The credit can be classified into
two types based on liquidity and they are
a) Self-liquidating loans: They generate income
immediately and are to be paid within one year or after
the completion of one crop season. Ex: crop loans.
b) Partially –liquidating and Non-liquidating loans:
They will take some time to generate income and can
be repaid in 2-5 years or more, based on the economic
activity for which the loan was taken. Ex: Dairy loans,
tractor loans, orchard loans etc.

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7. Based on approach:
a) Individual approach: Loans advanced to individuals
for different purposes will fall under this category.
b) Area based approach: Loans given to the persons
falling under given area for specific purpose will be
categorized under this. Ex: Drought Prone Area
Programme (DPAP) loans, etc
c) Differential Interest Rate (DIR) approach: Under
this approach loans will be given to the weaker
sections @ 4 per cent per annum.

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8. Based on contact:
a) Direct Loans: Loans extended to the farmers directly
are called direct loans. Ex: Crop loans.
b) Indirect loans: Loans given to the agro-based firms
like fertilizer and pesticide industries, which are
indirectly beneficial to the farmers are called indirect
loans.

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