Agricultural Finance

UNIT – I
 Introduction:
 Credit needs of the farmers can be examined from two different angles:
a. On the basis of Time
b. On the basis of Purpose
 ON THE BASIS OF TIME: Agricultural credit needs of the farmers can be classified
into three categories on the basis of time:
i. Short–term: they are required for the purchase of seeds, fertilizers, pesticides, feeds
and fodder of livestock, marketing of agricultural produce, payment of wages of
hired labour, litigation, and a variety of consumption and unproductive purposes.
The period of such loans is less than 15 months. The main agencies for granting
short-term loans are money lenders and cooperative societies.
ii. Medium–term: They are generally obtained for the purchase of cattle, small
agricultural implements, repair and construction of wells, etc. The period of such
loans extends from 15 months to 5 years. These loans are generally provided by
moneylenders, relatives of farmers, cooperative societies and commercial banks.
iii. Long–term: They are loans required for effecting permanent improvement on land,
digging tube wells, purchasing larger agricultural implements and machinery like
tractors, harvesters, etc., and repayment of old debts. The period of such loans is
normally taken from Primary Cooperative Agricultural and Rural Development Banks
(PCARDBs).
∆ ON THE BASIS OF PURPOSE: Agricultural Credit needs of farmers can be
classified on the basis of purpose into the following categories:
i. Productive: We can include all credit requirements which directly affect
agricultural productivity. Farmers need loans for the purchase of seeds,
fertilizers, manures, agricultural implements, livestock, digging and repair of
wells and tube wells, payment of wages, effecting permanent improvements on
land, marketing of agricultural produce, etc. Repayment of these loans is
generally not difficult because the very process of production generally creates
the wherewithal's for repayment.
ii. Consumption: Farmers often require loans for consumption as well. Between the
moment of marketing of agricultural produce and harvesting of the next crop
there is a long interval of time and most of the farmers don’t have sufficient
income to sustain them through this period. Therefore, they have to take loans
for meeting their consumption needs. In the time of droughts or floods, the crop
in considerably damaged and farmers who otherwise avoid taking loans for
consumption purposes. Accordingly, farmers are forced to fall back upon
moneylenders and mahajans to meet such requirements.
iii. Unproductive: In addition to consumption, farmers also require loans for a
multiplicity of other unproductive purposes such as litigation, performance of
marriages, social ceremonies on birth and death of a family member, religious
functions. festivals, etc. Since institutional agencies don’t grant credit for such
unproductive purposes, farmers have to seek assistance from money lenders
and mahajans. It is often very difficult to repay such loans because they don’t
contribute to the productivity of farmer.
 SOURCES OF AGRICULTURAL
I)
FINANCE:
NON-INSTITUTIONAL SOURCES:
i. Money Lenders: In rural areas, two distinct categories of money lenders can be identified: the
wealthy farmers or landlords who combine farming with money lending and the professional
money lenders whose primary occupation is solely the act of lending money. These two groups
play an essential role in the financial ecosystem of rural communities, especially for farmers who
rely heavily on credit for their agricultural and personal needs.
The farmers and cultivators, often with limited access to formal banking services, turn to money
lenders to fulfil their immediate and long-term financial needs. The money lenders are generally
quick to provide loans for both productive and non-productive purposes, such as buying seeds,
fertilizers, agricultural equipment, or even funding personal expenditures, including weddings or
medical emergencies. This broad scope of credit helps the farmers maintain their livelihoods and
address both agricultural and personal financial challenges.
Money lenders in rural areas typically offer both short-term and long-term loans, depending on the
specific needs of the farmer. Short-term loans may be used for immediate expenses, while long-
term loans might be sought for investments in agricultural infrastructure or other large projects.
Their accessibility and willingness to offer flexible terms make them a crucial financial resource for
rural communities, especially in areas where access to formal banking institutions is limited.
Data from studies and rural development reports have shown that in many developing regions,
rural households are predominantly dependent on informal lenders like these due to the lack of
banking infrastructure in rural areas. In India, for instance, it is estimated that nearly 30% of
farmers borrow from informal lenders, with many being forced into cycles of debt due to high
interest rates. This financial dependence can create a challenging situation for farmers, as the
terms of repayment are often harsh, leading to indebtedness.
ii. Relatives: In rural areas, individuals often rely on their relatives for short-term financial
support, particularly for unproductive consumption. This type of financial assistance is
typically sought for immediate needs that do not directly contribute to economic
productivity, such as personal expenses, household consumption, or social obligations like
weddings, festivals, or medical emergencies. Unlike loans taken for farming or business
investments, these funds are often used to cover non-productive expenditures.
Relatives are often the first point of contact for such financial help due to the close-knit
nature of rural communities, where family ties play a central role in social and economic life.
This informal borrowing arrangement is typically less formal than borrowing from money
lenders or financial institutions, with fewer or no interest rates, and often relies on mutual
trust and a sense of obligation between family members. This system is particularly
important in regions where formal banking services are limited or inaccessible.
Data from rural economic studies show that a significant portion of rural households—
especially in developing countries—depend on family members or relatives for short-term
financial support. According to a report by the International Fund for Agricultural
Development (IFAD), informal loans from relatives account for a considerable share of the
financial resources in rural communities, particularly for unproductive purposes. In some
regions, up to 50% of rural households report using family networks for short-term financial
assistance.
While borrowing from relatives can be a lifeline in times of need, it also has its challenges.
The informal nature of these transactions means there is often no clear agreement on
repayment terms, which can lead to misunderstandings or strained family relationships.
Additionally, such loans are usually limited in size, which may not be sufficient to meet
larger financial needs, especially for more significant social or personal expenses.
iii. Traders, Commission agents and Landlords: Once the crops are harvested,
traders and commission agents often exert significant control over the sale of the
produce. They may pressure farmers to sell their goods at lower prices than market
value, taking advantage of the farmers' immediate need for cash to repay the loan. In
addition, these intermediaries typically charge high commissions for their services,
further reducing the amount of money the farmers ultimately receive from their
harvests. This practice can place farmers in a cycle of dependence, as they are
compelled to accept unfavourable terms due to their lack of bargaining power and the
urgency of securing funds.
Research on rural finance and agricultural economics highlights that this form of
financing is particularly prevalent in markets for cash crops. For instance, a study by the
Food and Agriculture Organization (FAO) found that in countries like India and African
nations, farmers growing cash crops such as cotton, groundnuts, and tobacco are often
dependent on traders and commission agents for early financing. These intermediaries
not only provide essential capital but also control the marketing of the crops, which can
result in farmers receiving a much lower price than they would in a more competitive,
open market.
Data also indicates that the charges and commissions levied by traders can be
exorbitant, sometimes reaching as high as 20-30% of the total value of the produce. This
substantial cut leaves farmers with little to reinvest in their agricultural activities or to
cover their personal expenses, perpetuating a cycle of debt and poverty.
Moreover, in the case of perishable goods like mangoes and other fruits, traders' control
becomes even more pronounced. Due to the short shelf life of these products, farmers
II) INSTITUTIONAL SOURCES:
Institutional sources include government agencies, cooperative societies,
commercial banks, and regional and lead banks.
i) Co-operative Banks/ Societies: Indian planners view cooperation as a key
tool for the economic development of marginalized farmers, especially in rural
areas. They consider the village panchayat, village co-operatives, and village
schools as the core institutions on which a self-sufficient and equitable
economic and social order should be built. The cooperative movement in India
began primarily to provide farmers with financial support for agricultural
activities at low interest rates, shielding them from the exploitation of
moneylenders. Rural cooperative credit institutions in India are structured into
short-term and long-term systems. The short-term co-operative structure
follows a three-tier system, with the exception of the northeastern states.
The movement was formalized with the establishment of the first cooperative
credit society in 1904, with the goal of providing affordable credit to farmers.
The short-term co-operative credit structure typically involves three levels:
Primary Agricultural Credit Societies (PACS) at the village level,
District Central Co-operative Banks (DCCBs) at the district level, and
State Co-operative Banks (SCBs) at the state level. This structure aims
to facilitate access to credit at various levels. However, the northeastern
states of India have different structures due to regional differences.
II) Primary Agricultural Credit Society: Primary Agricultural Credit Societies (PACS) are the
foundational units of the short-term cooperative credit structure in India, functioning at the
grassroots level. These societies are established in rural areas, usually at the village level,
to provide essential financial services to farmers. PACS are central to India's rural credit
system and play a crucial role in the economic upliftment of farmers, especially those from
economically weaker sections.
PACS serves as a direct link between farmers and the cooperative credit system. They are
responsible for granting short-term and medium-term loans to farmers, enabling them to
finance agricultural operations, purchase inputs, and meet other related needs. In addition
to providing loans, PACS also take on distribution and marketing functions, helping farmers
access goods and sell their produce. This dual role of lending and facilitating trade helps
farmers reduce their dependence on middlemen and moneylenders, ultimately improving
their financial situation.
The role and utility of PACS have grown significantly over the years. Initially, these
societies were focused primarily on providing credit, but over time, their services have
expanded to include a broader range of financial services such as savings, insurance, and
marketing support. They have become vital to the rural economy, particularly in providing
credit to small and marginal farmers, who often have limited access to formal financial
institutions.
In 1950-51, PACS advanced loans worth Rs. 23 crores. This was a modest amount,
reflecting the initial stages of the cooperative credit movement. By 2000-01, the amount of
loans advanced by PACS had surged to Rs. 34,520 crores. This dramatic increase highlights
the expansion and significance of PACS in providing financial assistance to farmers. The
surge in disbursements is indicative of the growing recognition of the role of cooperatives
iii) Central Cooperative Banks: The second-tier District Central Co-operative Banks
(DCCBs) are established at the district level. As of 2001-2002, there were 369 DCCBs
operating across the country. These banks have disbursed a total of Rs. 56,650 crore in
loans to farmers. The primary role of DCCBs is to support and provide guidance to the
Primary Agricultural Credit Societies (PACS) at the village level.
DCCBs act as intermediaries between the state cooperative banks and the PACS. They
provide financial assistance, guidance, and oversight to PACS, which are responsible for
direct lending to farmers. DCCBs also help ensure that the credit system operates
efficiently at the local level, thereby contributing to rural economic growth.
DCCBs play a significant role in the disbursement of agricultural credit. As of 2001-2002,
they had advanced Rs. 56,650 crore to farmers, marking an important step in the
development of rural finance in India. The amount reflects the growth in the credit flow
to farmers through the cooperative system, although the demand for agricultural credit
continues to outpace the supply.
By the early 2000s, DCCBs had expanded significantly, with each district having at least
one such bank. Their widespread presence in rural areas has facilitated the provision of
much-needed financial services to farmers, especially those in remote areas who might
otherwise lack access to formal banking channels.
The DCCBs are critical in ensuring that PACS function effectively by providing them with
necessary resources, credit lines, and technical support. Additionally, DCCBs are tasked
with ensuring that loans reach the farmers in a timely manner and that the repayment
processes are managed efficiently.
iv) State Cooperative Banks: State Cooperative Banks (STCBs) represent the third and
highest tier in the cooperative credit structure, functioning at the state level. There are 30
State Cooperative Banks across India. These banks serve as the apex institutions within the
cooperative credit framework, acting as intermediaries between the National Bank for
Agriculture and Rural Development (NABARD) and the lower-tier banks. They borrow funds
from NABARD and lend them to District Central Cooperative Banks (DCCBs) and Primary
Agricultural Credit Societies (PACS) in rural areas. The Central Cooperative Banks (CCBs)
function as intermediaries between the State Cooperative Banks and PACS, helping
facilitate the flow of credit to farmers.
As apex institutions, STCBs have a crucial role in the cooperative credit structure. They
provide funds to DCCBs, which in turn lend to PACS and, ultimately, to farmers. They are
also responsible for overseeing the functioning of the lower-tier cooperative banks and
ensuring that credit reaches the grassroots level efficiently.
India has 30 State Cooperative Banks, each serving a specific state or union territory. These
banks serve as the backbone of the cooperative credit system in their respective regions,
ensuring the smooth operation of financial services across rural areas.
STCBs maintain a direct link with NABARD, the central institution for rural finance in India.
NABARD provides refinancing support to these banks, allowing them to meet the credit
requirements of DCCBs and PACS. This connection is vital for ensuring that sufficient
liquidity is available to sustain the cooperative credit system.
State Cooperative Banks have significantly contributed to the growth of rural credit by
ensuring that funds flow through the system. Over the years, the loan disbursements from
STCBs to DCCBs and PACS have grown steadily, supporting farmers' needs for agricultural
 Cooperatives functions of STCBs
are as follows:
a) Commercial Banks: Until 1970, the government primarily relied on cooperative banks as
the main source of institutional credit for rural areas. However, with the increasing
demand for agricultural finance, the government realized that cooperative banks alone
could not meet the growing needs of rural credit. As a result, the policy was revised, and
various other financial institutions were developed to provide credit in rural regions. In
1969, the government nationalized 14 major banks, and in 1980, six more banks were
nationalized. By 2004, the total number of bank branches across India had increased to
67,062, with 32,200 branches located in rural areas. By 2016, this number had risen to
47,599 rural branches, reflecting the expansion of banking services in rural India.
As of 2021-2022, there are approximately 1,40,000 branches of scheduled commercial banks
in India, with a substantial portion of these branches located in rural areas. The number of
rural branches has continued to grow, making banking services more accessible to farmers
and rural residents. Recent government policies and initiatives, such as the Pradhan Mantri
Jan Dhan Yojana (PMJDY), have further expanded financial inclusion in rural India, with more
b) Regional Rural Banks: The Working Group on Rural Banks (1975)
recommended the establishment of Regional Rural Banks (RRBs) to
complement the efforts of commercial banks and cooperatives in providing
credit to the weaker sections of the rural population, including small and
marginal farmers, landless labourers, artisans, and other low-income rural
residents. The goal behind creating these new banks was to combine the
local understanding and familiarity with rural issues, which cooperatives
possessed, with the business organization and modern approach of
commercial banks, aiming to reach the rural poor more effectively.
Following the recommendations of the Working Group, the first five RRBs
were set up in 1975. Over time, the number of RRBs increased, reaching
196 by the early 2000s. In the financial year 2003-04, RRBs disbursed Rs.
7,567 crore as credit to the agricultural sector. In the financial year 2022-
23, RRBs disbursed Rs. 3,23,250 crore as a credit to the agricultural sector.
By 2021-2022, RRBs had significantly increased their credit outreach, with
total advances surpassing Rs. 2.5 lakh crore, reflecting their growing role
in rural credit distribution. RRBs continue to focus on rural areas, offering
financial services to underserved sectors like small farmers, rural
labourers, and artisans. They play a pivotal role in ensuring financial
inclusion and credit accessibility for the rural population.
c) National Bank for Agriculture and Rural Development (NABARD): The most important
development in the field of rural credit has been the setting up of the National Bank for Agriculture and
Rural Development (NABARD) in July 1982. It took over all the functions that the latter performed in the
field of rural credit from the Reserve Bank of India. NABARD is now the open bank for rural credit.
Designed specifically as an ‘organizational device for providing undivided attention, forceful direction
and pointed focus, to the credit problems of the rural sector’, NABARD is now the apex bank for rural
credit.
Functions of NABARD:
1. To serve as an apex financing agency for the institutions providing investment and production credit
for promoting various development activities in rural areas.
2. To take measures towards institution building for improving absorptive capacity of the credit
delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit
institutions, and training of personnel.
3. To coordinate the rural financing activities of all institutions engaged in development work at the
field level and liaison with the Government of India, the State Governments, the Reserved Bank,
and other national-level institutions concerned with policy formulation.
4. To undertake monitoring and evaluation of projects refinanced by it.
5. NABARD gives high priority to projects formed under Integrated Rural Development Programme
(IRDP).
6. It arranges refinance for IRDP accounts in order to give the highest share for the support for poverty
allevia­tion programs run by the Integrated Rural Development Programme.
7. NABARD also gives guidelines for the promotion of group activities under its programs and provides
100% refinance support for them.
8. It is setting linkages between the Self-help Groups (SHG), which are organized by voluntary
agencies for the poor and needy in rural areas.

NABARD’s refinance is available to State Cooperative Agricultural and Rural Development Banks
(SCARDBs), State Cooperative Banks (StCBs), Regional Rural Banks (RRBs), commercial banks, and
other financial institutions approved by the Reserved Bank, while the ultimate beneficiaries of
9. It refinances to the complete extent for those projects which are operated
under the ‘National Watershed Development Programme ‘ and the ‘National
Mission of Wasteland Development‘.
10. It also has a system of District Oriented Monitor­ing Studies, under which
the study is conducted for a cross-section of schemes that are sanctioned in
a district to various banks to ascertain their performance and to identify the
constraints in their implemen­tation; it also initiates appropriate action to
correct them.
11. It also supports “Vikas Vahini” volunteer programs, which offer credit
and development activities to poor farmers.
12. It also inspects and supervises the cooperative banks and RRBs to
periodically ensure the development of rural financing and farmers’ welfare.
13. NABARAD also recommends about licensing for RRBs and Cooperative
banks to RBI.
14. NABARD gives assistance for the training and development of the staff
of various other credit institutions that are engaged in credit distributions.
15. It also runs programs for agriculture and rural development throughout
the country.
16. It is engaged in regulations of the cooperative banks and the RRBs and
manages their talent acquisition through IBPS CWE (Institute of Banking
Personnel Selection Common Written Exams) conducted across the country.