Agricultural Credit: Definition, Need, and Classification
UNIT -
4
A
G
R
I
C
U
L
T
U
R
A
L
C
R
E
D
I
T
-
M
E
A
N
I
N
G
,
D
E
F
I
N
I
T
I
O
N
,
N
E
E
D
A
N
D
C
L
A
S
S
I
F
I
C
A
T
I
O
N
D
e
f
i
n
i
t
i
o
n
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. Thus, credit involves
a
temporary transfer
of
wealth.
Agricultural Credit is the amount
of
investment funds made
available
for
agricultural
production from resources outside
the farm
sector.
Agricultural Finance is considered as separate field
of
study dealing with lending and
borrowing by organizations and
farmers.
Hopkin
et
al referred agricultural
finance
as
the
means
of
acquiring and control
of
assets,
ownership by
cash
purchase or borrowing or leasing or
custom-hiring.
Warren F.Lee
et al defined Agricultural Finance
as
the
economic
study
of
the
acquisition
and
use
of
capital in agriculture. It deals with
the
supply of and demand
for
funds in
the agricul-
tural
sector
of
an
economy.
According
to William G.
Murray, agricultural finance is
the
economic study of borrowing
of
funds by
farmers;
of
the
organization and operation
of
farm lending agencies; and
of
society's
interest in credit
for
agriculture.
Farm Finance is
a
branch
of
agricultural economics
which
deals with
the
provision and
management
of
services
of
financial resources related
to the
individual
farm
units.
Farm
finance can
also be defined as
the
amount
of
funds
obtained
from
off-farm
sources
for use
on
the
farm, repayable in
future
with an interest agreed
to
either explicitly or
implicitly.
F
a
r
m
F
i
n
a
n
c
e
iii.
i.
is not meant merely
for more
production but also
to
raise
the
productivity of
farm
resources;
ii.
not
a
mere loan or advance
,
but it is an instrument
to
promote
the
well
being
of
the
farming community;
is not
just a
science
to
manage
the
money, but is an applied science
of
allocating
scarce
resources
to
derive
optimum output;
and
iv.
not
a
mere social obligation on
the
society; but it is
a
lever
with backward and forward
linkages
to the
economic development both
at
toe
micro and macro
level.
At
macro
level,
farm
finance
may
be defined as
the study
of impact
of
finance (extended
to the
farmers by
the
intermediaries) on agricultural sector and also on
the
economy as
a
whole.
At
micro
level,
farm finance
may
be defined as the
study
of
these
intermediaries
who
extend
finance to the
farming sector and obtain their
loanable
funds
from financial
markets.
Thus, farm finance should have
the
following
features:
i.
finance
should be extended
to
farmers
for
farm
activities;
ii.
finance
should stimulate tie productivities of farm resources resulting in higher
economic returns
for
the
investment;
iii.
finance
should promote economic development
of
farm households;
and
iv.
finance
should be provided by an external agency
for
strengthening the backward
and forward linkages with country's economic
development.
Further, farmers and bankers
view
farm finance
in different
ways
as detailed
below:
C
l
a
s
s
i
f
i
c
a
t
i
o
n
o
f
A
g
r
i
c
u
l
t
u
r
a
l
c
r
e
d
i
t
Agricultural credit
can
be classifified based
on
purpose,
time
(repayment period),
security, generation
of
surplus funds, creditor and number
of
activities
for
which
credit
is
provided.
i
)
P
u
r
p
o
s
e
:
B
a
s
e
d
o
n
t
h
e
p
u
r
p
o
s
e
f
o
r
w
h
i
c
h
l
o
a
n
i
s
g
r
a
n
t
e
d
,
a
g
r
i
c
u
l
t
u
r
a
l
c
r
e
d
i
t
i
s
c
a
t
e
g
o
r
i
z
e
d
i
n
t
o
:
a)
D
e
v
e
l
o
p
m
e
n
t
c
r
e
d
i
t
o
r
I
n
v
e
s
t
m
e
n
t
C
r
e
d
i
t
:
T
h
i
s
i
s
p
r
o
v
i
d
e
d
f
o
r
a
c
q
u
i
r
i
n
g
d
u
r
a
b
l
e
a
s
s
e
t
s
o
r
for
improving
the
existing assets. Under this, credit is extended
for:
-
purchase
of
land and
land
reclamation.
-
purchase
of
farm machineries and
implements
-
development
of
irrigation
facilities
-
construction
of
farm
structures
-
development
of
plantation and
orchards
-
develonment
of
dairy, poultry, sheep/goat, fisheries, sericulture,
etc.
b)
P
r
o
d
u
c
t
i
o
n
c
r
e
d
i
t
:
i
s
g
i
v
e
n
f
o
r
c
r
o
p
,
p
r
o
d
u
c
t
i
o
n
:
H
e
r
e
,
t
h
e
l
o
a
n
a
m
o
u
n
t
i
s
u
s
e
d
f
o
r
p
u
r
c
h
a
s
i
n
g
i
n
p
u
t
s
a
n
d
f
o
r
p
a
y
i
n
g
w
a
g
e
s
.
c)
M
a
r
k
e
t
i
n
g
c
r
e
d
i
t
:
I
t
i
s
e
s
s
e
n
t
i
a
l
t
o
c
a
r
r
y
o
u
t
t
h
e
m
a
r
k
e
t
i
n
g
f
u
n
c
t
i
o
n
s
a
n
d
t
o
g
e
t
h
i
g
h
e
r
p
r
i
c
e
s
for the
produce.
d)
C
o
n
s
u
m
p
t
i
o
n
c
r
e
d
i
t
:
I
t
i
s
t
h
e
c
r
e
d
i
t
r
e
q
u
i
r
e
d
b
y
t
h
e
f
a
r
m
e
r
t
o
m
e
e
t
h
i
s
f
a
m
i
l
y
e
x
p
e
n
s
e
s
.
i
i
)
R
e
p
a
y
m
e
n
t
P
e
r
i
o
d
:
B
a
s
e
d
o
n
t
h
e
p
e
r
i
o
d
f
o
r
w
h
i
c
h
t
h
e
b
o
r
r
o
w
e
r
r
e
q
u
i
r
e
c
r
e
d
i
t
,
i
t
i
s
d
i
v
i
d
e
d
i
n
t
o
:
a)
S
h
o
r
t
-
T
e
r
m
C
r
e
d
i
t
:
I
t
i
s
g
i
v
e
n
t
o
f
a
r
m
e
r
s
f
o
r
p
e
r
i
o
d
s
r
a
n
g
i
n
g
f
r
o
m
6
t
o
1
8
m
o
n
t
h
s
a
n
d
i
s
primarily meant
to
meet cultivation expenses viz., purchase
of
seed, fertilizer, pesticides and
payment of wages
to
labourers.
It
serves as
the
working capital
to
operate
the farm
efficiently
and is expected
to
be repaid at
the time
of
harvesting
/
marketing
of
crops. It. should be repaid in
one
instalment.
b)
M
e
d
i
u
m
-
T
e
r
m
C
r
e
d
i
t
:
R
e
p
a
y
m
e
n
t
i
s
f
o
r
t
h
e
p
e
r
i
o
d
o
f
2
t
o
5
y
e
a
r
s
,
I
t
i
s
f
o
r
t
h
e
p
u
r
c
h
a
s
e
o
f
pump-sets,
farm
machineries and implements, bullocks, dairy animals
and to carry
out minor
improvement in
the
farm. It
can
be repaid either in
half
yearly or annual
installments.
c)
L
o
n
g
-
T
e
r
m
C
r
e
d
i
t
:
I
t
i
s
a
d
v
a
n
c
e
d
f
o
r
p
e
r
i
o
d
s
m
o
r
e
t
h
a
n
5
y
e
a
r
s
a
n
d
e
x
t
e
n
d
s
e
v
e
n
u
n
t
o
twenty five years against mortagage
of
immovable property
for
undertaking development works
viz., sinking
wells,
purchase
of
tractor, and rnaking permanent improverments in
the
farm. It has
to
be repaid in half-yearly or annual
instalments.
i
i
i
)
S
e
c
u
t
i
r
t
y
:
C
r
e
d
i
t
i
s
p
r
o
v
i
d
e
d
t
o
f
a
r
m
e
r
s
b
a
s
e
d
o
n
t
h
e
s
e
c
u
r
i
t
y
o
f
f
e
r
e
d
b
y
t
h
e
m
.
a)
F
a
r
m
M
o
r
t
g
a
g
e
C
r
e
d
i
t
:
I
t
i
s
s
e
c
u
r
e
d
a
g
a
i
n
s
t
m
o
r
t
g
a
g
e
o
f
l
a
n
d
.
b)
C
o
l
l
a
t
e
r
a
l
C
r
e
d
i
t
o
r
C
h
a
t
t
e
l
C
r
e
d
i
t
:
I
t
i
s
g
i
v
e
n
a
g
a
i
n
s
t
t
h
e
s
e
c
u
r
i
t
y
o
f
l
i
v
e
s
t
o
c
k
,
c
r
o
p
o
r
w
a
r
e
h
o
u
s
e
r
e
c
e
i
p
t
.
c)
P
e
r
s
o
n
a
l
C
r
e
d
i
t
:
I
t
i
s
g
i
v
e
n
b
a
s
e
d
o
n
t
h
e
c
h
a
r
a
c
t
e
r
a
n
d
r
e
p
a
y
i
n
g
c
a
p
a
c
i
t
y
o
f
t
h
e
p
e
r
s
o
n
a
n
d
not on any tangible
assets. In
general, LT credit is usually advanced
against
security of land
while MT
and
ST
loans are sanctioned against personal and. collateral
security.
i
v
)
G
e
n
e
r
a
t
i
o
n
o
f
S
u
r
p
l
u
s
F
u
n
d
s
:
B
a
s
e
d
o
n
g
e
n
e
r
a
t
i
o
n
o
f
s
u
r
p
l
u
s
f
u
n
d
s
,
c
r
e
d
i
t
c
a
n
b
e
c
l
a
s
s
i
f
i
e
d
a
s
s
e
l
f
-
l
i
q
u
i
d
a
t
i
n
g
a
n
d
n
o
n
-
s
e
l
f
-
l
i
q
u
i
d
a
t
i
n
g
c
r
e
d
i
t
.
a
)
S
e
l
f
L
i
q
u
i
d
a
t
i
n
g
C
r
e
d
i
t
:
I
n
t
h
i
s
c
a
s
e
,
l
o
a
n
a
m
o
u
n
t
g
e
t
s
a
b
s
o
r
b
e
d
i
n
t
h
e
p
r
o
d
u
c
t
i
o
n
p
r
o
c
e
s
s
-
in one year or production period and
the
additional income generated is sufficient
to
repay
the
entire loan
amount.
b
)
N
o
n
-
S
e
l
f
L
i
q
u
i
d
a
t
i
n
g
C
r
e
d
i
t
:
H
e
r
e
t
h
e
r
e
s
o
u
r
c
e
s
a
c
q
u
i
r
e
d
w
i
t
h
t
h
e
b
o
r
r
o
w
e
d
f
u
n
d
s
a
r
e
n
o
t
c
o
n
s
u
m
e
d
i
n
t
h
e
p
r
o
d
u
c
t
i
o
n
p
r
o
c
e
s
s
d
u
r
i
n
g
t
h
e
p
r
o
j
e
c
t
p
e
r
i
o
d
.
T
h
e
i
n
v
e
s
t
m
e
n
t
i
s
s
p
r
e
a
d
o
v
e
r
a
p
e
r
i
o
d
o
f
s
e
v
e
r
a
l
y
e
a
r
s
.
T
h
e
a
d
d
i
t
i
o
n
a
l
i
n
c
o
m
e
g
e
n
e
r
a
t
e
d
i
n
o
n
e
y
e
a
r
i
s
n
o
t
s
u
f
f
i
c
i
e
n
t
t
o
r
e
p
a
y
t
h
e
e
n
t
i
r
e
l
o
a
n
a
m
o
u
n
t
a
n
d
h
e
n
c
e
t
h
e
r
e
p
a
y
m
e
n
t
i
s
s
p
r
e
a
d
o
v
e
r
t
o
n
u
m
b
e
r
o
f
y
e
a
r
s
.
v
)
C
r
e
d
i
t
o
r
o
r
L
e
n
d
e
r
w
i
s
e
C
r
e
d
i
t
:
C
r
e
d
i
t
c
a
n
b
e
c
l
a
s
s
i
f
i
e
d
f
r
o
m
t
h
e
p
o
i
n
t
o
f
v
i
e
w
o
f
c
r
e
d
i
t
o
r
.
a)
N
o
n
-
I
n
s
t
i
t
u
t
i
o
n
a
l
A
g
e
n
c
i
e
s
:
T
h
e
y
i
n
c
l
u
d
e
m
o
n
e
y
l
e
n
d
e
r
s
,
t
r
a
d
e
r
s
,
c
o
m
m
i
s
s
i
o
n
a
g
e
n
t
s
,
f
r
i
e
n
d
s
a
n
d
r
e
l
a
t
i
v
e
s
.
T
h
i
s
k
i
n
d
o
f
l
o
a
n
i
s
g
e
n
e
r
a
l
l
y
e
x
p
l
o
i
t
a
t
i
v
e
.
b)
I
n
s
t
i
t
u
t
i
o
n
a
l
A
g
e
n
c
i
e
s
:
T
h
e
y
i
n
c
l
u
d
e
c
o
-
o
p
e
r
a
t
i
v
e
’
s
,
c
o
m
m
e
r
c
i
a
l
b
a
n
k
a
n
d
r
e
g
i
o
n
a
l
r
u
r
a
l
b
a
n
k
.
v
i
)
N
u
m
b
e
r
o
f
A
c
t
i
v
i
t
i
e
s
S
e
r
v
e
d
:
B
a
s
e
d
o
n
t
h
e
n
u
m
b
e
r
o
f
a
c
t
i
v
i
t
i
e
s
f
o
r
w
h
i
c
h
a
m
o
u
n
t
t
h
e
l
o
a
n
can
be used, credit
can
be categorized into a) single purpose loan and
b)
composite
loan.
Problems of Agricultural Credit in
India
with Suggested
Remedies!
Agricultural
Credit:
An
average
Indian
farmer, who has
to
work on
an
uneconomic
holding’,
using traditional methods of cultivation
and
being exposed
to the risks of
a
poor agricultural season
is almost always in
debt.
He is a
perennial
debtor.
Once the farmer falls
into
debt due
to
crop failure or
low
prices of
crops
or malpractices
of moneylenders
he
can
never come
out of
it.
In fact,
large part of the liabilities of farmers
is
‘ancestral
debt’.
Thus,
along
with his landed property, he passes on
his
debt to
the
next
generation.
There are four main causes of rural indebtedness in
India:
(i)
low earning power of
the
borrower,
(ii)
use of loan for unproductive
purposes,
(iii)
very high
rate
of interest charged by the
village
moneylender
and
(iv)
the manipulation of accounts by the
lenders.
In a
few cases, the bad
habits
of the farmers
(such as
gambling,
drinking, etc.)
are
responsible
for his
burden of ‘unproductive’ debt.
However,
in most
cases, the cause of the debt
may
be some
expensive social ceremony which
the
farmer was perhaps forced
to
“arrange for fear of
a
social
boycott”.
Need for
Finance:
Finance
is
required by farmers not
only
for the production
and
marketing of crops but
also
to keep
a
stagnant agricultural economy
alive. Most
Indian
farmers live near the brink of starvation.
A
bad
monsoon,
a
poor harvest,
an
accident or
illness in
the
family
forces
him
to approach
the
moneylender
for a
loan.
In
India, there
is
the
preponderance of such ‘distress’ or unproductive loans. Agricultural
finance in
India
is not
just one requirement of the agricultural
business but
a
symptom of the distress prevailing among the
majority of the
farmers.
Rural
credit includes not only credit provided
to farmers
but
also
credit extended
to
artisans, owners of small
and
medium industries
in
rural areas,
small
transport operators
and
so on.
Two main
sources of rural credit
are private and
institutional.
The
former
includes private moneylenders, traders
and
commission agencies,
relatives
and-
landlords.
The sources of institutional credit are rural co-operatives,
commercial banks, particularly the State
Bank
of
India (SBI).
And,
with the setting up of
a
specialised institution called the National
Bank
for Agricultural
and Rural
Development
(NABARD)
the
Agricultural Refinance
and
Development Corporation (ARDC)
has
ceased to exist.
Up
to
1982 it was
responsible for extending
agricultural finance under
guidance
of the Reserve
Bank
of
India.
It may
also be noted that the short-
and
medium-term credit
requirements of
the
farmers
is met
by indigenous bankers or village
moneylenders, co-operative credit societies
and
commercial banks.
Long-term credit needs
are
met by
land
development banks
and
NABARD.
The principal
aim
of institutional credit
is
to replace the widely
prevalent money-lending
at a
very
high rate
of interest. Available
data show that the rural credit institutions
have
succeeded to
a
considerable
extent in achieving
this
aim.
Institutional Farm
Finance:
The need
for
institutional credit has been felt because of the
inherent defects
of
private
agencies.
Five main defects of the system of private credit are the
following:
1.
It is
highly exploitative
in
character because of the
inherent
profit
motive.
2.
Since such credit
is
provided largely for unproductive purposes
the rate of interest charged
is
very
high.
3.
Such credit
is
not
necessarily directed toward needy persons or
desired
channels.
4.
Such credit
is
provided for short periods of
time and at high
rates
of interest
and cannot,
therefore,
be
utilised for land development
or long- term improvement of
agriculture.
5.
Institutional credit
is not
linked
with
other
non-farm
services
such
as
marketing
and
processing
and
warehousing.
By
contrast, institutional credit
is
basically un-exploitive
in
character.
It is largely
directed towards raising agricultural
productivity so that the income of the farmer increases sufficiently
and he
becomes self-sufficient.
The
rate of interest
is not
only low
but varies from
case
to case. Different rates of interest are charged
for different types of loans
and
different categories of
farmers.
Institutional agencies
also
draw
a
clear-cut distinction
between
short-term credit
and
long- term credit. Moreover,
they
recognise
the organic
link
between credit
and
other needs of the farmers
and
seek
to achieve an
integration of credit with such
needs.
Farmers not only need credit but
also
guidance
in
adopting
improved
methods
of cultivation.
Thus, it is
necessary to provide
such guidance
and
extension
services along
with credit. They
must
be taught how to use
quality
seeds, fertilisers, pesticides, etc.
and
also how
to
grow
crops.
They
must also
be provided marketing
assistance
so that they can
obtain the best possible
return
from their produce.
Only
institutions
like
co-operative societies, commercial banks, etc. can
provide
such
guidance, not the usurious moneylenders
and
greedy commission
agents. So
it is now
necessary to
make a
brief review
of
different
institutional agencies of rural
credit.
Consequences:
Rural
indebtedness
is also
likely to have some undesirable social
consequences. Due to ever-growing debt there emerges
in
the rural
economy of
India a
class of landless labourers
and
tenants.
Consequently independent or self-sufficient farmers gradually lose
their
identity. The
landless workers have nothing to offer
as
security
in
order to obtain loans from moneylenders, except their
labour
power.
Consequently, they become bonded labourers. This creates
discontent among them
and adds
to rural tensions.
In fact,
the
acquisition
of land by the traders
and
moneylenders
and
the con-
sequent deprivation of the poor farmers of their meager landed
property was
the
root cause of the
Naxalite
movement, which
assumed serious proportions
in West
Bengal, Orissa
and
Andhra
Pradesh
in
the
late 1960s and
the 1970s.
Thus
there
is no
use
denying the problem of rural indebtedness. Sooner
the
problem
is
removed from
its
roots
the
better
for India’s
rural
economy.
Suggested Remedies:
Since the problem of rural indebtedness has two
major
dimensions,
to solve the problem we have to
adopt a
two-fold strategy. Since the
magnitude of debt
is quite high,
steps
may
be taken
to
cancel old
debts. There
is a
strong case for
reduction
of ancestral debt
and
even for their
liquidation.
This
can be done by State Governments by passing
Insolvency Acts.
It may
be noted
that
the Government decided
in 1990
to
write off
Rs.
14,000 crores of loans outstanding from farmers
Up
to
a
maximum
of
Rs. 10,000
crores.
This
was considered necessary
because
80%
of
India’s
population were farmers
and farm
workers.
Earlier
in
some States moratorium
had
been declared on the
recovery of debt
by
moneylenders from farmers, rural artisans
and
landless workers
as
per the
20-
point
Programme.
Secondly,
it is
to be ensured that the
quantum
of fresh borrowing
is
reduced to
the minimum,
keeping
in view
the repayment capacity of
farmers.
It is
equally important to
ensure
that new
borrowing is
strictly for productive purposes
and not
for meeting consumption
needs.
It is,
however,
difficult
for the Government to
ensure
this
in
practice.
Only through the spread of education
and
propaganda among
farmers
it is
possible to check the volume of loans
made
for
unproductive purposes. However,
in LDCs
like
India,
arrangement
may also
be
made
for providing such loans on
a modest
scale.
As a
subsidiary
measure,
control of the activities of moneylenders
is
also
necessary.
This
has been done
by
some States where sale of
land to moneylenders has been prohibited by
law.
It is
important to note that
the
abolition of bonded labour
and
liquidation of rural indebtedness
are
the two
major
aspects of the
20-point Programme.
The
system of bonded labour
was
abolished
by
an Act
of Parliament
in
1976. However,
it
seemed that the only
answer to the present
multi-
agency credit system
is
implementing
a
new
multipurpose system with efficient
management.
This
will
have
to
be
so devised
as
to meet
the
need
for
consumption
loan of the farmers so that they
are not
exploited by being paid low
wages or
low
returns on their products. Moreover, the
RRBs,
if
properly
managed, can go a
long way
in
solving the problem of rural
indebtedness
in an
effective
manner.
Conclusion:
Due
to extension of institutional credit
facilities
since
1950-51
the
monopoly position of the village moneylender has been challenged.
Due
to progressive institutionalization of credit,
private
sources
now
meet barely
20%
of the short-
and
medium-term credit needs
of the
farmers.
In
other words, institutional sources meet about
80%
of such needs.
But
the Agricultural Credit
Review
Committee headed by Prof.
A.
M. Khusro,
in
its
report
submitted
on
August 1989, commented that
despite the disappearance of dual
financial
system, moneylenders
are
still operating their business
in
rural
India.
One recent study of the Reserve
Bank
of
India
admitted that rural
households still rely on informal credit markets for
60
to 70% of
their credit needs even though interest rates charged are typically
over
30%. This is
due to apathy of State-owned commercial banks
in
providing credit to poor peasants.
Actually,
big landlords
are
capable of obtaining more loans
and
advances from
various
institutions
in
their
own favour
at the
expense of the poor
farmers.
Despite
huge
increase
in
overall agricultural credit,
there
is a
serious problem
of
over-dues which has been inhibiting credit
expansion on
the
one
hand and
economic viability of the lending
institutions, mainly the co-operatives
and
regional
rural
banks on
the other. The
waiver
of agricultural loans to the tune
of Rs.
10,000
crores
in 1990-91
has virtually stopped the credit cycle.
If
this
.prac-
tice
is
continued in the future too
rural
credit
expansion
will take
a
back seat.
But, if
more
and
more
emphasis is
to be given to
the
agricultural sector, lending institutions will be
under
more
and
more pressure.
Above
all,
small
and marginal
farmers still remain unworthy
borrowers
in
the
banking
parlance, though
it
was hoped
at
the time
of nationalisation that these banks would take care of
the
credit
needs of the
farmers.
Their dependence on informal markets after
50 years of planning does
not
augur well.
The
quantitative
expansion of institutional sources
hide all
these facts. From the
qualitative angle, their performance
is
subject to serious
scrutiny.
Agricultural credit involves obtaining money for farming activities with a promise to repay in the future. It plays a crucial role in facilitating agricultural production by providing financial resources from external sources. The definition, need, and classification of agricultural credit are explored in detail, covering aspects such as purpose, time of repayment, security, and more, to understand its significance in promoting economic development in the agricultural sector.
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Presentation Transcript
UNIT - 4 AGRICULTURE CREDIT
AGRICULTURAL CREDIT-MEANING, DEFINITION, NEED AND CLASSIFICATION Definition 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. Thus, credit involves a temporary transfer of wealth. Agricultural Credit is the amount of investment funds made available for agricultural production from resources outside the farm sector. Agricultural Finance is considered as separate field of study dealing with lending and borrowing by organizations and farmers. Hopkin et al referred agricultural finance as the means of acquiring and control of assets, ownership by cash purchase or borrowing or leasing or custom-hiring. Warren F.Lee et al defined Agricultural Finance as the economic study of the acquisition and use of capital in agriculture. It deals with the supply of and demand for funds in the agricul- tural sector of an economy. According to William G. Murray, agricultural finance is the economic study of borrowing of funds by farmers; of the organization and operation of farm lending agencies; and of society's interest in credit for agriculture. Farm Finance is a branch of agricultural economics which deals with the provision and management of services of financial resources related to the individual farm units. Farm finance can also be defined as the amount of funds obtained from off-farm sources for use on the farm, repayable in future with an interest agreed to either explicitly or implicitly. Farm Finance i. is not meant merely for more production but also to raise the productivity of farm resources; ii. not a mere loan or advance , but it is an instrument to promote the well being of the farming community; is not just a science to manage the money, but is an applied science of allocating iii. scarce resources to derive optimum output; and iv. not a mere social obligation on the society; but it is a lever with backward and forward linkages to the economic development both at toe micro and macro level.
At macro level, farm finance may be defined as the study of impact of finance (extended to the farmers by the intermediaries) on agricultural sector and also on the economy as a whole. At micro level, farm finance may be defined as the study of these intermediaries who extend finance to the farming sector and obtain their loanable funds from financial markets. Thus, farm finance should have the following features: i. ii. finance should be extended to farmers for farm activities; finance should stimulate tie productivities of farm resources resulting in higher economic returns for the investment; iii. iv. finance should promote economic development of farm households; and finance should be provided by an external agency for strengthening the backward and forward linkages with country's economic development. Further, farmers and bankers view farm finance in different ways as detailed below: Farmers Lending Agencies i) acquire finance for farm needs at extend finance which can be easily proper time. collected. ii) try to get finance at a reasonable cost try to get a reasonable rate of return for capital. iii) ensure that their own assets arenot ensure proner degree of liquidity of exposed to high risks. securities for safety. Classification of Agricultural credit Agricultural credit can be classifified based on purpose, time (repayment period), security, generation of surplus funds, creditor and number of activities for which credit is provided. i) Purpose: Based on the purpose for which loan is granted, agricultural credit is categorized into: a) Development credit or Investment Credit: This is provided for acquiring durable assets or for improving the existing assets. Under this, credit is extended for: - purchase of land and land reclamation. - purchase of farm machineries and implements - development of irrigation facilities - construction of farm structures - development of plantation and orchards
- develonment of dairy, poultry, sheep/goat, fisheries, sericulture, etc. b)Production credit: is given for crop, production: Here, the loan amount is used for purchasing inputs and for paying wages. c) Marketing credit: It is essential to carry out the marketing functions and to get higher prices for the produce. d) Consumption credit: It is the credit required by the farmer to meet his family expenses. ii) Repayment Period: Based on the period for which the borrower require credit, it is divided into: a) Short-Term Credit: It is given to farmers for periods ranging from 6 to 18 months and is primarily meant to meet cultivation expenses viz., purchase of seed, fertilizer, pesticides and payment of wages to labourers. It serves as the working capital to operate the farm efficiently and is expected to be repaid at the time of harvesting / marketing of crops. It. should be repaid in one instalment. b) Medium-Term Credit: Repayment is for the period of 2 to 5 years, It is for the purchase of pump-sets, farm machineries and implements, bullocks, dairy animals and to carry out minor improvement in the farm. It can be repaid either in half yearly or annual installments. c)Long-Term Credit: It is advanced for periods more than 5 years and extends even unto twenty five years against mortagage of immovable property for undertaking development works viz., sinking wells, purchase of tractor, and rnaking permanent improverments in the farm. It has to be repaid in half-yearly or annual instalments. iii) Secutirty: Credit is provided to farmers based on the security offered by them. a) Farm Mortgage Credit: It is secured against mortgage of land. b)Collateral Credit or Chattel Credit: It is given against the security of livestock, crop or warehouse receipt. c) Personal Credit: It is given based on the character and repaying capacity of the person and not on any tangible assets. In general, LT credit is usually advanced against security of land while MT and ST loans are sanctioned against personal and. collateral security. iv) Generation of Surplus Funds: Based on generation of surplus funds, credit can be classified as self-liquidating and non-self -liquidating credit. a) Self Liquidating Credit: In this case, loan amount gets absorbed in the production process- in one year or production period and the additional income generated is sufficient to repay the entire loan amount.
b) Non-Self Liquidating Credit: Here the resources acquired with the borrowed funds are not consumed in the production process during the project period. The investment is spread over a period of several years. The additional income generated in one year is not sufficient to repay the entire loan amount and hence the repayment is spread over to number of years. v) Creditor or Lender wise Credit: Credit can be classified from the point of view of creditor. a)Non - Institutional Agencies: They include money lenders, traders, commission agents, friends and relatives. This kind of loan is generally exploitative. b)Institutional Agencies: They include co-operative s, commercial bank and regional rural bank. vi) Number of Activities Served: Based on the number of activities for which amount the loan can be used, credit can be categorized into a) single purpose loan and b) composite loan.
Problems of Agricultural Credit in India with Suggested Remedies! Agricultural Credit: An average Indian farmer, who has to work on an uneconomic holding , using traditional methods of cultivation and being exposed to the risks of a poor agricultural season is almost always in debt. He is a perennial debtor. Once the farmer falls into debt due to crop failure or low prices of crops or malpractices of moneylenders he can never come out of it. In fact, large part of the liabilities of farmers is ancestral debt . Thus, along with his landed property, he passes on his debt to the next generation. There are four main causes of rural indebtedness in India: (i) low earning power of the borrower, (ii) use of loan for unproductive purposes, (iii)very high rate of interest charged by the village moneylender and (iv) the manipulation of accounts by the lenders. In a few cases, the bad habits of the farmers (such as gambling, drinking, etc.) are responsible for his burden of unproductive debt. However, in most cases, the cause of the debt may be some expensive social ceremony which the farmer was perhaps forced to arrange for fear of a social boycott . Need for Finance: Finance is required by farmers not only for the production and marketing of crops but also to keep a stagnant agricultural economy alive. Most Indian farmers live near the brink of starvation. A bad monsoon, a poor harvest, an accident or illness in the family forces him to approach the moneylender for a loan. In India, there is the preponderance of such distress or unproductive loans. Agricultural finance in India is not just one requirement of the agricultural business but a symptom of the distress prevailing among the majority of the farmers.
Rural credit includes not only credit provided to farmers but also credit extended to artisans, owners of small and medium industries in rural areas, small transport operators and so on. Two main sources of rural credit are private and institutional. The former includes private moneylenders, traders and commission agencies, relatives and- landlords. The sources of institutional credit are rural co-operatives, commercial banks, particularly the State Bank of India (SBI). And, with the setting up of a specialised institution called the National Bank for Agricultural and Rural Development (NABARD) the Agricultural Refinance and Development Corporation (ARDC) has ceased to exist. Up to 1982 it was responsible for extending agricultural finance under guidance of the Reserve Bank of India. It may also be noted that the short- and medium-term credit requirements of the farmers is met by indigenous bankers or village moneylenders, co-operative credit societies and commercial banks. Long-term credit needs are met by land development banks and NABARD. The principal aim of institutional credit is to replace the widely prevalent money-lending at a very high rate of interest. Available data show that the rural credit institutions have succeeded to a considerable extent in achieving this aim. Institutional Farm Finance: The need for institutional credit has been felt because of the inherent defects of private agencies. Five main defects of the system of private credit are the following: 1.It is highly exploitative in character because of the inherent profit motive. 2.Since such credit is provided largely for unproductive purposes the rate of interest charged is very high. 3.Such credit is not necessarily directed toward needy persons or desired channels.
4.Such credit is provided for short periods of time and at high rates of interest and cannot, therefore, be utilised for land development or long- term improvement of agriculture. 5.Institutional credit is not linked with other non-farm services such as marketing and processing and warehousing. By contrast, institutional credit is basically un-exploitive in character. It is largely directed towards raising agricultural productivity so that the income of the farmer increases sufficiently and he becomes self-sufficient. The rate of interest is not only low but varies from case to case. Different rates of interest are charged for different types of loans and different categories of farmers. Institutional agencies also draw a clear-cut distinction between short-term credit and long- term credit. Moreover, they recognise the organic link between credit and other needs of the farmers and seek to achieve an integration of credit with such needs. Farmers not only need credit but also guidance in adopting improved methods of cultivation. Thus, it is necessary to provide such guidance and extension services along with credit. They must be taught how to use quality seeds, fertilisers, pesticides, etc. and also how to grow crops. They must also be provided marketing assistance so that they can obtain the best possible return from their produce. Only institutions like co-operative societies, commercial banks, etc. can provide such guidance, not the usurious moneylenders and greedy commission agents. So it is now necessary to make a brief review of different institutional agencies of rural credit. Consequences: Rural indebtedness is also likely to have some undesirable social consequences. Due to ever-growing debt there emerges in the rural economy of India a class of landless labourers and tenants. Consequently independent or self-sufficient farmers gradually lose their identity. The landless workers have nothing to offer as security
in order to obtain loans from moneylenders, except their labour power. Consequently, they become bonded labourers. This creates discontent among them and adds to rural tensions. In fact, the acquisition of land by the traders and moneylenders and the con- sequent deprivation of the poor farmers of their meager landed property was the root cause of the Naxalite movement, which assumed serious proportions in West Bengal, Orissa and Andhra Pradesh in the late 1960s and the 1970s. Thus there is no use denying the problem of rural indebtedness. Sooner the problem is removed from its roots the better for India s rural economy. Suggested Remedies: Since the problem of rural indebtedness has two major dimensions, to solve the problem we have to adopt a two-fold strategy. Since the magnitude of debt is quite high, steps may be taken to cancel old debts. There is a strong case for reduction of ancestral debt and even for their liquidation. This can be done by State Governments by passing Insolvency Acts. It may be noted that the Government decided in 1990 to write off Rs. 14,000 crores of loans outstanding from farmers Up to a maximum of Rs. 10,000 crores. This was considered necessary because 80% of India s population were farmers and farm workers. Earlier in some States moratorium had been declared on the recovery of debt by moneylenders from farmers, rural artisans and landless workers as per the 20- point Programme. Secondly, it is to be ensured that the quantum of fresh borrowing is reduced to the minimum, keeping in view the repayment capacity of farmers. It is equally important to ensure that new borrowing is strictly for productive purposes and not for meeting consumption needs. It is, however, difficult for the Government to ensure this in practice. Only through the spread of education and propaganda among farmers it is possible to check the volume of loans made for
unproductive purposes. However, in LDCs like India, arrangement may also be made for providing such loans on a modest scale. As a subsidiary measure, control of the activities of moneylenders is also necessary. This has been done by some States where sale of land to moneylenders has been prohibited by law. It is important to note that the abolition of bonded labour and liquidation of rural indebtedness are the two major aspects of the 20-point Programme. The system of bonded labour was abolished by an Act of Parliament in 1976. However, it seemed that the only answer to the present multi- agency credit system is implementing a new multipurpose system with efficient management. This will have to be so devised as to meet the need for consumption loan of the farmers so that they are not exploited by being paid low wages or low returns on their products. Moreover, the RRBs, if properly managed, can go a long way in solving the problem of rural indebtedness in an effective manner. Conclusion: Due to extension of institutional credit facilities since 1950-51 the monopoly position of the village moneylender has been challenged. Due to progressive institutionalization of credit, private sources now meet barely 20% of the short- and medium-term credit needs of the farmers. In other words, institutional sources meet about 80% of such needs. But the Agricultural Credit Review Committee headed by Prof. A. M. Khusro, in its report submitted on August 1989, commented that despite the disappearance of dual financial system, moneylenders are still operating their business in rural India. One recent study of the Reserve Bank of India admitted that rural households still rely on informal credit markets for 60 to 70% of their credit needs even though interest rates charged are typically over 30%. This is due to apathy of State-owned commercial banks in providing credit to poor peasants. Actually, big landlords are
capable of obtaining more loans and advances from various institutions in their own favour at the expense of the poor farmers. Despite huge increase in overall agricultural credit, there is a serious problem of over-dues which has been inhibiting credit expansion on the one hand and economic viability of the lending institutions, mainly the co-operatives and regional rural banks on the other. The waiver of agricultural loans to the tune of Rs. 10,000 crores in 1990-91 has virtually stopped the credit cycle. If this .prac- tice is continued in the future too rural credit expansion will take a back seat. But, if more and more emphasis is to be given to the agricultural sector, lending institutions will be under more and more pressure. Above all, small and marginal farmers still remain unworthy borrowers in the banking parlance, though it was hoped at the time of nationalisation that these banks would take care of the credit needs of the farmers. Their dependence on informal markets after 50 years of planning does not augur well. The quantitative expansion of institutional sources hide all these facts. From the qualitative angle, their performance is subject to serious scrutiny.
