In modern farming, credit has become
one of the crucial inputs. The co-operative credit societies was, in the past
and even now, the most important source of credit to the farmers. Since 1969,
commercial banks are also financing agriculture because of `social control'.
There has been tremendous increase in the bank branches in the rural areas,
Govt. has adopted the policy of `multi-agency approach' in agricultural
credit,. At present, primary agricultural co-operative societies, land
development banks, commercial banks and regional rural banks are financing
agriculture. National Bank for Agriculture and Rural Development (NABARD) is
providing refinance to the commercial banks. In order to reduce the competition
amongst the commercial banks in the rural areas, a policy of "Service Area
Approach" has been adopted since 1988. As per this policy, each bank has to
adopt few villages and they are required to meet credit.
Farm Credit in the Past and the
In the past, farming was carried out
in a traditional way. It was a subsidence farming and was more or less self
sufficient Credit needs of the farmers were limited and were met with mostly by
the money lenders, relatives, friends and to some extend by Taccavi loans from
Government. Money lenders used to exploit the farmers in various ways like
exorbitant rates of interest, false documents, etc.
After independence and particularly
after the Green Revolution, agriculture entered the era of modernisation and
the credit needs of the farming community started increasing. In the present
day market oriented farming, the credit has become one of the crucial inputs.
Co-operative Credit Societies Acts of
1904 and 1912 was the first important land mark in the agricultural credit
policy in India. In the subsequent period, the co-operative credit became more
and more significant. It became the most important source of farm credit in the
country. It was the result of the policy to have progressive
institutionalization for supply of cheaper and adequate credit to agriculture.
Slowly, the importance of money lenders was reduced.
Social Control on
Commercial Banks (1969):
The agricultural credit policy took
another significant turn in 1969. In this year, Govt.of India nationalised 14
major commercial banks and imposed `Social Control' on them. Hitherto the
commercial banks were not financing agriculture. As per the new policy, they
were made to provide finance to agriculture on priority basis. Consequently,
many commercial banks opened their branches in the semi-urban and rural areas.
Another important feature of the
credit policy since independence is the "multi-agency approach". Farmers are a
liberty to avail finance from any of the credit institutions. At present, the
major institutional agencies supplying credit to farmers and rural weaker
sections are -Commercial Banks, Primary Agricultural Co-operative Credit
Societies, Land Development Banks and Regional Rural Banks. In addition,
National Bank for Agriculture and Rural Development (NABARD) is refinancing in
a big way the banks for different agricultural development projects like lift
Irrigation Schemes, etc.
The success of agricultural production
programme depends upon the supply of credit. Under the strategy of multi-agency
adopted by the Government, the above named credit institutions are providing
credit to cultivators in general and weaker sections in particular. Because of
this, the activities of the money lenders and their exploitation particularly
of the weaker sections in the rural areas has been drastically reduced in the
Agricultural credit has been
classified into three categories viz.short-term credit (crop loan), medium-term
credit and long-term credit. This classification is based on the periods for
which the loan is given. This is to meet the varying needs of the farming
community. The short term loan which is also known as the crop loan, is
provided for 15 month period and is meant for meeting the needs like seed,
fertilizer, labour, cattle feed, etc. The farmer can repay the loan after
harvest of the crop. The period for medium term loan is from 15 months to five
years. These loans are provided for meeting the expenses on land improvements,
digging of wells, purchase of implements and machinery, farm animals, etc.
These items require relatively more investment and as such the period for
repayment is kept upto 5 years. The long term credit as the name indicates is
for longer period than 5 years. This type of credit is given for activities
requiring heavy investment. The Land Development Banks provide only the long
term finance; while the Regional Rural Banks give loans only to the weaker
sections like small and marginal farmers, agricultural labourers, village
Mounting overdues is the serious
problem faced by these financing institutions in the rural areas. This is an
obstacle in the recycling of funds with the credit institutions.
New Policy in the
Rural Credit for Banks:
As indicated earlier, after 1969,
there was a rapid spread of branches of commercial banks in the rural areas. As
a result, there was duplication of efforts and scattered lending over wider
areas. In order to avoid this, a new policy was adopted in 1988 which is known
as the"Service Area Approach". Under this policy, each semi-urban and rural
branch of commercial bank is assigned a specific area comprising of a cluster
of villages within which it will operate. Thus, the compactness in the area of
operation will make it easy for the clientele to approach the bank for credit.
It will also help the bank in credit planning and monitoring of the Funds. The
banks are supposed to prepare annual credit plans for all the adopted villages.
The Credit requirements of agriculture
are of three types viz.
1. Short -Term
2. Medium - Term
3. Long- Term (LT)
We shall deal with long-term credit in
Long Term Credit :
The period of long-term credit is generally 5 to 20 years or even more in some
special cases. In any industry, long-term investment is necessary, to create
permanent assets which give returns over a period of time. The permanent
investment is not only necessary for a particular industry but even for the
country. Because for continuity of production and progress of the country. This
applies to agriculture also. In Agriculture, long-term investment comprises of
sinking well, land levelling, fencing and permanent improvements on land
purchase of big machinery like tractor with its attachments including trolleys,
establishment of fruit orchard of mango, cashew, coconut, sapota (chiku),
orange, pomogranate, fig, guava, etc. There are many other items of long-term
capital investment. Investment once made in the beginning continious to give
returns over a long period. Fruit orchards particularly do not give any income
in the first 4 - 5 years as in case of other seasonal crops. So the expenditure
incurred in the first 4-5 years becomes a capital cost.
All the long-term investments mentioned above require large amounts of funds.
Although they have good potential to give returns in future, individual farmers
have no financial capacity to make such costly investments from their own funds
because they have no savings or very little savings. Therefore, they have to
resort to bank borrowing to meet their such needs. The financial criteria terms
and conditons procedures of granting L.T.loans are altogether different from
short-term loans : Even the bank or agency providing LT loans is separatedue to
its particular mode or system of raising capital and graign.
Land Development Banks :
The special banks providing LT Loans are called Land Development Banks (LDA).
The history of LDB's is quite old. The first LDB was started at Jhang in Punjab
in 1920. But the real impetus to these banks was received after passing the
Land Mortgage Banks Act in 1930's (LDB's were originally called Land Mortgage
Banks). After passing this Act LDB's were started in different states of India.
These Banks have two-tier structure
1. Primary Land Development Bank at district level with branches at taluka
2. Control or State Land Development Bank. All primary Land Development Banks
are federated into Central Land Development Bank at the State Level. In some
States, there is " Unitary structure" wherein, there is only one State Land
Development Bank at the state level operating through its branches and
sub-branches at district and below levels.
Raising Funds :
The main function of raising funds is carried out be the Central or State Land
Development Bank which can really deal with the money market of the country
effectively and advance loans to primary LDB's. The sources of funds of State
1. Share capital.
2. Issue of debentures
3. Loans from NABARD
4. Reimbursements of subsidies from the Govt.
5. Other funds.
Issue of debentures is the main source
of funds for the LDB's. Debentures is a `Bond' conveying and acknowledging the
debt and also containing the provision of promise for payment of interest at
stipulated rate and return of the principal amount. The period of debentures
varies from 7 to 15 years. As LDB's require funds of longer duration to advance
LT loans to borrowers, the debenture is a convenient instrument of raising
funds. Because it guarantees that funds will remain with the Banks for a
There are three types of debentures:-
1. Regular debentures
2. Rural debentures
3. Special development debentures.
These debentures are mostly purchased
by financial institutions like LIC, Commercial Banks, Co-op. Banks, NABARD, and
State Govts. As there is limited response from the public. The State Govt. give
incentive subsidies for many development activities by individual farmer
including purchase of tractor. The amounts of subsidies are reimbursed to the
Interest rate :
The rates of interest for LT Loans are generally low and within the paying
capacity of farmers. They are around 11 to 12%.
Loan Procedure :
The Branch offices receive applications from the prospective borrower. Then
Agricultural Finance Officer or Inspector scrutinises these applications, they
visit places of the application and ascertain the purpose of borrowing, verify
the genuineness of the proposal and it economic viability, repaying ability of
the farmers, adequacy of security,etc. After completing those formalities, the
loan is granted by the appropriate authority at appropriate level depending
upon the delegation of powers by the Banks.
Crop loan is a short term credit and
is generally obtained from primary credit co-op. Society of a village or also
from commercial bank. The period of loan is about one year except for sugarcane
for which the period is 18 months. There are two criteria for granting crop
One third of gross value
Cost of cultivation.
third of gross value approach takes into account the
yield and price of the crop, its cost of cultivation
and family expenditure. If the gross value is more,
more amount of loan becomes available. For e.g. Rice.
in second situation farmer is entitled for Rs.3330
per hectare which is higher than in the first situation.
Thus this method takes into account the productive
aspect of a crop.
cost of cultivation, direct paid-out costs are only
considered. They include items, like seeds, manures,
fertilizers, pesticides, diesel/electricity, hired
labour etc. In this approach, it is expected that
all direct costs to be incurred by the farmer should
be covered and accordingly he should get adequate
credit. If the cost of all these items of input is
Rs.3500/-. If the loan is granted according to first
approach, then the amount which is short, is spent
by the farmer from his own funds. Since crop loan
is for one season, its recovery is made in one installment
after the harvest of the crop. Crop loan is an annual
requirement and farmer has to borrow fresh loan for
new crop season every time. Therefore, he has to repay
the earlier loan with interest within stipulated time.
Since this loan is required every season/every year,
the procedure of getting this loan is simple and convenient
and it is made available by the District Central Co-op.Banks
through the village Co-op. Credit Society. So the
farmer gets his loan in the village itself. If the
loan is to be taken from commercial bank, it is available
from the nearby branch of the commercial bank. As
for security, the farmer has to offer his land as
a security. There is a three tier structure providing
crop-loans through co-operative institutions.
Bank- State Co-op. Bank.
Central co-op. Bank
co-op. Credit Society.
is the most important need of the farmer to increase
and maintain his productive ability. With the help
of this loan amount, he can purchase modern costly
inputs and adopt new technologies on his farms. So
through these loans co-operative banks play important
role in the development and prosperity of agriculture.
Among the various types of bank loans to agriculture,
the share of crop loan is the highest.