The Agricultural Credit System in India

Agricultural credit is one of the most basic and important inputs for conducting any agricultural development programme. Agriculture has always been a major source of national income, while being a major basis of our earnings too, as India is one of the largest producers of major food products like rice, wheat, pulses, various spices etc. Indian agriculture provides employment to about 50% of the nation’s work force and has a contribution of 18% in India’s GDP. In spite of playing such an important role in the national income and national growth, we can see that agricultural indebtedness and lack of proper credit facilities have been not only an economic but also a social crisis. There are various reasons for this, like the transcendence of the deficit nature of rural families especially the small land owners, the burden of old debt, the unpredictable weather, a high illiteracy rate along with various other socio-economic reasons. In India, the prime source of agricultural credit was from moneylenders and there is an immense need for agricultural credit as Indian farmers are very poor. Although post Independence, the Government adopted the institutional credit approaches through various agencies like co-operatives, commercial banks and regional rural banks in order to provide adequate credit to farmers at a cheaper rate of interest. Presently, with growing modernization of agriculture during the post green revolution period the requirement of agricultural credit has increased in the recent years.

Types of agricultural credit

Short term credit is the credit given to farmers to meet their short-term needs like purchasing seeds, fertilizers, paying wages to hired workers for a period less than 15 months etc. Such loans are usually paid back after harvest. In contrast, medium term credit includes the credit facilities given to farmers for medium periods ranging between 15 months and 5 years. They extend for usually longer than short term credit and are mostly used for the purchasing of cattle, pumping sets, and other agricultural implements.

Lastly, farmers are also given long term credit. When farmers require finance for a long period of more than 5 years for a long-term purpose, like buying additional land or making permanent improvement on the land like drilling of wells, reclamation of land, horticulture etc, it is termed as long term credit. It requires a sufficient amount of time to repay back these loans. It is known that the unorganized sector has financed Indian agriculture since a long time and the institutional sector has stepped in as recently as this century. However, these days, long term and short term credit needs of these institutions are being met by National Bank for Agriculture and Rural Development (NABARD).

Non-institutional sources of finance

Non-institutional sources of finance include money borrowed from moneylenders, traders and commission agents, relatives, landlords etc. Money lenders form a major portion of agricultural credit and often indulge in malpractices and manipulation of accounts and charge exorbitant amounts of interest rates on their loans (sometimes as large as 24%). Traders and commission agents provide loans to the farmers before the maturity of crops, following which, they force the farmers to sell their crops at very low prices. These types of loans are mostly advanced for cash crops and traders or commission agents charge heavy commissions for them.

Poor farmers also borrow funds from their own relatives or friends in forms of cash or kind during times of financial crisis. These loans are informal loans and carry no interest rates and are usually returned after harvest. Though the farmers also take loans from landlords for meeting their financial requirements, this source of finance has been a major source of the ill-practices of exploiting the cultivators followed by money lenders and traders.

Institutional sources of finance

There are multiple institutional sources of finance. Co-operative credit societies are one of the cheapest and best sources of rural credit in India, while land development banks usually offer long term co-operative advance credit for a period of 15-20 years to the farmers against the mortgage of their lands for permanent improvement, purchasing agricultural implements and for repaying old debts.

Other major institutional bodies include banks those are both commercial as well as regional in nature. In the initial years, commercial banks had not played a very vital role in the development of rural credit facilities (In the 1950s only 1% of agricultural credit was advanced by the commercial banks). However, after nationalization of commercial banks in 1969, they began extending financial support both directly as well as indirectly. Regional rural banks were established in 1975 for supplementing the commercial banks and co-operatives in supplying rural credit. They have been providing direct loans to small and marginal farmers, agricultural labourers and rural artisans for productive purposes.

Some other sources of finance include the government, the microfinancing sector and the NABARD. The government plays an important role in providing agricultural credit in our country. These loans are known as “Taccavi Loans” and are lent usually during emergencies or during times of distress like flood or famines. The rates of interest charged against such loans are usually as low as 6%. Microfinance refers to a banking or financial service that is offered by banks or other financial institutions to individuals or farmers who belong to a comparatively lower income group or to underprivileged sections of the society. Microfinance is usually in the form of loans, insurance and saving deposits. It is a great way to help poor individual farmers to be financially independent and use the funds offered by the banks at a very low rate of interest to start their own venture.

The National Bank for Agriculture and Rural Development, abbreviated as NABARD is an apex development financial institution in India, established on the recommendations of B Sivaraman, and is headquartered at Mumbai. It has undertaken activities such as monitoring and evaluation of projects refinanced by it. NABARD regulates the institutions which provide financial help to the rural economy and also provides training facilities to institutional workers in the field of rural upliftment. It co-ordinates the rural financial activities of all the institutions engaged in the development work at the field level and maintains a liaison with the Government of India, State Government, the RBI, and other national level institutions concerned with policy formulation. It regulates and supervises these cooperative banks throughout the entire country.

We know that credit is the basic input for any production in agriculture. However, in many cases we have seen that there is a very high rate of indebtedness among Indian farmers for various reasons. There is a very high rate of agricultural indebtedness in states like Maharashtra, West Bengal, Tamil Nadu, Kerala, Karnataka, Andhra Pradesh, Rajasthan and Punjab as compared to the national average of 48.6 per cent. Most of the indebted farmers are marginal and small farmers and are a part of the disadvantaged social groups such as SC, ST and OBC. It has been estimated that in Maharashtra, 1200 farmers have committed suicide in a span of 3 years. It is ironic that farmers who provide us with food are the ones committing suicide because of starvation. Farmers committing suicide is not only a socio-economic crisis but also a humanitarian crisis.

We as individuals can help these farmers in very small ways such as, instead of purchasing items from hypermarkets and supermarkets we can purchase them from the local vendors. This small act would indeed help the small-scale farmers. Also, the next time we waste food we must keep in mind that we are actually wasting someone’s hard work, someone’s sweat, someone’s love, and the food that we are throwing away could have been someone’s meal. Thus, a saying which should be kept in mind is “We need doctors, teachers, and lawyers at least once in a lifetime. But we need a farmer every day, at least three times”.

Picture Courtesy- The Financial Express

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