INDIAN ECONOMY

Topic – Explain the credit delivery mechanism developed to supply credit to farmers.
Tell whether these intuitions has achieved the desired objectives in brief?

Submitted to lovely professional university

In the proper fulfillment of requirements for the award of the degree of Bachelors of Arts
Course Code: ECO213
CLASS: B.A LLB
SECTION: L1701
Roll no.:A20

SUBMITTED TO: SUBMITTED BY:

Mr. Hitesh Kamboj Priya garg

(11718820)
Introduction

“Indian agriculture has made great strides in the last fifty years of the twentieth century. From
chronic hunger and abject dependence on the import of food grains, the country has achieved
self-sufficiency not only in the production of food grains, but has emerged a net exporter of
food grains consecutively for the last six years, despite the trebling of the country’s population
in the last six years. “

‘State of the Indian Farmer’— A Millennium Study

Agriculture credit is an important prerequisite for agricultural growth. Agricultural policies

have been reviewed from time to time to provide adequate and timely availability of finance to
this sector. Rural credit system assumes importance because for most of the Indian rural
families, savings are inadequate to finance farming and other economic activities. This coupled
with the lack of simultaneity between income realization and expenditure and lumpiness of
agricultural capital investments. The institutional credit system is critical for agricultural
development and its role has further increased in the liberalized economic environment. In
India a multi-agency approach comprising cooperative banks, scheduled commercial banks and
regional rural banks (RRBs) has been followed to allow credit to agricultural sector. In rural
sector if you ask someone to institutional frame work of agriculture credit, maximum of them
are wordless

For a country where two-thirds of its population is dependent on agriculture, there is no denying
the fact that agricultural growth is critical for the growth of the entire economy. In fact, from
time to time, agricultural growth or the lack of it has served as a parameter for overall economic
growth of the country. Under such conditions, coupled with the sheer limitation on expanding
crop area, growth of farm productivity is crucial and depends heavily on sustained infusion of
credit. However, in a developing country like India, depending on farmers‟ savings for
acquiring farm capital only leads to marginal variations in the existing traditional technology.
Availability of credit at reasonable rates, therefore, becomes a pre-requisite for agricultural
growth
Meaning of agricultural credit

The word “Credit” is derived from a Latin word “Credo”, meaning “I Believe”. The Latin
verb “credere” means “to repose confidence in”. Credit means the ability to command other
peoples’ capital in return for a promise to repay at some specified time in future. It is therefore
the combination of the “ability to borrow” and “willingness to borrow”. It can also be regarded
as an economic good to be produced, managed and marketed. 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.

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.
Differences between Financing of Agricultural and Other Sectors

Financing agriculture requires a thorough understanding of farming conditions as it is different

from lending to other sectors. The important factors which differentiate farm finance from other
lending are as follows:

S.no Financing Agriculture Financing other sectors

1 Farmers are not aware of credit They are aware of banking procedures.
policies and procedures.

2 Difficult to estimate the efficiency Efficiency can be assessed as all returns are
of farming in the absence of farm recorded.
records

3 Farming is exposed to natural Risk and uncertainties involved in an

calamities and uncertainties. enterprise can be foreseen and managed.

4 Frequent supervision and follow-up Monitoring is easy and less time consuming.
after loan disbursement are difficult
as farms are scattered

5 Land as major security being Apart from immovable assets, movable

immovable is not highly liquid. assets are also taken as security which can be
easily liquidated

Types of Agriculture Credit

The agriculture credit can be classified on the basis of: According to Tenure of Agricultural
Credit The credit requirement based on the time-period of loans can be three types:

• Short-Term: It refers to the loans required for meeting the short-term requirements of
the cultivators. These loans are generally for a period not exceeding and repaid after
the harvest. For example loans required for the purchase of fertilizers, HYV seed, for
meeting expense on religious or social ceremonies etc.
• Medium-Term: These loans are for a period up to 5 years. These are the financial
requirements to make improvements on land, buying cattle or agricultural equipments,
digging up of canals etc.
 • Long-Term: These loans are for a period of more than 5 years and are generally
required to buy additional land or tractor or making permanent improvements on land.

Source of Agricultural Credit in India

On the basis of organization there are two broad sources of agricultural credit in India: Non-
Institutional Sources, Institutional Sources.

• Non-Institutional Sources: The non-institutional finance forms an important source of

rural credit in India, constituting around 38.9 percent (2002) of total credit in India. The
interest charged by the noninstitutional lenders is usually very high. The land or other
assets are kept as collateral. The important sources of non-institutional credit are as
follows:
i. Traders and Commission Agents: Traders and commission agents advance
loans to agriculturists for productive purposes against their crop without
completing legal formalities. It often becomes obligatory for farmers to buy
inputs and sell output through them. They charge a very heavy rate of interest
on the loan and a commission on all the sales and purchases, making it
exploitative in nature. It an important source of finance in case of cash crops
like cotton, tobacco and groundnut.
ii. Landlords: Mostly small farmers and tenants depend on landlords for meeting
their financial requirements.
iii. Money lenders: Despite rapid development in rural branches of different
institutional credit agencies, village money lenders still dominate the scene.
Money lenders are of two types agriculturist money lenders who combine their
money lending job with farming and professional money lenders whose sole
job is money lending. A number of reasons have been attributed for the
popularity of moneylenders such as: they meet demand for productive as well
as unproductive requirement; they are easily approachable at odd hours; and
they require very low paper work
iv. Friends and relatives: These credits are generally used for meeting personal
expenditure or too short time expenditure.
 • Institutional Sources
The general policy on agricultural credit has been one of progressive institutionalization
aimed at providing timely and adequate credit to farmers for increasing agricultural
production and productivity. Providing better access to institutional credit for the small
and marginal farmers and other weaker sections to enable them to adopt modern
technology and improved agricultural practices has been a major thrust of the policy.
National Bank for Agriculture and Rural Development (NABARD) is an apex
institution established in 1982 for rural credit in India. It doesn’t directly finance
farmers and other rural people. It grants assistance to them through the institutions
described as follows:
• Rural Co-Operative Credit Institutions: Rural Credit cooperatives are the oldest and
most extensive form of rural institutional financing in India. The major thrust of these
cooperatives in the area of agricultural credit is the prevention of exploitation of the
peasants by moneylenders. The rural credit cooperatives may be further divided into
short-term credit cooperatives and long-term credit cooperatives.

The short-term credit cooperatives provide short-term rural credit and are based on a three-tier
structure as follows:

i. Primary Agricultural Credit Societies (PACs): These are organized at the village level.
These societies generally advance loans only for productive purposes. The main
objective of a PACS is to raise capital for the purpose of giving loans and supporting
the essential activities of the members such as supply of agricultural inputs at cheap
price, improving irrigation on land owned by members, encourage various income-
augmenting activities such as horticulture, animal husbandry, poultry etc.
ii. District Central Cooperative Banks: These cooperatives are organized at the district
level. The PACS are affiliated to the District Central Co-operative Banks (DCCBs).
DCCBs coordinate the activities of district central financing agencies, organize credit
for PACs and carry out banking business.

iii. Government: The government sector banks extend both short term as well as long-term
loans. These loans are popularly known as "Taccavi loans" which are generally
advanced in times of natural calamities. The rate of interest is low and it is not a major
source of agricultural finance.
 iv. Commercial Banks: Previously commercial banks (CBs) were confined only to urban
areas serving mainly the activities of trade, commerce and industry. Their role in rural
credit was meager i.e., 0.9 per cent in 1951-52 and 0.7 per cent in 1961-62. The
insignificant participation of CBs in rural lending was explained by the risky nature of
agriculture due to its heavy dependence on monsoon, unorganized nature and
subsistence approach. Through nationalisation of CBs in 1969 and CBs were made to
play an active role in agricultural credit was accelerated and they are the largest source
of institutional credit to agriculture.
v. Regional Rural Banks (RRBs): RRBs were set up in those regions where availability of
institutional credit was found to be inadequate but potential for agricultural
development was very high. However, the main thrust of the RRBs is to provide loans
to small and marginal farmers, landless labourers and village artisans. These loans are
advanced for productive purposes. At present 196 RRBs are functioning in the country
lending around Rs 9,000 crore to rural people, particularly to weaker sections.
Various Govt schemes through which commercial banks give loans to the farmers
Agricultural loans in India are not only offered to farmers working towards the cultivation of
food crops, but they are available to anyone who is engaged in other agriculture-related sectors
like horticulture, aquaculture, animal husbandry, silk farming, apiculture and floriculture.

• National Bank for Agriculture and Rural Development (NABARD)

In India, all premier banking and financial organisations, at all levels, offer a great deal of
financial help to farmers. However, this trend of boosting the rural economy and agriculture
through financial credit was started by the National Bank for Agriculture and Rural
Development (NABARD) back in the early 1980s. When it comes to credit in the field of
agriculture, all other banks throughout the country fall under the purview of the NABARD.

This financial institution is working in conjunction with the Government of India to boost
agriculture sector. It is credited with several innovative schemes that have immensely aided the
farmers throughout the country

• Kisan Credit Card Scheme

The Kisan Credit Card is a scheme launched by the Indian banks back in 1998, as a way to
fulfil the financial necessities of the agricultural sector. This is done by giving monetary
support to farmers, which in turn comes with various features and benefits. The quantum of the
loan depends on several factors like cost of cultivation, farm maintenance cost, et cetera.
This has been particularly beneficial for those farmers who are not aware of the banking
practices. Moreover, it is meant to protect farmers from harsh and informal creditors, which
may land them in a massive debt.

The farmers can use the KCC card to withdraw funds for the purpose of crop production and
domestic requirements.

• Land Development Banks

Land Development Banks were set up in order provide for long term finance Previously they
were called Land Mortgage Banks. The objective of the bank is to provide long term credit to
cultivators against the mortgage of their lands These banks provide loans for :-
Repayment of old loans to cultivators
Purchasing new land
Digging, construction and repairing of the well
• Regional Rural Banks
The Regional Rural Banks were set up in 1975 on the recommendations of M. Narsimha
committee The main objective of the RRBS is to provide credit and other facilities particularly
to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs so as
to develop agriculture, trade commerce, industry and other productive activities in the rural
areas.
• Farm Credit Package
In 2004, Government of India announced a package for doubling the credit flow to
agriculture, from Rs 80,000 crore in 2003-04, in three years. On account of concerted efforts,
the target was achieved in just two years by adopting various measures like revision of scales
of finance, units costs, coverage of new farmers, issue of comprehensive credit cards, etc.
While the quantum jump was impressive overtime, there was sub-sectoral bias towards farm
mechanisation and refocus on irrigation, land development, horticulture,
NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT
National Bank for Agriculture and Rural Development (NABARD) was established in the year
1982 by an Act of Parliament and was entrusted with all matters concerning policy, planning
and operation in the field of credit for agriculture and other economic activities in rural areas.
The Bill for setting up the Bank was passed by the Parliament in December, 1981 and National
Bank for Agriculture and Rural Development came into existence on 12th July, 1982. Before
that, this job was being done by Reserve Bank of India.
Initiatives taken by NABARD to improve the credit facility in the agriculture sector:
• Food Processing Fund (FPF) : The Ministry of Food Processing Infrastructure has
launched a new scheme for creation of Agriculture Processing Clusters in the country,
which would be established on at least 10 acres of land area, wherein at least 5 food
processing units with a minimum investment of Rs.25 crore would be set up. The
projects approved by the Ministry for capital grant assistance are notified as designated
food parks, so as to make them eligible for availing term loan from out of Food
Processing Fund instituted in NABARD.
• Warehouse Infrastructure Fund (WIF) : The Warehouse Infrastructure Fund (WIF) was
instituted in NABARD by GOI with a corpus of Rs.5000 crore in 2013-14 for providing
credit to public and private sectors for creation and augmentation of decentralized
modern scientific storage facilities and postharvest credit facilities for farmers to realise
better prices, thus minimizing distress sale of farm produce immediately after harvest.
WIF was augmented by another Rs.5000 crore in 2014-15
• Long-Term Irrigation Fund (LTIF) : The Long-Term Irrigation Fund (LTIF) was set up
in NABARD with an initial corpus of Rs.20,000 crore for funding 99 irrigation projects
during 2016-17 following announcement in the Union Budget, was further
supplemented with additional allocation of Rs.20,000 crore in 2017-18 and Rs.15,000
crore in 2018-19. In addition to the 99 projects, two more projects namely Polavaram
National Project from Andhra Pradesh and North Koel Reservoir Project from Bihar
and Jharkhand were included for funding under LTIF.
• Credit Facility to Marketing Federations In order to strengthen the arms of Marketing
Cooperatives, NABARD established a separate line of credit, viz. Credit Facility to
Federations, which promotes marketing of agricultural produce and other farm
activities. The eligible institutions are Marketing Federations and Corporations,
registered Companies and other Cooperatives. NABARD provides credit facility to
state entities engaged in procurement of food grains, aggregation, storage and value
additional and marketing which help the farmers in marketing of their produce at
remunerative prices
• Pradhan Mantri Awas Yojana- Grameen (PMAY-G) : Ministry of Rural Development
(MoRD), GoI entered Memorandum of Agreement (MoA) on 15th February 2018 for
availing loan from NABARD to meet the budgetary gap for implementing the PMAY-
G scheme. Around 2.95 crore houses are to be constructed under PMAY-G by 2022 in
 a phased manner. In the first phase, one crore houses are to be constructed over a period
of 3 years viz. 2016-17 to 2018-19 with a financial requirement towards Central Share
amounting to Rs.81,975 crore. The total estimated amount of loan to be availed from
NABARD is Rs.21,975 crore.
• Agri Marketing Infrastructure Fund (AMIF) :. The objective of the fund is to develop
and upgrade the existing 585 APMCs and 22000+ rural haats into Grameen Agricultural
Markets The physical infrastructure in the rural haats are expected to be strengthened
using the resources available under MGNREGA and other Government Schemes. The
corpus under AMIF is expected to be used to digitally link these haats to e-NAM to
provide facilities to farmers to make direct sale to consumers and bulk purchasers.

Summary and Conclusions

Public policy on rural credit in India has been focused on institutionalization as a means of
providing cheaper credit to farmers. As a result, the share of private moneylenders had
decreased substantially from 93 per cent in early-1950s to 31 per cent by 1991. Disturbingly
enough, they have emerged as an important source, more so for the resource-poor with a share
of 39 per cent by 2002. The multiagency system onset for giving a wider choice to farmers has
turned out to be ineffective due to deficiencies of design and architecture.

Also, ailing cooperatives, backtracked RRBs and commercial banks with waning interest in
rural credit have contributed to the ineffectiveness of the multiagency system, hampering the
credit delivery. Several measures have been taken to revitalise the system from time to time.
Cooperatives are given a package assistance for revival following Vaidyanathan Committee
Report. RRBs have been amalgamated and are being given capital to cleanse up their balance
sheets. Commercial banks have been successfully involved in Farm Credit Package for
doubling the credit and other initiatives of Government of India.