Unit -3

Meaning of Agricultural Credit:

Agricultural credit is essentially needed for agricultural growth. From time to time,
agricultural policies have been reviewed to give timely and adequate credit availability to
the agriculture sector. The rural credit system calls for more attention as most of the rural
families in India live with inadequate savings to finance farming and other economic
activities. Lack of simultaneity between expenditure and income realization, coupled with
huge agricultural capital investments adds to the misery. The institutionalized credit
system is critical to agricultural development. In India, commercial banks, regional rural
banks, and co-operative banks have adopted a multi-agency approach to credit the
agricultural sector.

Agricultural Credit System -: Types of Credit

Based on tenure and purpose of the credit requirement, agricultural credit is
classified under three categories –
» Short-term Credit – Refers to the credit required by farmers to meet their short-term
needs (purchasing fertilizers and HYV seeds, meeting expenses on social and religious
ceremonies). The tenure of the loan usually does not exceed 15 months and is repaid after
the harvest.

» Medium-term Credit – These loans are usually to meet financial requirements like
purchasing agricultural equipment or cattle, improving the land, digging up canals, etc.
The tenure can go up to 5 years.

» Long-term Credit – This refers to loans taken to purchase a tractor, an additional

agricultural land, or to make permanent improvements in the land. These loans are taken
for a period of more than 5 years.

Source of Agricultural Credit:

The sources of agricultural finance are broadly classified into two categories:
(A) Non institutional Credit Agencies or informal sources, and
(B) Institutional Credit Agencies or Formal Sources.

A. Non-institutional Credit Agencies:

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.

ii) Landlords: Mostly small farmers and tenants depend on landlords for meeting
their production and day to day 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:

(a) They meet demand for productive as well as unproductive requirement;

(b) They are easily approachable at odd hours; and
(c) They require very low paper work and advances are given against promissory notes or
land. Money lenders charge a very high rate of interest as they take advantage of the
urgency of the situation. Over the years a need for regulation of money lending has been
felt. But lack of institutional credit access to certain sections and areas had facilitated
unhindered operation of money lending.

B. Institutional Credit Agencies:

The evolution of institutional credit to agriculture could be broadly classified into
four distinct phases - 1904-1969 (predominance of co-operatives and setting up of RBI),
1969-1975 [nationalisation of commercial banks and setting up of Regional Rural Banks
(RRBs)], 1975- 1990 (setting up of NABARD) and from 1991 onwards (financial sector
reforms). Institutional funding of the farm sector is mainly by commercial banks, regional
rural banks and co-operative banks. Share of commercial banks in total institutional
credit to agriculture is almost 48 percent followed by cooperative banks with a share of
46 per cent. Regional Rural Banks account for just about 6 per cent of total credit
disbursement.

i) Government:
These are 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. But it is not a major source of agricultural finance.

ii) Cooperative Credit Societies:

The history of cooperative movement in India dates back to1904 when first
Cooperative Credit Societies Act was passed by the Government. The scope of the Act
was restricted to establishment of primary credit societies and non-credit societies were
left out of its purview. The shortcomings of the Act were rectified through passing
another Act called Cooperative Societies Act 1912. The Act gave provision for
registration of all types of Cooperative Societies. This made the emergence of rural
cooperatives both in the credit and noncredit areas, though with uneven spatial growth. In
subsequent years a number of Committees were appointed and recommendations
implemented to improve the functioning of the cooperatives. Soon after the
independence, the Government of India following the recommendations of All India
Rural Credit Survey Committee (1951) felt that cooperatives were the only alternative to
promote agricultural credit and development of rural areas. Accordingly, cooperatives
received substantial help in the provision of credit from Reserve Bank of India as a part
of loan policy and large scale assistance from Central and State Governments for their
development and strengthening. Many schemes involving subsidies and concessions for
the weaker sections were routed through cooperatives. As a result cooperative institutions
registered a remarkable growth in the post-independence India.

iii) Commercial Banks:

Previously commercial banks (CBs) were confined only to urban areas serving
mainly to 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 1961-61. 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. A major change took place in
the form of nationalisation of CBs in 1969 and CBs were made to play an active role in
agricultural credit. At present, they are the largest source of institutional credit to
agriculture.

iv) 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.

v) Micro financing:
Micro financing through Self Help Groups (SHG) has assumed prominence in
recent years. SHG is group of rural poor who volunteer to organise themselves into a
group for eradication of poverty of the members. They agree to save regularly and
convert their savings into a common fund known as the Group corpus. The members of
the group agree to use this common fund and such other funds that they may receive as a
group through a common management. Generally, a self-help group consists of 10 to 20
persons. However, in difficult areas like deserts, hills and areas with scattered and sparse
population and in case of minor irrigation and disabled persons, this number may range
from 5-20. As soon as the SHG is formed and a couple of group meetings are held, an
SHG can open a Savings Bank account with the nearest Commercial or Regional Rural
Bank or a Cooperative Bank. This is essential to keep the thrift and other earnings of the
SHG safely and also to improve the transparency levels of SHG's transactions. Opening
of SB account, in fact, is the beginning of a relationship between the bank and the SHG.
The Reserve Bank of India has issued instructions to all banks permitting them to open
SB accounts in the name of registered or unregistered SHGs.
Co-operative Banks:
Meaning of Cooperative Bank:
Cooperative bank is an institution established on the cooperative basis and dealing
in ordinary banking business. Like other banks, the cooperative banks are founded by
collecting funds through shares, accept deposits and grant loans.

History of Cooperative Banking in India:

Cooperative movement in India was started primarily for dealing with the problem
of rural credit. The history of Indian cooperative banking started with the passing of
Cooperative Societies Act in 1904. The objective of this Act was to establish cooperative
credit societies “to encourage thrift, self-help and cooperation among agriculturists,
artisans and persons of limited means.”

Many cooperative credit societies were set up under this Act. The Cooperative
Societies Act, 1912 recognised the need for establishing new organisations for
supervision, auditing and supply of cooperative credit. These organisations were- (a) A
union, consisting of primary societies; (b) the central banks; and (c) provincial banks.

Structure of co-operative bank:

There are different types of cooperative credit institutions working in India. These
institutions can be classified into two broad categories- agricultural and non-agricultural.
Agricultural credit institutions dominate the entire cooperative credit structure.
Agricultural credit institutions are further divided into short-term agricultural credit
institutions and long-term agricultural credit institutions.

The short-term agricultural credit institutions which cater to the short-term financial
needs of agriculturists have three-tier federal structure- (a) at the apex, there is the state
cooperative bank in each state; (b) at the district level, there are central cooperative
banks; (c) at the village level, there are primary agricultural credit societies.
Long-term agricultural credit is provided by the land development banks. The whole
structure of cooperative credit institutions is shown in the chart given.
Short-Term Rural Cooperative Credit Structure:
In rural India, there exists a 3-tier short-term rural cooperative structure. Tier-I
includes state cooperative banks (SCBs) at the state level; Tier-II includes central
cooperative banks (CCBs) at the district level; and Tier- III includes primary agricultural
credit societies (PACSs).

In 19 states, there exists a 3-tier short-term cooperative credit structure,

comprising SCBs, CCBs and PACSs. And in 12 states, there exists a 2-tier short-term
cooperative structure. In the north-eastern states, including Sikkim, the structure is 2-tier,
comprising only SCBs and PACSs.

1. State Cooperative Banks (SCBs):

Functions and Organisation:
State cooperative banks are the apex institutions in the three-tier cooperative credit
structure, operating at the state level. Every state has a state cooperative bank.
State cooperative banks occupy a unique position in the cooperative credit
structure because of their three important functions:
(a) They provide a link through which the Reserve Bank of India provides credit to the
cooperatives and thus participates in the rural finance,

(b) They function as balancing centers for the central cooperative banks by making
available the surplus funds of some central cooperative banks. The central cooperative
banks are not permitted to borrow or lend among themselves,

(c) They finance, control and supervise the central cooperative banks, and, through them,
the primary credit societies.

2. Central Cooperative Banks (CCBs):

Functions and Organisation:
Central cooperative banks are in the middle of the three-tier cooperative credit
structure.

Central cooperative banks are of two types:

(a) There can be cooperative banking unions whose membership is open only to
cooperative societies. Such cooperative banking unions exist in Haryana, Punjab,
Rajasthan, Orissa and Kerala.

(b) There can be mixed central cooperative banks whose membership is open to both
individuals and cooperative societies. The central cooperative banks in the remaining
states are of this type. The main function of the central cooperative banks is to provide
loans to the primary cooperative societies. However, some loans are also given to
individuals and others.
3. Primary Agricultural Credit Societies (PACSs):
Functions and Organisation:
Primary agricultural credit society forms the base in the three-tier cooperative
credit structure. It is a village-level institution which directly deals with the rural people.
It encourages savings among the agriculturists, accepts deposits from them, gives loans to
the needy borrowers and collects repayments.

It serves as the last link between the ultimate borrowers, i.e., the rural people, on
the one hand, and the higher agencies, i.e., Central cooperative bank, state cooperative
bank, and the Reserve Bank of India, on the other hand.

A primary agricultural credit society may be started with 10 or more persons of a

village. The membership fee is nominal so that even the poorest agriculturist can become
a member.
The members of the society have unlimited liability which means that each
member undertakes full responsibility of the entire loss of the society in case of its
failure. The management of the society is under the control of an elected body.

Commercial Banks:
Commercial banks are profit-based institutions that offer financial products like
loans, as well as services like deposit, electronic transfer of funds, etc. to their customers.
Commercial banks have a significant role in a country’s economy as these organisations
fulfil the short and mid-term financial requirements of industries.

Functions of commercial banks:

Functions of commercial banks are primarily based on a business model of
accepting public deposits and utilising that fund for various investment purposes. Such
functions can be classified into two categories, primary and secondary functions.

I. Primary Functions 
1. Deposits:
a. Accepting Deposits – Commercial banks accept deposits from their customers
in the form of saving, fixed, and current deposits. 

b. Savings Deposits – Savings deposits allow a customer to credit funds towards

their accounts for up to a certain limit. These deposits are preferred by individuals with a
fixed income, utilised to create savings over time.

c. Fixed Deposits – Fixed deposits come with a predetermined lock-in period.

Fixed deposits are also referred to as time deposits as the funds are deposited for a
specific time frame.
 d. Current Deposits – Current deposits allow account holders to deposit and
withdraw money whenever necessary. In some cases, current accounts also offer
overdrafts until a pre-specified limit to individuals and businesses.

2. Providing Loans:
One of the main functions of commercial banks is providing credit to
organisations and individuals, and profit from the earned interest. Usually, banks retain a
small reserve for their expenses while offering the remaining amount to customers as
various types of short and long-term credits. Commercial banks provide both secured and
unsecured loans, categories are-

a. Cash Credit – Commercial Banks and its Functions include extending

advances to individuals and organisations against bonds, inventories, and other types of
securities. This facility, commonly known as cash credit, provides a more substantial sum
when compared to other forms of credits.

b. Short-Term Credits – Short-term loans are usually pledged without any

security, offering a smaller loan amount and repayment tenor. These are also referred to
as personal loans.

3. Credit Creation:
A unique function of commercial banks is credit creation. Instead of offering
liquid cash, banks create a line of credit and transfer the loan to a business or commercial
body all at once.

II. Secondary Functions 

1. Providing locker Facilities – Commercial banks provide locker facilities to

customers who want to store valuables safely. Locker facilities eliminate the impending
risk of theft or loss, which prevail when kept at home.

2. Dealing in Foreign Exchange – Commercial banks help provide foreign

exchange to individuals and organisations which export or import goods from overseas.
However, only certain banks which have the licence to deal in foreign exchange are
eligible for such transactions. 

3. Exchange of Securities – Another function of commercial banks is to trade in

bonds and securities. Customers can purchase or sell the units from the financial
institution itself, which offers more convenience than alternate approaches.

4. Discounting Bills of Exchange – The main function of a commercial bank in

today’s date is to discount bills of businesses. Bill discounting is considered as a
profitable investment for banks. Bills create a steady flow of funds, while not becoming a
risky venture during payment as it is considered as a negotiable instrument. These also do
not involve the financial institution in any litigation. 

5. Bank as an Agent – Commercial Bank and its Function also requires them to
provide finance-related services to customers, fulfilling the role of an agent. These
services usually include – 
 Acting as an administrator, trustee, or executor of a customer-owned estate.
 Assisting customers with tax returns, tax refunds, and other similar tasks.
 Serving as a platform to pay premiums, repay loan installments, etc.
 Offering a platform for electronic transaction of funds, processing of cheques,
drafts, bills, etc.

Types of Commercial Banks:

It is necessary to understand the different types of financial institutions to explain
the functions of commercial banks effectively. Commercial banks are commonly
categorised into three types.

1. Public Sector Banks:

Public sector banks refer to a type of financial institution that is state-
owned by the corresponding Government. A significant part of the share of such
organisations is held by the Government. In India, the Reserve Bank of India,
which acts as the central bank, creates operating guidelines for the public sector
banks. 

2. Private Sector Banks:

Private sector banks are financial institutions registered as companies with
limited liabilities. The major part of the share capital of such companies is owned
by individuals or private businesses. 

3. Foreign Banks:
Foreign banks are financial institutions that are operating overseas within a
foreign nation. Post the financial reform of India (in 1991), there was a marked
increase in the number of foreign banks on Indian soil. They are essential for the
economic development of a nation.

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 will all matters
concerning policy, planning and operation in the field of credit for agriculture and other
economic activities in the rural areas. The Bill for setting up the Bank was passed by the
Parliament in December, 1981 and National Bank came into existence on 12th July,
1982. Before that, this job was being done by Reserve Bank of India itself. 
Objectives:
NABARD works for progressive institutionalization of the rural credit and ensures
that the demands for credit from agriculture including the new and upcoming areas like
floriculture, tissue culture, bio-fertilizers, sprinkler irrigation, drip irrigation etc. are met.
It is also vested with the responsibility of promoting and integrating rural development
activities through refinance. 

Management:
The management of NABARD is vested in the Board of Directors which consists
of a Chairman, two directors from amongst experts in rural economics, three directors out
of whom two be persons with experience in cooperative banking and one with experience
in commercial banking, three directors from among the officials of the State
Governments, and a Managing Director. Directors of the Board of Management are
appointed by the Central Government In consultation with the Reserve Bank of India
(RBI).

Functions:
1.  It helps in planning and operational matters related to credit for agriculture and
allied activities, rural artisans, village industries and other rural development activities.

2. It extends refinance to commercial banks for term loans in relation to

agriculture and rural development.

3. It provides short term credit to state cooperative banks, RRBs, and any other
financial institution notified by RBI for a period not exceeding 18 months by way of
refinance for agricultural operations, marketing of crops and marketing and distribution
of agricultural inputs.

4. It makes direct loan by way of refinance to all eligible institutions for a period
not exceeding 25 years.

5. It provides finance for production and marketing activities of rural artisans,

cottage industries, small-scale industries, handicrafts etc. in the rural areas.

6. It facilitates all eligible financial institutions for conversion of production loans

into term loans in the times of natural calamities.

7. It contributes to share capital and securities of eligible institutions and State

Governments concerned with agriculture and rural development.

8. It also helps State Governments to contribute to the share capital of eligible

institutions working for rural development.
 9. It offers advice and guidance to State Governments, co-opertative federations
and National Cooperative Development Corporation (NCDC) and functions in close
contact with Central Government in matters related to agriculture and rural development.

It coordinates and monitors all agricultural and rural lending activities with a view
to tie up with extension and planned development activities in rural areas; and it conducts
training, consultancy and research relating to agricultural finance and agricultural and
rural development.

Land Development Bank:

Indian farmers need three types of credit, viz., short-term, medium-term and long-
term. Their short-term and medium-term credit requirements are fulfilled by the co-
operative banking institutions like PACs, CCBs and SCBs.

Farmers have to borrow also for the long-term (for a period of 5 years to 20 years)
for buying equipment like pump sets, tractors, etc., and for other development purposes,
such as reclamation of land, fencing, digging of new wells, construction of a tank or tube-
well, or buying additional land. Thus, a need for a special kind of institution to provide
long-term finance to the Indian agriculturists was earnestly felt. Consequently, land
development banks came into existence.

Initially, the land development banks were instituted in the form of co-operative
land mortgage banks. The first co-operative land mortgage bank was established at Jhind,
in Punjab in 1920. However, it did not function well. A real beginning was made by the
establishment of the Central Land Mortgage Bank in Madras in 1929. Later on, the
movement spread too many other states.

The land mortgage banks grant long-term loans to the farmers against the
conveyance of land as security. Since, 1966-67, the land mortgage banks are renamed as
land development banks.

Organisation and Structure of Land Development Banks:

The Land Development Banks (LDBs) are essentially co-operative institutions. All
the LDBs are registered under the Co-operative Societies Act. In a strict sense, however,
they are semi co-operatives. In fact, they are limited liability associations of agricultural
borrowers, as their members have limited liability. Further, unlike other co-operatives,
LDBs do not have personal involvement in their functioning.

The working capitals of LDBs are raised from share capital, deposits and
debentures, and borrowings from the State Bank of India, commercial banks and the State
Co-operative Banks. However, a large part of their funds are raised through long-term
debentures. The debentures can be issued only by the Central Land Development Banks
and not by the Primary Land Development Banks.
 The Land Development Banks have no uniform pattern. In some states, they are
unitary and in some others, they are federal in nature. States like Bihar, Gujarat,
Maharashtra, and Uttar Pradesh have a unitary structure of the LDBs. Other states have a
federal structure.

Under its federal structure, the LDB consists of two-tier institutions: (i) the Central
Land Development Bank at the State level, and (ii) the Primary Land Development Bank
at the district or Taluka level.

Obviously, there is only one Central Land Development Bank in each state and
one primary development bank at the district level. Thus, a state is normally supposed to
have many primary land development banks as there are a number of districts. The
Primary Land Development Banks are affiliated to the Central Land Development Bank
in the State.

Regional Rural Banks:

Regional rural banks are basically, banking organisation for local level operations
across the States in India. They are created with a mandate to provide essential or basic
banking and financial services to the rural areas. While Regional Rural Banks are meant
for rural areas, they can operate in urban areas also.

The main purpose behind setting up the RRBs is to mobilise financial resources
from the rural areas and grant loans to needy and marginal farmers and artisans. They
also facilitate the movement of government funds to MGNREGA workers, or distribution
of pension.

History of RRBs:
The Regional Rural Banks were setup on the basis of Narsimham Committee
report (1975), by the legilations of the Regional Rural Banks Act of 1976. Thereafter, the
first Regional Rural Bank was setup in 1975 itself by the name Prathama Grameen Bank.

Ownership of RRBs:
The equity of RRBs is held by the stakeholders in fixed proportions of 50:15:35
distributed among the following –

 Central Government has 50% share

 State Government has 15% share.
 The Sponsor Bank has 35% share.
These ratios are important to remember to be able to face the questions related to regional
rural bank recruitment.
Objectives of Regional Rural Banks (RRB):
 To bridge the credit gap in rural regions in India.
 To check rural credit outflow to urban areas.
 To reduce regional imbalances in terms of availability of financial facilities.
 To increase rural employment generation.

Characteristics features of RRBs:

 RRBs have knowledge of rural constraints and problems like a cooperative
because it operates in familiar rural environment.
 RRBs show professionalism in mobilising financial resources like a commercial
bank.
 RRBs are supposed to work in its prescribed local limits.
 It provides banking facilities as well as credit to small and marginal farmers, small
entrepreneurs, labourers, artisans in rural areas.
 RRBs have to fullfil the priority sector lending norms as applicable on other
commercial banks.

Role of Regional Rural Banking for Rural Development:

Regional Rural Banks were established with the following responsibilities in
mind:
1) Taking the banking services to the doorstep of rural masses, particularly in
hitherto unbanked rural areas.
2) Identify the financial need especially in rural areas.
3) Making available institutional credit to the weaker section of the society who
had by far little or no access to cheaper loans and had perforce been depending on the
private money lenders.
4) To enhance banking & financing facilities in backward or unbanked areas.
5) Mobilize rural savings and channelize them for supporting productive activities
in rural areas.
6) To provide finance to the weaker sections of society like small farmers, rural
artisans, small producer, rural labourers’ etc.
7) To create a supplementary channel for the flow the central money market to the
rural areas through refinances.
8) To provide finance to co-operative societies, Primary Credit societies,
Agricultural marketing societies.
9) Generating employment opportunities in rural areas and bringing down the cost
of providing credit to rural areas.
10) Enhance & improve banking facilities to semi urban, rural & other untapped
market. With these objectives in mind, knowledge of the local language by the staff is an
important qualification
Functions of RRB:
Every RRB is authorized to carry on transacting the business of banking as
defined in the Banking Regulation Act and may also engage in other business specified in
Section 6 (1) of the said Act. In particular‚ a RRB is required to undertake the business
of:

1) Granting loans and advances to small and marginal farmers and agricultural
labourers‚ whether individually or in groups, and to cooperative societies‚ including
agricultural marketing societies‚ agricultural processing societies‚ cooperative farming
societies‚ primary agricultural credit societies or farmers’ service societies‚ primary
agricultural purposes or agricultural operations or other related purposes, and

2) Granting loans and advances to artisans‚ small entrepreneurs and persons of

small means engaged in trade‚ commerce‚ industry or other productive activities‚ within
its area of operation.

Agricultural refinance:
Farmers in India require mainly medium term and long term loans and they face a
lot of difficulties in getting them. The only organisation providing long term credit is land
development banks which have lagged behind and recorded only limited success. The
credit requirements of the agricultural sector are increasing year after year. Besides credit
requirements at the farm level for seasonal cultivation expenses and minor improvements
in land, the farmers and agricultural agencies supplying credit require long-term financial
accommodation to cater to the needs of projects for agricultural development. These
projects involve huge expenditure with long gestation period. With the aim of bridging
the gap in agricultural finance and to extend credit for projects involving agricultural
development an organisation called the Agricultural Refinance Development Corporation
was established by an Act of Parliament and it started functioning from July 1, 1963.

Objectives of agricultural refinance development corporation:

 To provide necessary funds by way of refinance to eligible institutions such as the
Central Land Development Banks, State Co-operative Banks and Scheduled
Banks.

 To subscribe to the debentures floated by the central land development banks, state
co-operative banks, Co-operative societies and scheduled banks, provided they
were approved by the Reserve bank of India.

Refinancing facilities to the lending institutions:

Refinancing facilities to the lending institutions were extended for the following
types of projects only:
 For planned projects of minor irrigation covering compact areas, reclamation and
preparation of and for irrigation.
 For construction of storage accommodation for the cultivator’s produce, and for
development of plantation crops such as coconut, cashew nut, cardamom, coffee,
tea and rubber.
 For purchasing equipment like tube-wells, pump sets and also for mechanical
farming.
 For promotion and development of agricultural in India, including animal
husbandry, dairy farming, poultry farming and pisiculture.
 For construction of quarters for labourers in plantations, where this is statutorily
required and also for setting up processing units directly linked with the
development of a particular plantation crop.