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RURAL FINANCE
Unit Structure
1.0 Objectives
1.1 Introduction
1.2 Features of Rural Finance
1.3 Problems of Rural Credit in India
1.4 Measures taken to Improve Credit Flow to Agriculture
1.5 Types of Rural Credit
1.6 Importance of Rural Credit in Indi a
1.0 OBJECTIVES
1) Understanding features of Rural finance.
2) Understanding the problems of Rural Credit in India.
3) Understanding the Improve Credit flow to Agriculture.
4) Studying the types of Rural Credit.
1.1 INTRODUCTION
Finance has been recog nized as the life blood of all economic activities.
Like all other producers agriculturist also need credit. Generally, in
underdeveloped countries farmers cannot expert their credit needs to come
from saving. It is so because their income farm operations are sufficient to
provide minimum necessities of life. Therefore, they have to rely upon
outside finance. Modern agriculture is a costly affair. Credit is needed to
adopt new farm technology resulting in ushering of green revolution. In
India, it has two f old necessities. Firstly crop productivity is very low due
to traditional methods of cultivation and secondly, there is an urgent need
to enhance agricultural.
Production to get self -sufficiency and save valuable foreign exchange. In
short, effective ar rangements are needed to provide credit facilities so that
agriculturist may adopt better techniques of production.
The different studies conducted show a strong positive relationship
between agricultural growth and availability of credit. Broadly, credit in
agricultural sector may be divided into short -term loans to meet the input
expenses and medium and long -term loans to facilities the development of
fixed farm assets such as land. munotes.in
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2 Agriculture is a productive occupation and such one of the essentials of
agricultural production is capital. This may provided by the cultivator
himself or like other business; he may borrow it from someone else and
repay it from the output of the field in which it has been invested. The
problem of agricultural finance relates to i) capital needs of the farmer, ii)
agencies of credit and iii) the repayment of loans. Thus the all India Rural
Credit Survey Committee observed that, Agricultural credit is a problem
when it cannot be obtained: it is also a problem when it can be had but in
such a form that on the whole it does more harm than good. It may be said
that, in India, it is this two fold problem of inadequacy and unsuitability
that is perennially presented by agricultural credit.
1.2 FEATURES OF RURAL FINANCE
In our country , rural finance has the special features which are discussed
below in detail.
1. Agriculture Development
2. Productive Credit
3. Unproductive Credit
4. Loan for Agro -based Industries
5. Loan for Agro -processing Industries
6. Loan for Rural and Small scale Industries
7. Commerc ial Agriculture Loan
8. Rural Development
1.3 PR OBLEMS OF RURAL CREDIT IN INDIA
1. Insufficiency:
In spite of expansion of rural credit structure, the volume of rural credit in
the country is still insufficient as compared to its growing requirement
arising out of increase in prices of agricultural inputs.
2. Inadequate Amount of Sanction:
The amount of loan sanctioned to the farmers by the agencies is also very
much inadequate for meeting their different aspects of agricultural
operations. Considering the a mount of loan sanctioned as inadequate and
insignificant, the farmers often divert such loan for unproductive purposes
and thereby dilute the very purpose of such loan.
3. Lesser Attention of Poor Farmers:
Rural credit agencies and its schemes have failed to meet the needs of the
small and marginal farmers. Thus, lesser attention has been given on the munotes.in
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Rural Finance
3 credit needs of the needy farmers whereas the comparatively well -to-do
farmers are getting more attention from the credit agencies for their better
credit wo rthiness.
4. Growing Over -dues:
The problem of over -dues in agricultural credit continues to be an area of
concern. The recovery of agricultural advances to various institutions is
also not at all satisfactory. In 1997 -98, the recovery of agricultural
adva nces of commercial banks, co -operative banks and regional rural
banks were 63 per cent, 66 per cent and 57 per cent respectively. Such
growing over -dues has also been resulted from poor repaying capacity of
farmers. As a result of that, the credit agencies are becoming wary of
granting loan to farmers.
5. Inadequate Institutional Coverage:
In India, the institutional credit arrangement continues to be inadequate as
compared to its growing needs. The development of co -operative credit
institutions like Prima ry agricultural credit societies, land development
banks, commercial banks and regional rural banks, have failed to cover the
entire rural farmers of the country.
6. Red Tapism:
Institutional agricultural -credit is subjected to red -tapism. Credit
instituti ons are still adopting cumbersome rules and formalities for
advancing loan to farmers which ultimately force the farmers to depend
more on costly non -institutional sources of credit.
1.4 MEASURES TAKEN TO IMP ROVE CREDIT FLOW
TO AGRICULTURE
In order to imp rove the flow of credit to agriculture, the Government
has intro duced the following measures in 1998 -99:
(i) Procedural simplification for credit delivery has been made (as per
R.V. Gupta Committee Report) through rationalization of internal
returns of b anks.
(ii) More powers have been delegated to branch managers to raise the
credit flow to agriculture.
(iii) Introduction of composite cash credit limit to farmers, introduction of
new loan products with saving components, cash disbursem*nt of
loans, dispe nsation of no due certificate and discretion to banks on
matters relating to margin security requirements for agricultural loans
above Rs. 10,000.
(iv) Introduction of at least one specialized agricultural bank in each state
to cater to the needs of high t ech.
(v) Introduction of cash credit facility. munotes.in
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4 (vi) Insuring Kisan Credit cards to farmers to draw cash for their
production needs on the basis of the model scheme prepared by
NABARD.
(vii) The Government has made arrangement for hassle free settlement of
disputed cases of over dues.
(viii) To augment Rural Infrastructural Development Fund (RIDF) with a
corpus of Rs. 10,000 crore with NABARD to finance rural
infrastructure development projects by states.
Thus, the flow of institutional credit for agricultur e and allied activities
which was Rs. 31,956 crore in 1997 -98 is estimated to have increased to
Rs. 64,000 crore in 2001 -02. The total credit now from all agencies is
projected to reach the level of Rs. 82,073 crore by 2002 -03. The total
credit now to agri culture during the period 1997 -2002 is likely to be of the
order of Rs. 2,33,700 crore which is close to the Ninth Plan projection of
Rs. 2,29,750 crore.
For the Tenth Plan period (2002 -07) the credit flow into agriculture and
allied activities from all ba nking agencies is projected at Rs. 7,36,570
crore, which is more than three times the credit flow during the Ninth
Plan.
Farm Credit Package:
The Government of India announced the “Farm credit package” in June
2004 which aimed at doubling the flow of insti tutional credit for
agriculture in the ensuing three years. Accordingly, the credit to the farm
sector got doubled during two years, i.e., from Rs. 86,981 crore in 2003 -04
to Rs. 1,80,486crore in 2005 -06, as against the stipulated time period of
three year s. The credit flow continued to increase at Rs. 2, 29,400crore in
2006 -07 and then to Rs, 2,64.455crore in 2008 -09.
1.5 TYPES OF RURAL CREDIT
Classification of Rural Finance
Purpose Length of period Security Needs
a) Agriculture a) Short Period a) Farm mortgage credit
b) Non-farm business b) Medium period b) chattel or collateral
Credit
c) Family expenditure c) long period c) Personal period
a) Productive Credit b) Unprodu ctive credit munotes.in
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5 A) According to Purpose:
Following the Reserve Bank’s classification of agriculture credit by
purpose, we may say that such credit is required to purchase land to effect
permanent improvement on it.
1. For Agricultural purpose:
Such credit is need ed for the purchase of seed, manure and fodder,
payment of rent, wages, revenue, cess and other charges, irrigation of
crops, hire charges of pumps and purchase of water, purchase of live -stock
and effecting other land improvements . Repaired of agricultur al
implements, machinery, transport equipment’s, farm houses, cattle sheds,
repairs of wells and other irrigation services, laying of orchards, for
reclamation of lands and construction of irrigation wells, tanks and other
capital expenditure on agricultur e.
2. For Non -Farm Business purpose:
Such credit is needed for repair of production and transport equipment and
furniture, current expenditure in non -farm business, purchase, construction
and repair of building or non -farm business, purpose of farm equipment
and other capital expenditure on non -farm business.
3. For meeting Family Expenditure:
Such credit is needed for purchase of domestic utensils and clothing’s,
playing for medical, educational and other family expenses, purchase
construction and repair of re sidential houses and expenses relating to death
and marriage and other ceremonies and litigation expenses.
4. Other purposes:
These include purchase of building and ornaments, share and debentures
of cooperative societies, deposits with cooperatives societie s, private
money lenders and traders, unspecified purposes and payment of old
debts.
B) According to the Length of the Loan period:
From the point of view of the length of the loan period, agricultural credit
may fall into three categories, viz.
1. Short -term credit:
This is needed normally for short period of less than 15 months to meet
current expenses of cultivation, to facilitate production and for meeting
domestic expenses. For example, a farmer may need credit to buy seeds,
fertilizers and fodder for cat tle. He may also require funds to support his
family in those years when the crops have not been good or adequate for
the purpose. Such short -term loans are normally repaid fully after the
harvest. They are recoverable out of the sale proceeds of the crops
concerned.
According to the recommendations of V. L. Mehta committee on
Cooperative Credit, short -term production loans should be advanced on
the basis of sureties only. In some states such as M.P, Kerala and Orissa, munotes.in
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6 however, even such loans are being pr ovided on mortgage of land. In
Bihar and W. Bengal a member can borrow up to Rs.200/ - only on surety
basis and has to offer mortgage security for loans exceeding this amount.
2. Medium -term loans:
Which are required for medium period ranging between 15 month s and 5
years for the purpose of making some improvement on land, buying cattle,
agricultural implements, gardening, fencing, plantation etc?Purchase of
shares in cooperative sugar factories, pig breeding sheep and goat rearing,
purchase of storage bins an d purchase of rubber rollers under agricultural
machinery.
These loans are larger than short term loans and can be repaid over a
longer period of time. The period of loan is generally linked up with the
period of serviceability of the assets to be procure d with the loan but
normally it does not exceed 5 years.
3. Long -term loans:
Which the farmer need for the purchase of buying additional land, to make
permanent improvements on land like reclamation and bunding,
construction of farm house, cattle and machine -sheds, horticulture,
tractors, oil engines, machinery for crushing sugarcane, manufacturing of
gur, consolidation of holdings, purchase or acquisition of title of
agricultural lands by tenants, etc. to pay off old debts and to purchase
costly machinery. S uch loans can be repaid only out of the extra income
secured by the investment on land. Therefore, these loans are for long
periods of more than 5 years, ranging from 15 to 20 years.
It may be observed that almost all types of credit are needed by the far mer
at different stages of farming. But the pressing need is the provision of
long and medium term credit as the same is not readily available to him.
C) According to security:
On the basis of security offered, agricultural credit can be classified into
following categories.
1. Farm Mortgage Credit:
This is secured against land by means of a mortgage of land.
2. Chattel and collateral credit:
The farmer is given on the security of the farmer’s livestock, crops or
warehouse receipts and the latter on the security of other kinds of property
such as shares, bonds and insurance policies.
3. Personal Credit:
This is advanced on the promissory or personal notes of the farmer with or
without another’s security or guarantee. The rural credit survey committee
found that abo ut 50 % of the families surveyed were willing to offer their
immovable property as security, of the rest about 25 p.c indicated personal munotes.in
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7 security and remaining families did not specify the type of security which
they had to offer.
D) Productive and Unproduct ive credit needs:
Agriculture may require credit for the purpose of production and
consumption. In other words, credit needs of the farmers can be classified
into two parts -
i) Credit needed for productive purpose:
The loans which are used in productive oper ation of agriculture are called
the productive credit. However, productive requirements of the farmers
are loans for purchase of cattle, implements, fertilizers, inputs, better seeds
and requirements of the farmers are loans for purchase of cattle,
impleme nts, fertilizers, inputs better seeds and machinery etc.
ii) Unproductive credit needs:
On the contrary, farmers need credit for consumption purpose. The loans
which are used for consumption purposes are called the unproductive
credit. Between the movement of marketing of agricultural produce and
harvesting of next crop, there is a long interval of time. Most of the
farmers do not have sufficient income to sustain them through this period.
Therefore, they have taken loans for meeting their consumption needs. I n
the times of drought or flood, when the crops are damaged, the farmers
have also to insure such loans. In fact, unproductive loans are taken for
also taken for social purposes like birth of a male child, marriage or death
of persons in the family. Litiga tion too forces the farmers to borrow.
1.6 IMPORTANCE OF RURAL CREDIT IN INDIA:
1. Agricultural Development.
2. Development of Rural Industry.
3. Increasing Economic and Social Background of Agricultural Farmer.
4. Development of Agro Based Industries.
5. Increasing the Employment in Rural Area.
6. Commercial Agricultural Farming.
7. Development of Rural Economy.
8. Control of Poverty in Rural Area.
9. Increasing the Institutional Credit.
10. Rural Industrialization.
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8 2
RURAL INDEBTEDNESS
Unit Structure :
2.0 Objectives
2.1 Introduction
2.2 Causes of Rural Indebtedness
2.3 Consequences of Rural Indebtedness
2.4 Measures for Eradicating Indebtedness
2.5 Sugg estions for Removing Rural Indebtedness
2.0 OBJECTIVES
1) Understanding cause of Rural Indebtedness
2) Understanding Consequences of Rural Indebte dness
3) Studying measures and Suggestions for Removing Rural
Indebtedness
2.1 INTRODUC TION
Rural indebtedness has been the ever green companion of the Indian
peasants. According to a well-known saying, the Indian peasant is born
in debt, lives in debt and dies in debt. The prevalence of poverty
among agricultural labouring households is unde rlined by the prevalence
of the rural indebtedne ss. With the increase in the level of poverty, the
level of debt increases.The burden of debt passes on from generation
to generation. The number of those in the grip of this vicious problem is
even now very large, despite vigorous attempts to solve it. Rural
indebtedness has eaten into the very vitals of our rural social structure.
Hence it has drawn the att ention of sociologists, economists, planners,
bureaucrats and others since long time past.
While borrowing money the borrower does not pay attention to his
repaying capacity and for him even a little debt becomes a trap o ut of
which he cannot come out. Loans from the money- lender support
the farmer as the hangman’s rope suppo rts the hang ed.
Rural borrowing and rural debt signify two different things. There is
nothing wrong in borrowing especially when the funds are required for
agricultural operations. But indebtedness arises when the income of the
farmer is not sufficient to repay the debt incurred or when he spends his
income for unproductive purposes and does not save for the purpose of munotes.in
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9 paying off his debt. When the borrower fails to repay the loan in time
and the loan goes on accumulating, he becomes indebted.
2.2 CAUSES OF RURAL INDEB TEDNESS
The factors accounting for rural indebtedness are many and varied. They
are as follows:
1. Poverty of the farmers:
The basic cause of the rural indebtedness in India is the extreme
poverty of the farmers. The farmers being poor have to borrow for various
purposes. Sometimes, the crops fail because of the failure of monsoons, or
because of floods etc. They have to purchase seeds, implements, cattle
etc. and since they have no past savings to draw upon, they are
forced to bo rrow. Just as poverty forces him to borrow, it is his
poverty again which forces him to have so little for paying off his debt.
2. Passi on for land:
The farmers in the Indian context have a tremendous passion for
land. They are keen to make improvements on land. They do it mostly
through borrowing.
3. Ancestral debt:
The most important cause of the existing rural indebtedness is the
ancestral debt. Many agriculturists start their career with a heavy burden
of ancestral debt and drag the loan for the whole of their lives, taking it to
be a religious and social obligation.
This increases the debt burdens on the inheritors, every time the debt is
thus passed on. The Royal Commission on Agriculture has aptly
described this situation, in its observation that the farmer “is born in
debt, lives in debt and dies in debt.”
4. Ease of taking loan:
Institutional agencies have fixed hou rs and stipulate that some
formalities should be observed before the loans are sanctioned
and then paid. On the other hand, a money lender has been easily
approachable even at odd hours. This encourages borrowing.
5. Litigation:
Litigation, civil or criminal, is another cause of rural indebtedne ss.
Agriculturists of standing are gene rally involved in various kinds of
disputes such as intra-family disputes, inter-family disputes, and disputes
over bounda ry lines, theft of crops, and division of ancestral lands etc.
which often force them to go to courts of law. Such prolonged
litigations involve heavy expenditure and to meet these expenses,
farmers take a loan which further aggravates the burden of rural
indebtedness. munotes.in
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10 6. Small sized holdings:
Approximately 72.6 per cent of the operational holdings in India are less
than 5 acres in size. When the holdings are small, modernization of
agriculture becomes impossible. The cultivation ceases to be
economical even in the best of years and the yield from land becomes
insufficient for the maintenance of the farmer and his family. On
account of this reason the farmer incur debt.
7. Illiteracy and ignorance:
The illiteracy and ignorance of the peasants stand in the way of
improving the economic conditions. They are not conscious about the
utility of small family norms. In view of the large size of the family,
they are compelled to borrow money for fulfilling the basic
necessities of life.
8. Extravagant expenditure:
Being bound to customs and tradition, the ruralites consider the expenses
on the occasion for marriage, birth, death, and caste dinners on auspicious
occasions and on some religious observance as unavoidable. Being poor,
they have no reserve to fall back upon. This makes them to borrow.
They borrow at least for two reasons. In the first place, if they do
not spend on these occasions, their image in the public eyes will be
tarnished. Secondly, they have ambition to excel others in pomp and
grandeur.
9. Malpractices of the money-lenders:
The private money -lenders are known to have adopt ed various
malpractices.
(a) They have been charging exorbitant rates of interest varying between
40 to 60 per cent per annum.
(b) They have also been found keeping false accounts.
(c) They are more interested in forcing the borrowers to part with their
land by encouraging the farmers to borrow from them and get their
lands mortgaged to them.
(d) They have been purchasing the crops of the farmers at very low price
when the latter approach them for selling their crops in order to
repay their debts.
(e) When the farmers’ debt has accumulated to a sufficient amount, they
take away the land of the borrowers. Like a fly in the cobweb, which
can rarely escape, similarly, the farmer once caught by the money-
lender can rarely come out of his clutches.
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11 10. High rates of interest:
The high rates of interest also compel the cultivators to borrow. The
rates vary from state to state but due to the poor economic condition
of the peasants, the interest accumulates every year. Quite often it is
extremely difficult to clear up even interest charges alone. The Bombay
Banking Committee rightly observes, “It is not that the agriculturist”
repays too little, he often repays too much. It is the high rate of interest
and the malpractices followed by the money-lenders that tend to
perpetuate his indebtedness.”
2. Pulls of high standard of living:
Sometimes high standard of living constitutes the cause of indebtedne ss.
Of late, the benefits of urbanization have reached the doorsteps of the
ruralizes. Poor peasants have fallen a prey to the cons meristic culture.
They are attracted by the temptations of the amenities of city life. They
are induced to buy them even if there is no great need for them.
12. Exce ssive burden of land revenue and rent:
During the British rule, the land revenue was fixed high. So the farmers
were not able to pay in time. Hence, they were forced to borrow. Even
in the Post-Independent India excessive land revenue with its rigid
procedure of collection is squarely responsible for aggravating the
problem of rural indebtedness.
The rent is tasking for the small and marginal farmers. The dues being
fixed, they are bound to pay even when production suffers during
conditions of flood and drought. Therefore, the farmers are forced
to take loans to make these payments. Consequently the burden of
indebtedness increases.
13. Addiction to drinking:
Drinking leads to rural indebtedness in two ways. In the first place, it
gives rise to a number of quarrels and crimes resulting in litigation.
Litigation as all of us know entails unnecessary expenditure.
Secondly, drinking is itself an expensive habit and a good share of the
peasant’s income is spent for drinking.
14. Inflation:
Inflation una ccompanied by corresponding increase in the income of
the ruralites compels them to bo rrow to meet their basic nee ds.
15. Inadequate infrastructural facilities and institutional
arrangements:
Inade quate infrastructural facilities stand in the way of improving the
economic condition of the farmer. Due to inadequate marketing facilities,
he has no other alternative but to sell away the produce imme diately after
harvest at the unreasonable prices. The heavy indebtedness of the farmer munotes.in
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12 also makes it difficult for him to store the produce for sale on favourable
terms at a later date.
2.3 CONSEQUENCES OF RURAL INDEBTEDNES S
Rural indebtedness is dysfunctional for the rural society in more ways
than one. Some of its evil consequences are as follows:
1. From the economic point of view, increasing rural indebtedness leads
to growing pauperisation of the small and marginal farmers. They
mortgage their landed property to the money-lenders and ultimate ly lose
it to the latter.
In th is way, they join the ranks of the landless labourers. The small
farmer gets a low price while selling his produce and pays high prices
for bu ying inputs. Hence rural indebtedness is both the cause and effect of
the growing poverty of the Indian farmers.
2. Increasing rural indebtedne ss has also undesirable social consequences.
In the first place, it creates a class of landless labourers and tenants in the
place of independent farmers.
Secondly, the heavily indebted farmers are forced to pledge their own
person and become bonded slaves to the landlords and money-lenders.
Somet imes their women fall prey to money-lenders’ caprice and vice.
This has led to moral degradation of rural society.
Thirdly, in many parts of the country, the small peasants who have lost
their land to the money-lenders have revolted against the latter in a
violent manner. The problem is particularly serious in some parts of
Bihar, Orissa and Andhra Pradesh. In such states the high caste money-
lenders have exploited the innocent and illiterate advises and have
deprived them of their meager land ownership.
Quite naturally this has been the direct cause of Naxalite movements in
these areas. Dr. Thomas aptly observes, “A society steeped in debt is
necessarily a social volcano. Discontent between classes is bound to arise
and shouldering discontent is always dange rous.”
3. Rural indebtedness has far-reaching political implications for the rural
society. The money-lenders become unscrupulous politicians and e xploit
the heavily indebt ed farmers when elections to village Panchayats, co-
operative societies, state assembly and LokSabha are held. Democracy
becomes a mockery.
4. From the psychological angle we observe that the borrowers are always
a frustrated lot. They always remain in the grip of worry and te nsion.
5. Deterioration of agriculture:
As a result of indebtedness, the condition of agriculture also deteriorates.
Two reasons may be attributed to this state of affairs. In the first place,
the heavily indebted farmers because of paucity of funds are not in a munotes.in
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13 position to mode rnize agriculture. This would cripple their capacity to
increase their income level. Secondly, most of the farmers have to work
on the moneylender’s land as servants. Obviously they lack interest in
work.
6. Low standard of health:
The farmers burdened with a heavy debt grow weaker because they are
beset with the problem of repaying it. They work hard to repay the loan
which somet imes tell upon their health. They also cannot afford to have
medical facilities for themselves and for their children. They cannot have
any nourishing diet. All these lead to the lowering of their health
standards.
2.4 MEASURES FOR ERADICATING INDE BTEDNESS
The Government has undertaken several measures since long to put an
end to rural indebtedness. They are as follows:
1. (a) Removing the need for borrowing:
(i) Steps have been taken to reduce the effective burden of land revenue
and to ma ke its payment convenient through greater elasticity in its
administration and collection.
(ii) Adequate irrigation facilities have been provided to the farmers. (iii)
Inputs have been made available at cheap rates.
(iv) Agro-based industries have been promoted in the rural areas.
(v) Improvement has been effected in the sphere of means of
communication and transportation. Better marketing facilities have
been made available to the peasants.
(b) Protecting the assets of the agriculturists from passing into the
hands of moneylenders:
For this purpose various Acts have been passed in the past e.g. the Land
Alienation Acts, the Encumbered the Estates Relief Act of 1876 etc.
(c) Regulation of the activities of moneylenders:
For this purpose various legislative measures have been enacted. They are
as follows:
(i) The Deccan Agriculture Act, 1879:
Under this Act the courts were allowed to go behind the contract of
debt and to modify it in favour of the borrower.
(ii) The Various Loans Act, 1918:
This Act tried to improve the legal position of the borrower.
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14 (iii) The Regulation of Accounts Act, 1930:
It aimed at protecting the debtor from manipulated accounts by
prescribing forms of accounts and insisting on the debtor being supplied
with these regularly.
(d) The Punjab Relief of Indebtedness Act, 1934:
It drew a distinction between secured and unsecured loans for purposes
of rate of interests.
(e) Various Acts like the Punjab Registration of Mon eylenders Act,
1938 provided for the registration and licensing of money lenders.
(f) The Acts like the Punjab Restoration of Mortgaged Lands Act and
the Punjab Debtor’s Protection Act provided for restoration of mortgaged
lands on p ayment of nominal compensation and exempted ancestral
property from attachments as also standing crops.
2. Nationalisation of Commercial Banks:
The commercial banks were nationalised in 1969. Since then special
efforts have been made to increase the involvement of public sector
banks in the development of agriculture and other associated activities
in the rural areas. At present, the commercial banks are mand ated to
earmark 18% of their total annual lending to agricultural sector as part of
priority sector lending.
They have also been associated with the rural finance through some
other important schemes such as the Lead Bank Scheme, Village
Adoption Scheme, Service Area Plan, Intensive Centre Scheme,
Agricultural Finance Corporation etc.
3. Regional Rural Banks:
Regional Rural Banks have been established since 1975 as a new source
of finance in the rural areas. The main objective of these banks is to
provide credit and other facilities to the small and marginal farmers,
agricultural labourers, artisans and small entrepreneurs. These banks are
sponsored by the nationalised commercial banks. So far as the area of
operation is concerned, such a bank covers one or more districts of a
state.
At present, there are 196 Regional Rural Banks in the country and
these have about 14500 branches.
4. Twenty-Point Economic Programme:
Under the 20- point programme launched in July, 1975, the government
had declared a moratorium on the recovery of debt by money-lenders
from farmers, landless labou rers and rural artisans. Liquidation of rural
indebtedness and abolition of bonded labour were two dynamic
aspects of the old 20-point economic programme. munotes.in
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15 5. Co-operative Credit Institutions:
Co-operative finance is the best and the cheapest source of rural credit.
It is because loans are advanced for productive activities and also at
very low rates of interest as compared to those charged by the money -
lenders and various other institutions. The P rimary Agricultural Co-
operative Credit Societies generally advance short- term and medium-
term loans to the farmers, the Primary Land Development Banks cater
to the long-term financial requirements of the farmers.
6. Report of the Sivaram Committee:
In its report submitted in Ap ril, 1976 the Sivaram Committee outlined the
following proposals pertaining to rural indebtedness.
(a) Consumption loans for marriages, births and deaths, religious
expenses, medical expenses, education etc. should be provided by the
government corporations and nationalised banks to small farmers,
landless labourers and artisans.
(b) Banks and Co-operatives should provide similar loans to
marginal farmers.
(c) Schemes should be devised to enable these classes of people to
return these loans.
7. National Bank for Agriculture and Rural Development:
NABARD was set up by the Government of India on 12th July, 1982
with an authorised capital of Rs. 500 crore and a paid up capital of Rs.
100 crore. It plays the role of a catalyst of rural resurgence through
injection of adequate finance for approved development projects. It is an
apex institution entrusted with the responsibility of bringing about rural
prosperity.
The number of schemes sanctioned as well as the financial assistance
extended by the Bank for these schemes has been constantly increasing.
NABARD has been paying special attention in extending credit facilities
in less developed banked areas like Bihar, Rajasthan and Orissa.
Of late, the b ank has been taking special steps for augme nting
credit flow to the North East Region.
The role of NABARD in providing funds for the promotion of self-help
groups, especially the ‘Rural Women’s Development and Empowerment
Scheme’ is, indeed, commendable.
Recently, the bank prepared a model scheme for the commercial banks to
issue ‘Kisan Credit Cards’ to the farmers. The purpose of the KCC
scheme is to facilitate short term credit to the farmers. The scheme has
gained popularity and its implement ation has been taken up by 27
commercial banks, 187 Regional Rural Banks and 334 Central
Coope rative Banks. munotes.in
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16 Since its inception till the end of March 2004, more than 41 million
KCCs have been issued and total loans sanctioned amount ed to
Rs. 97,710 crores. KCC holders are also provided personal accident
insurance cover of Rs. 5,000 for death and Rs. 25,000 for disability.
2.5 SUGGESTIONS FOR REMOVING
RURAL INDE BTEDNESS
Several suggestions have been made for eradicating rural
indebtedne ss. Of them, major ones are the following:
1. Measures should be devised for cancelling old debts.
2. Measures should be adopted for limiting fresh borrowing to the
minimum necessary and to the productive type.
3. The government should make arrangements for giving loans to the
farmers at low rates of interest.
4. In order to make loans available to the villagers, the formal procedure
for the grant of loans in the co-operative societies and banks should be
made as simple as possible.
5. The laws preventing money-lender to take possession of farmer’s
land should be strictly put to practice.
6. Efforts should be made to desist ruralizes from undertaking
unproductive and wasteful expend iture. Hence they ought to be
educated about the harmful consequences of unproductive debts.
7. In order to reduce the dependen ce of the ruralizes on local
money-lenders, the network of institutional credit structure
comprising cooperatives, commercial banks and regional rural
banks should be rapidly expand ed throughout the country to cater to
the credit needs of the small farmers and artisans.
8. There should be a check on the practice of private money
lending. The account register of the moneylenders should be
checked to find out how far they have increased their landed
property during the period under review. Besides, only the
registered and license holders should be allowed to advance loans.
In fine, the problem of rural indebtedness is linked with the larger issue
of rural poverty. Poverty alleviation measures have to be taken up on
a war footing to augment the income of the ruralizes. Mobilization of
local, social and e conomic resources, an equitable distribution of
benefits of new agricultural strategy and establishment of a good
number of co-operatives and commercial banks will go a long way in
mitigating the magnitude of rural indebtedne ss from the rural social
matrix.
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17 3
SOURCE S OF RURAL CREDIT IN INDIA
Unit Structure :
3.0 Objectives
3.1 Introduction
3.2 Sources of Rural Credit in India
A) Non institutional sources
1) Money-lenders,
2) Traders and commission agents,
3) Relatives and landlords.
B) Institutional sources:
i) Government
ii) Co-operative societies
iii) Commercial banks
iv) Regional rural banks (RRBs)
v) NABARD.
vi) Lead Bank Scheme
vii) Kisan Credit Card scheme
viii) Farmer Service Societies
ix) Agricultural Finance Corporation (AFC)
x) State Bank of India (SBI)
3.0 OBJECTIVES
1) Understanding the sources of Rural Credit in India.
2) Understanding the sources of Non- Institutional credit
3) Understanding the sources of Institutional credit
3.1 INTRODUC TION
Credit needs of the In dian farmers can be classified into three types
depend ing upon the period and the purpose for which they are required: munotes.in
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18
a) Farmers need funds for short periods of less than 15 months for the
purpose of cultivation or for meeting domestic expenses. For e.g.,
they want to buy seeds, fertilizer’s, fodder for cattle, etc. They may
require funds to suppo rt their families in those years when the crops
have not been good or adequate for the purpose.
b) The farmers require finances for medium period ranging between
15 months and 5 years for the purpose of making some improvement
on land, buying cattle, agricultural implements, etc. These loans
are larger than short-term loans.
c) The farmers need finances for the purpose of buying additional land,
to make payment improvements on land, to pay off old debt and to
purchase costly agricultural machinery. These loans are for long
periods of more than 5 years.
3.2 SOURCES OF RURAL CREDIT IN INDIA
There are two sources of credit available to farmers:
A) Non institutional sources: Private or Non institutional sources
include
a) Money-lende rs,
b) Traders and commission agents,
c) Relatives and landlords.
Non institutional sources accounted for 93 percent of the total credit
requirements in 1 951-52 and institutional sources including the
government accounted for only 7 percent of the total credit needs in that
year.
B) Institutional sources:
Institutional credit refers to loans provided to farmers by
i) Government
ii) Co-operative societies
iii) Commercial banks
iv) Regional rural banks (RRBs)
v) NABARD.
vi) Lead Bank Scheme
vii) Kisan Credit Card scheme
viii) Farmer Service Societies munotes.in
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Sources of Rural Credit in
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19 ix) Agricultural Finance Corporation (AFC)
x) State Bank of India (SBI)
A) Non institutional sources:
Source: All India debt and Investment Survey.
a) Money Lenders: are of two types:
i) Landlords or rich farmers:
Who combine farming with money lending and professional money
lenders? The cultivators depend upon the money-lenders for their
requirements of cash. The moneylenders freely supplies credit for
productive and non-productive purposes. They provide credit for
short term as well as long term requirements of the farmers. The
moneylende rs are easily accessible and maintain a close and personal
contact with the borrower, often having relation with family extending
over gene rations. His methods of business are simple and elastic. He
has local knowledge and experience and therefore can lend against
promissory notes. He knows how to protect himself against default,
through legal and illegal methods.
ii) Landlords and others:
Traders and commission agents supply funds to farmers for productive
purposes much before the crop matu re. They force the farmers to sell their
produce at low prices and they charge a heavy commission for th eir
dealings. Farmers often borrow from their own relatives in cash or in kind
for their temporary requirements. They carry low or no interest and
they are returned soon after the harvest. Farmers, particularly small
farmers and tenants, depend upon landlords and others to meet their
financial requirements for they charged exorbitant interest rates. Non
institutional
sources: 1951
-52 1961
-62 1971
-72 1981
-82 1991-
92 2010-
2011
Money
Lende r 69.7 49.2 36.1 16.1 17.6 18.2
Traders
and
Commission
agen ts 5.5 8.8 8.4 3.2 2.5 4.8
Relatives 14.2 8.8 13.1 8.7 5.5 4.4
Land lords. 3.3 14.5 10.7 8.8 4.3 5.7
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20 Despite rapid development in rural branches of different institutional
credit agencies, village money lenders still dominate the scene.
Money lende rs are of two types- agriculturist money lenders who
combine their money lending job with farming and professional
money lende rs whose sole job is money lending. A number of reasons
have been attributed for the popu larity 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 a reas had facilitated
unhindered operation of money lending. Cooperative credit and self-
help groups can play a major role in control of money lending.
b) Traders and Commission Agents:
Traders and commission agents advance loans to agriculturists for
productive purposes ag ainst 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.
c) Relatives:
Farmers also borrow from their own relatives in cash or kind. These loans
are taken for the short period in order to tide over temporary difficulties.
These loans are generally contracted in an informal manner, the carry
low or no interest and they are returned soon after the harvest. But this
source of finance is uncertain and with increasing needs of modern
agriculture, the farmer cannot depend upon this source to any large
extent. Moreover, the importance of this source in the total borrowing of
the cultivators was 14.2 percent in 1951-52 which declined to 8.8 per
cent in 1961-62.
B) Institutional sources:
The need for institutional credit arises because of the weakness or
inadequacy of private agen cies and their exploitative nature of credit. The
basic motive of Institutional credit is to he lp the farmer to raise his
productivity and maximize his income. The rate of interest is not only
relatively low but can be different for different groups of farmers and for
different purposes.
As far as institutional sources are concerned, the first institutions
established and promoted was the institutions of Cooperative credit
institutions. History of co-operative credit is very old in India. The
organization of rural co-operative credit institutions in India can be
clear from this chart. munotes.in
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21 Co-operative Credit Institutions
Rural Institutional sources: (%)
Institutional
sources: (%) 1951-52 1961-62 1971-72 1981-82 1991-92 2010-2011 Government 3.3 15.5 7.1 3.9 6.1 7.8
Co-operative Credit 3.1 2.6 22.0 29.9 27.6 24.9
Commercial Banks 0.9 0.6 2.6 29.4 33.7 27.1
Other - - - - 2.7 7.1
Total 7.3 18.7 31.7 63.2 70.1 66.9
Source: All India debt and Investment Survey and NSSO.
Rural Co-operative Credit
Institutions (95,765) Urban Co-operative Credit
Institutions Short Term (95,048) Long Term (717)
State Co-operative
Banks (31) District Central Co-
operative Banks (370) Primary Agricultural
Credit Societies (94 ,647)
State Co-operative Agricultural &
Rural Developments Banks (20) Primary Co-operative Agricultural
& Rural Developments Banks (697)
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22 Rural Institutional sources: (Rs in crores)
Year Co-
operative
Banks Share in% RRBS Share in% Commercial Banks Share
in% Total Institutional Credit
1984-85 3440 55 - - 2790 45 6230
1991-92 5800 52 596 05 4806 43 11202
2001-02 23604 38 4854 08 33587 54 62045
2002-03 23716 34 6070 09 39774 57 69560
2003-04 26959 31 7581 09 52441 60 86981
2004-05 31424 25 12404 10 81481 65 125309
2005-06 39404 22 15223 08 125859 70 180486
2006-07 33987 24 15170 10 100999 67 150156
2007-08 35875 20 17989 10 128876 70 182738
2008-09 36165 19 19325 10 132761 71 188251
2009-10 32871 18 23984 13 121879 69 178734
2010-11 70105 18 43988 10 332708 74 446779
2011-12 53187 20 29073 11 179869 69 262129
Source: Econom ic Survey and NABA RD various issues
1) The Government :
These are both short term as well as long-term loans. These loans are
popu larly 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. The government provides finance
indirectly as well as indirect.
1. Indirect financing indirect credit is provided through the co- operative
societies.
2. Direct financing The govt. has been financing farmers directly.
Agricultural credit from the govt. is calls “taccavi' and has a long
history in India, it is provided under Land Improvement Loan
Act of 1883 and the agricultural Loans Act of 1884. The government
gives “taccavi loans” to the farmers which are disbursed at the time of
distress famines, flood etc. At a low interest rate of 6 percent and the
repayment schedule is very convenient.
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Sources of Rural Credit in
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23 2. Rural Co-operative Credit Institutions:
The rural co-operative movement was started in over 100 years back
largely with a view to providing agriculturists funds for agricultural
operations at low rates of interest and protect them from the clutches of
money lenders.
The organisation of the co-operative credit for short period is as
following,
A. Short Term Rural Credit :
a) Primary Agricultural Credit Society (PACS):
It may be started with ten or more persons, normally belonging to a
village. The value of each share is generally nominal. PACS deal
directly with farmer - borrowers, grant short term and medium term
loans and also unde rtake distribution and marketing functions. The
management of the society is under an elected body consisting of
President, Secretary and Treasurer. Profits are not distributed as
dividends to shareholders but are used for the welfare of the village
.The usefulness of PACS has been rising steadily.
In 1950-51, they advanced loans worth Rs. 23crores, which increased to
Rs. 200crores in 1960-61 and further to Rs. 34,520 crores in
2000-01. This progress has been spectacular but not adequate
considering the demand for finance from farmers.
The number of PACS had come down from 2,12, 000 in 1960 61 to
1,61,000 in 1970-71 and recently number of PACS are 94,647. At the
end March 2006 with estimated membership of over 10 crore farmers.
Most of the PACS are dependent on the finance provided by Central
Cooperative Banks (CCBs). In case the CCBs are weak, the PACS are
starved of finance which affects the credit functions of PACS. At the end
of March 2006, the loans and advances outstanding for PACS were about
Rs. 51,780 crores.
b) District Central Co-operative Banks (DDCBs):
These are federations of primary credit societies in specified areas
normally extending to a whole district. These banks have a few private
individuals as shareholders who provide both finance and
management. They m ay accept deposits from the general public but
their main task is to lend to village primary societies.
By the end of March 2007, there were 370 District Central
Cooperative Banks. The loans outstanding came to Rs.
79,200crores. They acts as an intermediaries between the State Co-
operative Bank on the one hand and the village primary credit societies on
the other.
The Reserve Bank – now NABARD has formulated a scheme for the
rehabilitation of weak central co-operative banks. NABARD is providing munotes.in
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24 liberal assistance to the State Governments for contributing to the share
capital of the weak Central Cooperative Banks selected for the purpose.
c) State Co-operative Banks (STCBs):
The STCB finances and controls the working of the District Central
Cooperative banks in the State. It serves as a link between NABARD
from which it borrows and the cooperative central banks and village
primary societies. There are 31 State Cooperative Banks (STCB) in
the country.
The State Coope rative Bank not only interested in helping the rural
cooperative credit movement but also in promoting other co-operative
ventures and in extending the principles of cooperation. During 2005-
06 the 31 state cooperative banks had lent about Rs. 48,260crores to
District Central Co-operative Banks.
B. Long Term Rural Credit:
Cooperative Agriculture and Rural Development Banks (CARDBs) :
The long term requirements of the farmers were traditionally met by the
money-lende rs. Initially, land mortgage banks were organised for the
purpose of providing long term credit to farmers. These banks were later
called land development banks. In recent years, they have been renamed
as Cooperative Agricultural and Rural Development Banks (CARDBs).
These were classified into;
