Sources of Agricultural Finance

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Agricultural finance


Agricultural finance is the provision of multiple types of services dedicated to supporting both on- and off-farm agricultural activities and businesses including input provision, production, and distribution, wholesale, processing and marketing.

Sources of Agricultural Finance:

This can be divided into two categories:

(i) Non-institutional sources.

(ii) Institutional sources

(i) Non-Institutional sources are the following:

(a) Moneylenders

(b) Relatives

(c) Traders

(d) Commission agents

(e) Landlords

(ii) Institutional sources:

(a) Cooperatives

(b) Scheduled Commercial Banks

(c) Regional Rural Banks (RRBs)

(a) Co operatives:

(i) Primary Agricultural Cooperative Societies (PACSs) provide short and medium term loans.

(ii) PCARDBs provide long term loan for agriculture.

(b) Commercial banks

In fact up to 1970 the government policy was to depend entirely on the cooperative banks as a major source of institutional credit in rural areas. Government felt that Cooperative Bank alone cannot meet the growing demand. Therefore Govt, policy changed and a number of institutions were developed to give rural credit. In 1969, 14 major banks were nationalised.

In 1980, six more banks were nationalised. In 2004, the number of total branches had shot up to 67062, of this 32,200 in rural areas. Despite the achievement of the commercial banks in the field of rural creditmentioned above, their performance and operations have invited a lot of criticism.

(c)Regional Rural Banks:

The Working Group on Rural Banks (1975) recommended the establishment of Regional Rural Bank (RRBs) to supplement the efforts of the commercial banks and the cooperatives in extending credit to weaker sections of the rural community, small and marginal farmers, landless labourers, artisan and other rural residents of small means.

The intention in having these new banks was that there should, in the Indian context, be an institutional device which combined the local feel and familiarity with the rural problems which the cooperatives possessed and the degree of business organisation and modernised outlook which the commercial banks had, with a view to reaching the rural poor more extensively.

Consequent upon the recommendations of the Working Group, 5 RRBs were initially set up in 1975. Their number later rose to 196. In 2003-04, RRBs provided Rs. 7,581 crores as credit to the agricultural sector. This was 8.7% of total institutional credit to agriculture in that year.

National Bank for Agriculture and Rural Development (NABARD):

The most important development in the field of rural credit has been the setting up of the National Bank for Agriculture and Rural Development (NABARD) in July 1982. It took over from Reserve Bank of India all the functions that the latter performed in the field of rural credit. NABARD is now the open bank for rural credit.

Functions of NABARD (1982):

The main functions of NABARD are as follows:

(1) It works as an open body to look after the credit requirement of the rural sector.

(2) It has authority to oversee the functioning of ‘the cooperative sector through its Agricultural Credit Department.

(3) It provides short-term credit (up to 18 months) to State Cooperative Banks for seasonal agricultural operation (crop loans), marketing of crops, purchase and distribution of fertilizers and working capital requirements of cooperative sugar factories.

(4) It provides medium-term credit (18 months to 7 years) to State Co-operative Banks and RRBs for agricultural purposes purchase of shares of processing societies and conversion of short- term crop loans into medium term loans in areas affected by natural calamities.

(5) It provides medium and long-term credit (not exceeding 25 years) for investment in agriculture under schematic lending to State Cooperative Banks, Land Development Banks, RRBs and commercial banks.

(6) It provides long-term assistance in the form of loans to state governments (not exceeding 20 years) for contribution to share capital of cooperative credit institutions.

(7) It has been entrusted with the responsibility of inspecting District and State Cooperative Banks and RRBs. The inspection of State Land Development Banks and other Federation Cooperative are undertaken on a voluntary basis.

(8) It maintains a research and development fund to be used to promote research in agriculture and rural development so that projects and programmes can be formulated and designed to suit the requirement of different areas.

NABARD and Rural Credit:

It is an apex institution in the field of rural credit. Therefore it does not deal directly with farmers and other rural people. It grants credit to them through the cooperative banks, commercial banks, RRBs.

(1) NABARD provides two types of refinance. The first is extended to RRBs, and apex institutions, namely StCBs and State governments. The other type of refinance is extended to augment resources for ground level deployment of rural credit.

During 2000-04, the NABARD’s refinance policy on short term SAO (Seasonal Agricultural Operations) for co-operative banks and RRBs laid emphasis on augmentation of the ground level credit flow through adoption of region- specific strategies and rationalisation of lending policies and procedure.

(2) Rural Infrastructure Development Fund (RIDF) was established in 1995-96 with a corpus of Rs 2000 crore with the major objective of providing funds to state governments and state- owned corporations to enable them to complete various types of rural infrastructure projects.

Loans under RIDF are given for various purposes like irrigation projects, watershed management, construction of rural roads and bridges etc.

(3) The access to credit for the poor from conventional banking is often constrained by lack of collaterals, information asymmetry and high transaction cost associated with small borrowed accounts. Micro finance has emerged as a liable alternative to reach the hitherto reached for their social and economic empowerment through social and financial intermediation, it involves provision of thrift, credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and thereby improve living standards.

In operational terms, micro credit involves small loans, up to Rs 25,000, extended to the poor without any collateral for undertaking self-employment project. Such loans are provided through Micro Finance Institutions (MFIs). One of the most popular models of MFI has been the Grameen Bank model, developed originally in Bangladesh and replicated in various parts of the world. Under this model, Non-Government Organisations (NGOs) form and develop self- help groups (SHGs) and provide credit to them.

(4) Kissan Credit Scheme was established in 1998- 99 to facilitate short-term credit to farmers.

(5) Credit Monitoring Arrangement is established with a view to providing to operative banks with more freedom and discretion to operate in an increasingly liberalised and competitive banking environment. NABARD, start in consultation with the Reserve Bank, decided to start the Credit Authorisation Scheme (CAS) with the Credit Monitoring Arrangement (CMA) with effect from the year 2000-2001.

(6) Cooperative Development Fund (CDF) was set up in 1993 with the objective of strengthening the cooperative credit institutions in the areas of organisational structure, human resource development, resource mobilisation, recovery position etc. The assistance is provided to StCBs/SCARDBs/ CCBs)/PCARDBs by way of grant or loan or both.

The following Table shows the contribution of these different sources to the total agricultural credit in India since 1951-52 to 1996.

It can be revealed from the above table that among all the different non-institutional sources the contribution of moneylenders was highest and that was to the extent of 69.7%. However, its contribution gradually came down to 49.2% in 1961-62 and then to 7% in 1996. Total contribution of non-institutional source towards agricultural credit has gradually declined from 92.7% in 1951-52 to 25% in 1996.

The share of institutional sources to the total agricultural credit which was 7.3% in 1951-52 gradually increased’ to 18.7% in 1961-62 and then to 75% in 1996. Out of these institutional sources cooperatives contributed 40% and commercial banks contributed 30% of the total farm credit in 1996. Although the share of non- institutional sources in the rural areas decreased but still remained very important in supplying credit to the farmers.

The most important development in the field of rural credit is. the setting up of NABARD in July, 1982. This is an apex bank which coordinates the functioning of different financial institutions working for the expansion of the rural credit. It is run by a Board of Directors headed by a chairman.

So far as the supply of credit to agriculture and to rural industries is concerned, this bank performs all the functions including short, medium and long-term refinancing that were previously performed by the Reserve Bank of India. The paid up capital of NABARD is wholly subscribed by the Central Government and the RBI.

The NABARD played an important role in solving the problem of rural indebtedness in India. This aspect would be clear if we study the functions of NABARD, and the overall impact of all activities on Indian agriculture.


The Lead Bank Scheme, introduced towards the end of 1969, envisages assignment of lead roles to individual banks (both in public sector and private sector) for the districts allotted to them. A bank having a relatively large network of branches in the rural areas of a given district and endowed with adequate financial and manpower resources has generally been entrusted with the lead responsibility for that district. Accordingly, all the districts in the country have been allotted to various banks. The lead bank acts as a leader for coordinating the efforts of all credit institutions in the allotted districts to increase the flow of credit to agriculture, small-scale industries and other economic activities included in the priority sector in the rural and semi-urban areas, with the district being the basic unit in terms of geographical area.

Land Development Banks

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.

Farmer Service Co-operative

An agricultural cooperative, also known as a farmers’ co-operative, is a cooperative where farmers pool their resources in certain areas of activity. A broad typology of agricultural cooperatives distinguishes between ‘agricultural service cooperatives’, which provide various services to their individually farming members, and ‘agricultural production cooperatives’, where production resources (land, machinery) are pooled and members farm jointly.[1] Examples of agricultural production cooperatives include collective farms in former socialist countries, the kibbutzim in Israel, collectively governed community shared agriculture, Longo Mai co-operatives[2] and Nicaraguan production co-operatives.[3]

The default meaning of ‘agricultural cooperative’ in English is usually an agricultural ‘service’ cooperative, which is the numerically dominant form in the world. There are two primary types of agricultural service cooperatives, ‘supply cooperative’ and ‘marketing cooperative’. Supply cooperatives supply their members with inputs for agricultural production, including seeds, fertilizers, fuel, and machinery services. Marketing cooperatives are established by farmers to undertake transportation, packaging, distribution, and marketing of farm products (both crop and livestock). Farmers also widely rely on credit cooperatives as a source of financing for both working capital and investments.








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