Meaning of Credit

The concept of “credit” originates from the Latin word Credo, meaning “I believe.”

 This emphasizes that credit relies fundamentally on belief, trust, confidence, and faith between parties, as credit essentially involves loaning money on the understanding it will be repaid.

Definition of Credit/Loan
A credit or loan is a specific amount of money extended for a certain purpose under agreed conditions, with an interest rate applied, which can be repaid over time. According to Professor Galbraith, credit represents a “temporary transfer of asset from one who has to one who has not.”

Credit Classification Based on Various Criteria:

1. Classification Based on Time:

This criterion divides credit according to the loan repayment period, tailored to meet specific needs of the borrower.

Short-term loans: These are loans that are repaid within 6 to 18 months. Primarily, they are used by farmers for expenses directly related to ongoing agricultural activities, like sowing, fertilizer application, plant protection, and wages for casual labor. The loans are generally repaid from the proceeds of the harvested crops.

Medium-term loans: Loans with a repayment period ranging from 18 months to 5 years. Farmers utilize these loans for improvements on their farms, such as purchasing implements, electric motors, and livestock like milch cattle, sheep, and goats. Since these improvements take time to yield returns, a longer repayment period is allowed.

Long-term loans: Loans with repayment periods extending from 5 to over 20 years. These loans, alongside medium-term loans, are referred to as investment or term loans. Farmers use them for more permanent investments like land leveling, farm building construction, tractor purchases, and orchard development. Due to the nature of these investments, repayment is extended as they are non-liquidating.

2. Classification Based on Purpose:

Loans are classified by their intended purpose, categorized as follows:

Production loans: Also called Seasonal Agricultural Operations (SAO) loans, these short-term or crop loans, ranging from 6 to 18 months, are intended to cover crop production expenses and increase crop output.

Investment loans: Given for the purchase of durable assets such as tractors, pumpsets, and tube wells. These loans are repaid over several years since the assets contribute to productivity over multiple years.

Marketing loans: Designed to assist farmers in avoiding distress sales and allowing them to market produce advantageously. Based on warehouse receipts, commercial banks provide loans equal to 75% of the produce’s value, helping farmers wait for better prices and manage debt effectively.

Consumption loans: These loans cover non-production-related needs, indirectly supporting productive crop loan usage by reducing the diversion of funds. Although unproductive directly, consumption loans are issued in areas affected by natural disasters, benefiting individuals such as IRDP beneficiaries, small and marginal farmers, landless agricultural laborers, and rural artisans. These loans, capped at Rs. 5000 per individual, are sanctioned by branch managers and have an interest rate around 11%.

3. Classification Based on Security:

This classification depends on the guarantee given by the borrower and is further divided into:

Secured loans: Loans supported by collateral or security:

• • Personal security: Based on the borrower’s personal guarantee, a promissory note is given, and third-party guarantees may be optional.
  • Collateral Security: Movable property (e.g., LIC bonds, fixed deposit bonds, machinery) is pledged to obtain credit.
  • Chattel loans: Loans obtained from pawn brokers with movable property like jewelry or metal utensils as collateral.
  • Mortgage: Involves immovable property such as land or buildings as security. Mortgages can be:
    • Simple mortgage: Registered ancestral property is used as collateral.
    • Equitable mortgage: Self-acquired property serves as security without needing registration.
  • Hypothecated loans: The borrower retains ownership but the lender has legal rights to the property in case of default. The borrower uses the loaned machinery to pay installments. Hypothecated loans include:
    • Key loans: The produce remains with the lender.
    • Open loans: The borrower physically possesses the item but the lender holds legal ownership.
• Unsecured loans: These loans are based solely on trust, with no collateral, typical of private lending.

4. Classification Based on Lender:

Credit can also be categorized based on the lender’s type:

Institutional credit: Provided by agencies like co-operatives and commercial banks, institutional credit is regulated and often carries lower interest rates.

Non-institutional credit: Provided by private individuals like moneylenders, traders, and relatives, often without strict formalities, but potentially at higher interest rates.

5. Classification Based on Borrower:

Credit is also classified by the nature of the borrower’s activity and financial standing.

Business activity: Loans may support specific sectors like agriculture, dairy, poultry, or pisciculture.

Farm size: Credit can be extended to various farm sizes, including marginal, small, medium, and large farmers.

Location-based: Loans can be targeted toward hill or tribal farmers to support their unique agricultural needs.

6. Classification Based on Liquidity:

Liquidity-based classification distinguishes loans by the ease of converting assets or returns into cash.

Liquid credit: Loans that are easily repayable in short periods as the invested funds generate quick returns, such as crop loans repaid after each season.

Non-liquid credit: Long-term loans for substantial investments with delayed returns, requiring a longer repayment schedule, like loans for tractors or land development.

Credit Needs in Indian Agriculture

In Indian agriculture, credit serves as a vital financial resource for farmers, enabling them to meet various needs related to production, infrastructure, risk management, and income stability. The role of agricultural credit is crucial in advancing productivity, addressing seasonal financial needs, and supporting the transition from traditional to more modern, technology-driven agricultural practices.

1. Purchase of Agricultural Inputs: Farmers require credit to buy seeds, fertilizers, pesticides, feed, and fodder for livestock—essential inputs for enhancing productivity and crop yields.

1. Household and Emergency Support: In years with poor harvests or during off-seasons, credit helps farmers sustain their households and maintain income stability.

1. Land Expansion and Improvement: Access to credit enables farmers to acquire additional land, improve soil quality, and implement conservation practices, increasing land productivity and farm efficiency.

1. Machinery and Equipment: Purchasing or leasing farm machinery (tractors, harvesters, irrigation equipment) requires significant financial investment, which is facilitated by credit and leads to increased mechanization and reduced labor dependency.

1. Water and Irrigation Management: Credit allows farmers to invest in irrigation systems, wells, and water storage solutions, ensuring better water availability and reducing the risks of drought.

1. Risk Management and Insurance: Credit supports farmers in paying insurance premiums, which helps mitigate risks from crop failures due to natural disasters, pests, and diseases.

1. Diversification of Income Sources: Many farmers seek credit to diversify into allied activities like dairy, poultry, or fisheries, creating additional income streams and reducing reliance on seasonal crops.

1. Infrastructure Development: Credit is essential for constructing farm infrastructure such as storage units, greenhouses, livestock sheds, and fencing, which enhance productivity and reduce post-harvest losses.

1. Sustainable and Modern Farming Practices: Agricultural credit enables the adoption of sustainable practices like organic farming, precision agriculture, and conservation techniques, promoting long-term environmental health.

1. Education and Training: Credit can support farmers in accessing training on modern farming techniques, market trends, and financial management, thereby enhancing their knowledge and skills.

Role of Agricultural Credit in Indian Agriculture

1. Increases Productivity: By providing access to better inputs, machinery, and modern technology, credit directly contributes to higher crop yields and productivity.

1. Supports Economic Development: Agricultural credit fuels the rural economy, encouraging growth by creating jobs, increasing rural purchasing power, and supporting agro-based industries

1. Reduces Dependence on Moneylenders: The structured credit system, including cooperatives, banks, and regional rural banks, offers more affordable and reliable alternatives to exploitative private moneylenders.

1. Encourages Modernization and Mechanization: Credit enables farmers to adopt mechanized farming practices, reducing dependency on manual labor, improving efficiency, and expanding production capacities.

1. Promotes Income Stability: Credit helps farmers manage income fluctuations due to seasonal variability and crop failures, ensuring a steady livelihood.

1. Reduces Regional Disparities: By providing financial resources to underserved rural areas, credit helps bridge economic gaps between urban and rural regions, supporting balanced development.

1. Facilitates Crop Diversification and Risk Reduction: Access to credit allows farmers to diversify crops and income sources, helping them manage risks better and sustain livelihoods in challenging times.

1. Enhances Standard of Living: With better credit access, farmers can improve their productivity, increase income, and invest in better living conditions, healthcare, and education for their families.