Source of Agricultural Credit

Agricultural credit can be classified into two broad categories: Non-Institutional Credit and Institutional Credit.

1. Non-Institutional Credit Agencies

Non-institutional credit is provided by entities like money lenders, traders, commission agents, landlords, friends, and relatives. This type of credit is often informal and lacks legal formalities.

• Nature of Credit: Loans are advanced for productive purposes, usually secured against crops. There are no formal agreements or legal procedures involved.

• Obligations for Farmers: It may become obligatory for farmers to purchase inputs and sell outputs through the credit provider.

• Interest and Exploitation: Money lenders and other non-institutional sources often charge very high rates of interest and commissions on all sales and purchases, making this credit exploitative.

• Importance for Cash Crops: Non-institutional credit is crucial for the financing of cash crops like cotton, tobacco, and groundnut, where small farmers and tenants depend heavily on landlords for financial support.

Types of Money Lenders:

• Agriculturist Money Lenders: These lenders combine farming with money lending.
• Professional Money Lenders: These lenders focus solely on money lending.

Reasons for Popularity:

• Unrestricted Credit Supply: Money lenders provide credit for any purpose, without restrictions.

• Easy Access: Farmers have easy access to these lenders, as they maintain close relationships with rural families.

• Flexibility: Business methods adopted by money lenders are simple and flexible.

• Timely Availability: Credit is made available quickly and without much formal process.

• Local Knowledge: Money lenders have a good understanding of local conditions, making them well-suited for their business.

• No Collateral: Money lenders often do not require specific types of security for loan approval.

Unfair Practices:

• No Receipts: They do not provide receipts for repayments and may deny repayment claims.
• High Interest Rates: Money lenders charge exorbitant interest rates.
• Loans for Both Productive and Unproductive Purposes: This often leads to indebtedness among farmers.

Relatives as Credit Sources:

• Informal Loans: Farmers may also borrow funds from relatives during times of crisis. These loans are typically informal, interest-free, and repaid after the harvest.
• Advantages:
  • No external control over the lending practices.
  • Suitable for poor households who may not have access to formal credit.

2. Institutional Credit

Institutional credit is provided by formal, recognized institutions and financial organizations that operate under government regulations. These include:

Commercial Banks

• • Role: Primary source of formal credit for the agricultural sector.
  • Services:
    • Short-term Loans: For seasonal needs such as seeds, fertilizers, and pesticides.
    • Medium-term Loans: For purchasing machinery, livestock, and minor irrigation projects.
    • Long-term Loans: For large-scale investments like land development and irrigation projects.
    • Additional Services: Savings accounts, insurance, and financial advisory.

Cooperative Banks

• • Role: Operate on mutual assistance and cooperative principles, providing services especially in rural areas.
  • Services:
    • Short-term and Medium-term Loans: For crop production and other agricultural activities.
    • Microloans: For small farmers and rural entrepreneurs.
    • Savings Accounts: To encourage rural savings.

Development Banks

• • Role: Specialized financial institutions focused on long-term development.
  • Examples: Agricultural Development Banks, Rural Development Banks.
  • Services:
    • Project Financing: For large infrastructure projects such as irrigation and storage facilities.
    • Technical Assistance: Assistance with project planning and implementation.
    • Subsidized Loans: To support development goals.

Microfinance Institutions (MFIs)

• • Role: Provide financial services to underserved and unbanked populations, primarily in rural areas.
  • Services:
    • Microloans: For small-scale agricultural projects.
    • Savings Accounts: Safe options for saving money.
    • Insurance: Micro-insurance products to protect against risks.
    • Group Lending Models: To reduce default rates.

Government Programs and Agencies

Governments also provide financial support for agricultural development through various programs and policies.

• Programs:
  • Agricultural Credit Guarantee Schemes: Encourage lending to the agricultural sector by providing guarantees to banks.
  • Rural Development Programs: Support overall rural development, including agricultural finance.
  • Subsidized Loans: Offer lower interest rates to make borrowing affordable.
  • Technical Support: Provide training and extension services to improve agricultural practices.
  • Infrastructure Development: Invest in rural infrastructure, including irrigation, roads, and markets.

Non-Governmental Organizations (NGOs)

NGOs often fill the gaps left by formal financial institutions, especially in remote areas.

• Services:
  • Microcredit: Small loans for agricultural activities.
  • Savings Programs: Encourage community savings and provide safe saving options.
  • Capacity Building: Train farmers in best agricultural practices and financial management.
  • Market Linkages: Help farmers access markets and get better prices.

International Financial Institutions

International institutions play a significant role in providing funding and technical assistance for large-scale agricultural projects.

• Examples:
  • World Bank: Provides loans and grants for agricultural projects worldwide.
  • International Fund for Agricultural Development (IFAD): Focuses on eradicating rural poverty and hunger.
• Services:
  • Project Financing: For large-scale agricultural projects.
  • Grants and Loans: For specific development projects.
  • Policy Support: Advise governments on agricultural policies.
  • Technical Assistance: Expertise in project design, implementation, and monitoring.

Government Support for Agricultural Finance

• Direct Finance: Governments provide direct financial support to farmers through various schemes, such as taccavi loans during distress situations (e.g., famine, flood, drought).
• Land Improvement Act of 1883 and Agriculturists Loans Act of 1984: These acts extend long and short-term financial assistance to farmers for agricultural development, especially during times of distress.

In summary, agricultural finance is a critical component for the growth of agriculture in India, encompassing both non-institutional and institutional sources, as well as government and NGO support. It facilitates the purchase of quality inputs, infrastructure development, sustainable farming practices, and risk management, contributing to overall rural development and economic stability.