Meaning The word “credit” comes from the Latin word “Credo” which means “I believe”. Hence credit is based up on belief, confidence, trust and faith. Credit is other wise called as loan.

Definition: Credit / loan is certain amount of money provided for certain purpose on certain conditions with some interest, which can be repaid sooner (or) later

Credit needs in Agriculture:

 Agricultural credit is one of the most crucial inputs in all agricultural development programmes. For a long time, the major source of agricultural credit was private moneylenders. But this source of credit was inadequate, highly expensive and exploitative.

To curtail this, a multi-agency approach consisting of cooperatives, commercial banks and regional rural banks credit has been adopted to provide cheaper, timely and adequate credit to farmers.

The financial requirements of the Indian farmers are for,

1. Buying agricultural inputs like seeds, fertilizers, plant protection chemicals, feed and fodder for cattle etc.
2. Supporting their families in those years when the crops have not been good.
3. Buying additional land, to make improvements on the existing land, to clear old debt and purchase costly agricultural machinery.
4. Increasing the farm efficiency as against limiting resources i.e. hiring of irrigation water lifting devices, labor and machinery

Classification of Agricultural credit

Credit is broadly classified based on various criteria:

1. Based on time:

This classification is based on the repayment period of the loan. It is sub-divided in to 3 types

Short term loans:

• These loans are to be repaid within a period of 6 to 18 months.
• All crop loans are said to be short–term loans, but the length of the repayment period varies according to the duration of crop.
• The farmers require this type of credit to meet the expenses of the ongoing agricultural operations on the farm like sowing, fertilizer application, plant protection measures, payment of wages to casual labourer etc.

Medium term loans:

1. Here the repayment period varies from 18 months to 5 years.
2. These loans are required by the farmers for bringing about some improvements on his farm by way of purchasing implements, electric motors, milch cattle, sheep and goat, etc.
3. The relatively longer period of repayment of these loans is due to their partially liquidating nature.

Long term loans:

• These loans fall due for repayment over a long time ranging from 5 years to more than 20 years or even more.
• These loans together with medium terms loans are called investment loans or term loans.
• These loans are meant for permanent improvements like levelling and reclamation of land, construction of farm buildings, purchase of tractors, raising of orchards, etc.
• loans due to their non – liquidating nature.

2. Based on Purpose:

Based on purpose, credit is sub-divided in to 4 types.

Production loans:

• These loans refer to the credit given to the farmers for crop production and are intended to increase the production of crops.
• They are also called as seasonal agricultural operations (SAO) loans or short – term loans or crop loans.
• These loans are repayable with in a period ranging from 6 to 18 months in lumpsum.

Investment loans:

• These are loans given for purchase of equipment the productivity of which is distributed over more than one year.
• Loans given for tractors, pumpsets, tube wells, etc.

Marketing loans:

• These loans are meant to help the farmers in overcoming the distress sales and to market the produce in a better way.
• Regulated markets and commercial banks, based on the warehouse receipt are lending in the form of marketing loans by advancing 75 per cent of the value of the produce.
• These loans help the farmers to clear off their debts and dispose the produce at remunerative prices.

Consumption loans:

• Any loan advanced for some purpose other than production is broadly categorized as consumption loan.
• These loans are extended based on group guarantee basis with a maximum of three members.
• The loan is to be repaid within 5 crop seasons or 2.5 years whichever is less.
• The rate of interest is around 11 per cent.

3. Based on security:

The loan transactions between lender and borrower are governed by confidence. Therefore it is essential to classify the loans under this category into two sub-categories viz., secured and unsecured loans.

Secured loans: Loans advanced against some security by the borrower are termed as secured loans. Various forms of securities are offered in obtaining the loans and they are of following types.

I) Personal security: Under this, borrower himself stands as the guarantor. Loan is advanced on the farmer’s promissory note.

Third party guarantee may or may not be insisted upon (i.e. based on the understanding between the lender and the borrower)

ii) Collateral Security:

Here the property is pledged to secure a loan.

The movable properties of the individuals like LIC bonds, fixed deposit bonds, warehouse receipts, machinery, livestock etc, are offered as security.

III. Chattel loans: Here credit is obtained from pawn-brokers by pledging movable properties such as jewellery, utensils made of various metals, etc.

4. Mortgage:

As against to collateral security, immovable properties are presented for security purpose For example, land, farm buildings, etc.

The person who is creating the charge of mortgage is called mortgagor (borrower) and the person in whose favour it is created is known as the mortgagee (banker). Mortgages are of two types

Simple mortgage: When the mortgaged property is ancestrally inherited property of borrower then simple mortgage holds good.

Equitable mortgage: When the mortgaged property is self-acquired property of the borrower, then equitable mortgage is applicable.

5. Hypothecated loans:

Borrower has ownership right on his movable and the banker has legal right to take a possession of property to sale on default (or) a right to sue the owner to bring the property to sale and for realization of the amount due.

The person who creates the charge of hypothecation is called as hypothecator (borrower) and the person in whose favor it is created is known as hypothecate (bank) and the property, which is denoted as hypothecated property.

This happens in the case of tractor loans, machinery loans etc. Under such loans the borrower will not have any right to sell the equipment until the loan is cleared off. The borrower is allowed to use the purchased machinery or equipment so as to enable him pay the loan installment regularly.

 Hypothecated loans again are of two types viz., key loans and open loans.

a) Key loans : The agricultural produce of the farmer – borrower will be kept under the control of lending institutions and the loan is advanced to the farmer . This helps the farmer from not resorting to distress sales.

b) Open loans: Here only the physical possession of the purchased machinery rests with the borrower, but the legal ownership remains with the lending institution till the loan is repaid.

c) Unsecured loans: Just based on the confidence between the borrower and lender, the loan transactions take place. No security is kept against the loan amount

6. Lender’s classification: Credit is also classified on the basis of lender such as

Institutional credit:

Here are loans are advanced by the institutional agencies like co-operatives, commercial banks. Ex: Co-operative loans and commercial bank loans.

Non-institutional credit:

Here the individual persons will lend the loans Ex: Loans given by professional and agricultural money lenders, traders, commission agents, relatives, friends, etc.

7. Borrower’s classification:

The credit is also classified on the basis of type of borrower. This classification has equity considerations.

• Based on the business activity like farmers, dairy farmers, poultry farmers, pisiculture farmers, rural artisans etc.
• Based on size of the farm: agricultural labourers, marginal farmers, small farmers , medium farmers , large farmers ,
• Based on location hill farmers (or) tribal farmers.

8. Based on liquidity:

The credit can be classified into two types based on liquidity and they are

• Self-liquidating loans: They generate income immediately and are to be paid with in one year or after the completion of one crop season. Ex: crop loans.
• Partially -liquidating: They will take some time to generate income and can be repaid in 2-5 years or more, based on the economic activity for which the loan was taken. Ex: Dairy loans, tractor loans, orchard loans etc.,

9. Based on approach:

• Individual approach: Loans advanced to individuals for different purposes will fall under this category
• Area based approach: Loans given to the persons falling under given area for specific purpose will be categorized under this. Ex: Drought Prone Area Programme (DPAP) loans, etc
• Differential Interest Rate (DIR) approach: Under this approach loans will be given to the weaker sections @ 4 per cent per annum.

10. Based on contact:

Direct Loans: Loans extended to the farmers directly are called direct loans. Ex: Crop loans.

Indirect loans: Loans given to the agro-based firms like fertilizer and  pesticide industries, which are indirectly beneficial to the farmers are called  indirect loans.