Agricultural Finance: An Overview

As against the target of Rs. 4, 75,000 cr. fixed for the year 2011-12, the actual amount which was sanctioned was Rs. 5, 11,029 cr. which was 8% more than the target. One of the most intriguing features of India's agrarian economy in recent years has been the persistence of agrarian distress in many regions, even while agricultural credit flow has risen sharply. Rising flow of credit to agriculture is normally associated with buoyancy in the farm sector. In a bonanza for farmers, the government on Saturday raised agriculture credit target by Rs 50,000 crore to Rs 8.5 lakh crore for 2015-16 fiscal and also announced financial support to enhance irrigation and soil health to achieve higher agriculture productivity.

Credit needs of the farmers can be examined from two different angles:

I. On the basis of time

II. On the basis of purpose

On the basis of time: Agricultural credit needs of the farmers can be further classified into three categories on the basis of time:

I. Short-term,

II. Medium-term

III. Long-term

Short-term loans are required for the purchase of seeds, fertilisers, pesticides, feeds and fodder of livestock, marketing of agricultural produce, payment of wages of hired labour, and a variety of consumption and unproductive purposes. The period of such loans is less than 15 months. Main agencies for granting of short-term loans are the moneylenders and cooperative societies. Medium-term loans are generally obtained for the purchase of cattle, small agricultural implements, repair and construction of wells, etc. The period of such loans extends from 15 months to 5 years. These loans are generally provided by moneylenders, relatives of farmers, cooperative societies and commercial banks. Long-term loans are required for effecting permanent improvements on land, digging tube wells, purchase of larger agricultural implements and machinery like tractors, harvesters, etc., and repayment of old debts. The period of such loans extends beyond 5 years. Such loans are normally taken from Primary Cooperative Agricultural and Rural Development Banks (PCARDBs).

On the basis of purpose: Agricultural credit needs of the farmers can be classified on the basis of purpose into the following categories:

I. Productive

II. Consumption needs

III. Unproductive

Under Productive needs: We can include all credit requirements which directly affect agricultural productivity. Farmers often require loans for consumption as well. Between the moment of marketing of agricultural produce and harvesting of the next crop there is a long interval of time and most of the farmers do not have sufficient income to sustain them through this period. Therefore, they have to take loans for meeting their consumption needs. During the time of droughts or floods, the crop is considerably damaged and farmers who otherwise avoid taking loans for consumption have also to incur such loans. Institutional credit agencies do not provide loans for consumption purposes. Accordingly, farmers are forced to fall back upon moneylenders and Mahajans to meet such requirements. In addition to consumption, farmers also require loans for a multiplicity of other unproductive purposes such as solemnizing of marriages, social ceremonies, birth or death of a family member, religious functions, festivals, etc.

Sources of Agricultural Finance and Their Relative Importance

Non-institutional and Institutional Sources

Sources of agricultural finance can be divided into two categories:

• Non-institutional sources
• Institutional sources

The non-institutional sources are the following:

I. Moneylenders

II. Relatives

III. Traders

IV. Commission agents

V. Landlords

The institutional sources comprise of:

I. Cooperatives

II. Scheduled Commercial Banks

III. Regional Rural Banks (RRBs)

Agricluture Credit Target

As far as cooperatives are concerned, the Primary Agricultural Credit Societies (PACSs) provide mainly short and medium-term loans and PCARDBs long-term loans to the farmers. The commercial banks, including RRBs provide both short and medium-term loans for agriculture and allied activities. The National Bank for Agriculture and Rural Development (NABARD) is the apex institution at the national level for agricultural credit and provides refinance assistance to the agencies mentioned above. At the time of Independence, the most important source of agricultural credit was the moneylenders, but as the banking facilities are increasing in the country, non-institutional sources of credit are decreasing rapidly.