Agricultural finance is a critical component in ensuring the progress and sustainability of agricultural operations. It refers to the provision of short-term, medium-term, and long-term funds required to support various agricultural activities such as crop cultivation, dairy farming, poultry, farm mechanization, development of irrigation infrastructure, marketing of agricultural produce, and adoption of advanced technologies. Timely and adequate financial support enables farmers to adopt scientific farming methods, enhance productivity, and reduce dependence on traditional techniques.
Farmers need financial support not only for productive investments like purchasing quality seeds, fertilizers, and pesticides, but also for non-productive purposes like family consumption, social obligations, and repayment of old debts. In India, where agriculture still serves as the main livelihood source for a majority of the rural population, access to agricultural credit is crucial for inclusive rural development.
Agricultural credit sources are broadly categorized into:
- Institutional Sources
- Non-Institutional Sources
Institutional sources refer to organized financial entities that are governed and regulated by the Reserve Bank of India (RBI), NABARD, or government authorities. These institutions provide credit with transparent terms, fixed interest rates, proper documentation, and regulatory oversight. The focus of institutional finance is to ensure fair and sustainable lending to farmers at concessional interest rates.
- Function at grassroots levels such as villages and block levels, often forming the foundation of rural credit structure.
- Comprise Primary Agricultural Credit Societies (PACS), Central Cooperative Banks, and State Cooperative Banks.
- Extend short-term and medium-term loans for seasonal agricultural operations, purchase of livestock, and small machinery.
- Encourage collective financial management and foster a sense of ownership among rural borrowers.
- Specialized institutions that extend long-term credit for capital investments.
- Finance development-oriented activities like land improvement, construction of irrigation systems, wells, tube wells, fencing, and farm buildings.
- Structured in a two-tier system: Primary Land Development Banks at district level and Central Land Development Banks at state level.
- Their role is significant in enhancing the long-term productive capacity of land.
- Serve as the backbone of rural credit by offering a wide range of financial services.
- Provide short-term crop loans, term loans for tractors, irrigation pumps, greenhouses, cold storage, etc.
- Operate schemes like Kisan Credit Card (KCC), which allows farmers to withdraw funds as per crop cycle.
- Encourage financial inclusion through rural branches and digital banking platforms.
- Established in 1975 to bridge the gap between cooperative and commercial banks in rural credit delivery.
- Focus on small and marginal farmers, rural artisans, and agricultural laborers.
- Offer concessional loans for crop production, dairy, fisheries, and other allied activities.
- Operate under the joint ownership of the Central Government, State Government, and Sponsor Bank.
- Apex financial institution for agriculture and rural development in India, formed in 1982.
- Provides refinance assistance to cooperative banks, RRBs, and commercial banks involved in rural lending.
- Plays a key role in capacity building, research, policy formulation, and financial inclusion.
- Undertakes development projects like watershed development, rural infrastructure, and farmer producer organizations (FPOs).
Non-institutional sources refer to informal, unregulated entities or individuals that provide credit in rural areas. These sources are popular due to their easy accessibility, minimal documentation, and flexible repayment terms. However, they often charge exorbitant interest rates and operate outside the purview of legal regulations, which can lead to exploitation and debt traps.
- Most common traditional lenders in rural areas.
- Known for prompt loan disbursal without any paperwork or collateral.
- Tend to charge very high interest rates, often leading to a cycle of indebtedness.
- Some moneylenders use coercive practices and unfair terms, making them unreliable for long-term financial security.
- Often provide credit to farmers for purchase of seeds, fertilizers, and other inputs.
- Credit is tied to sale of produce through the same trader or agent, usually at lower prices than the market rate.
- Farmers become dependent on them for both inputs and marketing, reducing their profit margins and bargaining power.
- Offer informal credit on the basis of personal relationships and mutual trust.
- Loans may be interest-free or at nominal rates, and repayment terms are flexible.
- Though helpful in emergencies, the volume of credit available through this source is limited.
- In cases of tenant farming or sharecropping, landlords may offer loans to tenants for agricultural inputs.
- These loans are often recovered through a share in produce or fixed payments, which may not always be fair.
- The relationship is often feudal in nature, leading to socio-economic dependence.
Agricultural finance is essential for increasing agricultural productivity, rural income, and food security. While institutional sources offer regulated and affordable credit with developmental objectives, their reach is still limited in some remote regions. Non-institutional sources continue to dominate in such areas despite their risks and high costs.
To achieve inclusive rural growth, it is important to:
- Strengthen and expand the reach of institutional credit networks.
- Promote financial literacy among farmers.
- Digitize and simplify loan application processes.
- Encourage Farmer Producer Organizations (FPOs) and Self-Help Groups (SHGs) to act as intermediaries for accessing institutional credit.
An integrated approach combining institutional strengthening with social awareness can reduce farmers’ dependency on informal credit and lead to more equitable and sustainable agricultural development.