Rural credit

Rural credit refers to any kind of loan or financial assistance that is taken by the people
residing in the rural areas for the purpose of agriculture or setting up small businesses.

Types of Rural credit

On the basis of time, rural credit can be classified into three categories - (i) short-term, (ii)
medium-term, and (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,
litigation, 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
tubewells, 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, rural credit can be classified into the following categories:

1. Productive needs:
Under productive needs, we can include all credit requirements which directly affect
agricultural productivity. Farmers need loans for the purchase of seeds, fertilisers,
manures, agricultural implements, livestock, digging and repair of wells and
tubewells, payment of wages, effecting permanent improvements on land, marketing
of agricultural produce, etc. Repayment of these loans is generally not difficult
because the very process of production generally creates the means for repayment.
2. Consumption needs:
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. In the time of droughts or floods, the crop is considerably damaged and
farmers who otherwise avoid taking loans for consumption, often have 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.
 3. Unproductive needs:
In addition to consumption, farmers also require loans for a multiplicity of other
unproductive purposes such as litigation, performance of marriages, social ceremonies
on the birth or death of a family member, religious functions, festivals, etc. Since
institutional agencies do not grant credit for such unproductive purposes, farmers have
to seek assistance from moneylenders and mahajans. It is often very difficult to repay
such loans because they do not contribute to the productivity of farmer.

Sources of rural credit

Sources of institutional credit can be divided into two categories:

1. Non- institutional sources:

a) Money Lenders:
There are two types of money lenders in rural areas- a) Agricultural money
lenders and b) professional money lender. Agricultural money lender's main
occupation is farming and money lending is secondary. On the other hand,
professional money lender's main profession is money lending. Although the
reliance on money lender by rural poor declined over the years, the credit
disbursed by money lenders still forms a major portion of the total credit
obtained by the farmers. The money lenders were supplying a major portion of
the agricultural credit (69.7% in 1951-52) and indulge in mal-practice like
manipulation of accounts and charged a huge rate of interest for their loan.
Due to all these factors, the share of money lenders in the total farm credit has
declined sharply from 69.7% in 1951-52to 7% in 1995-96.

b) Traders and commission Agents:

Traders and Commission Agents also advances loan to the Agriculturist for
productive purposes. Though the rate of interest charged by them is not as
high as charged by the money lenders, they charge more in the form of
concessions and service charges, they mostly finance for the cultivation of
commercial crops like sugarcane, cotton, ground-nut, tobacco, onion, etc. The
share of credit provided by these agencies to total credit decreased from 5.5
per cent in 1951 to 2.5 per cent in 2002.

c) Relatives:
Farmers borrow from their relatives in cash or kind for temporary exigencies.
It is simply a mutual help. Since all farmers are living under similar
conditions, they cannot lend large sums as loans. Normally, no interest is paid
on such loans.

d) Land Lords:
 Small farmers and tenants rely on land lords for finance to meet their
productive and unproductive expenses. This source of finance has all the
defects associated with money lenders. Interest rates are exorbitant. Often
small farmers are forced to sell out their lands to these land lords and they
become land less labourers. The reliance on this agency by farmers has
decreased over the years, i.e., from 1.5 per cent in 1951 to 1.0 per cent in
2002.

2. Institutional sources:
The main motive of Institutional credit is to assist the farmers in raising their
agricultural productivity and maximizing their income. Institutional credit is also not
exploitative in character. The following are some of the important institutional
sources of agricultural credit in India:

a) Co-operative Credit Societies- This source of credit is the most economical and
important source of rural credit. It was set up with the aim of facilitating the complete
credit needs for small and medium farmers. Co-operative Credit Societies progressed
steadily after a few years from inception. They started supporting the farmers in a
significant way with short-term loans issued by Primary Agricultural Credit Societies
(PACs), which progressed from ₹305 crores in 1965-66, to ₹5,200 crores in 1999-00.
At the same time, the loans granted raised from ₹37 crores to ₹2,100 crores. However,
the co-operatives could not meet the credit needs completely, so the moneylenders
kept on dominating the rural economic markets.
b) Land Development Bank- Land development bank (formerly known as land
mortgage banks) mainly provide long-term loans to farmers against the mortgage of
their lands at low rates of interest over a period of 15 to 20 years. These types of loans
are usually taken if costly land improvement programmes such as digging or
deepening of wells are to be undertaken, or if additional land is to be acquired through
outright purchase, or if previous debts have to be repaid. Though land development
bank has made notable progress still the contribution is insignificant because most of
the farmers are not aware of the existence of such land schemes or the importance and
use of such banks. However, such a bank set up by the primary banks and the
government has increased immensely over the years.
c) Commercial Banks- Before nationalisation of top 14 commercial banks in June
1969, they were mainly accepting deposits from the urban people and making loans to
trade and industry. Agriculture and rural industries were neglected by them. Since
agriculture by its very nature was a risky venture, private commercial banks turned
away from rural areas. Since the nationalisation of commercial banks in which one of
the objectives was to ensure a smooth flow of credit to agriculture and small-scale
industries—the two top priority sectors of Indian economy, there has occurred a rapid
expansion of their rural branches. Today these banks provide both direct and indirect
finance to agriculture. Direct finance is provided for short and medium terms to
 enable farmers carry out agricultural operations smoothly. Indirect finance is provided
in the form of advances for the purchase of inputs like seeds and fertilisers. Such loan
is also provided through PACs. These banks also give credit options for stocking and
delivery of agricultural inputs. They have also executed the ‘village adoption
scheme’, firstly initiated by the State Bank of India, to examine into credit and other
needs of the farmers.

d) Regional Rural Banks- In 1975, the Government set up a network of regional rural
banks to look into the special needs of small and marginal farmers, landless workers,
rural artisans and the rural poor in general. The unique feature of the RRBs is that
they cater exclusively to the weaker sections of the rural community. Almost all the
tribal districts are covered. As much as 90% of the branches of RRBs have been
opened in unbanked areas and most of the advances (about 92%) are granted to
weaker sections, the average size of the advance per account being just Rs. 2,000.
However, the amount of credit disbursed by RRBs was very small compared to the
loans issued by other institutional agencies.

e) The Government- The Government has also provided short-term and long-
term loans to farmers in times of emergency such as floods or famine. Such
loans are known as Taccavi loans. Such loans are offered at a concessional rate
of interest (6%) and the mode of repayment is also very convenient. It can be
repaid in several installments at the time of payment of land tax. However,
such loans have not assumed significance over the years.

f) NABARD (National Bank For Agriculture And Rural Development): The most
important development in the field of rural credit has been the setting up of NABARD
in July 1982. It is now the apex bank for rural credit. NABARD provides short term
credit facilities to state cooperative banks (StCBs) for financing Seasonal Agricultural
Operation (SAO), marketing of crops, pisciculture activities, production and
marketing activities of industrial cooperatives, financing of rural artisans through
PACs, etc. Medium term facilities are provided to StCBs and RRBs for converting
short term loans for financing Seasonal Agricultural Operation (SAO) to medium
term loans and for approved agricultural purposes. Long term loans are provided to
the state governments for contributing to share capital of cooperative credit
institutions.