UNIT 1 RURAL CREDIT

Structure
1. I

Inlroduction
()l?jzct1vr.s

I .-2
1.3
1.4
1.5
1.6
1.7

Need for Credil

Risks in Agriculture
Agricultural Holdings
Credit for Agriculture and other Purposes
Credit Kec~uirementsin India .
Rural Credit Agencies

'
1.8
I .9

1.7.1
1.7.2
1.7.3
1.7.4
L .7.S
1.7.6

Cooperatives
Cormnel.cial Banks
Regional Rural Banks (RKBs)
National Bank for Agriculture and Rural Devdoplnetlt (NAB ARD)
Rcaerve Balk of India (RBI)
(3overnmental Support to Kulal Crcdit

Summary
Answers to SAQs

1.1 INTRODUCTION
In this unit we will review the signiticance and basic need of credil alongwilh risks in
agriculture and structure of agricullural holdings. l11e different purposes of credit in
agriculture and allied activities will be outlined and tlie estimates of credit requireinents in
India will be examined. An overvie5.v will be taken of the agencies that have contributed in
nleeting the credil needs. The topics discussetl in this unit represent lhc essentials of rural
credil and serve as pre-requisites f('r a proper understd~dingof the rcma~ndcrof the block.

Objectives
Aftcr studying h i s unil, you should be able to
explain the significance of credit in agricultural development and the basic
reasoils for big spurt in dc~nandfor agricultural credil.
state the future role of credit in rural development, del'ine major types of risk in
agricullure m d identify ways to counter thein,
analyse Ule distribution of agricullural holdi~lgsm d visualise its significance in
designing agricultural credit schemes,
state purposes for which institutional rural credl is disbursed,
,analyse the trends in agricultural credit requirements in India,
list rural credit agencies and their ob.jectives, functions and perfornmanccs, and
describe role of inter-agency linkages.

1.2 NEED FOR CREDIT

In this section we are going to tell you lhat economic tleveloplncllt in India cenlrcs around
i b agricultural development, thal agricultural development at present stage of economy is
possible mainly through increased Iand productivity via adoption of iiriproved agricultural
technology and adequate infrastructural support. 'Ihese unperatives srgnily the increasing
need for credit.
Indja ha9 been confronting number of econonlic problems mainly stenlrnillg from its vast
and growing popularion such as sectoral and regional imbal;lnces, unemploynlent and
underemployment, poor rate of economic growth and widespread poverty. Ally approach

Credit Srhc~lics

to ecoilonlic development is not likely to fructify unless agricultural development

continues to get due einphasis because agricultural economic sustains the 1ivelihtx)dof
76.7 per cent of population (1981 censuq) and contributes about (me-third of national
incoine according to 1988-89 statistics. Credit has worked as a powerful instrunlent in
proinoting economic development w~thequity and social justice and nlore particularly t o
increase agricultural production and to improve the level of living of rural population.
Poverty is inore widespread in rural sector of our economy. The 1981 census indicated that
about 40 per cent oC those who depended on Iaanclk)r livelihood were agricultural labourers
with no land, of the other 60 per cent tluee-fourlll owned one bur# of the tolal I u ~ d
available .and the residual one fourth owned three-fourth of the land. Thus, rural
households which constitute a substanual majority of the 26 per cent of our population
living below poverty line are left with very little or no funds to put in productive process,
Illerefore, there is dire need of adequate credit in our agricultural sector.
Agricultural development in future will basically depcnd upon increasing pn~ductivilyin
agriculture because there is very little or no scope of bringing additional area under
cultivation. This will be possible through extensive use of new md inlproved technology.
Ille new and improved technology has enhanced the credit need in agriculture as it
requires high yielding variety seeds, heavy doses of fertilizers, pesticides, irrigatioil as well
as investment in power and machinery. As the n~ajorityof farmers in the country have very
little marketable surplus, they are unable to nlect their farm financial requiremenis lion1
their own funds. As a result, the full potential of new technology ha! not been fully
exploited which is evident from existing gaps between yieu obtained on research stations,
natiolral denionsvations and that obtained on fariners' fields. ThereQre, the need for
agricultural credit will continue to grow for years to come. '

.
i

13esides, the agriculture is to be increasingly supporlcd with adequate ~ntrastrudmt:111

terms of irrigation (tlle existing irrigated area being only about one-third of thc total
cultivated area), Wansport, lnarketing and storage fdcil ities and modem institutions for
tapping the full potential of new rechnology in agriculture. This increasing capilal
requirement in agriculture will have to be fil~allcedthrough credit.
The above scenario reveals that unless credit is made available to farmers, agricultural
labourers, rural artisans, small trade and commerce in rural sector, in adequate amount, at
right time, at reasonable cost 'and at suitable terms and conditions almost at their doorstep,
the pace of rural development catmot be stepped up. This calls for an efficient rural credit
system.
'The agricultural credit system was reorganised to meet the new challenges in agriculture
arising fro111 flle emergence of green revolution in the late sixties. As a result, the
production of foodgrains has gone up from a stagnant 80 m. tomes, to over 170 nl. ttnmes.
The credit support has also been responsible for white revolution in milk, a blue revolution
in fish .and yellow revolution in edible oils. Yet, the quality of life for majority of the
to
farmers has not iinproved substantially. Therefore, the need for rural credit will co~~tinue
grow in future.

1.3 RISKS IN AGRICULTURE

b~this section we shall give you an idea of different types of risks faced in agriculture and
the risk management alternatives particularly through agricultural financial system.
Agricultural production depends upon a number of factors ranging from weather
conditions to input applications .and institutional support. In the non-farming sector. the
available technology is much more dependable and the borrower carry much less risk in
taking it up. Rut the agricultural technology is highly location specific, the success oi'
adopting it successfully also depends upon many i~aturalfactors, which make it even more
uncertain and risky.
In our country, despite massive investment in development of water resources, only about
one-third of the total area under principal crops hiis assured irrigation facilities. Therefore,
farming in the country still depends heavily upon raingod. As a result, there are yeii to
year fluctuations in farm yields, production, prices and income. Farmer has to, therefore,
plan his area under crops, level of resourced use and other farm rehted decisions under an
environment of risk *anduncertainty.

Several types d risks and uncertainty are important to farmer as he formulates plans and
courses of action which commit resources at the present for a product tixthcoming at a
future date. Major types of risks faced by farmers are the following:
Yield Risk

Also known as the weather risk is the risk that realized yields inight bc lower than the
expected yields leading to lower prtduction. Yield risk .are caused by unfavourllble
wealher resulting into floods, droughts, hailstorms etc., and also by diseases, insects m d
pests.
Price Risk
'

Also known as the market risk is the risk that realised product prices inight be lower than
the expected product prices and that realized input prices inight be higher Ihan the
expected input prices leading to lower gross returns and higher cost of production than
expected.
'lbere are other sources of risk and uncertainty such as risk and uncertainty ruising out of ,
changes in goven~mentalactions, actions of other business and people such as landlord,
lender etc., and changes in technology. Rut these risks and uncertainties -areexperienced by
fiuincrs less frequently.
Risk Management Alternatives

Product diversification, flexibility in enterprise and resource organizatioil to adjust to

changing conditions as well as choices of enterprises with low yield variability art: some of
the inforinal ways of countering yield risk. To counter price risk, farnler can choose
enterprises with low price variability and can inake use of forward contracts for sale of is
produce and purchase of inputs. Rut both these sets of altenlatives are limited in scope.

!P

I b e Governinent's price support programme for major crops, Comprehensive Crop

Insurdice Scheillc (CCIS) introduced in April 19135 for cereals, pulses and oilseed crops,
the policy of conversion of short term loans into medium term loans by cooperative credit
agencies, and relief payments by Government have greatly benefited the farmers in
managing their risks in agriculture. But slill a majority of small rind marginal farmers are
cilher not participating in Ule Government programmes or are out of Ihc reach of the
programmes.
1;iniincial intennedillries such as banks who link suppliers of funds (savers) and buyers of
funds (borrowers) can be helpful to f.hfmers in Inore efficiently nrmaging their risks in
agriculture. Because of vagaries of weather, pests and governmental actions, farmers
commonly experience wide swings in prices received, crop yields and hence incomes. To
survive, they must adjust to these risks by holding surplus crops, livestock, gold, money, or
other form of savings - including deposits - that can be easily liquidated. Unutilized
institution credit reserves is an important alternative for managing the risks. To be useful
in risk mlinageinent, a financial system must offer a large number of people convenient
deposit services and also be tlexible and dependable enough to provide a large number of
credit worthy people access to loans.

1.4 AGRICCTLTURAL HOLDINGS

In this section you will l e g how to malyse the structure of agricultural holdings and its
importance in relation to-agricultural credlt.

H t l n l Credit

Credit Schemes

The distribution pattern of agricultural land holdings hw a large significance in designing

credit policies and programmes. Credit schemes play .an important role in resource
allocation and risk management. Therefore, for loan targetting to speed development in a
given area, to help a certain group of farmers or to boost a particular enterprise, analysis of
land distribution pattern becomes an important aspect. The all India distribution of land
holdings is presented in Table 1.1.
Table 1.1: All India Distribution of Land Holdings
Category
of
Holdings

No. of Operational
Holdings ('000)

Area Operated
('000 ha)

Average Size of Holdings (ha)

(1980-81) (19135-86) (1980-81) (1985-86) (1990-91)

(1980-81)

(1985-86)

Marginal
(I
1 ha)

50122
(56.4)

56748
(58.1)

19735
(12.1)

21606
(13.2)

0.39

0.38

0.39

Small
(1-2 ha)

16072
(18.1)

17881
(18.3)

23169
(14.1)

25533
(15.6)

1.44

1.43

1.43

Semi-mediu
m(2-4 ha)

12455
(14.0)

13253
(13.5)

34645
(21.2)

36579
(22.3)

2.78

2.76

2.76

7920
(8.1)

(29.6)

(28.7)

Large
(10 and

2166
(2.4)

1929
(2.0)

37705
(23.0)

33187
(20.2)

17.41

17.20

17.33

A11

88883
(100.0)

9773 1
(100.0)

163797
(100.0)

163913
(100.0)

1.84

1.68

1.57

holdings

Figures in brackets indicate the pevcentaRe in respecttve colurnn totals.

Source: Agrtc~~ltrrrul
Statistics at a Glance, Feb. 1998.

Following the unprecedented expansion of rural population from 290 million in 1951 to
520 million in 1981, the per capita land available has shrunk. In 1970, there were 70
million holdings; and by 1985 they increased to about 98 million; the size of average
holding came down by 40% to 1.68 ha in the process. According to 1985-86 statistics,
58% of the holdings have less than one hectare .and about 18% between one .and two
hectares. Thus,holding upto two hectare constitute about three-fourth (76%) of the total
holdings and own only about one-fourth (28%) of area operated. Whereas, holdings of
more than two hectares constitute about one-fourth (23.8%) of the total holdiilgs and o w l
about three-fourth (71%) if area operated. In view of such skewness in the distribution of
land holdings in the country, the agricultural policy in general and credit policy in
particular has to be designed with great care to strike the right b d m between equity and
efficiency.
These 75 million marginal and small farmers alongwith about 60 million landless
agricultural labourers community and the society, majority of whom are below the poverty
line, have been designated as the weaker section of the rural community and the society.
Therefore, they deserve special attention in development policy and planning. Credit has
been recognised as one of the powerful policy instrument for promoting growth with
equity. Therefore, efforts have to be accelerated to channel a larger flow of timely credit
assistance at concessional term and conditions to these weaker sections of rural
community. Consistent with the diversity of economic activities undertaken by the weaker
sections of the rural community, the technical capability of the financing institutions has to
be continuously strengthened at the villaagelevel to enable them to play an active role.
"

Keeping in view the fact that land is a basic resource, the scope for large absorption of
investment credit on marginal and small farms appears to be narrow, because of smallness
of their holdmgs. Therefore, short term credit holds a special significance for Ulem and
efforts are needed to increase their share in short term loans.

t
,

1.5 CREDIT FOR AGRICULTURE AND OTHER

PURPOSES

In this section you will be given an idea of the various purposes/schemes for which credit
support is given by the rural credit agencies in agriculture and allied activities.
Modernization of agriculture and diversification of rural economy has given rise to huge
requirements of credit for working capital as well as for fixed investment. In accordance
with the national policy objective of "growth with social justice", special programmes for
the development of agriculture and allied activities have been drawn-up with focus on
small farmers, marginal farmers and other weaker sections of the rural population. The
small and marginal farmers .are encouraged to undertake non-farm activities to improve
their income through product diversification.
The v.arious purposes for which rural credit is provided by cooperatives, commercial banks
and regional rural banks are summarized below:
1)

Crop Loans

To purchase seed, fertilizer, pesticides/insecticides and to meet expenses on agricultural

operations.
2) Minor Irrigation
Well, boring, rahat, pumpset, tubewell, irrigation channels, sprinkler irrigation, drip
img ation p&phouse/farmhouse, etc.

3) Farm Mechanization

Purchase of tractor, power tiller, power thresher, and various other agricultural
implements. Repair of tractor, engine and pumpset.

4) Horticulture and Forestry

i)

Orchards -mango, lemon, grapes, apple, lichi, orange, guava, appricot, etc.

ii) Nursery development -potato, vegetables, flower, bettlevine, etc.

iii) Social forestry - Popular Eucaliptus, etc.

5) Land Development
i)

Waster and fallow land development.

ii) Land consetvation.

6)

Miscellaneous Purposes

i)

Livestock rearing :Cow, buffalo, goat, sheep, poulty, piggery, poney, camel ahd
rabbit rearing.

ii) Rsheries :ponds, fingerlings, net, boat,etc.

iii) Dunlop bullock cart.
iv) Gobar Gas
v) New Sources of energy : Solar pump, wind mill etc.
7)

Small and Cottage Industry

Woodwork, bressware, oil expeller, sugarcane expeller, jaggery and khandsari units,
basket making, sports material unit, shoe making, bee-keeping, black-smithy, rope making,
match box unit, bangles, carpet and mat industry, jari work, stone work, hand printing and
colouring, sewing machine, and cycle industry, manufacturing of radio and motor parts,
plastic goods, tiles and marble work, seed and fertilizer stores etc.

Ruri~lCredit

Credit Schemes

8) Rural Housing
i)

Construction of new house.

ii) Repair of old house.

9) Consumption Credit
To the weaker sections in nual areas viz., Cultivators with land holdmgs upto 0.5 acre,
whether as owner or tenant, landless labourers, rural artisans, and other people of meagre
means such as carpenters, barbers, washerman etc., consumption credit can be granted by
institutional agencies. The loans are an integral part of the credit extended for main
business or activity of the borrower. As a support to consumption credit, the risk fund for
coilsumptioil credit has been operating as a non-plan scheme since 1977-78 covering all
the states and Union territories.

1.6 CREDIT REQUIREMENTS IN INDIA

In this section you will be given estimates of agricultural credit requirements in India at
different points in time to show how rapidly the credit requirements have been growing
and developing into a future challenge for agricultural financial system of the country.

Increasing importance of agricultural credit is evident from continuously increasing credit

requirements in agriculture.
In 1950-51, the Rural Credit Survey Committee estimated that the mnu'al borrowings of
the cultivators were Rs. 750 crore. Cooperatives which dominated the institutional
agricultural credit at that time provided 24.23 crore (3.2 per cent of the total boGrowings),
the government provided 3.8 per cent of the total borrowings, and the remaining credit was
met by non-institutional sources (93.0 per cent). The Rural Debt and Investment Survey
conducted in 1961-62revealed that the borrowings of the cultivators had gone upon Rs.
1034 crores. Cooperatives provided 214.35 crores of agricultural credit in 1960-61. The
All India Rum1 Credit Review Committee (1969) basing its estimates on the exercises
done by the Planning Commission for the Fourth Five Year Plan worked out totaI
production credit needq in agriculture at Rs. 2000 crore by 1973-74. The mediuin term
credit requireineilts were assessed at Rs. 500 crore per year and that for long term credit at
Rs. 1500 crore during the period 1969-70 and 1973-74. Thus, total credit requiremei~tin
agriculture was estimated at Rs. 4050 crore per year during the Fourth Plan period.
However, the institutional sources of credit provided only Rs. 1186.70 crore (29.3 per cent
of' the credit requirement) in the 1973-74, comprising 73.8 per cent (876.70 crore) from
cooperatives, 18.5 per cent Rs. 219.20 crore) from commercial banks, and 7.7 per cent
(Rs. 90.8 crore) k?om government (Table 1.2).

According to estimates of the National Commission on Agricvlture (1976), the total credit
requirements of all the f i e r s in the country by the year 1985 were projected to be
Ks.16,549 crore for short, medium and long term purposes of which 28.34 per cent was for
small and marginal f i r s . Against this, flow of institutional credit for agriculture by the
end of 1985 (July-June) was of the order of Rs.6166.80 crore (37 per cent of the credit
requirement) comprising R s . ~154.30 crore of cooperative credit (51.1 per cent), Rs.2461
crore of commercial bank credit (39.9 per cent), Rs.310.10 crore of regional rural bank
credit (5.0 per cent) and Rs.241.40 crore of government credit (4.0 per cent) as is shown in
Table 1.2.
M.L.Dantwala estimated that the direct demand for agricultural credit was Ks.27,551
crores in 1989-90. However, the available statistics suggest that flow of institutional
agricultural credit in 1989-90 was estimatedltargetted to be Rs.13,260 crores (48 per cent
of the demand ) comprising Rs.5453 crores of cooperative credit (41.1 per cent ), Rs.7515
crores of credit from commercial banks .and regional rural banks(56.7 per cent) and
Rs.292 crore of government credit (2.2 per cent). According to Dantwala, the direct
demand of agricultural credit will rise to Rs.57,316 crore by 1994-95. These estimate are
based on the assumption of 5 per cent per m u m increase in input price over 1984-85
prices. The agricultural credit requirements and agricultural credit availability at different
points in time are given in Table 1.2.

Table 1 2 Agricultural Credit Requirement and Dhbursement of Direct Institutional Finance

for Agriculture (July June )

( Rs. in crores)

Particulars

(1950-51)

(1961-62)

(1973-74)

(1984-85)

(1989-90)

Agril. Credit requirement

750.0

1034.00

4000.00

16549.00

2755 1.00

Direct Institutional Finance

for Agriculture

24.23

214.35*

1186.70

6166.80

13260.20

Cooperatives:
i) Shorl termes
ii) Medium term
iii) Long term

24.23
22.90

214.35
182.82
19.93
11.60

876.70
663.10
55.50
158.10

3 154.30
2323.30
369.70
46 1.30

5453.40
4079.20
639.30
734.90

Commercial Banks:
i) Short tenn
ii) Term Loan

N.A.
N.A.
N.A.

N.A.
N.A.

219.20
105.40
113.80

2461.00
1034.90
1426.10

6867.80
28 19.40
4048.40

310.10
13 1.70
178.40

647.20
335.60
311.60

24 1.40

291.80

a)

b)

1.33

N.A.

c) Regional Rural Banks:

i) Short term
ii) Termban
d) State Governments

N.A.

N.A.

90.80

NA = Not Available, P = Provisionul, T = Turget, E = Estimate, * Relate to year 1960-61, Government Louns
taken us short-term loam and relate to April-March
Source:

I ) Agricirlturul Statistics cct u Glace, Feb.1990.

2 ) Report ort Currency and Finunce, Vol.I, 1975-76, 1987-88,1990-91.
3 ) Economir Survey, Part -11, 1991-92.

From the above observations, the following inferences can be drawn:

1)

Consequent to the impact of green revolution in the country atid on the general
awareness of its farming community of the possibilities of increased income
through use of modem techniques in agriculture and its diversification,
agricultural credit demand has been increasing manifold.

2)

The rise in agricultural cre&t requirement is largest in short term credit followed
by medium and long term credit.

3) The credit gap, that is the difference between the credit requirement and
institutional credit availability in agriculture has been narrowiilg down as result
of progressive institutionalisation and strengthening of agricultural credit system.

4) To meet the fast growing requirement of agricultural capital, agricultural credit

will continue to hold a vital place in national agricultural policy and programmes.

h..= .
I.

1.7 RURAL CREDIT AGENCIES

In this section you will be g i v a a concised idea of the various rural credit agencies
operating in India, alongwith their objectives, structure, functions and performance.
L
t

I
I

I
L

Rural credit agencies in India consist of institutional and non-institutional sources. The
non-institutional sector consists mainly of the professional and agricultural money-lenders,
land lords, commission agents, traders and the relative and friends. These non-institutional
'agencies dominated the rural credit accounting for about 93 per cent of total borrowings of

Rural Credit

Credit Schemes

agriuculturists in 1950-51. The non-institutional agencies still continue to play an active

role and account for about 30 to 40 per cent of total agricultural credit. Although these
lenders charge usurious rates of interest and follow unethical practices, they continue to be
active because the farmers find it more expedient to resort to them rather than agencies in
the organised sector. The main reason for this is that their lending procedure are relative
simple, credit assistance timely and the assistance is not tied with purpose of borrowing.
Since non-institutional credit does meet a sizeable portion of rutal credit requirements, the
Rural Credit Policy does not aim at eliminating these non-institutional sources altogether
but seeks to regulate their operations so that supplementary sources of credit could be
available.
The promotion of institutional sources of lending to the rural sector has long been an
important approach of the governments' agricultural development policy. It acquired
added significance and urgency with the advent of green revolution in the mid-sixties with
its requirements of modem high value inputs like HYV seeds, chemical fertilisers,
insecticides and pesticides, mechanisation and the need to provide infrastructural support
through development of land and water resources, transport, marketing and storge
facilities. To meet the growing credit needs, the thrust of the Rural Credit Policy in India
has been progressive institutionalization of rural credit under a multi-agency approach
involving cooperatives, commercial banks and regional rural banks. Presently, these
institutional sources together account for about 60 per cent of total rural credit.
The institutional credit structure for purveying rural credit in India to farmers and other
rural borrowers consists of three distinct types of organisation.
1) Cooperatives
2)

Commercial banks, and

3)

Regional rural banks

In addition to these three types of institutions, government also provides a small amount of
rural credit as a measure of relief. At the apex (national level) of the above rural credit
structure is the National Bank for Agricultural and-Rural Development (NABARD) which
was set up in July 1982. Until then Reserve Bank of India (through its rural credit
department) served as the apex bank. The institutional credit structure is presented in
Figure 1.1. A concised account of the functional distinction and relationship of these
institutions follows.

Banks

I\

NABARD

E@l Government

bq
LAMPS

Branch
PLDB

Farmers/Rural Borrowers
NABARD

National Bank for Agriculture and Rural Development.

SCB

State Cooperative Bank

SLDB

State Land Development Bank

CCB

Central Cooperative Bank

PLDB

Primary Land Development Bank

RRB

Regional Rural Bank

PACS

Primary Agricultural Credit Societies

FSS

Farmers' Service Societies

LAMPS

Large Sized Advivasis Multi-Purpose Cooperative Societies

Figure 1.1: Institutional Rural Credit Structure in lndii%@

.a

1.7.1 Cooperatives
The institutional credit system in the rural sector commenced with the adoption of
Cooperative Soc~etiesAct in 1904. Since then, the building up of the cooperative as a part
of the schemne of planned development has been one of the primary goals of the national
policy in India. With the active support from the governmenl and other national
institutioi~s,cooperatives have emerged as the principal institutional agency for rural
credit. About 40 per cent of the aimual disbursement of direct institutional finance for
agriculture is by cooperative, according to 1989-90statistics.
The Cooperative Credit structure consists of two wings, i.e, short term and long term. The
short termcredit structure in each state comprises a three-tier structure with State
Cooperative Rank (SCB) at the apex (state level); Celltral Cooperative Banks (CCBs) at
the district level; and Prlmary Agricultural Credit Societies (PACS) at the 1owestJprimary)
village level. A limited quantity of credit also flows through the short term credit structure
for medium term investment. Special types of primary cooperatives have also been
organised to cater to the special needs of tribals and weaker sections of the society. These
are farmers' Service Societies (FSSs) and Large Sized Adivasis (tribals) Multi-purpose
Cooperalive Societies (LAMPS). Tlle PACSs provide fann credit to the member farmers.
?11e CCBs which are the federations of PACSs extend f i n m c i n r e f i n c g facilities to
PACSs and the SCBs which are federations of CCBs provide financinglrefinancing
facilities to CCBs (Figure 1.I). There are 27 SCBs, 337 CCBs and approximately 94,000
PACSs in this wing of the Cooperative Credit Structure. There are 2525 FSSs and 2958
LAMPSin the country.
The other wing consists of land development banks catering to long termlinvestment credit
of their inembers in agriculture and allied sectors. Primary Land Development Banks
(PLDBs) provide farm credit to the member farmers. State Land Development Banlcs
(SLDBs) extend fina~cingIrefin.dl~cing
to PLDBs. In some states of the country, the LDB
structure is unitary and not federal. Therefore, the branches of SLDBs are directly
providing long term credit to their member Farmers. There are 19 SLDBs, one for each
state. Eight SLDBs lend directly through their own branches numbering about 1029, while
11 SLDBs lend through their affiliated PLDBs numbering about 890. The details of
Cooperative banks are dealt in Unit 2.

1.7.2 Commercial Banks

Commercial BailEcs were brought into rural financing through nationalisation of 14 major
commercial banks in June 1969. 'Illis had to be done in view of the effective credit support
required for diffusion of llew technology in agriculture and the iwdbility of cooperatives to
meet the challenge. Subsequently, in April 1980, six more commercial banks were
natio~ralisedto further expand the institutional credit structure to meet the Fast rising
demand of rural credit. At present there are 28 public sector commercial banks comprising
the 20 nationalised banks, and State Bank of India and its seven subsidiaries.
Cormrcial banks since natio~lalisationhave made major strides in rural financing and
have become a11important source of rural finance alongwith cooperatives. At present
ilearly 52 per cent of the direct institutional finance for agriculture is accounted for by the
commercial banks through their branches in the rural areas and also through the medium of
PACSs in tllejurisdictio~lof the weak CCBs. The operations of each rural branches of
commercial banks are confined to about 15-20 compact villages, called the Service Area of
the branch. Comnlercial banks provide short term l o u ~ and
s term loans. 'll~eyalso
participate in the government sponsored programmes such as Integrated Rural
Development Programmes (IRDP), Comprehensive Crop Insurance Scheme (CCIS),
Different Interest Rate Scheme (DIR) and the 20 Point Progralnme etc.
As at the end of June 1991, of the total commercial bank branches of 60,190 (8262 in June
1969),58.4 per cent (22.2 per cent in June 1969) were rural branches. These rural branches
mobilised rural deposits which were 15.3 per cent (3.1 per cent in June 1969) of the
aggregate bank deposits of Rs.2,00,036 crore at the end of March 1991 (Rs.4665crore in
June,1969).
Of the total outstanding net bank credit of Rs.1,09,283 crore at the end of March 1991
(Rs.3599 crore at the end of June 1959), 39.2 per cent (14 per cent at the end of June 1969)
was a~riculturalcredit. The ~ooulationtxr bank office at the end of June 1991 had come

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Rural Credit

Credit Schemes

down to 11,000 from 65,000 at the end of June 1969. The detailed role of commercial
banks in rural banking is discussed in Unit 2.

1.7.3 Regional Rural Banks (RRBs)

In September 1975, Regional Rural Banks were established combining the good features
of both cooperatives and commercial banks and for low cost of operation in rural credit.
These banks were estdablished"for development of rural economy by providing for the
purpose of development of agriculture, trade, commerce, industry and other productive
activities in the rural area, credit and other facilities paarticularlyto the small and marginal
farmers, agricultural labourers, artisans and small entrepreneurs". XIUS,these banks were
set up exclusively for the benefit of small and marginal farmers and other weaker sections
in the m a 1 area because it was felt that institutional credit agencies existing till then were
not paying adequate attention to Ule weaker sections in providing credit. The RRBs also
finance PACSs .and FSSs if the societies have a preponderance of smalllmarginal hrmers
.and landless labourers etc. According to 1989-90 statistics, RRBs account for a h u t 5 per
cent of direct institutional finance for agriculture.
The RRBs axe opened with the joint participation of commercial banks, state government
and the central government. The authorised capital of every RRB is Rs. 5 m r e while the
issued capital is Rs.1 crore of which 50 per cent is subscribed by the central government,
35 per cent by the sponsoring commercial bank and 15 per cent by the concerned state
government.
The operations of each RRB are confined to one or two districts only. RRBs provide both
short term and term loans. They also participate in government sponsored programmes
such as Integrated Rural Development Programme (IRDP), Comprehensive Crop
Insurance Scheme (CCIS), Differential Interest Rate Scheme (DIR), and the 20 Point
Programme etc.
At the end of Sept. 1990, there were 196 RRBs (6 in 1975) operating in the country
covering 380 districts (12 in 1975) with 14,511branches (17 in 1975).
The aggregate deposits wre Rs.4267 crore and the outstanding credit was Rs.3547.5 crore
at the end of Sept.1990. Their overdues were 32.7 per cent. The viability of these banks
continue to be a cause of anxiety. Out of the 196 RRBs, only 44 were making profits while
the remaining 152 were in loss.

1.7.4 National Bank for Agriculture and Rural Development

(NABARD)
The NABARD was set up on July 12,1992 because the need for taking +anintegriated view
was felt with the growing involvement of banking system in rural financing. It took over
functions of the erstwhile Agriculture Credit Department, Rural Planning and Credit Cell
of the RBI and the Agricultural Refinance and Development Corporation (ARDC), the
associate institution of the RBI.
NABARD is an apex institution accredited with all matters concerning policy, planning
and operations in the field of credit for agriculture and other economic activities in the
rural areas. It serves as an apex refinancing agency for institutions providing investment
and production credit for promoting various developmental activities in the rural areas;
takes measures towards institutions building for improving absoqtive capacity of Credit
Delivery System including monitoring, formulation of rehabilitation schemes,
restructuring ~f credit institutions, training of persomel etc; coordinates rural financing
activities of d l the institutions engaged in the developmental work at field level and
maintains liaison with the Centrd GovernrnentlState Governments, RBI and other national
institutions concerned with policy formulation; and also undertakes monitoring .and
evaluation of projects refinanced by it.

1.7.5 Reserve Bank of India (RBI)

The Reserve Bank of India through its Rural Credit Dep.utment plays a significant role in
providing support to rural credit. Until the establishment of the NABARD in July, 1982,
the RBI acted as the apex bank for rural credit. It provided refinance facilities to the
cooperative credit system and the regional rural banks at a concessional rate of interest for

seasonal agricultural operations and for investment in agriculture. It maintained two

separate funds; (i) National Agricultural (Long Term Operations) Fund for providing loan
;~ssistianceto cooperative credit institutions for investment; and (ii) National Agricultural
Credit (Stabilization) Fund for providing relief as medium term loans to enable the
cooperative to convert the short tenn loans of the farmers into medium term loans at the
time of natural calainities resulting into more than 50 per cent of crop loss.
The Reserve Bank of India as the Central Bank of the country plays a crucial role in the
sphere of rural credit by giving overall direction to rural credit and financial support to
NABARD for its operations.

NABARll's refilunce is available to the SLDBs, SCBs scheduled CBs and RRBs. While
the ultimate beneficiaries of investment crcdit can be individuals, partnership concerns,
companies and slate owned corporations or cooperative societies, production credit is
generally given to individuals. It provides refinance for short term loans (not exceeding 18
months ) and medium term loans (not exceeding 5 years) to credit cooperatives and RRBs;
and for term loans (not exceeding 25 years) on schematic basis to all credit institutions.
' I l e important schemes that are covered for refinance by the NABARD are - minor
irrigation; land development/Co~mnandArea Development; farin mechanisation;
planlation/horticulture; poultrylsheep breediilg/piggery; fisheries; dairy development;
storagelmiket years; IRDP and other schemes.
u

NARARD provides credit for promotion of agriculture, small sc-aleindustries, cottage and
village industries, handicrafts and other rural crafts and other allied economic activities in
rural areas with a view to promoting integrated rural development and securing prosperity
of rural areas. It also provides long term assistance in the form of loans to State
(;overninents (not exceeding 20 years) for contribution to share capital of cooperative
credit institutions. It also provides medium term loans to cooperatives for stabilisation
arrangement. It mainlains a Research and Development Fund for research in agriculture
and rural development. The assistance obtained, from the International Development
Agency (IDA) and World Bank, for agricuture and rural development is routed through
NABARD.
'Tile NABARD is owned by the Central Government and the RBI. The authorised share

capital d NABARD is Rs.500 crore and paid up capital is Rs.100 crore contributed
equally by the RBI and the Central Govemnent. Deposits received from the Central
Government and the State Governments are also a source of their resources. ' I l e ndtiorlal
bank also raises resources through market borrowings by floating bonds and debentures.
Borrowings from the RBI and Government of India are other sources of their resources.
NABARD operates throughout the country through its 16 regional offices located in the
capitals of all the major states and three sub-offices. District level offices numbering 114
have also been opened by the NABARD to prepare potential linked credit plans for each
district.
Term loan disbursement of NABARD by way of refinance under schematic lendings was
Rs.1702 crore during the financial year 1989-90. Refinance commitments under the new
schemes approved during the same period were &.2039 crore. Refinance provided for
implementatioi~of the IRDP touched Rs.549 crore during the period.

1.7.6 Governmental Support to Rural Credit

Govenlmeilt entered the field of agricultural credit primarily to provide relief from distress
caused by droughts, floods and other natural calamities. The loans were called as Takavi.
Advancing of loans by the government to finance the emergent needs of agricvlturists on a
regulaar basis began towards the end of' the 19th century.
Startiilg as loans to provide relief to the agricullurists who were adversely affected by
famine, floods and other natural calamities and to assist them to tide over emergencies,
takavi loans (Govetnment loans) subsequently became regular loans for productive
purposes. The Government departments namely revenue and community development
which handled Takavi loans are burdened with multifarious duties resulting in too much
delay in the disbursement of loans and inadequate supervision or lack of coordination to
ensure proper use of loans. The committee on Takavi lom and cooperative credit
appointed by Lhe Government of India in 1961 recommended the discontinuance of Takavi

Run1 Credit

Credit Schemes

loans for normal production and land improvement purposes to agriculturistis direct and
suggested that, barring certain exceptional cases, funds available with the governinent for
granting loans to agriculturists should be utilised to supplement the resources of
cooperatives. Therefore, the governmental efforts since then have been directed inore
towards strengthening of institutioiral credit framework by way of financial and legislative
support rather that1 coming up as an agency for direct lending to farmers.
With a view to ensuring increased flow of credit for the agricultural development
programmes and to improve the income opportunities of the rural poor, both centrial and
the State Governments have been taking several measures, important amollg thein are
summarized as follows:
1) Cooperative laws have been amended to provide for universal inen~bershipto
enable sinall rind inarginal farmers, tenmt cultivators, agricultural labourers, rural
artisans etc. to become members without facing procedural problems.
2)

Some state governments provide long lerm loans to persons belonging lo weaker
sections to enable them to purchase shares and become members of cooperatives.

3 ) Cooperative loans provide for reservation of seats on the managing committee of

credit cooperatives for the representatives of the weaker sections.

4)

Governinent subsidies are provided for the poorest of weaker sections such as
tribals a ~ scheduled
d
castes to relieve their interest burden on institutional loans.

5) In appropriate cases, managerial subsidies *arealso provided to cooperatives in

the initial stages of their organisation.
6) The Cencrial Government provides assistance to institutional credit agencies
through plan schemes in the banking sector and cooperative sector. In the
banking sector, loans are given to NABARD to meet its refinance obligations and
for sl~.arecapital to RRBs. In the cooperative sector the Central Government and
State Government provides resources to the LDBs on a matching basis by
investment in debentures floated by them.

7) In order to correct the regional iinbal.ance in the cooperative development,

Central Government provides assistance to CCBs, located in the identified weak
areas to cover the deficit in their interest resources to enable thein to borrow from
tile NABARD for their loatling programmes. A term loan at concessional rate is
released to the State Governments who, in turn, together with their matchins
contribution utilize it for augmenting the internal resources of CCBs.
8) In order to give relief to cultivators whose capacity to repay the production loans
is impaired due to natural calamities leading to crop failure, agricultural credit
stabilization funds have been constituted at v.arious levels of the cooperative
credit structure and at the national level in the NABARD. The short term dues of
the cultivators are converted into medium term loans by recourse to the
agricultural credit stabilization funds at a prescribed proportion. l l ~ CCBs
e
atld
the SCBs meet 25 percent of the conversion, the NABARD, 60 per cent and tl~e
SPate Government, 15 per cent.

Under the Central Scheme, the Central Government provides financial assistance by way
of subsidy (75%) and long term loans (25%) for building up the stabilization funds of the
SCBs. The loan is payable in 25 years of which for the first 10 years only Ule interest is
payable. Government subsidy ranging between 25 per cent and 33 per cent of the cost of
investment is provided to the selected beneficiaries under the comprehenqive Integrated
Rural Development Programme (IRDP) which envisages a package of assistance to the
nual population living below poverty line.
Thus, the strategy of government is to provide assistance to institutional credit agencies
through plan schemes to improve the economy of the rural areas through a package of
infrastructure on farm development activities with the ob-jectivesof optimum utilisation of
land, water, human and livestock resources.

Ruri~lCredit

I .is1 agci~cics111;~L ],roviclc r'ural crcrlit.

Stale (lit* rolc o l NiZI3AKI).

Wha( is (!ic cotllrihulion 01' s(a(ci n pro\-iding crctli! lo rur.~ipcol-)!i:'.'

1.8 SUMMARY.
In this unit we have covered the following points:
1) Rural credit is key to development of m a 1 sector.
2)

Risks are higher in agriculture than in industry.

3) Majority of agricultural holdings in India are margin4aland small. Therefore,

credit schemes have to be designed to suit their specific needs.
4)

Every type of productive activity in agricultural and allied sector is now covered
for providing credit support by credit agencies.

5 ) Agricultural credit requirements in India are growing fast and that

non-institutional agencies ae still active in meeting agricultural credit needs.
6 ) Multi-agency system of rural credit has shown impressive per1orinance in

meeting the challenge of growing credit requirements in the country.

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1.9 ANSWERS TO SAQs

Refer respective text in the unit.