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BY ALINDA GEORGE (2008-05-107)


Under the supervision ofDr.M. A Lizy Associate Professor Dept of Rural Banking and Management

2 College of Co-operation, Banking and Management.

Agriculture plays a crucial role in the development of the Indian economy. It accounts for about 19 per cent of GDP and about two thirds of the population is dependent on the sector. Agricultural finance is a subset of rural finance dedicated to financing agricultural related activities such as input supply, production, distribution, wholesale, processing and marketing. The modern agriculture has increased the use of inputs specially for seed, fertilizers, irrigational water, machineries, implements etc. which has increased demand for agricultural credit. The adoption of modern technology, which is capital intensive, has commercialized agricultural production in India. Besides, the farmer's income is seasonal while his working expenses are spread over time. In addition, farmer's inadequate savings require the uses of more credit to meet the increasing capital requirements. Furthermore, credit is a unique resource, since it provides the opportunity to use additional inputs and capital items now and to pay for them.

The rural population in India suffers from a great deal of indebtedness and is subject to exploitation in the credit market due to high interest rates and the lack of convenient access to credit. Rural households need credit for investing in agriculture and smoothening out seasonal fluctuations in earnings. Since cash flows and savings in rural areas for the majority of households are small, rural households typically tend to rely on credit for other consumption needs like education, food, housing, household functions, etc. Rural households need access to financial institutions that can provide them with credit at lower rates and at reasonable terms than the traditional money-lender and thereby help them avoid debt-traps that are common in rural India. Timely and adequate agricultural credit is important for increase in fixed and working capital for farmers. In order to provide sufficient credit to the farmers, many institutional and non-institutional agencies are working. Under institutional agencies-cooperative, commercial, regional rural banks and different Government organizations are supplying credit to the needy farmers on priority basis.

Chart 1.Classification of agricultural credit

Period -wise 1. Short term 2. Medium term 3. Long term 1

Purpose - wise 1. Farm 2. Non-farm 3. Family expenditure

Security-wise 1. Secured 2. Unsecured

Creditor-wise 1. Institutional 2. Noninstitutional

Chart2.Institutional arrangements for rural credit in India

4 Agricultural credit is disbursed through a multiagency network consisting of Commercial Banks (CBs), Regional Rural Banks (RRBs) and Cooperatives. There are approximately 100,000 village-level Primary Agricultural Credit Societies (PACS), 368 District Central Cooperative Banks (DCCBs) with 12,858branches and 30 State Cooperative Banks (SCBs) with 953 branches providing primarily shortand medium-term agricultural credit in India. The long-term cooperative structure consists of 19 State Cooperative Agricultural and Rural Development Banks(SCARDBs), with 2609 operational units as on 31 March 2005 comprising 788 branches and 772 Primary Agricultural and Rural Development Banks (PCARDBs) with 1049 branches.

As against the target of Rs 2,80,000 crore (provisional) for agricultural credit in 2008-09, the banking system disbursed credit of Rs 2,92,437crore to the agricultural sector, thereby exceeding the target by around 4 per cent. Commercial banks and regional rural ranks (RRBs) together extended credit to 81.02 lakh new farmers during 2008-09. In addition to this, cooperative banks provided loans to13.88 lakh new farmers during the period, thus taking the total number of farmers financed by the banking system to 94.90 lakh.The total credit flow to agriculture during 2009-10 up to October 31, 2009 by commercial banks, cooperative banks and RRBs was of the order of Rs1,65,439.37 crore, amounting to 51 per cent of the annual target of Rs 3,25,000 crore .

Kisan Credit Card (KCC) scheme

Kisan Credit Card (KCC) scheme was introduced to provide adequate and timely support from the banking system to the farmers for their cultivation needs. This scheme has made rapid progress and more than645 lakh cards issued up to October 2006.

The KCC scheme has become a widely accepted mechanism for delivery of credit to farmers.The banking system has issued 878.30 lakh KCCs as of november0, 2009. The scheme now also covers borrowers of the long-term cooperative credit structure The KCC has thus become a single window for a comprehensive credit product. The year-wise and agency-wise break up of the cards issued since inception.

There is a tremendous growth in number of accounts in priority sector in these years. Agriculture loans constitute major number of accounts and amount outstanding. Number of accounts has been increased from 170 in 1969 to 29368 in

7 2009.Amount outstanding is also showing an increasing trend. Of the 4.25%of loan outstanding in priority sector, 17.6% is that of agriculture.

Paddy and rice constitute almost 32% of total agricultural advances outstanding. Loans outstanding towards some crops like wheat, pulses, rapeseed etc.declined in 2009.But towards paddy and some other crops are increasing.

9 This table shows rapid expansion of branches of all banks except non-scheduled commercial banks. Non-scheduled commercial banks have not expanded branches since 2007.Nationalised banks showed more branch expansion in this period than any other banks.RRBs and foreign banks are showing low rate of growth. Of the total rural branches, RRBs constitute the major share.SBI& its associates have more percentage of rural branches than nationalised banks. Percentage of rural branches in non-scheduled banks is less when compared to scheduled banks. Percentage of rural branches of foreign banks is very low when compared to others.

Major findings
Some of the major discernible trends are as follows: Over time the public sector banks have made commendable progress in terms of putting in place a wide banking network, particularly in the aftermath of nationalisation of banks. The number of offices of public sector banks increased rapidly from8,262 in June 1969 to 711966 by March 2005. One of the major achievements in the post-independent India has been widening the spread of institutional machinery for credit and decline in the role of non-institutional sources, notwithstanding some reversal in the trend observed particularly in the 1990s. The share of institutional credit, which was little over 7 per cent in 1951, increased manifold to over 66 per cent in 1991, reflecting concomitantly a remarkable decline in the share of noninstitutional credit from around 93 per cent to about 31 percent during the same period . Notwithstanding their wide network, co-operative banks, particularly since the 1990s have lost their dominant position to commercial banks. The share of co-operative banks (33 per cent)during 2009 was less than half of what it was in 1992-93 (62per cent), while the share of commercial banks (68 percent) cent) and RRBs (9per cent) almost doubled during the above period The efforts to increase the flow of credit to agriculture seems to have yielded better results in the recent period as the total institutional credit to agriculture recorded a growth of around 180.5 in 2005-06 from 69.6 12in 2002-03.

10 In terms of total credit to agriculture, the commercial banks recorded a considerable growth (from 65 to 68%while cooperative banks registered a fall (over 25 per cent to over 20percent) during 2004-2010. However, the growth of direct finance to agriculture and allied activities witnessed a decline in the 1990s1 (12 per cent) as compared to the 1980s (14 per cent) and 1970s (around 16 per cent). Furthermore, a comparative analysis of direct credit to agriculture and allied activities during 1980s and since 1990s reveals the fact that the average share of long-term credit in the total direct finance has not only been much lower but has also decelerated (from over 38 per cent to around 36 per cent), which could have dampening effect on the agricultural investment for future growth.



Credit in conjunction with modern agricultural technologies has ushered agricultural development across Indian regions. The liberal credit supply by the lending institutions enabled rapid infrastructural growth across Indian regions and thereby improved the farm level credit absorption capacity. Although credit has played vital role in agricultural development yet regional and farm-category wise disparity has also taken place. Infact, some of the states with better natural resource base have progressed well while some others lagged far behind. Like wise, some farmers with better resource endowments and access to financial and other institutions have marched faster while others could not do so. Furthermore, multiplicity of lending institutions together with the liberal deployment of credit through various on going schemes including micro-financing saved rural dwellers from the clutches of money lenders. Yet, non-institutional credit agents still survive as they follow the canons of financing.All the existing agencies e.g. money lenders, commercial banks, co- operatives and the State have to be integrated and harnessed to a common purpose. Such a comprehensive approach is essential for ensuring the best use of all the available resources of the nation.


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4. RBI Bulletin November 2004 5. 6. Dr.Murosu, Siva sankar (2008), Rural Financial Institutional in India (Study on agriculture sector), banking & Finance Vol XXI No.11 November 2008