Lecture 30

Agricultural Finance and Agricultural credit- Role of institutional

and non - institutional agencies-Rural indebtedness
 Agricultural Finance
• Murray (1943): AF is an economic study of
borrowing funds by farmers; of the organization
and operation of farm lending agencies, and of
society’s interest in credit for agriculture.

MACRO
Study
of borrowing funds by farmers
of the organization and operation of farm lending agencies,
and of society’s interest in credit for agriculture
 Agricultural Finance
• Tandon and Dhondyal (1962): AF is a branch of
Agricultural Economics which deals with the
provision and management of bank services
and financial resources related to individual
farm units.

MICRO
Subba Reddy & Raghu ram (1996): Agricultural
Finance is studying, examining and analysing
the financial aspects pertaining to farm
business.
 Importance
• Vital importance at micro & macro level
– Farm level assets, firms & infrastructure
– Macro level social projects, industries & infrastructure
• Plays catalytic role: strengthening farm business
and enhancing productivity of resources
– HYV & Hybrid seeds and related inputs
– Mechanization
• Development of input & output markets
 Subject Matter & Nature
• Farm Financial Management
– Decisions
– Characteristics (nature) of decisions
– Steps in Process of FFM
 FFM Decisions
• Decisions regarding:
– Requisite of Capital
– Sources of Capital
– Allocation of Capital MR = MC
– Counter Risk and Uncertainty (diversification,
flexibility, insurance, contracts, production
management and back-up management)
– Legal Problems
 Characteristics of FF Decisions
• Frequency (Periodic, recur and dynamic)
• Importance (profit, loss and alternatives)
• Imminence (quick)
• Revocability (corrections, cost…TIME)
• Alternative Decisions (availability/TIME)
 Steps in Process of FFM
• Objectives
• Problem recognition
• Analysis
• Decision Making
• Action
• Accepting the consequences
• And Evaluation
 Scope of FFM
• Three basic activities of Farm management
– Production activities
– Financial activities (more often & exclusive)
– Marketing activities
 Agricultural Credit
• Credit is certain amount of money provided
for certain purpose on certain conditions with
some interest which should be repaid sooner
or later.
 Classification of Credit / Loan

Credit
Source Purpose Time Security Liquidity Activity Approach Contact
Formal Production Short term Secured Unsecured Self Individual Direct

Informal Marketing Medium term Personal Partially Area Indirect

Consumption Long term Collateral DIR

Chattel

Mortgage
Simple

Equitable

Hypothecation
Key loans

Open loans
 Classification of Credit / Loans
I. Based on purpose
1. Production Loans: for crop production- also called seasonal
agricultural operations (SAO) loans or short –term loans or crop
loans. repayable within a period ranging from 6 months to 18
months in lumpsum.
2. Investment Loans: Loans given for equipment whose productivity
is distributed over more than one year- for tractors, pumpsets,
tube wells, livestock, etc.,
3. Marketing Loans: to overcome distress sales - Regulated markets
& commercial banks, based on the warehouse receipt- financial
assistance - 75 per cent of the value of the produce
4. Consumption Loans: some purpose other than production, - not
very widely advanced and restricted to those areas, which are hit
by natural calamities- to be repaid within five crop seasons or 2
½ years whichever is less. The rate of interest is around 11 per
cent.
 II. Based on Time

1. Short- term loans: to be paid back from 6 months to 18

months. All crop loans are said to be short- term loans
2. Medium-term loans: These loans are extended for a period
varying from 15 months to 5 years. Eg: purchasing implements,
electric motors, milch cattle, sheep and goat, etc.
3. Long-term loans: from 5 years to more than 20 years.
These loans together with medium-term loans are called
investment loans or term loans.
These loans are meant for bringing about permanent
improvements on the land, like leveling, reclamation and
conservation, construction of farm buildings, purchase of
tractors, raising orchards, etc.
 III. Based on Security

• Secured and unsecured

1. Secured loans: Loans advanced against some
security by the borrower are termed as secured
loan.
i. Personal security – promissory note
ii. Collateral security – jewellry, machinery, bonds
iii. Chattel loans - from pawnbrokers
iv. Mortgage - Simple mortgage, Equitable mortgage
v. Hypothecation - Key loans , Open loans
 IV. Based on liquidity

• Self- liquidating Loans: The income generated

through these loans helps the farmer to repay the
entire loan amount in the same season or year of
obtaining the loan. Example: short-term loans or
crop loans.
• Partially-liquidating Loans: The income generated
through these borrowings will help to pay part of
the loan component only. These loans require
relatively longer time for realization of benefit.
Example: Term loans.
V. Based on Activity Orientation
• If a loan is borrowed for sericulture, it is called
sericulture loan. Similarly, tractor loans, dairy
loans, orchard loans, loans for land
development, etc., can be cited under this
category.
 VI. Based on approach

1. Individual approach - to any potential

borrower Examples: crop loans, dairy loans
2. Area approach - by selecting the contiguous
area by a bank branch
3. DIR loans (Differential Interest Rate) - to the
weaker sections of the community at an
interest rate of 4 per cent per annum
 VII. Based on Contact with the Farmers

1. Direct loans: These are advanced directly to the

farmers by the institutional agencies. Examples:
ST loans and Term loans.
2. Indirect loans: Loans given to organizations for
activities, which contribute to the productivity
of agricultural operations
• Examples: Financing PACS, financing fertilizer
manufacturing companies, financing
construction of warehouses, market yards etc.,
 Sources of Agricultural Credit
A. Non-institutional Credit Agencies
(Informal sources )
a. Money lenders
i. Professional money lenders
ii. Agricultural money lenders
b. Traders and Commission agents
c. Land lords
d. Relatives and friends
e. Others (indigenous bankers nidhis,
chit funds etc,)
B. Institutional Credit Agencies
(Formal Sources)
1. Government
2. Cooperatives
3. Commercial Banks
4. Regional Rural Banks
5. Reserve Bank of India
6. Agricultural Refinance and
Development Corporation (ARDC)
7. Agricultural Finance Corporation
(AFC)
8. National Bank of Agriculture and
Rural Development (NABARD)
 Non Institutional sources
Advantages
i. Unrestricted supply of credit for any purpose..

ii. Easy access by farmers as money lenders maintain close

relationship with rural families.

iii. Method of business adopted are simple and flexible.

iv. Timely availability of credit without much formalities.

v. Knowledge on local conditions and experience of money lender

facilitate his business.

vi. Money lenders do not insist upon any particular type of security
for the grant of loans.
 Malpractices
a. They manipulate bonds and promissory notes obtained from
debtors and enter large sum than actually lent.

b. They give no receipt for repayments and often they deny such
repayments.

c. They charge very high rate of interest

d. They give loans for both productive and unproductive purposes

which results in indebtedness
 Advantages
1. They are granted for long period of time.
2. Low interest is charged.
3. The repayment plan is convenient, i.e.,
repayment in equal annual instalments.
4. Several schemes & benefits
 Disadvantages
1) Quantum of loan is determined an the basis of value of security
offered, by which, large farmers receive more credit than small
and marginal farmers.

2) As these loans are not production oriented, they do not satisfy

the standard needed for sound system of farm credit.

3) The loan amount is inadequate.

4) The land less labourers were left out in the lurch at the time of
distress.

5) The taccavi loans are not popular among farmers due to

inordinate delay , imposition of irrelevant conditions,
incompetent supervision and inconvenient recovery methods.
 Indirect Finance to Agriculture by
Government
1) It allocates subsidized fertilizer to states according to their
needs.

2) It provides technical assistance to farmers through Tamil Nadu

agricultural Development Programme.

3) It implements price stabilization schemes for various crops.

4) In consultation with the RBI, the government prescribes the

rates of interest to be charged on loans granted to weaker
sections of rural areas.

5) It contributes to the share capital and debentures of co-

operatives.
Rural Indebtedness
 The Indian Farmer is born in debt, lives in
debt and dies in debt

CAUSES:
• The Indian Farmer borrows year after year but
he is not in a position to clear off the loans
• Borrow for various purposes
• Slow returns
• Crops fail
• Market failure
• Social customs
– Marriage, religious ….
• Litigation Vicious cycle
• Inherited debt
• Money lenders
– High interest
– False accounts

credit supports the farmer as the

hangman’s rope supports the hanged
CONSEQUENCES:
• Low standard of living
• worsening poverty amongst cultivating classes
• unable to market their product
• income of the farmers is mostly spent for
repayment
• agricultural improvements tend to get
neglected
• will not be in a position to adopt modern farming
practices
• a low price while selling his produce, but has to
pay high prices while buying inputs
• creates a class of landless labourers and tenants
• forced to pledge their own person and become
bonded slaves to the landlords and money-
lenders
• high caste money-lenders have fraudulently
deprived the simple and illiterate
 Remedies to the problem of Rural
Indebtedness
• Settlement of old debt
• Reduce dependence on money-lenders
• Control of new loans
• Productive purposes
• Provision of alternative sources of credit.