Rural Credit: Meaning, Purpose, Need, Sources and Critical Appraisal

What is Rural Credit?

Agriculture is the primary source of income for people living in India’s rural areas. Farmers and peasants have to invest a significant amount of funds each year to guarantee a healthy crop. As a result, they frequently borrow money from moneylenders and financial institutions to meet their basic requirements before harvest season so they can make money by selling their crops. Thus, Agricultural Rural Credit refers to any loan taken for agricultural reasons or small home enterprises in India’s rural regions.

Purpose of Credit Requirement

The rural economy’s growth is primarily dependent on capital infusions from time to time to achieve better productivity in agriculture and non-agriculture sectors. Farmers borrow from various sources to meet their initial investment in seeds, fertilisers, tools, and other family costs such as marriage, funerals, religious rituals, and so on, because the time gap between crop sowing and realisation of income after production is quite long.

Moneylenders and merchants abused small and marginal farmers and landless labourers during the freedom period by lending them at high interest rates and manipulating their accounts to keep them in debt. After 1969, India implemented social banking and a multiagency strategy to properly satisfy the requirements of Agricultural Rural Credit. 

Rural areas frequently suffer from poor income, which leads to a low rate of savings. Farmers have a tough time increasing their productivity by spending on farmland. Credit in many ways helps farmers to commercialise their farming. Even though small and marginal farmers produce only for subsistence, they do not generate enough surplus to reinvest in their lands, resulting in land deterioration. Agriculture has always been dependent on the weather. Farmers suffer the most when there is no rainfall or harvest failure. Crop insurance and agricultural rural credit are thus critical in saving them from such disasters.

Need for Rural Credit 

There are two angles through which the credit needs of the farmers can be examined. These are:

• On the Basis of Time
• On the Basis of Purpose

1. On the Basis of Time: Based on time, there are three categories under which the credit needs can be classified:

• Short-term Credit: The credit taken by the farmers for a period of less than 15 months in order to meet their short-term needs is known as Short-term Credit. The purpose of short-term credit is to purchase seeds, pay wages to the hired workers, buy fertilisers, etc. The repayment of such credit can be made out of the farmer’s current income.
• Medium-term Credit: The credit taken by the farmers for a medium period between 15 months and 5 years is known as Medium-term Credit. The purpose of medium-term credit is for productive activities (purchase of agricultural implements, cattle, etc.) and unproductive activities (expense on social functions, marriage, etc.).
• Long-term Credit: The credit taken by the farmers for a long period of more than 5 years, which can even extend to 15 to 20 years in order to meet long-term needs is known as Long-term Credit. The repayment of such loans is done over a long time period. The purpose of Long-term Credit is to dig tubewell, repay old debts, purchase of large agricultural implements, etc.

2. On the Basis of Purpose: Based on purpose, there are two categories under which the credit needs can be classified:

• Productive Loans: The loans which help the farmers raise agricultural productivity and production are known as Productive Loans. For example, loans taken by the farmers to buy seeds, farm implements, fertilisers, or to make permanent improvements on their land.
• Unproductive Loans: The loans which do not help the farmers raise agricultural productivity and production are known as Unproductive Loans. For example, loans taken for marriage, religious functions, social functions, etc.

Sources of Rural Credit in India

The two sources of rural credit from which the farmers can raise loans are as follows:

1. Non-institutional Sources (Informal):

It constitutes of cash lenders, free agents, landlords, relatives, and friends. Historically, non-institutional sources satisfied or fulfilled the majority of farmers’ credit requirements due to their simpler loan procedures and willingness to give even for unproductive purposes. However, due to restricted resources, they were unable to satisfy their medium and long-term needs/requirements. These sources accounted for roughly 93% of the full credit score requirement of the agricultural people in 1950-51 and at present account for 30% of the most effective credit score requirement. They used to take advantage of small and marginal farmers by asking high rates of interest and manipulating accounts to keep them in debt.

The major non-institutional sources of rural credit are:

1. Moneylenders: Moneylenders have long been a source of credit for many agricultural households in India’s rural credit environment. However, they exploit peasants through high rates of interest and even manipulate their accounts to keep them in debt.
2. Traders and Commission Agents: Traders and commission agents give loans to agriculturists for productive reasons before crop maturity and then compel farmers to sell their harvests at very low rates to them while charging a high fee. This form of loan is typically used for cash crops. 
3. Relatives: In times of crisis, cultivators frequently borrow funds from their own relatives, either in cash or in kind. These are informal debts that have no interest and are usually repaid after harvest. 
4. Rich Landlords: In India, small and marginal cultivators and tenants are also accepting loans from landowners to satisfy their financial requirements. This source has been following all of the bad practices of moneylenders, merchants, and so on. Landless workers are sometimes forced to work as bonded laborers. 

2. Institutional Sources (Formal):

It is mainly composed of the government, cooperative societies, rural municipal financial institutions, industrial financial institutions, and other entities. It accounted for the most efficient 7% of the general credit score requirement at the start of the main five years plan (in 1950-51), but it is now due for approximately 70%. 

Some of the Institutional sources of rural credit are as follows:

1. Co-operative Credit: The main goal of co-operatives is to free Indian peasants from the clutches of moneylenders and provide them with credit at low interest rates. This is the most cost-effective and essential source of rural financing. It was established with the goal of facilitating small and medium-sized farmers’ complete financing requirements. 
2. Land Development Banks: These institutions lend money to farmers in exchange for a lien on their property.  Loans are available for permanent property improvement, the purchase of farming tools, and the repayment of past obligations. 
3. Commercial Bank Credit: Commercial banks initially played a minor part in promoting rural credit. However, after nationalisation in 1969, they extended their rural branches and began directly financing farmers. 
4. Regional Rural Banks: India is an agriculturally oriented nation with a large population engaged in the agricultural sector. Thus, in order to utilise this sector and connect Indian farmers with banks in order to facilitate financial transactions, the Government of India established Regional Rural Banks. (RRB). Regional rural banks in India play a key role in providing banking facilities to farmers living in remote areas. 
5. National Bank for Agricultural and Rural Development (NABARD): National Bank for Agriculture and Rural Development (NABARD) is the Apex Bank which has to coordinate the functioning of various financial institutions that are working for the expansion of rural credit. The basic objective of NABARD is to promote the health and strength of credit institutions including commercial banks, cooperatives, and regional rural banks. It also provides assistance to the non-farm sectors for the promotion of integrated rural development and prosperity of backward rural areas.
6. Self-Help Group (SHG) Bank Linkages Programme for Micro Finance: The primary emphasis of SHGs is on the rural poor, who lack long-term access to the formal banking system. Therefore, the targeted customers of SHGs include small and marginal farms, agricultural and nonagricultural workers, artisans, and so on. SHGs encourage thrift in small portions by asking for a minimal contribution from each member. Credit is granted to needy members at fair interest rates, to be returned in small instalments from the pooled funds. 

As the banking system expanded rapidly, it affected the rural farm and non-farm output, income, and employment positively. After the green revolution, farmers could use credit facilities to avail of different loans in order to meet their production needs. Besides, famines have become an event of the past with the rise in buffer stock.

Critical Appraisal of Rural Banking

The rural banking system has provided support to the farmers and has helped in rural development, directly and indirectly. With it, the farmers can now avail credit at cheap rates of interest from the formal sources of rural credit. It has also helped the farmers in increasing rural farm and non-farm output, income, and employment in rural areas. Besides these benefits, the agricultural credit structure of the economy faces a lot of problems. Some of these problems include:

1. Insufficiency: As compared to the demand for rural credit, its volume in India is still insufficient.
2. Inadequate Coverage of Institutional Sources: As the institutional credit arrangements have failed to cover the country’s rural farmers, they remain inadequate.
3. Inadequate Amount of Sanction: Besides credit arrangements, the amount sanctioned by the sources of rural credit is inadequate, because of which the farmers divert the loans for different unproductive purposes. As a result, the basic purpose of such types of loans gets diluted.
4. Less attention to Poor or Marginal Farmers: Under the rural banking system, the credit requirements of poor or marginal farmers have been given less attention. It is because the demand for credit by these needy farmers gets rejected by banks and other institutional sources, as they do not have collateral. However, because of better creditworthiness, well-to-do farmers get more attention.
5. Growing Overdues: Overdue is one of the major problems in agricultural credit that keeps on growing. The basic reason behind it is the poor capacity of farmers to repay the loan amount, because of which credit agencies are now becoming more cautious while granting loans to the farmers. It is presumed that the rise in agriculture loan default is because the farmers are refusing to pay back loans. Therefore, this issue has now become a threat to the smooth functioning of the rural banking system and hence needs control. 
   Because of the above-stated problems, the expansion and promotion of the rural banking system have been slow after the reforms. The formal institutions except the commercial banks have failed to develop a culture of lending to needy farmers, deposit mobilisation, and effective loan recovery.

In order to improve such situation, the banks should change their approach and build banking relationship with the borrowers instead of just being a lender. Besides, they should also encourage the farmers to inculcate saving habit and make efficient use of their financial resources.

Features of an Effective Rural Credit System

A rural credit system is said to be effective if it has the following features:

1. Low-Interest Rate: The banks or other institutional sources should grant loans with easy credit terms. It means that the rate of interest on the borrowed amount should be low and for a fairly long period.

2. Equity to the Farmer: When a farmer fails to repay the loan amount, his property should be liquidated in a way that a fair price is secured to him and after meeting the amount due to creditors and the cost of liquidation, the rest of the amount should be returned to him.

3. Convenience to Farmer: The repayment procedure should be formed in a way that is convenient to the farmer’s needs. It can be done by allowing easy instalments that spread over the period, and in other ways.