Sources of 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.

Sources of Rural Credit in India:

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

• Non-institutional Sources (Informal)
• Institutional Sources (Formal)

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 for high rates of interest and manipulating accounts to keep them in debt.

The major non-institutional sources of rural credit are:

i) 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.

ii) 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. These traders’ share of agricultural loans grew gradually from 5.5 percent in 1951-52 to 8.8 percent in 1961-62 before declining to 5.0 percent in 1996. As a result, its significance has decreased in recent years.

iii) 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. This form of farm credit is also becoming less important, with its share of agricultural credit declining from 14.2 percent in 1951-52 to 8.7 percent in 1981 and then to 3.0 percent in 1995-96.

iv) 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 labourers. This source of agricultural credit increased from 3.3 percent in 1951-52 to 14.5 percent in 1961-62, then declined significantly to 8.8 percent in 1981 and then to 10.0 percent in 1995-96. 

As a result, non-institutional sources of agricultural credit suffered from severe flaws such as exorbitant interest rates, loans for useless purposes, non-repayment of loans, and so on.

Exploitation by Non-institutional Sources

The farmers are usually exploited by non-institutional sources such as traders, landlords, and moneylenders in the following ways:

• Manipulation of Accounts: The non-institutional sources are often involved in different malpractices. They do so by manipulating the accounts of the borrowers without having them in their knowledge. They even take advantage of the illiteracy of the farmers and do not give them any receipts for repayment.
• Unfavourable Loan Conditions: These sources often impose numerous unfavourable conditions on farmers while granting them loans. Sometimes they even force the farmers (borrowers) to sell their agricultural produce to them at low prices.
• High-Interest Rates: The non-institutional sources charge high-interest rates from the farmers ranging from 24% to 50%.

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%. The Cooperative Credit Societies Act was passed in 1904, and the cooperatives society was founded, which played a major role in the development and diversification of credit in rural regions. However, a substantial change happened after 1969, when India implemented a social banking and multi-agency strategy to meet rural lending requirements. 

According to this method, 

• 14 major commercial banks were nationalised in July 1969, and six more were nationalised in April 1980.
• In 1976, rural regional banks were created.
• The apex bank, NABARD, was established in July 1982 to manage the operations of different financial institutions involved in providing rural credit.

The two main objectives of the Government behind establishing the institutional sources are the provision of adequate credit to the farmers at a cheap rate of interest and assisting small and marginal farmers, so they can raise their agricultural productivity and maximise their income.

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

i) 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. After a few years of beginning, Co-operative Credit Societies progressed consistently. They initiated the provision of substantial assistance to farmers through short-term loans provided by Primary Agri­cultural Credit Societies (PACs), which increased from 305 crores in 1965-66 to 5,200 crores in 1999-00. At the same time, the amount of credit issued increased from ₹37 crores to ₹2,100 crores. However, as the co-operatives were unable to satisfy all of the loan requirements, moneylenders continued to dominate the rural economic markets. 

ii) 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. A land mortgage is another name for this type of loan. It basically gives farmers an affordable long-term financing option based on the mortgage of their property at cheap interest rates for 15 to 20 years. These types of loans are typically accepted if farms need to do some land development work, such as digging wells, if additional land is to be purchased completely, or if earlier debts have to be paid back. Though land development banks have made significant progress, their contribution remains insignificant because most farmers are unaware of the presence of such land schemes, as well as the significance and use of such banks. However, the number of such banks established by the primary banks and the government has increased immensely over the years.

iii) 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. Earlier, these banks only accepted deposits from the urban populace and issued loans only to industry and trade. They usually ignored agriculture and rural businesses because agriculture is a high-risk business. However, today these banks provide both direct and indirect agricultural investment. Direct finance is granted here for short and medium-term periods, enabling farmers to perform agricultural activities with ease. Indirect finances are provided in the form of loans to buy items such as cereals and fertilisers. Commercial banks also grant finance to the Food Corporation of India and state food organisations for purposes such as food procurement. Additionally, they have implemented the “village adoption scheme,” which was originally started by the State Bank of India and examines credit and other needs of the farmers.

iv) 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). The Narasimham group proposed the RRB idea, and it was formed in 1975 with the main goal of providing loans and other financial services to farmers, agricultural labourers, and small merchants. Prathama Grameen Bank, the first RRB bank, was established on October 2, 1975. Initially, there were six RRBs with 17 locations in India till December 1975. However, there are 43 RRBs established in India by 2022. 

Regional rural banks in India play a key role in providing banking facilities to farmers living in remote areas. There are many kinds of regional rural banks in India and these are sponsored banks, i.e., each bank is sponsored by a parent bank like the Kerala Gramin Bank is sponsored by Canara Bank. The regional rural banks provide good interest to the people on their savings accounts. Also, in rural areas most of the population is employed in the agricultural sector, thus these banks also provide farmers with loans for purchasing crops and fertilisers at a significantly lower rate. 

v) 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.

vi) Self-Help Group (SHG) Bank Linkages Programme for Micro Finance: 

In recent years, SHG has surfaced as the country’s main microfinance programme. Their primary emphasis 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. Around 6 crore women in India have become members of 54 lakh women SHGs, by May 2019. SHGs have also contributed to women’s empowerment. However, the purpose of borrowings from SHGs is mainly consumption and a small part of the borrowings is made for productive purposes.

Benefits of Institutional Sources

Various advantages of institutional sources are as follows:

• The interest rate at which institutional sources provide credit is low. Also, these sources charge different interest rates for different categories of farmers and different types of loans.
• The primary objective of institutional sources of rural credit is to help farmers raise their productivity without exploiting them. Therefore, it can be said that the institutional sources of rural credit are not exploitative.
• Another benefit of institutional sources is that the agencies provide loans to the farmers after making a clear distinction between short-term credit and long-term credit requirements.
• Ultimately, the institutional credit is also combined with other different agricultural operations and improvements, including the use of fertilisers, seeds, etc.