Agricultural credit is a critical factor for the development and modernization of agriculture in India. Given the heavy dependence on agriculture for livelihoods and the significant role the sector plays in food security and rural development, timely and adequate credit is necessary for farmers to invest in inputs such as seeds, fertilizers, equipment, and irrigation. The agricultural credit structure in India comprises a multi-tiered system involving formal and informal institutions, with a variety of credit channels to meet the needs of the farming community.

1. Agricultural Credit Structure in India

The agricultural credit structure in India is primarily supported by institutional (formal) and non-institutional (informal) sources. Institutional credit is regulated and subsidized by the government, while non-institutional credit includes private moneylenders and unorganized financial sources.

a) Institutional Sources

Institutional sources of agricultural credit have grown in importance over time and are crucial for providing affordable and structured financial services to farmers. These include:

Cooperative Banks

Primary Agricultural Credit Societies (PACS): The PACS are the grassroots-level institutions that serve as the first point of contact for farmers seeking credit. They offer short-term and medium-term credit for farming operations.
District Cooperative Banks (DCBs): These act as intermediaries between PACS and state cooperative banks, ensuring the flow of credit to the grassroots level. They provide financial services to farmers and other rural entrepreneurs.
State Cooperative Banks (SCBs): These are the apex institutions in the cooperative credit structure and provide credit to district cooperative banks and PACS. SCBs also mobilize resources through government schemes and other sources.
Weaknesses: The cooperative system often suffers from problems such as political interference, low recovery rates, and poor financial management.

Commercial Banks

Public and private sector banks: Commercial banks provide both short-term and long-term credit to the agricultural sector. They operate through rural branches and increasingly through digital platforms, ensuring the flow of credit directly to farmers.
Priority sector lending: As part of the Reserve Bank of India’s (RBI) regulations, commercial banks are mandated to allocate a certain portion of their lending to the agriculture sector. Currently, 18% of a bank’s adjusted net credit must be directed toward agricultural activities.
Challenges: Despite mandated lending, the flow of credit often skews toward large farmers, leaving small and marginal farmers underserved.

Regional Rural Banks (RRBs)

Role: RRBs were established to cater to the financial needs of small and marginal farmers, agricultural laborers, and rural artisans. They operate at the district and sub-district levels, providing easy access to credit.
Coverage: There are more than 40 RRBs, with extensive branch networks in rural areas, helping to bridge the credit gap in underserved regions.
Challenges: RRBs have been affected by issues like low profitability and limited capital, which sometimes hinder their ability to extend credit.

National Bank for Agriculture and Rural Development (NABARD)

Role: NABARD is the apex body that oversees and regulates rural financing and agricultural credit. It refinances and supports the entire institutional credit structure, including cooperative banks, commercial banks, and RRBs.
Development role: NABARD also supports rural infrastructure development and promotes innovations in agriculture through schemes and programs aimed at boosting rural credit flow.
Kisan Credit Card (KCC): NABARD played a key role in introducing the KCC scheme, which provides farmers with easy access to short-term credit for crop production and related expenses. The KCC has become one of the most popular credit instruments for farmers.

b) Non-Institutional Sources

Despite the growth of institutional credit, a significant portion of rural credit still comes from non-institutional sources, primarily due to the inaccessibility of formal credit institutions for many small and marginal farmers.

Moneylenders

Role: Private moneylenders continue to be a dominant source of credit in many rural areas, particularly where institutional credit is unavailable or difficult to access. They provide quick, informal credit without collateral but often charge exorbitant interest rates, leading to debt traps for farmers.

Traders and Commission Agents

Credit against produce: Traders and commission agents extend credit to farmers with the condition that they will sell their produce to them. While this offers convenience to farmers, it also binds them to exploitative arrangements where they are forced to sell at lower prices.

Friends and Relatives

Role: Credit from friends and relatives is informal and based on mutual trust. This source is especially important for small farmers who may not have access to formal credit. While it may not charge interest, the amount of credit available is often small and irregular.

2. Flow of Agricultural Credit

The flow of agricultural credit in India has expanded over the years due to policy interventions and an increasing focus on financial inclusion. However, the distribution of credit remains skewed, and small and marginal farmers often face challenges in accessing formal credit.

a) Short-Term and Long-Term Credit

Short-term credit: This type of credit is used primarily for seasonal agricultural operations such as the purchase of seeds, fertilizers, and other inputs. Short-term loans are generally repaid within a year.
Long-term credit: This is used for capital investments such as the purchase of tractors, irrigation equipment, and infrastructure development. Long-term credit is typically repaid over several years.

b) Trends in Agricultural Credit

Increasing flow of credit: Over the past few decades, the government has consistently increased the target for agricultural credit flow. For instance, in 2022-2023, the government set an agricultural credit target of ₹18.5 lakh crore, up from ₹16.5 lakh crore in 2021-2022.
Inequality in distribution: Despite the rising targets, a significant portion of the credit goes to medium and large farmers, who have better access to formal credit due to land ownership and established banking relationships. Small and marginal farmers often face challenges such as the inability to provide collateral, poor credit history, and lack of financial literacy.

c) Government Initiatives to Enhance Credit Flow

Interest Subvention Scheme (ISS): The government provides interest subsidies to farmers who take short-term loans for crop production, reducing the effective interest rate to as low as 4% per annum. This scheme is intended to reduce the burden of interest payments on farmers.
Pradhan Mantri Fasal Bima Yojana (PMFBY): The PMFBY scheme provides crop insurance to farmers, safeguarding them against crop failures due to natural disasters. This reduces the risk associated with agricultural credit, making it easier for farmers to access loans.
Agriculture Infrastructure Fund (AIF): This scheme provides medium and long-term credit to farmers and farmer groups for developing post-harvest infrastructure such as warehouses, cold storage, and processing units.
Doubling Farmers’ Income: The government’s mission to double farmers’ income by 2022-2023 includes improving access to credit as a key component, particularly through digitalization, mobile banking, and expanding the Kisan Credit Card (KCC) network.

3. Challenges in Agricultural Credit Flow

Access to credit for small and marginal farmers: Small farmers often lack the collateral and documentation required to access formal loans, resulting in a reliance on non-institutional credit at higher interest rates.
Regional disparities: The flow of agricultural credit is uneven across regions, with states like Punjab, Haryana, and Maharashtra receiving a higher share of institutional credit due to better infrastructure and banking penetration. In contrast, states like Bihar, Jharkhand, and Odisha are underserved.
High indebtedness: Many farmers, particularly those in drought-prone areas, find it difficult to repay their loans, leading to a cycle of indebtedness. This is exacerbated by crop failures, market fluctuations, and lack of alternative income sources.

Conclusion:

The agricultural credit structure in India is a multi-tiered system designed to provide farmers with access to financial resources for crop production, infrastructure development, and other farming activities. While institutional sources like commercial banks, cooperative banks, and RRBs play a crucial role in the flow of credit, non-institutional sources such as moneylenders still dominate in some rural areas. The government has taken several measures to enhance credit flow, including interest subvention, crop insurance, and financial inclusion schemes. However, challenges such as unequal access, regional disparities, and indebtedness persist, requiring further reforms to ensure that small and marginal farmers benefit from the formal credit system.