5 Major Sources of Rural Credit in India

The following points will highlight the five major sources of rural credit in India.
They are: 1. Co-Operative Credit Societies 2. Land Development Banks 3.
Commercial Banks 4. Regional Rural Banks 5. The Government.
Source # 1. Co-Operative Credit Societies:
The cooperative societies are supposed to be the cheapest and most important
source of rural credit. When co-operatives were first set up it was thought that they
would be able to meet almost the entire credit needs of numerous small and medium farmers.
As a result, the moneylenders would recede to the background. But this has not
really happened. Till 1950-51 they played a passive role in the area of rural credit.
However, during the plan period the co-operative societies have made steady
progress and have succeeded to some extent in promoting thriftiness and self-help
among farmers. They have started helping the farmers in a big way. Short-term loans
issued by Primary Agricultural Credit Societies (PACs) increased from Rs. 305 crores
in 1965-66 to Rs. 5,200 crores in 1999-00. During the same period term loans issued
increased from Rs. 37 crores to Rs. 2,100 crores.
Increasing reliance has also been placed by the Government on co-operatives as the
most important set of institutions for meeting the credit needs of the farmers. Due
to the encouragement and assistance provided by the Government as also by the
NABARD, notable progress has been made by co-operatives in some States such as
Tamil Nadu, Andhra Pradesh, Karnataka, Punjab and Himachal Pradesh. Whereas the
co-operatives managed to meet hardly 3% of the credit needs of the farmers in 195051, they succeeded in meeting about 39% of the total credit needs of the farmers in
1999-00.
However, since co-operatives have not been able to meet, the entire credit needs of
the farmers the moneylenders continue to dominate the rural financial markets.
Moreover, the large farmers have derived the maximum benefits from the co-operative societies. The small farmers, for whom the cooperative movement was originally
initiated, found it increasingly difficult to meet all their credit needs through these
institutions.
Moreover, the movement is yet to take deep roots in most eastern States like Bihar,
Orissa and West Bengal, as also in Rajasthan. In most areas the unscrupulous

moneylenders, rich farmers and land-owners have worked against the movement.
Consequently, the really needy and deserving farmers have been deprived of the
benefits of co-operatives.
Source # 2. Land Development Banks:
Land development bank (formerly known as land mortgage banks) mainly provide
long-term loans to farmers against the mortgage of their lands at low rates of
interest over a period of 15 to 20 years. Farmers find borrowing from such banks
attractive if costly land improvement programmes (such as digging or deepening of
wells) are to be undertaken, or if additional land is to be acquired through outright
purchase, or if previous debts have to be repaid.
Some progress has, of course, been made by land development banks in recent
years, but their contribution is still insignificant. Hence they have not been able to
touch the root of the rural credit problem. In fact, most farmers are not even aware
of the existence or the usefulness of such banks. But the total number of such banks
set up by the State Governments and primary banks increased steadily over the
entire plan period.
ADVERTISEMENTS:
The amount of term credit distributed by LDBs was much higher, compared to the
credit disbursed by commercial banks in the initial years, but in the later years the
picture became mixed. The total amount of loan sanctioned by such banks was only
Rs. 3 crores in 1950-51. The figure crossed Rs. 1,500 crores in 1999-00. Moreover,
rich farmers were able to obtain the maximum amount of loan from such banks
because of large land holdings. Thus, small and marginal farmers have not derived
much benefit from such banks.
Source # 3. Commercial Banks:
Before nationalisation of top 14 commercial banks in June 1969, they had an urban
bias. They were mainly accepting deposits from the urban people and making loans
to trade and industry. Agriculture and rural industries were neglected by them. Since
agriculture by its very nature was a risky venture, private commercial banks turned
away from rural areas.
Other factors obstructing flow of bank credit to agriculture were :
i. Inability of farmers to provide security,

ADVERTISEMENTS:
ii. Difficulties in recovering loans,
iii. Lack of clear-cut and up-to-date accounting of agricultural transactions,
iv. The small amount of loan and.
v. The consequent high transaction cost.
However, one of the objectives of nationalisation of commercial banks was to ensure
a smooth flow of credit to agriculture and small-scale industriesthe two top
priority sectors of Indian economy.
Since the nationalisation of commercial banks in 1969 the stress has been on
expanding and strengthening the institutional structure of rural credit. However,
even today the rural areas in India are yet not properly served by banking institutions. Most commercial banks feel shy to block their funds in risky agricultural
operations.
There is very little chance of loan recovery in most cases due to high risks associated
with natural calamities. Of course, commercial banks finance the marketing of crops
by advancing funds to traders. But sometimes loan is made directly to rural borrowers. However, the quantum of such loans is very small. Of course, there has been a
distinct change in the attitudes and lending policies of commercial banks after
nationalisation.
Commercial banks now provide both direct and indirect finance to agriculture. Direct
finance is provided for short and medium terms to enable farmers carry out
agricultural operations smoothly. Indirect finance is provided in the form of advances
for the purchase of inputs like seeds and fertilisers. Such loan is also provided
through PACs.
Commercial banks not only provide assistance for agricultural operations but also for
extending credit to service units which provide infrastructural facilities such as
storing and warehousing of agricultural produce, marketing, transporting and repairing of agricultural implements.
Since the nationalisation of commercial banks, there has occurred a rapid expansion
of their rural branches. The number of rural branches has increased from 1,832 in
June 1969 to 37,500 in March 1999, constituting 56.8% of the total branches of
commercial banks. During this period the amount of outstanding advances to agricul-

ture increased from Rs. 162 crores to Rs. 31,167 crores. However, despite the vast
increase in short- term loans by commercial banks, the PACs continued to dominate
the scene.
Commercial banks also provide finance to the FCI, and the State Government
agencies for food procurement operations. Banks also provide credit for storing and
distribution of agricultural inputs. They are implementing the village adoption
scheme, originally initiated by the SBI, to look into credit and other needs of the
farmers.
Farmers also get commercial bank assistance under various schemes as Small
Farmers Development Agencies (SFDAs) and Marginal Farmers and Agricultural
Labourers (MFAL). Commercial banks have also sponsored regional rural banks as per
the 20-point Programme with a view to extending credit to small and marginal
farmers and protect them from the exploitation of moneylenders.
Source # 4. Regional Rural Banks:
In 1975, the Government set up a network of regional rural banks to look into the
special needs of small and marginal farmers, landless workers, rural artisans and the
rural poor in general. The unique feature of the 196 RRBs operating since September
1990 is that they cater exclusively to the weaker sections of the rural community
through nearly 14,800 branches spread over India.
Almost all the tribal districts are covered. The RRBs have been lending around Rs. 400
per annum on an average. As much as 90% of the branches of RRBs have been
opened in hitherto unbanked areas and most of the advances (about 92%) are
granted to weaker sections, the average size of the advance per account being just
Rs. 2,000. However, the amount of credit disbursed by RRBs was very small compared to the loans issued by other institutional agencies.
Source # 5. The Government:
The Government has also provided short-term and long-term loans to farmers in
times of emergency such as floods or famine. Such loans are known as Taccavi loans.
Such loans are offered at a concessional rate of interest (6%) and the mode of
repayment is also very convenient. It can be repaid in several installments at the time
of payment of land tax. However, such loans have not assumed significance over the
years.

In fact, the contribution of the Government in total agricultural loan had fallen from
3.3% in 1951-52 to 2.6% in 1961-62. The total amount of short-term loans to
agriculture by State Governments exceeded Rs. 1,000 crores in March 1999. Various
factors have accounted for this unsatisfactory state of such loans, viz., delays involved in getting loans sanctioned and disbursed, time wasted in making frequent
trips to government offices, itching palms of the officials who sanction the loans and
so on. These and other reasons explain why such loans have not become much
popular over the years.
Conclusion:
Due to extension of institutional credit facilities since 1950-51 the monopoly position
of the village moneylender has been challenged. Due to progressive
institutionalisation of credit, private sources now meet barely 20% of the short and
medium-term credit needs of the farmers. In other words, institutional sources meet
about 80% of the rural credit needs.
The four major sources of institutional credit are co-operatives, commercial banks,
regional rural banks and government departments. It is felt that there will be more
and more reliance on co-operative credit in future as the commercial banks, instead
of directly financing the agricultural operations, are likely to utilise the co-operative
system for extending short-term credit facilities, mainly for production purposes.