Problems of Agricultural Credit in India with Suggested Remedies!

Agricultural Credit:

An average Indian farmer, who has to work on an uneconomic holding’, using traditional methods of cultivation and being exposed to the risks of a poor agricultural season is almost always in debt. He is a perennial debtor.

Once the farmer falls into debt due to crop failure or low prices of crops or malpractices of moneylenders he can never come out of it. In fact, large part of the liabilities of farmers is ‘ancestral debt’. Thus, along with his landed property, he passes on his debt to the next generation.

There are four main causes of rural indebted­ness in India:


(i) low earning power of the bor­rower,

(ii) use of loan for unproductive purposes,

(iii) very high rate of interest charged by the vil­lage moneylender and

(iv) the manipulation of accounts by the lenders.


In a few cases, the bad habits of the farmers (such as gambling, drinking, etc.) are responsible for his burden of ‘unproductive’ debt. However, in most cases, the cause of the debt may be some expensive social ceremony which the farmer was perhaps forced to “arrange for fear of a social boy­cott”.

Need for Finance:

Finance is required by farmers not only for the production and marketing of crops but also to keep a stagnant agricultural economy alive. Most Indian farmers live near the brink of starvation. A bad monsoon, a poor harvest, an accident or ill­ness in the family forces him to approach the mon­eylender for a loan. In India, there is the prepon­derance of such ‘distress’ or unproductive loans. Agricultural finance in India is not just one re­quirement of the agricultural business but a symp­tom of the distress prevailing among the majority of the farmers.

Rural credit includes not only credit provided to farmers but also credit extended to artisans, owners of small and medium industries in rural areas, small transport operators and so on. Two main sources of rural credit are private and insti­tutional. The former includes private moneylend­ers, traders and commission agencies, relatives and- landlords.

The sources of institutional credit are rural co-operatives, commercial banks, particularly the State Bank of India (SBI). And, with the set­ting up of a specialised institution called the Na­tional Bank for Agricultural and Rural Develop­ment (NABARD) the Agricultural Refinance and Development Corporation (ARDC) has ceased to exist. Up to 1982 it was responsible for extending agricultural finance under guidance of the Reserve Bank of India.


It may also be noted that the short- and medium-term credit requirements of the farmers is met by indigenous bankers or village moneylenders, co-operative credit societies and commercial banks. Long-term credit needs are met by land development banks and NABARD.

The principal aim of institutional credit is to replace the widely prevalent money-lending at a very high rate of interest. Available data show that the rural credit institutions have succeeded to a considerable extent in achieving this aim.

Institutional Farm Finance:

The need for institutional credit has been felt because of the inherent defects of private agen­cies.

Five main defects of the system of private credit are the following:

1. It is highly exploitative in character be­cause of the inherent profit motive.

2. Since such credit is provided largely for unproductive purposes the rate of interest charged is very high.

3. Such credit is not necessarily directed to­ward needy persons or desired channels.

4. Such credit is provided for short periods of time and at high rates of interest and cannot, therefore, be utilised for land development or long- term improvement of agriculture.

5. Institutional credit is not linked with other non-farm services such as marketing and process­ing and warehousing.


By contrast, institutional credit is basically un-exploitive in character. It is largely directed to­wards raising agricultural productivity so that the income of the farmer increases sufficiently and he becomes self-sufficient. The rate of interest is not only low but varies from case to case. Different rates of interest are charged for different types of loans and different categories of farmers.

Institutional agencies also draw a clear-cut distinction between short-term credit and long- term credit. Moreover, they recognise the organic link between credit and other needs of the farmers and seek to achieve an integration of credit with such needs.

Farmers not only need credit but also guidance in adopting improved methods of culti­vation. Thus, it is necessary to provide such guid­ance and extension services along with credit. They must be taught how to use quality seeds, fertilis­ers, pesticides, etc. and also how to grow crops.

They must also be provided marketing assistance so that they can obtain the best possible return from their produce. Only institutions like co-operative societies, commercial banks, etc. can pro­vide such guidance, not the usurious moneylend­ers and greedy commission agents. So it is now necessary to make a brief review of different insti­tutional agencies of rural credit.



Rural indebtedness is also likely to have some undesirable social consequences. Due to ever-­growing debt there emerges in the rural economy of India a class of landless labourers and tenants. Consequently independent or self-sufficient farm­ers gradually lose their identity. The landless work­ers have nothing to offer as security in order to obtain loans from moneylenders, except their la­bour power.

Consequently, they become bonded labourers. This creates discontent among them and adds to rural tensions. In fact, the acquisition of land by the traders and moneylenders and the con­sequent deprivation of the poor farmers of their meager landed property was the root cause of the Naxalite movement, which assumed serious pro­portions in West Bengal, Orissa and Andhra Pradesh in the late 1960s and the 1970s. Thus there is no use denying the problem of rural indebted­ness. Sooner the problem is removed from its roots the better for India’s rural economy.

Suggested Remedies:

Since the problem of rural indebtedness has two major dimensions, to solve the problem we have to adopt a two-fold strategy. Since the mag­nitude of debt is quite high, steps may be taken to cancel old debts. There is a strong case for reduc­tion of ancestral debt and even for their liquida­tion.

This can be done by State Governments by passing Insolvency Acts. It may be noted that the Government decided in 1990 to write off Rs. 14,000 crores of loans outstanding from farmers Up to a maximum of Rs. 10,000 crores. This was considered necessary because 80% of India’s popu­lation were farmers and farm workers. Earlier in some States moratorium had been declared on the recovery of debt by moneylenders from farmers, rural artisans and landless workers as per the 20- point Programme.


Secondly, it is to be ensured that the quan­tum of fresh borrowing is reduced to the minimum, keeping in view the repayment capacity of farm­ers. It is equally important to ensure that new bor­rowing is strictly for productive purposes and not for meeting consumption needs. It is, however, dif­ficult for the Government to ensure this in prac­tice.

Only through the spread of education and propaganda among farmers it is possible to check the volume of loans made for unproductive pur­poses. However, in LDCs like India, arrangement may also be made for providing such loans on a modest scale.

As a subsidiary measure, control of the ac­tivities of moneylenders is also necessary. This has been done by some States where sale of land to moneylenders has been prohibited by law.

It is important to note that the abolition of bonded labour and liquidation of rural indebted­ness are the two major aspects of the 20-point Pro­gramme. The system of bonded labour was abol­ished by an Act of Parliament in 1976. However, it seemed that the only answer to the present multi- agency credit system is implementing a new multi­purpose system with efficient management.

This will have to be so devised as to meet the need for consumption loan of the farmers so that they are not exploited by being paid low wages or low re­turns on their products. Moreover, the RRBs, if properly managed, can go a long way in solving the problem of rural indebtedness in an effective manner.


Due to extension of institutional credit fa­cilities since 1950-51 the monopoly position of the village moneylender has been challenged. Due to progressive institutionalization 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 such needs. But the Agricultural Credit Review Committee headed by Prof. A. M. Khusro, in its report submitted on August 1989, commented that despite the disappearance of dual financial sys­tem, moneylenders are still operating their busi­ness in rural India.

One recent study of the Reserve Bank of India admitted that rural households still rely on informal credit markets for 60 to 70% of their credit needs even though interest rates charged are typically over 30%. This is due to apathy of State-owned commercial banks in pro­viding credit to poor peasants. Actually, big land­lords are capable of obtaining more loans and advances from various institutions in their own favour at the expense of the poor farm­ers.

Despite huge increase in overall agricultural credit, there is a serious problem of over-dues which has been inhibiting credit expansion on the one hand and economic viability of the lending insti­tutions, mainly the co-operatives and regional ru­ral banks on the other. The waiver of agricultural loans to the tune of Rs. 10,000 crores in 1990-91 has virtually stopped the credit cycle. If this .prac­tice is continued in the future too rural credit ex­pansion will take a back seat. But, if more and more emphasis is to be given to the agricultural sector, lending institutions will be under more and more pressure.

Above all, small and marginal farmers still remain unworthy borrowers in the banking par­lance, though it was hoped at the time of nation­alisation that these banks would take care of the credit needs of the farmers. Their dependence on informal markets after 50 years of planning does not augur well. The quantitative expansion of in­stitutional sources hide all these facts. From the qualitative angle, their performance is subject to serious scrutiny.