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 1950-51, 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.

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,

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 industries—the 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 agricul­ture 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.



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.