In this article we will discuss about the institutional and non-institutional agencies of rural credit in India.

Institutional Agencies:

(1) Government:

In India, the Government has been providing loans to agriculturists under the Land Improvement Act, 1883 and the Agriculturists Loans Act of 1884. Since Independence, Government has also been giving loans under the schemes like Grow More Food as well as the schemes for the rehabilitation of displaced persons from Pakistan. Many of these loans are called Taccavi loans. Such loans are generally given whenever there is a flood or famine in the country. There have been many defects in the distribution of loans by the Government.

These are:


(a) Inadequacy of Amount:

It is noticed that the loans given for the purchase of livestock or cattle are only Rs.200 when the amount required may be Rs.1000. In shorty, the distribution of these loans is such as to ensure the satisfaction of the maximum number of cultivators. Hence it is inadequate.

(b) Un-quality of Distribution:

The distribution of loans is very unequal and it is based more towards larger farmers. For instance, according to the AIRCS, the large farmer borrowed 60% in contrast to only 30% borrowed by the medium-farmers and only 10% borrowed by the small-farmers.


(c) Inappropriateness of the Basis of Security:

The Government generally demands immovable property like land as security from the borrowers. Thus, the loan given on the security of immovable properties ranged between 75% to 100% of the total loans given by the Government in 1951-52.

(d) Inconvenience of Time:

The delay in the sanction of loans has been a regular feature. Very often illegal gratifications are required to be made for obtaining the loans. The loans sanctioned are at the end of the year, i.., by 31st March every year. “Delay which was the normal drawback of taccavi in the olden days was replaced by the opposite evil of haste.”


(e) Inefficient Supervision:

The supervision for productive use of the taccavi loans is inefficient. This may be obvious from the fact that in one case, loans were sanctioned for the sinking of wells. The Government subsidised the scheme of sinking of wells by 50% i.e. by sharing about Rs.1000 out of the expenses of Rs.2000 per well. One of the conditions of the loan was an inspection by a Government official before distributing the amounts. The person who went to inspect the well had no knowledge of water levels below the surface, the character of land, etc.

(f) Lack of Co-ordination:

A number of departments of the Government are concerned with the sanctioning of different types of loans. For instance, the agricultural loans and the land improvement loans were sanctioned by one department; the seed loans and the cattle purchase loans by another; the co-operative loans were given by still another department.

There was no co-ordination between all these departments of the Government. No single department had been enquiring about the particulars of the borrowers from any other department. The result was that many unscrupulous persons managed to borrow money from more than one department of the Government.

(2) Co-Operative Credit Societies:

The co-operative societies play a negligible role in providing credit to the farmers, because they give only 3.1% of the total requirement of credit to the farmers. However, in 1961 to the farmers. However, in 1961-62, they contributed 15.5% of the total rural credit. During 1977-78 the cooperatives provided short and medium- term credit amounting to Rs. 982 crores and long-term credit of Rs.212 crores. Short term and medium term credit is provided by agricultural credit co-operatives which numbered 1,7400 in 1977-78 and had a membership of 3.7 crores persons.

The long-term credit is provided by land development banks. In 1977-78, there were 20 Central Land Development Banks and 900 Primary Land Development Banks. The contribution of co-operatives to agricultural credit is yet far from adequate, being hardly 40% of the total requirements. Besides, there are a number of defects in the working of the co-operative.

These may be briefly noted as follows:


(a) Inadequate Coverage:

The co-operative societies cover a negligible percentage of the people of a village as its members.

(b) Inadequacy of Finance:

The finance provided by the co-operative is woefully inadequate.


(c) Resources:

The resources of the societies, such as capital, reserve fund and deposits are poor. Therefore, they have to depend on borrowing from others.

(d) Only Short-term Loans:

These societies neglect the medium-term finance required by the farmers.


(e) Delay:

The granting of loans takes a long time and there by defeats its purpose because the cultivators apply for loans only when they want the money badly.

(f) Unproductive Loans:

Loans are not related to productive purpose and are after given for undeserving purposes.

(g) Collateral:

Most of the societies insist on collateral security like land etc. Thus they debar the tenants and landless labourers from getting the benefits.


(h) Over-dues:

Over-dues or outstanding loans are very heavy and this further reduces the resources of the societies.

(i) Switch-overs:

Many times, the members repay their old loans by borrowing a new loan from the societies.

(j) Favouritism:

The managing committees of the societies consist mainly of the rich people. These people favour their friends and relatives while giving loans.


(k) Management:

The supervision of the societies is not systematic. It is generally in the hands of the rich influential people of the villages. The entire work of management is left to honorary secretaries who are over­worked and under-paid. The staff of the societies is not only inadequate and ill-paid but it is also ill-trained.

(l) Loans to Big Farmers:

The co-operative societies are mostly used by large farmers. The average borrowing from the co-operatives per family in the case of big cultivators is Rs.21/- as compared to only Rs,5/- for the medium-cultivators and only Rs.2/- for the small cultivators,

(m) Losses:

A large number of societies suffer losses and many others are dormant or defunct.


(3) Land Mortgage Banks:

As the co-operative societies do not provide long-term loans, such loans are provided by the land mortgage banks. They are called land mortgage banks because they give .loans on the security of land which is mortgaged to the societies.

These societies are also ineffective for a number of reasons, which are as follows:

(a) The number of such banks is negligible.

(b) These banks are concentrated in a few States. For instance 45% of the total number of such banks are located in the State of Tamil Nadu. Also, half of the other States of India do not have any such banks.

(c) The resources of these banks are poor. The debentures of banks, in spite of the State guarantee, are not popular.


(d) It is necessary that the loans given by such banks should be repayable instalments which are flexible in nature. In practice, however, the repayment terms were very rigid. Loans are required to be repaid in equal instalments within a period of 15 to 30 years.

(e) Most of the loans taken from these banks, are used for unproductive purposes.

(f) These banks mostly cater to the requirement of the richer agriculturists and neglect the smaller and poorer agriculturists.

(g) These banks do not “have sufficiently trained staff for execution of loans.

(h) There is hardly any co-ordination in the activities of the central and mortgage banks and the State co-operative banks.

Hence the Committee rightly concluded that the land mortgage banking system “raise inadequate funds in a manner ill-related to demand and usually lends them in a manner uncoordinated with development, acts as if prior debts, and not production, had prior claim on its attention, reaches mainly the large cultivator and reaches him late,”

(4) Commercial Banks:

The share of commercial banks is the lowest in providing agricultural finance. In 1951 they provided only 0.9% of the total requirements of rural credit while in 1961-62, they supplied only 0.6% of the total credit. The commercial banks developed mostly in the urban industrialised areas of the country and ignored the agricultural areas. They generally helped trade and industry and neglected agriculture.

A large part of the loans given for agricultural purposes goes to the large rubber and tea plantations in the country. According to the survey of bank, advances carried out by the Reserve Bank in March 1966, scheduled, commercial banks supplied nearly 0.2% of the total rural credit to agriculture.

The recent policy of Reserve Bank is to encourage banks to give more credit to agriculture. It was with that idea that ‘Social Control of ‘Banks’ was introduced by the Government. The implications of these moves are that soon commercial bank will emerge as an important institutional agency for purveyance of rural credit.

A welcome change in the attitude of commercial banks towards farm finance is now noticeable, particulary since the nationalisation of 14 major Indian joint-stock banks in July 1969. As a result of this nationalisation a large and free flow of bank funds may be expected towards farm finance.

From June 1969 to the end of June 1977, commercial banks’ direct assistance to agriculture recorded a rise from Rs. 27 crores in the previous year to about Rs. 378 crores. Thus in the first 8 years of nationalisation direct finance to agriculture increased by more than 14 times.

In fact, a synthesis of commercial banks and the co-operative Banks can prove very useful. The co-operatives can better judge the credit worthiness and fix credit limits and the commercial banks are in a better position to mobilise savings.

Non-Institutional Agencies:

1. Relatives:

The loans taken by farmers from their relatives amounted to 14.2% of their total requirements of rural credit in 1951-52 and 8.8% in 1961-62. By definition, all these loans are free of interest. Their terms of repayment are also more liberal.

2. Moneylenders (Professional and Agricultural):

The moneylenders pro­vided 697% of the total requirements of rural credit in 1951-52 and 49.2% in 1961-62 and 279% in 1971-72. The great importance of the money-lenders has been due to the failure of other agencies. As compared to the institutional agencies the money-lender enjoys a number of advantages.

These advantages may be summarised as follows:

(a) He has a perfect knowledge of the character and the repaying capacity of the borrowers,

(b) He has a firm hold on the persons to whom he lends the money. Socially, the farmer enjoys a lower status than a money-lender. If a borrower fails to repay, he loses the local prestige because of the disapproval of the money-lender and a variety of other social sanctions used by the money-lender.

There are also a number of economic considerations. The money-lender may withhold the sanction of further credit in future. The money-lender may act through the trader to recover his dues from the cultivator. Very often, the money-lender is himself a trader or a landlord so that his task is still easier,

(c) His ability to hand over the money promptly. Because of these advantages, lie has a virtual monopoly of rural credit. In most of the cases, this is the only agency of credit available to the cultivator.

There are a number of malpractices adopted by money-lenders whilst giving loans such as the rates of interest charged are exhorbitant. In some cases it is as high as 50% to 75% per year, apart from other types of payments in kind.

Some of the other questionable practices of money-lenders are:

(i) payment of interest in advance,

(ii) demand for a present for opening the nurse while giving the loans, known as girah kholai (purse-opening),

(iii) taking of a thumb impression on a blank paper with a view to inserting any arbitrary amount at a later date, if the debtor becomes irregular in the payment of interest,

(iv) general manipulation of the accounts to the disadvantage of the debtor,

(v) insertion in the written documents, sums considerably in excess of the actual amount lent,

(vi) taking of conditional sale deeds in order to provide against the possible evasion of the payment by the debtor.

It is true that the legislations for prevention of malpractices by the money­lenders have been passed in various States. But in practice, these laws have not been implemented properly. The provision of law regarding licences, rate of interest, records of transactions are often evaded.

3. Others (like Traders, Commission Agents, Landlords, etc.):

The share of the others was 8.8% of the total rural credit in 1951-52 and it rose to 22.3% in 1961-62 which fell to 14.3% in 1971-72. The share of landlords is declining particularly due to the abolition of zamindari from thecountry. The traders advance loans against future. Drop at a low rate of interest but pay very low price for the crop resulting in loss to the farmers.