AGRICULTURE FINANCE

ABM 502 Lecture 6

A mention in NAP on Ag credit
Agriculture policy talks about easy availability of credit
and other inputs

Progressive institutionalization of rural and farm credit
will be continued for providing timely and adequate
credit to farmers.

The rural credit institutions will be geared to promote
savings, investments and risk management.

Particular attention will be paid to removal of
distortions in the priority sector lending by commercial
banks for agriculture and rural sectors.

Special measures will be taken for revamping of
cooperatives to remove institutional and financial
weaknesses and evolving simplified procedure for
sanction and disbursement of agriculture credit.

The endeavour will be to ensure distribution equity in
the disbursement of credit. Micro-credit will be
promoted as an effective tool for alleviating poverty.

Self Help Group Bank linkage system, suited to
Indian rural sector, will be developed as a
supplementary mechanism for bringing the rural poor
into the formal banking system, thereby improving
banks outreach and the credit flows to the poor in an
effective and sustainable manner
Need for agriculture credit
Need for land and its improvements
Need of agricultural implements, machines, and
livestock
Requisite inputs such as seed, irrigation facilities,
fertilisers, pesticides, oil, cement, etc.
Need of food, clothing, and shelter to maintain the
farmer and his family during the period of
production
To meet emergency needs
Basis of credit requirement
Production and Equipment credit

Settlement and Development Credit

Credit for unforeseen circumstances

Classification of agricultural credit
Based on purpose
For agricultural purpose- for purchase of seeds,
manure, fertilizer, irrigation, hire charges,
purchase of livestock, repair of equipments
For non farm business purpose-purchase,
construction , and repair of building
For meeting family expenditure- for purchasing
household goods, clothing, medicine
Other purpose- purchase of building and
ornaments, shares of cooperative societies,
deposits with cooperative societies, private
money lenders and traders, and repayment of
old debts.


Classification of agricultural credit
Duration based
Short term credit-load needed normally for less than
15 months to meet current expenses of cultivation,
supporting family in those years when the crop have
not been good. These types of loans are normally
repaid out of the sale proceeds of the crops.
Medium term credit- which are required for 15
months to 5 years for the purpose of making some
improvements on land, buying cattle, agricultural
implements, fencing, plantation, pig breeding,
sheep rearing etc.
Long term credit-repayment in 5 years or more.
Permanent improvement on land

Classification of agricultural credit
Security based
Farm Mortagage credit: secured against land by
means mortgage of land

Chattel and collateral credit: in the former , the loan
is given on the security of farmers livestock, crops ,
or warehouse receipts. In the latter case, on the
security of other kind of property, such as shares,
bonds and insurance policies.

Personal credit: loan is advanced on promissory pr
persoanl notes of the farmer with or without
anothers security or gurantee
Requisites of a good agricultural
credit system
Should be granted for a sufficient long time
Must be available at rates comparable to those
paid by other industries
Must be available at short notice
Should help in the effective growth and
development of beneficiaries
Should be managed by people who are special
trained and have actual banking experience
Should be an effective alternative to private
agencies of credit
Must be adequate for the purpose
Should safeguard the interests of farmer

NSSO 59th Round Survey
Results
51.4% of farmer households are financially excluded
from both formal/ informal sources.
Of the total farmer households, only 27% access
formal sources of credit; one third of this group also
borrowed from non-formal sources.
Overall, 73% of farmer households have no access to
formal sources of credit.
Across regions, financial exclusion is more acute in
Central, Eastern and North-Eastern regions. All three
regions together accounted for 64% of all financially
excluded farmer households in the country. Overall
indebtedness to formal sources of finance of these
three regions accounted for only 19.66%.

However, over the period of five decades, there has been overall improvement in
access to formal sources
4
of credit by the rural households (Chart 1).

World Bank Financial Access Survey
From the table 1 given below, it would be observed that in our
country, financial exclusion measured in terms of bank branch
density, ATM density, bank credit to GDP and bank deposits to GDP
is quite low as compared with most of developing countries in the
world.



Due to RBIs concerted efforts since 2005, the number of branches of Scheduled
Commercial Banks increased manifold from 68,681 in March 2006 to 1,02,343 in
March 2013, spread across length and breadth of the country (Chart).

In rural areas, the number of branches increased from 30,572 to 37,953 during
March 2006 to March 2013. As compared with rural areas, number of branches in
semi-urban areas increased more rapidly.
Villages Covered
The number of banking outlets in villages
with population more than 2000 as well
as less than 2000 increased consistently
since March 2010
Total Bank Outlets (including
RRBs)
Total number of banking outlets in villages
increased from 67,694 in March 2010 to 2,68,454
in March 2013 (increased around 4 times during
the period of three years). Of total branches,
banking outlets through BCs increased from
34,174 to 2,21,341 during the same period
(increased around 6.5 times).

Kisan Credit Cards (KCC)
Issued
Agriculture Advances:
While the number of farmers accounts with SCBs
increased from just 63 lakh in March 2006 to 176
lakh in March 2010
17
; in terms of credit, farmers
with land holdings above 5 acre accounted for
largest share of 44% of total bank credit. To
achieve meaningful financial inclusion, banks
should give priority for small farmers as compared
to large farmers while sanctioning credit

Rural indebtedness- causes
Ancestral debt
Fragmentation of holdings
Vagaries of the climate
Illiteracy of the cultivator
Low income of the cultivator
Vicious moneylender
High rates of interest
Impractical borrowings
Litigation
Absence of marketing facilities
Why commercial banks should
finance agri on priority
Adoption of new technology in agriculture
Rural development
Need for credit
Lending policies
Weaknesses of commercial
banks
Branch expansion
Lending operations
Problem of recovery
Unskilled staff
High cost
Value added services
Small size accounts
References
http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/MFI
101213FS.pdf
http://www.iba.org.in/events/flowofcreditcover.pdf
http://www.epw.in/system/files/pdf/2006_41/11/Ag
ricultural_Credit_in_India.pdf