AGRICULTURAL FINANCE:

NATURE & SCOPE

 Finance

• Broad term & describes two related activities

– Study of how money is managed
– The actual process of acquiring needed fund
 AGRICULTURAL FINANCE
• Finance in agriculture is as important as
development of technologies.
• Technical inputs can be purchased & used by farmers
only if sufficient money (funds) is available with
farmers.
• Most of the times farmers suffer from the problem of
inadequate financial state.
• This situation leads to borrowing from an easy &
comfortable source
Definition
• means studying, examining & analyzing the financial
aspects pertaining to farm business
– financial aspects include money matters relating to prodn
of agrl products & their disposal.
• study of financing & liquidity services as well as
credit provision to farm borrowers
• Study of those financial intermediaries who provide
loan funds to agriculture & the financial markets in
which these intermediaries obtain their loanable
funds.
• Murray (1953) - an economic study of borrowing
funds by farmers, the organization & operation of
farm lending agencies & of society’s interest in credit
for agriculture

• Tandon & Dhondyal (1962) - as a branch of

agricultural economics, which deals with the
provision & management of bank services & financial
resources related to individual farm units
 HISTORY OF FINANCING AGRICULTURE IN INDIA
• Farmers suffered from the problem of inadequate
financial state.
• This situation lead to borrowing from an easy &
comfortable source
• Professional money lenders were the only source of
credit to agriculture till 1935.
• They used to charge unduly exorbitant interest rates &
follow serious practices while giving loans & recovering
them.
• Farmers- heavily burdened with debts & many of them
are left with perpetuated debts.
• There were widespread discontents among farmers
against these practices- instances of riots also
• With the passing of RBI Act 1934- District Central
Cooperative Banks & Land Development Banks-
improvements in agricultural credit.
• Large-scale credit -reasonable interest rates at easy
terms, both in terms of granting loans & recovery of
them
• From 1930’s, Cooperative banks were playing a
predominant role in financing agriculture
• 1969- 14 major commercial banks were nationalized
• After nationalization, it was made mandatory for these
banks to provide finance to agriculture as a priority
sector.
• The procedures & amount of loans for various
purposes have been standardized.
 Nature & Scope of AF
• studied at both micro & macro level.
Micro Macro

• FM of an individual farm • different sources of raising

units
• how the ind farmer
considers various sources of
credit, quantum of credit to
be borrowed from each
source & how he allocates
the same among the
alternative uses with in the
farm
funds for agriculture as a
whole in the economy.
• also concerned with the
lending procedure, rules,
regulations, monitoring &
controlling of different
agricultural credit
institutions
• related to financing of
agriculture at aggregate
level.
 SIGNIFICANCE OF AGRICULTURAL FINANCE
1. Essential & significant in the agro– socioeconomic growth of
the country.
2. Plays a catalytic role in strengthening the farm business &
augmenting the productivity of scarce resources.
3. Helps in purchase & use of new technological inputs - helps to
increase the agricultural productivity.
4. Increase farm income.
5. AF is required to create the supporting infrastructure for
acceptance of new technology.
6. Agricultural investment is wanted to carry out micro & macro
irrigation projects, rural electrification, installation of compost
& pesticide plants, execution of agricultural promotional
programmes & poverty alleviation programmes in the country.
 Sources of Agricultural Finance

Non- Institutional
institutional

- Moneylenders - Cooperatives
- Friends/ Relatives - Scheduled Commercial
- Traders Banks
- Commission agents - Regional Rural Banks (RRBs)
- Landlords
 AGRICULTURAL CREDIT
• Loan
• Credit / loan is certain amount of money provided
for certain purpose on certain conditions with some
interest, which can be repaid sooner (or) later.
• “ability to borrow” & “willingness to borrow” - ability
to command other peoples’ capital in return for a
promise to repay at some specified time in future.
• It can also be regarded as an economic good to be
produced, managed & marketed.
 Need for Agricultural Credit

1. Purchase of new inputs

2. Purchase of implements
3. Better management of risk
4. Permanent improvement in land
5. Better marketing of crops
6. Facing crises
7. Balanced development
 CLASSIFICATION OF CREDIT

1. On the basis of time

a) Short-Term
• generally advanced for meeting annual recurring
purchases such as, seed, feed, fertilizers, hired
labour expenses, pesticides, weedicides & hired
machinery charges
• seasonal loans/crop loans/production loans
• These are expected to be repaid after the harvest
• Repayment- 1 year or at the most 18 months.
b) Medium-term loans
• advanced for moderately longer lived assets such as
machinery, diesel engine, wells, irrigation structure,
threshers, shelters, crushers, draught & milch animals,
dairy/poultry sheds, etc.,
• Done for improvements in field- returns accumulate from
spread in farm assets increase over more than one
production period.
• Repayment - 15 months to 5 years
c) Long-term loans
• heavy machinery, land & its reclamation, erecting of farm
buildings, construction of permanent drainage or
irrigation system
• Repayment - 5 to 15 years or even upto 20 years.
II. Based on Purpose
i. Production loans/ Crop loans
ii. Investment loans
iii. Marketing loans
iv. Consumption loans

III. Lender classification

a) Institutional Credit
b) Non-Institutional Credit
IV. Based on Security
a) Secured loans- against the security of tangible
personal property - land, livestock & other capital
assets, i.e., medium & long term loans.
– Personal security- promissory note
– Collateral Security – movable property- LIC bonds, FD
bonds, warehouse receipts, machinery, livestock
– Chattel loans- pawn-brokers – jewelry
– Mortgage- immovable properties - land, farm buildings-
mortgagor (borrower) & mortgagee (banker)
- Simple & equitable mortgage
– Hypothecated loans- legal ownership of the asset financed
remains with the lender despite physical possession being
with the borrowers- tractor, machinery & equipments.
b) Unsecured loan- short-term crop loans
V. Based on borrower
• production or business activity as well as size of
business) such as crop farmers, dairy farmers,
poultry farmers, fisherman, rural artisans etc. or
• agricultural labourers,
• marginal/small/ medium/large farmers, hill farmers
or tribal farmers etc.
VI. Based on liquidity

a) Self-liquidating loans: They generate income

immediately & are to be paid within one year or
after the completion of one crop season. Ex: crop
loans.
b) Partially -liquidating: They will take some time to
generate income & can be repaid in 2-5 years or
more, based on the economic activity for which the
loan was taken. Ex: Dairy loans, tractor loans,
orchard loans etc.
VIII. Based on contact

a) Direct Loans: Loans extended to the farmers

directly - Crop loans.
b) Indirect loans: Loans given to the agro-based firms
like fertilizer & pesticide industries, which are
indirectly beneficial to the farmers
VIII. Based on approach

a) Individual approach
b) Area approach
c) DRI approach- 1972 to financially assist chosen low
income groups
 5 C’s of Credit
1) Character
• include borrower’s moral qualities like honesty,
integrity, sense of responsibility and trust
worthiness.
• If a person has been borrowing the loan and also
timely repaying the debt, it reflects that he possesses
ideal credit character and vice-versa.
• Therefore both mental and moral character of the
borrowers will be examined while advancing a loan.
• Generally people with good mental and moral
character will have good credit character as well.
2. Capacity:
• It means capacity of an individual borrower to repay
the loans when they fall due.
• It largely depends upon the income obtained from
the farm.
3. Capital:
• Capital indicates the availability of money with the
farmer - borrower.
• When his capacity and character are proved to be
inadequate, the capital will be considered.
• It represents the net worth of the farmer.
• It is related to the repayment capacity and risk
bearing ability of the farmer - borrower.
4. Condition:
• It refers to the conditions needed for obtaining loan
from financial institutions i.e. procedure to be
followed while advancing a loan.
5. Commonsense:
• This relates to the perfect understanding between
the lender and the borrower in credit transactions.
• This is in fact prima-facie requirement in obtaining
credit by the borrower.
7 Ps of farm credit/ principles of farm
finance