Moving forward on the journey to crack the NABARD Grade A examination requires more than just academic prowess; it demands an in-depth understanding of Economic and Social Issues (ESI) and Agriculture and Rural Development (ARD). Among the various facets of ARD, institutional financing agencies play a pivotal role in shaping the country’s financial landscape, particularly in the agricultural sector.
In both Phase 1 and Phase 2 of the NABARD exam, Agriculture and Rural Development holds considerable significance. Candidates are expected not only to comprehend but also to internalize the intricate details of this subject. The section encompasses many topics related to the nation’s financial system, emphasizing agricultural finance. Crucial to the success of aspirants is a profound grasp of the diverse institutional financing agencies that extend credit to farmers, catering to their short-term and long-term needs. This blog aims to delve into the intricate nuances of this significant ARD topic, providing comprehensive insights and aiding aspirants in their preparation journey.
As we navigate the multifaceted landscape of agricultural finance, we will focus on unraveling the complexities surrounding institutional financing agencies. By exploring their roles, functions, and impact on the agricultural sector, we aim to equip candidates with the knowledge required to confidently tackle this section of the NABARD Grade A examination.
Join us on this enlightening exploration as we dissect the core elements of institutional financing agencies, unveiling the vital connections between agricultural finance and the broader financial system. Through this comprehensive blog series, we aspire to be your guiding light in mastering the nuances of NABARD Grade A’s ARD section.
Institutional Financing Agencies
Financial institutions play a pivotal role in injecting liquidity into the market and providing individuals with essential funds in the form of loans or credit for defined periods. These loans or credits serve as indispensable resources for farmers, catering to their diverse needs across short-term, medium-term, and long-term horizons. Short-term financing addresses immediate requirements, such as purchasing seeds and fertilizers, while medium-term financing supports activities like equipment acquisition or land development.
Long-term financing, on the other hand, aids in substantial investments like infrastructure development or farm expansion. The accessibility and flexibility of funds from financial institutions empower farmers to navigate the dynamic agricultural landscape, ensuring their financial stability and fostering sustainable growth in the sector. This symbiotic relationship between farmers and financial institutions forms the bedrock of a resilient and thriving agricultural economy. Let’s take a closer look at institutional and non-institutional financing agencies for the agricultural sector
Institutional Financing Agencies for Agriculture Sector
In contemporary agriculture, institutional agricultural finance has assumed unprecedented significance. The quest for enhanced productivity and increased output necessitates the judicious use of various inputs such as fertilizers, seeds, fungicides, and insecticides. However, not everyone possesses the financial means to procure these essential resources. In this context, institutional agricultural finance is a crucial lifeline for many.
Farmers, especially those with limited resources, often rely on specific institutions to finance their agricultural needs. These institutions bridge the financial gap by providing loans or credit facilities tailored to the agricultural sector. These funds enable farmers to access the vital inputs for optimal crop cultivation. Institutional agricultural finance ensures equitable access to these critical inputs, whether acquiring high-quality seeds for improved yield, purchasing fertilizers to enrich the soil, or obtaining pesticides to protect crops from pests and diseases.
In essence, the support extended by financial institutions becomes a catalyst for agricultural development, empowering farmers to adopt modern and sustainable farming practices. As agriculture evolves, institutional finance becomes increasingly indispensable, fostering a resilient and thriving agricultural sector that contributes significantly to economic growth.
Non-Institutional and Institutional Agencies of rural credit in India
Since India’s independence, a cornerstone of the nation’s agricultural policy has been enhancing farmers’ access to institutional credit, aiming to alleviate their reliance on informal and often usurious credit sources. The government has spearheaded various initiatives to realize this objective, marking significant milestones in the evolution of rural farm credit.
Key initiatives include the endorsement of the Rural Credit Survey Committee report in 1954, the nationalization of major commercial banks in 1969 and 1980, the establishment of Regional Rural Banks in 1975, and the National Bank for Agriculture and Rural Development (NABARD) in 1982. The watershed moment of financial sector reforms in 1991 further transformed the landscape. Subsequent farm credit programs, such as the Special Agricultural Credit Plan (1994–1995), the introduction of Kisan Credit Cards (1998–1999), the Doubling Agricultural Credit Program (2004), the Agricultural Debt Waiver and Debt Relief Scheme (2008), and the Interest Subvention Scheme (2010–2011), have significantly contributed to realizing the goal of accessible and affordable credit for farmers.
Institutional sources, comprising cooperatives and commercial banks (including the State Bank of India Group and RBI), have become the bedrock of formal agricultural credit. Conversely, non-institutional sources like moneylenders, traders, commission agents, relatives, and landlords represent the informal credit sector. The dynamic interplay between these sources underscores the evolving landscape of agricultural finance in India, reflecting a concerted effort to uplift farmers and fortify the agricultural sector’s economic resilience.
Institutional Agencies of Rural Credit
Institutional agencies in agricultural finance form the backbone of India’s efforts to provide structured financial support to farmers. These agencies, including cooperatives, commercial banks, and specialized entities like NABARD, play a pivotal role in delivering institutional credit reducing farmers’ reliance on informal sources. This dynamic landscape has evolved significantly since independence, reflecting a strategic commitment to empower farmers and enhance the sustainability and productivity of the agricultural sector. Let’s take a closer look at institutional agencies.
The Government
In India, the government has historically supported agriculturists by providing loans under the Land Improvement Act of 1883 and the Agriculturists Loans Act of 1884. Post-independence, initiatives like the Grow More Food campaign and rehabilitation schemes for those displaced from Pakistan saw the implementation of schemes offering loans, commonly called Taccavi loans. Primarily disbursed during times of floods or famines, Taccavi loans were intended to be short-term financial aids for impoverished farmers, aiding in the purchase of seeds, fertilizers, equipment, and other agricultural necessities.
Introduced in the late 1950s, the concept aimed to boost crop productivity and augment the income of economically disadvantaged farmers. Despite its noble intentions, the Taccavi loan system faced challenges in execution. The program struggled to achieve its objectives as a significant portion of the benefits were availed by affluent farmers, leaving the intended beneficiaries – the economically vulnerable farmers – underserved. The failure to effectively reach the targeted demographic underscored the need for more precise and equitable financial mechanisms, prompting subsequent adjustments in agricultural finance policies to address better the unique challenges faced by small and marginalized farmers in the country.
Co-Operative Credit Societies
Cooperative credit societies stand out as a vital and economical source of rural credit in India, envisioned to address the comprehensive credit requirements of small and medium-scale farmers. Despite experiencing steady progress after their inception, cooperative societies presently contribute only 3.1% of the total credit needs of farmers. In the early 1960s, they played a more substantial role, providing 15.5% of rural credit. By 1977-78, cooperatives disbursed short and medium-term credit amounting to Rs. 982 crores and long-term credit of Rs. 212 crores.
Agricultural credit cooperatives, numbering 17,400 in 1977-78 with a membership of 3.7 crores individuals, primarily focus on providing short and medium-term credit. However, despite their efforts, cooperatives have been unable to fulfill the credit needs entirely, leaving room for moneylenders to continue exerting influence over rural economic markets. This highlights the ongoing challenges and the need for a more comprehensive and effective rural credit system to empower farmers and alleviate their dependency on informal credit sources.
Land Mortgage Banks
Land mortgage banks fill a crucial gap left by cooperative societies, specializing in providing long-term loans to farmers. These institutions derive their name from their core function—offering loans secured by land mortgaged to the banks. Farmers can avail themselves of long-term loans by pledging their land as collateral, benefiting from comparatively lower interest rates extended over an extended period, typically spanning 15 to 20 years.
These loans find application in various agricultural activities, such as land development projects, well-digging endeavors, outright land purchases, or settling previous dues. Despite their potential, the impact of land mortgage banks has been limited due to a lack of awareness among farmers about the existence and utility of such schemes. However, collaborative efforts between primary banks and the government have gradually increased awareness and utilization of these banks.
While challenges persist, the progress made signifies a positive trajectory in enhancing rural credit options, especially for long-term financial needs related to land development and expansion, ultimately contributing to the sustainable growth of the agricultural sector.
Commercial Banks
Historically, commercial banks primarily focused on urban deposits and extended loans for trade and industry, often neglecting agriculture and rural industries due to the perceived high-risk nature of farming. However, this paradigm has shifted over time, and contemporary commercial banks now actively contribute to the agricultural sector through direct and indirect investments.
Direct finance from commercial banks facilitates small and medium-term agricultural operations, offering farmers the necessary capital for seamless cultivation. Indirect finance is provided in advance for procuring essential agricultural inputs like grains and fertilizers. Furthermore, commercial banks extend financial support to entities such as the Food Corporation of India and state food agencies, aiding in critical operations like food procurement.
To enhance support for agriculture, commercial banks also offer credit options for the stocking and delivery of agricultural inputs. Initiatives like the ‘village adoption scheme,’ pioneered by the State Bank of India, demonstrate a proactive approach by commercial banks to assess and address farmers’ credit and additional requirements at the grassroots level. This evolving role of commercial banks reflects a more comprehensive and inclusive approach towards fostering agricultural development and mitigating financial challenges faced by farmers.
Regional Rural Banks
The establishment of Regional Rural Banks (RRBs) by the government aimed at addressing the unique needs of landless workers, small and marginal farmers, rural poor, and artisans. These banks were strategically initiated to cater to the financial requirements of the most economically vulnerable segments in rural areas. By focusing on the financial inclusion of those traditionally underserved, RRBs play a pivotal role in fostering rural development. Through targeted efforts, these banks contribute to uplifting the livelihoods of landless laborers, small farmers, and other marginalized groups, aligning with the broader goal of inclusive economic growth in the rural landscape.
Non-Institutional Agencies of Rural Credit
Relatives
In 1951-52, loans from relatives constituted 14.2% of the total rural credit needs for farmers, and by 1961-62, this share had reduced to 8.8%. These loans from family members are inherently interest-free and typically come with more flexible repayment terms. The decreasing percentage over the years indicates a relative decline in dependency on familial sources for rural credit. The absence of interest and the lenient repayment conditions associated with loans from relatives provide farmers with financial support characterized by familial trust and understanding, contributing to the intricate web of informal credit relationships within rural communities.
Moneylenders (Professional and Agricultural)
In 1951-52, moneylenders supplied a substantial 69.7% of the total rural credit needs, and this share decreased to 49.2% in 1961-62, rising slightly to 27.9% in 1971-72. The persistent significance of moneylenders in rural credit can be attributed to the limitations and shortcomings of other credit agencies. Moneylenders enjoy advantages over institutional sources, such as greater flexibility, quicker processing, and less stringent eligibility criteria. However, their prominence underscores the challenges and gaps in the formal credit system, highlighting the need for more robust and accessible financial mechanisms to reduce dependency on informal credit channels.
Others (like Traders, Commission Agents, Landlords, etc.)
In 1951-52, the share of other sources in rural credit was 8.8%, increasing to 22.3% in 1961-62, and then declining to 14.3% in 1971-72. The diminishing role of landlords in providing credit can be attributed to the abolition of zamindari. Traders, constituting a part of the “others,” extend loans against future crop yields, often at low interest rates. However, farmers face a drawback as they receive a minimal price for their crops, resulting in financial losses. The evolving dynamics of rural credit sources underscore the complex interplay between historical, economic, and policy factors in shaping the agricultural credit landscape.
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Summing Up
The intricate web of institutional and non-institutional financing agencies in the agricultural sector reflects the dynamic evolution of India’s rural credit landscape. From governmental initiatives to cooperatives, land mortgage banks, commercial banks, and Regional Rural Banks, these institutions play pivotal roles in supporting farmers’ financial needs. The changing dynamics also highlight the challenges and opportunities in transitioning from informal credit sources. As the agricultural sector continues to evolve, a robust and inclusive financial system remains essential for empowering farmers and ensuring sustainable growth.
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