Agricultural finance is the provision of financial services—credit, savings, insurance, and remittances—to the agricultural sector. Given that a majority of India’s population is dependent on agriculture, a robust and accessible credit system is vital for increasing productivity, ensuring food security, and promoting rural development.
1. Classification of Agricultural Credit
Agricultural credit is primarily classified based on the tenure of the loan, which corresponds to the farmer’s needs.
| Type | Tenure | Purpose |
|---|---|---|
| Short-Term Credit | Up to 15 months | To meet working capital needs for a single crop cycle. Examples: Purchase of seeds, fertilizers, pesticides, and payment of wages. |
| Medium-Term Credit | 15 months to 5 years | For capital investments that span multiple crop seasons. Examples: Purchase of farm machinery (tractors, pump sets), livestock, and minor land improvements. |
| Long-Term Credit | More than 5 years | For significant, long-term capital expenditure. Examples: Purchase of additional land, major land development, farm mechanization, and repayment of old debts. |
2. Sources of Agricultural Credit
This is a critical topic for exams. The sources are broadly divided into two categories:
A. Non-Institutional (Informal) Sources: These are traditional sources of credit that have historically dominated the rural landscape.
- Moneylenders (Professional & Agricultural): Easily accessible but notorious for charging exorbitant interest rates and using unethical recovery practices.
- Traders and Commission Agents: Provide advances to farmers with the condition that the produce must be sold to or through them, often at non-competitive prices.
- Landlords: Large landowners who provide credit to their tenants or smaller farmers, often leading to exploitative relationships.
- Relatives and Friends: An informal source for small, interest-free loans for immediate needs.
B. Institutional (Formal) Sources: These are regulated entities established to provide adequate and timely credit at reasonable interest rates. The government has consistently promoted these sources to reduce farmers’ dependence on informal channels.
- Co-operative Credit Institutions: A cornerstone of rural credit, with a vast network reaching the village level. They have a three-tier structure for short-term credit:
- Primary Agricultural Credit Societies (PACS): At the village level, directly interacting with farmers.
- District Central Co-operative Banks (DCCBs): At the district level, overseeing and financing PACS.
- State Co-operative Banks (StCBs): The apex body at the state level.
- For long-term credit, there are Land Development Banks (now State Co-operative Agriculture and Rural Development Banks – SCARDBs).
- Scheduled Commercial Banks (SCBs): Including public sector banks (like SBI, PNB), private sector banks (like HDFC, ICICI), and foreign banks. Since the nationalization of banks in 1969, SCBs have significantly expanded their rural branch network and are now the largest purveyors of agricultural credit.
- Regional Rural Banks (RRBs): Established in 1975, these are specialized banks created to serve the credit needs of rural and semi-urban areas, with a focus on small and marginal farmers, agricultural laborers, and rural artisans.
- NABARD (National Bank for Agriculture and Rural Development): NABARD is the apex development financial institution for rural and agricultural credit. It does not lend directly to farmers but plays a crucial role by:
- Refinancing: Providing funds to SCBs, RRBs, and Co-operative Banks for their agricultural lending.
- Supervision: Supervising RRBs and Co-operative Banks.
- Development: Promoting rural development, financial inclusion, and managing funds like the Rural Infrastructure Development Fund (RIDF).
3. Key Policies and Schemes
A. Priority Sector Lending (PSL) Norms for Agriculture: This is a mandatory RBI directive for banks to lend a specific portion of their total credit to priority sectors.
- Overall Target: For Scheduled Commercial Banks, 18% of their Adjusted Net Bank Credit (ANBC) must be lent to the agriculture sector.
- Sub-Target: Within this 18%, a sub-target of 10% is mandated for Small and Marginal Farmers.
- Applicability: These targets apply to SCBs. For Regional Rural Banks (RRBs) and Small Finance Banks (SFBs), the total PSL target is higher at 75% of ANBC, with agriculture being a major component.
- Consequence of Shortfall: Banks that fail to meet their PSL targets must contribute the shortfall amount to the Rural Infrastructure Development Fund (RIDF) maintained by NABARD.
B. Kisan Credit Card (KCC) Scheme: Launched in 1998, the KCC scheme is a flagship initiative to provide adequate and timely credit to farmers under a single window.
- Objective: To meet the comprehensive credit requirements of farmers for crop cultivation, post-harvest expenses, consumption needs, and investment in farm assets.
- Features:
- It is a revolving cash credit facility. Farmers can draw funds as and when required up to their limit.
- The credit limit is determined based on the scale of finance for crops, landholding, and allied activities.
- The card is valid for 5 years, subject to an annual review.
- It comes with an ATM-enabled RuPay debit card.
- The scheme has been extended to include farmers engaged in animal husbandry and fisheries.
C. Interest Subvention Scheme: To make farm credit affordable, the Government of India provides an interest subsidy on short-term crop loans.
- Mechanism: Farmers can avail of short-term crop loans up to ₹3 lakh at a concessional interest rate of 7% per annum.
- Prompt Repayment Incentive (PRI): An additional subvention of 3% is provided to farmers who repay their loans on time (within one year).
- Effective Interest Rate: For a diligent farmer, the effective interest rate on a short-term crop loan up to ₹3 lakh comes down to just 4% per annum.
Agricultural Credit Societies in India:
Primary agricultural credit society are cooperative financial institutions established to provide affordable and timely credit to farmers. They form the grassroots level of the vast rural cooperative credit system and are fundamental to the government’s mandate of financial inclusion and agricultural development.
1. Understanding the Cooperative Credit Structure
The rural cooperative credit system in India is a three-tier structure designed to channel funds from the apex level down to the individual farmer.
- Tier 1: State Co-operative Banks (StCBs)
- The apex cooperative bank at the state level.
- It finances and controls the District Central Co-operative Banks (DCCBs).
- Tier 2: District Central Co-operative Banks (DCCBs)
- Operates at the district level.
- It acts as a crucial link between the StCB and the primary societies at the village level.
- It provides funds to and supervises the Primary Agricultural Credit Societies (PACS).
- Tier 3: Primary Agricultural Credit Societies (PACS)
- Operates at the village or a cluster of villages level.
- This is the foundation of the entire cooperative credit system.
- It deals directly with the individual farmers, providing them with loans and other services.
2. Primary Agricultural Credit Societies (PACS): The Core Unit
For your exams, PACS are the most important component to understand. They are the final link between the higher financial agencies (like NABARD and commercial banks) and the ultimate rural borrower.
A. Establishment and Regulation:
- The first PACS was formed in 1904.
- They are registered under the respective State Co-operative Societies Act.
- They are regulated by the State Government and supervised by NABARD.
B. Key Objectives and Functions:
The primary objective of a PACS is to serve its members by promoting savings and providing loans for productive purposes. Their functions have evolved to be multi-faceted:
- Credit Provision (Core Function):
- Provide short-term and medium-term loans to farmers for agricultural operations.
- This includes loans for purchasing seeds, fertilizers, pesticides, and small farm implements.
- They are the primary channel for the disbursal of Kisan Credit Card (KCC) loans at the village level.
- Input Distribution:
- Supply essential agricultural inputs like seeds, fertilizers, and pesticides to farmers, often on credit. This ensures both timeliness and quality.
- Promotion of Savings:
- Encourage the habit of thrift and savings among their members by accepting deposits.
- Marketing Assistance:
- Help farmers get better prices for their produce by providing marketing support and storage facilities (godowns).
- Distribution of Consumer Goods:
- Many PACS also run Fair Price Shops, distributing essential consumer goods like kerosene and sugar in rural areas.
C. Recent Developments – PACS as Multi-Service Centers: The Government of India is actively promoting the development of PACS into Multi-Service Centers (MSCs) or one-stop shops for farmers. This involves expanding their business activities to include:
- Dairy and fishery activities.
- Agro-processing.
- Setting up of godowns and cold storages.
- Providing services of Farmer Producer Organizations (FPOs).
- Operating as Pradhan Mantri Kisan Samriddhi Kendras (PMKSK) for fertilizer distribution.
A massive, centrally sponsored project for the computerization of all functional PACS is underway to improve their efficiency, transparency, and accountability.
3. Significance of Agricultural Credit Societies
- Last-Mile Credit Delivery: Their deep penetration into remote villages makes them the most important institutional source for last-mile credit delivery where commercial bank branches may not be present.
- Financial Inclusion: They bring a large part of the rural population, especially small and marginal farmers, into the formal financial system.
- Affordable Credit: They provide credit at much lower interest rates compared to informal moneylenders, protecting farmers from debt traps.
- Democratic Structure: They are owned and controlled by their members (the farmers themselves), operating on the principles of cooperation and mutual help.
4. Challenges Faced by Agricultural Credit Societies
Despite their importance, PACS face several challenges that are often discussed in the context of rural finance reforms:
- Inadequate Resources: Their owned funds are limited, and they are heavily dependent on financing from DCCBs.
- Over-dues and NPAs: A significant problem is the high level of overdue loans, which affects their financial health and ability to recycle funds.
- Lack of Professional Management: Many societies are managed by individuals who may lack professional expertise in finance and banking.
- Regional Disparities: The cooperative movement is strong in some states (like Maharashtra, Gujarat, Kerala) but very weak in others, leading to regional imbalances in credit flow.
In India, the major part of agricultural credit is supplied by commercial banks.
Here’s a breakdown of the major sources:
🔹 1. Commercial Banks – Major source
- After the nationalization of banks and subsequent reforms, commercial banks became the largest provider of agricultural credit.
- They provide both short-term and long-term loans to farmers.
- Includes public sector banks, private banks, and regional rural banks (RRBs).
🔹 2. Cooperative Credit Institutions
- Traditionally, cooperatives were the main source.
- Still significant, especially for short-term and small loans.
- Includes:
- Primary Agricultural Credit Societies (PACS)
- District Central Cooperative Banks (DCCBs)
- State Cooperative Banks (SCBs)
🔹 3. Regional Rural Banks (RRBs)
- Play a major role in rural and semi-urban areas.
- Mainly target small and marginal farmers.
🔹 4. Microfinance Institutions (MFIs) and NBFCs
- Important for non-institutional borrowers or those not covered by banks.
- Growing influence in recent years.
Public Sector Banks (PSBs) are mandated to play a pivotal role in providing credit to the agricultural sector, aligning with the government’s objectives of rural development and financial inclusion. All their agricultural loans fall under Priority Sector Lending (PSL). Here’s a detailed look at the offerings from key PSBs.
1. Bank of Baroda (BoB)
Bank of Baroda offers a comprehensive suite of products for farmers, with the Baroda Kisan Credit Card being its flagship scheme.
A. Baroda Kisan Credit Card (BKCC)
This scheme is designed to provide timely and adequate credit to farmers to meet their holistic credit requirements.
| Feature | Details |
|---|---|
| Purpose | 1. Short-Term Credit: For crop cultivation expenses. 2. Post-Harvest & Household Needs: For produce marketing and consumption. 3. Investment Credit: For farm assets, allied activities (dairy, fishery). |
| Eligibility | All farmers (individuals/joint cultivators), tenant farmers, sharecroppers, and Self Help Groups (SHGs) or Joint Liability Groups (JLGs) of farmers. |
| Nature of Facility | It is a revolving cash credit facility for crop loans. The investment credit component is a term loan. |
| Loan Quantum | Based on the scale of finance for crops, landholding, and proposed investments. Minimum loan is ₹5,000. |
| Validity & Review | The card is valid for 5 years, with an annual review to assess performance and adjust the credit limit. |
| Interest Rate | – Up to ₹3 lakh: 7% p.a. (subject to Govt. of India’s Interest Subvention Scheme). – Prompt repayment earns a 3% incentive, making the effective rate 4% p.a. |
| Security | – Up to ₹1.60 lakh: Hypothecation of crops. No collateral security required. – Above ₹1.60 lakh: Hypothecation of crops + Mortgage of land or other suitable security. |
B. Baroda Agri Gold Loan
This loan allows farmers to leverage their gold assets for quick and hassle-free credit for agricultural purposes.
| Feature | Details |
|---|---|
| Purpose | To meet short-term and long-term financial needs for agriculture and allied activities. |
| Loan Amount | Up to ₹50 lakh. The loan amount is up to 80% of the appraised value of the gold ornaments. |
| Tenure | Maximum 12 months. |
| Repayment | Flexible repayment schedule aligned with the farmer’s income generation from crop harvest/marketing. |
| Processing Fees | NIL for loans up to ₹3 lakh. |
C. Baroda Tractor Loan
A medium to long-term loan for farm mechanization.
- Purpose: Purchase of new tractors, accessories, and implements.
- Eligibility: Farmers with a minimum of 2.5 to 4 acres of irrigated land (varies by state).
- Repayment Tenure: Up to 9 years.
- Margin: Typically 15-25% of the tractor’s cost.
2. State Bank of India (SBI)
SBI, being the largest bank, has an extensive range of agricultural credit products.
A. SBI Kisan Credit Card (KCC)
SBI’s KCC scheme is one of the most widely used in the country.
| Feature | Details |
|---|---|
| Purpose | Comprehensive credit for crop production, post-harvest expenses, farm maintenance, and investment needs. |
| Eligibility | All farmers, including tenant farmers and sharecroppers. |
| Nature of Facility | Revolving cash credit with a passbook. Comes with an ATM-cum-debit RuPay Card. |
| Loan Quantum | Based on cropping pattern, scale of finance, and ancillary credit needs. No collateral required for limits up to ₹1.60 lakh. |
| Validity & Review | Valid for 5 years, with a 10% annual increase in the limit each year subject to review. |
| Interest Rate | – Up to ₹3 lakh: 7% p.a. (with Interest Subvention). <br> – Prompt repayment incentive of 3% available, making the effective rate 4% p.a. |
| Special Feature | Credit balance in the KCC account earns interest at the savings bank rate. |
B. SBI Multi-Purpose Gold Loan
This scheme is for farmers who need quick funds against their gold for agricultural purposes.
| Feature | Details |
|---|---|
| Purpose | To meet any kind of farm expenditure (short-term or long-term). |
| Loan Amount | Up to ₹50 lakh. |
| Tenure | Up to 12 months for a demand loan. A 3-year repayment option is available for an overdraft facility. |
| Security | Pledge of gold ornaments. |
3. Punjab National Bank (PNB)
PNB also has a strong rural presence and offers a variety of schemes for farmers.
A. PNB Kisan Credit Card (KCC)
PNB’s KCC scheme is aligned with the national guidelines to provide comprehensive credit.
| Feature | Details |
|---|---|
| Purpose | To meet short-term credit needs for crop cultivation, post-harvest expenses, household consumption, and investment credit for allied activities. |
| Eligibility | All farmers, including tenant farmers, oral lessees, and sharecroppers. |
| Loan Quantum | Determined by the scale of finance fixed by the District Level Technical Committee (DLTC). |
| Validity & Review | Valid for 5 years, subject to annual review. |
| Interest Rate | Follows the Government of India’s Interest Subvention Scheme (7% p.a. up to ₹3 lakh, with a 3% incentive for prompt repayment). |
| Security | No collateral security up to a limit of ₹1.60 lakh. |
B. PNB Kisan Tatkal Rin Yojana
This is a unique scheme designed to provide instant credit to farmers for emergency needs.
| Feature | Details |
|---|---|
| Purpose | To meet emergent fund requirements for agriculture, allied activities, and household needs during the off-season or in case of temporary difficulties. |
| Eligibility | Existing KCC holders or agricultural borrowers with a satisfactory repayment track record of at least two years. |
| Loan Amount | 25% of the existing credit limit, subject to a maximum of ₹50,000. |
| Repayment | Repayable in 5 yearly installments, starting 12 months after disbursal. |
| Security | The existing security under the KCC/agri loan is extended. No additional collateral is required. |
Summary Comparison of KCC Schemes
| Feature | Bank of Baroda (BKCC) | State Bank of India (KCC) | Punjab National Bank (KCC) |
|---|---|---|---|
| Primary Facility | Revolving Cash Credit | Revolving Cash Credit | Revolving Cash Credit |
| Card Type | RuPay Debit Card | ATM-cum-Debit RuPay Card | RuPay Debit Card |
| Validity | 5 Years | 5 Years | 5 Years |
| Interest Subvention | Yes (up to ₹3 lakh) | Yes (up to ₹3 lakh) | Yes (up to ₹3 lakh) |
| Collateral-Free Limit | Up to ₹1.60 lakh | Up to ₹1.60 lakh | Up to ₹1.60 lakh |
| Special Feature | Digital renewal facility available. | Credit balance earns SB interest. | Offers a unique “Kisan Tatkal Rin” for emergency needs of existing borrowers. |
MCQ
What is the primary role of agricultural credit?
A. Build rural roads
B. Facilitate adoption of new farming technologies
C. Enhance industrial production
D. Manage urban housing projects
Answer: B
What is a major challenge in agricultural credit?
A. Lack of modern farming tools
B. Overuse of fertilizers
C. Dependency on non-institutional credit sources
D. Absence of crop insurance schemes
Answer: C
What is the PSL target for agriculture under the RBI guidelines?
A. 40% of ANBC
B. 18% of ANBC
C. 33% of ANBC
D. 12% of ANBC
B. 18% of ANBC
What percentage of agricultural PSL is reserved for small and marginal farmers?
A. 16%
B. 10%
C. 12%
D. 5%
Answer: B
Loans for installing solar pumps fall under which category?
A. Farm Credit
B. Agriculture Infrastructure
C. Ancillary Activities
D. Renewable Credit
Answer: A
What is the loan limit for financing Farmer Producer Organizations (FPOs)?
A. ₹1 crore
B. ₹2 crore
C. ₹5 crore
D. ₹10 crore
Answer: C
What is the main objective of the Kisan Credit Card (KCC)?
A. Provide flexible credit for farmers
B. Offer subsidies for fertilizers
C. Increase rural employment
D. Build rural warehouses
Answer: A
What is the interest subvention scheme primarily meant for?
A. Subsidizing fertilizer costs
B. Reducing interest rates on short-term crop loans
C. Financing renewable energy projects
D. Managing farmer producer organizations
Answer: B
What is the maximum loan limit for a farmer against negotiable warehouse receipts?
A. ₹50 lakh
B. ₹75 lakh
C. ₹1 crore
D. ₹2 crore
Answer: B
What is the loan limit for agri-startups under priority sector lending?
A. ₹25 crore
B. ₹30 crore
C. ₹50 crore
D. ₹100 crore
Answer: C
Which body introduced Priority Sector Lending (PSL)?
A. NABARD
B. RBI
C. Ministry of Finance
D. SEBI
Answer: B
Which of the following is NOT included under agricultural infrastructure loans?
A. Cold storage construction
B. Plant tissue culture labs
C. Urban housing development
D. Irrigation facilities
Answer: C
What is a significant drawback of farm loan waivers?
A. Promotes over-farming
B. Weakens credit culture
C. Reduces crop diversity
D. Increases interest rates on all loans
Answer: B