Agricultural Finance

Agricultural Finance is the provision of financial services—including credit, savings, and insurance—to support agricultural activities and the rural economy. Given that a large part of India’s population depends on agriculture, this is a critical area of lending for banks and a key component of the Priority Sector.

Types of Agricultural Credit (Based on Tenure)

Agricultural loans are classified based on the duration for which the money is needed.

1. Short-Term Loans

  • Purpose: To meet the working capital needs for a single crop season.
  • Duration: Usually for a period of up to 18 months.
  • Examples:
    • Purchase of seeds, fertilisers, and pesticides.
    • Payment of labour wages.
    • Fuel for tractors and pumps.

2. Medium-Term Loans

  • Purpose: To finance the purchase of assets that have a longer life than one crop season but are not permanent.
  • Duration: Typically from 18 months to 5 years.
  • Examples:
    • Purchase of small farm machinery (like a pumpset).
    • Buying livestock (cows, buffalo).
    • Digging of wells.

3. Long-Term Loans

  • Purpose: For making permanent improvements to the land or buying expensive machinery.
  • Duration: For a period of more than 5 years.
  • Examples:
    • Purchase of a tractor.
    • Buying additional land.
    • Major irrigation projects.

Kisan Credit Card (KCC) Scheme

The Kisan Credit Card (KCC) scheme provides farmers with a simple, flexible, and revolving line of credit to meet their cultivation and other needs.

  • Simple Meaning: It’s like a special credit card for farmers.

Key Features of the KCC Scheme:

  • Revolving Credit: The farmer can withdraw and repay money as many times as they need within the sanctioned limit, just like a Cash Credit (CC) account.
  • Comprehensive Credit: The KCC limit covers:
    • Short-term credit for crop cultivation.
    • A small portion for post-harvest expenses and household consumption needs.
    • A component for farm asset maintenance.
  • Interest Subvention: Farmers who take short-term crop loans up to ₹3 lakh through their KCC are eligible for the government’s Interest Subvention Scheme.
    • This scheme ensures that farmers get the loan at a very low effective interest rate (often 4% per annum) if they repay on time.
  • Validity: The KCC is typically valid for 5 years, with an annual review.

Role of NABARD

  • National Bank for Agriculture and Rural Development (NABARD) is the apex institution for agricultural finance.
  • It does not lend directly to farmers but refinances banks (Commercial Banks, RRBs, Cooperative Banks) for their agricultural lending, ensuring they have enough funds to support the rural sector.

Summary

Agricultural finance is a specialized area of lending aimed at supporting farmers and the rural economy. Loans are categorised by their tenure into short-term (for crop expenses), medium-term (for small machinery/livestock), and long-term (for tractors/land). The cornerstone of agricultural lending in India is the Kisan Credit Card (KCC) scheme, which provides farmers with flexible and affordable credit. The government supports this through an Interest Subvention Scheme for timely repayment of crop loans. NABARD acts as the apex refinancing agency, ensuring a steady flow of credit to the sector.

Quick Revision Points

  • Short-Term Loan: For crop expenses (seeds, fertilisers). Up to 18 months.
  • Medium-Term Loan: For small machinery and livestock. 18 months to 5 years.
  • Long-Term Loan: For tractors, land. More than 5 years.
  • KCC: The main scheme for providing farm credit. It’s a revolving credit facility valid for 5 years.
  • Interest Subvention: Government scheme providing a concessional interest rate (e.g., 4%) on timely repayment of crop loans up to ₹3 lakh.
  • NABARD: The apex refinancing agency for agriculture. It does not lend directly to farmers.