Question

Rural credit in India, with current data and proper graphical presentation under the following heads

Answer 1

Economics Discussion

5 Major Sources of Rural Credit in India

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The following points will highlight the five major sources of rural credit in India. They are: 1. Co-Operative Credit Societies 2. Land Development Banks 3. Commercial Banks 4. Regional Rural Banks 5. The Government.

Source # 1. Co-Operative Credit Societies:

The co­operative societies are supposed to be the cheap­est and most important source of rural credit. When co-operatives were first set up it was thought that they would be able to meet almost the entire credit needs of numerous small and me­dium farmers.

As a result, the moneylenders would recede to the background. But this has not really happened. Till 1950-51 they played a passive role in the area of rural credit.

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However, during the plan period the co-operative societies have made steady progress and have succeeded to some ex­tent in promoting thriftiness and self-help among farmers. They have started helping the farmers in a big way. Short-term loans issued by Primary Agri­cultural Credit Societies (PACs) increased from Rs. 305 crores in 1965-66 to Rs. 5,200 crores in 1999-00. During the same period term loans is­sued increased from Rs. 37 crores to Rs. 2,100 crores.

Increasing reliance has also been placed by the Government on co-operatives as the most im­portant set of institutions for meeting the credit needs of the farmers. Due to the encouragement and assistance provided by the Government as also by the NABARD, notable progress has been made by co-operatives in some States such as Tamil Nadu, Andhra Pradesh, Karnataka, Punjab and Himachal Pradesh. Whereas the co-operatives man­aged to meet hardly 3% of the credit needs of the farmers in 1950-51, they succeeded in meeting about 39% of the total credit needs of the farmers in 1999-00.

However, since co-operatives have not been able to meet, the entire credit needs of the farmers the moneylenders continue to dominate the rural financial markets. Moreover, the large farmers have derived the maximum benefits from the co-opera­tive societies. The small farmers, for whom the co­operative movement was originally initiated, found it increasingly difficult to meet all their credit needs through these institutions.

Moreover, the movement is yet to take deep roots in most eastern States like Bihar, Orissa and West Bengal, as also in Rajasthan. In most areas the unscrupu­lous moneylenders, rich farmers and land-owners have worked against the movement. Consequently, the really needy and deserving farmers have been deprived of the benefits of co-operatives.

Source # 2. Land Development Banks:

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Land devel­opment bank (formerly known as land mortgage banks) mainly provide long-term loans to farmers against the mortgage of their lands at low rates of interest over a period of 15 to 20 years. Farmers find borrowing from such banks attractive if costly land improvement programmes (such as digging or deepening of wells) are to be undertaken, or if additional land is to be acquired through outright purchase, or if previous debts have to be repaid.

Some progress has, of course, been made by land development banks in recent years, but their contribution is still insignificant. Hence they have not been able to touch the root of the rural credit problem. In fact, most farmers are not even aware of the existence or the usefulness of such banks. But the total number of such banks set up by the State Governments and primary banks increased steadily over the entire plan period.

The amount of term credit distributed by LDBs was much higher, compared to the credit disbursed by commercial banks in the initial years, but in the later years the picture became mixed. The total amount of loan sanctioned by such banks was only Rs. 3 crores in 1950-51. The figure crossed Rs. 1,500 crores in 1999-00. Moreover, rich farm­ers were able to obtain the maximum amount of loan from such banks because of large land hold­ings. Thus, small and marginal farmers have not derived much benefit from such banks.

Source # 3. Commercial Banks:

Before nationalisa­tion of top 14 commercial banks in June 1969, they had an urban bias. They were mainly accept­ing deposits from the urban people and making loans to trade and industry. Agriculture and rural industries were neglected by them. Since agricul­ture by its very nature was a risky venture, private commercial banks turned away from rural areas.

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Other factors obstructing flow of bank credit to agriculture were :

i. Inability of farmers to pro­vide security,

ii. Difficulties in recovering loans,

iii. Lack of clear-cut and up-to-date accounting of agricul­tural transactions,

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iv. The small amount of loan and.