Sources and Issues of Agricultural Financing

Before Green revolution, most of the inputs were developed by farmers themselves. Seeds were made by farmers using traditional methods, fertilizers were mostly green manure and cow dung which were locally available. But the Green Revolution changed the characteristics of revolution and necessitated more capital for successful agriculture and financing agriculture became a new concern.

In India, the institutionalized system of financing was ill-developed especially in villages and farmers had to depend on non-institutionalised financiers or money lenders. The exploitation was very high, with interest rates too big and many a time money lenders dictated the terms of loans. At the time of Independence, 90% of agricultural finance was covered by this group.

Initially, the most important institutionalized mechanism to finance agriculture was Cooperatives. They were started in India in 1904 but had a limited impact in the society at that time.

The cooperatives operating in ground level are called Primary Credit Societies. All farmers who take loan should be members of this PCS and contributes to the initial capital which is very low and insufficient at times. The PCS are members of District Cooperative Banks. The DCBs provide the loan to PCS which then lend to the farmers.

These District Cooperative Banks are members of State Cooperative Banks and are refinanced by them. State Cooperative banks are formed with state assistance. In PCS, the profit gained is pooled so as to sustain the lending activities.

Insufficiency of Cooperatives and continued exploitation by money lenders forced the government to come up with more measures and Regional Rural Banks were started in 1975. This was after the failure of Lead bank schemes to ensure proper financial inclusion in spite of government support. Regional Rural Banks are
subsidiaries created by a shareholding of Central Government, State Government and a Sponsor Bank in ratio, 50:15:35.

The government could set up banks from time to time wherever it considered necessary under RRB act of 1976 and every bank was to be sponsored by a “Public Sector Bank”. However, they were planned as the self-sustaining credit institution which was able to refinance their internal resources in themselves and was excepted from the statutory pre-emptions. The RRB concept was based upon the policy that they would lend only to the weaker sections of rural society, charging lower interest rates, opening branches in remote and rural areas and keep a low-cost profile. But the commercial motivation was absent and they started making losses in short period.

The viability of RRBs was questioned and Narasimhan Committee recommended merger of RRBs with sponsor banks as a corrective measure. Recapitalisation, mergers etc are other solutions. Currently, Amalgamation of RRBs is under processing where many RRBs merge together to form a larger entity.

The third source of agricultural finance was commercial banks lending to farmers. Initially, it was very less as credit worthiness was very low in the sector and defaulters are more.

The government came up with a separate regulator in form of NABARD to ensure the financial viability of Rural credit and introduced schemes like Kisan Credit Card and Agricultural Insurance to prevent defaulters.

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