Rural credit is vital for the development of the agricultural sector and the consequent rural economic development.
Rural Credit – Introduction
Rural poverty is an issue of grave concern. The income of the people in rural areas is barely enough for their sustenance. Consequently, they are unable to make any worthwhile savings. Low income and the resultant low rate of savings make it difficult for farmers to invest in their farmlands to increase productivity. The few banks that are present in rural areas prefer to advance credit to farmers with large landholdings. Small and marginal farmers have none but moneylenders to turn to. The inability to increase productivity implies that the total farm output remains low and, thus, the conditions of low income and poverty continue to prevail.
The infusion of credit is essential to counter these conditions. Rural credit is vital for the development of the agricultural sector and the consequent rural economic development.
Importance of Credit in Rural Development
Promotes commercialization of farming: The produce of small and marginal farmers is hardly enough for their own subsistence. They are unable to generate sufficient surplus to reinvest on their lands. The influx of funds helps these farmers to upgrade their productivity and, thereby, commercialize their farming. The easy and cheap availability of rural credit enables the farmers to invest in modern techniques of farming, which in turn helps them generate a surplus for the market. Consequently, their income increases.
Helps finance farming inputs: A long gestation period exists between the sowing of seeds and the harvesting of crops. In other words, the time lag between the investment made by farmers on farming inputs and the receipt of income from the sale of their output is very long. As a result, farmers often fail to finance the initial requirements such as seeds, fertilizers, and tools. Here, credit plays a crucial role by enabling farmers to meet the initial requirements of farming inputs.
Keeps farmers out of the vicious circle of poverty: Credit saves farmers from the vicious circle of poverty. Farmers require funds to meet their general and specific needs. These needs can be fulfilled via credit.
Protects farmers against natural calamities and a dynamic market environment: Indian agriculture has always been at the mercy of the vagaries of climate. Farmers are the worst hit in the event of poor rains and crop failure. This pushes them into debt traps, thereby preventing them from undertaking any farming in the subsequent period. In such a scenario, crop insurance, and farm credit play a significant role. They cushion the impact of an unfavorable market environment or a natural calamity such as flood and enable farmers to survive.
Types of Rural Credit
On the basis of purpose and use
Rural credit can be classified into the following two categories on the basis of purpose or use.
Productive credit: This refers to the credit requirements of farmers for purchasing farming inputs necessary for production, such as seeds, fertilizers, and machinery.
Unproductive credit: This refers to the credit requirements of farmers to meet personal expenses such as conducting marriage and paying for medical treatment.
On the basis of duration of credit
Rural credit can be classified into the following three categories on the basis of the duration for which credit is advanced.
Short-term credit: This form of credit is advanced for a short period (typically, ranging between 6 months and 15 months). Farmers use short-term credit to buy farming inputs such as seeds and fertilizers.
Medium-term credit: This form of credit is advanced for a period ranging between 15 months and 5 years. Farmers use medium-term credit for productive purposes such as purchasing machinery, carrying out land improvements, and purchasing farm animals. This form of credit also serves the purpose of enabling farmers to meet certain personal expenses such as conducting a marriage.
Long-term credit: This form of credit is advanced for a period ranging between 5 years and 20 years. Farmers use long-term credit for productive purposes that require large funds, such as purchasing additional land and purchasing modern machineries like tractors and threshing machines.
Sources of Rural Credit in India
Sources of rural credit in India can be divided into two broad categories.
- Non-institutional sources
- Institutional sources
Non-institutional source of credit
You must have seen Indian films wherein rich landowners, moneylenders, and big traders are shown advancing loans to poor farmers. These landowners, moneylenders, and traders from non-institutional sources of credit. At the time of independence, these were the major and popular sources of credit in rural India. They accounted for more than 90% of the total rural credit. Landowners and moneylenders would often exploit poor farmers. They would charge exorbitant rates of interest and even manipulate the accounts. As a result, farmers would get caught in never-ending debt traps.
Some of the important non-institutional sources of credit are discussed below.
Moneylenders are the most popular sources of credit in rural areas. Rural folk can readily obtain funds from moneylenders for both productive and unproductive purposes. Moneylenders can be either professional or non-professional. Professional moneylenders are those for whom lending money is the sole business. Non-professional moneylenders, on the other hand, are those who engage in money lending activities in addition to their primary occupation (usually farming).
Traders, landlords, and relatives
Traders, landlords, and relatives are some other non-institutional sources of credit. Traders advance credit to farmers by way of purchasing their produce. They force farmers to sell their output at very low prices and, in the process, charge high amounts of commission for themselves.
Institutional source of credit
Non-institutional sources of credit are usually exploitative by nature. To counter this, sources of credit needed to be institutionalized. The first step taken in this direction was the nationalization of commercial banks in 1969. Since then, rural credit has increasingly been seen as a priority issue and steps have been taken to adopt social banking and a multi-agency approach to cater to the rural credit requirement. In India, the structure of rural banking is called the multi-agency system. It includes the following institutions.
- Cooperative banks and cooperative credit societies
- Commercial banks
- Regional rural banks
- Land development banks
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