Credit Policy

In modern farming, credit has become one of the crucial inputs. The co-operative credit societies was, in the past and even now, the most important source of credit to the farmers. Since 1969, commercial banks are also financing agriculture because of `social control’. There has been tremendous increase in the bank branches in the rural areas, Govt. has adopted the policy of `multi-agency approach’ in agricultural credit,. At present, primary agricultural co-operative societies, land development banks, commercial banks and regional rural banks are financing agriculture. National Bank for Agriculture and Rural Development (NABARD) is providing refinance to the commercial banks. In order to reduce the competition amongst the commercial banks in the rural areas, a policy of "Service Area Approach" has been adopted since 1988. As per this policy, each bank has to adopt few villages and they are required to meet credit.

Farm Credit in the Past and the Present:

In the past, farming was carried out in a traditional way. It was a subsidence farming and was more or less self sufficient Credit needs of the farmers were limited and were met with mostly by the money lenders, relatives, friends and to some extend by Taccavi loans from Government. Money lenders used to exploit the farmers in various ways like exorbitant rates of interest, false documents, etc.

After independence and particularly after the Green Revolution, agriculture entered the era of modernisation and the credit needs of the farming community started increasing. In the present day market oriented farming, the credit has become one of the crucial inputs.

Co-operative Credit:

Co-operative Credit Societies Acts of 1904 and 1912 was the first important land mark in the agricultural credit policy in India. In the subsequent period, the co-operative credit became more and more significant. It became the most important source of farm credit in the country. It was the result of the policy to have progressive institutionalization for supply of cheaper and adequate credit to agriculture. Slowly, the importance of money lenders was reduced.

Social Control on Commercial Banks (1969):

The agricultural credit policy took another significant turn in 1969. In this year, Govt.of India nationalised 14 major commercial banks and imposed `Social Control' on them. Hitherto the commercial banks were not financing agriculture. As per the new policy, they were made to provide finance to agriculture on priority basis. Consequently, many commercial banks opened their branches in the semi-urban and rural areas.

Multi-agency approach:

Another important feature of the credit policy since independence is the "multi-agency approach". Farmers are a liberty to avail finance from any of the credit institutions. At present, the major institutional agencies supplying credit to farmers and rural weaker sections are -Commercial Banks, Primary Agricultural Co-operative Credit Societies, Land Development Banks and Regional Rural Banks. In addition, National Bank for Agriculture and Rural Development (NABARD) is refinancing in a big way the banks for different agricultural development projects like lift Irrigation Schemes, etc.

The success of agricultural production programme depends upon the supply of credit. Under the strategy of multi-agency adopted by the Government, the above named credit institutions are providing credit to cultivators in general and weaker sections in particular. Because of this, the activities of the money lenders and their exploitation particularly of the weaker sections in the rural areas has been drastically reduced in the recent years.

Classification of credit:

Agricultural credit has been classified into three categories viz.short-term credit (crop loan), medium-term credit and long-term credit. This classification is based on the periods for which the loan is given. This is to meet the varying needs of the farming community. The short term loan which is also known as the crop loan, is provided for 15 month period and is meant for meeting the needs like seed, fertilizer, labour, cattle feed, etc. The farmer can repay the loan after harvest of the crop. The period for medium term loan is from 15 months to five years. These loans are provided for meeting the expenses on land improvements, digging of wells, purchase of implements and machinery, farm animals, etc. These items require relatively more investment and as such the period for repayment is kept upto 5 years. The long term credit as the name indicates is for longer period than 5 years. This type of credit is given for activities requiring heavy investment. The Land Development Banks provide only the long term finance; while the Regional Rural Banks give loans only to the weaker sections like small and marginal farmers, agricultural labourers, village artisans, etc.

The Problem:

Mounting overdues is the serious problem faced by these financing institutions in the rural areas. This is an obstacle in the recycling of funds with the credit institutions.

New Policy in the Rural Credit for Banks:

As indicated earlier, after 1969, there was a rapid spread of branches of commercial banks in the rural areas. As a result, there was duplication of efforts and scattered lending over wider areas. In order to avoid this, a new policy was adopted in 1988 which is known as the"Service Area Approach". Under this policy, each semi-urban and rural branch of commercial bank is assigned a specific area comprising of a cluster of villages within which it will operate. Thus, the compactness in the area of operation will make it easy for the clientele to approach the bank for credit. It will also help the bank in credit planning and monitoring of the Funds. The banks are supposed to prepare annual credit plans for all the adopted villages.