Describe the role of credit in rural development

Agriculture is the primary source of income of individuals residing in the rural regions across India. Every year, farmers and peasants need to invest a considerable amount of funds to ensure a healthy harvest. Thus, they often resort to borrowing money from moneylenders and financial institutions to fulfill their basic needs before harvest season arrives, and they can earn money by selling their crops.

Thus, any loan taken for agricultural purposes or small home businesses across the rural areas in India is known as a Rural Credit.

Sources of Rural Credit 

Simply understanding what Rural Credit means is not enough. Commerce students also need to learn the various sources from which such monetary assistance is available to rural families. Listed below are the five major sources for Rural Credit in India.

1. Land Development Banks 

These banks provide a considerable sum of money as a credit to farmers by using their land as collateral. This low-interest loan has a repayment tenure ranging between 15 and 20 years. Farmers are free to avail this loan to bear the cost of land development work, including the creation of wells or other irrigation related facilities.

Still, land development credits are underutilized since most farmers remain unaware of this source of funding.  

2. Co-operative Credit Societies

One of the most economical sources of funding for farmers, co-operative credit facilitates credit to small- and medium-scale farmers. These short-term credits are extended by Primary Agricultural Credit societies or PACs. Nonetheless, these societies have not been able to minimize the influence of moneylenders on the Rural Credit market.

3. Regional Rural Banks

Set up by the government, regional rural banks or RRBs extend monetary assistance to marginal farmers, landless laborers and artisans.

4. Commercial Banks

Originally, commercial banks were reluctant to provide credit for agriculture due to the risks involved with such a move. However, today, these banks extend monetary help both directly and indirectly, to farmers. Direct investment in agriculture refers to short and medium term loans to simplify farming activities. Indirect investment, on the other hand, refers to the advances to farmers made through intermediary agencies or institutions.

5. Government

Also known as Taccavi loans, these are short-term credits extended by the Indian government to assist struggling farmers, especially in the aftermath of natural calamities, such as floods and droughts.

Types of Rural Credits

Short Term Credit – These loans have a limited repayment tenure that can range up to one year at the most. Therefore, such credits can act as a brief business or private capital requirement for farmers and others in a rural setting.

Medium Term Loan – Any loan that has a tenure ranging from two years to less than 10 years is classified as a medium-term loan. The credit amount available varies from one firm or individual to the next, depending on the credit rating and a host of other factors.

Long Term Loan– These are considerable sums that farmers can avail for a tenure ranging between 5 years and 20 years. In agriculture, such a line of credit is useful in creating permanent assets. For example, with the help of such a loan, farmers can purchase tractors and other farming properties.

In this milieu, the present study has examined the performance of agricultural credit flow and has identified the determinants of increased use of institutional credit at the farm household level in India. The study based on the secondary data has revealed that the institutional credit to agriculture in real terms has increased tremendously during the past four decades. The structure of credit institutions has witnessed a substantial change and commercial banks have arisen as the major contributor in institutional credit in recent years. 

The quantum of institutional agri-credit availed by the farmers is affected by various sociodemographic factors such as education, landholding, family size, caste, gender, etc. The study has suggested that reduction in procedural complications may lead simplification of the procedure for a better access to agricultural credit of smallholders and less educated/illiterate farmers. Satyasai (2012) in his findings brought out that inequalities in the distribution of number of loans vis-à-vis operational holdings have increased over time. Chavan (2020) highlights that gender gap in credit access is significantly high.

Credit growth convergence

Before analysing the causes for regional disparity in ground level credit across states, we made attempt to check whether growth in GLC is converging across the states over the years. β-convergence method is used to empirically investigate the disparity in credit distribution in agriculture across Indian states. The fixed effect panel regression consisted of all 29 states (Jammu & Kashmir and Ladakh as considered one state) for 2011-12 to 2020-21 with eight-year average credit growth as a dependent variable and the base period credit growth as an independent variable. The coefficient of β found positive and statistically insignificant. The finding suggests no statistical evidence of convergence of credit growth of agri-credit across states over time.

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