Dr.J.

Vasantha Arockiaselvi
Assistant Professor
Department of Economics
Meaning
 Rural Finance

Financial services are key to enhancing economic

development and reducing poverty in rural areas.
However, access to key financial services such as savings,
credit insurance, leasing and remittance facilities is
generally scarce in rural areas of most developing
countries. Access is particularly limited for poor
households and for micro, small, and medium enterprises.
characteristics
 General characteristics of rural areas
such as poorly developed
infrastructure, dispersed economic
activity, and inadequate availability of
skilled personnel constrain the
provision of financial services in rural
areas.
Cont…
 Inadequate knowledge among service
providers of operating in a rural
environment and insufficient products
tailored to rural needs makes the availability
of financial services in rural areas scarcer.
Additionally, the supply of credit services is
limited by the lack of collateral and lack of
risk management mechanisms.
Rural indebtedness
 Causes
Ancestral Debt: The main cause of rural
indebtedness is that the farmers inherit it
from their ancestors. The farmers are unable
to pay off even the interest. Traditionally
they regard it as their duty to pay off their
ancestral debts. They pay whatever they can
during their life time and after death, they
leave it for their posterity to do the same.
Cont…
 Poverty and Extravagance of farmers:
The average income of the farmer is very low
every year. However they spend lavishly on
the occasions of marriages, and other
functions. To meet this expenditure they
borrow money from money lenders and
banks.
Cont…
 Litigation :
Usually farmers are in the habit of
entering into litigation on small
disputes. They are compelled to borrow
money to carry on litigation which is a
long-drawn out affair in our country.
Cont…
 Backward Agriculture: Even today Indian
agriculture is a gamble in monsoon. The
frequency of crop-failure due to droughts ,
floods etc is largely responsible for all in
agricultural output. It results in endless
miseries and farmers take recourse to the
money lenders who exploit them in this
situation.
Cont…
 Heavy burden of land revenue and rent:
Farmers are supposed to pay land
revenue to the state governments even
when production suffers due to flood
and drought and in such situation they
have take loans to make these
payments, consequently the burden of
debt increases.
Cont…
 Exploitative system of money lending:
Money lenders and owners are exploiting
farmers in many ways. Like forcing the
farmers to borrow more and more money
from them, increase the interest rates,
fictitious entries in their books of accounts,
transfer of land from the farmer to money
lenders.
Cont…
Neglect of marketing facilities:
In India the system of agricultural
marketing is quite defective with
the result that the farmer does not
get a fair price for his produce.
 Adverse effects of indebtedness:
Economic effects: it leads to low standard of living and
poverty and thereby inefficient agriculture.
Due to heavy burden of debt, very often the farmer is
compelled to sell his produce at a predetermined price
under rigid market conditions.
In the process of indebtedness the farmer often loses his
property and become landless labourer.
 Social effects:
The problem of indebtedness leads to social
tensions, increase inequality in rural areas,
bonded labourer etc.
Political effects:
The indebted farmers have no political status,
it leads to irresponsible citizens, seeking
favours from government officials by bribing
them etc.
Suggestions

1. Increase in the income of the farmers

2. Permanent improvement in agriculture
3. Settlement of ancestral debt
4. Check on new debts
5. Establishment of multi-purpose cooperative socities.
NABARD
 National Bank for Agriculture and Rural Development
was set up in the year 1982.
 Functions:
i) it provides refinance facilities for agriculture, small
scale industries, cottage and village industries,
handicrafts and other allied economic activities so
that production may be increased.
ii) It can borrow from RBI and the Government of
India. It can arrange funds from the World Bank and
other multilateral and bilateral financial agencies.
Functions
It can advance loans up to a period of 20 years to state
governments so that they may participate in the share
capital of co-operative credit societies. It can provide credit
facilities for short term ,medium term and long terms to
state co-operative Banks, Regional Rural Banks and other
financial institutions.
iv) It coordinates the work of the Government of India,
Planning Commission and state government for village and
small scale industries.
Cont…
 v)it finances research on agriculture
and rural development
 vi)it supervises the work of RRBs and
coopertive banks.
Agricultural Credit
 There are three sources of providing agricultural
credit to farmers in India.
 Short term loans – period of less than 15 months
 Medium term loans –period of 15 months to 5 years
 Long term loans – period of more than five years
Other sources
Non-institutional sources: money lenders, landlords etc
Institutional sources: commercial banks, co-operative
banks and government sources.