Social Science Journal of Gargaon College, Volume III • January, 2015 ISSN 2320-0138

Institutional Finance in Indian Agriculture :

A Comparative Study of Pre and Post
Reform Period
*Ritopan Borah

Abstract

Agricultural credit plays a key role in enhancing agricultural production in

India. The Green Revolution characterized by a greater use of inputs such as fertilizers,
seeds and other inputs has increased the credit requirements which are accessible for the
poor farmers of the country only through financial institutions. No doubt, the outreach
and the amount of agricultural credit have increased over the years, but still there exist
some weaknesses which have strongly affected the viability and sustainability of these
institutions. Study reveals that the large proportion of the farmers of lower strata receives
much less credit than its requirement. In this context the study tries to examine the
existing credit flow to agriculture and make a comparative analysis of the distribution of
agricultural credit in pre reform period and post reform period.

Key words : Agricultural credit, Credit flow, Co-operative, Commercial bank.

1.1 Introduction :
In developing countries like India, the development of agricultural sector
is imperative for variety of reasons. Agriculture sector depends more on credit
than any other sector of the economy because of the seasonal variations in the
farmers returns and over the years, it has been observed a significant change
from the subsistence level of production to market oriented commercial
production. Diversification and commercialization in agriculture have resulted in
shifting of cropping patterns from traditional crops to commercial and high value
crops and produced for new markets. Credit may provide all those opportunity
_____________________________
* Assistant Professor of Economics, Madhya Kamrup College, Barpeta.

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for pushing the agricultural production to the high horizons consequently raises
the living standards of our rural poor farming community. Hence, it plays a
pivotal role in development of the economy. In India, with the introduction of
green revolution, the capital necessities in agriculture have increased substantially
and by many folds. Therefore, there is a greater need for institutional credit as
vital input to support agriculture and allied activities for promoting modern
methods of production and for sustained farm returns. In developing countries
credit structure is of two types i.e., co-existence of institutional (formal) and non-
institutional (informal) credit sources. Due to illiteracy farmers find it convenient
to approach private moneylenders and other non-institutional sources because of
their simple procedures of financing. Moreover most of the farmers are small and
marginal, suffer from the problem of lack of required capital. Small farmers
usually face cumbersome procedure and collateral problems in availing credit.
Evidence suggests that such loans further aggravate rural poverty as the effective
rate of interest on informal credits is exorbitantly high.

1.2 The Literature :

Dantwala (1989) in his study dealt with a quick review of the performance
of institutional credit since the nationalization of commercial banks revealed that
short-term and medium-term institutional credit to agriculture has grown at a
compound rate of 14.2 percent and 20.4 percent per annum, respectively during
the period from 1974-75 to 1984-85.The share of commercial banks in short-term
institutional credit flow rose from 16.3 percent in 1974-75 to 35.8 percent in 1984-
85.
Barman, K. K. & Devi, N. (2004) showed in their study that despite of
impressive growth bank branches in North East India the credit-deposit ratio is
not satisfactory. The low level of credit-deposit ratio is attributed by low level of
utilization of advances, poor recovery of loans etc. Absence of close monitoring
of loans after disbursement is a serious problem leading to miss-utilization of
fund.
Borah and Chakraborty (2004) in their study found that institutional credit
flow in North Eastern region is very poor which is reflected by poor credit -

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deposit ratio. In 1999 the credit deposit ratio for the region was 30.29 as against
national average of 51.66. By using trend equation to see the variation in scheduled
commercial banks (SCB's) credit (outstanding) flow to agriculture it is found that
during 1990-91 to 2000-01 growth in the percentage share of agriculture out of
the total SCB's credit (outstanding) to NER is negative (-0.674).
Choudhury, R.K. (2004) finds that total bank credit in Assam during 1995-
2000 increased by more than 50 percent and annual quantum of credit in all the
sectors went up except in Agriculture sector where it is declined by 10 percent
.The credit deposit ratio declined from 49 percent in 1990-91 to 33 percent in
Assam in that period. He has also find out that there has been a vast gap between
the official purposes of the farm credit and the purpose it has been put by the
farmers.
Sahu and Rajasekhar (2005) find out that from the period 1981-2000 the
share of agricultural credit of scheduled commercial bank in total net bank credit
had declined from 13.84 percent in 1990 to 8.38 percent in 2000 after introduction
of banking sector reforms.
Satish, P. (2006) took the review of institutional credit indebtedness and
suicide in Punjab and found that share of co-operative credit decline from 65.05
percent to 47.92 percent and that the share of commercial bank raised 34.91percent
to 52.08 percent during the period 1990-91 to 2002-03. He also reflected that
indebtedness is not due to the absence of institutional credit supply but it is an
outcome of excessive unproductive consumption expenditure and decline return
from agriculture.
Golait (2007) finds out that despite of significant improvement in terms of
spread and outreach of financial institution, the quantum of Agricultural credit
flow in India is still inadequate. He has identified host of the factor responsible
for low flow of investment credit to Agriculture such as high transaction cost,
structural deficiencies, issues related to credit worthiness etc.
Khan et al (2007) examined the interregional disparities in per hectare
flow of short term credit to Agriculture in India .He found that interregional
disparities in per hectare flow of institutional credit had increased during pre
-liberalization period between 1980-81 to 1990-91.During the post liberalization

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period (1990-91 to 2001-02) the interregional disparities of credit flow have

reduced. But the coverage is still very low.
Panda (2007) made a study of growth trends of the institutional agricultural
credit in Orissa. The finding of the study is that the whatever the agricultural
credit are supplied by the institutional agencies all are more noticeable only in
crop loans. The annual growth rate, in term loans was found to be very low as
compared to all India average.

1.3 Objectives :
The objectives of the analysis are—
• To estimate the trend of growth of institutional agricultural credit in India
• To make a comparative analysis of the distribution of agricultural credit in
pre reform period and post reform period.

1.4 Data and Methodology :

The entire study is based on secondary sources. Secondary sources are—
1. Credit related issues published in different journals and edited books.
2. Government official website.
3. RBI reports.
4. Statistical Handbooks.

2. Discussion :
2.1 Co-Operative Bank :
The formal institutional credit delivery mechanism in India had marked
its beginning, with the introduction of "Land Improvement Act"1883 and
"Agricultural loan Act"1884, thereby public funds became open to farmers for
obtaining credit. In 1892 the Madras now (Tamilnadu) government placed Mr.
Fedrick A. Nicholson on special duty to enquire in to the possibility of agriculture
and other land banks. He in his report submitted in 1895 highlighted the weakness
of non-institutional sources and advocated the setting up of co-operative credit
societies in different parts of the country to develop thrift, prudence and self-
reliance in the Peasantry. In 1898 sixty four banks were set up in different parts

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of the country on the basis of cooperative principle. Thereafter a committee was

appointed under Edward Law to make proposal regarding cooperative credit
societies. The committee drew model scheme of management for rural and urban
societies that formed the basis of the cooperative credit societies Act 1904 heralding
the beginning of the cooperative movement in India. On the basis of various
committee recommendations in 1944, a three tire system of agriculture cooperative
credit came in to existence in India namely-
1. The provincial co-operative bank at the apex level (at present state level)
2. The Central co-operative banks at the intermediate (at present district level)
3. The primary credit societies at the base level (at present village level)
As on 1950-51 there were 15 provincial co-operative bank, 505 central
cooperative bank and 1,49,000 primary credit societies. But the cooperative credit
system was subjected to a major review in 1950s by All India Rural Credit system
which observed a very pitiable picture of share of these sources to total rural
credit .This is because a large share of rural credit requirement is fulfilled by
traditional sources. In order to stimulate the development of cooperative credit
institution The All India Rural Credit Survey Committee (1953-54) recommended
the public sector banks which would be responsive to the need of the rural sector
in general and cooperative institution in particular.

2.2 Entry of commercial bank :

During the 1950s the share of commercial banks in rural credit was very
much negligible as it was concentrated only to class section of the society. The
All India Credit review committee chaired by G.D .Gorwala in its report submitted
in August 1954 revealed that the share of institutional and non-institutional sources
of rural credit were 7.3 percent and 93.7 percent, respectively. As per the
recommendation of this committee it was realize that the commercial bank could
play a significant role in supplementing the efforts of the cooperative societies to
meet the credit needs in agriculture and allied sector. On the basis of
recommendation of rural credit survey committee the Imperial Bank of India and
certain state associated banks were amalgamated to form State Bank of India
with the major objective to provide the vast remittance to cooperative. Accordingly

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imperial bank was nationalized in 1955 and the new State Bank of India was
asked to open 400 branches in semi urban areas and start agricultural lending
even if at loss. Moreover on the basis of insignificant credit flow to priority sector
like agriculture the government of India introduced Social control in December
1967 and the National Credit Council was set up in February 1968 to advise
government and reserve bank of India in budgeting and planning the small
credit flow with due consideration of neglected sector of the Economy. As the
policy of social control was not effective, the 14 major commercial banks were
nationalized in 1969.This was the marked beginning of Multi-Agency approach
involving commercial banks of the country to play a dynamic role in providing
additional credit to neglected sector like agriculture. Further in 1980 the
government of India acquired the ownership of six largest private sector banks
bringing the total number of nationalized bank to 20.With the initiation of Green
revolution in late sixties the government interest was to channelize credit through
formal sources to agriculture sector in rural areas. As a result, the rural branches
went up from 1443 in 1969 to 19453 in 1981. But, after 1990 there was a slowdown
in branch expansion of schedule commercial banks as the government accepted
the recommendation of the committee chaired by Narashinham, which advocated
further branch expansion to be based on 'need, business potential and financial
viability of location' (Table-2.1).

Table - 2.1
Expansion of Rural Branches of Commercial bank (1969-2013)

Year No of Rural branches Percentage of total

1969 1443 22.2
1974 6165 36.5
1979 13333 44.1
1981 19453 56.0
1989 33014 57.2
1994 35329 57.2
1999 32857 50.6
2004 32121 47.80
2007 30592 42.0
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2007 30592 42.0

2008 30772 40.35
2009 31453 39.20
2010 32473 37.97
2011 33909 37.19
2012 36428 36.94
2013 39336 37.19

Source : Data up to 2007 are based on Banking statistics, Basic statistical returns, RBI
Mumbai, 2008, from 2008-13 data are based on Handbook of Statistics of Indian Economy,
RBI 2012-13

2.3 Introduction of Regional Rural bank :

Although there was a massive expansion of commercial bank branches
during the post nationalization period the working group on rural bank appointed
by govt. of India under the chairmanship of M. Narasimhin its report submitted
on 31st July, 1975 recommended the setting up of state sponsored region based
,rural oriented commercial bank so as to reach the unreached section of the rural
area primarily the small and marginal farmers, landless labourers and all the
weaker section of the rural society for their productive credit needs .On the basis
of this the government of India accepted the recommendation and the president
of India issued the "The Regional Rural bank Ordinance 1975" on September 26,
1975 with immediate effect to facilitate setting up of Regional Rural bank in the
country. Finally, the ordinance was replaced as "Regional Rural Bank Act 1976"
and the RRB's were set up as poor man's bank (Table-2.2).

Table - 2.2
Progress of Regional rural banks in India from 1975 to 2010

Year No of bank No of Branches

1975 6 17
1980 85 3279
1985 188 12606
1990 196 14443
1995 196 14509
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Social Science Journal of Gargaon College, Volume III • January, 2015 ISSN 2320-0138
1990 196 14443
1995 196 14509
2003 196 14400
2008 86 15181
2009 82 15480
2010 82 16001

Source : Consolidated Review of Performance of Regional Rural Banks, As on March 31,

2011, Ministry of Finance, Govt. of India.

3. Distribution of Institutional Agricultural Credit in India: A Comparative

Study of Pre and Post Reform Period :
Agricultural credit apparently started to grow after bank nationalization
and it has been growing continuously since then with all concerns. Historically
Co-operative societies have played a vital role in the provision of institutional
credit to agricultural sector. With the entry of commercial bank in rural area, the
share of Co-operative credit in total Agricultural Credit had gone down.
Considering the disbursement of direct institutional credit in pre-reform period
and post reform period the study reveals that the agricultural credit policies and
economic reform in general aim to have positive influence on the total volume
of institutional credit. The study reveals that Co-operative banks dominated in
total agricultural credit disbursement in the pre reform period .The loan
disbursement in direct institutional credit was higher for co-operatives in pre-
reform period.

Table - 3.1
Direct institutional credit in pre reform period (Rs. In Crore)
Year Loan issued Loan outstanding
Co- Commercial Regional Co- Commercial Regional
operatives bank rural operatives bank Rural
bank bank
1980-81 1386 517 - 1908 1162 -
1981-82 1796 623 - 2149 1370 -
1982-83 1908 565 98 2225 1351 109
1983-84 2158 872 120 2554 1638 147
1984-85 2323 1035 132 2836 1964 206
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1983-84 2158 872 120 2554 1638 147
1984-85 2323 1035 132 2836 1964 206
1985-86 2747 1252 176 3237 2355 265
1986-87 2620 1482 201 3293 2619 324
1987-88 3120 1672 246 3871 3071 400
1988-89 3594 1765 250 4668 3414 479
1989-90 3974 1898 336 4948 4005 575
1990-91 3448 2048 125 5178 4235 590

Source: Handbook of Indian Economy, Reserve Bank of India 2008

The Co-operative banks provided Rs. 1386 crore in 1980- 81. It has increased
to Rs.3448 crore in 1990-91.The schedule commercial banks disbursed Rs. 517
crore in 1980-81, which had gradually increased to Rs. 2048 crore in 1990-91. The
direct agricultural credit disbursed from Regional Rural banks was Rs. 125 Crore
in the same period (Table-3.1).

Direct institutional credit in post reform period :

Considering post reform period the amount of loan issued by the Co-
operative bank in 1991-92 was Rs. 3934 Crore, whereas the Schedule Commercial
Bank disbursed only Rs. 2341 Crore. The dominance of Co-operatives in
Agricultural loan disbursement was retained till the year 2004-05. In 2005-06, the
direct loan disbursement from SCBs was higher than the Co-operative bank. The
loan disbursement from SCBs was Rs. 45644 crore, whereas it was Rs 35624 crore
for co-operative in 2005-06.The RRBs provide Rs.12816 crore in the same year
(Table-3.2).
Table - 3.2
Direct institutional credit in post reform period (Rs. In Crore)
Year Loan issued Loan outstanding
Co- Commercia Regional Co- Commercia Regional
operatives l bank rural operatives l bank Rural
bank bank
1991-92 3934 2341 337 5110 4631 679
1992-93 4394 2432 451 5900 4988 799
1993-94 6039 2860 476 6640 5425 887
1994-95 6996 3842 688 7091 6154 1115

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1994-95 6996 3842 688 7091 6154 1115
1995-96 9243 4628 849 9312 7173 1308
1996-97 9489 5625 1147 9618 8766 1625
1997-98 10084 6233 1457 10060 9522 1914
1998-99 10698 7742 1750 10462 10821 2238
1998-00 17255 9505 2285 16241 12610 2808
2000-01 18556 10704 3095 18168 15442 3692
2001-02 21670 12661 3810 21540 18882 4812
2002-03 23629 16825 4834 24518 232111 6495
2003-04 29326 24134 6133 30808 31982 7664
2004-05 31887 29978 9883 32481 42798 10980
2005-06 35624 45644 12816 34140 59971 13877
2006-07 40796 65245 17031 37764 76006 18707
2007-08 47390 68243 20377 43696 96152 22748
2008-09 48022 107766 22851 45686 126285 26652
2009-10 61951 124646 30529 54970 167623 33663

Source: Handbook of Statistics of Indian Economy, Reserve Bank of India, 2012-13.

Comparison of two periods :

To analyze the agency wise difference in growth of agricultural credit
between pre and post reform period compound growth rate is calculated. In pre
reform period the Commercial bank achieved 15percent (approx.) compound
growth of direct agricultural credit disbursement. It was followed by Co-operatives
approximately 10 percent. In pre reform period the regional rural banks were
dominant in the growth of direct agricultural credit outstanding.
In post reform period the co-operative had attained less growth of both
direct agricultural disbursement and outstanding in comparison to SCBs and
RRBs. The highest compound growth rate of direct agricultural advances (both
disbursement and outstanding) was attained for the Regional Rural Bank in post
reform period followed by Commercial bank (Table-3.3).

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Table - 3.3
Compound Growth Rate
(Agency wise difference in Agricultural credit growth)
Banks Pre reform period Post reform period
Disbursement Outstanding Disbursement Outstanding
CO-operative 9.54 % 10.49% 16.54 % 14.10%
Commercial 14.75 % 13.80 % 24.71% 22.06 %
Bank
Regional Rural 3.08 % 23.50 % 28.44% 24.21 %
Bank

Calculation based on the data published on Hand Book of Statistics of Indian

Economy RBI 2012-13.The Compound Growth Rate is calculated by using
following formulae :-
1
CAGR (Compound Growth Rate) = CAGR ( , 0 )=( ( )/ ( 0 )) − 0 −1
( 0 )=Start value, ( )=Finish Value, − 0=Number of years.

Status of Institutional Agricultural Credit in India after 2000 :

After the Nationalization of Commercial banks in 1969, India has strongly
pursued a policy of "Social and Development Banking" in Rural areas. Particularly
the Commercial banks, emerged as an importance source of augmenting the
supply of credit in rural areas .one of the main aspect of the post -1969 policy of
Social and Development banking was that Commercial banks were required to
open four branches in unbanked rural areas for every branch opened in
Metropolitan areas. Another aspect was that, according to different interest rate
Scheme of 1974, loans were provided at concessional interest rate on advances
made by the public banks to selected low income groups engage in productive
and gainful activities. But in early 1990; s the policy of social and development
banking was criticized by the proponents of financial liberalization. The committee
on financial system (Narashinham committee) argued that banks should function
on a commercial basis , and profitability should be the prime concern in their
activities thus banks should give a free hand to charge rates of interest as well
as to be permitted to close rural branches , in the name of the liberalization of

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branch network. As a consequence, the period of financial liberalization after

1991, there was a - large scale closer of commercial bank branches in rural areas
and a sharp fall in the growth of commercial credit flow to agriculture (Chavan,
2005, 2007)
A comprehensive credit policy was announced by the Government of
India on 18 June 2004, containing measures for doubling agriculture credit flow
in the next three years and providing debt relief to farmers affected by natural
calamities. The following are the highlights of this announcement :-
• Credit flow to agriculture sector to increase at the rate of 30 per cent per year.
• Debt restructuring in respect of farmers in distress and farmers in arrears
providing for rescheduling of outstanding loans over a period of five years
including moratorium of two years, thereby making all farmers eligible for
fresh credit.
• Special One-Time Settlement scheme for old and chronic loan accounts of
small and marginal farmers.
• Banks allowed extending financial assistance for redeeming the loans taken
by farmers from private moneylenders.
• Commercial Banks (CBs) to finance at the rate of 100 farmers/ branch; 50 lakh
new farmers to be financed by the banks in a year.
• New investments in agriculture and allied activities at the rate of two to three
projects per branch.
• Refinements in Kisan Credit Cards (KCCs) and fixation of scale of finance.

Role of Indirect finance :

Historically, agricultural credit has comprised mainly of credit provided
directly to cultivators, which was called "direct finance to agriculture". Within
direct finance to agriculture, short-term- credit or credit for seasonal agricultural
operations has accounted for a significant share. Short-term loans to agriculture
are referred to as "crop loans", as they are advanced for crop cultivation against
the hypothecation of the crop to be cultivated by the farmer. Apart from crop
loans, direct finance also includes credit for medium and long-term investment
in agriculture. The second component of agricultural finance is called "indirect

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finance", which does not go directly to cultivators but to institutions that support
agricultural production in rural areas. In this system rural people were financed
by banks through primary agricultural co-operatives, registered societies, Gram
Panchayats, NGO's and SHG, etc. The typical forms of indirect finance to
agriculture were loans to input dealers for their role in the provision of agricultural
inputs and loans to electricity boards for supplying power to cultivators.
One of the main features of the Agricultural credit growth after 2000 is
role of indirect finance. Of the total increase in Credit supply to agriculture
between 2000 and 2011, about one third was contributed by Indirect Finance.
Share of direct and indirect finance to agriculture in total credit to agriculture
from scheduled commercial banks in India from 2000 onwards are as shown in
the Table-3.4.

Table - 3.4
Share of Direct and Indirect Finance to Agriculture from Schedule
Commercial Bank in Total Agricultural Credit (in percent)

Year Direct Finance Indirect Finance Total

2000 84.5 15.5 100
2005 76.1 23.9 100
2006 72.1 27.9 100
2007 74.5 25.5 100
2008 77.5 22.5 100
2009 77.1 22.9 100
2010 76.1 23.9 100

Source: Report of the Working Group on outreach of Institutional finance, Co-operatives

and Risk management, for the 12th Five year plan (2012-17), Planning Commission,
November 2011.

There has been a distinct shift in the preference of Commercial banks

towards indirect finance to agriculture. Of the total Credit outstanding to
Agriculture, the share of indirect finance was 15.5 percent in 2000 which increased
to 27.9 percent in 2006 and stood at 23.9 percent in 2010.

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Agency wise share in Total credit Disbursed :

The dominance of share in total credit disbursed by co-operatives was
retained till the year 2003-04. From 2004-05, the share in total credit by Commercial
bank was gradually increasing. In 2004-05 the share of commercial bank was 45.9
whereas the share of co-operatives was 42.7 percent. The parentage share of Co-
operatives in total Agricultural Credit was 29.6 percent as against the 58.2 percent
share of Commercial bank in total Agricultural Credit in 2007-08. The share of
RRBs was 12.2 percent in 2007-08.In 2008-09 the percentage share of both Co-
operatives and RRBs banks were declined whereas the percentage share of
Commercial banks increased by 7 percent as against 2007-08. In 2011-12, the
share of Co-operatives was 17.21 percent and the share of Commercial bank and
RRBs are 72.13 percent and 10.65 percent respectively. The most significant rise
in total Agricultural credit was took place in 2011-12.As against the target of Rs.4,
75,000 crore fixed for 2011 -12, the total disbursement to Agriculture sector was
5, 11,029.09 crore and exceeding the target by 8 percent (approx.). While the
Commercial banks and RRBs together extended credit to 99.65 lakh new farmers
during 2011-12, Co-operative banks extended Credit to 21.52 lakh new farmers
during the same period. Thus taking the total no of new farmers brought under
the banking system to 121.17 lakh. The total no of Agricultural loan accounts
financed as on March 2012 was 6.47 crore. The credit flow to agriculture during
2012 -13 by Commercial banks, Co-operatives and RRBs together was Rs. 2,39,629
crore till September 2012, accounting for 42 percent of the annual target of
Rs.5,75,000 crore set for 2012-12. The annual target for 2013-14 is Rs. 7, 00,000
crore (Table-3.5).

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Table - 3.5
Agency wise share in Total credit Disbursed
Year Share in Total Credit (percent)
Co-operatives SCBs RRBs
2001-02 56.4 34.4 8.4
2002-03 52.2 38.4 9.0
2003-04 48.0 43.4 8.6
2004-05 42.7 45.9 11.3
2005-06 33.4 56.0 10.6
2006-07 28.5 60.0 10.7
2007-08 29.6 58.2 12.2
2008-09 23.89 65.32 10.77
2009-10 16.51 74.33 9.16
2010-11 16.68 73.86 9.46
2011-12 17.21 72.13 10.65

Source: Handbook of Statistics on Indian Economy, Reserve Bank of India, 2012

Progress of Kishan Credit Card Scheme :

To provide adequate and timely support from the banking system to the
farmers for their cultivation needs including purchase of inputs in a flexible and
cost effective manner, a Kishan Credit Card scheme was introduced in 1998 for
short term and medium term loans.
Banks issued 9080374 cards in 2004-05 where the commercial bank had
the highest share with 45.4 percent as against the 36.8 percent and 17.86 percent
share of Co-operative bank and RRBs respectively. There is declining trend in the
share of Co-Operative bank, as in 2004 -05 the share of Co-operative bank in no
of card issued was 36.8 percent which declined to 19.4 percent in 2009-10. However
the share of Regional Rural bank declined in 2008-09 but in following years its
share progressively improved to 21.65 percent in 2009-10. The Kishan Credit card
has been an important initiative for universal access of farmers to institutional
credit. The number of operative KCCs issued by Co-operative banks and RRBs
in the country as on August 31 ,2012 was 406 lakh against outstanding loan
amount was Rs. 1,12,33.90 crore. As reported by RBI, Commercial Banks had

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issued a total of 547.49 lakh cards (Cumulative since inception) as on March 31,
2012 with a sanction amount of Rs. 3,53,144.82 crore (Table-3.6).
Table - 3.6
Agency-wise & Year-wise Kisan Credit Cards Issued Along with Loan
Amount Sanctioned [Rs. Crore]
Year Commercial Bank Co-operative Bank Regional Rural Total
bank
No of Card Amount No of Amount No of Amount No of Amount
issued ( Crore) Card ( Crore) Card ( Crore) Card ( Crore)
issued issued issued
2004-05 4395564 14756 3555783 15597 1729027 3833 9680374 34186
(45.40 ) (36.8) (17.86) (100)
2005-06 4164551 18779 2598226 20339 1249474 8483 8012251 47601
(52.0) (32.4) (15.6)

2006-07 4807964 26215 2297640 13141 1405874 7373 8511478 46729

(56.5) (27.0) (16.5)
2007-08 4605775 59530 2091329 19991 1772498 8743 8469602 88264
(54.4) (24.69) (20.93)
2008-09 5833981 39009 1343845 8428 1414647 5648 8592473 53085
(67.89) (15.6) (16.5)
2009-10 5313085 39940 1743253 7606 1949785 10132 9006123 57678
(59.0) (19.4) (21.65)

Source: Microfinance Gateway, Figure in the parentheses indicates percentage in total.

Interest Subvention Scheme :

The interest subvention scheme is being implemented by Government of
India since 2006-07 to make short term crop loans up to Rs 3 lakh for a period
of one year available to farmers at the rate of interest rate 7 percent per annum.
The government of India has since 2009-10 been providing additional interest
subvention to farmers who repay their loans in time. The additional subvention
which was 1 percent in 2009-10 was gradually increased to 2 percent in 2010-11
and 3 percent in 2011-12 and 2012-13

Demand -Supply Gap :

Despite the vast expansion of the formal credit in the country the
dependence of rural poor on the money lenders continues in many areas especially

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for meeting the credit requirement. Such dependence is pronounced in the case
of marginal farmers, landless labourers belonging to socially and economically
backward class.
India's economy is based on rural sector because more than two third of
the population is depended upon the Agriculture. Finance being the lifeline of
every venture, availability of funds at reasonable terms is mandatory to ensure
rapid economic development. In India the institutional finance to Agriculture is
inadequate. A review of the performance of Agricultural Credit in India reveals
though the overall flow of institutional credit has increased over the years , there
are several gaps in the system like inadequate provision credit to small and
marginal farmers , paucity of medium and long term lending etc. This has major
implication for reducing the gap between credit requirements and credit supply.
So the biggest challenge for the development of Indian Agriculture is demand
supply gap of Agricultural Credit. In recent years the demand -supply gap
increases gradually. Even after taking the comprehensive credit policy of 2004
with the objective of doubling agricultural credit in next three years demand-
supply gap was exist. During the period 2002-03 the credit gap was 4.0 percent
which increased to 33.1 percent in 2007-08. The average increase of demand-
supply gap from 2002-03 to 2007-08 was 11.4 percent (Table-3.7).

Table - 3.7
Agricultural Credit (Demand- Supply Gap)

Year Actual Supply of Estimated Demand- Supply

Total Agricultural Demand For Gap
Credit (in billion) Agricultural (in Percent)
Credit (in billion)
2002-03 2562 2665 4.0
2003-04 3004 3260 8.5
2004-05 3583 3811 6.4
2005-06 4411 4944 12.1
2006-07 5361 6745 25.8
2007-08 5817 7741 33.07
Average (Geometric Mean) 11.4

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Source : Calculation based on the data published in written speech delivered by Dr.
Duvvuri Subbarao, Governor, and Reserve bank of India, at the thirty anniversary
celebration of NABARD at Mumbai on July 12, 2012.RBI Monthly Bulletin August
2012.
Formula for Calculating Demand- supply gap
= {[Estimated Demand for Agricultural Credit - Actual Supply of total agricultural
credit] ÷ Actual Supply of Agricultural credit} × 100

4. Suggestions & Conclusion :

The flow of Agricultural credit witnessed a rapid increase after the bank
nationalization. The Co-operative system was unable to provide adequate support
to the needy farmer's .As per the recommendation of All India Credit Survey
Committee constituted in 1966, the Government of India nationalize leading banks
1969. Between 1971-72 and 2001-12, the agricultural credit witnessed around 578
times jump from merely 883 crore in 1971-72 to Rs5,11,029 crore in 2011-12. The
opening up of rural bank branches led to decline in the role of informal agencies.
The commercial bank occupies major share of institutional credit to agriculture.
But still the objective of easy accessibility of rural finance has not been reached
to desired extent. Thus the financial institution as well as the government has to
make some remarkable step for enhancing credit facilities to the rural areas.
1. Role of institutional credit to Agriculture cannot be viewed just as a support
to food producing activity but simultaneously it should considered as a tool
to improve the overall economic well being of the farmers. Thus the banks
and other financial institution are seemed to be very active in flowing credit
facilities to needy farmers of the rural area
2. However question arises because in most of the cases people misuse the loan
amount and again some the genuine farmers are not able to get credit due to
cumbersome and complicated procedure. Therefore, the government and other
financial institution who are the provider of rural credit should pay attention
in this regard.
3. Majority of the farmers are not well informed about the formal process, and
they always depend on mediator. Considering this bank should undertake

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Social Science Journal of Gargaon College, Volume III • January, 2015 ISSN 2320-0138

such a policy so that all the farmers become well informed about the formal
procedure of obtaining credit.
4. Financial Agencies should try to make credit available on time. Transaction
cost of credit should also be reduced. Credit is a condition that enables a
person to extend his control over ownership of resources. It plays the role of
an accelerator in agricultural development and thereby reducing poverty
provided it is adequate in quantity, cheap and development oriented and
fully utilized. Land, soil, fertilizer, HYV, irrigation and rainfall are treated as
the major component for determining the productivity of agriculture.
Management of agriculture sector is essentially related to all. Credit is an
essential pre-requisite for carrying all those activities.

References :
• Dantwala, M.L., (1989): "Estimates of Demand for Credit and its Role in Poverty
Alleviation", Indian Journal Agricultural Economics, Vol. 44 (4), pp. 416-422.
• Gandhimathi, S. (2012): "Distribution of Agricultural Credit in India"
International journal of Management, IT and Engineering, Vol. 2, Issue 9, Sept.,
2012
• Goilate, Ramesh (2007): "Current issues in Agricultural credit in India: An
assessment", Reserve bank of India occasional paper, Vol.28, No 1.
• Handbook of Indian Economy (2008): Reserve Bank of India.
• Handbook of Indian Economy (2012-13): Reserve Bank of India .
• Mohan, Rakesh (2004): "Agricultural Credit in India: Status, Issues and Future
Agenda", Indian Journal of Agricultural Marketing, Vol. 18, No. 1 January -
April.
• Report of the Working group on outreach of Institutional Credit, Co-operatives and
Risk Management, for the 12th five year plan (2012-17), Planning Commission,
November 2011.
• Sahu, G. B. and Rajasekhar, D. (2005): "Banking Sector Reforms and Credit
Flow to Indian Agriculture", Economic and Political Weekly, Vol. XL, (53), pp.
5552-59.

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• Satis, P. (2006): "Institutional Credit, Indebtedness and Suicides in Punjab",

Economic and Political Weekly, Vol. XLI, (4), pp. 298-300.
• Tripathi A. and Prashad A.R. (2009): "Agricultural development in India Since
Independence- A Study on Progress, Performance and Determinants", Journal
of Emerging Knowledge on Emerging Markets, Vol. 1, issue 1, 2009.
• Siddiqi, Nahid Akhter and Asif, Mahammad (2011): "Flow of institutional
credit to agricultural in India: An Overview", in Anil Kumar Thakur and
Praveen Sharma, Economic Reforms and Agricultural Development, (ed.), Deep
and Deep publications Pvt. Ltd., pp. 9-25.
• Subbarao, D (2012): "Agricultural Credit -Accomplishment and Challenges" Speech
delivered by Dr. D. Subbarao, Ex- Governor, Reserve Bank of India at the
thirty years anniversary celebration of NABARD at Mumbai on July 2012,
published in RBI monthly bulletin, August.
• Veerpaul, M.K. and Singh, A (2013): "Role of NABARD and RBI in Agriculture
sector growth" International Journal of Emerging Research in Management and
Technology, Vol. 2, Issue 3, March.

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