What is Rural Credit?
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.
Quick Question
Q. What is the Full Form of RRB and PACs?
A. RRB stands for regional rural banks. PACs stands for Primary Agricultural Credit societies.
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.
Multiple-Choice Question
Q. What is the Tenure for Medium-Term Rural Credits?
One to five years
Five to ten years
Two to ten years
Ten to twenty years
Ans. (3) Two years to ten years
Importance of Rural Credit in India
Rural Credit is Necessary for the Following Reasons –
The gestation period in agriculture is significant, which means that the period from sowing the crop to selling the produce is vast. Therefore, Rural Credit helps farmers with their livelihood until the crops are ready for sale in the market.
The credit can help farmers acquire seeds, tools, fertilizers, and more, which are essential parts of their trade.
Another valid reason for availing of Rural Credit is to mitigate personal expenses, such as marriage, religious functions, death, and more. Additionally, such financial assistance can also aid in repaying outstanding debts.
Multiple-Choice Question
Q. Mr X is looking to build a well on his farm. Which of the following forms of Rural Credit is Perfect for this Purpose?
Long-term credit
Medium-term credit
Short-term credit
None of the above
Ans. (1) Long-term credit
To acquire a better understanding of Rural Credit and its types, students can join Vedantu’s online commerce classes. Conducted by expert members, these classes strictly follow the CBSE class 11 and class 12 curriculums.
Evolution of Rural Credit
The Rural Credit system in India is separated into two parts: an unstructured or informal system of lenders, merchants, and input suppliers, and a formal, organized system made up of cooperatives, regional rural banks, the banking sector, and nonbanking financial enterprises. In recent years, the need to improve formal credit institutions has been justified not just by the need for contemporary inputs, but also by usurious money lending practices that could not instead be successfully resisted. The ideological commitment of India to fostering a "cooperative commonwealth" also had a role, particularly in building cooperative credit organizations at all levels.
The Real Need for Rural Finance
Many of the issues with rural financial services stem from a misconception of the nature of the income effect for these services[60]. The first misperception was that peasants and other rural inhabitants required finance primarily for agricultural output. In reality, an appropriate demand for credit can exist, backed up by a desire and capacity to afford, to balance out a variety of scenarios when income and spending streams are poorly timed. Non-agricultural credit may be as essential as agriculture loans. Indeed, for many rural residents, the most significant reason for seeking credit is as a utilization loan to cover living expenses in the months until the next harvest, rather than to acquire inputs to increase agricultural output. The second misperception was that most impoverished farmers were unable to repay loans, implying that there had to be credible but no effective demand. The research today indicates that impoverished families are both capable and willing to repay loans if they take for their own stated needs and are properly vetted and supervised.
FAQs on Rural Credit: Types and Importance
1. What are the primary types of rural credit in India, classified by loan duration?
Rural credit is primarily classified into three types based on the tenure of the loan, which corresponds to the agricultural needs of the borrower:
- Short-Term Credit: This loan is provided for a period of up to 15 months. It is typically used to finance recurring agricultural expenses like purchasing seeds, fertilisers, pesticides, and paying for electricity or wages.
- Medium-Term Credit: This type of credit has a repayment period ranging from 15 months to 5 years. It is generally taken for purchasing machinery, livestock, constructing fences, or making other semi-permanent improvements to the farm.
- Long-Term Credit: With a tenure of more than 5 years, often extending up to 20 years, these loans are used for major investments. This includes purchasing additional land, undertaking permanent land improvements, or buying expensive equipment like tractors.
2. Why is rural credit considered crucial for the development of India's agricultural sector?
Rural credit is vital for India's agricultural sector for several key reasons. Firstly, it boosts agricultural productivity by enabling farmers to invest in modern inputs like high-yield variety (HYV) seeds, fertilisers, and advanced farm machinery. Secondly, it helps farmers manage their consumption needs during the long gestation period between sowing and harvesting, when there is no regular income. Lastly, and most importantly, access to formal credit helps farmers escape the clutches of exploitative non-institutional lenders (like moneylenders) who often charge exorbitant interest rates, preventing farmers from falling into a perpetual debt trap.
3. What are the main institutional and non-institutional sources of rural credit in India?
The sources of rural credit in India are broadly divided into two categories:
- Institutional Sources: These are formal, regulated entities established or supported by the government. They include Commercial Banks, Regional Rural Banks (RRBs), Co-operative Credit Societies, and Land Development Banks. The National Bank for Agriculture and Rural Development (NABARD) acts as the apex body that regulates and refinances these institutions.
- Non-Institutional Sources: These are informal, largely unregulated sources of credit. The main examples are local moneylenders, traders, commission agents, landlords, and even relatives. While easily accessible, they often come with very high interest rates and exploitative terms.
4. How do Self-Help Groups (SHGs) play a unique role in providing rural credit?
Self-Help Groups (SHGs) have emerged as a vital mechanism for micro-credit in rural areas. They function by encouraging a small group of individuals, typically from similar socio-economic backgrounds, to pool their savings regularly. This collected fund is then used to give small loans to members in need. Once the SHG establishes a consistent record of repayment, it becomes eligible for the SHG-Bank Linkage Programme, allowing it to access larger loans from commercial banks. This model promotes financial discipline, provides credit without the need for collateral, and has been particularly successful in empowering rural women by giving them access to financial resources.
5. What is the fundamental difference between institutional and non-institutional sources of rural credit?
The fundamental difference lies in their operational framework and objective. Institutional sources like banks and cooperatives are formal, regulated entities that aim for both social welfare and commercial viability. Their interest rates are regulated, and their primary goal is to promote productive activities in agriculture. In contrast, non-institutional sources like moneylenders are informal and unregulated. Their main objective is profit, which often leads to exploitative practices such as extremely high interest rates and unfair loan recovery methods, trapping borrowers in debt.
6. What is the specific role of NABARD in the Indian rural credit system?
The National Bank for Agriculture and Rural Development (NABARD), established in 1982, functions as the apex development bank for rural India. It does not lend directly to farmers but plays a crucial role by:
- Providing refinance facilities to other institutions like commercial banks, RRBs, and cooperative banks that offer rural credit.
- Supervising and monitoring the functioning of Regional Rural Banks and Cooperative Banks.
- Promoting rural development projects and supporting research in agriculture and rural finance.
- Facilitating the growth of the rural credit delivery system to ensure a smooth flow of funds to the agricultural sector.
7. What are some of the major problems currently facing the rural credit system in India?
Despite progress, the rural credit system in India faces several challenges:
- Inadequacy of Funds: The total amount of institutional credit available is often insufficient to meet the entire demand from the rural sector.
- Issue of Collateral: A significant number of small and marginal farmers are unable to access formal credit because they lack the required collateral or security.
- High Overdues: A large number of loan defaults and overdues weaken the financial stability of lending institutions, hindering their ability to recycle funds effectively.
- Regional Disparities: The distribution of institutional credit is uneven across different states, with some regions being better served than others.
8. Why does the long gestation period in agriculture make rural credit essential for farmers?
The gestation period in agriculture refers to the significant time lag between sowing a crop and generating income from its sale. During this period, which can last for several months, farmers have minimal to no income. However, they still need funds for two main purposes: production needs (like ongoing irrigation or pest control) and consumption needs (such as food, education, and healthcare for their families). Rural credit, particularly short-term loans, is essential to bridge this financial gap, allowing farmers to sustain their agricultural operations and meet their basic living expenses until the harvest is sold.
