Economics · Ch 5 — Rural Development in India
Rural Credit — Institutional and Non-Institutional Sources
Rural Credit — Institutional and Non-Institutional Sources
Rural Credit
Farmers and rural households need credit for two broad purposes: short-term needs (seeds, fertiliser, labour, day-to-day expenses) and long-term/investment needs (land improvement, irrigation, farm machinery, starting an allied or non-farm activity).
Non-institutional sources
These were historically the dominant, and in many villages still an important, source of rural credit:
- Moneylenders — individuals who lend against personal knowledge of the borrower, often without formal documentation.
- Traders and commission agents — who advance money against a future crop, sometimes tying the loan to a condition that the crop be sold to them later, often at a price below the prevailing market rate.
- Landlords — who lend to their tenants.
- Relatives and friends — informal, interest-free or low-interest borrowing within the family or community.
Problems with non-institutional credit: very high rates of interest, opaque terms, and — particularly with moneylenders and trader-cum-lenders — the risk of exploitative conditions (crops or land pledged as security, produce tied to sale at a low price) that can trap a household in a long cycle of debt.
Institutional sources
Built up deliberately by policy over the decades specifically to reduce farmers' dependence on costlier non-institutional credit:
- Co-operative credit structure — Primary Agricultural Credit Societies (PACS) at the village level, refinanced through District Central Co-operative Banks and State Co-operative Banks; historically the first organised institutional channel of rural credit in India, and one in which Maharashtra's own co-operative movement has been particularly active.
- Commercial banks — brought into agricultural lending on a large scale after bank nationalisation (1969); today they extend both crop (short-term) and term (long-term) loans, including through the Kisan Credit Card (KCC), which gives a farmer a revolving line of credit for crop and allied needs.
- Regional Rural Banks (RRBs) — set up from 1975 specifically to extend credit to small and marginal farmers, agricultural labourers and rural artisans.
- NABARD (National Bank for Agriculture and Rural Development) — established in 1982 as the apex institution that refinances co-operative banks and RRBs, coordinates rural-credit policy, and promotes rural infrastructure and microfinance, including the Self-Help Group (SHG)–Bank Linkage Programme that channels credit to rural households, especially women, organised into SHGs.