Q.Why has reducing dependence on non-institutional credit been a long-standing goal of Indian rural credit policy?

Non-institutional credit sources have historically charged high interest rates and offered less transparent terms, which is why shifting farmers toward institutional credit has been a consistent policy goal. …

Non-institutional sources of rural credit — moneylenders, traders, commission agents and landlords — have historically been an easy and quick source of funds for rural households, especially those lacking the collateral or documentation that formal institutions require, or those needing credit urgently. However, this convenience has come with well-documented costs: interest rates charged by non-institutional lenders have often been very high, sometimes described as exploitative, and the terms of such loans are frequently less transparent and more one-sided than those offered by regulated institutions.

A further concern is that dependence on non-institutional credit can trap borrowing households in long-term cycles of indebtedness — where a farmer, unable to repay a loan on favourable terms, ends up borrowing further from the same or another informal lender, sometimes across generations of the same family. This directly affects farmers' welfare and their ability to invest productively in their land, since a large share of any surplus may go toward servicing informal debt at high interest. …

Students sometimes state a specific numeric interest rate or exact current share of non-institutional credit without a citation — since these figures vary by survey and over time, the correct conceptual answer describes the qualitati …