In this article we will discuss about:- 1. Introduction to Agricultural Credit 2. Characteristics of Agricultural Credit 3. Need for Credit in Agriculture 4. Classification 5. Requisites of a Good System 6. Credit Requirements.
Introduction to Agricultural Credit:
Like all other producers, the farmers also require credit, “Credit supports the farmer as the hangman’s rope supports the hanged.” That agriculturist cannot carry on his business without outside finance is a fact proved by history and evidenced by the poverty and indebtedness of the persons engaged in the business of agriculture.
Agricultural credit is a problem when it cannot be obtained and it is also a problem when it can be obtained, but in such a form that, on the whole, it does more harm than good. In India it is this two-fold problem of inadequacy and unsuitability that is being continually faced by the farmers.
Characteristics of Agricultural Credit:
The study of agricultural credit needs a special treatment because of the fact that agricultural production and organisation possess fundamental differences from that of the industry or other economic activity.
These characteristics are:
1. Agriculture is a Complex of Many Industries:
It is not a single homogeneous industry but an industrial complex of many different types of production and marketing. For instance, farms vary in size from the large bonanza estates in the U.S.A. or collective farms in Russia or cooperative farms in Israel, covering hundreds of hectares, to the unpretentious small holdings peculiar to India.
Agricultural methods also vary, dependent largely upon tradition, general economic needs and local conditions. The size of the holding, forms of land tenure and methods of production differ from place to place, and create many different kinds of complex relationships between farmers on the one hand, and the middlemen, manufacturers and consumers on the other.
The peculiar problems of marketing (like heavy sales in villages, adulteration and lack of means of transport) and finance (i.e., its costliness and inadequacy) are also influenced and controlled by the mode of agricultural organisation. It is this complex nature of agriculture that makes the financing of agriculture relatively more difficult than the financing of industry and trade.
2. The Small Size of the Farm:
The size of farms is very small as compared to the representative factory, from the point of view of the amount of labour employed, the extent of capital invested and the value of the annual turnover. Further, there is no control over the yield and quality, and there is a lack of security to be offered for loans.
As such credit agencies like the commercial banks, naturally prefer lending to a few big manufacturers in cities, whose credit can be more easily assessed to lending to a number of small scattered farmers. The fact that he is a small-scale producer reduces the bargaining power and credit-worthiness of the farmer, and makes it difficult for him to secure adequate supplies of credit and reasonable rates of interest.
3. Difficulties of Combination in Agriculture:
The farmers are further handicapped from getting cheap credit because they are mostly individualistic and suspicious of combining with each other. Combinations to secure a common purpose are more numerous in industry but rather rare in agriculture. Belshaw has rightly said, “The nature of the farm economy develops social characteristics and habits of mind that raise a barrier to corporate effort.”
Therefore, even when combinations are known to be beneficial as in the marketing of agricultural produce and the obtaining of cheap credit, they have even now not become common in agriculture. This has retarded the availability of cheap finance.
4. Risks in Agriculture:
In agriculture, it is difficult to foresee risks and provide against uncertainties. The farmer has to face a large number of uncertainties and risks like those of droughts, floods, accidental breakdown of farm machinery, unsuspected defects in seed and manures, infectious plant diseases and destructive pests may cause unexpected but considerable damage to the farmer.
Hence, a predetermined output cannot be held by regulating the intensity of his effort. Further, agricultural produce tends to deteriorate in storage and the lack of proper storage facilities to hold back surpluses, when supply exceeds demand; lead to further difficulties. These add to commercial risks of agriculture, which arise out of the operations of natural hazards, the nature of the agricultural operations and the uncertainty of agricultural production.
The frequent changes in weather makes it difficult for the farmer to adjust his output to fluctuations in demand. This fact further aggravates the situation for a large proportion of agricultural capital like land is so highly specialised that it cannot be easily diverted from one use to another, and even the farmer cannot afford to change from one crop to another due to numerous unfavourable factors such as the weather, the differences in fertility of the soil, and the changing demand in the market, and the lack of proper marketing facilities.
He therefore, cannot easily regulate his supply in accordance with variations in demand. The farmer must, therefore, carry the entire risks of his productive operation himself, for unlike industry, he cannot transfer a part of his prospective profits by inducing his lenders to share, his risks.
5. The Long Economic Lag in Agriculture:
There is a long interval in agriculture during which costs are incurred before a crop if, harvested and put into the market. It takes months to receive the return of its labour and supply of agricultural produce is seasonal while the demand exists all the year round. This makes financial arrangements much more unavoidable in order to make adjustments of both and stabilize prices.
Further, the farmer can hardly foresee the conditions which may prevail at the time the crop will be marketed and even if the conditions can be foreseen, there is always the possibility that the farmers’ judgment might be mistaken.
6. Other Features:
The farmer also suffers from ignorance and poverty and is heavily indebted to the village mahajans. His need for ready money to pay off land revenue and family burdens often compels him to dispose of his crops at the wrong time, wrong place and at the wrong price.
Secondly, the markets are usually located at some distance from the farm; devoid of suitable road links. The demand ordinarily fluctuates, and produce is either perishable or cannot be stored for a variety of reasons—all these factors also increase the commercial risks peculiar to agriculture.
The former is unable to control successfully either his output or his income. This uncertainty regarding the yield from land and the income from the sale of produce, makes the ordinary credit agencies unwilling to lend to farmers except at higher rates than those charged to other industries; and thus agricultural credit is not easily available as and when needed.
The Committee, on Agricultural Credit in England has very succinctly placed the entire situation thus- “In the very nature of things the agriculturist is often isolated and remote from the normal opportunities for obtaining credit. Compared with those of the manufacturer and the trader his operations are complex, long in their cycle and subject to exceptional risks from weather and disease beyond the ordinary ups and downs of prices and wages which he suffers in common with industrialists. For greater part of the year and specially when he is most in need of credit, his credit is sunk in the form of wealth, difficult for anyone but an expert to value and nor readily chargeable as security for an advance, while his personal training and method of life are not such as to fit him to surmount these disadvantages and to establish that position in the credit market to which his financial stability and high standard of probity generally entitle him.” These observations apply to India in toto.
The Need for Credit in Agriculture:
The demand for capital in agriculture is a composite demand made up to demands for different types of capital good which vary greatly in the degree of their fixity or permanence.
Agriculture requires the following capital goods:
(i) Land and its improvements;
(ii) Agricultural implements, machines and livestock;
(iii) Requisite inputs such as seed, irrigation, fertilisers, oil, cement etc.;
(iv) Stocks of food and clothing to maintain the farmer and his family during the period of production.
In other words, capital/credit in agriculture is needed both for productive and non-productive business needs of cultivators. According to the Rural Credit Survey Committee (1959), the productive purposes accounted for 43.7 per cent and non-productive purposes for 56.3 per cent of the total borrowings in the case of rural families; and 46.6 per cent and 53.4 per cent in the case of cultivators; and 25.9 per cent and 74.1 per cent in the case of non-cultivators.
In the case of cultivators, about 32.0 per cent of the borrowing was for capital expenditure on farm, about 13.0 per cent for current expenditure on farm and about 47.0 per cent for family expenditure and the rest for non-farm expenditure.
In other words, about half of the borrowed funds were utilised for unproductive family expenditure and a little less than one-third was spent on farm improvement. As between the cultivators and non-cultivators, the emphasis on the purposes varied.
The need to satisfy for which credit is required could be related either to:
(a) Conduct productive activity at normal levels of efficiency, which means obtaining credit directly for annual production needs such as purchase of seeds, manures, fertilizers, agricultural implements, livestock and for payment of rent, revenue, wages, and for current expenditure incurred on the maintenance of the farmer and his family. Such credit is generally called Production and Equipment Credit. This type of credit is needed to start and carry on the work of production efficiently.
(b) Develop or conserve resources, which requires credit for developing fully the potentialities of the resources of cultivators which are left unutilised in the course of his current productive activity. Farmers require credit not only to pay off their previous debts and redeem their mortgaged land but also for draining and fencing of the land, construction of wells or digging of tanks and making of embankments, construction of farm buildings or for tree or orchard planting.
The credit for these purposes adds to the income of the farmer by enabling him to undertake improvements. This type of credit can be called Settlement and Development Credit.
(c) Meet circumstances of calamity or distress, occasioned by the incidence of famine, flood or locusts or any other calamity. The requirements of such finance is above all the requirements for ordinary production needs and consumption needs.
Thus, credit may be obtained either for production or consumption, Productive credit, “is that credit which is employed to stop a loss, or effect economy or to create something materially tangible. The savings or gains which result ought to be eventually equal to the sum borrowed hence, no one needs to be afraid of this form of credit provided the amount and the extent be judiciously limited to availability of prompt payment.” As has been rightly said, “Productive credit makes its own security and liquidates itself.”
According to the All India Rural Credit Survey Committee, 28 per cent of the credit is taken for productive purposes, 50 per cent for non-productive, and 32 per cent for unproductive purposes.
Classification of Agricultural Credit:
Agricultural credit may be classified on the basis of:
(A) The purpose for which it is needed;
(B) The length of the period for which loans are required; and
(C) The security against which loans are advanced.
(A) According to Purpose:
Following the Reserve Bank’s classification of agricultural credit by purpose, we may say that such credit is required to purchase land to effect permanent improvements on it.
1. For Agricultural Purposes:
Such credit is needed for the purchase of seed, manure and fodder; payment of rent, wages, revenue, cess and other charges; irrigation of crops, hire charges of pumps and purchase of water; purchase of live-stock and effecting other land improvements; repairs of agricultural implements, machinery, transport equipments, farm houses, cattle sheds, repairs of wells and other irrigation services; laying of orchards; for reclamation of lands and construction of irrigation wells, tanks and embankments; and other capital expenditure on agriculture.
2. For Non-Farm Business Purpose:
Such credit is needed for repair of production and transport equipment and furniture; current expenditure in non-farm business; purchase, construction, and repair of building or non-farm business; purchase of farm equipment and other capital expenditure on non-farm business.
3. For Meeting Family Expenditure:
Such credit is needed for purchase of domestic utensils and clothings; paying for medical, educational and other family expenses; purchase, construction and repair of residential houses; and expenses relating to death and marriage and other ceremonies and litigation expenses.
4. Other Purposes:
These include purchase of building and ornaments; shares and debentures of cooperative societies; deposits with cooperative societies, private money lenders and traders; unspecified purposes; and payment of old debts.
(B) According to the Length of the Loan Period:
From the point of view of the length of the loan period, agricultural credit may fall into three categories, viz.:
1. Short-Term Credit:
It is needed normally for short period of less than 15 months to meet current expenses of cultivation, to facilitate production and for meeting domestic expenses. For example, a farmer may need credit to buy seeds, fertilizers and fodder for cattle. He may also require funds to support his family in those years when the crops have not been good or adequate for the purpose. Such short-term loans are normally repaid fully after the harvest. They are recoverable out of the sale proceeds of the crops concerned.
According to the recommendations of V.L. Mehta Committee on Cooperative Credit, “short-term production loans should be advanced on the basis of sureties only.” In some states such as M.P., Kerala and Orissa, however, even such loans are being provided on mortgage of land. In Bihar and West Bengal a member can borrow upto Rs. 200/- only on surety basis and has to offer mortgage security for loans exceeding this amount.
2. Medium-Term Loans:
These loans are required for medium period ranging between 15 months and 5 years for the purpose of making some improvements on land, buying cattle, agricultural implements, gardening, fencing, plantation etc., purchase of shares in cooperative sugar factories, pig breeding, sheep and goat rearing, purchase of storage bins and purchase of rubber rollers under agricultural machinery.
These loans are larger than short term loans and can be repaid over a longer period of time. The period of loan is generally linked up with the period of serviceability of the assets to be procured with the loan but normally it does not exceed 5 years.
3. Long-Term Loans:
It is which the farmer need for the purpose of buying additional land; to make permanent improvements on land like reclamation and bunding, construction of farm house, cattle and machine-sheds, horticulture, tractors, oil engines, machinery for crushing sugarcane, manufacturing of gur, consolidation of holdings, purchase or acquisition of title to agricultural lands by tenants, etc., to pay off old debts and to purchase costly machinery. Such loans can be repaid only out of the extra income secured by the investment on land. Therefore, these loans are for long periods of more than 5 years, ranging from 15 to 20 years.
It may be observed that almost all types of credit are needed by the farmer at different stages of fanning. But the pressing need is the provision of long and medium term credit as the same is not readily available to him.
(C) According to Security:
On the basis of the security offered, agricultural credit cam be classified into following categories:
(1) Farm Mortgage Credit:
It is secured against land by means of a mortgage of land.
(2) Chattel and Collateral Credit:
In this, the farmer is given on the security of the farmer’s livestock, crops or warehouse receipts, and the latter on the security of other kinds of property such as shares bonds and insurance policies.
(3) Personal Credit:
It is that credit which is advanced on the promissory’ or personal notes of the farmer with or without another’s security or guarantee. The Rural Credit Survey, Committee found that about 50% of the families surveyed were willing to offer their immovable property as security, of the rest about 25 per cent indicated personal security and remaining families did not specify the type of security which they had to offer.
It is worth noting that security loans may be either individual or collective. For instance, in the case of Land Development Bank, the debentures it issues are secured both against the resources of the bank, and all the mortgages against which it has advanced loans. The individual loans of the Bank are secured by means of individual mortgage but the Bank’s bond holders or creditors enjoy a collective security.
Similarly, in cooperative credit societies of the Raiffeisen type, farmers borrow on their collective security. The principle of mutual guarantee is the characteristic of all cooperative credit societies.
Another thing to be noted is that the nature of security demanded by the lender depends upon the length of the period for which loan is required. As a general rule, the longer the period for which loan is required, the more tangible is the security needed by the lender. Thus, long-term loans are usually advanced on the security of land, while medium and short-term loans are made on collateral or personal security.
In, sum, it may be said that the relative importance of different types of agricultural credit varies in accordance with a number of factors such as the country, the land tenure, and the kind of farming practiced etc. For example, in countries like Australia, U.S.A., U.S.S.R., and New Zealand, where land is being settled and developed, long-term credit is more important than short-term or medium-term credit and the same is true of the sharer farmer.
The amount and type of credit need also varies from one type of farming to another. Thus, a smaller amount but a large proportion of long-term credit is needed on dairy farms than on sheep or cereal farms.
Requisites of a Good System of Credit to Agriculture:
Agriculture credit to serve a really good purpose, should according to Louis Tardy; conform to the following criteria:
(1) It should be granted for a sufficiency long time, commensurate with the length of operation which it is desired to facilitate.
(2) It should ensure an equalisation of credit terms, i.e., it must be available at rates comparable to those paid by other industries.
(3) It should be adequately secured in order to avoid any abuse of credit facilities but the security should not necessarily be material.
(4) It should be adapted to the average yield and capacity for the payment of the farms, particularly during the periods of economic depression.
(5) It should be placed in the hands of the direction who have received special training and had actual banking experience.
In India, the Rural Credit Survey Committee has suggested the following requisites which the agricultural credit system should satisfy:
(i) It should be associated with the policies of the State.
(ii) It should be an effective alternative to the private agencies of credit.
(iii) It should have the strength of adequate resources and of well trained personnel.
(iv) It should lend not merely on security of land and other usual forms of security but also on the security of anticipated crops.
(v) It should be such that it helps in the effective growth and development from the village upwards of the cooperative form of association.
(vi) It should effectively supervise the use of credit and constantly bear in mind the borrower’s legitimate needs and interests.
From our point of view, a good system of credit to agriculture should also satisfy the following conditions, besides those given above:
It should satisfy the principle of convenience to the farmer, i.e.:
(a) Provision should exist for the supply of all the three types of credit needed by the farmer viz., long-term, medium-term and short-term credit.
(b) The loans advanced to the farmer must be adequate for the purpose for which they are needed, else other sources will have to be tapped by the farmer at his own peril.
(c) The loan must be available at short notice, such as the loan for the purchase of seed and manures at the beginning of the cultivation season rather than 3 or 4 months after.
(d) The credit system, should be elastic, i.e., it should be capable of expansion during the busy season and system should be devised whereby crops in maturity or transit to the market may be used as security against the issue of loans.
(e) It should safeguard the equity of the farmer, in the event of this being declared insolvent i.e., when his property is sold for non-payment of his loan, provision must be made to secure for him a fair price and to return to him any balance that may be left over after the claims of his creditors and the costs of liquidation have been met.
(f) The capacity of credit institutions to act as a buffer or to spread risks is one of the important tests of a good system of credit to agriculture.
Credit Requirements in India:
Though it is rather difficult to estimate the credit requirements for short and long-term needs of agriculture, yet various efforts have been made to estimate the quantitative dimension of agricultural credit.
Some of the important estimates are given below:
1. The All-India Rural Credit Survey Committee (1954) had placed the total agricultural credit requirements at Rs. 2,000 crores. Of this amount Rs. 800 crores was to be self-financed; and the remaining Rs. 1,200 crores were to be supplied by the agencies extending credit to the farmers.
2. The Working Group (1965) set up by the Agricultural Production Board of the Government of India, estimated the total credit need of agriculture at Rs. 1,160 crores (for 1970-71).
3. The Panel of Economists (under the Chairmanship of Prof. M.L. Dantwala) on the basis of the value of agricultural produce and the expenses incurred, estimated the agricultural credit requirements somewhere between Rs. 1,011 crores and Rs. 1,174 crores in 1970-71.
4. The National Commission on Agriculture has placed the total long- term, short-term and medium-term requirements to the extent of Rs. 9,400 crores by 1985.
5. The Agricultural Credit Review Committee observed that the financial requirement of agriculture depends upon projected growth in agricultural sector. The Committee estimated that direct demand for agricultural credit will be Rs. 57,316 crores in 1994-95 and Rs. 1,10,873 crores in 1999-2000.
The estimates indicate the magnitude of the credit requirements for agriculture. It should be noted that because of the occurrence of drought conditions in many parts of the country and floods in others, and also because of the introduction and extension of new agricultural technology, the credit needs would be very high indeed for future.