Understanding the Agricultural Credit Structure in India

Agriculture is the backbone of rural India, supporting livelihoods for nearly half the country’s population. But farming doesn’t run on land and labour alone – it needs money. Whether it’s buying seeds before the sowing season, repairing a broken tractor, or investing in a new irrigation system, farmers need timely access to funds. That’s where the agricultural credit structure comes in. India has built an elaborate framework of lending institutions and government schemes to channel credit to its farming communities. Yet, the story of agricultural credit is not just about banks and policies – it’s also about village moneylenders, local traders, and relatives who still fill the gaps left by formal finance.

What is agricultural credit and why does it matter? 🔗

Agricultural credit refers to the financial resources made available to farmers and rural households for carrying out farming and allied activities. It covers everything from purchasing inputs like seeds and fertilizers to investing in machinery, land improvement, and even meeting day-to-day household expenses between harvest cycles.

Farming is inherently seasonal. Farmers invest at the time of sowing but receive returns only after harvest – a gap that can stretch from a few months to an entire year depending on the crop. During this period, they need financial support to sustain operations and their families. Without adequate credit, farmers may be forced to reduce input use, delay planting, or fall into the hands of exploitative lenders. Adequate, timely, and affordable credit is therefore considered essential for profitable farming and increased agricultural productivity.

Types of agricultural credit by duration 🔗

Agricultural loans in India are broadly classified into three categories based on their repayment period and purpose:

Short-term credit is meant for periods up to one year. Farmers typically use these loans to buy seeds, fertilizers, pesticides, and to pay for labour during the cropping season. These loans are usually repaid after the harvest. The Kisan Credit Card (KCC) scheme is one of the most popular instruments for providing short-term credit to farmers.

Medium-term credit covers a period of one to five years and is used for semi-durable investments – purchasing dairy animals, digging wells, or buying small farm equipment. These loans allow farmers to improve their productive capacity without needing to repay immediately after a single harvest cycle.

Long-term credit extends beyond five years and finances large capital investments such as land purchase, tractor acquisition, construction of farm structures, or major irrigation projects. Land development banks and commercial banks are the primary providers of such credit.

Institutional sources of agricultural credit 🔗

India’s formal agricultural credit system is regulated and monitored by the Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (NABARD). These institutional sources aim to provide structured, regulated, and affordable finance to the rural sector. Here are the key players:

Cooperative credit societies 🔗

The cooperative credit structure is the oldest institutional framework for agricultural lending in India. It operates through a three-tier system: State Cooperative Banks (StCBs) at the top, District Central Cooperative Banks (DCCBs) at the middle level, and Primary Agricultural Credit Societies (PACS) at the village level. PACS are the grassroots units that directly interact with farmers, providing short-term crop loans and recovering them after harvest. NABARD has played a central role in strengthening this cooperative structure through recapitalisation, technical assistance, and regulatory oversight.

However, cooperatives have faced persistent challenges – weak governance, inadequate capital, limited reach in certain states, and politicisation of their management. Despite these issues, they remain an important channel for credit delivery, especially in states like Maharashtra, Gujarat, and Karnataka.

Scheduled commercial banks 🔗

Commercial banks – both public and private sector – are now the largest source of institutional agricultural credit in India. After the nationalisation of major banks in 1969 and 1980, the government mandated banks to direct a portion of their lending to priority sectors, including agriculture. Under the priority sector lending (PSL) norms, banks are required to allocate a specified share of their total credit to agriculture.

Commercial banks provide short-term crop loans, term loans for investment, and also serve as channels for government subsidy schemes. According to data from the NSS 77th Round (2019), commercial banks accounted for about 44.5% of all outstanding agricultural loans, making them the single largest formal lender to farmers.

Regional rural banks (RRBs) 🔗

Regional Rural Banks were established in 1975 on the recommendations of the Narasimham Committee, with the specific mandate of serving the rural and semi-urban population. They are jointly owned by the central government, state government, and a sponsor commercial bank. RRBs combine the local knowledge and reach of cooperatives with the professional banking practices of commercial banks.

RRBs provide both short-term and medium-term credit to small and marginal farmers, agricultural labourers, and rural artisans. The NSS 77th Round data shows that RRBs contributed roughly 8.1% of total outstanding agricultural loans. NABARD provides refinance support and supervisory oversight to RRBs, helping them strengthen their operations and expand their outreach.

NABARD – the apex institution 🔗

NABARD was established in 1982 as the apex development financial institution for rural and agricultural credit in India. It does not directly lend to farmers but plays a pivotal role by refinancing cooperative banks, RRBs, and commercial banks. NABARD also prepares district-level credit plans, supervises rural financial institutions, and promotes initiatives like the Self-Help Group (SHG)-Bank Linkage Programme, which has become one of the world’s largest microfinance programmes.

NABARD also manages important funds such as the Rural Infrastructure Development Fund (RIDF), established in 1995-96, which finances rural infrastructure projects like irrigation, roads, and drinking water supply using the shortfall in priority sector lending by commercial banks.

Micro-finance institutions and self-help groups 🔗

Micro-finance institutions (MFIs) and SHGs have emerged as important supplements to the formal banking system, especially for reaching women and the rural poor who lack collateral. SHGs are small, informal groups (usually of 10-20 members) who pool savings and provide internal loans. Under NABARD’s SHG-Bank Linkage Programme, these groups are connected to banks for larger credit access. By enabling collective savings and borrowing, SHGs have helped millions of small and marginal farming households access formal credit without the need for traditional collateral.

Non-institutional sources of agricultural credit 🔗

Despite decades of effort to expand formal finance, a significant portion of farmers – especially small and marginal ones – continue to depend on informal or non-institutional sources for their credit needs. These include:

Moneylenders remain one of the most prominent informal lenders in rural India. They offer quick, hassle-free loans without documentation or collateral requirements. However, they often charge excessively high interest rates, which can trap farmers in cycles of debt. According to the NSS 77th Round survey, professional and agricultural moneylenders together accounted for over 20% of outstanding agricultural loans.

Relatives and friends are another common source, particularly for small, consumption-related loans. These loans may carry little or no interest but come with social obligations. The same NSS data put their share at about 5.7% of outstanding loans.

Traders and commission agents (also called arhatiyas) extend credit to farmers against the promise of selling their produce through these agents at harvest time. This arrangement ties the farmer’s marketing decisions to the lender, often resulting in unfavourable sale prices. Landlords also provide credit to tenant farmers and sharecroppers, typically with exploitative terms.

Why do farmers still rely on informal credit? 🔗

Even though institutional credit has expanded massively – the ground level agriculture credit target grew from ₹8 lakh crore in FY 2014-15 to ₹27.5 lakh crore in FY 2024-25 – informal sources have not disappeared. An RBI Working Group that reviewed agricultural credit in 2019 found that about 28% of credit needs were still met through non-institutional sources. Several factors explain this persistence:

Collateral requirements are a major barrier. Banks typically demand land documents as security, which excludes tenant farmers, sharecroppers, and landless labourers. The RBI Working Group noted that the absence of proper land leasing frameworks and incomplete land records makes it difficult for these groups to access institutional credit.

Complex procedures and delays in loan processing deter many farmers with limited literacy. In contrast, a village moneylender can disburse a loan within hours. A NABARD survey found that lengthy loan sanction procedures, collateral demands, and short crop loan tenures pushed farmers toward informal sources.

Small loan requirements also play a role. Many small and marginal farmers need very modest amounts, which banks find unprofitable to service due to high administrative costs per account. Additionally, limited bank branch penetration in remote and hilly areas leaves many farmers without physical access to a bank.

Government initiatives to strengthen agricultural credit 🔗

The Indian government has launched several initiatives over the decades to make institutional credit more accessible and affordable for farmers:

Kisan Credit Card (KCC) scheme 🔗

Introduced in 1998 by NABARD in association with RBI, the KCC provides farmers a revolving credit facility to purchase agricultural inputs, meet post-harvest expenses, and cover household consumption needs. As of March 2024, India had approximately 7.75 crore operational KCC accounts with outstanding loans of ₹9.81 lakh crore. The scheme has since been extended to cover fisheries and animal husbandry activities as well. In the Union Budget 2025-26, the loan limit under the Modified Interest Subvention Scheme was raised from ₹3 lakh to ₹5 lakh, significantly expanding coverage for small and marginal farmers.

Interest subvention scheme 🔗

Under the Modified Interest Subvention Scheme (MISS), farmers can avail short-term crop loans at a concessional interest rate of 7%. An additional 3% incentive is provided for prompt repayment, effectively bringing the rate down to 4% per annum. This scheme has made institutional credit significantly cheaper than borrowing from moneylenders, who may charge 24-36% or more annually.

Raising the collateral-free loan limit 🔗

To further ease access, the government increased the collateral-free loan limit for short-term agricultural loans from ₹1.60 lakh to ₹2 lakh per borrower from January 2025. This move benefits small and marginal farmers who lack adequate assets to pledge as security.

Priority sector lending norms 🔗

The RBI mandates that all scheduled commercial banks must allocate a specified percentage of their adjusted net bank credit (currently 18% of ANBC) toward agriculture. Within this, there are sub-targets for small and marginal farmers. The RBI Working Group recommended increasing the lending target for small and marginal farmers from 8% to 10%, given that this group holds 86% of operational landholdings but only 41% of them had bank coverage.

Challenges that remain 🔗

Despite all progress, the agricultural credit system in India faces several persistent challenges:

Regional disparity is a significant concern. Southern states receive a disproportionately large share of agricultural credit compared to eastern and north-eastern states. As of 2018-19, the southern region had the highest share (43%) of institutional credit, while the entire north-eastern region received less than 1%.

Imbalance between short-term and long-term credit is another issue. The interest subvention scheme has incentivised short-term crop loans at the expense of long-term investment credit. The RBI Working Group observed that the share of short-term loans in agricultural credit rose from 51% in 2000 to 75% in 2018. This skew is problematic because long-term investment in irrigation, mechanisation, and land development is crucial for sustainable agricultural growth.

Credit diversion has also been flagged – some studies suggest that agricultural credit may be used for non-agricultural purposes in states where credit flow exceeds agricultural GDP. And the allied sector (livestock, fisheries, forestry), which contributes about 40% of agricultural output, receives only about 10% of total agricultural credit – a gap that policymakers are now trying to address through dedicated sub-targets.

The road ahead 🔗

India has made remarkable progress in expanding institutional agricultural credit. Total credit disbursement reached ₹25.48 lakh crore in FY 2023-24, growing at an average annual rate of over 13% over the past decade. Digital tools like the Kisan Rin Portal are now streamlining the credit process, reducing delays, and bringing greater transparency to the system. The formation and strengthening of Farmer Producer Organisations (FPOs) is also helping small farmers pool their resources and bargain collectively for better credit terms.

However, the core challenge remains – ensuring that credit reaches the farmers who need it most, particularly small and marginal farmers, tenant cultivators, and those in underserved regions. Completing the digitisation of land records, simplifying loan procedures, improving financial literacy, and strengthening cooperative institutions at the grassroots level will be key to building a more inclusive credit system.

What do you think? Can digital tools and policy reforms truly bridge the gap between institutional credit and the millions of small farmers who still depend on moneylenders? What role can farmer collectives and cooperatives play in reshaping the credit landscape in rural India?

References

1. https://prsindia.org/budgets/parliament/demand-for-grants-2023-24-analysis-agriculture-and-farmers-welfare
2. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2099696&reg=3&lang=2
3. https://www.britannica.com/topic/National-Bank-for-Agriculture-and-Rural-Development
4. https://prsindia.org/policy/report-summaries/report-review-agricultural-credit
5. https://ruralindiaonline.org/en/library/resource/situation-assessment-of-agricultural-households-and-land-and-livestock-holdings-of-households-in-rural-india/
6. https://www.nabard.org/content.aspx?id=4
7. https://www.businesstoday.in/industry/agriculture/story/over-50-agricultural-households-in-debt-with-average-loan-of-rs-74000-in-2019-nso-survey-306431-2021-09-11
8. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2098033
9. https://thewire.in/agriculture/despite-availability-of-institutional-credit-farmers-also-depend-on-informal-sources
10. https://www.ibef.org/news/government-boosts-credit-flow-to-agriculture-sector-through-targeted-policy-measures