Cooperative Finance in Indian Agriculture: Structure and Role

For most small and marginal farmers in India, accessing formal credit from commercial banks has historically been difficult. Stringent documentation requirements, distant branch locations, and collateral demands have kept millions of rural households dependent on moneylenders charging exploitative interest rates. The cooperative finance system was designed specifically to address this gap. Built on the principles of mutual help and self-reliance, India’s agricultural cooperative credit structure has, for over a century, served as the primary institutional channel for delivering affordable credit to farmers at the grassroots level.

The three-tier cooperative credit structure 🔗

India’s short-term cooperative credit system operates through a well-defined three-tier hierarchy. At the top are the State Cooperative Banks (SCBs), which function as the apex institutions at the state level. Below them are the District Central Cooperative Banks (DCCBs), operating at the district level. At the base are the Primary Agricultural Credit Societies (PACS), which operate directly at the village level and interact with individual farmers. Each tier has a distinct role, and together they form a federated structure through which credit flows downward from the state to the farm.

As of 2025, this network includes around 96,000 PACS, 370 DCCBs, and 33 SCBs operating across the country under the supervisory oversight of the National Bank for Agriculture and Rural Development (NABARD).

State Cooperative Banks (SCBs) 🔗

State Cooperative Banks serve as the apex body of the cooperative credit system within each state. Their primary function is to mobilize resources – through deposits, borrowings, and refinance from NABARD – and channel these funds down to the DCCBs. The SCBs also serve as a link between the national-level financial architecture and the district-level cooperative credit institutions. They fall under the regulatory purview of the Reserve Bank of India under the Banking Regulation Act, and NABARD is empowered under Section 35(6) of the Banking Regulation Act to conduct statutory inspections of these banks.

District Central Cooperative Banks (DCCBs) 🔗

DCCBs form the middle tier of the short-term cooperative credit structure. They mobilize funds from the SCBs at the apex and provide finance to the PACS at the grassroots level. Beyond simply passing on credit, DCCBs also provide funds for a range of agricultural investment activities, including the excavation of wells, purchase of pump sets, horticulture, animal husbandry, and rural transport such as tractors. They also directly raise resources through public deposits and borrowings, giving them an independent financial base beyond what they receive from SCBs. DCCBs act as a critical intermediary – without them, the pipeline connecting state-level financial resources to village-level credit delivery would break down.

Primary Agricultural Credit Societies (PACS) 🔗

PACS are the grassroots-level arms of the short-term cooperative credit structure. They deal directly with rural and agricultural borrowers – disbursing loans, collecting repayments, and also undertaking distribution and marketing functions. Unlike commercial banks, PACS operate on cooperative principles: individual farmers are member shareholders, and office-bearers are elected from within the society. The first PACS was established in 1904 under the Cooperative Credit Societies Act, and until the early 1970s, they were the only institutional credit agency accessible to people in rural India.

PACS primarily offer two types of credit: short-term crop loans and medium-term loans for agricultural investment. Crop loans are extended at the start of the cropping cycle, with banks charging 7% interest – of which 3% is subsidized by the Centre and 2% by state governments, effectively making credit available to farmers at just 2% interest. Beyond credit, PACS also distribute agricultural inputs like seeds and fertilizers, encourage savings among members, and act as the final link between farmers and higher financing agencies.

Functions of cooperative finance in agriculture 🔗

The cooperative finance structure performs several interconnected functions that go beyond simple lending. Understanding these functions helps explain why cooperatives remain important even in an era of expanding commercial banking.

Short-term and medium-term credit delivery 🔗

The most direct function of cooperative finance is providing seasonal agricultural loans. PACS are expected to mobilize deposits from members and use them, along with borrowings from higher tiers, for providing loans to needy members. Short-term crop loans support the purchase of seeds, fertilizers, and pesticides at the start of each cropping season. Medium-term loans – typically with a tenure of 15 months to 5 years – support asset creation: buying machinery, constructing farm infrastructure, or investing in irrigation. This dual credit function is essential for both day-to-day farm operations and longer-term agricultural development.

Savings mobilization 🔗

Cooperative societies are not just credit channels; they are also savings institutions. By offering savings and deposit accounts to members and non-members alike, they mobilize small savings, provide consumption and production loans, and support access to institutional finance. Mobilizing local savings is especially important because it gives cooperatives a resource base independent of external borrowings, improving their financial sustainability. However, in practice, most PACS rely heavily on refinance from higher-tier institutions. As NABARD’s data shows, of the total ground-level credit disbursed by rural credit cooperatives, over 55% of resources are mobilized from NABARD, highlighting the limited deposit generation capacity at the PACS level in most states.

Agricultural marketing support 🔗

Cooperative finance is closely linked to cooperative marketing. PACS deal in the procurement and distribution of agricultural inputs, and many are linked to cooperative marketing societies that help farmers sell their produce collectively at better prices. The National Agricultural Cooperative Marketing Federation of India (NAFED), established in 1958, serves as the apex cooperative marketing institution at the national level. By integrating credit with marketing, the cooperative system attempts to address two major vulnerabilities of small farmers simultaneously – lack of pre-harvest financing and lack of post-harvest market access.

Role of RBI and NABARD in supporting cooperative finance 🔗

Cooperative finance institutions do not operate in isolation. They are supported, regulated, and refinanced by two key national institutions: the Reserve Bank of India and NABARD.

NABARD’s refinance and supervisory role 🔗

NABARD was established in 1982, taking over the agricultural credit functions previously held by the RBI and the Agricultural Refinance and Development Corporation (ARDC). Its role in cooperative finance is multifaceted. NABARD provides short-term refinance to State Cooperative Banks for on-lending to DCCBs for various purposes, including crop loans and seasonal agricultural operations. In 2022-23, NABARD disbursed ₹64,224 crore for Seasonal Agricultural Operations and ₹65,564 crore for Additional Seasonal Agricultural Operations to cooperative banks and Regional Rural Banks.

Beyond refinance, NABARD supervises State Cooperative Banks and DCCBs and conducts statutory inspections of these entities under Section 35(6) of the Banking Regulation Act, 1949. A Board of Supervision constituted by NABARD provides directions on inspection and guidance on the financial health of these banks, ensuring that weaknesses are identified and remedial measures taken. NABARD also provides long-term loans to state governments to contribute to the share capital of cooperative credit institutions – a reimbursement-based support designed to encourage larger lending programs to meet agricultural credit requirements.

RBI’s regulatory oversight 🔗

The RBI regulates SCBs and DCCBs through the Banking Regulation Act, 1949. It has the authority to issue banking licences, and as of the latest data, 348 out of 351 DCCBs and 33 out of 34 SCBs have been issued a banking licence by RBI. The RBI also frames monetary policy and interest rate guidelines that influence the cost and availability of refinance to cooperative institutions. NABARD, in turn, provides recommendations to the RBI regarding licensing and the opening of new branches by State Cooperative Banks.

Government subsidies and financial support 🔗

The Government of India provides direct financial support to strengthen cooperative credit delivery. The interest subvention scheme – where the Centre subsidizes 3% and states subsidize 2% of crop loan interest – directly reduces the cost of credit for farmers accessing loans through PACS. Additionally, the Government of India is implementing a ₹2,516 crore project to computerize functional PACS, linking all PACS to NABARD through an ERP-based national software platform connected via DCCBs and SCBs. This initiative aims to improve governance, reduce transaction costs, enable faster loan disbursement, and support seamless accounting across the cooperative hierarchy.

Challenges facing cooperative finance 🔗

Despite its reach and institutional depth, cooperative finance in India faces persistent structural challenges. Though geographically active PACS cover about 90% of villages, the rural population covered as members is only 50% of all rural households. The resources of PACS remain inadequate relative to the short- and medium-term credit needs of the rural economy, with the bulk of their funds coming from higher financing agencies rather than owned capital or deposit mobilization.

Large loan overdues are a major financial strain. As per an RBI report, PACS had reported lending worth ₹1,43,044 crore and NPAs of ₹72,550 crore – a non-performing asset ratio that reflects both borrower defaults and political pressures that compromise loan recovery. Governance weaknesses, political interference, and variations in managerial efficiency compound these problems, weakening the financial sustainability of many societies. Coverage gaps in the northeast, inadequate trained staff, and the limited use of technology have further constrained the effectiveness of cooperative finance in reaching the most vulnerable farmers.

Recent reforms and the way forward 🔗

The Government of India has taken several steps to revitalize cooperative finance. The creation of a separate Ministry of Cooperation in 2021 signaled a fresh policy commitment to strengthening the cooperative sector. The PACS computerization project, covering over 63,000 societies, is expected to improve transparency and operational efficiency significantly. The government has also expanded the list of permissible activities for PACS – from fertilizer retail and Kisan Credit Card disbursement to functioning as Pradhan Mantri Kisan Samridhi Kendras – to help them generate independent income and become financially viable over time.

The vision of Sahkar Se Samridhi (prosperity through cooperation) underpins these policy moves. By integrating credit with input supply, savings, digital banking, and agricultural marketing within the cooperative framework, the aim is to transform PACS from narrow credit dispensaries into comprehensive rural service centres. The establishment of new cooperative institutions like the National Cooperative Exports Limited (NCEL) and National Cooperative Organics Limited (NCOL) further extend the cooperative model into new value chains, creating income-generating linkages that can improve both member welfare and the financial health of the broader cooperative system.

What do you think? Given that over half of PACS’ lendable resources come from NABARD refinance rather than local deposits, does the cooperative finance system truly reflect the self-reliance principles it was founded on – and what structural changes would make it more financially independent? With large overdues and political interference continuing to weaken many societies, should cooperatives be subjected to stricter commercial banking norms, or would that undermine their purpose of serving small and marginal farmers?

References

1. https://financialservices.gov.in/beta/en/agriculture-credit
2. https://vajiramandravi.com/current-affairs/cooperative-banks/
3. https://www.dalvoy.com/upsc/previous-years/2020/district-central-cooperative-banks-dccb-agriculture-credit-pacs-funding
4. https://www.cooperation.gov.in/en/about-primary-agriculture-cooperative-credit-societies-pacs
5. https://iasbaba.com/2023/02/primary-agricultural-credit-societies-pacs-2/
6. https://www.nabard.org/digitalizing-cooperatives-faq.aspx
7. https://www.gktoday.in/cooperative-credit-societies/
8. https://www.nabard.org/annual-report/cooperatives-tackling-challenges-building-opportunities.html
9. http://eagri.org/eagri50/AECO242/pdf/lec05.pdf
10. https://www.nabard.org/content.aspx?id=4
11. https://www.nabard.org/about-departments.aspx?id=5&cid=469
12. https://www.nabard.org/about-departments.aspx?id=5&cid=466
13. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2099568
14. https://www.drishtiias.com/daily-updates/daily-news-analysis/primary-agricultural-credit-societies-1
15. https://www.drishtiias.com/daily-updates/daily-news-analysis/primary-agricultural-credit-societies
16. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2073319