Institutional Credit and Its Impact on Indian Agriculture

For decades, Indian farmers depended heavily on local moneylenders for credit – borrowing at interest rates that could reach anywhere between 24% and 36% per annum, or even higher in remote areas. This cycle of debt was one of the biggest constraints on agricultural growth. The systematic expansion of institutional credit – through banks, cooperatives, and government-backed schemes – has fundamentally changed that landscape. Today, institutional finance is not just an economic tool; it is the backbone of farm investment and rural prosperity in India.

What is institutional credit in agriculture? 🔗

Institutional credit refers to loans and financial support provided by formal, regulated bodies – as opposed to informal sources like local moneylenders or landlords. In Indian agriculture, institutional credit flows through three main channels: cooperative banks, commercial banks (including nationalised banks), and Regional Rural Banks (RRBs). Each of these serves different segments of the farming community and operates under the oversight of the Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (NABARD).

According to an RBI working paper, before India’s First Five-Year Plan began in 1951, almost all financial needs of the rural sector were met by moneylenders. The push to replace this with a structured, affordable, and accessible credit system became one of the defining policy goals of independent India.

The rise of institutional credit: A policy-driven transformation 🔗

The shift from informal to institutional credit did not happen overnight. It was the result of deliberate, phased policy interventions spread over several decades.

Bank nationalisation and the cooperative movement 🔗

The nationalisation of 14 major commercial banks in 1969 was a watershed moment. It compelled banks to lend to priority sectors – including agriculture – and expand their rural branch networks. Cooperative credit societies, which had existed since the colonial era, were simultaneously strengthened to serve farmers at the village level. Primary Agricultural Credit Societies (PACS) became the grassroots units of cooperative credit, providing short-term crop loans directly to cultivators.

Establishment of Regional Rural Banks 🔗

Regional Rural Banks (RRBs) were established under an ordinance dated 26 September 1975, followed by the RRB Act 1976, with the explicit purpose of providing banking and credit facilities for agriculture and other rural sectors. Set up on the recommendations of the M. Narasimham Working Group, the first five RRBs were inaugurated on 2 October 1975 during the tenure of Prime Minister Indira Gandhi’s government. The primary rationale was straightforward: around 70% of India’s population was rural and largely excluded from the economic mainstream.

RRBs are jointly owned by the central government (50%), the sponsoring commercial bank (35%), and the concerned state government (15%). These banks mobilise financial resources from rural and semi-urban areas and grant loans mostly to small and marginal farmers, agricultural labourers, and rural artisans. Over the years, they have been consolidated for greater efficiency. As of May 2025, there are 28 RRBs operating with a network of over 22,966 branches across India.

The creation of NABARD 🔗

The next major institutional milestone was the creation of NABARD in 1982. NABARD was formed under the National Bank for Agriculture and Rural Development Act of 1981, following the recommendations of the Sivaraman Committee, which recognised the need for a single apex institution to oversee and improve rural financing. It took over the agricultural credit functions of the RBI and the refinancing role of the Agricultural Refinance and Development Corporation (ARDC).

NABARD’s core function is to refinance smaller banks and financial institutions for lending in priority areas, particularly agriculture. When cooperative or rural banks provide crop loans to farmers, NABARD replenishes a large portion of those funds at concessional rates, encouraging more lending. It also supervises RRBs and cooperative banks, prepares district-level credit plans, and supports rural infrastructure through the Rural Infrastructure Development Fund (RIDF), established in 1995-96.

The Kisan Credit Card: Making credit accessible 🔗

Perhaps the most impactful single initiative in agricultural credit reform has been the Kisan Credit Card (KCC) scheme. The scheme was introduced in 1998 so that farmers could readily purchase agriculture inputs such as seeds, fertilizers, and pesticides, and draw cash for their production needs. The model was designed by NABARD and is implemented through commercial banks, RRBs, small finance banks, and cooperative banks.

The KCC works as a revolving credit facility. It provides farmers with a pre-sanctioned credit limit based on their cropping pattern, scale of finance, and cost of cultivation, which is reviewed and revised periodically. Farmers can make multiple withdrawals within the approved limit without having to apply for a fresh loan each season – a significant simplification over earlier processes.

What the KCC covers 🔗

The scheme was designed to be comprehensive. It covers short-term crop cultivation costs, post-harvest expenses, produce marketing loans, household consumption needs, and working capital for farm assets. The KCC scheme was expanded in 2004 to include investment credit for allied and non-farm activities. In 2018-19, it was further extended to animal husbandry and fisheries, broadening its reach well beyond crop farming.

Interest subsidies and affordability 🔗

A key element of the KCC’s success is the interest subvention built into it. Under the Modified Interest Subvention Scheme (MISS), farmers can access short-term loans at a subsidised rate of 7% per annum. Those who repay on time receive an additional 3% incentive, bringing the effective interest rate down to just 4%. Given that informal moneylenders charge multiples of this, the difference is substantial and directly affects farm profitability.

The government has expanded this scheme aggressively. The Union Budget 2025-26 increased the loan limit under the Modified Interest Subvention Scheme from ₹3 lakh to ₹5 lakh, reflecting the government’s continued commitment to agricultural financing. As of March 2024, there are 7.75 crore operational KCC accounts with a total outstanding loan of ₹9.81 lakh crore.

How institutional credit has grown: The numbers 🔗

The scale of growth in institutional agricultural credit over the past decade is striking. Total institutional credit flow to agriculture rose nearly three times between 2014-15 and 2023-24, climbing from ₹8.5 lakh crore to ₹25.48 lakh crore. Short-term agricultural credit more than doubled in the same period, from ₹6.4 lakh crore to ₹15.07 lakh crore.

The reach among smaller farmers has also improved significantly. The proportion of small and marginal farmers accessing agriculture loans grew from 57% in 2014-15 to 76% in 2023-24 – a clear sign that institutional credit is no longer the preserve of larger landholders.

Historically, institutional credit to agriculture rose from 66.3% of total agricultural credit in 1991 to 68.8% by 2010, despite a notable decline in non-institutional credit, reflecting the overall shift in the credit landscape. Regional disparities, however, remain a concern – credit access per hectare varies enormously across states.

Microfinance and the SHG-Bank Linkage model 🔗

Not all farmers or rural households have the land records or credit history needed to access formal bank loans. This is where microfinance and self-help groups (SHGs) have played a crucial bridging role. NABARD launched the SHG-Bank Linkage Programme in 1992 as a pilot to connect around 500 SHGs with formal financial institutions. It has since grown into the world’s largest coordinated microfinance programme, covering 17.75 crore households across India by March 2024.

The SHG model is straightforward. Small groups – typically 10 to 20 members – pool their savings regularly, lend to each other internally, and are eventually linked to banks for formal credit. Because the group functions as a collective guarantor, there is no need for individual collateral. Microfinance programmes through bank linkage have helped participants break free from the poverty trap and the clutches of moneylenders.

Impact on moneylender dependence 🔗

The practical impact on informal borrowing has been measurable. Initiatives like the Jeevika programme in Bihar saw the average interest rate on loans drop from 69% to 58% per year after households transitioned to SHG-linked credit – still high, but a meaningful reduction. Microfinance has also been central to women’s financial inclusion: over 83% of SHGs under the NABARD programme are exclusively women’s groups, making credit access a vehicle for broader social change.

Joint Liability Groups for tenant farmers 🔗

A further innovation is the Joint Liability Group (JLG) model, introduced by NABARD as a pilot in 2004-05 in eight states. JLGs are informal groups of four to ten members engaged in similar economic activities, who jointly take responsibility for repaying bank loans. This model specifically targets tenant farmers and sharecroppers who lack formal land titles and therefore cannot access standard crop loans – a group that had long been excluded from institutional credit.

Challenges that remain 🔗

Despite the progress, institutional credit in Indian agriculture still faces structural challenges. Regional disparities in credit distribution remain wide. A coefficient of variation of 81% in institutional credit distribution across states indicates ongoing inequities, with states like Kerala receiving far more credit per hectare than states like Assam. Small and marginal farmers, despite improved access, still encounter documentation barriers, collateral requirements, and limited banking infrastructure in remote areas.

There is also the issue of end-use diversion. Instances have been reported where farmers availed KCC credit but used the funds for non-agricultural purposes, or where fraudulent documentation was submitted to access loans. These problems point to the need for better monitoring and digital verification – a gap that the government has begun addressing through tools like the Kisan Rin Portal, launched in September 2023 to digitise and streamline interest subvention claims under the KCC scheme.

The overall trajectory, however, is clear. Institutional credit has moved from being an elite or urban privilege to a tool that reaches tens of millions of Indian farmers. The combination of RRBs operating at the district level, NABARD providing refinancing and oversight, the KCC offering flexible revolving credit, and microfinance extending services to those still outside the formal system has created a layered, increasingly inclusive credit architecture for Indian agriculture.

What do you think? With 76% of small and marginal farmers now accessing institutional loans – up from 57% a decade ago – what more needs to change to ensure the remaining quarter is not left out? And as digital tools like the Kisan Rin Portal replace paper-based processes, do you think technology will ultimately solve the problem of rural credit exclusion, or are there deeper structural issues that need addressing first?

References

1. https://www.nabard.org/content.aspx?id=4
2. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/05WS080513_F.PDF
3. https://en.wikipedia.org/wiki/Regional_rural_bank
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8. https://testbook.com/ias-preparation/kisan-credit-card-kcc
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11. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2099696&reg=3&lang=2
12. https://www.academia.edu/27361597/Trend_and_Growth_of_Flow_of_Credit_to_Agriculture_after_1991_in_India
13. https://www.nabard.org/about-departments.aspx?id=5&cid=477
14. https://www.researchgate.net/publication/262125081_Exploring_Possibilities_Microfinance_and_Rural_Credit_Access_for_the_Poor_in_India
15. https://www.ujjivansfb.bank.in/banking-blogs/msme-loan/how-micro-loans-are-driving-rural-development-in-india
16. https://www.nabard.org/content1.aspx?id=2799&catid=8&mid=8