Understanding the Agricultural Credit Structure in India

Agriculture in India supports the livelihoods of over half the country’s population. But farming is capital-intensive – farmers need money to buy seeds, fertilizers, equipment, and to sustain their households between harvests. This is where agricultural credit steps in. India has built a vast credit structure over decades, involving both formal financial institutions and informal lending channels, to ensure that farmers can access the funds they need. Understanding how this structure works – who lends, on what terms, and how government policies have reshaped the landscape – is essential for anyone studying Indian agriculture.

What is agricultural credit? 🔗

Agricultural credit refers to the loans and financial assistance provided to farmers and rural communities for carrying out agricultural activities. These funds help farmers purchase inputs like seeds, fertilizers, and pesticides, invest in irrigation and machinery, manage day-to-day household expenses during lean seasons, and repay earlier debts. Credit serves as a critical lifeline, especially for small and marginal farmers who lack the savings to self-finance their operations.

Agricultural credit in India is broadly classified based on tenure into three types:

Short-term credit covers loans taken for a period of up to one year, mainly for meeting immediate crop production needs such as buying seeds, fertilizers, and paying labour wages. These loans are typically repaid after the harvest. Medium-term credit spans one to five years and is used for purchasing equipment, livestock, or making land improvements. Long-term credit extends beyond five years and supports larger investments like land purchase, construction of farm infrastructure, or setting up irrigation systems.

The two pillars: institutional and non-institutional sources 🔗

The agricultural credit structure in India is divided into two broad categories – institutional sources and non-institutional sources. This distinction is fundamental to understanding how credit flows in rural India.

Non-institutional sources 🔗

Before independence and for several decades after, the majority of farmers depended on informal or non-institutional lenders for their credit needs. These sources include:

Moneylenders: Historically the dominant source of rural credit, moneylenders operate at the village level and offer quick, collateral-free loans. However, they are notorious for charging very high interest rates – sometimes exceeding 36% annually – which often traps farmers in a cycle of debt. Despite the growth of formal banking, moneylenders continue to operate in areas with limited institutional reach.

Traders and commission agents: In many parts of India, traders who buy agricultural produce also extend credit to farmers. The catch is that farmers are often bound to sell their produce to the same trader at below-market prices, effectively reducing their income. Commission agents in agricultural markets (mandis) play a similar role.

Relatives and friends: Borrowing from family members or neighbours is common, especially for smaller amounts. While these loans may carry little or no interest, they are unreliable and limited in amount.

Landlords: In agrarian economies where land ownership is concentrated, landlords lend money to tenant farmers and sharecroppers. This relationship often involves exploitative terms, and in extreme cases, can lead to bonded labour.

The key problems with non-institutional sources are high interest rates, lack of transparency, exploitative terms, and the absence of any regulatory oversight.

Institutional sources 🔗

To free farmers from the grip of informal lenders, the Indian government has built a robust network of institutional credit agencies over the decades. These are formal, regulated financial institutions that provide credit at reasonable interest rates with defined terms. The major institutional sources include cooperatives, commercial banks, and regional rural banks.

Cooperative credit societies 🔗

Cooperatives were the first institutional response to the rural credit crisis in India. The cooperative credit structure operates as a three-tier system:

Primary Agricultural Credit Societies (PACS) form the base, functioning at the village level. They accept deposits from members and provide short-term and medium-term loans for crop production and other agricultural needs. District Central Cooperative Banks (DCCBs) operate at the district level and serve as an intermediary between PACS and the apex institution. State Cooperative Banks (StCBs) sit at the top of this structure and coordinate the flow of funds across the system. According to the Department of Financial Services, PACS fall outside the purview of the Banking Regulation Act unless they use the word “bank” in their name.

Cooperatives are especially important for reaching small and marginal farmers who may not qualify for loans from commercial banks. However, the cooperative system has faced persistent challenges – mismanagement, political interference, high levels of loan defaults, and weak governance have limited its effectiveness in many states.

Commercial banks 🔗

The nationalisation of 14 major commercial banks in 1969 was a turning point for agricultural credit in India. Before nationalisation, commercial banks had a strong urban bias and largely ignored rural areas. Post-nationalisation, there was a significant push to expand bank branches into rural and semi-urban regions, and agriculture was brought under the ambit of priority sector lending (PSL).

Under PSL guidelines set by the Reserve Bank of India, commercial banks are required to direct a specified share of their total lending to agriculture and other priority sectors. Today, scheduled commercial banks – including public sector banks, private sector banks, and foreign banks – are the single largest source of institutional credit to agriculture. Their share in total institutional agricultural credit has grown to nearly 48% and above, surpassing cooperatives.

Commercial banks provide short-term crop loans, medium-term loans for equipment and livestock, and long-term investment credit for infrastructure like irrigation and farm buildings.

Regional rural banks (RRBs) 🔗

Regional Rural Banks were established in 1975 on the recommendations of the Narasimham Committee, with a specific mandate to serve the credit needs of small and marginal farmers, agricultural labourers, artisans, and rural entrepreneurs. RRBs are jointly owned by the central government, the respective state government, and a sponsoring commercial bank.

RRBs combine the local knowledge and grassroots reach of cooperatives with the professional banking practices of commercial banks. They offer savings accounts, crop loans, and term loans at competitive rates. While their share in total agricultural credit remains relatively small – around 6% historically – they play a vital role in areas where commercial banks have limited presence.

The role of NABARD 🔗

The National Bank for Agriculture and Rural Development (NABARD) is the apex institution in India’s agricultural credit system. Established in July 1982 under an Act of Parliament, NABARD took over the agricultural credit functions of the RBI and the refinance functions of the erstwhile Agricultural Refinance and Development Corporation (ARDC).

NABARD does not directly lend to farmers. Instead, it functions as a refinancing body, providing funds to cooperative banks, RRBs, and commercial banks so they can extend credit to farmers and rural entrepreneurs. Its functions broadly fall into three categories – financial support, developmental initiatives, and supervisory oversight of rural financial institutions.

Some key contributions of NABARD include the creation of the Rural Infrastructure Development Fund (RIDF), which channels funds from commercial banks’ shortfall in priority sector lending into rural infrastructure projects like irrigation, rural roads, and drinking water. NABARD also pioneered the SHG-Bank Linkage Programme, which has become one of the world’s largest microfinance initiatives, connecting self-help groups (predominantly women) with formal banking services.

The Kisan Credit Card (KCC) scheme 🔗

Launched in 1998, the Kisan Credit Card scheme is one of the most significant innovations in Indian agricultural credit. Designed by NABARD on the recommendations of the R.V. Gupta Committee, KCC provides farmers with a revolving credit facility that they can use to purchase inputs, cover post-harvest expenses, meet household consumption needs, and invest in allied activities like dairy and fisheries.

The scheme is implemented by commercial banks, RRBs, small finance banks, and cooperatives. Farmers holding KCCs can avail short-term crop loans at a subsidised interest rate of 7% per annum (for loans up to ₹3 lakh), which drops further to an effective rate of about 4% for those who repay on time, thanks to the government’s interest subvention and prompt repayment incentive. With over 7.72 crore active KCCs and outstanding loans of approximately ₹10.2 lakh crore, the scheme has become a central pillar of India’s agricultural financing system.

The shift from non-institutional to institutional credit 🔗

One of the most important trends in India’s agricultural credit story is the steady shift from non-institutional to institutional sources. At independence, moneylenders and other informal lenders accounted for over 90% of rural credit. Government policy interventions – including the expansion of cooperatives, bank nationalisation, the creation of RRBs, and the establishment of NABARD – have dramatically altered this landscape.

According to a working group report by the RBI, by 2016-17, approximately 72% of the credit needs of agricultural households were being met through institutional sources, with 28% still coming from non-institutional channels like relatives and moneylenders. The persistence of informal lending is attributed to factors such as the absence of collateral among landless labourers and tenant farmers, poor credit histories, and involvement in subsistence-level agriculture that formal lenders consider unviable.

The interest subvention scheme for short-term crop loans has been a major policy driver, boosting the share of such loans from 51% of total agricultural credit in 2000 to about 75% by 2018. However, this has also created an imbalance – long-term investment credit, which is critical for sustainable agricultural growth, has seen a declining share.

Challenges in the agricultural credit structure 🔗

Despite significant progress, India’s agricultural credit structure faces several persistent challenges:

Regional disparities: Credit distribution is uneven across states. Southern states like Tamil Nadu and Andhra Pradesh receive a disproportionately large share of agricultural credit relative to their agricultural output, while eastern and north-eastern states remain significantly underserved. Research published in SAGE Journals highlights that the eastern region accounts for about 12.3% of India’s agricultural GDP but accesses only about 9% of institutional credit.

Exclusion of small and marginal farmers: Small and marginal farmers hold 86% of operational landholdings in India, yet only about 41% of them have access to bank credit. Lack of land titles, complex documentation requirements, and limited financial literacy remain major barriers.

Inadequate long-term credit: The dominance of short-term crop loans – incentivised by the interest subvention scheme – has crowded out medium and long-term investment credit that farmers need for irrigation, mechanisation, and land development.

Loan waivers and credit discipline: Multiple states have announced loan waivers amounting to lakhs of crores in recent years. While intended as relief measures, these waivers disrupt credit discipline, discourage timely repayment, and squeeze the fiscal space available for productive investment in agriculture.

Land records and tenancy issues: The absence of updated, digitised land records and proper land leasing frameworks makes it difficult for tenant farmers, sharecroppers, and oral lessees to access institutional credit.

Government initiatives to strengthen agricultural credit 🔗

The Indian government has taken multiple steps over the decades to strengthen the formal credit system for agriculture:

Priority Sector Lending (PSL): RBI mandates that commercial banks allocate a specified portion of their total lending to agriculture and related activities. This ensures a steady flow of institutional credit to the sector.

Interest Subvention Scheme: Introduced during Kharif 2006-07, this scheme provides short-term crop loans at subsidised rates. Farmers who repay promptly benefit from an effective interest rate as low as 4%.

Self-Help Group (SHG) Bank Linkage: NABARD’s programme connects informal community-based savings groups with the formal banking system, improving credit access for women and marginalised communities in rural areas.

Digital integration: The launch of the Kisan Rin Portal and linkage with Common Service Centres (CSCs) in rural areas has streamlined the application and processing of agricultural loans, reducing delays and improving transparency.

Setting annual credit targets: The government sets annual Ground Level Credit (GLC) targets for agricultural lending. For instance, the GLC target was set at ₹18.5 lakh crore for FY 2022-23, signalling the government’s commitment to ensuring adequate credit flow to the sector.

Looking ahead 🔗

India’s agricultural credit structure has come a long way from the days when moneylenders dominated rural finance. The institutional framework – built around cooperatives, commercial banks, RRBs, and NABARD – now serves as the backbone of agricultural financing. Policy interventions like the KCC scheme, priority sector lending norms, and the interest subvention scheme have expanded credit access to millions of farmers.

Yet, the job is far from done. Bridging regional credit gaps, bringing tenant farmers and sharecroppers into the formal lending net, increasing the share of long-term investment credit, and digitising land records are all critical priorities. As Indian agriculture faces new pressures from climate change, rising input costs, and market volatility, a strong and inclusive credit system will be more important than ever.

What do you think? Should India focus more on expanding long-term investment credit for agriculture rather than relying heavily on short-term crop loan subsidies? And what role can digital technology play in making agricultural credit more accessible to the most marginalised farming communities?

References

1. https://www.britannica.com/topic/bonded-labour
2. https://financialservices.gov.in/beta/en/agriculture-credit
3. https://www.rbi.org.in/
4. https://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Development
5. https://www.nabard.org/content.aspx?id=4
6. https://www.pib.gov.in/FactsheetDetails.aspx?Id=148600&reg=3&lang=2
7. https://indiacsr.in/kisan-credit-card-scheme-india-farm-credit-expansion/
8. https://prsindia.org/policy/report-summaries/report-review-agricultural-credit
9. https://journals.sagepub.com/doi/10.1177/2633190X211040622