Name- Anandaroop Bhattacharya
Subject- Research Proposal for admission to PhD Economics
Institutional Finance and Agricultural Development in India
1). Introduction and prospects of the study:
Agriculture today in India requires intensive application of science and
technology through capitalization and mechanization. Under the impact of new
developments in agricultural science and increase in the commercialization of farming,
especially after green revolution, the inputs have become extremely dear for the
cultivators. Hence this fact gives rise to the need for credit in agriculture. The present
study of mine will primarily deal with the link between formal credit and agricultural
development. It will also project the various obstacles that the formal credit institutions
have to face in order to have dominance over rural finance in India.
The rural credit market in India comprises of the formal institutional
sectors consisting of the Co-operatives, Commercial Banks and the Regional Rural Banks
and of the informal institutional sectors prevalent are professional moneylenders,
agricultural moneylenders, landlords, traders and commission agents, relatives and
friends etc. The formal credit institutions are organized either by the government or by
the assistance of the government bodies and is subject to regulations under the provisions
of the banking regulation act as well as the RBI. It is highly institutional in character with
its large scale credit operations, highly complex in nature and involving various
formalities and procedures. It provides credit at concessional rates of interest. On the
other hand the informal institutions are not subject to governmental regulations, the RBI
and the banking regulations act. It is characterized to be non institutional in nature and
personalized operation differing from borrower to borrower. They are flexible in
operation with simple procedures and links credit with non-credit activities. Their interest
rates vary from being nil to exorbitantly high.
The All India Debt and Investment Survey (AIDIS) shows that over the
last four decades the rural credit scenario has shown a changing profile in rural indebt
ness. The objective of rural credit policy has been to enlarge the role of institutional
credit agencies. The All India Rural Credit Survey (AIRCS) projects that the share of
institutional agencies in financing the borrowings of the rural households was 7.1% in
1951-52, whereas the share of private moneylenders was as high as 68.6%. The report
points out the problems that comes out from the monopoly of money lenders in supplying
rural credit. The interest rates are often higher than the mandatory rates prescribed by the
government and are often out of proportion to the risk involved. The indigenous
moneylenders exercise several ways of control over the poor borrowers in the village
whose expenses regularly fall short of income..
Henceforth considering the strengths and weaknesses of non institutional
rural finance the AIRCS (1954) recommended the setting up of a co operative credit
structure. based on three tier system, consisting of an apex body at state level, an
intermediary level consisting of the District Central Cooperative Bank(DCCB) at the
district level and the Primary Credit Society (PACS) at the local village level.. Here
cooperatives are of two types, namely one that provides short term and medium term
loans and the other, the Land Development Banks that provide long and medium term
loans for agricultural development.
The commercial banks in 1951 were lending negligible proportion of
their funds in rural areas. With an objective to increase the role of institutional credit
agencies, the government accepted the idea of a multiple agency approach as
recommended by the AIRCS. This led to the nationalization of 14 scheduled commercial
banks in 1969. In 1975 the Regional Rural Banks (RRBs) were established to give
exclusive attention to the weaker sections of the society comprising of small and medium
farmers, agricultural labourers and rural artisans. Thus the multi agency credit system
was developed in order to address the growing needs of agriculture and rural activities.
2) Scope of the study:
The scope of the study is to figure out the various obstacles the formal
financial institutions face in playing a dominant role in the rural financing system. The
informal rural financial institutions still being dominant, the cooperatives are moving
towards a stage of unsustainability. The study aims to show how the formal rural
financial institutions can be linked to agricultural development. And parallely
recommend the steps that it has to take in order to meet the credit demands of the
agricultural sector and at the same time accelerate the credit flow in rural vicinities.
3) Problem Statement:
Major hurdles came for the formal RFIs in the post reform period. The
share of farmers holding 25 acres of land in the number of accounts (in terms of loans
issued) declined rapidly from 48% in 1990 to 40%in the 1990’s. Correspondingly the
percentage share in terms of the accounts involved declined rather steeply in the 1990’s
(Shetty, 2003). The number of small bank accounts declined by Rs 253 lakhs between
March 1992 to March 2001 with the borrowers account with above Rs.25, 000 credit
showed an increase by Rs.118 lakhs during the same period. As a result the advances for
weaker sections have steadily declined by 9.7% of net bank credit in march 1991 to 7.3%
in march 2001 against the prescribed share of 10%. Similarly the number of borrowers
under the Differential Interest Rates (DIRs) scheme declined from 35 lakhs in march
1991 to a very low of 11 lakhs by march 1999 and their share in total outstanding
advances fell from 0.7% to 0.2%.(Shetty 2002)
Other main problems on the way of formal RFIs are as follows:-
a) Viability- As there is rapid expansions of service from banks and formal credit
institutions, there is bound to be a rise in unit cost as the overhead cost are high
when they deal with large number of small depositors and the borrowers are
unable to provide service of reasonable quality by attracting person of relevant
ability and experiences. The deficiencies are glaring in the case of cooperatives,
which are essentially rural based.
b) High cost of banking- it is accepted till the banks have long-term goals of rural
development. In short term it proves to be costly due to rising overdues, defaulters
and non-recovery of loans.
c) Deficiencies – deficiencies in the form internal management within a policy
environment cum political culture that encourage lending for not so productive
activities at subsidized rates, discourages professional approach and promotes
4) Review of Literature:
Kashirsagar.K.G (2005),in his study focuses on the credit experience of various
categories of farmers and landless households with the credit institutions along with the
objective of suggesting the policy measures of ensuring credit to them. He provides
two different views about the functioning of lending institutions in the state. He has
emphasized upon the need for formal credit agencies to simplify lending procedures so as
to improve overall operational efficiencies. Other suggestions include making sufficient
use of Kisan credit cards with group lending through SHGs.
Sanjay .Kumar (2005) attempted to identify the important socio-economic factors
responsible for the non-repayment of the borrower farmers. He interviewed 140
households spread over 8 villages of 4 development blocks of Ranchi district through
specially designed questionnaires for primary data collections. He used proportional
sample methods for selection of respondents such as defaulters and non-defaulters. His
results which was based on Discriminate Fraction Analysis indicated the characteristics
like literacy, percentage of income from other sources, number of officials, percentage of
borrowing from other institutions to the total production credit, irrigation potential and
cropping intensity. These characteristics enabled him to differentiate between the
defaulters and non- defaulters of loans.
Jagannath Lenka (2005), in his study he seeks to highlight the incidence of debt of
rural farmers households as well as the relative role of the institutional and non-
institutional agencies in financing the rural indebt ness across the major states in India.
He carried his study on the basis of secondary data sources and found out that half the
Indian farmer households are indebted in various degrees. He projected that the
agriculturally developed states were home to large number of indebted farmers as when
compared to the less developed states. He found out that the incidence was highest
among the farmers who belong to the backward communities. He coined the fact that
inspite of 60% of the indebted households having borrowed for agricultural pursuits, as
high as 40% of them have availed loan for unproductive purposes. The most important
finding of his study was that even after a decade of economic reforms, the professional
moneylenders were the predominant source of lending for the rural farmers. Since time
immemorable inability to pay back loans to moneylenders have been responsible for
farmers committing suicide, he suggests at the end of his study that government should
take lucid steps in order to remove the farmers from the clutches of the moneylenders and
at the same time provisions for adequate finance should be made to instill confidence in
the poor farmers who constitute the real strength of the economy. He stresses on the
importance of not only a farmer friendly policy but also its active implementation within
a time framework.
Sohi and Chahal(2005) in their study debated that the issue of rationale
behind interlinked transaction has remained by and large inconclusive. Furthermore they
point out that at the empirical level there haven’t been enough attempts to examine the
incidence and types of interlinked contracts involving different parties. Their study
addresses some alike issues with reference to rural Punjab. More specifically their
objectives were (1) to study the type and extent of linkages between credit services and
marketing (2) to examine the socio economic status of the linked credit participants
determining the linkages between credit and marketing in Punjab. They had used primary
sources of data collection after consulting relevant literature. And views of experts, they
framed well structured questionnaires for farmers and non- farmers separately. They
analysed the collected data through Logit Regression to identify the socio economic
features influencing probability of linkages. They also identified the various kinds of
inter linkages such as (a) credit product which signified that marketing of the farm
products were linked to credit services. It is in fact one of the most important forms of
inter linkages wherere payment is done by selling the produce through the commission
agents. In the regulated markets. (b) Cash-input- under this the farmer is supplied with
inputs either by the cooperatives in the formal sector or by the commission agents and
input dealers in the informal sector. (c) Cash Labour- here the credit is mainly issued to
the labourers and the repayment is done only in terms of labour services.(d) Cash-land-
under this type the credit is mainly issued to the farmers against land which is kept as
security. In conclusion they said that the operational cost of these linkages is
disadvantages of the borrowers. According to their study findings this needed to be
institutionalized in a way that shares the incremental cost between the borrowers and the
Pradhan Narayan Chandra and Gulati Ramesh (2005) in their paper
examined some important institutional aspects of agricultural credit in the post
liberalization period, with the aim of drawing some lessons and delineating prospects for
the future. According to their comparative analysis direct institutional credit to
agriculture and the allied activities in the 80’s and the 90’s revealed that the growth of
long term credit has decelerated and that of short term credit has stagnated. This
phenomenon has continued in the later period and reached an alarming position in 2002-
03. They concluded that the possible constraints causing slow growth of credit could have
been countered by the way of timely availability of credit to the farmers at lower rate of
interest providing them with relief at the time of natural calamity and liquidity
smoothening process linking credit supply to input use as well as broadening agricultural
empathy i.e. matters relating to morale of repayment of debt.
5) Objectives of the study:
There are broadly two main objectives behind my study that are as follows:
1) To analyze the agricultural credit flow in India.
2) To study how growth in formal institutional credit flow will lead to better
implementation of improved technology in agriculture which will enable growth
in productivity i.e. how formal credit will lead to technical progress.
3) To study how insurance can be made available to small and medium farmers
without and obstructions..
6) Analytical framework:
In my study I plan to use multiple regression analysis to identify the
various socio economic factors affecting the agricultural credit flow in India, especially
in the underdeveloped states.. my analysis will be carried out with the help of log linear
type of model.
Eg. Y= ax1b1 . x2b2. x3b3..x4b4..x5b5..x6b6.x7b7.u
Here Y= the total credit disbursement, a= intercept, x1= area under HYV of seeds, x2=
number of small and medium farmers, x3= fertilizer consumption, x4= dairy co-operation,
x5= number of bank branches, x6=diversification index and x7= infrastructure
The regression analysis will be carried out only after transforming the
dependent and independent variables into index forms. The purpose behind this
transformation is to mkinimse the intensity of disturbances.
7) Methodology and Data Sources:
The study will be based on the secondary data sources relating to period
between 1980-81 to 2000-01. To make the conclusion of the study more precise and
reliable the index number techniques will be used to formulate diversification index,
deflation index and infrastructure development index. Dependent variables are taken to
be loans and the independent variables are the same as that in the cases of x1………………x7.
Here Yij is the transformed value index of the jth state.
Data will be collected through various secondary sources NABARD
surveys on rural credit flow for various years, RBI Credit and Investment survey for
various years during the period of study, Directorate of Economics and Statistics-
Ministry of Agriculture (Govt. of India), Indian Economic Survey from 1981 to 2001,
Ministry of Agriculture annual reports during 1981-2001, RBI-handbook of Indian
8) Potential intellectual contribution of the study and its developmental
The study will address the need to expand the operations of formal Rural
Financial Institutions (RFI) in the country where rural finance is still in the grip of
informal lending institutions. The study will identify the various obstacles that are faced
by the formal institutions to dominate the rural credit market, hence through necessary
policy implications like consolidation of banks these obstacles can be controlled to
certain extent. The study will also suggest measures to bring the burgeoning interest rates
of the informal institutions under government scrutiny.
Through appropriate analysis and study of relevant literature will also
attempt to figure how proper channelization of agricultural credit through formal
institutional financers will lead to agricultural growth. Agriculture still being the sector of
utmost importance in the country has to undergo sea changes in terms of modernization.
One of the areas that need massive improvement is formal institutional financing for
agricultural needs, which will enable the rural folks to have access to loans at low rate of
interest. The study will also make an attempt to suggest legitimate ways as to how the
extremely complex procedures and formalities involved in having financial assistance
from formal RFIs can be reduced.
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Use: A Micro Level Analysis with Reference to Kerala”, Indian Journal of Agricultural
Narsaiah Lakshmi (2000),” Institutional Finance and Agricultural Development in India”
Sohi.R.S and Chahal.S.S.(2004),” Interlinked Credit Transactions in Rural Punjab”,
Indian Journal of Agricultural Economics:Vol-59.No-1.Jan-March 2004.
Desai. B.M, “ Credit-Summaries of Group Discussion,” Indian Journal of Agricultural
Economics-Vol-42 No-1 Jan-March-2001.
Khusro. A.M, “ A Review of the Agricultural Credit system in India: Report of the
Agricultural Credit Review Committee,” Indian Journal of Agricultural Economics-Vol-
Satish. P “Agricultural Credit: Are there two Distinct classes of Borrowers?, “Indian
Journal of Agricultural Economics-Vol-60 No-3.Oct-Dec1998.
Bathla Seema and Gulati Ashok (2002), “ Institutional Credit to Indian Agriculture:
Deafluts and Polciy option”, NABARD- Mumbai )(2002)- Occasional study paper-23
Singh R.K.P and Nasir.S, “Agricutral Credit flow in Bihar: An Econometric Ananlysis,”
Indian Journal of Agricultural Economics-Vol-56 No-1. Jan-March 2003.
Kulkarn. B.W, Jayaraman.P. and Despande R.S (2005), “ Rural Credit in Karnataka,
Sysytematic weakness and Correections,” Indian Journal of Agricultural Economics-Vol-
Kumar Sanjay( 2005), “ Problems of Overdues in Tribal areas of Jharkhand”, Indian
Journal of Agricultural Economics.
Lanka Jagannath, “ Indebtness of Rural farmer households” A profile of major states in
India”, Indian Journal of Agricultural Economics.
Golait Ramesh and Pradhan Narayan Chandra, “ Intuitional Credit to Agriculture in
India: Emerging Trends and Future prospects”, Indian Journal of Agricultural
Mishra. R.K, “ Impact of Intuitional finance on farm Income and productivity: A case
study of Orissa”, Indian Journal of Agricultural Economics.
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the period 18/07/2005 to 17/07/2006.
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