How ‘rural' is India's agricultural credit?
By Pallavi Chavan
The Hindu, Friday,12  August 2010

Recent data on banking has brought out a fourth disturbing feature of the revival in agricultural credit. There has been a sharp growth of agricultural finance that is urban in nature. Between 1995 and 2005, the share of agricultural credit supplied by urban and metropolitan bank branches in India increased from 16.3 per cent to 30.7 per cent ( Table). The share of agricultural credit supplied by metropolitan branches alone increased from 7.3 per cent in 1995 to 19 per cent in 2005. While there was a moderate decrease in these shares between 2006 and 2008, urban and metropolitan branches continued to supply about one-third of the total agricultural credit in 2008. Concurrently, there was a sharp fall in the share of agricultural credit supplied by rural and semi-urban branches from 83.7 per cent in 1995 to 69.3 per cent in 2005. In 2008, the share of rural and semi-urban branches in total agricultural credit was 66 per cent.
Data show that what is termed agricultural credit may have very little to do with agriculture, the way we know it.

Report of the Technical Group Set up to Review Legislations on Money Lending


The survey reveals that out of every Rs 1,000 outstanding of farmer households in the country, Rs 257 was sourced from moneylenders. The share of moneylenders in the indebtedness of farmer households in Bihar, Manipur, Punjab, Rajasthan, Tamil Nadu and Andhra Pradesh were well above the national average, with Andhra Pradesh at the top. The penetration of moneylenders is significant even in States that are regarded as being adequately banked (Andhra Pradesh and Tamil Nadu).


Box 3

Profile of Informal Credit Providers

Various categories of informal credit providers are in existence in most of the States where the survey was conducted. The categories of informal credit providers in order of frequency are pawnbrokers followed by input suppliers, arthiya/commission agents, kirana shopkeepers, lender against land, etc. According to what was reported by the 11 Regional Offices of the RBI there were 12,601 registered moneylenders as on March 1995. This number has increased to 19,627 as on March 2006. Anecdotal evidence suggests that there is a corresponding increase in unregistered moneylenders.

Their mode of operations, viz, maintaining inter-personal relationship with the borrowers, their informal approach, round-the-clock availability of finance, etc., have made them the most important lenders in the villages. Their policy of 'any time, anywhere, any amount', which is borrower-friendly, has strengthened their position in the villages, thus reducing the role of banks. They offer a variety of products tailor-made to the needs of the borrowers.

Amount lent by moneylenders: District officials from only five States could furnish the data on the amount of loan advanced by the moneylenders in their jurisdiction as under:

Amt. in Rs. Crore

Name of State

As on March 1995

As on March 2006













Uttar Pradesh



b) Size of the loan: The average size of the loan varied widely from Rs 1,000 to 30,000. In some cases, it could be as low as Rs 10 and as high as Rs 5 lakh.

c) Purpose: The loans provided by the informal credit providers were generally short-term in nature and mainly for the purpose of meeting social obligations associated with weddings, birth or death ceremonies. Loans for farming and livelihood were also common.

d) Security obtained: Mostly all the loans were granted against the security of gold jewellery, land documents, cultivation rights, promissory notes and even against utensils. Many of the informal credit providers lent money/inputs-consumption and production credit to farmers/small businessmen without any security/documents and with only a signature in their cashbook register for having taken the loan.

e) Savings products offered by moneylenders: Though most moneylenders do not offer any savings products, some operate 'Chit Funds' and Bishis.

f) Innovative Products: Some moneylenders in Karnataka and Rajasthan had introduced a new product viz. 100 days loan. Under the scheme, the principal amount of Rs.1,000 is lent after deducting an interest amount of Rs120 (upfront) and a sum of Rs10 is collected on a daily basis for the next 100 days. The interest collected works out to 44 per cent per annum. Similarly, a sum of Rs 20,000 is lent deducting an amount of Rs 2,400 as interest (upfront) towards the purchase of vehicles etc., and Rs.200 is collected on a daily basis for the next 100 days. In Karnataka in the Gangavati taluk of Koppal district, it was observed that informal credit providers (who were also rice mill owners and commission agents) have formed co-operative society (the Tungabhadra Co-operative Society) under the Karnataka Souharda Co-operative Societies Act. They accept deposits and lend to farmers with an informal agreement that the farmers will sell the produce only to the directors of the cooperative societies for liquidating the loan. These societies collect pigmy deposits and also disburse loans with daily/weekly repayment schedules. Under the Souharda Co-operative Societies Act, the supervision and control of the Co-operation Department of Government of Karnataka is minimal and the accounts of the society are audited by a chartered accountant firm.

g) Rates of interest: The rates of interest charged by the creditors ranged from 12 per cent to 150 per cent per annum although the average rate of interest ranged from 18 per cent to 36 per cent per annum. In some cases, it was observed that the input suppliers did not charge any interest explicitly though such interest was subsumed in the cost of the input itself. Also all moneylenders invariably deducted interest upfront from the principal amount and the balance amount was given to the borrower.

h) Collection of Interest: There was no fixed or specific period for the collection of interest by the lenders. They adopted their own practices which were binding on the borrowers. The interest was collected either upfront or on redemption of the loan as per the terms and conditions or after harvest or daily/monthly/half-yearly. In some of the districts of West Bengal it was observed that the interest was collected by the lenders by way of taking the cultivation rights of the mortgaged land which is known as 'Sudha-varna System' till the loan amount was repaid. This practice was also prevalent in Punjab. The lenders were not charging any additional interest except in few cases where penalties were imposed on borrowers for delayed repayment of the loan.