Page 167 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 14: Rural Credit and Marketing

14.2 Credit Delivery Mechanism in Rural Finance: Multi Agency Approach Notes

Need for Institutional Finance

The need for institutional credit arises because of the weakness or inadequacy of private agencies to
supply credit to farmers. Private credit is defective because :
(i) it is based on profit motive and, therefore, it is always exploitative;
(ii) it is very expensive and is not related to the productivity of land;
(iii) it does not flow into most desirable channels and to most needy persons;
(iv) it is not available for making agricultural improvements—and much of the necessary
improvements are not undertaken as funds are not available for long periods at low rates of
interest; and
(v) it is not properly integrated with the agriculturist’s other needs.
Institutional credit is not exploitative and the basic motive is always to help the farmer to raise his
productivity and maximise his income. The rate of interest is not only relatively low but can be
different for different groups of farmers and for different purposes. Institutions also make a clear
distinction between short-term credit and long-term credit requirements and give loans accordingly.
Finally, institutional credit is fully integrated with other needs of agriculturists. The farmers require
not only credit but also guidance in the planning of their agricultural operations like the use of seeds,
fertilisers, pesticides etc., assistance in raising crops and in general, help for maximising their income.
Agricultural credit and agricultural improvement should go hand in hand and the farmers should be
taught improved farming methods and also be provided adequate and cheap credit. In all developed
countries, provision of credit facilities and extension services go hand in hand. This work can be
done best by institutions like co-operative societies and commercial banks and not by rapacious
money-lenders and commission agents.
National Policy and Objectives

Since independence, a multi-agency approach consisting of co-operatives, commercial banks and regional
rural banks—known as institutional credit— has been adopted to provide cheaper and adequate
credit to farmers. The major policy in the sphere of agricultural credit has been its progressive
institutionalisation for supplying agriculture and rural development programmes with adequate
and timely flow of credit to assist weaker sections and less developed regions.
The basic objectives of this policy are :
(a) to ensure timely and adequate flow of credit to the farming sector;
(b) to reduce and gradually eliminate the money-lenders from the rural scene;
(c) to make available credit facilities to all the regions of the country, i.e., reduce regional imbalances;
and
(d) to provide larger credit support to areas covered by special programmes like Pulses Development
Programme, Special Rice Production Programme and the National Oilseeds Development
Project.
Institutional credit, as mentioned earlier, refers to the funds made available by co-operative societies,
commercial banks, and Regional Rural Banks (RRBs).
Evolution of Multi-agency Approach
Faced with the serious problem of deteriorating agricultural production and the rapacious money
lenders, the Government set up co-operative credit societies and land mortage banks. Much was
expected from the co-operative credit movement as it was led by the farmers themselves. A survey of
rural credit in 1950-51 showed that the co-operatives could meet barely 33 per cent of the total credit
requirements of farmers, while the money-lenders accounted for 93 per cent of the credit needs of the
farmers. The All-India Rural Credit Survey Committee (1954) stated : “Co-operation has failed, but

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