What is agriculture finanace and what is procedure of agriculture finanace?
In the Indian economy agriculture continues to occupy central role. Its contribution to national income is more than 40 per cent and nearly 65 to 70 per cent of the population depends on agriculture for their livelihood upto 1967, providing finance to agriculture was considered responsibility of the co-operative credit institutions. However, nationalization of banks in 1969 brought a revolution in the participation ofcommercial banks in the agriculture sector. The nationalization of banks led to a fast expansion of the bank branches to rural areas as per the Reserve Bank of India guidelines under the priority sector advances 16% to 17% of the bank credit was directed towards agriculture. Even in the post liberalization phase of the Indian banking providing credit to cultivators has not lost its importance.
In 1982, the National Bank for Agriculture and Rural Development (NABARD) was set up as an apex institution dealing with all the matters concerning policy, planning and operations in the field of credit for agricultural and other activities in the rural areas, its main objectives being to :
(i) serve as an apex financing agency for the institutions providing investment and
production credit for variousdevelopmental activities in rural areas.
(ii)take measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitative schemes, restructuring of credit institutions, training of personnel etc;
(iii) co-ordinate the rural financing activities of all institutions engaged in development
work at the field level and maintain liaison with central/state Governments, RBI and other national institutions concerned with policy formulation, and
(iv) undertaking monitoring and evaluation of projects financed by it.
This apex bank provides agricultural credit through refinancing facilities to Regional
Rural Banks, banks and commercial banks hardly needs any emphasis that significant portion of the bank credit continues to flow in agriculture.
The finance or credit provided by commercial banks to the agricultural sector of cultivators falls under two categories :
(a) Direct finance
(b) Indirect finance
Direct finance to the farmers flows in the form of
(i) Crop loans for short term credit needs of the cultivators
(ii) Development loans to meet the medium and long term credit needs of the
Direct finanace to cultivators for agriculture purposes
The banks provide short term loans for raising crops, commonly called crop loans against pledge hypothecation ofagricultural produce for a period not exceeding 3 months. It also provides medium to long term finances for production and development needs like:
(a) purchase of implements, machinery and transport equipments.
(b) development of irrigation facilities:
(c) reclamation and land development;
(d) construction of farm buildings, structures and storages;
(e) production and processing of hybrid seeds;
(f) payment of irrigation charges;
(g) short term loans for non-traditional plantations, horticulture etc;
(h) promotion of allied activities like dairying, fishery, piggery, poultry etc.
Indirect finance provided by the banks relate to :
(a) financing the distribution of fertilizers, seeds etc;
(b) financing through primary agricultural co-operative societies or similar other institutions;
(c) financing Electricity Boards for reimbursing the expenditure incurred for providing
tube well connections;
(d) financing hire-purchase schemes for agricultural machinery and implements;
(e) financing construction and running of storage capacities.
(f) loans to institutions which undertake spraying operations;
(g) refinancing primary agricultural marketing co-operative societies;
(h) financing through co-operative institutions;
(j) loans to state financial corporations for further finance to agriculturists;
(k) financing organizations or units who maintain fleet of tractors, bulldozers, well boring equipment, threshers, combines etc; which are provided to farmers on hire.
(i) crop loans
Crop loans are the direct finances to the agriculture. These are normally repayable at the time of harvesting, the land should be held by the borrower in his own name. The quantum of finance should be worked out by technical committee for various crops. The Reserve Bank of India guidelines in this regard provide for the following:
(a) Amount of Loan : The amount of the loan to be sanctioned shall be determined on the basis of:
(i) the area to be cultivated by him, and;
(ii) the scale of finance for specific crops per hectare.
The scale of finance will take note of expenses to be incurred by farmers for raising crops including costs of inputs, cost of operations and services. The scale of finance shall be revised periodically taking into account the increase in expenses.
(b) Disbursement : Short term loans are usually divided into two components. One
component is cash component which is disbursed in cash. Second component is kind component which is disbursed through suppliers of seeds, fertilizers.
(c) Margin Money: The quantum of margin keeps on undergoing revision from time to
time. The basic principles of the guidelines regarding margin money are that:
(1) for low amounts of loan or small loans to small or marginal farmers, agricultural
labourers or share croppers no margin be asked for ;
(2) for categories other than the above mentioned a margin of 15 to 25 percent may be required If any subsidy is available, it may be treated as margin.
(d) Security : If the amount of the loan is small and a movable asset is being created only primary security by way of hypothecation of crops or the movable asset created should be sufficient. Any collateral security by way of mortgage of land or immovable property should not be insisted upon. Only for a high amount loan mortgage etc. may be sought for. In case of difficulty in creation of mortgage a third party guarantee may be accepted as security.
(e) Conversion into Term loan : Banks can convert a crop loan into a term loan of 3 to 5years duration, if the borrower is unable to pay due to reasons like natural calamities, death.
(f) Rate of interest: The rate of interest are lower than the commercial loan
(ii) Development loans
The development loans are the term loans. The commercial banks grant medium term
loan to agriculturists for number of purposes like:
(i) Minor Irrigation Works : Like digging of new wells, renovation of wells. Setting up
of pump sets etc;
(ii) Land Improvement Works : Like reclamation, soil conservation, leveling and shaping of land, laying out for field channels/drainage etc;
(iii) Other purposes : Like purchase of tractors, machinery, horticulture development, plantation, allied activities like dairy, poultry, sheep breeding,
piggeries, fisheries. Construction of stores and godowns, forestry, gobar gas plants, purchase of work animals like bullocks and animal driven carts, sericulture and bee keeping etc;
Period : The period of the loan will depend upon its purpose, capacity to repay etc. These should normally be payable within a period of 3 to 10 years.
Security : Regarding security in case of term loans the following approach should be adopted :
(a) Where loan results into movable asset : If a loan results into creation or acquisition
of a movable asset, the asset itself may be hypothecated for a loan upto cost of the asset. In case loan exceeds the cost of the asset, third party guarantee may be obtained. If the amount is large, the mortgage of the land may also be obtained.
(b) When no movable asset is created : Where no asset is acquired loans of only small amounts may be granted against loan agreements. If bank feels satisfied, it may sanction loan on the basis of a declaration or agreement that a charge has been created. If it feels necessary
mortgage may be obtained.
Margins : For loans of very small loans no margin may be required or only a small
margin, say 5% be required. Maximum margins are between 15 to 25 per cent. In number of cases, term laid down by NABARD may be adopted.
Rate of Interest : In view of the deregulation of interest rates, the old system of interes rates ceases to be applicable. The interest shall be payable at the time of repayment of loan or as the instalments may be fixed. If the interest outstanding becomes overdue, it can be added to the principal amount and compound rate of interest may be charged
Repayment: The repayment of the loan should as may be settled at the time of sanction of the loan. However, in case of natural calamity or death etc. of the borrower, the repayme period can be extended without making this rescheduling as a bar for fresh loan.
1. Completion of application forms: In the field of agriculture; especially, small and
marginal farmers are illiterate. They find difficulty in filling the forms and at times feel discouraged due to these formalities. The banks should help such farmers in completing these formalities.
2. Timing of the release of Loan: The bank should work out a calendar for making the
credit in adequate quantity available to the cultivators at the right time.
The applications forloans have to be received well in advance. Delay is sanction could mean that the sowing crop is delayed, resulting into poor yield. This will also affect the chances of recovery of the loan The development loans should be sanctioned, when the farmers are free from crops and can use the funds properly.
3. Completion of other formalities : In case of development loans, the banks should
complete the other formalities in time. These formalities will also depend upon the type of the loan being sanctioned. For example, if the loan is for the purchase of tractor, it has to be seen that the borrower has adequate land holding around 10 acres). If the land holding is very small the repayment of loan will become difficult. It has to be seen that the major portion of
the loan will be paid out of the incremental income. In case of small holdings possibility of joint loan will be the appropriate approach.
Similarly, when financing is of pumpsets the factors like : (a) adequate ground water (b) minimum land holding (c) agro-climatic conditions of the area (d) requisite horsepower of the set (e) the quality of the pumpset etc. has to be kept in mind. For example, the refinance will
be available from NABARD, if the pumpset has B.I.S. certification. Keeping these factors or considerations in mind the loan can be sanctioned.
4. Area Approach : In case of finance for agriculture area approach' - which aims at
intensive average around a branch may be followed. This will enable bank to save operational costs, as they know various agro-climatic conditions very well. This however, does not mean that viable loan applications from area beyond the area identified for area approach are not to