Ind. Jn. of Agri. Econ.

Vol. 61, No. 1, Jan.-March 2006

Agricultural Credit and Indebtedness in India: Some Issues

R.S. Sidhu and Sucha Singh Gill*

In almost all the models of growth and development, capital accumulation is

pivotal because it raises the productive capacity of the sector in which it takes place.
The capital accumulation depends on the rate of investment, which in turn depends
on the rate of savings. The financial institutions play a dominant role in mobilising
savings and then channelising those savings for investments into productive
economic activities. Therefore, the role of financial institutions is crucial in the
development of any sector and agriculture is no exception to it. Rather the
development of agriculture sector is more dependent on banking sector because 80
per cent of the farmers are small and marginal farmers, who are unable to save and
invest due to their low levels of income. Further, about 70 per cent of the population
in India lives in rural areas contributing about 24.2 per cent to gross domestic product
(GDP) and forms the largest consuming market leading to income and employment
generation through multiplier effects. Banking sector helps in the monetisation of the
rural economy, which is useful in achieving the multiplier effect to the maximum
benefit. Agriculture sector is the most crucial sector of the Indian economy because
the main objectives of economic policy of output growth, price stability and poverty
alleviation are best sub-served in this sector. There is thus a need to increase the
credit flow to agriculture, raise productive capacity of land and enhance the potential
of water resources as well its use efficiency for agricultural development.
A tremendous increase in the production of foodgrains has been witnessed from
82 million tonnes in 1960-61 to 212 million tonnes in 2003-04. This growth was
made possible by the adoption of high yielding varieties especially wheat and rice
crops, expansion in irrigation, higher use of modern inputs and development of
infrastructure and institutions like power, village roads, agricultural market
infrastructure, minimum support price policy and institutional agricultural credit.
Agricultural credit in itself is not an input but it helps in creating environment for the
adoption of modern production technology and encouraging private investments on
the farms. Recognising the importance of credit, the National Agricultural Policy
adopted in July 2000 envisages a growth of 4.0 per cent of agriculture to achieve 8
per cent economic growth of the country and emphasises adequate and timely supply

*Professor of Economics, Punjab Agricultural University, Ludhiana - 141 004 and Professor of Economics,
Punjabi University of Patiala, respectively.
Keynote paper on Subject I “Agricultural Credit and Indebtedness” presented during the Annual Conference of
Indian Society of Agricultural Economics held at Punjab Agricultural University, Ludhiana on November 24-26,
2005.
12 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

of institutional credit to farmers. The agricultural credit institutions will therefore

have to gear up to meet this challenge. The Government of India has recently
announced the target of doubling the flow of institutional agricultural credit in next
three years. It has been noted that though the institutional agricultural credit has
increased on an overall basis but its growth is not equally spread in all the regions of
the country. The developed regions had greater access to credit as compared to less
developed regions (Dadibhavi, 1988; Giri and Dasgupta, 1988; Haque and Verma,
1988). Similarly, the dependence of small and marginal farmers is still very high on
non-institutional sources. The transaction costs of borrowing from formal institutions
to the borrowers are high due to complicated lending procedures, required
documentation and tangible loan collaterals while such costs are less in non-
institutional sources due to flexibility in lending, no requirement for documentation
and loan security. Even from the lenders’ point of view, the transactions cost of
agricultural lending is considered to be high due to heavy overheads and large
number of small loans. Further, the rural financial institutions are reeling under the
problem of poor recovery due to variability in agricultural incomes, low incomes of
small holders and expectation of waiver of loans causing willful default, multiplicity
of lending agencies, etc. In recent years, many parts of the country are facing the
problem of suicides of farmers associated with increasing indebtedness in the rural
sector (Gill, 2005) due to deceleration in agricultural production, productivity and
incomes (Chand, 2005; Sidhu and Johl, 2002). In this context, it becomes important
to examine the growth and distributional aspects of institutional agricultural credit
over time, its role in promoting use of modern production inputs and private capital
formation and analysing its shortcomings and weaknesses in not meeting the
objectives of agricultural credit policy of equity, adequacy, cost effectiveness, low
prices and playing pro-active role in increasing agriculture production. The problem
of indebtedness and suicides in the rural sector and reasons thereof also needs to be
investigated in order to suggest some policy measures to tackle these grave issues.
This paper tries to explore the issues of growth of institutional agricultural credit in
India, its distribution in different regions and accessibility of credit to rural poor
especially small and marginal farmers and economic viability of the operations of
agricultural credit disbursement in terms of recovery performance and margins. The
degree of indebtedness and factors causing indebtedness and suicides was also
studied in Punjab, Andhra Pradesh, Maharashtra, Tamil Nadu and other states.
GROWTH OF INSTITUTIONAL AGRICULTURAL CREDIT

Many policy changes have taken place since 1960, when the agricultural credit
scenario was largely dominated by private informal sources of credit, to increase the
flow of institutional credit to the agriculture sector. The co-operative credit structure
was strengthened by reorganising and merging weak credit societies with strong
societies. The number of village level co-operative societies also increased. Presently,
more than 92,000 primary agricultural co-operative credit societies are working in
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 13

villages. The participation of scheduled commercial banks (SCBs) was negligible in

agricultural loans. However, after the nationalisation of commercial banks (CBs) in 1969,
they were mandated to increase their geographical and functional presence in the rural
areas. Consequently, the number of rural branches of CBs increased from just 1833 in
1969 to 32,121 in 2004. Another credit institution lending exclusively to weaker sections
of the rural areas, known as Regional Rural Banks, was set up in 1975. To meet the
challenges of institutional agricultural credit, both short-term and long-term, the apex
institution namely National Bank for Agriculture and Rural Development (NABARD)
was created in July 1982. To increase the flow of agricultural credit, new approaches
were also initiated like Service Area Approach, micro finance and Kisan Credit Cards.
There is now a very strong network of rural and semi-urban branches catering to the
requirements of agriculture sector and rural areas. The growth of agricultural advances
has also been significant over the years. The direct agricultural advances increased from
Rs. 3,436 crores in 1980-81 to Rs. 38,128 crores in 2000-01 at an annual growth rate of
13.05 per cent. If we compare the growth of agricultural credit in real terms since 1980s,
it was noted that the growth was very high in the period of 1980-81 to 1989-90, when
green revolution technology was at full bloom. The new technology was widely adopted
and capital investments on developing irrigation structures, development of land and farm
machinery were made to realise the full potential of new high-yielding technology.
However, during the period of deceleration in growth of agriculture, the growth in
institutional credit also slowed down significantly from around 10.6 per cent in the earlier
period to 6.8 per cent in the later period (Table 1). The agricultural advances at 1990-91
prices increased from Rs. 4,361 crores in 1980-81 to Rs. 10,686 crores in 1989-90 and
further to Rs. 17,762 crores in 2000-01.
TABLE 1. GROWTH OF DIRECT INSTITUTIONAL AGRICULTURAL CREDIT IN INDIA
(Rs. crores)
At 1990-91 prices
Total at current
Year Short term Long term prices Total Per ha GCA
(1) (2) (3) (4) (5) (6)
1980-81 2,047 1,388.8 3,435.8 4,361 253
(59.6) (40.4) (100.0)
1985-86 4,529 2,629.4 7,158.4 7,864 441
(63.3) (36.7) (100.0)
1989-90 6,499 4,128.9 10,627.9 10,686 586
(61.2) (38.8) (100.0)
1994-95 11,932 6,840.8 18,772.8 11,399 606
(63.6) (36.4) (100.0)
1999-2000 23,694 12,276.3 35,970.3 17,505 923
(65.9) (34.1) (100.0)
2000-2001 26,421 11,706.6 38,127.6 17,762 935
(69.3) (30.7) (100.0)
CGR (per cent)
Overall 13.05 11.89 12.63 6.57 6.00
1980-81 to 1989-90 13.10 13.78 13.35 10.56 10.15
1989-90 to 2000-01 15.87 12.40 14.59 6.76 6.30
Source: Handbook of Statistics on the Indian Economy, 2004-05, RBI, Mumbai.
GCA refers to gross cropped area.
Figure in parentheses indicate percentage to the total.
14 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

A target of 18 per cent of net bank credit has been set for lending to agriculture
sector for SCBs. Despite significant growth in agricultural advances, only 5 SCBs
have achieved this target showing that still greater effort for increasing agricultural
credit is required from SCBs (Reserve Bank of India, 1991). Yet, SCBs have given
many reasons for this shortfall in target like faster growth in bank credit in other
sectors, poor uptake of credit due to drought in many states, low capital formation in
agriculture and low recovery in north-eastern states (Reserve Bank of India, 2004).

STATE-WISE DISTRIBUTION OF INSTITUTIONAL CREDIT

Another issue which is strongly associated with the growth is the distribution of
agricultural credit among different states and regions of the country. There are wide
variations in the availability of institutional credit per ha of gross cropped area in
different states. The flow was as high as Rs. 6,235 in Kerala, Rs. 5,502 in Tamil
Nadu, Rs. 3,806 in Punjab and Rs 3428 in Andhra Pradesh while it was as low as Rs.
873 in Uttar Pradesh, Rs. 432 in West Bengal and only Rs. 155 in Bihar in 1999-2000
(Table 2). The accessibility to institutional credit is higher in the southern region
while it is very poor in the north-eastern region. Secondly, it is highly related with the
level of agricultural development. Similar results were reported in the studies
conducted earlier during the 1980s (Rao, 1994). It is a kind of vicious cycle operating
in less developed states. Less availability of credit influences adversely the adoption
of modern technology and private capital investments, which in turn lowers the
productive capacity of the agricultural sector and results in lower productivity and
production and also pushes the farmers to borrow from non-institutional sources.
Consequently, the demand for agricultural credit for short and long term purposes is
dampened.
The annual increase in the availability of credit also varied widely across states. It
was only 3 per cent in Orissa whereas it was 47.5 per cent in Punjab from 1990-91 to
2001-02 accentuating the disparity in agricultural credit further in favour of irrigated,
technologically advanced and agriculturally more developed regions. The largest
increase occurred in the northern region while the smallest in central region
comprising Uttar Pradesh and Madhya Pradesh states. The distribution of institutional
credit on the basis of area was highly skewed in favour of the southern region as
against the central and north-eastern regions. The southern states with only 19 per
cent of the gross cropped area of the country accessed about 44 per cent of the total
disbursals at all India level in 2001-02. The central states accounted for 27 per cent of
the area and obtained only 14 per cent share of the total disbursals. Further, the share
of the central region in the total credit declined over time making the distribution
more skewed. The proportional share of Madhya Pradesh, Orissa and Bihar in the
total credit was much lower than their respective shares in gross cropped area.
Similarly, the share of Rajasthan was lower than its share in area. On the other hand,
the share of Tamil Nadu, Kerala, Andhra Pradesh, Punjab, Karnataka and Gujarat in
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 15

institutional agricultural credit was higher than their respective shares in gross
cropped area. The skewness in distribution of credit after NEP has slightly declined
with respect to southern region and availability has improved for the western and
central regions. However, the proportional availability has fallen for the eastern
region.

TABLE 2. DISTRIBUTION OF FLOW OF INSTITUTIONAL AGRICULTURAL CREDIT

IN DIFFERENT STATES OF INDIA

1990-91 2001-02 Rs./ha of GCA

Annual Percentage Annual
Per Per increase GCA increase
Region/states Rs. crores cent Rs. crores cent (per cent) (1998-99) 1990-91 2001-02 (per cent)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Northern 1314 12.9 8236 19.9 43.9 20.25 377 2132 38.9
Punjab 642 6.3 4304 10.4 47.5 4.22 856 5352 43.8
Haryana 285 2.8 1821 4.4 44.9 3.22 482 2964 42.9
Rajasthan 326 3.2 1490 3.6 29.7 11.7 168 667 24.7
Himachal
Pradesh 20 0.2 248 0.6 93.2 0.51 207 2555 94.5
Jammu and
Kashmir 20 0.2 83 0.2 25.5 0.57 191 764 25.0
North-Eastern 41 0.4 207 0.5 34.0 2.90 96 374 31.4
Assam 20 0.2 124 0.3 42.4 2.09 54 311 39.9
Eastern 846 8.3 3062 7.4 21.8 14.71 463 1092 22.8
Orissa 306 3 414 1 3.0 4.53 319 479 4.2
West Bengal 285 2.8 1573 3.8 37.6 4.83 329 1708 34.9
Bihar+
Jharkhand 245 2.4 1076 2.6 28.3 5.25 233 1075 30.1
Central 1722 16.9 5835 14.1 19.9 27.57 349 1110 18.2
Madhya
Pradesh +
Chattisgarh 764 7.5 1821 4.4 11.5 13.67 320 698 9.9
Uttar
Pradesh +
Uttranchal 958 9.4 4056 9.8 27.0 13.90 376 1529 25.6
Western 1386 13.6 5959 14.4 27.5 7.06 430 1831 27.4
Gujarat 520 5.1 2980 7.2 39.5 5.56 501 2809 38.3
Maharashtra 846 8.3 2938 7.1 20.6 11.40 387 1352 20.8
Southern 4880 47.9 18127 43.8 22.6 17.51 1410 5426 23.8
Andhra
Pradesh 1477 14.5 5587 13.5 23.2 6.36 1120 4604 25.9
Karnataka 642 6.3 4014 9.7 43.8 6.13 546 3432 44.1
Kerala 835 8.2 2276 5.5 14.4 1.56 2766 7666 14.8
Tamil Nadu 1895 18.6 6166 14.9 18.8 3.44 2857 9403 19.1
All-India 10188 100 41385 100 25.5 100.00 549 2169 24.6
Source: Report of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the
Banking System, RBI, Mumbai, 2004.
GCA refers to gross cropped area.
16 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

Role of Institutional Agriculture Credit in Modern Technology and Capital

Formation

When the country faced the problem of food shortages in the early sixties,
agricultural public policy aimed at increasing productivity and production of
foodgrains to meet this challenge. The introduction of dwarf wheat and rice varieties,
which were highly responsive to use of fertilisers and irrigation, fortunately coincided
with this period. The farmers were hesitant to adopt modern technology, which was
new and untested, on their fields. Secondly, their levels of income were low due to
low productivity of crops. Therefore, agricultural credit policy aimed at increasing
the flow of institutional credit at reasonable rates of interest to the agriculture sector.
The policy measures adopted included strengthening of the co-operatives,
nationalisation of scheduled commercial banks, fixing targets for lending to
agriculture, launching new schemes like service area approach and lead bank scheme,
creation of Regional Rural Banks and apex national level bank namely, National
Bank for Agriculture and Rural Development (NABARD). Apart from public capital
formation especially on the major and medium irrigation projects, the growth in
private capital formation on minor irrigation facilities, farm machinery and other farm
equipment was facilitated by long term lending by the formal financial institutions. It
was noted that the relationship of short term advances by the credit institutions with
purchased inputs like chemical fertilisers, pesticides, irrigation charges and electricity
and diesel was very strong (Table 3). The growth in short term advances facilitated
the adoption of modern technology and as the short term advances grew over time the
use of chemical fertilisers, pesticides and other variable production inputs also grew.
It was a two-way relationship. Short term loans helped use of modern production
inputs which in turn created demand for short term capital and thus the demand for
short term institutional loans went up.
Though the rate of growth of short term advances remained higher than the
expenditure on current (variable) inputs during all the periods but it was lower than
the growth in demand for purchased inputs during the immediate green revolution
period of 1970-71 to 1979-80. Consequently, the share of short term advances to the
expenditure on purchased inputs like fertilisers, pesticides, irrigation, electricity and
diesel fell from 74.5 per cent in TE 1973 to only 50.7 per cent in TE 1983. In the
eighties the share continued to vary but was the lowest at 43.8 per cent in TE 1993.
Due to emphasis on institutional agricultural credit in the post-economic reform
periods, when a minimum of 18 per cent target lending to agriculture sector of total
credit was assigned to all SCBs, the institutional agricultural advances picked up and
constituted between 65 to 72 per cent of the expenditure on purchased inputs. The
demand for purchased inputs has also slowed down during this period due to
deceleration in productivity and many developed regions like Punjab and Haryana
already attained very high levels of use of these inputs. The share of short term credit
to total variable inputs hovered around 39 per cent since the mid-nineties.
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 17

TABLE 3. GROWTH AND SHARE OF SHORT TERM LOANS (ST) IN PRODUCTION INPUTS IN INDIA

(Rs. crores at current prices)

Current Purchased ST/ Current inputs ST/Purchased
Period ST credit inputs inputs (per cent) inputs (per cent)
(1) (2) (3) (4) (5) (6)
TE 1973 673 2,035 903 33.1 74.5
TE 1983 2,515 8,245 4,964 30.5 50.7
TE 1988 4,852 13,304 8,494 36.5 57.1
TE 1993 6,752 24,681 15,429 27.4 43.8
TE1998 16,955 43,916 23,491 38.6 72.2
TE 1999 18,734 47,923 26,906 39.1 69.6
TE 2000 20,979 53,470 31,088 39.2 67.5
TE 2001 23,575 60,212 36,392 39.2 64.8
CGR (per cent)
1970-71-1979-80 14.43 13.64 18.21
1980-81-1989-90 13.47 11.57 12.62
1990-91-2000-01 15.87 12.12 11.41
1970-71-2000-01 13.25 12.5 13.36
Correlation coefficients with ST credit
1970-71-1979-80 1.00 0.951 0.956
1980-81-1989-90 1.00 0.984 0.98
1990-91-2000-01 1.00 0.994 0.962
1970-71-2000-01 1.00 0.992 0.984

Sources: 1. Handbook of Statistics on the Indian Economy, 2004-05, RBI, Mumbai.

2. CSO data on inputs use and value added in agriculture.
Purchased inputs include fertilisers, pesticides, electricity, irrigation, diesel costs. Current inputs include
purchased inputs, seeds, manures, current repairs and maintenance, marketing charges, etc.

The correlation coefficient of short term advances with variable production inputs
and purchased inputs was very high in all the periods but in the post green revolution
period of the 1980s when the modern technology was widely adopted on the farms, it
was the highest with purchased inputs. During the post-economic reform (including
financial sector reforms) period, when the deceleration of agricultural growth set in,
this relationship slightly weakened. The responsiveness of use of modern production
inputs to institutional credit was also examined by fitting linear regression models
with short term advances as the independent variable and current inputs and
purchased inputs as dependent variables separately (Table 4). It was noted that one
rupee increase in short term advances resulted in Rs. 1.49 increase in expenditure on
purchased inputs and Rs. 2.5 increase in current inputs. The elasticity of use of inputs
to agricultural credit was close to unity indicating the strong contribution of
institutional agricultural credit in promoting modern production technology for
increasing productivity and production. The elasticity of fertiliser use with respect to
short term agricultural advances was the highest. Further, the elasticity of output to
fertilisers use was estimated between 0.134 in Orissa and 0.70 in Tamil Nadu
indicating its importance in increasing agricultural production in different states of
the country (Government of India, 2005).
18 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

TABLE 4. EFFECT OF SHORT TERM INSTITUTIONAL CREDIT ON USE OF PRODUCTION

INPUTS IN INDIA, 1980-81 TO 2000-01
(Rs.)
Dependent variable Regression coefficient Elasticity
(1) (2) (3)
Current (Variable) inputs 2.525 0.898
Fertiliser 0.835 0.933
Pesticides 0.039 0.558
Fertilisers + pesticides 0.873 0.906
Purchased inputs 1.487 0.892

The growth of long term advances to agriculture sector has been very high over
time, which has greatly helped in private capital investments on irrigation and land
development, farm machinery, livestock, etc. Private investments being lumpy in
nature and requiring heavy expenditure are generally financed by the institutional
sources. Table 5 shows the growth in gross private capital formation and long term
advances and their relationship in India. It was seen that the long term agricultural
credit increased at a faster rate than rate of growth of private capital formation during
1970s and 1980s. Therefore, the share of credit in capital formation increased from
37 per cent in triennium ending (TE) 1973 to 77 per cent in TE 1988. However,
during the decade of the nineties, the growth in long-term advances was little lower
than the growth in private capital formation resulting fall in the share of institutional
credit to private investments to 54 per cent in TE 2001. Overall, the growth in long
term advances slowed down over time leading to lower growth in private
investments. The decline in public investments may also have caused fall in private
investments due to their positive relationship.

TABLE 5. SHARE AND CONTRIBUTION OF LONG TERM (LT) CREDIT IN PRIVATE CAPITAL
FORMATION IN AGRICULTURE IN INDIA

Period Long-term credit Private GCF Share of credit (per cent)

(1) (2) (3) (4)
TE 1973 267 725 37
TE 1983 1,513 2,306 66
TE 1988 3,173 4,148 77
TE 1993 4,554 9,467 48
TE 2001 12,023 22,261 54
CGR (per cent)
1970-71-1979-80 19.07 17.31
1979-80-1989-90 14.29 10.85
1989-90-2000-01 12.40 12.81
Correlation coefficient of long-term credit with Private GCF
1970-71-1979-80 0.980
1979-80-1989-90 0.951
1989-90-2000-01 0.967
Contribution of long-term credit to Private GCF
Regression Coefficient 1.84
Elasticity 1.01
Sources: 1. Handbook of Statistics on the Indian Economy, 2004-05, RBI, Mumbai.
2. Agricultural Statistics at a Glance, Ministry of Agriculture, Government of India, New Delhi.
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 19

The relationship of long term advances with private capital formation was very
strong in all the periods (correlation coefficient being higher than 0.95) but during the
1980s and 1990s, it slightly weakened as compared to the 1970s. The regression
coefficient between long term loans as an independent variable and private capital
formation as dependent variable was as high as 1.84 and elasticity 1.01, which
indicated the contribution of long-term institutional loans in promoting capital
investments on the farms enhancing their productive capacity. The contribution of
credit in output growth was found to be significant by Chand and Kumar (2004). In
the phase of declining public investments in agriculture, it was the private
investments facilitated by the institutional loans, which did not allow the agriculture
sector to slip to the era of negative growth. The private capital investments on
irrigation helped raising agricultural production as the impact of irrigation is very
strong on agricultural productivity and production (Rao, 1994; Rao et al., 1988;
Vaidyanathan, 1991; Dhawan, 1993). Similarly, farm machinery helped raising
multiple crops and obtaining higher production on per unit area basis. The Punjab
state represents the case of role of farm mechanisation including tractorisation and
private tubewell irrigation, which encouraged multiple cropping, precision in farm
operations, bringing larger area under high-yielding varieties and higher use of
modern production inputs, all of which put agriculture sector of the state on high-
growth path (Sidhu et al., 1998; Bhalla, 1993; Sidhu and Grewal, 1991).

SOME POLICY ISSUES

The institutional agricultural credit has grown significantly over time

encouraging adoption of modern production technology and private capital formation
on farms to enhance their productive potential. It helped raising agricultural
productivity and production in different states and the country as a whole. Yet, the
institutional agricultural credit delivery system is faced with some problems, which
restrict its outreach to different areas and sections of farming classes as well as are
hindering its growth and contribution towards agricultural growth to the optimum
levels. We have tried to discuss these issues here which require adequate policy
attention.

(1) Transaction Costs of Agricultural Credit

Two issues are involved in agricultural lending in India. The banking sector has
to cater to a very large number of small borrowers spread over a very large area.
Secondly, size of the loan is very small. The small and marginal farmers constitute
more than 80 per cent of the farmers and some of the areas in India are located in
remote places and catering to their requirements becomes very difficult and costly.
From the borrowers’ point of view, access to institutional credit especially for small,
resource poor and illiterate farmers gets inhibited as the procedural and
20 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

documentation requirements are cumbersome and time consuming and raise the cost
of borrowing for the farmers. On the other hand, access to non-institutional
agricultural credit is regarded to be very simple where transaction cost is negligible
and involve no procedural complications. Some of the empirical studies have brought
out this fact (Table 6). The transaction cost in case of non-institutional loans was
negligible whereas it was quite high in the case of institutional loans. In case of CBs
they ranged between 3 and 5 per cent per annum while in case of co-operatives they
were lower than 3 per cent. The transaction cost was the highest in case of RRBs due
to small size of the loans.

TABLE 6. TRANSACTION COST OF BORROWINGS FOR AGRICULTURAL CREDIT FROM

DIFFERENT SOURCES IN INDIA

Transaction Effective Rate

Area/Farm Type of cost (per cent of Interest
Author(s) State Period category Institution of loan) (per cent)
(1) (2) (3) (4) (5) (6) (7)
Reddy Andhra Pradesh 1992 Developed Informal Neg. 22.13
Backward Informal Neg. 43.13
Singh and Uttar Pradesh 1990 Aligarh district Coop. 2.69 N.A.
Mruthyunjaya RRBs 8.58 N.A.
Non-inst. Nil N.A.
Rao, N. Andhra Pradesh 1989 - Formal 5.71 17.68
Sanjeeva et al. Non-Inst. 0.48 23.35
Dandekar Andhra Pradesh 1987 Small farmers Institutional 2.71 13.71
Medium Institutional 2.61 13.61
Other farmers Institutional 2.82 13.82
Small Non-Inst. Nil 23
Medium Non-Inst. Nil 21.4
Other Non-Inst. Nil 24.7
Srivastava Not known 1985 - SCB: 3-5 yrs 4.96 N.A.
and Kumar SCB: 5-7 yrs 3.29 N.A.
Coop: 5 yrs 1.8 N.A.
Coop: 7 yrs 1.41 N.A.
Moneylender Nil N.A.

2. Loan Overdues

Economic viability is a major issue in case of rural financial institutions as the

range of services provided by them is limited and institutions generally are regarded
as the providers of loans only. Secondly, the recovery of the loans in the agricultural
sector is poor. Empirical studies have suggested many reasons for high rate of loan
defaults in the agriculture sector. Low level of income generation especially on small
sized farms, diversion of loans to unproductive purposes, inadequacy of the loans
leading to their diversion and willful default under the hope of their waiver are
estimated to be the important ones. Besides high rate of loan default, which was
estimated to be 37 per cent ending March, 2000, the recovery performance varies
greatly across regions/states and financial institutions. It can be seen from Table 7
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 21

TABLE 7. AGRICULRTURAL CREDIT, RECOVERY AND PRODUCTIVITY OF FOODGRAINS IN

DIFFERENT STATES OF INDIA

Credit use in Average recovery as Foodgrains Net irrigated area

1999-2000 on June 1999 productivity in in 1996-97
State (Rs./ha of NSA) (per cent) 1998-99 (kg/ha) (per cent to NSA)
(1) (2) (3) (4) (5)
Northern
Punjab 10786 88 3741 93
Haryana 8611 80 2700 76
Rajasthan 1167 74 961 33
Himachal Pradesh 2839 62 1766 19
Jammu and Kashmir 438 32 1729 43
North-Eastern
Assam 276.4 10 1288 21
Manipur 115 11 2708 46
Meghalaya 328 36 1411 21
Nagaland 316 9 1338 28
Tripura 481 32 1893 13
Arunachal Pradesh 132 29 1038 19
Mizoram 338 51 1682 6
Eastern
Bihar 572 26 1441 49
Orissa 1269 45 1080 35
West Bengal 1734 61 2198 35
Central
Madhya Pradesh 1104 61 1113 32
Uttar Pradesh 2172 66 1957 69
Western
Gujarat 2887 74 1426 32
Maharashtra 2363 61 974 14
Southern
Andhra Pradesh 5253 66 2003 41
Karnataka 3253 62 1352 22
Kerala 9948 83 1768 16
Tamil Nadu 7640 70 2278 53
Correlation coefficient
Credit 1.00 0.75 0.63 0.53
Recovery 0.75 1.00 0.30 0.34
Foodgrain production 0.63 0.30 1.00 0.72
Reg. Coeff. 84.51 2.17 0.46
Std.deviation 17.47 0.85 26.86
R2 0.73 - -
F-value 17.35 - -
Source: Report of the Expert Committee on Rural Credit, NABARD, Mumbai, 2001.
Dependent variable: Credit use/ha of Net Sown Area (NSA); Constant = -5365.4.

that the rate of recovery was very high in the relatively developed states like Punjab,
Kerala, Haryana and Tamil Nadu, where it was greater than 80 per cent. It was in the
range of 60-80 per cent in Andhra Pradesh, Gujarat, Karnatka, Maharashtra,
Rajasthan, Madhya Pradesh and Uttar Pradesh. It was very poor in eastern and north-
eastern states except West Bengal. There is one good feature that where the use of
institutional credit was higher the recovery performance was also better. The
correlation coefficient between per ha use of credit and rate of recovery was 0.75.
22 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

The use of institutional credit has also had significantly positive association with
productivity of foodgrains and irrigated area. Yet, the correlation coefficient of
recovery with foodgrains productivity was not high because the southern states like
Karnataka, Kerala, Gujarat, Maharashtra, where the recovery performance was good,
do not grow foodgrains significantly. The production is largely dominated by cotton,
sugarcane and plantations. If we take a look on the recovery performance and the
productivity of major foodgrain growing states like Punjab, Haryana, Bihar, Orissa,
Uttar Pradesh, Madhya Pradesh, Andhra Pradesh and Tamil Nadu, it can be noticed
that the rate of recovery was very high in Punjab, Haryana, Andhra Pradesh and
Tamil Nadu, where foodgrain productivity was also high while on the other hand, in
the states like Bihar and Orissa, the productivity as well as recovery performance was
poor. The only exception was Madhya Pradesh, where the recovery performance was
at par with all India average despite low productivity.
The use of institutional credit (in terms of per ha credit across different states)
was also estimated to have been significantly influenced by foodgrains productivity
and rate of recovery by using simple single equation regression model. The
productivity reflected higher use of modern inputs requiring larger funds and
recovery performance reflected the ability of the farmers to obtain credit as well as
financial health of the rural institutions to fund short and long term credit needs of the
farmers.
3. Economic Viability of Rural Credit Institutions
Agricultural loans were considered to be economically unviable by rural financial
institutions due to low rates of interest on them in the pre-reform period. To promote
new technology, the policy of cheap agriculture credit was followed in India. Gulati
and Katula (1992) observed that agricultural loans were subsidised due to low rate of
interest on one hand and high risk and transaction cost on the other. High per unit
cost of service in case of agricultural loans was due to heavy overhead costs, large
number of small borrowers and higher risk cost. The lending (transaction) cost was
estimated to be 6.78 per cent on production and investment credit at all India level
whereas the interest margin varied between 2.55 and 5.93 per cent in 1980-81. The
average interest income from agriculture for PACS, CBs, primary land development
banks and RRBs taken together was lower than the total cost of lending during 1983-
84 to 1985-86 for Andhra Pradesh, Tamil Nadu, Kerala, Maharashtra, Haryana,
Assam, Uttar Pradesh and Orissa.
The interest rate structure started undergoing changes after the financial sector
reforms of 1991 in order to improve the economic viability of rural credit and provide
more flexibility to the banking institutions to decide the interest rate structure for
different sectors including the agriculture sector. The interest rates were further
rationalised after the exchange rate mechanism was made more flexible and foreign
capital was allowed in the Indian economy. In recent years, the pyramid of interest
rates for different sectors of the economy has been reversed. The rate of interest on
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 23

agricultural loans is higher than some of the loan categories like housing loans. Yet,
the economic viability of the rural financial institutions is not good due to high
transaction (lending) and risk cost. It was noted that the net margins (as per cent of
working capital) in the case of District Central Co-operative Banks was negative at
all-India level while the economic position of RRBs has improved (Table 8). The co-
operative loans have become more costly due to some margins getting added at every
level of its three-tier structure. Only recently, the agricultural loans of less than
Rs.50,000 are made accessible at 9 per cent rate of interest, which may further lower
down the net margins. But, the Expert Committee on increasing flow of agriculture
credit estimated that a 2 per cent reduction in the rate of interest on agricultural loans
will reduce the net margins of commercial banks only by 0.14 per cent.

TABLE 8. AGGREGATE MARGINS AVAILABLE TO BANKS IN INDIA

(per cent of working capital)

Financial Total transaction Miscellaneous
Agency margin cost Risk cost income Net margin
(1) (2) (3) (4) (5) (6)
CBs (2002-03) 2.91 2.24 1.35 1.66 0.98
RRBs (2002-03) 3.48 2.98 0.34 0.76 0.92
DCCBs (2001-02) 2.99 1.69 1.91 0.60 (-)0.01
Source: Report of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the
Banking System, 2004.
Financial margin= Financial returns minus financial cost of funds.

4. Access to Institutional Credit of Small Farmers

The small and marginal farmers constitute 80 per of the operational holdings and
cultivate about 36 per cent of the area in India. Their number is expected to increase
in future due to sub-division of holdings and lack of employment opportunities in the
non-farm sector. Due to their small holdings, they are disadvantageously placed with
respect to access to technology, capital, credit and other institutional support. The
information on distribution of institutional agriculture credit suggests that their access
to credit to meet their short term and long term capital requirements has not improved
over time (Table 9). Yet, the high share of small holders in institutional loans can be
attributed to target lending to them and higher share of southern states in total
advances where the proportion of small holdings is very high. Some medium and
large farmers also obtain sizeable loans in the name of small holders.
TABLE 9. ACCESS OF SMALL HOLDERS (FARM SIZE LESS THAN 2 HA) TO INSTITUTIONAL
CREDIT IN INDIA
(per cent)
Year Area operated Amount
(1) (2) (3) (4)
1985 Total 26.3 42.6
1996-97 Short term 36.0 61.0
Long term 31.0
Source: Desai, 1988 and NABARD, 2001.
24 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

There are some disquieting features of lending to small borrowers. The number of
small borrower accounts in case of commercial banks has come down over time
(NABARD, 2001) indicating shifting of their focus to large borrowers. The rate of
growth in agricultural advances to small and marginal farmers of less than 5 acres
farm size by scheduled commercial banks in the 1990s has come down as compared
to other farm size categories due to which their share declined from 54 per cent in TE
1993 to 51 per cent of total agricultural credit in TE 2002 (Table 10). The All India
Debt and Investment Survey (AIDIS) showed that rural households with assets less
than Rs. 20,000 had access to institutional loans for their credit needs only up to 35 to
37 per cent while the share of non-institutional agencies in the outstanding debt was
as high as 52 to 62 per cent. In case of higher asset households, 70 per cent of the
outstanding debt came from institutional sources. Therefore, despite strong network
of rural branches and strong emphasis on target lending under poverty alleviation
programmes, creating self employment opportunities, etc, a large number of rural
poor remain outside the fold of formal banking system for their credit needs.
According to the findings of Rural Financial Survey 2004, conducted by the World
Bank and NCAER only 19.4 per cent of the rural households in Uttar Pradesh and 24
per cent in Andhra Pradesh had access to formal sources of credit. Only 11.8 per cent
of marginal farmers and 33.8 per cent small farmers accessed institutional credit in
Andhra Pradesh as against 13.5 per cent and 24.7 per cent respectively in Uttar
Pradesh (Table 11). The important factors impeding the access of disadvantaged
sections of the rural society to institutional credit are higher transaction cost due to
large numbers and small borrowings, higher risk cost, complicated procedures and
large documentation required, inability of the borrowers to provide tangible
collaterals, non-availability of tenancy agreements, loan waivers affecting recovery
performance, poor risk mitigation mechanism on farms in the wake of crop failures
and the mindset of the bankers against small loans viewing them as unprofitable.

TABLE 10. DISBURSEMENT OF AGRICULTURAL CREDIT TO DIFFERENT FARM SIZE

CATEGORIES BY COMMERCIAL BANKS, INDIA

CGRs <2.5 acres 2.51 to 5.0 acres > 5 acres

(1) (2) (3) (4)
1980-81 to 1989-90 18.3 21.9 14.6
1989-90 to 2001-02 13.2 15.6 16.0
1980-81 to 2001-02 13.6 15.2 14.1
Share in total disbursals (per cent)
Period
TE 1983 27.1 20.9 52.0
TE 1993 28.3 25.7 46.0
TE 2002 25.4 25.5 49.1
Source: Handbook of Statistics on the Indian Economy, 2004-05, Reserve Bank of India, Mumbai.
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 25

TABLE 11. DISTRIBUTION OF RURAL HOUSEHOLDS’ ACCESS TO INSTITUTIONAL CREDIT

(per cent)
State Marginal Small Medium Large Others Total
(1) (2) (3) (4) (5) (6) (7)
Andhra Pradesh 11.8 33.8 41.9 56.3 20.7 24.0
Uttar Pradesh 13.5 24.7 30.8 36.1 17.7 19.4
Source: Report of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the
Banking System, Reserve Bank of India, Mumbai, 2004.

Indebtedness Among the Farmers

Indebtedness among Indian farmers has long been recognised by the observers of
rural scene in India. The Deccan Riots Commission (1875) reported that one-third of
occupants of the government land were under debt. The Famine Commission of
1880 reported that one-third of the land holders in the country were in deep debt and
another one-third were also in debt but in a position to redeem it. The Famine
Commission 1901 estimated that more than 80 per cent of the cultivators were under
debt. The great depression (1929-33) considerably increased the burden of debt of
the farmers (Kaushal, 1979). The problem of indebtedness of the farmers continues
in the post-Independence period. The proportion of indebted cultivators came down
to 46.1 per cent in 1971 and further declined to 22.3 per cent in 1981. In the
subsequent period, the proportion of indebted cultivators increased to 25.9 per cent in
1991 and has increased sharply to 57.2 per cent in 2003 (Table 12). If farmers
engaged in allied agricultural activities (going by principal source of income) are
added to the cultivators then the proportion of indebted farmers at all-India level is
estimated at 48.6 per cent (NSSO, 59th Round). Thus, the proportion of indebted
farmers has been higher than that was estimated in 1971. Deceleration in agricultural
growth in the 1990s is regarded as one of the most important factors responsible for
increasing indebtedness.

TABLE 12. INDEBTEDNESS AMONG CULTIVATORS IN INDIA

Year Percentage indebted cultivators

(1) (2)
1971 46.1
1981 22.3
1991 25.9
2003 57.2
Sources: 1. RBI Bulletin May 1999 (for the years 1971, 1981 and 1991).
2. NSSO (2005).

There is a wide variation in the number and proportion of indebted farmers across
the states and union territories in India. At the all-India level 48.6 per cent of the
total farmer households are reported to be indebted. The incidence of indebtedness is
the highest in Andhra Pradesh (82.0 per cent) followed by Tamil Nadu (74.5 per
26 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

cent), Punjab (65.4 per cent), Kerala (64.4 per cent), Karnataka (61.6 per cent) and
Maharashtra (54.8 per cent). The states of Haryana, Rajasthan, Gujarat, Madhya
Pradesh and West Bengal and group of UTs have reported indebtedness among the
farmers to the extent of 50 to 53 per cent. The states of Maghalaya (4.1 per cent),
Arunachal Pradesh (5.9 per cent) and Uttaranchal (7.2 per cent) are reporting very
low incidence of indebtedness among farmers. The rest of the states are reporting the
proportion of indebtedness among the farmers in the range of 18.1 per cent in Assam
and 49.2 per cent in Tripura (Table 13). The states with high level of agricultural
development are reporting high level of indebtedness among the farmers.

TABLE 13. ESTIMATED NUMBER OF TOTAL AND INDEBTED FARMER HOUSEHOLDS AND
AMOUNT OUTSTANDING IN EACH STATE

Av. amount
Estimated number Estimated number of Percentage of outstanding per
of farmer indebted farmer farmer households indebted farmer
State households (’00) households (’00) indebted (Rs.)
(1) (2) (3) (4) (5)
Andhra Pradesh 60,339 49,493 82.0 23,965
Arunachal Pradesh 1,227 72 5.9 493
Assam 25,040 4,536 18.1 813
Bihar 70,804 23,383 33.0 4,476
Chhattisgarh 27,598 11,092 40.2 4,122
Gujarat 37,845 19,644 51.9 15,526
Haryana 19,445 10,330 53.1 26,007
Himachal Pradesh 9,061 3,030 33.4 9,618
Jammu and Kashmir 9,432 3,003 31.8 1,903
Jharkhand 28,238 5,893 20.9 2,205
Karnataka 40,413 24,897 61.6 18,135
Kerala 21,946 14,126 64.4 33,907
Madhya Pradesh 63,206 32,110 50.8 14,218
Maharashtra 65,817 36,098 54.8 16,973
Manipur 2,146 533 24.8 2,269
Meghalaya 2,543 103 4.1 72
Mizoram 780 184 23.6 1,876
Nagaland 805 294 36.5 1,030
Orissa 42,341 20,250 47.8 5,871
Punjab 18,442 12,069 65.4 41,576
Rajasthan 53,080 27,828 52.4 18,372
Sikkim 531 174 38.8 2,053
Tamil Nadu 38,880 28,954 74.5 23,963
Tripura 2,333 1,148 49.2 2,977
Uttar Pradesh 1,71,575 69,199 40.3 7,425
Uttaranchal 8,962 644 7.2 1,108
West Bengal 69,226 34,696 50.1 5,237
Group of UT’s 732 372 50.8 10,931
All India 8,93,504 4,34,242 48.6 12,585
Source: NSSO (2005), Indebtedness of Farmer Households, 59th Round, Government of India, New Delhi.

The amount of outstanding loans per farmer also widely varies between different
states and group of UTs. The highest per farmer debt is reported from Punjab
(Rs.41,576) followed by Kerala (Rs. 33,907), Haryana (Rs. 26,007), Andhra Pradesh
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 27

(Rs. 23,965), Tamil Nadu (Rs. 23,963), Rajasthan (Rs. 18,372), Karnataka
(Rs.18,135) and Maharashtra (Rs. 16,973). The states of Gujarat (Rs. 15,526) and
Madhya Pradesh (Rs. 14,218) follow the states with high per farmer outstanding
loans. The rest of the states and group of UTs have per farmer loan ranging between
Rs.1,030 in Nagaland and Rs. 10,931 in case of group of UTs (Table 13). The states
with high level of agricultural development and with commercial farming report high
level of per farmer debt. The average holding size also differ across the states with
Punjab, Haryana and Rajasthan having relatively higher size compared to Kerala,
Tamil Nadu, Andhra Pradesh, Karnataka and Maharashtra reducing the gap in terms
of per hectare/acre outstanding loans among the states reporting high percentage of
farmers being indebted and also high per hectare outstanding loans.
The major shares of the outstanding loans of the farmers have been contracted for
capital and current expenditure in farm business. At all India level 58.4 per cent of
these loans have been used for meeting capital and current expenditure in farm
business. The agriculturally developed states practicing commercial agriculture like
Punjab, Haryana, Maharashtra, Karnataka and Andhra Pradesh have reported that
farmers in these states have used these loans for meeting capital and current needs of
agriculture. Among high farm household indebted states, Kerala has been exception
in this matter. Non-productive loans (including for consumption expenditure and
marriage ceremonies, medical treatment and other expenses and excluding for
education) accounted for 34 per cent of the total outstanding loans at all India level.
Among the major states, the share of non-productive loans has been varying between
24 per cent and 49 per cent. Among the non-productive loans, the combined share of
consumption loans and loans for marriages and other ceremonies has been the highest
(Table 14). The sizeable components of non-productive loans do not contribute to
repayment capacity of the farmers. The case of crop failure due to droughts/floods,
pest attacks or use of spurious insecticides and productive loans also add to high
incidence of indebtedness of farmers and contribute to high level of debt per farmer.
The consequences of loans and their transformation into outstanding debt are
considerably influenced by sources of loans. It is well known fact that availability of
loans from formal sources makes them cheap because interest rates on regulated loans
are low. But when loans are availed from informal sources, they involve high interest
rates. Although the cost of transaction of credit is very low/zero in case of informal
credits but high for formal sources of credit yet, formal credits are cheap. At all India
level 57.7 per cent of the outstanding loans are from formal sources and 42.3 per cent
loans have been obtained by farmers from informal sources. But the share of
informal loans, which mainly comes from the money lenders and traders, is as high as
68.6 per cent in Andhra Pradesh, 52.1 per cent in Punjab, 65.8 per cent in Rajasthan,
46.6 per cent in Tamil Nadu, 58.3 per cent in Bihar, 81.9 per cent in Manipur and
42.0 per cent in West Bengal. In Karnataka the share of informal loans of the total
outstanding loans is 31.1 per cent (Table 15).
28 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

TABLE 14. PER 1000 RUPEES DISTRIBUTION OF OUTSTANDING LOAN TAKEN BY FARMER
HOUSEHOLDS IN DIFFERENT STATES BY PURPOSE OF LOAN

Purpose of Loan
expenditure in

expenditure in

Marriages and
farm business

farm business

Consumption

All purposes
expenditure

expenditure
ceremonies

Education
Non-farm

treatment
business

Medical
Current
Capital

Other
State
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Andhra Pradesh 234 381 32 114 96 14 24 105 1000
Arunachal Pradesh 44 58 5 159 0 203 120 411 1000
Assam 166 67 162 124 117 1 15 348 1000
Bihar 308 86 76 64 229 23 102 112 1000
Chhattisgarh 403 300 82 67 64 3 34 47 1000
Gujarat 203 503 39 63 101 5 30 56 1000
Haryana 360 262 68 47 140 0 20 103 1000
Himachal Pradesh 94 101 290 66 102 9 29 309 1000
Jammu and Kashmir 260 32 241 183 83 0 20 181 1000
Jharkhand 272 53 248 105 97 0 9 216 1000
Karnataka 307 375 98 56 75 6 2 81 1000
Kerala 110 104 228 102 112 14 25 305 1000
Madhya Pradesh 470 213 14 96 143 1 36 27 1000
Maharashtra 379 375 48 42 49 9 15 83 1000
Manipur 4 30 124 111 93 87 220 331 1000
Meghalaya 321 464 0 141 1 2 0 69 1000
Mizoram 807 0 2 126 0 12 0 53 1000
Nagaland 115 60 189 127 44 81 8 376 1000
Orissa 289 244 115 113 140 1 29 69 1000
Punjab 264 360 44 84 102 0 26 120 1000
Rajasthan 375 197 22 139 176 8 39 44 1000
Sikkim 122 49 221 204 2 0 6 396 1000
Tamil Nadu 243 251 55 131 87 26 41 166 1000
Tripura 263 157 171 68 43 0 17 281 1000
Uttar Pradesh 403 206 70 68 118 2 62 71 1000
Uttaranchal 184 158 173 92 74 0 22 297 1000
West Bengal 244 213 103 72 111 5 51 201 1000
Group of UT’s 90 171 56 124 190 1 14 354 1000
All India 306 278 67 89 111 8 33 108 1000
Source: NSSO (2005), Indebtedness of Farmer Households, 59th Round, Govt. of India, New Delhi.

The prevalence of informal loans generates interlinked transactions in the market.

The farmers borrowing from informal sources generally use their crop as collateral
and commit to sell the output to the lenders. The loans are also used to acquire
modern inputs like seeds, fertilisers, insecticides, pesticides and also consumer goods
from the lenders. In some of the cases the farmers buy inputs as well as sell output
via lenders. The interlinked transactions take place because lenders are engaged to
marketing of agricultural inputs, consumer goods and agricultural output along with
money lending. The professional money lenders/commission agents charge high
interest rates generally between 18-36 per cent per annum and also exploit the
farmers in supply of inputs and marketing of agricultural output (Bell, 1988, Gill,
2000; 2004). This has negative implications for agricultural development and
cripples the farmers’ capacity to return loans and come out of debt trap.
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 29

TABLE 15. DISTRIBUTION OF OUTSTANDING LOANS TAKEN BY FARMER HOUSEHOLDS

IN DIFFERENT STATES BY SOURCE OF LOAN
(per ‘000 Rs.)
Sources of Loan
Government

Co-op. Society

Bank

money lender
Agri./Professional

Trader

friends
Relatives and

Doctor/Lawyer etc.

Others

All
State
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Andhra Pradesh 10 104 200 534 48 53 9 42 1000
Arunachal Pradesh 61 0 208 0 159 507 0 65 1000
Assam 70 27 278 155 120 246 5 99 1000
Bihar 22 25 370 328 11 127 12 105 1000
Chhattisgarh 13 206 505 130 42 62 7 35 1000
Gujarat 5 418 272 65 44 177 9 10 1000
Haryana 11 239 426 241 20 34 15 14 1000
Himachal Pradesh 61 116 476 72 55 170 1 49 1000
Jammu and Kashmir 131 2 543 11 155 156 0 2 1000
Jharkhand 39 45 557 190 17 136 4 12 1000
Karnataka 19 169 501 200 18 68 4 21 1000
Kerala 49 283 491 74 17 67 10 9 1000
Madhya Pradesh 19 169 381 226 90 101 6 8 1000
Maharashtra 12 485 341 68 8 59 3 24 1000
Manipur 15 0 166 329 40 401 0 49 1000
Meghalaya 60 0 0 128 3 809 0 0 1000
Mizoram 243 31 499 0 34 193 0 0 1000
Nagaland 75 77 536 3 153 156 0 0 1000
Orissa 130 181 437 148 9 84 1 10 1000
Punjab 19 176 284 363 82 63 6 7 1000
Rajasthan 13 59 270 365 192 69 18 14 1000
Sikkim 348 0 230 73 221 67 0 61 1000
Tamil Nadu 20 233 281 397 4 53 1 11 1000
Tripura 164 28 605 20 39 119 0 25 1000
Uttar Pradesh 24 67 512 191 29 138 19 20 1000
Uttaranchal 315 48 398 59 17 149 0 14 1000
West Bengal 103 192 285 130 107 153 7 23 1000
Group of UT’s 307 147 136 103 61 245 0 1 1000
All India 25 196 356 257 52 84 9 21 1000
Source: NSSO (2005).

Indebtedness and Farmers’ Suicides

Suicide deaths may occur on account of economic, social, cultural and
psychological factors and have been occurring across space, time and cultures. But
suicides among the farmers in India have been of recent origin. Farmers’ suicides are
reported in the country regularly for the period of a decade and a half. The states of
Andhra Pradesh and Karnataka have experienced a large number of farmers’ suicides.
The farmers’ suicide deaths are also reported from Kerala, Maharashtra and Punjab.
The emergence of this phenomenon has become a subject of debate among the
scholars, social organisations and policy makers. As a result, some studies have been
30 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

sponsored by the state governments while some scholars have studied this
phenomenon at their own. In Karnataka an expert committee was appointed by
Government of Karnataka in 2001 under the chairmanship of G.K. Veerah.
Similarly, Jayati Ghosh Committee was appointed by Government of Andhra Pradesh
in 2005 to investigate distress in agriculture of the state.
Many studies from Andhra Pradesh (Parthasarathy and Shameen, 1998; Rao,
2004, Sridhar, 2005; Reddy, 2005; Sarma, 2004), Karnataka (Assadi, 2000,
Krishnaprasad and George, 2005), Maharashtra (Mohanty and Shroff, 2004) and
Punjab (Gill and Singh, 2005; Iyer and Manick, 2000; AFDR, 2000; Gill, 2005) have
studied this phenomenon. Most of the studies have brought out multiple reasons for
farmers’ suicides. In Kerala and Maharashtra, along with economic factors, non-
economic factors remain important for distressed farmers committing suicide. But in
states of Andhra Pradesh, Karnataka and Punjab, economic factors are reported as
the main causes of farmers’ suicides. Among the economic factors, the failure of
crop (mainly cotton) and failure of investment in bore wells are responsible for
involvement of farmers in debt trap. In Punjab indebtedness of farmers is due to
stagnant agricultural yields along with crop failure (Table 16), which have put heavy
pressure on the farmers. In the wake of limited access to institutional credit, the
small farmers are forced to borrow from non-institutional sources. At times, they
rotate credit from non-institutional to institutional sources and vice versa leading to
their exploitation by multiple agencies. There are a large number of factors which

TABLE 16. PROFILE OF SUICIDE VICTIMS

Punjab Maharashtra Kerala

Bhalla et al.

kumar and

Prasad and
Mohanty
Iyer and

Krishna
Manick

Sharma

George
Mohan
(1998)

(2000)

(2000)
AFDR

(2005)

(2005)

(2005)

Sr. No. Items

(1) (2) (3) (4) (5) (6) (7) (8)

1. Households of suicide cases 53 75 79 66 35 26
studied (No.)
2. Percentage of cultivators who 55 66.66 84.80 100.00 100.00 100
committed suicides
3. Percentage of agricultural 45 33.33 15.20 N.A. N.A. N.A.
labour households
4. Percentage of small and 25 84.00 65.70 63.63 86.10 100.00
marginal farmers
5. Causes of Suicides (in percentage of suicide cases studied)
(i) Indebtedness as one of the 38 78.75 62.00 N.A. N.A. 100.00
multiple causes
(ii) Crop failure 1.05 10.00 5.10 67.00 N.A. N.A.
6. Debt exclusively from money 36.72 67.50 27.40 N.A. N.A. N.A.
lenders
7. Debt from money lenders and N.A. 81.25 73.60 72.27 N.A. 100.00
other sources
8. Unproductive use of loans 68.20 51.61 20.00 N.A. N.A. N.A.
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 31

operate simultaneously and cause unbearable distress to the farmers. The resource
poor farmers in all the major states reporting suicides constitute the largest proportion
of suicide victim farmers.
From the evidence available it can be concluded with reasonable certainty that
farmers suicide are reported from those states of India, which are relatively more
advanced and are front runners in commercial agriculture. They are Andhra Pradesh,
Karnataka, Kerala, Maharashtra and Punjab. These are the states which show high
proportion of the farmers under outstanding debt. With the exception of Kerala and
Maharashtra these are the states where farmers’ dependence on informal sources of
credit is quite high (Andhra Pradesh and Punjab). In case of Karnataka also, the
dependence on informal sources is to the extent of 31.10 per cent. In majority of the
cases, the suicide victim farmers have used loans for investment in agriculture and
they belong to the category of small and marginal farmers. The resource poor
farmers’ suicides indicate that there is breakdown of the community sense and social
support mechanism in areas of highly commercialised and competitive agriculture.

THE CHALLENGES AHEAD

Broadly speaking, there are three types of challenges before the rural financial
institutions to cater to the agriculture sector for accelerating its growth. (1) The flow
of agricultural credit has to be increased, (2) The accessibility of formal credit to rural
poor and disadvantaged and agriculturally less developed regions has to be improved
and (3) The economic viability of the rural banking operations has to be ensured over
time. The Planning Commission has projected the institutional credit requirements for
the agriculture sector at Rs. 7,36,570 crores for the Tenth Five Year Plan, which is
three times higher than credit flow during the Ninth Plan period. The banking
institutions have evolved new products to meet the challenge of increasing flow of
credit in the farming sector like Kisan Credit Cards, Self Help Group (SHG)–Bank
linkage programme, micro finance, etc. The expansion of the agricultural credit shall
have to be improved further (i) by covering large number of farmers, who still are
unable to access to formal credit due to rigidity in lending procedures and
requirements, rigidity in loan products such as oral lessee, lack of ownership title,
lack of capital, etc., inadequacy of the staff in rural branches and low profitability of
institutions; and (ii) by increasing quantum of flow.
The agriculture scenario in India is moving towards new directions under
globalisation. Promoting production of high value crops and value addition in
agricultural produce is the new mantra for accelerating growth in Indian agriculture.
Our agro-climatic conditions are so diverse that it provides the agricultural sector
opportunities to enhance production in high value commodities like fruits and
vegetables, livestock products, fisheries, etc., which are in high demand in the
domestic as well as in the international market. The modern marketing infrastructure
will be required to promote their production. Therefore, processing, value addition,
32 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

grading, standardisation, efficient and modern transportation, modern storage,

contract farming, etc. are going to step up the financing requirements of the
agricultural sector to drive full benefits from commodity production. New loan
products such as pledge financing, marketing credit, loans against warehouse
receipts, export credit, etc., shall have to be evolved to meet this challenge. The
demand for purchased inputs and hence for credit is expected to rise due to high tech-
high value agriculture. The formal agricultural credit delivery system has to address
to these issues. The present credit delivery mechanism overly emphasises production
credit. Thus, the imbalance between production and post production credit needs to
be rectified.
The agricultural credit delivery system has been found wanting with respect to
meeting adequately the credit requirements of high tech-high value agriculture and
non-crop agricultural activities. Apart from crop sub-sector, the financing of activities
like animal husbandry, fisheries, forestry, etc., which are registering significant
higher growth than crop sector in recent years, will require vast credit support. The
rural financial institutions will be required to play an active role in their promotion
after the initial bottlenecks with regard to feed, fodder, veterinary services and
processing facilities are removed.
The productive agriculture requires investments in complementary assets like
irrigation, land development, farm machinery, livestock, etc. Irrigation is the pivot to
the process of agricultural development. Sixty per cent of the net sown area of the
country is unirrigated. Further exploitation of irrigation potential will come through
watershed development and minor irrigation projects such as wells and tanks and
their energisation. These projects should receive priority in formal lending for
increasing agricultural productivity and production. The formal credit delivery
system should shed excessive caution and find alternative ways of risk management
in such investments to promote private capital formation. Rural financial institutions
have done a good job in watershed development and such lessons should be shared to
encourage watershed development further.
Financing rural non-farm employment activities is another area requiring
attention of rural credit institutions as the scope of employment in farm sector is
limited. The employment elasticity was estimated as 0.7 only during 1993-94 to
2001-02 (Tenth Plan Document). With the need for income diversification in rural
areas, credit institutions will have to play a larger role in financing non-farm
activities. Measures will include: strengthening capital structure, meeting
requirements in time, providing bridge loans, extending credit line for banks by
NABARD, better loan recovery mechanisms, etc.
The outreach of the formal agricultural credit is not adequate to rural poor, small
and marginal farmers and agriculturally less developed areas. The small and marginal
farmers, tenants and agricultural labourers still heavily depend upon informal sources
of finance to meet their credit needs and pay very high rates of interest. The target
oriented subsidy driven programmes have limited impact on income and employment
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 33

generation. We have seen some successful SHG–bank linkage projects, which have
created assets, increased income and generated employment for these disadvantaged
sections of the rural society. Such successful experiences of forming SHGs,
encouraging them to save and providing micro finance have to be replicated. The
consumption requirements of the rural poor, small holders and tenants need to be
integrated with production requirements. Therefore, a holistic approach to lending
covering their various sources of livelihood and consumption requirements is best
suited to expand the coverage of formal credit to such sections. New innovations in
risk management, individual or systemic, be evolved and tried because the security
offered by them is inadequate. It will also help in improving the recovery
performance of the loans and bring down the risk cost of financial institutions. KCC
takes care of individual risk. Crop insurance programmes need to be made more
effective to take care of the risk of crop failure. The tenants lack access to formal
credit because tenancy agreement is not in written form. If the land lease market is
made free, it can help tenants to meet their credit requirements from formal sources
of finance. The concept of contract farming with the backing of formal credit should
be encouraged to meet the credit needs of the small holders. There are wide regional
variations in agricultural advances. The reasons for inequalities should be studied and
corrective measures to the maximum possible extent should be taken to lessen these
variations.
The cost of borrowings to the farmers is also an important issue affecting flow of
credit to agriculture sector. The rate of interest to agriculture has been recently
brought down to 9 per cent for loans less than Rs. 50,000 and 10.5–12.5 per cent on
loans greater than Rs. 50,000. The cost of credit from the co-operative institutions is
still high because at every tier of the three tier structure some costs and margins are
added and secondly, co-operatives offer higher interest on deposits. The NABARD
has amended its 1981 Act to provide refinance directly to DCCBs. Yet, the
transaction cost is high, which need to be reduced by introducing new products like
group lending, strengthening SHGs–bank linkages, improving efficiency of the staff
through IT tools and increasing volume of business and providing multipurpose credit
facility. KCC scheme has helped reducing transaction costs by providing access to all
types of short term credit. Some procedural modifications are also required to reduce
the cost of transaction such as simplification of forms, delegation of more powers to
branch managers, introduction of composite cash credit limit, cash disbursement of
loans without tying with kind component, dispensation of ‘no due certificate’, lending
through non-banking financial companies, etc. Flexibility in the loans can also
increase the flow of agriculture credit and reduce transaction costs.
The Indian economy is changing, so is the agriculture sector. There are changes
in the livelihood pattern, pattern of holdings and input-output mix. The rural credit
institutions shall have to shed their inhibitions to support the process of agricultural
diversification and development. A progressive integration of financial market with
34 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS

emphasis on self regulation, accountability and autonomy of the institutions with

social responsibility will be required.

REFERENCES

AFDR (2000), Suicides in Rural Areas of Punjab: A Report (in Punjabi), Ludhiana.
Assadi, M. (2000), "Karnataka Seed Tribunal Interrogating Farmers' Suicide", Economic and Political Weekly,
Vol. 35, No. 43-44, October 21 to November 3, pp. 3808-3810.
Bell, C. (1988), "Credit Markets and Interlinked Transactions", in H. Chaney and T.N. Srinivasan (Eds.)
(1988), Handbook of Development Economics, Vol. I, Elseneia Science Publishers, B.V.
Bhalla, G.S.; S.L.Sharma; N.N.Wig; Swaranjeet Mehta and Pramod Kumar (1998), Suicides in Rural Punjab,
Institute for Development and Communication, Chandigarh.
Bhalla, Sheila (1993), “The Dynamics of Wage Determination and Employment Generation in Indian
Agriculture”, Indian Journal of Agricultural Economics, Vol. 48, No.3, July-September, pp. 448-470.
Chand, Ramesh (2005), “Exploring Possibilities of Achieving Four Percent Growth Rate in Indian
Agriculture”, Working Paper, National Centre for Agricultural Economics and Policy Research, New
Delhi.
Chand, Ramesh and Parmod Kumar (2004), “Determinants of Capital Formation and Agriculture Growth:
Some New Explorations”, Economic and Political Weekly, Vol. 39, No.52, December 25 to 31, pp. 5611-
5616.
Dadibhavi R. V. (1988) “Dimensions of Regional Disparities in Institutional Credit to Agriculture” Indian
Journal of Agricultural Economics, Vol. 43, No.3, July-September, pp. 374-380.
Dandekar, M.N. (1987), “Farm Credit in India”, Paper Presented at a Seminar on Farm Credit, organized by
Asian Productivity Organisation, Tokyo, December 2.
Desai, D.K. (1988), “Institutional Credit Requirements for Agricultural Production – 2000 A.D.”, Indian
Journal of Agricultural Economics, Vol. 43, No.3, July-September.
Dhawan, B.D. (1993), Trends and New Tendencies in Indian Irrigated Agriculture, Institute of Economic
Growth, Commonwealth Publishers, New Delhi.
Gill, Sucha Singh (2005), "Economic Distress and Farmers Suicides in Punjab", Journal of Punjab Studies,
Forthcoming.
Gill, A. and L. Singh (2005), Crisis of Agrarian Capitalism, Farmers Suicides and Response of Public Policy:
Evidence, Diagnosis and Alternatives, GAPS Series, Working Paper No. 5, Centre for Economic and
Social Studies, Hyderabad.
Gill, Anita (2000), Rural Credit Markets: Financial Sector Reforms and Informal Lenders, Deep and Deep
Publications, New Delhi.
Gill, Anita (2004), "Interlinked Agrarian Credit Markets: Case Study of Punjab", Economic and Political
Weekly, Vol. 39, No. 33, August 14-20, pp. 3741-3651.
Giri, A.K. and Tama Dasgupta l (1988), “Some Aspects of Inter-State and Intra-State Varieties in the Flow of
Institutional Agricultural Credit”, Indian Journal of Agricultural Economics, Vol. 43, No.3, July-
September, pp. 364-373.
Gulati, Ashok and Katula Rajni (1992), “Input Subsidies in Indian Agriculture: Concepts and Quantification”,
March (mimeo).
Haque, T. and Sunita Verma (1988) “Regional and Class Disparities in the Flow of Agricultural Credit in
India”, Indian Journal of Agricultural Economics, Vol. 43, No.3, July-September, pp. 356-363.
Iyer, G.K. and M.S. Manick (2000), Indebtedness, Impoverishment and Suicides in Rural Punjab, India
Publishers and Distributors, New Delhi.
Kaushal, G. (1979), Economic History of India, Kalyani Publishers, Ludhiana.
Krishnaprasad, P. and J. George (2005), “Agrarian Distress and Farmers Suicides in Kerala: A Study of
Wayanad District”, Paper presented at National Seminar on Economic Distress and Farmers' Suicides in
India, Acharya Nagarjun University, Guntur, February 24-26.
Government of India (2005), “Demand and Supply of Urea towards 2011”, Report of the Sub Committee
(Convenor: Ramesh Chand), Ministry of Chemicals and Fertilisers, Department of Fertiliser, New Delhi.
 AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA: SOME ISSUES 35

Mohan Kumar, S. and R.K. Sharma (2005), “Agrarian Distress and Farmers’ Suicides in Kerala: An Analysis
of Roots and Causes”, A Paper presented at National Seminar on Agrarian Distress and Farmers’
Suicides in India, Acharya Nagarjan University, Guntur, February 24-26.
Mohanty, B.B. (2005), “Farmers’ Distress and Suicides in Maharashtra” A Paper presented at National
Seminar on Agrarian Distress and Farmers’ Suicides in India, Acharya Nagarjan University, Guntur,
February 24-26.
Mohanty, B.B. and S. Shroff (2004), “Farmers' Suicides in Maharashtra”, Economic and Political Weekly, Vol.
39, No. 52, December 25, pp. 5599-5606.
National Bank for Agriculture and Rural Development (2001), Report of the Expert Committee on Rural
Credit (Chairman: V.S.Vyas), Mumbai, July.
NSSO (2005), Indebtedness of Farmer Households, 59th Round, Publication No. 498, Government of India,
New Delhi.
Parthasarthy G. and Shameem (1998), "Suicides of Cotton Farmers in Andhra Pradesh: An Explanatory Note",
Economic and Political Weekly, Vol. 33, No. 13, March 26- April 3, pp.720-726.
Rao, C.H.H. (1994), “Policy Issues Relating to Irrigation and Rural Credit in India”, in G.S. Bhalla (Ed)
(1994), Economic Liberalization and Indian Agriculture, Centre for Research in Rural and Industrial
Development, Chandigarh.
Rao, C.H.H., S.K. Ray, and K. Subbarao, (1988), Unstable Agriculture and Drought, Vikas Publishing House,
New Delhi.
Rao, N. Sanjeeva; G. Jayaramaiah and I. Satyanarayan (1989), “Cost of Borrowing Credit from Farmers
Service Society: A Case Study”, Agricultural Banker, January-March 10-11.
Rao, R.M. Mohan (2004), Suicides among Farmers: A Study of Cotton Growers, Concept Publishing
Company, New Delhi.
Reddy, G.V.S. (2005), “Farmers' Suicidal Deaths and the Response of Civil Society Organizations in
Anantapur District", Paper presented at National Seminar on Agrarian Distress and Farmers' Suicides in
India, Acharya Nagarjan University, Guntur, February 24-26.
Reddy, Narayana M.V. (1992), “Interlinkages of Credit with Factor Product Markets: A Study in Andhra
Pradesh”, Indian Journal of Agricultural Economics, Vol.47, No.4, October-December, pp.618-629.
Reserve Bank of India (1991) Report of the Committee on the Financial System, Department of Banking
Operation & Development, Bombay (Chairman: M. Narsimham), Indian Journal of Agricultural
Economics., Vol. 47, No.2, April-June, pp. 266-273.
Reserve Bank of India (2004), Report of the Advisory Committee on Flow of Credit to Agriculture and Related
Activities from the Banking System (Chairman: V.S. Vyas), Central Office, Mumbai.
Sarma, E.A.S. (2004), "Is Rural Economy Breaking Down?: Farmers Suicides in Andhra Pradesh", Economic
and Political Weekly, Vol. 39, No. 28, July 10-16, pp.3087-3089.
Shergill, H.S. (1997), Rural Credit and Indebtedness in Punjab, Institute for Development and
Communication, Chandigarh.
Sidhu, R.S. and S.S. Grewal (1990), “Factors Affecting Demand for Human Labour in Punjab Agriculture”,
Indian Journal of Agricultural Economics, Vol. 45, No.2, April-June, pp.125-133.
Sidhu, R.S. and S.S. Johl (2002), “Three Decades of Intensive Agriculture in Punjab: Socio-Economic and
Environmental Consequences”, in S.S. Johl and S.K. Ray (Eds.) (2002), Future of Agriculture in Punjab,
Centre for Research in Rural and Industrial Development, Chandigarh.
Sidhu, R.S.; Arjinder Kaur and Mini Goyal (1998), Institutional Agricultural Credit in Punjab: Growth, Equity
and Adequacy, Research Project Report, NABARD Chair Unit, Department of Economics and Sociology,
Punjab Agricultural University, Ludhiana.
Singh, S.P. and Mruthyunjaya (1990), “Short term Agricultural Credit Requirement, Availability and Gap on
Small and Marginal Farms of Aligarh District, U.P.” Agricultural Banker, April-June, pp. 37-41.
Sridhar, V. (2005), "Why Do Farmers Commit Suicide: The Case of Andhra Pradesh", A Paper presented at
National Seminar on Agrarian Distress and Farmers' Suicides in India, Acharya Nagarjan University,
Guntur, February 24-26.
Srivastava, Dru and Vinod Kumar (1985), “Cost of Credit”, Financing Agriculture, Vol.17, No.1, January-
March, 1985, pp.14-16.
Vaidyanathan, A. (1991), “Critical Issues Facing Indian Irrigation”, in Ruth Meinzen-Dick and Mark
Svendsen (Eds.) (1991), Future Directions of Indian Irrigation, International Food Policy Research
Institute, Washington, D.C., U.S.A.