TYPES OF CREDITSM
requirements of agriculture are of three types viz.
1. Short -Term
2. Medium - Term
3. Long- Term (LT)
We shall deal with
long-term credit in this article.
Long Term Credit :
The period of long-term credit is generally 5 to 20 years or even more in some special
cases. In any industry, long-term investment is necessary, to create permanent assets
which give returns over a period of time. The permanent investment is not only necessary
for a particular industry but even for the country. Because for continuity of production
and progress of the country. This applies to agriculture also. In Agriculture, long-term
investment comprises of sinking well, land levelling, fencing and permanent improvements
on land purchase of big machinery like tractor with its attachments including trolleys,
establishment of fruit orchard of mango, cashew, coconut, sapota (chiku), orange,
pomogranate, fig, guava, etc. There are many other items of long-term capital investment.
Investment once made in the beginning continious to give returns over a long period. Fruit
orchards particularly do not give any income in the first 4 - 5 years as in case of other
seasonal crops. So the expenditure incurred in the first 4-5 years becomes a capital cost.
All the long-term investments mentioned above require large amounts of funds. Although
they have good potential to give returns in future, individual farmers have no financial
capacity to make such costly investments from their own funds because they have no savings
or very little savings. Therefore, they have to resort to bank borrowing to meet their
such needs. The financial criteria terms and conditons procedures of granting L.T.loans
are altogether different from short-term loans : Even the bank or agency providing LT
loans is separatedue to its particular mode or system of raising capital and graign.
The special banks providing LT Loans are called Land Development Banks (LDA). The history
of LDBs is quite old. The first LDB was started at Jhang in Punjab in 1920. But the
real impetus to these banks was received after passing the Land Mortgage Banks Act in
1930s (LDBs were originally called Land Mortgage Banks). After passing this
Act LDBs were started in different states of India.
These Banks have
1. Primary Land Development Bank at district level with branches at taluka level.
2. Control or State Land Development Bank. All primary Land Development Banks are
federated into Central Land Development Bank at the State Level. In some States, there is
Unitary structure wherein, there is only one State Land Development Bank at
the state level operating through its branches and sub-branches at district and below
Raising Funds :
The main function of raising funds is carried out be the Central or State Land Development
Bank which can really deal with the money market of the country effectively and advance
loans to primary LDBs. The sources of funds of State LDBs are:-
1. Share capital.
2. Issue of debentures
3. Loans from NABARD
4. Reimbursements of subsidies from the Govt.
5. Other funds.
Issue of debentures
is the main source of funds for the LDBs. Debentures is a `Bond conveying and
acknowledging the debt and also containing the provision of promise for payment of
interest at stipulated rate and return of the principal amount. The period of debentures
varies from 7 to 15 years. As LDBs require funds of longer duration to advance LT
loans to borrowers, the debenture is a convenient instrument of raising funds. Because it
guarantees that funds will remain with the Banks for a specified period.
There are three
types of debentures:-
1. Regular debentures
2. Rural debentures
3. Special development debentures.
These debentures are
mostly purchased by financial institutions like LIC, Commercial Banks, Co-op. Banks,
NABARD, and State Govts. As there is limited response from the public. The State Govt.
give incentive subsidies for many development activities by individual farmer including
purchase of tractor. The amounts of subsidies are reimbursed to the LDBs.
Interest rate :
The rates of interest for LT Loans are generally low and within the paying capacity of
farmers. They are around 11 to 12%.
Loan Procedure :
The Branch offices receive applications from the prospective borrower. Then Agricultural
Finance Officer or Inspector scrutinises these applications, they visit places of the
application and ascertain the purpose of borrowing, verify the genuineness of the proposal
and it economic viability, repaying ability of the farmers, adequacy of security,etc.
After completing those formalities, the loan is granted by the appropriate authority at
appropriate level depending upon the delegation of powers by the Banks.
Crop loan is a short
term credit and is generally obtained from primary credit co-op. Society of a village or
also from commercial bank. The period of loan is about one year except for sugarcane for
which the period is 18 months. There are two criteria for granting crop loan.
- One third of gross value
- Cost of cultivation.
One third of gross
value approach takes into account the yield and price of the crop, its cost of cultivation
and family expenditure. If the gross value is more, more amount of loan becomes available.
For e.g. Rice.
One third (Rs.)
Thus in second
situation farmer is entitled for Rs.3330 per hectare which is higher than in the first
situation. Thus this method takes into account the productive aspect of a crop.
In cost of
cultivation, direct paid-out costs are only considered. They include items, like seeds,
manures, fertilizers, pesticides, diesel/electricity, hired labour etc. In this approach,
it is expected that all direct costs to be incurred by the farmer should be covered and
accordingly he should get adequate credit. If the cost of all these items of input is
Rs.3500/-. If the loan is granted according to first approach, then the amount which is
short, is spent by the farmer from his own funds. Since crop loan is for one season,
its recovery is made in one installment after the harvest of the crop. Crop loan is an
annual requirement and farmer has to borrow fresh loan for new crop season every time.
Therefore, he has to repay the earlier loan with interest within stipulated time. Since
this loan is required every season/every year, the procedure of getting this loan is
simple and convenient and it is made available by the District Central Co-op.Banks through
the village Co-op. Credit Society. So the farmer gets his loan in the village itself. If
the loan is to be taken from commercial bank, it is available from the nearby branch of
the commercial bank. As for security, the farmer has to offer his land as a security.
There is a three tier structure providing crop-loans through co-operative institutions.
Appex Bank- State
Crop-loan is the
most important need of the farmer to increase and maintain his productive ability. With
the help of this loan amount, he can purchase modern costly inputs and adopt new
technologies on his farms. So through these loans co-operative banks play important role
in the development and prosperity of agriculture. Among the various types of bank loans to
agriculture, the share of crop loan is the highest.