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CHAPTER - III

FARMERS INDEBTEDNESS IN INDIA

3.1 Introduction:

Agriculture plays a crucial role in the development of the Indian

economy. It accounts for about 19 per cent of GDP and about two thirds

of the population is dependent on the sector. The importance of farm

credit as a critical input to agriculture is reinforced by the unique role of

Indian agriculture in the macroeconomic framework and its role in

poverty alleviation. Recognizing the importance of agriculture sector in

India’s development, the Government and the Reserve Bank of India

(RBI) have played a vital role in creating a broad-based institutional

framework for catering to the increasing credit requirements of the sector.

Agricultural policies in India have been reviewed from time to time to

maintain pace with the changing requirements of the agriculture sector,

which forms an important segment of the priority sector lending of

scheduled commercial banks (SCBs) and target of 18 per cent of net bank

credit has been stipulated for the sector. The Approach Paper to the

Eleventh Five Year Plan has set a target of 4 per cent for the agriculture

sector within the overall GDP growth target of 9 per cent. In this context,

the need for affordable, sufficient and timely supply of institutional credit

to agriculture has assumed critical importance.1

104

Indian Agriculture has made rapid strides in Agricultural Sector

since Independence, with the Green Revolution of the 1960s ushering in

manifold increase in farm production and productivity. The Indian

Agriculture has rallied to become self-reliant in providing overall food

security to its population of more than 1 billion. However, inadequacies

of serious long-term concern are now affecting Indian Agriculture. The

rising input costs and poor pricing mechanism, to be candid, have only

increased the plight of majority of the farmers. The Green Revolution has

not necessarily translated into benefits for the lower strata in the

economic pyramid in terms of greater food security or economic

opportunity and wellbeing.2

Micro finance is expected to be one of the most important tools

against poverty in rural areas where credit market to be less developed

due to information asymmetries and the lack of enforcement.3

Microfinance has become popular all over the world since Dr. Yunus, a

Nobel Prize- winning activist and founder of Grameen Bank, lent small

amounts of his private money to the rural poor in Bangladesh three

decades ago. A lot of researchers have tried to identify the enabling

factors for Grameen Bank; high repayment performances in poor areas;

and how and to what extent the its microfinance model would be

applicable to other countries. However, many developing countries are

105

still having difficulty providing the appropriate financial services at

reasonable costs.4

Policy makers in India have long recognized the need to provide

short and long term institutional credit to agriculture at reasonable rates

for meeting formers production needs. This recognition came primarily as

the moneylenders and other non-institutional sources charged exorbitant

rates of interest of farmers who often had to mortgage, and sometimes,

sell their lands to clear their debts.5

In the development strategy adopted by independent India, the

primary focus was growth with equity. Given an understanding on the

seasonal credit was perceived fairly early in the development process as a

powerful tool for enhancing production and productivity and for poverty

alleviation. The debates surrounding these issues, as also the suggested

policy directions were clearly spelt out in the report of the All India

Credit Survey Committee 1952. To active the objectives of production

and productivity, the stance of policy towards rural credit was to ensure

provision of sufficient and timely credit at reasonable rates of interest to

as large a segment of the rural population as possible. The strategy

devised for the purpose rested on three pillars expansion of the

institutional structure, directed lending to disadvantage borrowers and

sectors and lower interest rates.6

106

3.2 Rural Cooperative Banking and Reforms in India:

Rural credit cooperatives were born more than 100 years ago, and

developed into two distinct streams of agricultural credit, one basically

meeting the crop loan requirements of farmers, and the other supporting

farmer level capital investments in agriculture. The structure which

primarily meets the crop loan requirements is a three-tier structure in

most of the states with primary agricultural credit cooperative societies

(PACS) with farmers as their members at the base level, central

cooperative banks (CCBs) as the intermediate federal structure with

PACS as principal affiliated members, and the state cooperative bank

(StCB) at the apex state level with CCBs and other cooperatives as its

principal members. This three-tier cooperative credit structure is

popularly known as the short-term cooperative credit structure (STCCS).

The ST CCS functions as a three-tier structure in 16 states; while

in 13smaller states & union territories, PACS are directly affiliated to the

StCB and the ST CCS functions as a two tier structure. In 3 states, a

mixed structure, i.e., two tier in some districts, and three-tier in the other

districts operates.

In principle, PACS was expected to mobilise deposits from its

members, and use the same for providing crop loans to the needy

members who need it. However, as deposits in PACS may not be enough

to meet the loan requirements of all its farmer borrowing members, PACS

107

draw support from the federal structure, viz., the CCB/StCB. The CCB

was therefore constituted as a small bank working in small towns to

mobilize deposits from public and provide the same for supporting the

credit needs of PACS and its members. As part of the federal structure,

the CCB was expected to also provide guidance and handholding support

to PACS. StCB was set up in each state not only to mobilise deposits and

thereby provide the required liquidity support to CCBs and PACS, but to

also provide the required technical assistance, guidance and support to

CCBs and PACS in fulfilling their obligations towards their farmer

members. Wherever required, the StCB was also expected to mobilise

liquidity and refinance support from the higher financing institutions like

NABARD for supporting the crop loan operations of CCBs and PACS

affiliated to it. Over time, ST CCS has also been providing medium term

loans for investments in agriculture and for the rural sector, often with

refinance support of NABARD.

The ST CCS was the only institutional arrangement for providing

agricultural credit until 1969. However, after nationalization, commercial

banks (CBs), and later, the regional rural banks (RRBs) which were

established from 1975 onwards, also started catering to the needs of

agriculture and rural development sectors.

The banking scenario is changing constantly and significantly due

to rapid and radical reforms taking place in Indian banks since 1993.

108

Application of prudential banking norms including norms for income

recognition and asset classification (IRAC) and capital adequacy based

on the risk (CRAR) to make them stronger and competitive was followed

by capitalization of public sector commercial banks and RRBs. Although

IRAC norms were gradually applied to the StCBs and CCBs, the risk

based capital norms were not applied to them for a variety of reasons.

In the meanwhile, the Committee on Financial Sector Assessment

(CFSA), set up by GoI in September 2006 under the Chairmanship of Dr

Rakesh Mohan looked into the financial health of all banks including the

cooperative banks and made recommendations for improvement of

financial health and systems for attaining/maintaining financial stability.7

3.3 Structure, Need and Classification of Rural Credit for

Agricultural Development:

Credit, an old French proverb says, "Support the farmer as the

hangman's rope supports the hanged."8 Similarly, Darling's statements

(RCS, 1991) 9, states that '' the Indian peasant is born in debt, lives in debt

and dies in debt,'' still remains true for the great majority of the peasant

communities in rural areas. The rural credit structure can be classified

into the Institutional and Non-institutional credit lending agencies. The

structure of non-institutional credit delivery system includes

moneylenders, agricultural-cum-moneylenders, traders and commission

agents, agro-shop dealers, friends and relatives, who charge exorbitant

109

rate of interest and tend to keep their eyes on grabbing the assets of

borrowers.

The demand for credit further increase due to emergence of new

areas of investment in agriculture such as adoption of high yielding

verities of seeds, early maturing, disease resistant verities of food as well

as non-food crops, adoption of latest technology requiring improved

irrigation systems and other machinery establishing commercial farms of

dairy, poultry, piggy, fishery, etc., equipped with adequate linkages for

processing, packaging, transport, marketing etc., tapping commercial

avenues in the areas of horticultural plantations, floricultural, equipped

with adequate linkages for processing, packaging, transport, marketing

etc, tapping commercial avenues in the areas of horticultural plantations,

floricultural, aquaculture, bee-keeping,, sericulture, mushroom

cultivation, developing capital intensive, hi-tech, non-conventional,

export oriented project in the field of bio-technology, tissue culture,

embryo-transfer technology, plasticulture, green house plantation of

aromatic and medical plants etc.10

According to Dantawala (1966) and Dandekar (1993) credit per se

(with respect to its inherent nature) does not influence agricultural

development because it is merely a means to an end. But when it results

in investment in real resources including human labor, it influences

output growth in agriculture. The new technology led inputs like HYV,

110

fertilizers, pesticides, diesel, electricity, form implements, certain

machines etc., and complement to the agricultural production.

Institutional credit that would encourages investment in these new inputs

and helps in utilization of capital and also output in agricultural.11 The

credit needs of modernizing India's agriculture have to be tailored to take

account these systemic changes, particularly in the marketing

infrastructure and generally in the output mix. It goes without saying that

deregulation of marketing structures, removing the heavy hand of

government and the amendment of the Essential Commodities Act is also

essential to modernizing agriculture by opening out markets to farmers.12

3.4 Strategy of Reserve Bank of India to Increase the Flow of

Rural Credit:

First, the coverage of rural credit is extended to include facilities

such as storage as well as credit through NBFCs. Second, procedural and

transactional bottlenecks are sought to be removed, including elimination

Service Area Approach, reducing margins, redefining over dues to

coincide with crop-cycles, new debt restructuring policies, one-time

settlement and relief measures for farmers indebted to non-institutional

lenders. Third, Kisan Card Scheme is being improved and widened in its

coverage while some banks are popularizing General Credit Cards

(GCCs) which is in the nature of clean overdraft for multipurpose use,

including consumption. Fourth, public and private sector banks are being

111

encouraged to enhance credit-delivery while strengthening disincentives

for shortfall in priority sector lending. Fifth, the banks are urged to price

the credit to farmers based on actual assessment of individual risk rather

than on a flat rate depending on category of borrower or end-use while

ensuring that interest-rates charged are justifiable as well as reasonable.

In brief, the thrust is on enhancing credit-delivery in a regime of

reasonable credit-prices within the existing legal and institutional

constraints.13

3.5 The Role of Credit in Rural Development:

The prevision of credit and generation of savings have long been

recognized as an essential element in any rural development strategy.

Credit plays a crucial role in the modernization of agriculture but its role

in the fight against rural poverty has seldom been recognized. Financial

institutions in developing countries, whether public or private, have

shunned rural areas for various reasons such as opportunity costs and low

financial credibility. Further, rural financial services have mostly been

controlled by rich farmers, who are able to use their large endowment

base and influence within the local power structure to secure loans at very

advantageous terms. Credit policies are also generally concentrated on

land-based agricultural production programmes, neglecting off-farm

activities in which the poor are mainly engaged.

112

The rural poor-men and women, landless, artisans, agricultural

laborers and small fishermen-have almost been excluded from these

financial services either because they were not available (collateral and

procedural requirements rendered them inaccessible) or simply because

they were not considered creditworthy. The erroneous view is that the

poor do not have any resources, do not save, that they cannot invest in

view of immediate consumption needs, and that they are ignorant of the

basic principles of sound money management.

In the competition for a small quantum of financial resources, the

poor naturally lost out in the institutional markets and were constrained to

resort to exploitative informal sources of credit such as money-lenders

and traders. The latter are able to respond quickly and with great

flexibility to pressing demand, and exploit the poor and further compound

their poverty.

Many national rural development programmes in the form of

integrated efforts or cooperatives have endeavored to increase the

availability of financial services, reduce collateral or other requirements,

and adapt procedures to rural clients. Credit cooperatives are widespread

in South Asian countries. But because of the principle of open

membership, most cooperatives have come under the control of well-to-

do powerful farmers and have failed to make any contribution in the

113

alleviation of poverty. The benefits of cooperative institutions have

frequently been diverted to serve the interests of a select few.

Government policies of many developing countries are built around

the premise that by increasing the flow of agricultural credit, rural

regeneration is possible. But it is wrong to equate credit flow with capital

creation in rural areas. Credit cannot be created merely by increasing

money supply, nor can capital be used for developmental purposes if

farmers divert savings for consumption purposes. By combining

additional labour with more capital, both production and productivity can

be enhanced, i.e., more produce and more income. Credit for rural

development depends upon two vital factors- rural savings and provision

of liquidity to farmers without sufficient funds too invest in improved

technological advances. There must be sufficient investible funds to

exploit opportunities created due to technological breakthroughs. Credit

enables extension of control as distinct from ownership resources; but, it

should be extended for investment in 'clearly spelt out' opportunities or it

will surely end up as additional consumption. This is not to state that new

technologies necessarily need additional credit or that new rural

technologies are not adopted without credit. Thus, credit is neither

essential nor sufficient for initiating rural development. Rural credit

agencies can, however, encourage the efficient reallocation of tangible

wealth as also new investment through in remediation between savers and

114

entrepreneurial investors, and also increase the rate of accumulation of

capital by providing increased incentives to save, invest and work.14

3.6 Schemes Entrusted with NABARD to Improve Credit Flow to

the Rural Economy in India:

Rural Infrastructure Development Fund is one of the most

important schemes entrusted with NABARD by the Government of India

to increase flow of credit for the development of rural infrastructure. The

fund was set up in 1995 with an initial corpus of Rs. 2,000 crore. Apart

from contributions of the Government of India. RIDF also receives

deposits from commercial banks to the extent of shortfall in their lending

to agriculture. As at end-March 2010, out of the total funds received by

RIDF since its inception both from the Government of India as well as

via deposits, more than half was from contributions by the Government of

India. Out of the total funds received so far, RIDF sanctioned loans worth

two third of the total amount so far. However, the percentage of disbursed

loans to sanctioned loans exhibited a declining trend since trance XI. The

decline in the disbursal of funds from RIDF was mainly caused by

procedural delays in administrative and technical approvals by State

Government in land acquisitions, statutory clearances and tendering

process. Efforts to rationalize these procedures have already been

initiated by State Government.

115

The Government of India opened a separate window under RIDF in

2006 for the Bharat Nirman Programme with a corpus of Rs. 4,000 crore.

Of the total funds received so far, these windows of RIDF sanctioned and

disbursed more than half of the amount. Notably, there is no delay

observed under this window in disbursing the sanctioned amount of loan.

Out of total loans sanctioned so far under RIDF, the major share

went towards building roads and bridges, followed by rural irrigation

programmes. Notably, more than 10 percent of loans went to the

development of social infrastructure such as drinking water, primary

school, public health centers and aganwadi centers.

Out of total loans sanctioned and disbursed under RIDF so far,

northern region and southern region accounted for more than half. North-

eastern region accounted for only 5.1 per cent of total sanctioned loans

and 4.0 per cent of total disbursed loans. The north – eastern region also

reported the lowest disbursed loans to sanctioned loans ratio amongst the

regions. The State-wise profile shows that Andhra Pradesh accounted for

the maximum share of loans sanctioned and disbursed, followed by

Gujarat and Madhya Pradesh.15 3.7 Growth of Institutional

Agricultural Credit in India:

In India nearly 72 percent of population lives in villages and is

mostly dependent for their livelihood on rural areas despite such a high

predominance, the share of agriculture and allied activities in India's GDP

Deleted: ¶

116

are only about 25 percent. Many policy changes have taken place since

I960, when the agricultural credit scenario was largely dominated by

private informal sources of credit, to increase the flow of institutional

credit to the agricultural sector. The cooperative credit structure was

strengthened by reorganizing and merging weak credit societies with

strong societies. The number of village level cooperative societies also

increased. The participation of scheduled commercial banks was

negligible in agricultural loans. However, after the nationalization of

commercial banks in 1969, they were mandated to increase their

geographical and functional presence in the rural areas. Another credit

institution lending exclusively to weaker sections of rural areas, known as

Regional Rural Banks, was set up in 1975. To meet the challenges of

institutional agricultural credit the apex institution namely National Bank

for Agriculture and Rural Development 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 card.

There is now a very strong network of rural and semi-urban branches

catering to the requirements of agricultural sector and rural areas.

Growth of direct institutional credit for agricultural and allied

activities are shown in table no. 3.1 The total direct institutional

agricultural advances increased from Rs, 32,697 crore in 1998 to Rs.

1,94,953 crore in 2007-08. The short term institutional agricultural credit

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Table 3.1

Direct Institutional Credit for Agricultural and Allied Activities in

India

Years Short-term Long-term Total 1998-99

20610

(63.03)

12087

(36.97)

32697

(100) 1999-00

29045

(63.79)

15968

(36.21)

45534

(100) 2000-01

32355

(67.14)

15346

(32.86)

48187

(100) 2001-02

38141

(70.38)

15612

(29.62)

54195

(100) 2002-03

45288

(69.49)

19887

(30.51)

65175

(100) 2003-04

59593

(71.43)

23834

(28.57)

83427

(100) 2004-05

71748

(68.13)

33555

(31.87)

105303

(100) 2005-06

94084

(65.33)

49938

(34.67)

144022

(100) 2006-07

123072

(64.94)

66442

(30.06)

189514

(100) 2007-08

136010

(69.76)

58943

(30.24)

194953

(100) 2008-09 178639

(72.62)

67337

(27.38)

245976

(100) 2009-10 217126

(72.90)

80705

(27.10)

297831

(100) Average

64995

(67.59)

31161

(32.41)

96156

(100)

Note : Figures in the bracket are percentage to total.

Source : Handbook of statistics on the Indian Economy, 2009-10,

Reserve Bank of India, Mumbai.

118

was Rs. 20,610 crore in 1998-99 which increased up to Rs, 1,36,010 crore

in 2007-08 and long term institutional agricultural credit increased from

Rs. 12,087 crore in 1998-99 to Rs. 58,943 crore in 2007-08. On an

average the institutional short term agricultural credit was 67.59 percent

and long term institutional credit was 32.41 percent during 1998-99 to

2009-10. Among the total institutional agricultural credit the share of

scheduled commercial banks was 71 percent it was 19 percent for

cooperative banks and 10 percent for Regional Rural Banks in 2007-08.

During the period from 1998-99 to 2009-10 the average total institutional

credit were Rs. 96,159 crore and long term credit were Rs. 31,161 crore

whereas, short term agricultural credit were Rs. 64,995 crore. It can be

seen from the table no. 31 the institutional agricultural credit shows

continuously increasing trends during the study period. After

nationalization of commercial banks agricultural credit shows tremendous

growth trends due to mandated of agricultural credit to nationalized

banks.

3.8 Credit flow to Agriculture in India:

Table 3.2 shows the number of loan accounts financed in India.

Although cooperatives are providing only 17% of agriculture credit, the

share of cooperatives in total number of agricultural accounts held by the

banking system is substantial. Cooperatives provided agricultural credit

to 3.09 crore farmers during 2011-12 compared to only 2.55 crore

119

farmers by commercial banks and 82 lakh by the RRBs. In fact,

cooperatives financed67 lakh new farmers during 2011-12 compared to

21 lakh new farmers by commercial banks and only 9 lakh new farmers

by RRBs.

Table 3.2

Number of Loan Accounts Financed in India

(Figures in lakh)

Agency 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Coops. 189 202 178 204 242 309

RRBs 62 62 76 73 73 82

CBs 172 175 202 205 234 255

Total 423 439 456 482 549 646

Source: Expert Committee, to examine Three Tier Short Term

Cooperative Credit Structure (ST CCS), Reserve Bank of India,

Central Office Mumbai, January 2013.

The success of cooperatives in reaching out to new farmers or

those who had gone out of the active credit fold of the banking system is

the real impact of the implementation of the Vaidyanathan revival

package and implementation of the agricultural debt waiver and debt

relief scheme in its true spirit.

Such high penetration by the cooperatives despite having a low

share in the total agricultural credit flow has the immediate implication of

120

per account loan at ` 28,467 (2011-12) being provided by cooperatives as

compared to ` 66,000 per account by RRBs and almost ` 1.5 lakh per

account by commercial banks (as shown in table 3.3). This trend has been

prevailing in the past also.

Table 3.3

Agricultural Loan Disbursed per Borrowing Account in India

(Amt. in Number`)

Agency 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Coops. 22476 23890 25951 31126 32281 28467

RRBs 32960 40826 35217 48242 60675 66402

CBs 96793 103479 113342 139414 147810 144525

Total 152229 168195 174510 218782 240766 239394

Source: Expert Committee, to examine Three Tier Short Term

Cooperative Credit Structure (ST CCS), Reserve Bank of

India, Central Office Mumbai, January 2013.

Table 3.4 shows small and marginal farmer accounts for loans

disbursed in India. Given the increasing trend in fragmentation of

holdings and growing preponderance of small and marginal farmers who

would require much smaller quantities of loans as compared to medium

and large farmers, an inference could perhaps be drawn that cooperatives

121

are increasingly supporting the neglected or sidelined category of small

and marginal farmers. Although this is a positive sign, the fact cannot be

overlooked that almost 55% of the agricultural loan accounts of

commercial banks and almost 72% of the agricultural loan accounts of

RRBs also pertain to small and marginal farmers.

Table 3.4

Small and Marginal Farmer Accounts for Loans Disbursed in India

(No. in lakh)

Agency 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Coops.

101

(53)

118

(58)

97

(55)

128

(63)

159

(66)

205

(66)

RRBs

40

(65)

42

(67)

43

(57)

50

(69)

52

(71)

59

(72)

CBs 74

(43)

97

(55)

106

(52)

107

(52)

125

(53)

141

(55)

Total 215 257 246 285 336 405

Note: Figures in brackets indicate percentage of small and marginal

farmer accounts to total accounts.

Source: Expert Committee, to examine Three Tier Short Term

Cooperative Credit Structure (ST CCS), Reserve Bank of

India, Central Office Mumbai, January 2013.

It is therefore, not that cooperatives alone finance small and

marginal farmers, while other banks finance only large farmers, as is

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often made out. At the same time, as has been mentioned elsewhere,

cooperatives are severely constrained in terms of resources for lending,

due to which PACS in almost all the states have prescribed individual

maximum borrowing power (IMBP) as an outer ceiling for any individual

loan to their members. Although there is no documented evidence, given

the fact that the proportion of small and marginal farmers financed by

RRBs is much higher than by cooperatives, and the per loan account

amount provided by RRBs is almost 2½ times that provided by

cooperatives, the possibility of fairly large number of borrowers from

cooperatives being underfinanced and not getting adequate loan to meet

their requirements and some members not getting any loans at all cannot

be ruled out. The resources position as well as the other than agricultural

credit business of the ST CCS therefore, needs to be looked in greater

detail.

3.9 Agency-wise Agricultural Credit in India:

Table 3.5 indicates the agency-wise credit disbursed to the

agriculture sector in India. As against the target of ` 4, 75,000 crore fixed

for 2011-12, ` 5, 1,029.09 crore was disbursed to the agricultural sector,

thereby exceeding the target by 8 per cent. While commercial banks and

RRBs together extended credit to 99.65 lakh new farmers during 2011-

12, cooperative banks extended credit to 21.52 lakh new farmers during

the same period, thus taking the total number of new farmers brought

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under the banking system to 121.17 lakh. The total number of agricultural

loan accounts financed as on March 2012 was 6.47 crore. The credit flow

to agriculture during 2012-13 by commercial banks, cooperative banks,

and RRBs together was ` 2,39,629 crore till September 2012, accounting

for 42 per cent of the annual target of ` 5,75,000 crore set for 2012-13

financial year.

3.10 Details of Cooperative Societies in Maharashtra State:

Co-operative movement plays a pivotal role in safeguarding

interests of the vulnerable and unorganized people engaged in various

economic and social activities. Co-operative have entered into all spheres

of socio-economic activities viz. production, marketing, credit & banking,

processing, sales, dairying, storage, housing, farming, fishing, etc. In the

post liberalization era, the co-operative sector is facing serious challenges

of competition from corporate sector and multinationals in addition to

resource constraints and lack of professionalism. As on 31st March, 2009

there were 2.12 lakh co-operative societies working in the State, with about

523 lakh members. Details of these co-operative societies are summarized

in Table 3.6.

3.11 Agricultural in Maharashtra:

The co-operative credit structure in the State is three-tier with the

State Co-operative Bank as the apex body at the State level, District

Central Co-operative Banks at district level and the Primary Credit

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Societies at village level. This credit structure plays an important role in

development of agriculture and promotion of allied activities in the State.

Details of these are given in Table 3.7.

Table 3.5

Agency-wise Credit Disbursed to the Agriculture Sector.

Year/

Agency

Coop.

Banks

Share

(%)

RRBs Share

(%)

Comm.

Banks

Share

(%)

Total

2006-07 42480 18.52 20435 8.91 166485 72.57 229400

2007-08 48258 18.95 25312 9.94 18/1088 71.11 254658

2008-09 46192 15.30 26765 8.87 228951 75.83 301908

2009-10 63497 16.51 35218 9.16 285799 74.33 384514

2010-11 78121 16.68 44293 9.46 345877 73.86 468291

2011-12 87963 17.21 54450 10.65 368616 72.13 511029

2012-13 64664 26.99 32127 13.41 142838 59.61 239629

Source: Commercial Bank data – Indian Banks Association

(IBA)/RBI, Cooperative Banks and RRBs data –NABARD.

125

Table 3.6

Details of Co-operative Societies in the State

(Rs. crore)

As on 31st March Particulars

2008 2009*

Percentage

change

Societies (No.) 2,05,753 2,12,344 3.2

Members (lakh) 505 523 3.6

Paid-up share capital 12,809 13,344 4.2

of which, state Govt. 1,917 2,049 6.9

Working capital 2,05,110 2,05,122 Neg.

Deposits 1,40,162 1,51,528 8.1

Advances (Gross) 88,166 86,485 (-)1.9

Advances (Net) 63,604 65,203 2.5

Societies in loss (No.) 55,257 57,888 4.8

Amount of loss 6,985 7,126 2.0

Loans outstanding 1,10,046 1,11,261 1.1

* Provisional Neg. Negligible

Source: Office of the Commissioner for Co-operation, Govt. of

Maharashtra.

Primary Agricultural Credit Societies (PACS) play a prominent

role in disbursement of short term agricultural credit mainly for Seasonal

Agricultural Operations (SAO). They include Farmers Service Societies

126

Table 3.7 Important Features of Agricultural Co-Operative Credit Banks in

Maharashtra (Rs. crore)

As on 31st March Particulars 2008 2009*

Percentage change

The Maharashtra State Co-operative Bank Ltd.

Members (No.) 2,178 2,168 (-)0.5 Working capital 22,360 25,681 14.9 Deposits 16,509 20,954 26.9 Gross loans advanced 10,227 10,365 1.3 Loans outstanding 9,331 8,743 (-)6.3 Overdues 1,213 1,356 11.8

District Central Co-operative Bank (31) Members (No.) 1,36,148 1,42,18

6 4.4

Working capital 45,629 51,402 12.7 Deposits 31,949 38,062 19.1 Gross loans advanced 18,598 14,336 (-)22.9 Loans outstanding 24,446 22,683 (-)7.2 Overdues 7,752 7,328 (-)5.5

Maharashtra State Co-operative Agricultural Rural Multipurpose Development Bank Ltd. @

Members (No.) 827 827 -- Working capital 1,753 1,750 (-) 0.2 Deposits 1 0 (-) 100.0 Gross loans advanced --- -- -- Loans outstanding 1,295 1,168 (-) 9.8 Overdues 1,142 1,074 (-) 6.0

District level Co-operative Agricultural Rural Multipurpose Development Banks (29)

Members (In lakh) 11.36 11.32 (-) 0.4 Working capital 1,648 1,506 (-) 8.6 Deposits 24.44 55.74 128.1 Gross loans advanced -- -- -- Loans outstanding 905 640 (-) 29.3 Overdues 576 552 (-) 4.2

* Provisional @ under liquidation, hence stopped advancing loans. Source: Office of the Commissioner for Co-operation, Govt. of Maharashtra.

127

Table 3.8 Details about PACS in Maharashtra

(Rs. crore)

Particulars 2007-08 2008-09* Percentage

change

Societies (No.) 21,248 21,285 0.2

Members (Lakh) 147 151 2.7

Working capital 14,280 16,467 15.3

Own funds 2,684 2,724 1.5

Share capital 1,829 2,050 12.5

Of which, State Government 10 14 40.0

Loanee members (Lakh) 36.68 39.95 0.7

of which 1) Marginal farmers

(up to 1 hectares)

10.46 10.61 1.4

2) Small farmers

(1 to 2 hectares)

8.93 9.27 3.8

Loans advanced 6,189 6,606 6.7

Loans outstanding 10,979 12,495 13.8

Loans recovered 5,295 5,160 (-) 2.5

Loans overdue 5,230 6,652 27.2

PACS in loss 13,560 13,665 0.8

Amount of loss 561 586 4.5

Proportion of overdues to

loans due for recovery

(percentage)

49.71 56.32 13.3

* Provisional

Source: Office of the Commissioner for Co-operation, GoM.

128

and Adivasi Co-operative Societies. Details of PACS are presented in

Table 3.8. About 64 per cent PACS were in loss during 2008-09. High

overdues, inadequacy and non-availability of funds and lack of capability

to mobilize resources are adversely affecting functioning of PACS. To

overcome these weaknesses, the Central Government provided financial

assistance to these PACS under Vidyanthan package and also the loans of

farmers amounting to Rs. 11,800 crore were waived by the Central and

the State Government during 2008-09.

3.12 Non-Agricultural Credit Societies in Maharashtra:

Maharashtra State Co-operative Housing Finance Corporation Ltd.

is the central non-agricultural credit institution functioning in the state. At

the end of March, 2009 the outstanding loans of the co-operative societies

have reduced by 10 per cent compared to last year, other details being

given in Table 3.9.

As on 31st March, 2009 under non-agricultural credit societies,

there were 574 urban co-operative banks, 16,358 urban co-operative

credit societies and 7,235 salary earners' co-operative societies in the

State. About one-fourth of the total non-agricultural credit societies were

in loss. The details are given in Table 3.10.

129

Table 3.9 Details of Maharashtra State Co-operative Housing

Finance Corporation Ltd.

(Rs. crore)

As on 31st March Particulars

2008 2009*

Percentage

change

Members (No.) 11,323 11,183 (-)1.2

Deposits 0.54 0.32 (-) 40.7

Working capital 350 339 (-) 3.1

Gross loans advanced 644 644 --

Loans outstanding 135 121 (-) 10.4

Loans overdue 37 38 2.7

Loans recovered 13 14 7.7

* Provisional

Source: Office of the Commissioner for Co-operation, Govt. of

Maharashtra.

3.13 Rural Credit Scenario of Maharashtra:

The rural credit scenario of Maharashtra encompassed several

aspects with major foci of attention on annual credit plans prepared for

various sectors by the State Level Bankers' Committee (SLBC), potential

linked credit plans for various region of the state, progress of various

130

rural financial institutions overtime, distributional aspect of credit, micro-

finance or linkage of bank credit with various self-help group, etc.

Majority of these aspects are evaluated in this section with a focus on

credit cooperatives, commercial banks, regional rural banks (RRBs), land

development banks (LDBs), and micro credit innovations.

Table 3.10 Details of Non-agricultural Credit Societies

(Rs. crore)

As on 31st March Particulars

2008 2009*

Percentage

change

Societies (No.) 25,106 24,167 (-) 3.7

Members (lakh) 202 210 4.0

Deposits 55,545 56,294 1.4

Owned funds 13,508 13,823 2.3

Share capital 5,938 6,089 2.5

Of which, State Govt. 8 9 12.5

Working capital 97,352 88,765 (-) 8.8

Loans advanced 52,169 54,181 3.9

Loans outstanding 60,279 62,388 3.5

Loans overdue 7,847 8,269 5.4

Loans recovered 1,596 1,685 5.6

Societies in loss (No.) 6,118 6,159 0.7

Amount of loss 525 610 16.2

* Provisional Source: Office of the Commissioner for Co-operation, Govt. of Maharashtra.

131

3.14 Credit Flow through Commercial Bank in Maharashtra:

Despite several targets prescribed by the RBI for Public Sector

Banks (PSBs), these banks are reported to have defaulted merrily on

majority of these targets (Mujumdar, 2001). This is evident from the fact

that, during the period between 1992 and 1996, the net bank credit of

PSBs to priority sectors at all-India level was well below 40 per cent. Not

only this, at all-India level, the net bank credit of PSBs to agriculture and

to weaker sections remained well below 18 per cent and 10 per cent,

respectively, of their total advances all through the period between 1991

and 2000. This is a reflection of the fact that the two sub-targets of credit

to agriculture and to weaker sections continue to remain unattained even

in more recent times. Thus, agriculture in general and weaker sections in

particular is grossly neglected by PSBs. However, in view of the

recommendations of the Union Budget of 1996-97, which laid emphasis

on the need to double the size of rural credit in the subsequent five years,

the RBI had restored the priority sector credit of PSBs to the level of 41

per cent of their total advances in March 1997, and it remained well

above 40 per cent thereafter.

As for institutional finance to farming community, the commercial

banks in Maharashtra have also not shown encouraging trends. The trend over

the past two decades shows a slower growth in rural institutional finance

through commercial banks during the decade of economic reforms as against

132

the pre-economic reform period (Table 3.11). The commercial banks in

Maharashtra have not only shown slower growth in their loan advances and

deposits but also decline in their credit-deposit (C-D) ratio during the period

of reforms as against the pre-economic reform period. However, mention

may be made here that though the rural C-D ratio of commercial banks in

Maharashtra has come down from 72 per cent during TE 1982/83 to 65 per

cent by the TE 1999/00, it is still well above the minimum prescribed limit of

60 per cent as stipulated by the RBI.

Table 3.11 Rural Deposits and Credits of Commercial Banks in

Maharashtra

(Rs. Crore)

Triennium Ending CGR (%) Indicators

1982/83 1992/93 1999/00 1980/90 1991/2000 1980/2000

Rural

Deposits 381 1964 5145 19.05 14.40NS 16.28

Rural

Credits

274 1457 3346 17.08 12.28NS 14.91

CD Ratio

(%)

71.91 74.18 65.03 -- -- --

Source : Computations are based on figures obtained from

various issue of 'Economic Survey of Maharashtra'.

133

3.15 Rural Indebtedness in India:

Indebtedness has been acknowledged as one of the most infamous

stumbling block in the way of rural property. It is cancerous, self

perpetuations malignant and maleficent. I abate agricultural production,

abashes social psyche, aggravates inequalities in the distributions of

socioeconomic opportunities and benefits, arrests social progress and

misdirects social efforts. Within the given institutional structure of the

Indian society it is felt that a cure for indebtedness is extremely difficult,

if not impossible. It is so because poverty, coupled with unequal

distribution of economic resources, breeds indebtedness, which in turn,

consolidates the causes of poverty and distributional injustice. This

vicious circle can, of course, be broken, but it requires a strong social will

and a manifestation thereof in determined efforts to eradicate the problem

of rural poverty and indebtedness. There is a pressing need for

identifications of weaker links of the said causal chain that makes the

vicious circle. A prudent strategy to break the circle would attack these

weaker links. The task of the identification of the weaker links

necessitates social research to be carried out. We must note that the

problem of rural indebtedness is not sociological, economic or political

problem in isolation; it is a serious and crucial problem that has its roots

in the social, political and economic texture of the society.16

134

3.16 Incidence of Indebtedness of farmer household in India:

Table No. 3.12 shows estimated number of rural household, farmer

household, indebted farmer households and percentage of farmer

households indebted in each of the states. At all India level, an estimated

60.4 percent of rural households were farmer households and of them

48.6 percent were reported to be indebted. The incidence of indebtedness

was highest in Andhra Pradesh (82 percent), followed by Tamil Nadu

(74.5 percent), Punjab (65.4 percent), Kerala (64.4 percent), Karnataka

(61.6 percent), and Maharashtra (54.8 percent). As per NSS 59th round

Moreover, Harayana, Rajasthan, Gujarat, Madhya Pradesh and West

Bangal each had about 50 to 53 percent farmer households indebted.

States with very low proportion of indebted farmer households were

Meghalaya, Arunchal Pradesh and Uttaranchal. In each of these states

less than 10 percent farmer households were indebted. In absolute terms,

out of an estimated 43.4 million indebted farmer household, 6.9 million

belonged to Uttar Pradesh, 4.9 million to Andhra Pradesh, 3.6 million to

Maharashtra, 3.5 million to West Bengal and 3.2 million to Madhya

Pradesh. More than half of the indebted farmer households belonged to

these five states.

3.17 Incidence of Indebtedness by Different Sources:

During independence period the growth of institutional rural credit

tremendously increased. Before independence non-institutional rural

135

Table 3 .12 Estimated Number of Rural Households and Total

Indebted Farmer Households in each State

State

Estimated number of

Rural households

(100)

Estimated number of

farmer households

(100)

Estimated number of indebted farmer

household (100)

Percentage of farmer

households indebted

1 2 3 4 5 Andhra Pradesh

142512

60339

49493

82.0 Arunchal Pradesh 15412 1227 72 5.9

Assam 41525 25040 4536 18.1 Bihar 116853 70804 23383 33.0 Chhattisgarh - 36316 27598 11092 40.2 Gujarat 63015 37845 19644 51.9 Haryana 31474 19445 10330 53.1 Himachal Pradesh 11928 9061 3030 33.4 Jammu & Kashmir

10418

9432

3003

31.8

Jharkhand 36930 28238 5893 20.9 Karnataka 69908 40413 24897 61.6 Kerala 49942 21946 14126 64.4 Madhya Predesh 93898 63206 32110 50.8 Maharashtra 118177 65817 36098 54.8 Manipur 2685 2146 533 24.8 Meghalaya 3401' 2543 103 4.1 Mizoram 942 780 184 23.6 Nagaland 973 805 294 36.5 Orissa 66199 42341 20250 47.8 Punjab 29847 18442 12069 65.4 Rajasthan 70172 53080 27828 52.4 Sikkim 812 531 174 38.8 Tamil Nadu 110182 38880 28954 74.5 Tripura 5977 2333 1148, 49.2 Uttar Pradesh 221499 171575 69199 40.3 Uttaranchal 11959 8962 644 7.2 West Bengal 121667 69226 34696 50.1 Group of UT's 2325 732 372 50.8 All India 1478988 893504 434242 46.6

Source: NSS Report No. 498: Indebtedness of Farmer

Households, 2003.

136

Credits were dominant. After nationalization of commercial banks and

dominant. After nationalization of commercial banks and mandated of

rural credit to these banks institutional rural credit increased and non-

instructional credit goes down. Total debt of farmer households was

estimated at Rs. 1.12 lakh crore in 2003; of which Rs. 65000 crore was

from institutional agencies and Rs. 47000 crore from non-institutional

agencies. Private moneylenders accounted for Rs. 29000 crore and traders

Rs. 6000 crore. About Rs. 18000 crore of debt from non-institutional

sources, a major portion of which was from moneylenders, carried an

interest rate grater than 30 percent. Clearly, there is an urgent need to

relieve the farmers from private debt currying high interest rate by

transferring it to institutional agencies.

Table No. 3.13 indicates the debt of cultivator households from

different sources since 1951 to 2002. The share of institutional sources in

cultivator's debt improved considerably in the years following bank

nationalization, from about 32 percent in 1971 to 66 percent in 1991, but

in the 1990's, there was a loss of momentum and the share declined to 61

percent in 2002. In the post nationalization period, the increase in the

share of commercial banks was rapid and sizeable. The cooperative

sectors share increased from 22 percent in 1971 to about 30 percent by

1981 and stagnated since then. In the 1990's while cooperative sustained

their, albeit low, share at 30 percent, the share of commercial banks

137

Table 3.13 Share of Debt of Cultivator Households from

Different Sources: 1951-2002

(In Percentages)

Sources of Credit 1951 1961 1971 1981 1991 2002

Institutional 7.3 18.7 31.7 63.2 66.3 61.1

Cooperative Societies /

Banks, etc

3.3

2.6

22.0

29.8

30.0

30.2

Commercial Banks 0.9 0.6 2.4 28.8 35.2 26.3

Non-Institutional 92.7 81.3 66.3 36.8 30.6 38.9

Moneylenders 69.7 49.2 36.1 16.1 17.5 26.8

Unspecified - - - - 3.1 -

Total 100.0 100.0 100.0 100.0 100.0 100.0

Source : Report of the Expert Group on Agricultural

Indebtedness Ministry of Finance, Government of India,

July 2007.

slipped from 35 percent in 1991 to 26 percent in 2002. The decline in the

share of institutional agencies in the 1990's could be attributed to the

decline in the share of commercial banks.

3.18 Incidence of Indebtedness by Land Holding in India:

Table No. 3.14 shows the incidence, amount and sources of

indebtedness by size class of land holding. The incidence of indebtedness

and the share of institutional finance in outstanding debt for all-India

increased with the size of land holding. The incidence of indebtedness

138

increased from 46 percent for marginal and small farmer household to 66

percent for large farmers and the share of institutional agencies in the

debt increased from 51 to 68 percent. The average size of loan per farmer

also increased with the landholding size. Small and marginal farmer

households, which accounted for 80 percent of indebted fanner

households, absorbed 51 percent of the total outstanding credit from

institutional agencies. The dependency of marginal and small farmers was

more on non-institutional agencies then of large farmers. As against large

farmers, one-third of whose debt was from non-institutional sources, one-

half of the debt of small and marginal farmers was from non-institutional

sources. The marginal farmers received a relatively smaller share even

from cooperatives and had to depend more on private moneylenders.

3.19 Incidence of Indebtedness by Purpose:

Table No. 3.15 shows a substantial proportion of cultivator

households debt was for productive purposes at the all-India level

However, debt for productive purposes as a percentage of total debt

declined from 71.6 percent in 1981 to 62.9 percent in 2002. Similarly the

share of debt incurred for farm business declined from 63.8 percent in

1981 to 52.5 percent in 2002. Within farm business expenditure, the share

of capital expenditure declined from 45.3 percent to 34.3 percent.

The increase in capital expenditure for non-farm business could not

fully compensate the fall in farm business expenditure, which resulted in

139

a fall in the share of overall productive expenditure between 1981 and

2002.

Table 3.14 Incidence, Amount and Source of Indebtedness by

Size Class of Holding: 2003 Loans from

Size class

of land

Possessed

(Hectares)

Total

Household

(%)

Total

Indebted

Household

(%)

Incidence

of

Indebtedness

(%)

Amount

Outstanding

per Farmer

Household

Institutional

Agencies (%)

Non

Institutional

< 0.01 1.4 1.3 45.3 6121 22.6 77.4

0.01-0.40 32.8 30.0 44.4 6545 43.3 56.7

0.41-1.00 31.7 29.8 45.6 8623 52.8 47.2

1.01-2.00 18.0 18.9 51.0 13762 57.6 42.3

Up to 2.00 83.9 79.9 46.3 8870 51.3 49.7

2.01-4.00 10.5 12.5 58.2 23456 65.1 35.0

4.01-10.00 4.8 6.4 65.1 42532 68.8 31.1

10.00+ 0.9 1.2 66.4 76232 67.6 32.4

All Sizes 100.0 100.0 48.6 12595 57.7 42.4

Source : NSSO, Situation Assessment Survey of Farmers, 2003.

3.20 Causes of Rural Indebtedness:

Broadly, there are several factors responsible on account of which

an Indian agriculturist incurs debts remains indebted for ever. It is the

very socio-economic structure of the rural area which compels him

borrow more and more. There is nothing wrong to borrow. He needs

money to cope up his needs but his earnings from the farm is very low.

He has to face many problems in his day to day work. Borrowing is very

common phenomenon in the world but the fact is that Indian farmers are

140

totally unable to return the amount of debt out of his meager income.

Thus, indebtedness goes on multiplying year after year. Let us make a

detailed investigation about the various causes of rural indebtedness

(Lekhi and Singh, 2008)17.

Table 3.15 Distribution of Debt by Purpose among Rural Cultivator

Households: 1961-2002

(In Percentage)

Purpose 1961 1971 1981 2002 Productive 40.1 54.0 71.6 62.9

Farm-Business 36.6 49.7 63.8 52.5

Capital Expenditure 26.8 34.7 45.3 34.3

Current Expenditure 9.8 15.0 18.5 18.2

Non-Farm Business 3.5 4.3 7.8 9.4

Capital Expenditure 1.4 3.2 6.3 7.4

Current Expenditure 2.1 1.1 1.5 2.0

Non-Farm Business 60.0 46.0 28.4 38.1

Household Expenditure 49.2 37.8 20.0 27.7

Other Purposes 10.8 7.2 8.4 10.4

Repayment of Debt. 5.0 1.5 0.1 1.5

Expenditure on Litigation 1.8 0.7 0.8 0.3

Financial Investment 0.2 0.2 1.0 0.6

All Purposes 100.0 100.0 100.0 100.0

Sources : Reports of Expert Group on Agricultural Indebtedness,

July 2007.

141

3.20.1 Chronic Poverty of Farmers:

A cultivator is forced to borrow for purposes of production or

consumption because he is too poor- It is true that he is poor because he

is indebted. The vicious circle of poverty saps the very vitality of the rural

follc. A United Nation's publication has remarked: "They lie...... in the

chronic insufficiency "of farmers' income and the consequent tendency of

consumption to outrun production," Poverty, misery and decay have not

yet been removed from the rural areas of the country; and the middle and

small peasants' condition is still grave that they can hardly live without

extra earnings from wage labour. "The vicious circle resulting in poverty,

debt and high interest rates holds the small cultivators in a tight grip.

Poverty is the mainre as other them is unable to save anything out of his

present earning .He is compelled to borrow due to adverse circumstances

in the family, failure of monsoon or floods or other calamity. It is argued

that the constant rise in the prices of agricultural goods in recent years has

resulted in a shift in the distribution of national income, from urban to

rural areas, through agricultural prosperity; and that it has benefited the

cultivating masses considerably. It has been concluded that debt problem

does not exist today. But this myth of me agricultural prosperity is the

result of the unawareness of the socio- economic structure of the rural

areas of the country. Still according to an estimate about 46 percent of

people is living in rural areas live below poverty line.

142

3.20.2 Ancestral Debts:

This is another important cause of rural indebtedness in the

country. The Decan Riot Commission had expressed the view that the

main cause of the existing indebtedness was ancestral debt. debt being

passed on from father to son, generation after generation without any

equitable the restriction. Royal Commission on Agriculture remarked.

"The Indian peasant is born in debt, lives in debt, dies in debt and

bequeaths debt." lie inherits debt from his forefathers and since poverty

makes him unable to pay, he takes loans from a moneylender to repay me

same. Thus, the burden of loans taken for this purpose and for fulfilling

his needs goes on increasing. It must he remembered here that the heirs

have got no legal obligation to repay the debts taken by their forefathers

or ancestors. The debts of the deceased person only pass on to his heirs

when they succeed to the deceased debtor's property and only to the

extent of such property. Therefore, it is ignorance of law that compels

peasants to repay the debts of their ancestors. Generally, peasants take it

their pious duty or religious obligation to take the ancestral debt as debt

of honor and consider important duty to discharge such debts.

3.20.3 Excessive Pressure of Population on Land:

With the rapid rise in population especially in the rural areas the

pressure of population on land is increasing day by day. This has

resulted in, the reduction of per capita income. Their meager income is

143

not being enough for meeting the family needs. Thus, farmers are

forced to borrow.

3.20.4 Sub-division and Fragmentation of Holdings:

The average holding of cultivators in India is too low. It is further

sub-divided and fragmented, making it more and more uneconomical.

The tendency for the sub-division of land holdings, facilitated mainly by

the Laws of Inheritance and Succession, is prevalent in all the states of

the country. It has resulted in the existence of numerous tiny land-farms

scattered at different places reducing agricultural productivity and per

capita production. Sir, M. I. Darling has rightly pointed out: "The

smallness of the average holding and its almost incredible fragmentation

together- constitute one of the basic causes of debt and so important are

they that we shall have to refer to them again and again." In other words,

it forces the poor cultivators to contract debts which once contracted

become a burden for him for the entire life time.

3.20.5 Unfavorable Climatic Conditions:

Another cause of rural indebtedness is that Indian agriculture is still

a gamble of rains. Frequent failures of monsoons results in droughts

which badly affect crops. On the other hand, excessive rains cause havoc

in the form of floods which damage crops. The failure of crops, whether

partial or complete, is a curse on the lot of farmers braking their bones

completely. Similarly other factors such as the raids of locusts,

144

hailstorms, fire also effect the damage on crops. This means misery to

farmers.

3.20.6 Heavy Cattle Mortality:

Farmers are helpless in maintaining their only material capital in

the form of cattle. They lose their cattle off and on either due to floods

which take a heavy toll of human and cattle lives or to drought which

makes them helpless to feed their cattle or to an epidemic which wipes

away most of the cattle. The loss of cattle compels cultivators to borrow

money for the purchase of cattle without which they cannot cultivate

land. This factor is greatly responsible for increasing indebtedness of the

cultivators.

3.20.7 Illiteracy of Farmers:

The illiteracy and ignorance of farmers are very big obstacles in the

overall improvement of the cultivators. They do not pay heed to bring

about permanent improvements on their land to increase production. They

do not bother to check up the various factors which compel them to

borrow. They are ignorant of the laws of the land. They are easily cheated

and duped by moneylenders and other private agencies which provide

credit. The documents are forged by the moneylenders as farmers are

illiterate. Interest goes on accumulating because they do not understand

the consequences of compound interest. The amount of interest

accumulates to such an extent that it even exceeds the principal amount.

145

Thus, their illiteracy comes in the way to progress. They fall in the

clutches of the victimizing moneylenders who want to extract as much

money as possible from them.

3.20.8 Extravagance of the Farmers:

Poor peasants generally lead a miserable and abstentious life, hut

on occasions; they become extravagant which goes to aggravate

indebtedness. It has been recorded that (they spend more than they can

afford on social and religious ceremonies, such as marriage, festivals,

ornament.' funerals, sradh and kalhas, seasonal feasts; caste dinners, etc.

They do not foresee and account for the future. They do not bother about

the lean years when they are having good times. To put in the words of

Sir M.L. Darling, that social ceremonial, marriage and expenditure on

jewellery were important causes of indebtedness. In recent years the

extravagance of farmers of social ceremonies, etc.. is on the increase; and

they are still not careful about the future especially when they reap good

harvests.

3.20.9 Litigation:

The "passionate love of litigation' on the part of the farmers of the

country is another potent cause of financial embarrassment and

consequent indebtedness. The cost which uneducated farmers incur on

litigation is very high. Owing lo their ignorance everybody in the Court

146

tries to fleece them. Moreover, long duration of law battle involve, time

energy and money. This also leads to the increase of debt for nothing.

3.20.10 Poor and Ill Health of the Farmers:

The poor and ill-health of farmers makes their lives miserable.

Adequate medical facilities are not available to them. They do not care

for their physical buildup. Under-nutrition is a general complaint. This

physical deficiency due to malnutrition makes them vulnerable to the

attacks of epidemics and diseases, when they are ill, they do not possess

enough savings for their treatment. Hence they are compelled to borrow

at a very high rate. Again, physical deficiencies badly affect their

efficiency and productiveness ultimately affecting their incomes.

3.20.11 High Interest Rate:

Another important point of rural indebtedness is the high rates of

interest which are charged by moneylenders in the villages. The high

rates of interest lend to perpetuate the indebtedness. The method of

charging compound interest is burdensome and increases the debt burden

considerably. According to an expert opinion, "Compound interest is

almost certainly an important factor in the rapid growth of debt; and

unless it is eliminated, no attempt to stop this growth is likely to succeed.

3.20.12 Moneylender only Source of Borrowing:

Moneylenders are the only source for the provision of credit

facilities to cultivators in the rural areas. In the absence of other agencies

147

of the former enjoys an almost monopolistic position and try to keep

cultivators into their clutches. It has correctly been observed by Wolff

"The country is in the grip of the Mahajan." These moneylenders adopt

some highly objectionable factices to dupe the needy and illiterate

cultivators. They make several unwanted deductions before actually

giving money to cultivators. They often write more in their account books

man that they would lend to them. They attract the latter with all facilities

and flexibilities in providing loans to them. After they have borrowed,

they are put to all sorts of harassments. Thus, the way in which

moneylenders deal with farmers also aggravates the problem.

3.20.13 Burden of Land Revenue and other Taxes:

Heavy land assessment, irrigation and other taxes, rigid procedure

for the collection of revenue and taxes, and the burden of growing

indirect taxes are also responsible for rural indebtedness. This becomes a

burden especially in the event of the failure. Besides, it is quite

burdensome for the poor peasants of the country especially when they

have to pay it in the form of cash. It becomes a cause of debt when they

are not able to produce enough to fulfill their own requirements; and are

further called upon to pay the revenue.

3.20.14 Low Hoarding Capacity of Farmers:

Farmers are compelled to dishoard their produce at the time of

harvesting because they can't wait for long. Thus they are compelled to

148

sell their produce and they do not get reasonable prices on account of

market glut. Lack of storage facilities, absence of adequate marketing

arrangements, pressure of payment of interest, etc., form moneylenders,

land revenue demands and other needs compel them to sell their produce

in the village itself at cheap rates. When they need money, they are

compelled to borrow at a high rate of interest. This results in heavy

burden on them.

3.21 Effects of Indebtedness:

Indebtedness has far–reaching economic, social as well as political

effects on the lives of farmers in India. It has lowered down their morale

and made them fatalists, marring their productive efficiency and dragging

them into the vicious circle of poverty. A cultivator is tied with such

bondages that he finds it difficult to escape. There is no incentive for his

lord work because his entire production will be taken by the moneylender

at fairly low prices against agreement of borrowings/ loans. The

atmosphere at village becomes tense which leads to further violence,

mutual jealousy and class struggle. The result is inefficiency in

agriculture sector. He is, thus, compelled to go on living at a subsistence

level feeling that he is sowing so that others may reap, and he toils so that

his creditor may gain. He knows that he will be "easily shorn of his gains

as a sheep of its fleece." It mars the overall progress of the rural areas of

the country. The cultivators become landless labour while money lender

149

turn into absentee landlords. There is no doubt that economic freedom is

a condition precedent to progress.

Some of the effects of rural indebtedness may be mentioned, in

brief, as follows:

3.21.1 Economic Effects:

1. The cultivators lose their productive efficiency as they do not take

much interest in permanent improvements on land. They feel that

any effort in this direction will bring no benefit to them, and the

fruits of their hard labour will go into the hands of their creditors.

The encouragement for more production is lost which further

means low productivity.

2. It results in the transfer of land from cultivators to non-cultivators

(Absentee landlordism). This again curtails production since non-

agriculturists cannot put the required amount of labour in farming.

3. Farmers are called upon by their creditors to sell their produce

through them alone. The latter offer low prices. Since farmers are

indebted, they are compelled to do so. They are also compelled to

purchase grains for seed and other requirements at higher prices

from their creditors. To quote All India Rural Credit Survey

Committee who reported that "in a significant number of districts

in which village sales were a marked feature, the cultivators

reported themselves indebted to the traders in respect of a large

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proportion of the sale transaction they had entered into with the

latter."

4. The terms of trade moves against the farmers.

5. The farmers lose his property for which he has deep love and

affection.

3.21.2 Social and Moral Effects:

1. The landless farmers are called to do free serve (beggar) to their

creditors especially when the loan has been taken from landlords

etc. This slavery and economic dependence of small peasants who

form the majority of the population of the country, is not at all

healthy for the progress of the country.

2. The indebtedness gives birth to a new class of landless proletariat

(serfs) in the country. These landless workers have to depend upon

other for their living. They are a burden to the State also. Most of

the farmers who are in possession of small holdings their holdings

become still smaller, lowering down their incomes and standard of

living.

3. It causes frustration in the minds of cultivators since it develops

into a life long worry from which, they know, they will not be able

to relieve themselves. Mental frustrating results in their moral

degradation. As a result, they become fatalists.

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4. The incentive to work hard, to take risks, to make permanent

improvements and to increase their incomes is marred and the

whole outlook is so changed as it goes to extinguish the spark of

life. It proves a great impediment to the growth of rural area.

3.21.3 Political Effects:

1. The indebtedness has greatly influenced the political status of the

small and marginal cultivators. Big landlords use them as tools and

consider votes of the laborers in their pockets. They do much

hoarse trading. In a sense, they lose their political freedom to cast

votes against their wishes.

2. Big landlords / moneylender indulge in mean and dirty practices in

order to attempt to squeeze the debtors. This poisons the political

atmosphere of the rural areas which in turn is a social tension.

Conclusion:

There are several concerns in relation to rural credit which are

generally expressed in terms of inadequacy, constraints on timely

availability, high cost, neglect of small and marginal farmers, low credit

deposit ratios in several states and continued presence of informal markets.

It is held that while the commercial banks are more focused in improving

efficiency and profitability, they have tended to give comparatively less

priority to rural credit. Regional Rural banks and cooperative appear to

face serious problems of governance as well as operational efficiency.

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Both institutional and non-institutional channels exist for supply of credit

in both rural and urban areas. While banks, microfinance institutions and

credit cooperative societies comprise the institutional channels, landlords,

local shopkeepers, traders and professional money lenders constitute the

non-institutional channels. The share of informal loans in rural credit went

down from 91 percent in 1951 to 45 percent in 1991. Most of the benefits

of this development have gone to the relatively better of people. Around 66

percent of large farmers are reported to have a deposit account and 44

percent have access to credit.

In India nearly 72 percent of population lives in villages and is

mostly dependent for their livelihood on rural areas despite such a high

predominance, the share of agriculture and allied activities in India’s

GDP are only about 25 percent. Many policy changes have taken place

since I960, when the agricultural credit scenario was largely dominated

by private informal sources of credit, to increase the flow of institutional

credit to the agricultural sector. On an average the institutional short term

agricultural credit was 67.59 percent and long term institutional credit

was 32.41 percent during 1998-99 to 2009-10. Among the total

institutional agricultural credit the share of scheduled commercial banks

was 71 percent it was 19 percent for cooperative banks and 10 percent for

Regional Rural Banks in 2007-08. At all India level, an estimated 60.4

percent of rural households were farmer households and of them 48.6

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percent were reported to be indebted. The incidence of indebtedness was

highest in Andhra Pradesh (82 percent), followed by Tamil Nadu (74.5

percent), Punjab (65.4 percent), Kerala (64.4 percent), Karnataka (61.6

percent), and Maharashtra (54.8 percent). As per NSS 59th round

Moreover, Harayana, Rajasthan, Gujarat, Madhya Pradesh and West

Benal each had about 50 to 53 percent farmer households indebted.

The share of institutional sources in cultivator’s debt improved

considerably in the years following bank nationalization, from about 32

percent in 1971 to 66 percent in 1991, but in the 1990's, there was a loss

of momentum and the share declined to 61 percent in 2002. In the post

nationalization period, the increase in the share of commercial banks was

rapid and sizeable. The decline in the share of institutional agencies in the

1990's could be attributed to the decline in the share of commercial

banks. The average size of loan per farmer also increased with the

landholding size. Small and marginal farmer households, which

accounted for 80 percent of indebted fanner households, absorbed 51

percent of the total outstanding credit from institutional agencies.

However, debt for productive purposes as a percentage of total debt

declined from 71.6 percent in 1981 to 2.9 percent in 2002. Similarly the

share of debt incurred for farm business declined from 64 percent in 1981

to 53 percent in 2002.

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