AGRICULTURAL FINANCE: NATURE AND SCOPE

Introduction -

Farm finance has become an important input due to the advent of capital-intensive agricultural technologies.

Farmers require capital to enhance the productivities of various farm resources.

Indian agriculture, in general, is characterized by low and uncertain returns.

To break the vicious cycle of low returns → low savings → low investment → low returns, provision of external finance to farmers becomes inevitable.

Organized and unorganized credit agencies in rural areas provide credit for both development and consumption purposes.

Provision of credit by these agencies involves many obstacles to both bankers and borrowers due to differences in banking systems followed by bankers, socio-economic conditions of borrowers, and infrastructural facilities and institutional support offered to the borrowers.

Besides, the government also frequently changes its agricultural credit policies regarding institutional credit set-up, credit rationing, rates of interest, subsidy, and the functioning of markets and other developmental agencies, which influence the extent of credit available to farmer-borrowers.

All these factors ultimately have a bearing on farm returns. Hence, problems regarding capital can be well understood by realizing the theoretical basis of the agricultural credit system in India, bottlenecks faced by bankers and borrowers, and the government's efforts in solving the problems involved in the agricultural credit system in India.

Importance of Agricultural Finance -

Credit is essential for agricultural development and also for the development of the economy as a whole. The agricultural finance is required for the following reasons:

1. The scope for extensive agriculture in India is limited. Therefore, an increase in agricultural production is possible only by intensification and diversification of farming. Intensive agriculture needs huge capital.
2. Extreme inequalities exist in the distribution of operational holdings and operational area. 74.5 percent of the total number of farm households which own less than 2 hectares operate only 26.2 per cent of the total operated area whereas only 2.4 percent of the total number of farm households which own more than 10 hectares each operate 23 percent of the total operated area in 1980-81 (In India, there were 88.883 million farm households which operated 163.797 million hectares in 1980-81). The purchasing power of these small and marginal farmers is limited to their subsistence farming. Hence, they have to depend on external financial assistance to use costlier (modern) inputs.
3. Farmers' economic condition is subject to frequent onslaughts of flood, drought, famine, etc. Therefore, either the continuance of cultivation of crops or making improvements on the farms depends on the nature and availability of finance.
4. In recent years, more area is brought under irrigation which, in turn, would increase the use of inputs like fertilizer and plant protection chemicals. In order to accomplish this, external finance is needed.
5. In order to sustain the development of agro-based industries, there should be a substantial increase in the supply of raw materials needed for such industries. Therefore, for the development of the farm sector, a constant flow of credit is essential and it would enhance the overall growth of the economy.
6. In agriculture, fixed capital is locked up in permanent investments like land, wells, buildings, etc. Moreover, it takes a long time to get returns from the farm. Hence, farmers need finance to continue their farm operations.
7. The weaker sections of the farming community should be motivated to participate in development programs by giving financial assistance to acquire productive assets.
8. Small and marginal farmers are trapped in the vicious cycle of poverty, i.e., low returns → low saving → low investment → low return. To break this cycle, credit has to be injected into the agricultural sector.

Differences between Financing of Agricultural and Other Sectors

Financing Agriculture	Financing Other Sectors
Farmers are not aware of credit policies and procedures	They are aware of banking procedures.
Difficult to estimate the efficiency of farming in the absence of farm records.	Efficiency can be assessed as all returns are recorded.
Farming is exposed to natural calamities and uncertainties.	Risk and uncertainties involved in an enterprise can be foreseen and managed.
Frequent supervision and follow-up after loan disbursement are difficult as farms are scattered.	Monitoring is easy and less time-consuming.
Land as a major security being immovable is not highly liquid.	Apart from immovable assets, movable assets are also taken as security which can be easily liquidated.
Ownership of land is difficult to verify as land records are not updated.	Identification of ownership can be easily done by verifying records.
As farm products are perishable, they are subjected to distress sales.	As industrial products are non-perishable, producers can fix prices.
Long gestation period between investment and returns.	Very short gestation period.
Since income is seasonal, repayment schedule is drawn in accordance with income generation from investment.	As income generation is a continuous process, repayments will be made continuously.
Adequate infrastructural facilities are not available to implement new technologies.	Sufficient infrastructure is available to implement their schemes.
Farmers are susceptible to external influence and hence some vested interests exploit them and guide them in the wrong direction.	Entrepreneurs are not usually misled by external influence as they are well organized.