Approach Note

Study on Sources of finance for production and investment credit : Understanding the
cash flow pattern of the farmers
Introduction

Agriculture and allied sector still accounts for about 54.6 per cent of total
employment (Census 2011) in India and the development of this sector
has been the foremost agenda item for the policy makers. Credit a non
land input is considered as an enabling factor for the development of the
sector. The demand for agricultural credit arises mainly due to (i) lack of
synchronization between the realization of income and act of expenditure
and (ii) lumpiness of investment in fixed capital formation such as land,
implements, machinery, etc. Limited income and paucity of savings force
the small farmers to avail credit. The farmers in general require credit for
taking up new activities and expanding the existing activities with
improved technology.
Institutional Credit for Agriculture
The public authorities in India have always emphasized on institutional credit in order to free
the farmers from the clutches of moneylenders and to provide finance for agriculture and
allied activities. The evolution of institutional credit to agriculture could be broadly classified
into four distinct phases
Phase I : 1904-1969 (predominance of co-operatives and setting up of RBI)
Phase II : 1969-1975 (nationalization of commercial banks and setting up of Regional Rural
Banks (RRBs))
Phase III : 1975 - 1990 (setting up of NABARD) and
Phase IV : From 1991 onwards (financial sector reforms)
The genesis of institutional involvement in the sphere of agricultural credit could be traced
back to the enactment of the Cooperative Societies Act in 1904. The establishment of the RBI
in 1935 reinforced the process of institutional development for agricultural credit. The
Government of India and Reserve Bank (RBI) have created broad-based institutional
framework for catering to the increasing credit requirements. Vigorous efforts have been
made to increase the flow of credit to Agriculture sector, adopting the supply lending
approach. The broad objectives have been to replace moneylenders, relieve farmers of
indebtedness and to achieve higher levels of agricultural credit, investment and agricultural
output.
The ground level credit flow for agriculture and allied activities has undergone multidimensional changes in terms of quantity, source, focus, products, composition, etc. as
described in the subsequent paragraphs.

Table 1 : Agency-wise credit flow (Rs. Crore)

Year/
Co-operatives
RRBs
Commercial
Other
Agency
Banks
Agencies
1991-92
5800 (52)
596 (5)
4806 (43)
0 (0)
1998-99
15957 (43)
2460 (7)
18443 (50)
0 (0)
2001-02
23524 (38)
4854 (8)
33587 (54)
80 (<1)
2003-04
26875 (31)
7581 (9)
52441 (60)
84 (<1)
2007-08
48258 (19)
25312 (10)
181088 (71)
0 (0)
2009-10
63497 (17)
35217 (9)
285800 (74)
0 (0)
2010-11
78007 (17)
44293 (9)
345877 (74)
114 (<1)
2011-12
87963 (17)
54450 (11)
368616 (72)
0 (0)
2012-13
111203 (18)
63681 (10)
432491 (72)
0 (0)
2013-14
118422 (20)
83307 (13)
521496 (67)
0 (0)
Source : NABARD

Total
11202 (100)
36860 (100)
62045 (100)
86981 (100)
254658 (100)
384514 (100)
468291 (100)
511029 (100)
607375 (100)
723225 (100)

Agricultural credit has increased from a modest Rs.11202 crore in 1991-92 to Rs. 723225
crore in 2013-14, indicating an increase of almost 645 per cent. The comparative share of
agencies in the overall credit disbursement has also undergone a change. The co-operative
banks once the major purveyors of credit at 52 per cent share in 1991-92 are dispensing only
20 per cent of the credit. On the other side, the commercial banks have emerged as the
dominant agency accounting for almost 70 per cent of the credit flow. The RRBs have shown
steady increase over time.
Major Initiatives
A host of initiatives were introduced during the period to boost agricultural credit flow. Some
of these include the following:
(i) Introduction of Kisan Credit Card Scheme: Consequent upon the

announcement in the Budget speech for the year 1998-99, Kisan Credit
Cards (KCCs) were issued by the banks with a view to provide adequate,
timely and hassle free credit in a cost effective manner to the farmers to
meet the credit requirement for short agricultural operations. The Scheme
was further revised in the year 2012 to make it more farmer friendly. The
basic aim was to provide credit under a single window to the farmers to
meet the short term credit requirements for cultivation of crops,
postharvest
expenses,
produce
marketing
loan,
consumption
requirements, working capital for maintenance of farm assets and
activities allied to agriculture, like dairy animals, inland fishery etc. and
investment credit requirement for agriculture and allied activities like
pump sets, sprayers, dairy animals etc. Upto March, 2013, 12.03 crore
KCC have been issued by the banks.
(ii) Doubling of agricultural credit and subsequent take off : In June 2004, GoI issued
direction to the banking sector to double the flow of credit in three years between 2004-05

and 2007-08. Though initially the goal of doubling was set for these three years, the system
of setting the target by the Union Finance Minister roughly at an annual increase of 20 per
cent has continued almost for a decade. The banking sector has achieved the target and the
achievements vis-vis the target for the last five years validates the same (Table 2).
Table 2 : Ground level flow of credit for agriculture Targets vis--vis Achievements
(Rs. crore)
Year
Target
Achievement
Achievement as % of Target
2010-11
375000
468291
125
2011-12
475000
511029
108
2012-13
575000
607375
106
2013-14
700000
723225
103
2014-15
800000
3,99,503*
*Upto December 2014
In his Budget speech, the Union Finance Minister has fixed target of Rs. 8,50,000 crore for
agriculture credit for the year 2015-16.
(iii) Interest Subvention: Since the year 2006-07, GoI has been providing interest
subvention at 2 per cent per annum to public sector banks, RRBs and co-operatives for
deploying their own funds for lending crop loans upto Rs. 3 lakh per farmer, at an interest
rate of 7 per cent per annum. It has also been providing additional interest subvention (rebate)
to those farmers who repaid their crop loans within/before one year of disbursement. The
rebate which started at 1 per cent in 2009-10, increased to 2 per cent in 2010-11 and has been
raised to 3 per cent since 2011-12. The ultimate aim of the scheme of interest subvention is to
make the crop loan upto Rs. 3 lakh available to the farmers at 4 per cent rate of interest. Some
of the State Governments have also introduced interest subvention and rebate schemes.
(iv) Debt Waiver and Debt Relief Scheme, 2008 : A major development in the field of
agricultural credit concerned the debt waiver scheme under which the small and marginal
farmers were given complete waiver of all eligible loans that were overdue on 31 March 2007
and remained to be paid for the next two months upto 28 February 2008. For other farmers, a
onetime settlement for all similar eligible loans was introduced under which a rebate of 25
per cent was given against the payment of 75 per cent before 29 June 2009, which was
subsequently extended to 30 June 2010. Approximately Rs. 52,000 crore were spent and
around 3.45 crore farmers were benefited under the scheme.
Issues in Agricultural Credit
Despite all these, the agricultural credit is plagued with a number of issues.
Rough estimates reveal that only half of the 14 crore farm households
avail credit from institutional sources. As per the Situation of Agricultural Households 70 th
NSSO, 2014, around 52 per cent of the agricultural households were indebted and the average
amount of loan outstanding per household was Rs.47,000/. There were interstate variations
with as high as 93 per cent in Andhra Pradesh and as low as 18 per cent in Assam. At all India
(i) Large scale exclusion :

level, 60 per cent of the outstanding loans were from institutional sources which included
Govt. (2%), Co-operative Society (15%) and banks (43%). Among the non institutional
sources, agricultural/professional moneylenders had the major share at 26 per cent, followed
by relatives and friends (9%), employer/landlord (8%), shopkeepers (3%) and others (2%).
An interesting point to be made in this case is that only about 15 per cent of the outstanding
loans of the lowest size of land holding (less than 2.5 acre) was from institutional sources
whereas more than 70 per cent of the loan outstanding of the highest size of land holding
(above 25 acres) was from the institutional sources. This indicates the predominance of non
institutional sources in purveying credit to lowest category of farmers.
: Credit/loans for agriculture generally fall under two
categories, i.e. short term credit (crop loans) and long term credit (investment credit/term
loans). Crop loans sustains the production process whereas investment credit lays the
foundation for expansion of agricultural production through capital formation in agriculture.
Loans for crop production are short term, normally repayable within one year. For most crops
(except some such as sugarcane and banana) a six month period is the maximum required
time to complete the crop cycle and take the produce to market. These loans are critical as
season after season the farmer has to undertake these operations. The other type of loan is a
long term loan, typically of a duration of three years or more. These loans are required to
acquire productive assets, or equipment that will improve production or productivity or make
improvements in existing productive assets. Improvements to land, creation of irrigation
facilities, purchase of tractors and farm equipment, purchase of milch animals, construction
of sheds for animal rearing, etc., are some of the purposes for which long term loans are used.
These investments will generate a stream of incomes over a longer period of time and hence
reckoned to be of a capital forming nature. A disquieting feature of agriculture credit in India
has been the declining share of investment credit in total agriculture credit. In 1999-2000 the
share of investment credit in total agriculture credit was 37 per cent which declined to 29 per
cent by 2007-08 and further to 22 per cent in 2012-13. For the period 2007-08 to 2012-13 the
average share of investment credit to total credit was 27 per cent. The achievements under the
investment credit has in fact been below the target year after year. Though the banks have
been able to achieve the target for total credit disbursement announced under Union Budgets,
the achievements under investment credit have invariably fallen short of the target. In 200708 banks could achieve around 86 per cent of the Investment credit targets which reduced to
58 per cent in 2012-13. The percentage of achievement has increased to 69 per cent in 201314 but the target was also reduced to Rs. 2 lakh crore from the previous year (Table 3).
(ii) Declining trend in Investment credit

Table 3 : Target and Achievement under Investment Credit (Rs. Crore)

Year
Target
Achievement
Achievement as % of Target
2007-08
85,000
73,264
86
2008-09
1,20,000
91,447
76
2009-10
1,25,000
1,07,858
86
2010-11
1,55,000
1,32,741
86

2011-12
1,95,000
2012-13
2,30,000
2013-14*
2,00,000
*Provisional
Source: GOI and NABARD

1,14,871
1,33,875
1,38,620

59
58
69

As per the Agriculture Census (2010-11), out of 138

million farming holdings in the country, 117 million are small and marginal holdings. From
62 per cent in 1960-61, small and marginal landholdings constitute around 85 per cent of total
number of land holdings and hold nearly 44 per cent of the cultivated area. The average size
of operational land holding stood at 1.16 ha. posing challenge to the viability of agriculture.
The question arises as to whether the small and marginal farmers have the capacity to service
the debt since the viability of agricultural operations casts shadow on the income generation.
(iv) Increasing trend of marginalisation :

The income from agriculture is used to repay agricultural

debt. Increase in per hectare credit beyond a certain income threshold affects the debt
servicing capacity of the farmer. Prof N. Srinivasan, in his Paper on State of Rural Finance
in India (2014) has calculated the ratio of credit to income as the number of multiples. The
higher the multiple, the more credit intensive is farming and lower will be the ability to
service credit with incomes from farming. The analysis showed that the national credit to
income ratio was 0.88 multiple of income per hectare. In some states like Andhra Pradesh,
Tami Nadu, Odisha it is more than the income per hectare rendering debt servicing difficult.
This casts doubt on the quality of credit, its use and also the farming a viable source of
livelihood.
(V) Increasing credit to income ratio :

Credit plays a critical role in the event of emerging

opportunities in the field of storage infrastructure (godowns, cold storage, silos, etc.), high
tech agriculture (tissue culture, agri business, etc.), agro processing including agri value
chain, etc. Though the general perception is that these opportunities are within the forte of
large and affordable farmers, all the categories of farmers need to avail the benefits of these
opportunities. Access to credit thus becomes all the more crucial so as to make the farmers as
a whole share the pie of emerging potentials.
(vi) Emerging opportunities in agriculture :

Need for the Study

In the background of this, a need was felt to understand how the farmers finance the
production and investment activities in agriculture, what are the sources that are tapped by
them for these purpose, what are the issues involved therein. The sources of finance for needs
to be analysed from overall broad spectrum of income and expenditure of the farmer
household. Hence, the need for cash flow pattern of the farm households. Analysis of cash
flow pattern of different categories of farmers i.e. small, marginal and other farmers would
throw greater insight into the analysis.
Theoretically cash flow statements of a household record all the cash flowing into and out of
the household during a year. To understand cash flows of a farmers information on income
(both household as a whole and individual members), expenditure, depletion/accumulation of

assets (livestock, house, household and agricultural assets), savings and credit facilities
accessed, the terms and conditions of such credit facilities, their impact on the farm
households need to be collected. Since the focus of the Study is to look into the sources of
finance for production and investment credit, the credit and saving related activities need to
be looked into in detail.
Objectives of the Study
The broad objectives of the Study would be the following :
(i) To understand the existing pattern of cash flow of the various categories of farmers (small,
marginal and other farmers)
(ii) To look into the sources of finance for meeting the short term (production) and long term
(investment) requirement for agricultural operations
(iii) To have an insight into the role played by the formal/institutional agencies in meeting the
credit requirement, in general and production and investment credit in particular
(iv) To delve into the issues associated with various sources of finance, especially for
agricultural operations, of the farmer households
Methodology
The broad methodology to be followed for the Study is outlined below :
(i) In view of the limited experience of the summer interns in conducting the Study, it may be
advisable to take up the Study in one district. The selection of block/s and village/s may be
decided as per prevailing conditions at the field level and at the same time justifying the
selection of the same.
(ii) Primary data on various aspects of cash flow may be collected from a total of 60 farmers
comprising 20 each of marginal (upto 2.5 acre), small (2.5 to 5 acre) and other farmers (more
than 5 acre). In addition to the farmers, information may be collected from 10 landless
agricultural labourers so as to understand their cash flow pattern. Care must be taken to select
a representative sample from the village/s. The data/information may be collected through a
Questionnaire designed for the purpose.
(iii) The interns will visit the bank branches, preferably all the three agencies (Commercial
Bank, RRB and Co-operative) in the area to get the information about the loan availed by the
farmers. The data on the type of loan availed by the sample farmers, pattern of withdrawal
and repayment of the loan, etc. may be collected from the books of account of the banks and
the feedback on issues related to agricultural lending may be obtained from interaction with
the bankers.
(iv) The collected data has to be interpreted and analysed by using appropriate statistical
techniques so as to derive conclusions with regard to cash flow of pattern of the farmers.
(v) The reference year of the Study would be financial year 2014-15.
Deliverables
At the end of the study period, the intern should come out with a Report highlighting the

following :
Activities pursued by the farm household including agriculture, allied, non farm, off
farm and others
The details of the activities including the investment and current expenses made in the
activities
The details of income received from various sources and cash outflow on various
expenses
Comparison of income and expenditure so as to know savings, if any, and the details
thereof
Assets holding pattern including physical and financial
The sources from which the short term and long term credit requirement for
agriculture are financed
Sources of finance for other than agricultural activities
Utilisation pattern of credit, both institutional and non-institutional
Repayment pattern of institutional and non-institutional credit and the issues thereof
Issues with regard to institutional sources of credit for agricultural operations,
especially with respect to KCCs wherever availed
Other issues related to agriculture including marketing, interest subvention, insurance,
etc.
Structure of the Report
The broad chapterisation of the Report is indicated below:
Executive Summary

The Executive Summary should present the snapshot of the major findings in a crisp manner
so as to convey the important highlights in brief.
Chapter I : Overview of Agricultural credit flow in the State

The chapter should cover the agency-wise short term, long term credit flow for agriculture,
coverage of small and marginal farmers, details regarding KCC issued, per hectare credit
disbursement during the last five years. The issues in agricultural credit as mentioned in the
Point No i to vi as indicated earlier in the Note may be analysed with reference to the State.
In the background of the same, the need for Study alongwith the objectives may be indicated
in the Chapter.
Chapter II : Sample design and Methodology

The Chapter may outline the selection of sample including the district, block/s, village/s,
farmer/s, bank/s. The techniques used for analysis of data and interpretation of the results
may also be highlighted.
Chapter 3 : Profile of the District

The Chapter should indicate the broad profile of the sample district giving emphasis on the

agriculture aspects in general and agriculture credit in particular. The banking profile of the
district may also be given to understand the institutional framework therein. The agency-wise
credit flow indicating the term-wise flow, coverage of small and marginal farmers, etc. should
also be analysed. The PLP of the district may serve as the guide in writing this chapter.
Chapter 4 : Sources of finance for agriculture for farmers

This chapter will cover almost all the aspects of the Study including sources of finance for
production and investment credit, cash flow pattern of farmers, their income and expenditure
as a whole.
Chapter 5 : Farmers Perspectives on issues relating to agriculture credit

The chapter would be based on the interaction with the farmers on various issues such as
overall agriculture scenario, institutional credit, agri insurance, etc.
Chapter 6 : Bankers Perspective on issues relating to agriculture credit

The chapter would be largely based on data collected from the sample branches as well as
interaction with the bank officials. The bankers views on the issues related to agri credit may
be analysed in this chapter.
Approach as suggested is indicative in nature. The RO may modify the approach depending
upon the state specific issues. However, the final Report may come out with clear information
on the cash flow of farmers with emphasis on the sources of finance for production and
investment credit. An indicative Questionnaire has also been prepared to guide the student in
collecting the data. The RO may include additional aspects, if any, without deleting the ones
already included in the Questionnaire.
Further, since the Study is allotted to six ROs and DEAR, HO will present the consolidated
findings of the Study to the Top Management, the data collected during the field visit need to
be keyed in Excel format and forwarded to us for further interpretation. We are in devising
the Worksheet which would facilitate the key in of data and the same will be forwarded to the
RO shortly.

References
1. Various Issues of Economic Survey of India
2. Key Indicators of Situation of Agricultural Households in India, NSSO, 70th Round,
December 2014
3. Union Budget of Govt. of India, Various Years
4. Status of Rural Finance : A limited Assessment, N. Srinivasan, 2014
5. Capital formation in Agriculture and Rural Infrastructure, Nirupam Mehrotra and
K.C. Badatya, 2014
6. Study on Viability of Small and marginal farmers, DEAR, HO, 2014-15