There are eight classifications of agricultural credit in agriculture. Agricultural credit has been classified mainly into three categories viz. short-term credit, medium-term credit, and long-term credit.
Agricultural credit can be classified based on purpose, time, security, generation of surplus funds, creditor, and number of activities for which credit is provided. This is to meet the varying needs of the farming community.
In this, article we will explore the meaning, definition, needs, and classification of agricultural credit in agriculture.
Meaning of Agriculture Credit:
The word “credit” comes from the Latin word “Credo” which means “I believe”. Hence credit is based on belief, confidence, trust, and faith. Credit is otherwise called a loan.
Definition of Agricultural Credit:
Agricultural credit/loan is a certain amount of money provided for a certain purpose on certain conditions with some interest, which can be repaid sooner or later. According to Professor Galbraith credit is the “temporary transfer of an asset from one who has to another who has not”
Agricultural Credit is the amount of investment funds made available for agricultural production from resources outside the farm sector.
Credit Needs in Agriculture:
Agricultural credit is one of the most crucial inputs in all agricultural development programs.
For a long time, the major source of agricultural credit was private moneylenders. However, this source of credit was inadequate, highly expensive, and exploitative.
To curtail this, a multi-agency approach consisting of cooperatives, commercial banks, and regional rural banks credit has been adopted to provide cheaper, timely, and adequate credit to farmers.
The financial requirements of the Indian farmers are for:
1. Buying agricultural inputs like seeds, fertilizers, plant protection chemicals, feed and fodder for cattle etc.
2. Supporting their families in those years when the crops have not been good.
3. Buying additional land, making improvements on the existing land, clearing old debt, and purchasing costly agricultural machinery.
4. Increasing the farm efficiency as against limiting resources i.e. hiring of irrigation water lifting devices, labor, and machinery.
Classification of Agricultural Credit:
Agricultural credit can be classified based on purpose, time (repayment period), security, generation of surplus funds, creditor, and number of activities for which credit is provided.
1. Based on time:
This classification of agricultural credit is based on the repayment period of the loan. It is sub-divided into 3 types
a. Short-term loans:
These loans are to be repaid within a period of 6 to 18 months. All crop loans are said to be short–term loans, but the length of the repayment period varies according to the duration of the crop. The farmers require this type of credit to meet the expenses of the ongoing agricultural operations on the farm such as sowing, fertilizer application, plant protection measures, payment of wages to casual laborers, etc. The borrower is supposed to repay the loan from the sale proceeds of the crops raised.
b.Medium-term loans:
Here the repayment period varies from 18 months to 5 years. These loans are required by the farmers to bring about some improvements on their farm by way of purchasing implements, electric motors, milch cattle, sheep and goats, etc. The relatively longer period of repayment of these loans is due to their partially-liquidating nature.
c. Long-term loans:
These loans fall due for repayment over a long time ranging from 5 years to more than 20 years or even more. These loans together with medium-term loans are called investment loans or term loans. These loans are meant for permanent improvements like leveling and reclamation of land, construction of farm buildings, purchase of tractors, raising of orchards, etc. Since these activities require large capital, a longer period is required to repay these loans due to their non – liquidating nature.
2. Based on Purpose:
Based on purpose, agricultural credit is subdivided into 4 types.
a. Production loans:
These loans refer to the credit given to the farmers for crop production and are intended to increase the production of crops. They are also called seasonal agricultural operations (SAO) loans short-term loans or crop loans. These loans are repayable within a period ranging from 6 to 18 months in a lump sum.
b. Investment loans:
These are loans given for the purchase of equipment the productivity of which is distributed over more than one year. Loans are given for tractors, pump sets, tube wells, etc.
c. Marketing loans:
These loans are meant to help the farmers overcome distress sales and to market the produce in a better way. Regulated markets and commercial banks, based on the warehouse receipt are lending in the form of marketing loans by advancing 75 percent of the value of the produce. These loans help the farmers to clear off their debts and dispose of the produce at remunerative prices.
d. Consumption loans:
Any loan advanced for some purpose other than production is broadly categorized as a consumption loan. These loans seem to be unproductive but indirectly assist in the more productive use of the crop loans i.e. without diverting them to other purposes. Consumption loans are not very widely advanced and are restricted to the areas that are hit by natural calamities.
These loans are extended based on a group guarantee basis with a maximum of three members. The loan is to be repaid within 5 crop seasons or 2.5 years whichever is less. The branch manager is vested with the discretionary power of sanctioning these loans up to Rs. 5000 in each case. The rate of interest is around 11 percent. The scheme may be extended to
1) IRDP beneficiaries
2) Small and marginal farmers
3) Landless Agril. Laborers
4) Rural artisans
5) Other people with very small means of livelihood hood such as carpenters, barbers, washermen, etc.
4. Based on security:
The loan transactions between lender and borrower are governed by confidence and this assumption is confined to private lending to some extent, but the institutional financial agencies do have their procedural formalities on credit transactions. Therefore it is essential to classify the loans under this category into two sub-categories viz., secured and unsecured loans.
a. Secured loans:
Loans advanced against some security by the borrower are termed secured loans. Various forms of securities are offered in obtaining the loans and they are of the following types.
I. Personal security:
Under this, the borrower himself stands as the guarantor. The loan is advanced on the farmer’s promissory note. Third-party guarantee may or may not be insisted upon (i.e.based on the understanding between the lender and the borrower)
II. Collateral Security:
Here the property is pledged to secure a loan. The movable properties of the individuals like LIC bonds, fixed deposit bonds, warehouse receipts, machinery, livestock, etc, are offered as security.
III. Chattel loans:
Here agricultural credit is obtained from pawn-brokers by pledging movable properties such as jewelry, utensils made of various metals, etc.
IV. Mortgage:
As against collateral security, immovable properties are presented for security purposes For example, land, farm buildings, etc. The person creating the mortgage charge is called the mortgagor (borrower), and the person in whose favor it is created is known as the mortgagee (banker). Mortgages are of two types
a. Simple mortgage:
When the mortgaged property is ancestrally inherited property of the borrower then a simple mortgage holds good. Here, the farmer borrower has to register his property in the name of the banking institution as a security for the loan he obtains. The registration charges are to be borne by the borrower.
b. Equitable mortgage:
When the mortgaged property is the self-acquired property of the borrower, then an equitable mortgage is applicable. In this no such registration is required, because the ownership rights are specified in the title deeds in the name of the farmer-borrower.
V. Hypothecated loans:
The Borrower has an ownership right on his movable and the banker has the legal right to take possession of the property to sale on default (or) a right to sue the owner to bring the property to sale and for realization of the amount due. The person who creates the charge of hypothecation is called a hypothecator (borrower) and the person in whose favor it is created is known as hypothecate (bank) and the property, is denoted as hypothecated property.
This happens in the case of tractor loans, machinery loans, etc. Under such loans, the borrower will only have a right to sell the equipment once the loan is cleared off. The borrower is allowed to use the purchased machinery or equipment to enable him to pay the loan installment regularly.
Hypothecated loans again are of two types viz., key loans and open loans.
a) Key loans:
The agricultural produce of the farmer-borrower will be kept under the control of lending institutions and the loan is advanced to the farmer. This helps the farmer from not resorting to distress sales.
b) Open loans:
Here only the physical possession of the purchased machinery rests with the borrower, but the legal ownership remains with the lending institution till the loan is repaid.
B. Unsecured loans:
Just based on the confidence between the borrower and lender, the loan transactions take place. No security is kept against the loan amount
4. Lender’s classification:
Agriculture Credit is also classified based on lenders such as
a. Institutional credit:
Here loans are advanced by institutional agencies like co-operatives, and commercial banks. Ex: Co-operative loans and commercial bank loans.
b. Non-institutional credit:
Here the individual persons will lend the loans Ex: Loans given by professional and agricultural money lenders, traders, commission agents, relatives, friends, etc.
5. Borrower’s classification:
The credit is also classified based on the type of borrower. This classification has equity considerations.
Based on the business activity like farmers, dairy farmers, poultry farmers, pisciculture farmers, rural artisans, etc.
Based on the size of the farm: agricultural laborers, marginal farmers, small farmers, medium farmers, large farmers,
Based on location hill farmers (or) tribal farmers.
6. Based on liquidity:
The credit can be classified into two types based on
a. liquidity Self-liquidating loans:
They generate income immediately and are to be paid within one year or after the completion of one crop season. Ex: crop loans.
b. Partially -liquidating:
They will take some time to generate income and can be repaid in 2-5 years or more, based on the economic activity for which the loan was taken. Ex: Dairy loans, tractor loans, orchard loans, etc.,
7. Based on approach:
a. Individual approach:
Loans advanced to individuals for different purposes will fall under this category
b. Area-based approach:
Loans given to persons falling under a given area for a specific purpose will be categorized under this. Ex: Drought Prone Area Program (DPAP) loans, etc
c. Differential Interest Rate (DIR) approach:
Under this approach, loans will be given to the weaker sections @ 4 percent per annum.
8. Based on contact:
a. Direct Loans:
Loans extended to the farmers directly are called direct loans. Ex: Crop loans.
b. Indirect loans:
Loans given to the agro-based firms like fertilizer and pesticide industries, which are indirectly beneficial to the farmers are called indirect loans.
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