What is Rural Credit?
Agriculture is the primary source of income of individuals residing in the rural regions across India. Every year, farmers and peasants need to invest a considerable amount of funds to ensure a healthy harvest. Thus, they often resort to borrowing money from moneylenders and financial institutions to fulfill their basic needs before harvest season arrives, and they can earn money by selling their crops.
Thus, any loan taken for agricultural purposes or small home businesses across the rural areas in India is known as a Rural Credit.
Sources of Rural Credit
Simply understanding what Rural Credit means is not enough. Commerce students also need to learn the various sources from which such monetary assistance is available to rural families. Listed below are the five major sources for Rural Credit in India.
1. Land Development Banks
These banks provide a considerable sum of money as a credit to farmers by using their land as collateral. This low-interest loan has a repayment tenure ranging between 15 and 20 years. Farmers are free to avail this loan to bear the cost of land development work, including the creation of wells or other irrigation related facilities.
Still, land development credits are underutilized since most farmers remain unaware of this source of funding.
2. Co-operative Credit Societies
One of the most economical sources of funding for farmers, co-operative credit facilitates credit to small- and medium-scale farmers. These short-term credits are extended by Primary Agricultural Credit societies or PACs. Nonetheless, these societies have not been able to minimize the influence of moneylenders on the Rural Credit market.
3. Regional Rural Banks
Set up by the government, regional rural banks or RRBs extend monetary assistance to marginal farmers, landless laborers and artisans.
4. Commercial Banks
Originally, commercial banks were reluctant to provide credit for agriculture due to the risks involved with such a move. However, today, these banks extend monetary help both directly and indirectly, to farmers. Direct investment in agriculture refers to short and medium term loans to simplify farming activities. Indirect investment, on the other hand, refers to the advances to farmers made through intermediary agencies or institutions.
5. Government
Also known as Taccavi loans, these are short-term credits extended by the Indian government to assist struggling farmers, especially in the aftermath of natural calamities, such as floods and droughts.
Quick Question
Q. What is the Full Form of RRB and PACs?
A. RRB stands for regional rural banks. PACs stands for Primary Agricultural Credit societies.
Types of Rural Credits
Short Term Credit – These loans have a limited repayment tenure that can range up to one year at the most. Therefore, such credits can act as a brief business or private capital requirement for farmers and others in a rural setting.
Medium Term Loan – Any loan that has a tenure ranging from two years to less than 10 years is classified as a medium-term loan. The credit amount available varies from one firm or individual to the next, depending on the credit rating and a host of other factors.
Long Term Loan– These are considerable sums that farmers can avail for a tenure ranging between 5 years and 20 years. In agriculture, such a line of credit is useful in creating permanent assets. For example, with the help of such a loan, farmers can purchase tractors and other farming properties.
Multiple-Choice Question
Q. What is the Tenure for Medium-Term Rural Credits?
One to five years
Five to ten years
Two to ten years
Ten to twenty years
Ans. (3) Two years to ten years
Importance of Rural Credit in India
Rural Credit is Necessary for the Following Reasons –
The gestation period in agriculture is significant, which means that the period from sowing the crop to selling the produce is vast. Therefore, Rural Credit helps farmers with their livelihood until the crops are ready for sale in the market.
The credit can help farmers acquire seeds, tools, fertilizers, and more, which are essential parts of their trade.
Another valid reason for availing of Rural Credit is to mitigate personal expenses, such as marriage, religious functions, death, and more. Additionally, such financial assistance can also aid in repaying outstanding debts.
Multiple-Choice Question
Q. Mr X is looking to build a well on his farm. Which of the following forms of Rural Credit is Perfect for this Purpose?
Long-term credit
Medium-term credit
Short-term credit
None of the above
Ans. (1) Long-term credit
To acquire a better understanding of Rural Credit and its types, students can join Vedantu’s online commerce classes. Conducted by expert members, these classes strictly follow the CBSE class 11 and class 12 curriculums.
Evolution of Rural Credit
The Rural Credit system in India is separated into two parts: an unstructured or informal system of lenders, merchants, and input suppliers, and a formal, organized system made up of cooperatives, regional rural banks, the banking sector, and nonbanking financial enterprises. In recent years, the need to improve formal credit institutions has been justified not just by the need for contemporary inputs, but also by usurious money lending practices that could not instead be successfully resisted. The ideological commitment of India to fostering a "cooperative commonwealth" also had a role, particularly in building cooperative credit organizations at all levels.
The Real Need for Rural Finance
Many of the issues with rural financial services stem from a misconception of the nature of the income effect for these services[60]. The first misperception was that peasants and other rural inhabitants required finance primarily for agricultural output. In reality, an appropriate demand for credit can exist, backed up by a desire and capacity to afford, to balance out a variety of scenarios when income and spending streams are poorly timed. Non-agricultural credit may be as essential as agriculture loans. Indeed, for many rural residents, the most significant reason for seeking credit is as a utilization loan to cover living expenses in the months until the next harvest, rather than to acquire inputs to increase agricultural output. The second misperception was that most impoverished farmers were unable to repay loans, implying that there had to be credible but no effective demand. The research today indicates that impoverished families are both capable and willing to repay loans if they take for their own stated needs and are properly vetted and supervised.
FAQs on Rural Credit: Types and Importance
1. What credit score do you need for a rural loan?
To qualify for a rural loan, lenders typically look for a credit score that reflects responsible borrowing and repayment. While specific requirements may vary by lender and loan type, most programs require a minimum credit score of around 620. Specialized government programs, such as those offered by agricultural banks or rural development agencies, may accept slightly lower scores if other aspects of the application, like stable income, are strong. Borrowers with higher credit scores may have access to better interest rates and more flexible loan terms. It’s important to check the specific requirements of the rural loan program you’re interested in to ensure eligibility and improve your chances of approval.
2. How is rural credit different from other credit?
Rural credit differs from traditional credit primarily in its purpose and the specific needs it addresses within agricultural or non-urban communities. Unlike regular consumer loans or urban business loans, rural credit usually targets farming, livestock, and rural enterprise development. Some distinctive features include:
- Longer repayment periods to match agricultural cycles
- Lower interest rates, often subsidized by the government
- Flexible collateral requirements tailored to rural assets
3. What is the rural credit score?
A rural credit score functions similarly to a standard credit score, serving as a measure of a borrower’s ability to repay loans. However, rural credit scores may sometimes consider factors unique to rural livelihoods, such as land ownership, farming history, or community reputation, in addition to income and past loan performance. Lenders use these scores to assess risk when offering agricultural loans or related financial products. A strong rural credit score increases the likelihood of loan approval and better terms, much like traditional credit scoring does in urban settings. Building a positive rural credit score is important for accessing future credit opportunities in rural areas.
4. What is considered a rural loan?
A rural loan is a financial product specifically designed to meet the needs of borrowers in non-urban areas, often focusing on agriculture, small-scale industry, or rural housing. These loans may include farm equipment financing, crop loans, livestock loans, and home construction or improvement in rural settings. Lenders often offer rural loans at competitive rates and with terms adjusted to seasonal income patterns, recognizing the unique cash flow challenges rural borrowers face. Qualifying for a rural loan usually requires proof of residence or business operations in a designated rural area. These loans support economic growth and stability in rural communities.
5. What are the main types of rural credit available?
Rural credit comes in various forms to support the diverse needs of rural populations. The main types include:
- Short-term credit for crop cultivation expenses
- Medium-term loans for purchasing equipment or livestock
- Long-term credit for land purchase or infrastructure development
- Consumption loans to cover urgent household needs
6. Why is rural credit important for agricultural development?
Rural credit provides essential funds for farmers and rural entrepreneurs who often lack personal savings or alternative financing options. Its importance for agricultural development can be seen in several ways:
- Enabling investment in seeds, fertilizers, machinery, and technology
- Helping manage risks from unpredictable weather or market prices
- Supporting rural employment and overall economic growth
7. Who provides rural credit?
Rural credit is offered by a mix of institutions, each serving different segments of rural populations. Providers include:
- Commercial banks with dedicated rural lending schemes
- Cooperative banks and credit societies focused on agricultural finance
- Microfinance institutions serving lower-income borrowers
- Government agencies offering subsidized loan programs
8. What are the challenges faced in accessing rural credit?
Accessing rural credit can be difficult due to several obstacles that many rural residents still encounter. Common challenges include:
- Lack of collateral or formal income documentation
- Distant or inadequate banking infrastructure
- Low awareness of available loan products
- Complex application procedures
9. How can farmers improve their eligibility for rural credit?
Farmers looking to increase their chances of receiving rural credit should focus on building a strong financial profile. Steps to improve eligibility include:
- Maintaining accurate records of farming operations and income
- Repaying previous loans on time to boost credit history
- Registering land holdings or assets for easier collateralization
- Participating in cooperative societies for group-based lending
10. What documents are usually required for rural loan applications?
When applying for a rural loan, borrowers typically need to provide several documents to demonstrate their eligibility and financial stability. Required documents commonly include:
- Proof of identity (such as a government-issued ID)
- Proof of residence in a rural area
- Income statements or records of agricultural production
- Land or property ownership documents
11. Are interest rates for rural loans different from urban loans?
Interest rates for rural loans often differ from those for urban loans due to the unique economic conditions of rural areas. Many rural loan products feature lower interest rates, frequently subsidized by governments or special development programs, to encourage agricultural growth and investment. These rates aim to make borrowing more affordable for farmers and small rural businesses who might otherwise struggle with the costs. However, some private lenders may charge higher rates due to the perceived risks. Overall, rural credit is designed to support community development while balancing the financial risks involved for lenders.
12. How does rural credit support women and marginalized groups?
Rural credit plays a significant role in empowering women and marginalized groups by giving them access to funds for starting businesses, improving agriculture, or enhancing their homes. Many programs are tailored to reach those who traditionally face difficulty obtaining loans, providing benefits such as:
- Relaxed collateral requirements for self-help groups and cooperatives
- Specialized training and support for financial literacy
- Targeted lending schemes for women entrepreneurs
