Rural Credit: Types and Importance

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?

1. One to five years

2. Five to ten years

3. Two to ten years

4. 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?

1. Long-term credit

2. Medium-term credit

3. Short-term credit

4. 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.