AGRICULTURAL FINANCE: NATURE AND SCOPE

Introduction

Farm finance has become an important input due to the advent of capital intensive 

agricu1tural technologies. Farmers require capital in order to enhance the productivities of 

various farm resources. Indian agriculture, in general, is characterized by low and uncertain 

returns. In order 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 area provide credit for both 

development and consumption purposes. Provision of credit by these agencies involved many 

obstacles to both bankers and borrowers due to differences in banking system followed by 

bankers, socio-economic conditions of borrowers and infra - structural 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 would 

influence the extent of credit available to farmer-borrower. All these factors, therefore, ultimately 

have a bearing on farm returns. Hence, problems regarding capital could be well understoood, 

if one could realise the theoretical basis of agricultural credit system in India, bottlenecks faced 

by bankers and borrowers, and the governments' 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:

i) The scope for extensive agriculture in India is limited. Therefore, increase in agricultural 

production is possible only by intensification and diversification of farming. Intensive agriculture 

needs huge capita1.

ii) Extreme inequalities exist in the distribution of operational holdings and operational area. 

74.5 per cent 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 per cent of 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 the external financial 

assistance to use the costlier (modern) inputs.

iii) Farmers economic condition is subject to frequent onslaught 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. 

iv) 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. 

v) 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 farm sector, a constant flow of credit is essential and it would enhance over all 

growth of the economy. 

vi) In agriculture, fixed capital is locked up in permanent investments like land, well, buildings, 

etc. Moreover, it takes a long time to get returns from farm. Hence, farmers need finance to 

continue their farm operations.

vii) The weaker sections of the farming community should be motivated to participate in 

development programmes by giving financial assistance to acquire productive assets.

viii) Small and marginal farmer’s 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 in 

agricultural sector.