Financing Small & Marginal Farmers in India: Some Policy Issues

This paper examines the scenario for agricultural credit in India and makes suggestions for a policy framework that would make rural financial intermediaries operationally sustainable. The paper discusses:

• The importance of the agricultural sector in India in contributing to economic growth and in providing livelihoods;
• The need for national policies and programs that can make the country self-reliant in its food requirements and create large-scale employment in rural areas;
• The Government's commitment to the development of rural financial intermediaries to facilitate easy access to credit in the rural areas.

The paper overviews the recent performance of various rural financial intermediaries and highlights their dismal performance in the coverage of small and marginal farmers. It then goes on to present information on:

• The characteristic features of agricultural finance;
• The risks associated with agricultural lending;
• International experience in agricultural credit in terms of directed credit and subsidized interest rate.

The paper makes the following suggestions for evolving a policy that would make rural financial intermediaries operationally sustainable and reduce their transaction costs:

• Diversification of farming activity to make it bankable;
• Focus on the provision of credit to all sectors of the rural economy;
• Establishment of credit societies and farmers' societies by banks;
• Reduction of transaction costs;
• Employment of experienced, trained loan officers.

It concludes with a look at the Government's role in the improvement of the agricultural credit scenario.