Agricultural Finance: Definition,scope and Importance

Table of Contents


In this article we are going to discuss about the definition ,scope and importance of agricultural finance.Due to the introduction of capital-intensive agricultural technologies, farm finance has become an important input. Farmers need capital to improve the productivity of their various farm resources. Low and uncertain returns classify Indian agriculture in general.


  1. Rural credit agencies, both organised and unorganised, provide credit for both development and consumption. Due to differences in banking systems followed by bankers, socioeconomic conditions of borrowers, and infrastructural facilities and institutional support offered to borrowers, these agencies faced numerous obstacles in providing credit to both bankers and borrowers.

2) Furthermore, the government frequently changes its agricultural credit policies in terms of institutional credit setup, credit rationing, interest rates, subsidies, and the functioning of markets and other developmental agencies, all of which have an impact on the amount of credit available to farmer-borrowers.

3) As a result, all of these factors have an impact on farm profits. As a result, capital problems could be better understood if one understood the theoretical foundations of India’s agricultural credit system, the bottlenecks faced by bankers and borrowers, and the governments’ efforts to solve the problems involved in India’s agricultural credit system.


  1. Many people in developing and emerging economies, particularly those in rural areas, rely on agriculture for a living. However, obtaining agricultural financing is frequently a challenge. Many farmers are unable to adopt new technology and improve their efficiency due to a lack of financial resources.

2) With food demand expected to rise by 60% by 2050, and the agricultural system already under strain to meet current demand, investing in sustainable technologies and climate-smart agriculture is the only way to increase food production.

3) Farmers would be able to produce more food with less environmental impact if these investments were made. In addition, wise investments could help keep food prices low and promote rural economic health.

4) However, financial institutions face numerous challenges when it comes to financing the agricultural sector. It can be costly to travel to remote rural areas. Weather risks, crop concentration, and price volatility raise lenders’ credit risk, reducing their appetite to fund the sector.


The two major sources of finance in agriculture are institutional and non- institutional sources.

A. Institutional Source

  1. Co-operative Societies :

Indian planners see cooperation as a tool for disadvantaged farmers’ economic development, particularly in rural areas. They see a village panchayat, village cooperatives, and village school as the trinity of institutions on which to build a self-sufficient and just economic and social order. The co-operative movement began in India primarily to provide agriculturists with low-interest loans for agricultural operations and to keep them out of the clutches of money lenders.

a) Primary Agricultural Credit Society :

Primary agricultural credit societies are the grassroots arms of the short-term co-operative credit system. PACs work directly with farmer borrowers, providing short and medium-term loans as well as distribution and lending services. The utility of PACs has been steadily increasing. It advanced loans worth Rs. 23 crores in 1950-51 and Rs. 34,520 crores in 2000-01. The PACs have increased their efforts to reach out to the weaker sections of society, particularly small and marginal farmers. The progress has been spectacular, but not enough to meet the demand for financing by farmers.

b) Central Co-operative Banks:

District Central Cooperative Banks now number 369 (as of 2001-2002). So far, farmers have received loans totaling 56,650 crores. Their primary responsibility is to oversee the village’s Primary Agricultural Credit Societies. The State Co-operative Bank and the Primary Agricultural Credit Society are linked by Central Co-operative Banks.

c) State Co-operative Banks:

In total, the country now has 30 State Cooperative Banks. The apex banks of the cooperative credit structure are these banks. It acts as a conduit between NABARD and the co-operative central bank and primary societies village, from which it borrows and lends.

B. Non – Institutional Source

  1. Money Lenders

In rural areas, there are two types of money lenders. There are wealthy farmers or landowners who combine farming and lending. Professional money lenders are those whose sole occupation or profession is lending money. The cultivators rely on moneylenders to meet their financial needs. However, there are numerous reasons for the continued dominance of village moneylenders in rural areas.

2) Landlord and others:

Farmers receive funds from traders and commission agents for productive purposes long before the crops mature. They force the framers to sell their products at a low cost, and they take a large commission. Thus, in the case of cash crops such as cotton, groundnut, and tobacco, as well as chard fruits such as mangoes, the source of finance is particularly important. Money lenders may be lumped in with traders and commission agents because their lending to farmers is also at exorbitant rates and has other negative consequences.


  1. In India, the potential for extensive agriculture is limited. As a result, the only way to increase agricultural production is to intensify and diversify farming. Intensive agriculture necessitates a significant investment.

2) The distribution of operational holdings and operational area is extremely unequal. In 1980-81, 74.5 percent of all farm households with less than 2 hectares operated only 26.2 percent of the total operated area, while only 2.4 percent of all farm households with more than 10 hectares each operated 23 percent of the total operated area (In India, there were 88.883 million farm households which operated 163.797 million hectares in 1980-81). These small and marginal farmers’ purchasing power is limited to subsistence farming. As a result, they must rely on outside financial assistance to use the more expensive (modern) inputs.

3) Floods, droughts, famines, and other natural disasters frequently strike farmers’ livelihoods. As a result, the nature and availability of finance determine whether or not crop cultivation or farm improvements will continue.

4) In recent years, more land has been irrigated, which has resulted in increased use of fertiliser and plant protection chemicals. External financing is required to accomplish this.

5) A substantial increase in the supply of raw materials required for agro-based industries is required in order to sustain their development. As a result, a steady flow of credit is critical for the development of the agricultural sector, and it would boost overall economic growth.

6) Fixed capital in agriculture is locked up in long-term investments such as land, wells, and buildings. Furthermore, receiving farm returns takes a long time. As a result, farmers require funding to continue operating their farms.

7) By providing financial assistance to acquire productive assets, the poorer sections of the farming community should be encouraged to participate in development programmes.

8) Small and marginal farmers are caught in the poverty cycle of low returns, low saving, low investment, and low return. Credit must be injected into the agricultural sector to break the cycle.

9) At both the macro and micro levels, agricultural finance plays a critical role in the country’s agro-social-economic development.

10) It is assisting in the strengthening of the farm business and increasing the productivity of limited resources.