Challenges of Rural Credit Delivery in India and Reforms for Strengthening Institutional Credit for Farmers

Introduction

Agriculture remains the cornerstone of the Indian economy, employing nearly 42% of the workforce and contributing to food security for 1.4 billion people. However, the growth and sustainability of agriculture depend critically on the availability, accessibility, and affordability of credit. Credit is the lifeblood that enables farmers to purchase seeds, fertilizers, equipment, and access technology. In India, rural credit delivery has historically been inadequate, inconsistent, and marked by deep structural flaws.

Despite several institutional initiatives—such as cooperative banks, regional rural banks (RRBs), commercial banks, and schemes like Kisan Credit Card (KCC)—a large number of farmers, especially small and marginal ones, remain excluded from formal credit systems. This exclusion drives them toward informal sources such as moneylenders, often resulting in debt traps, distress, and farmer suicides.

This article critically examines the challenges of rural credit delivery in India and suggests reform-oriented solutions to improve the reach, equity, and efficiency of institutional credit systems for farmers.

Understanding Rural Credit in India

Types of Rural Credit

Rural credit is typically required for:

• Short-term credit – for seasonal agricultural operations (e.g., seeds, fertilizers, wages).
  
  
• Medium-term credit – for machinery, irrigation equipment, livestock.
  
  
• Long-term credit – for land development, bore wells, and purchase of tractors or other capital assets.

Sources of Rural Credit

1. Institutional Sources:
   • Cooperative banks and societies
   • Regional Rural Banks (RRBs)
   • Scheduled Commercial Banks (SCBs)
   • NABARD and Government Schemes (e.g., KCC)
     
     
2. Non-Institutional Sources:
   • Moneylenders, traders, input dealers
   • Friends and relatives

While institutional credit has increased over the decades, over 30% of farmers still rely on informal sources, especially in states like Bihar, Odisha, and Jharkhand.

Key Challenges in Rural Credit Delivery

1. Low Coverage of Institutional Credit

• As per the NSSO 77th round (2019), only 51% of agricultural households had access to institutional credit.
  
  
• Marginal and tenant farmers are systematically excluded due to lack of land records or collateral.

2. Regional Imbalances in Credit Flow

• States like Punjab, Maharashtra, and Tamil Nadu receive a disproportionate share of agricultural credit, while eastern and northeastern states are underserved.
  
  
• The credit-deposit (CD) ratio in rural branches remains low in poorer regions.

3. Over-Reliance on Short-Term Credit

• Credit disbursed is heavily skewed toward short-term crop loans, often used for non-agricultural purposes.
  
  
• Long-term investment credit, essential for infrastructure and mechanization, remains neglected.

4. Credit without Productivity Linkage

• Credit is often disbursed without assessing the viability of farming activities.
  
  
• This leads to low returns, defaults, and mounting Non-Performing Assets (NPAs) in agriculture.

5. Complex Procedures and Documentation

• Formal lending institutions require land titles, Aadhaar, KYC, income proof, etc., which many farmers lack.
  
  
• Procedures are lengthy and cumbersome for illiterate or semi-literate farmers.

6. Weak Penetration of Kisan Credit Cards (KCC)

• Although over 20 crore KCCs have been issued, only a fraction are active users.
  
  
• Tenant and sharecroppers are often excluded from KCC schemes due to lack of ownership proof.

7. Lack of Tailored Financial Products

• Rural credit is not customized to diverse agricultural activities such as animal husbandry, fisheries, and horticulture.
  
  
• Insurance and credit products are poorly integrated.

8. Institutional Weaknesses

• Cooperative banks are under-capitalized and poorly governed.
  
  
• RRBs face high NPAs, and many rural branches of commercial banks are non-functional or inadequately staffed.
  
  
• Poor digital infrastructure limits online banking in rural areas.

9. Political Interference and Loan Waivers

• Frequent loan waivers, though politically popular, create moral hazard and discourage repayment.
  
  
• They weaken the culture of credit discipline among borrowers and strain state finances.

10. Inadequate Financial Literacy

• A majority of rural population lacks basic financial literacy and awareness about institutional schemes.
  
  
• This leads to low uptake of credit schemes and susceptibility to fraud.

Impact of Poor Rural Credit Delivery

1. Low Agricultural Productivity: Inability to invest in technology, irrigation, and inputs.
   
   
2. Indebtedness and Suicides: Debt from informal sources often leads to distress.
   
   
3. Inequity: Benefits of subsidies and schemes do not reach tenant farmers, women, and landless laborers.
   
   
4. Stagnant Rural Economy: Weak rural credit leads to lower consumption, investment, and employment.

Reforms to Strengthen Institutional Credit for Farmers

1. Universal Financial Inclusion

• Strengthen the PM Jan Dhan Yojana and ensure every farmer has access to:
  • Savings account
  • Kisan Credit Card (KCC)
  • Crop insurance
  • Direct Benefit Transfers (DBT)
    
    
• Link KCC with Jan Dhan and Aadhaar to promote ease of access and reduce leakages.

2. Digitization and Land Record Reforms

• Create digitized, tamper-proof land records using blockchain or GIS technology.
  
  
• Implement the Digital India Land Records Modernization Programme (DILRMP) effectively.
  
  
• Recognize tenant farmers and sharecroppers through land leasing laws, enabling them to access credit.

3. Targeted Credit for Small and Marginal Farmers

• Establish priority sector lending (PSL) sub-targets for small and marginal farmers.
  
  
• Offer interest subvention and credit-linked subsidies based on farm size and income.
  
  
• Encourage Joint Liability Groups (JLGs) and Self-Help Groups (SHGs) to extend credit to the landless.

4. Strengthening Cooperative and Regional Rural Banks

• Professionalize cooperative banks with trained staff and upgraded infrastructure.
  
  
• Merge weak RRBs and equip them with core banking systems and digital platforms.
  
  
• Enable cooperative banks to partner with NBFCs and microfinance institutions.

5. Crop and Activity-Based Credit Products

• Design credit instruments suited to:
  • Dairy, poultry, fisheries, and agro-processing
  • Seasonal and rain-fed agriculture
  • Organic and sustainable farming practices
    
    
• Integrate credit with insurance (PMFBY) and extension services for better risk management.

6. Promotion of Agri-Tech and FinTech

• Promote agri-fintech startups for:
  • Remote credit scoring
  • Mobile banking and loan applications
  • Market linkages and input advisory
    
    
• Use AI and data analytics for risk profiling and customized credit assessment.

7. Revamping the Kisan Credit Card Scheme

• Ensure automatic renewal of KCC based on crop cycle.
  
  
• Include dairy and allied sectors under KCC eligibility.
  
  
• Use mobile-based interfaces for credit withdrawal and monitoring.

8. Better Monitoring and Accountability

• Establish a centralized credit tracking platform under NABARD or RBI to monitor:
  • Credit flow
  • Default rates
  • Credit-deposit ratios by region and sector
    
    
• Penalize banks for failing to meet rural lending targets.

9. Curbing Political Interference

• Avoid indiscriminate loan waivers; instead, implement targeted relief based on distress.
  
  
• Promote crop insurance, disaster risk finance, and weather-based credit support.

10. Farmer Credit Literacy Programs

• Launch nationwide credit literacy drives in regional languages.
  
  
• Use radio, TV, WhatsApp, and village-level camps to educate farmers about:
  • Loan application processes
  • KCC benefits
  • Repayment schedules and consequences

Case Studies and Best Practices

1. Andhra Pradesh and Odisha

• These states have digitized land records and implemented land leasing frameworks, enabling sharecroppers to access institutional credit.

2. Kerala’s Kudumbashree

• Women SHGs linked with banks have shown high repayment rates and empowered thousands of rural households through credit and livelihoods.

3. NABARD’s Financial Inclusion Fund

• Used for capacity building, rural kiosks, mobile ATMs, and digital financial literacy in backward regions.

4. KCC Saturation Campaign (2022–2023)

• Aimed to cover 2.5 crore new farmers, especially dairy and fishery farmers, under the expanded KCC framework.

Conclusion

Access to timely and affordable rural credit is fundamental to ensuring sustainable agricultural growth, poverty reduction, and inclusive development in India. Despite notable efforts by the government, structural challenges in institutional credit delivery continue to marginalize a vast section of farmers, particularly the small, landless, and tenant farmers.

A multi-pronged approach—combining policy reform, technological innovation, financial literacy, and institutional strengthening—is essential to revamp rural credit. India must shift from a supply-driven, collateral-based lending model to a demand-driven, inclusive, and tech-enabled ecosystem that truly empowers farmers.

The vision should not just be about extending credit but enabling credit for growth, resilience, and dignity in rural India.