Finance and Credit: Vital for Agriculture and Agribusiness Development

By Sameer Abbas Zaidi

Agriculture has always been India’s most important economic sector, contributing about 18 percent of the country’s gross domestic product (GDP) and employs nearly 60 percent of the population. In India, agriculture is mostly depends on millions of small farmers, who need external finance to enable cultivation. In the recent years, increasing diversification of agriculture has seen an increase in credit needs. Easy availability of adequate agriculture finance at the right time has an important role in the development of the agriculture as well as in overall development of the Indian economy.

However, at the time of independence, the most important source of agricultural credit was the money lenders. In 1951, the year of initiation of planning in the country, money lenders accounted for as much as 71.6 percent of the rural credit. This predominant position of money lenders was due to lack of any worthwhile alternative source of credit. Post-independence, the Government of India took various measures to help the farmers to meet their needs of agricultural finance such as: Nationalisation of 14 major commercial banks in 1969, followed by six more banks in 1970; establishment of regional rural banks in 1975, setting up of the national bank for agriculture and rural development (NABARD) in 1982.

In India, multi agency approach is used for disbursing credit to agriculture. Agricultural credit delivery system comprises both formal (institutional) and informal sources. Institutional framework comprise a large number of agencies, including cooperatives, regional rural banks, commercial banks and self-help groups, whereas the important non-institutional sources are professional moneylenders, landlords, input suppliers, commission agents and also the large farmers. In a changing business environment, the institutional sources of finance play a significant role in agriculture development.

The three main objectives of institutional finance for the agricultural and rural sector are:

(a) Promoting growth;

(b) Ensuring better equity; and,

(c) Making financial operations viable.

Institutional finance consists of cooperatives, scheduled commercial banks and regional rural banks, among cooperatives primary agriculture credit societies which provide mainly short and medium-term loans; whereas primary cooperative agricultural and rural development banks provide long-term loans for the agriculture. The commercial banks including regional rural banks (RRBs) provide both short and medium-term loans for agriculture and allied activities. The National Bank for Agriculture and Rural Development (NABARD) is the apex institute at the national level for agricultural credit and provides refinance assistance to the above agencies.

On the other hand, rural institutional finance is extended not only to the agricultural production sub-system but for selective purposes also to the agricultural inputs sub-system and the agricultural produce marketing and processing sub-system. While this innovative policy has earned some dividends, there are some lacunae in it as well as in the intermediation instruments of rural financial institutions.

As the above-given functions of financial institutions are conventionally accepted, agricultural and rural development would require performing certain new functions like better access to extension, inputs, and marketing services as a result of technological changes in this sector. These new functions are widely recognised to institutionalise rural and agribusiness credit. However, commercial banks, RRBs, and to some extent cooperative banks are not sure as to ‘how’ and ‘by whom’ can these functions be performed. These doubts are somewhat unwarranted. In fact, rural financial institutions can promote access to inputs, marketing, and processing services by serving

the agricultural inputs sub-system and the agricultural produce marketing and processing sub-system besides the agricultural production


Agribusiness Financing

Agribusiness has emerged as an important area in recent years mainly because it serves as an instrument for realising the benefits of interrelationships between the two vital sectors of India economy viz agriculture and industry. As all these macro level possibilities are realised, the agri-business develops and opens the gates of opportunities for financial institutions like banks to devise their lending operations for the growth of this sector, having enormous potential. The growth of this sector subsequently enhances the scope for bank finance.

Agribusiness is widely recognised as a sunrise industry with a vision to make India to lead in the forefront in achieving what has been achieved in the information technology sector. Several measures are being considered which, among others, include post-harvest infrastructure, processing and packaging for fresh produces, creation of agri food parks, centers for value addition for agriculture and exploring the possibilities generating surplus for exports. It is evident that with the execution of these measures the need for infusing bank credit into agribusiness becomes conspicuous.

Agribusiness as an Investment Opportunity

India is in the threshold of transforming its agriculture into Agribusiness. It offers a lot of opportunities for different sectors to invest in this growing business:

Corporates – both indian and multinational – identifying agro processing as an opportunity;

Scope for Joint ventures with global players;

Investment by venture capitalists;

Huge potential for infrastructure creation like cold storages, chilling plants, market yards and handling facilities.

Financing opportunities for Commercial Banks/ Financial Institutions

Finance against goods stored in warehouses – in association with Collateral Management Companies;

Bill discounting facilities to agriculturists against acceptance of bill of exchange by the purchasing company;

Opportunities in price risk mitigation using commodity derivatives;

Financing for post harvest management such as cold storages, refrigerated vehicles;

Financing for creation of market yards and other infrastructure;

Financing quality testing and certifying agencies;

Labeling and Packaging industry;

Food parks with common facilities for storage, effluent treatment etc;

Channel financing and financing modern retail outlets;

IT kiosks in rural areas;

Private Agri -extension initiatives;

Organic farming;

Consultancy for project formulation and appraisal – as a fee based activity.


In India, the agricultural credit plays a very significant role in agriculture development. Over the years, the institutional framework of agriculture credit work well but still there exist several gaps in their performance. The public policies on agriculture credit has always directed towards providing adequate credit to farmers at reasonable rate. But in reality, due to lack of proper implementation of the policies lay down for the benefit of farmers and bureaucratic hurdles in getting credit from institutional sources.

For improving the credit flow to agriculture and allied activities, the need of the hour is to make institutional framework more participative through proper implementation of the existing policy so that the agriculture and agribusiness sector can be served like any other sector of the economy. It is necessary that all institutions should work together and complement each other. Linkage among the different agencies at all level is needed for improving credit flow to agriculture.


Anil Patil is a post graduate in horticulture and has nearly 35 years of experience in technical aspects of agri projects, agri project financing, banking, commerce and legal aspects.