CHAPTER-9

PROBLEMS OF
AGRICULTURE
FINANCE
 It is said that a farmer is born in debt, lives in debt and ultimately
dies in debt. The most worrisome feature of the rural economy is the
burden of debt which has been on the rise despite six decades of planned
development. But at the same time, borrowing is the dire necessity for the
farmers in general and marginal and small farmers in particular. There is
no denying the fact that agriculture is the backbone of our rural economy.
To sustain, to stimulate and to strengthen its smooth functioning, it
requires regular supply of sufficient agricultural credit with reasonability
of interest. However, it is blamed that financing of agriculture is plagued
with a number of problems such as the problem of over dues,
unsatisfactory credit conditions, increasing malpractices and corrupt
credit culture etc.

The study shows that a number of problems are faced by the

farmers in availing finance for agriculture. Similarly, the banks are also
experiencing many problems in the efficient and effective distribution of
agricultural finance. These problems have been discussed as under:

9.1. PROBLEMS FACED BY THE FARMERS

On the basis of the study conducted, the farmers, who are covered
under the study, are confronting the following problems:

9.1.1. No Loan without Surety/Security

The banks do not disburse any loan to the farmers without surety
and security. The farmers find it very difficult to arrange satisfactory
security as well as surety to the bank. Security for loans may be in the
form of hypothecation of assets owned by them. But the farmers do not
possess many assets except the land which they find it hard to offer as a
security. It becomes a big hurdle in obtaining loan from the bank. As a
result, many marginal and small farmers do not get the facility of
agriculture loan and remain bereft of the benefits of agricultural
development.

As for as the third party guarantee is concerned, banks generally

demand the guarantee of the rich and influential persons. The small and
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marginal farmers confront a number of problems in relation to a
guarantor. Even if some farmers are able to arrange some surety, the
person offering guarantee demands compensation for standing as a
surety. A poor farmer does not have money to pay him. As a result, he
faces humiliation and feels dejected with the whole system.

It is also to be noted that the financial capacity and integrity of the

farmer is verified from different quarters before sanctioning any loan to
him. These may include the village Sarpanch, some large farmers of the
area or neighbours of the farmers etc. They may or may not back the
credentials of the concerned farmer. The loan disbursement gets halted if
the banks receive negative information about the proposed borrower. The
issue here is that the information so obtained may not be true and may
suffer from personal biases and grudges of the concerned person against
the proposed borrower

9.1.2. Corrupt Practices of Patwaries, Agents and Bank Officials

It is said that money makes the mare go. The overall system has
been so polluted that the total process comes to a standstill till you grease
the palm of the various persons involved in the sanctioning of the loan.
The farmers need many papers and documents in order to process their
loan. It becomes a herculean task to get landholding and other revenue
records from Patwaries and other officials of the revenue department. The
corrupt practices of patwaries and other officials of the revenue
department hinder the loan process.

Similarly, many bank officials and other agents involved in the loan
process create many hurdles and demand their fee to resolve the
procedural issues. The poor farmers find it very difficult to meet the ever
growing demands of many persons. As a result, they are unable to get the
loans and waste their time and energy without any positive result.

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9.1.3. Credit Inadequacy

The banks have not been making a fair assessment of the credit
needs of the farmers. It results in the shortage of finance and there arises
inadequacy of credit. It is pertinent to note that if sufficient funding is not
available, it will not serve the desired purpose. Moreover, the delay in
disbursement also leads to many problems. It has been found in the study
that some of the farmers who received inadequate amount of credit used it
for some other purpose. Inadequate credit may be due to improper
estimate of requirement of borrowers or may be due to arrears of past
loans due to various unforeseen contingencies.

9.1.4. High Transaction Costs

The farmers have to incur many other costs in addition to the

interest they pay on the loan. These may include loss of wage earning
days, revenue stamps, letter of guarantees, cost of photographs, loan
agreement and other unidentified charges being incurred at various stages
to expedite the sanction of loans etc. These high transaction costs hamper
the spirit of the farmers for getting loans.

The information relating to the number of trips made and money

spent by the borrower farmers in connection with getting loans was
ascertained from the sample farmers and the same has been given in
Table 9.1. Information included the number of trips and money spent by
the borrower starting from the stage of application form collection, filling
up the form, procurement of required documents, obtaining
guarantee/witness, registration fee, lawyer’s fee, submission of application
form, answering of objections/queries, collection of sanctioned loan, bribe
demanded by / paid to the bank officials/ agents, etc.

As per the study conducted, a farmer has to make 5.4 trips in

Patiala district and 6.4 trips in Fatehgarh Sahib District on an average to
the bank for the purpose of availing a loan. Similarly, a farmer has to
incur Rs. 2750 in Patiala District and Rs. 2960 in Fatehgarh Sahib
District on an average for the purpose of availing a loan from the bank.

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 Table: 9.1
Transaction Costs of Borrowing across Sample Farmers from
Institutional Sources: (Per Sample Farmer)
Particulars Region
Patiala Fatehgarh Overall
Sahib
Average No. of trips made to 5.4 6.4 5.9
acquire loan
Average amount of Money Rs. 2750 Rs. 2960 Rs. 2855
spent

9.1.5. Ambiguous Terms and Conditions

Most of the farmers are illiterate. They are ignorant about the
various rules, terms and conditions of the banking institutions regarding
agricultural finance. They rely upon the information given to them by
bank officials and other agents involved in the process. They simply do not
understand the jugglery of finance terminology. Many of them even do not
know the interest rates, the amount of subsidy, the different schemes and
the repayment schedule etc. They simply put their thumb impressions on
the required documents where they are told to do. Sometimes, the
orthodox farmers are under the impression that once a person gets a loan,
it can be re-payed only by selling the land. The lack of clarity of banking
system and ambiguous terms and conditions stop them from deriving the
benefits of agricultural finance.

9.1.6. Complicated and Time-Consuming Procedure

The loan process is considered complicated and time consuming.

The farmers require crop loans during the particular seasons. If they do
not get the credit in time, it will not serve the desired purpose. The delay
in processing the loan is a common problem felt by the farmers. Similarly,
if the farmers require term loan for buying certain assets, it is also
required in time. Otherwise, if the asset is bought after the work has been
done, the asset will remain idle till its next use. The farmers also complain

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about the complications in the loan process. These complications may
relate to the procedural complications and behavioural complications.

9.1.7. More Beneficial to Large Farmers:

The farmers normally get term loans to buy agricultural equipments

and farm machinery. They also get loans to add to their existing
landholdings. However, the heavy terms loans for such facilities are
availed in most of the aces by large farmers because of their better access
to the banks. The marginal, small and even medium farmers do not take
up the courage to opt for such loans. They also do not have the required
guarantee and resources to avail the facility of such loans. It is felt that
the facility of heavy term loans is more beneficial to large farmers and they
derive the maximum benefits from the banking facilities.

9.1.8. Stress of Repayment

It is said that getting a loan is difficult but its repayment in time is

more difficult. The small and marginal farmers live under pressure of
repayment of the loan. They are expected to repay the loan immediately
after the harvest. Sometimes, they do not get fair price after harvest. But
due to hard conditions of repayment, they have to sell the crop without
any bargain regarding price. It creates a problem in their minds whether
to go for such loans or not.

9.1.9. Corruption in DRDA Office

District Rural Development Agency (DRDA) is considered at par with

other government departments. This office is expected to play the growth
oriented role for the farmers. It sanctions loan-cum-subsidy to the
farmers. However, it is felt by the farmers that the files in the department
do not move till the wheels of corruption are attached to them

9.1.10. High Rates of Interest

The farmers feel that the rates of interest charged by banks on loans
are quite high in comparison to the returns expected by them on their
yield. The subsidies on the loans are also decreasing day by day. High

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rates of interest prove to be a bottleneck in the repayment of debt by the
farmers to the banks.

9.1.11. Less Branches of Banks in Villages

Although, over the years, the branch network of commercial banks

has increased manifold, still there are many villages in which there is no
branch of any commercial bank. The banks in most of the cases prefer to
open their new branches in the urban and semi-urban areas or large
villages. Non presence of commercial banks at village level also forces the
farmers to avail credit facilities from non-institutional sources. The loan
from non-institutional sources creates a vicious circle of a never ending
loan process. They always remain in debt till they leave this world. The
less number of branches has led to lesser banking habits among the rural
folk of the state.

9.1.12. Unapproachable for Tenants and Small Farmers

Due to formal procedure of availing credit facilities from institutional

sources, tenants and small farmers are unable to avail the credit facilities
from commercial banks. They are unable to meet the necessary basic
requirements of the commercial banks for availing credit facilities.

Thus, in spite of significant increase in institutional lending, the

malpractices prevailing in the system make the borrowing more
cumbersome and costly to a farmer. Therefore, the farmers have to resort
to non institutional sources to get the loan.

The various responses of farmers in relation to various problems

faced by them while availing loan from commercial banks as enunciated
by them can be summarized in the following table:

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 Table 9.2
Problems faced by the Farmers in Availing Institutional Credit in
Punjab: [Percentage of Farmers (Multiple Responses)]
Sr. Problems Type of Farmers
No. Marginal Small Semi- Large
Medium
&
Medium
1 No loan without surety/ 35.5 25.6 14.7 12.8
security

2 Corrupt Practices of 24.3 32.4 29.7 32.7

Patwaries, Agents and
Bank officials
3 Credit Inadequacy 19.4 29.4 28.4 27.4

4 High Transaction costs 25.4 34.4 32.4 34.2

5 Ambiguous Terms and 27.3 26.7 17.3 28.2

conditions

6 Complicated and Time 42.2 38.5 33.4 39.6

Consuming Procedure

7 More Beneficial to Large 34.3 33.3 27.5 0.0

Farmers

8 Stress of Repayment 26.7 31.9 25.4 25.6

9 Corruption in DRDA Office 23.4 21.4 28.9 29.1

10 High Rate of Interest 24.3 29.6 22.6 15.2

11 Less Branches of Banks in 26.6 33.9 21.4 12.3

Villages
12 Unapproachable for 27.4 26.4 11.2 1.2
Tenants and Small farmers

13 No Problem at All 4.5 3.2 5.6 4.7

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9.2 RANKING OF PROBLEMS ACCORDING TO THE CATEGORIES OF
THE FARMERS

Data received through questionnaires has been further analyzed in

following four categories:

A. Problems of marginal farmers

B. Problems of small farmers
C. Problems of semi-medium & medium farmers
D. Problems of big farmers.
9.2.1. Problems of Marginal Farmers
Almost all marginal farmers responded about problems and their
high rank problems are – complicated and time consuming procedure,
denial of loan due to unavailability of security, lack of funds available to
them as large share of funds available are procured by the big farmers etc.
Different problems faced by the marginal farmers have been shown rank-
wise in the following table:
Table 9.3
Problem Faced by Marginal Farmers (Rank-wise)
Sr. No. Nature of Problem Rank
1 Complicated and time consuming procedure I
2 No loan without surety/ security II
3 More beneficial to large farmers III
4 Unapproachable for tenants and small farmers IV
5 Ambiguous terms and conditions V
6 Stress of repayment VI
7 Less branches of banks in villages VII
8 High rate of interest VIII
9 High Transaction costs IX
10 Corrupt practices of Patwaries, Agents and Bank X
officials
11 Corruption in DRDA office XI
12 Credit inadequacy XII

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9.2.2. Problems of Small Farmers
There are various problems which are being faced by the small
farmers. Their high rank problems are – complicated and time consuming
process of availing loan, high transaction cost, more institutional loan to
big farmers, lack of availability of banking facility at village level etc.
Different problems faced by the small farmers in availing bank loan facility
are summarized rank-wise in the following table:
Table 9.4
Problem Faced by Small Farmers (Rank-wise)

Sr. No. Nature of Problem Rank

1 Complicated and time consuming procedure I
2 High Transaction costs II
3 More beneficial to large farmers II
4 Less branches of banks in villages IV
5 Corrupt practices of Patwaries, Agents and V
Bank officials
6 Stress of repayment VI
7 High rate of interest VII
8 Credit inadequacy VIII
9 Ambiguous terms and conditions IX
10 Unapproachable for tenants and small farmers X
11 No loan without surety/ security XI
12 Corruption in DRDA office XII

9.2.3. Problems of Semi-Medium & Medium Farmers

Semi-Medium & Medium farmers registered their problems rank-
wise as cumbersome process of getting loan, high transaction cost,
corrupt practices of Patwaries, agents and bank official, corruption in
DRDA officials etc. The various problems faced by the medium farmers
have been shown rank-wise in the following table:

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 Table 9.5:
Problem Faced by Semi-Medium & Medium Farmers (Rank-wise)
Sr. No. Nature of Problem Rank
1 Complicated and time consuming procedure I
2 High Transaction costs II
3 Corrupt practices of Patwaries, Agents and Bank III
officials
4 Corruption in DRDA office IV
5 Credit inadequacy V
6 More beneficial to large farmers VI
7 Stress of repayment VII
8 High rate of interest VIII
9 Less branches of banks in villages IX
10 Ambiguous terms and conditions X
11 No loan without surety/ security XI
12 Unapproachable for tenants and small farmers XII

9.2.4. Problems of Large Farmers

Responded top problems of large farmers are – cumbersome process
of getting loan, high transaction cost, corrupt practices of Patwaries and
other officials, credit inadequacy etc. Various problems faced by the
farmers have been listed, rank-wise, in the following table:
Table 9.6
Problem Faced by Large Farmers (Rank-wise)
Sr. No. Nature of Problem Rank
1 Complicated and time consuming procedure I
2 High Transaction costs II
3 Corrupt practices of Patwaries, Agents and Bank III
officials
4 Corruption in DRDA office IV
5 Ambiguous terms and conditions V
6 Stress of repayment VI

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 7 Credit inadequacy VII
8 High rate of interest VIII
9 No loan without surety/ security IX
10 Less branches of banks in villages X
11 Unapproachable for tenants and small farmers XI
12 More beneficial to large farmers XII

Some common problems faced by all the four groups of farmers are
cumbersome process of getting loan, high rate of interest and the defective
role of officials concerned at the concerned bank and at revenue office etc.
9.2.5: Comparison of Ranks Given to the Various Problems Faced by
the Farmers
Different categories of farmers gave different ranks to the problems
faced by them as per their perception. The following table compares the
ranks given by them and rank correlation among them has been
calculated.
Table 9.7
Comparison of Ranks given to the Various Problems Faced by the
Farmers
Sr. Nature of Problem Marginal Small Semi- Large
farmers Medium
No.
&
Medium

1 Complicated and time consuming 1 1 1 1

procedure
2 No loan without surety/ security 2 11 11 9
3 More beneficial to large farmers 3 3 6 12
4 Unapproachable for tenants and 4 10 12 11
small farmers
5 Ambiguous terms and conditions 5 9 10 5
6 Stress of repayment 6 6 7 6
7 Less branches of banks in villages 7 4 9 10
8 High rate of interest 8 7 8 8
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9 High Transaction costs 9 2 2 2
10 Corrupt practices of Patwaries, 10 5 3 3
Agents and Bank officials
11 Corruption in DRDA office 11 12 4 4
12 Credit inadequacy 12 8 5 7
Values of Correlation: R12 = 0.182, R23 = 0.587, R34 = 0.748, R41 = -0.258
R24 = 0.273, R13 = -0.328
The above table signifies that the ranks given by the different
categories of farmers to the various problems in raising finance for
agriculture are different. All the farmers agree that to get agricultural
finance is complicated and time consuming procedure. Marginal farmers
find it very difficult to arrange the surety or security for getting the loan.
The negative correlation between marginal farmers and large farmers
shows that there is a difference in the perception about the problems of
agriculture finance. The value of correlation between marginal farmers
and semi-medium/medium farmers is also negative and signifies that the
problems of marginal farmers differ from the problems of semi-
medium/medium farmers. The value of correlation between small and
medium farmers is very moderate which signifies the commonality of some
of the problems in both the categories. Most of the farmers in the analysis
also think that transaction costs to get credit are also very high. The value
of correlation between medium and large farmers is quite high which
signifies that they think alike on the problems.
9.3. PROBLEMS FACED BY THE BANKS
The banks experience a number of difficulties and problems in the
efficient and effective administration of agriculture financing. The
interactions and discussions with the branch managers of the banks
under study reveals the following major problems faced by them:
9.3.1. Increasing Demand for Agriculture Credit
Due to the technological upgradation on the agricultural front, the
credit need of the agricultural sector is on the rise. To meet the rising
credit demand of agricultural sector is an enormous task, and
responsibility will have to be borne by the formal financial institutions,
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mainly the co-operatives and commercial banks. As resources available to
commercial banks in the agricultural sector are limited, it is important
that every commercial bank attempts to make optimum use of its limited
resources in this sector. It is not possible to meet the requirements in
proportion to the demand.
9.3.2. Slow Disbursement of Subsidies by DRDA
The government sanctions subsidies under its various schemes
through District Rural Development Agency. The BDO of the concerned
area sends the application of the borrower to the bank with his certificate
regarding availability of amount for the purpose of subsidy. The banks
then forward the case to DRDA for sanction of subsidy to the borrower.
Generally the officials of DRDA delay the loan case of the borrowers owing
to their vested interests. Under such circumstances, the banks cannot
sanction and disburse the amount unless it is intimated by the DRDA that
the said borrower has been sanctioned the required amount of subsidy for
the purchase of assets.
9.3.3. Problem of Over Dues
The problem of mounting over dues has become a major cause of
concern for the banking institutions. The amount of recoverable loans
from the farming sector has been piling up day by day. The interaction of
the researcher with branch managers regarding this major issue revealed
the following causes for poor recovery of loans:
1. The farming activities are largely dependent on the mercy of Almighty
God in our country. Nature plays havoc with the farmers almost every
year. Natural calamities like floods or droughts ruin the crops of the
farmers and they are left with very little produce. It affects their
repaying capacity and as a result, the recovery of loans becomes a
tough task.
2. It is very common among the farmers that they use the amount of
loan for domestic or leisure purposes. Sometimes, they spend the
loan money on social functions, litigation, sickness and other such
purposes. It leads to reduction in the revenue and ultimately affects
their capacity to repay the loan.
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3. The cumbersome procedure of disbursement of loans, high time
taken by DRDA in releasing the subsidies and other procedural
formalities sometimes defeat the very purpose of the loan. As a result,
the loan obtained after the desired time is used for some other
purpose.
4. The farmers are illiterate and ignorant about the financial
management practices. They do not know how to make the optimum
use of the loan taken. They simply take the loan as their own money
and many times use it on wasteful items. They also do not maintain
any account of the loan taken by them. Basically, they do not
understand the cost of the loaned capital. It results in non-recovery
of loans.
5. There is a crisis of character and attitude in the people of the
country. Most of the people have developed an attitude of willful
default because they feel that the loan taken by them is the money of
the government and it is not meant to be repaid. There have been
situations when because of political considerations, the respective
governments waived off the loans of the farmers. As a result, people
have developed the feeling that the governments will again waive off
the loans and they simply go on waiting for that time.
6. Crop failure or lesser production due to shortage of fertilizers,
pesticides, good variety of seeds also compels farmers not to repay
loans. Lesser production causes lesser income and lesser capacity of
the farmers to meet their financial obligations.
7. There is a cut throat competition among different financial
institutions. They offer different lucrative schemes to the people for
credit which induce them to have multiple credit facilities from
different institutions. It puts a great liability on them to repay
installments of these multiple loans. It results in difficulty for them to
repay all the installments at the same time. So, they become
defaulters.
8. Rural poverty and indebtedness, decreasing size of holdings,
unemployment and disguised unemployment contribute a lot to the
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 miserable plight of the farmers. Their income from agriculture is
hardly sufficient to meet even their day to day expenditure on food,
clothing and shelter. It results in the over dues piling up.
9. Our system of finance is also affected by politics. The cooperatives
normally issue loan money only to those big farmers, who have some
political connections. Small farmers lag behind them. They fail to get
credit. In the absence of credit, they are unable to purchase desirable
inputs and other farm material. Absence of modern inputs further
lowers their income and lessens their paying capacity of loan.
10. The banks do not have effective follow up system for the recovery of
loans. The recovery of loans also gets affected by political
interference.
9.3.4. Unhealthy Competition & Lack of Coordination
With the emergence of many private sector banks, there is an
unhealthy competition among various financial institutions. There are
many hidden costs charged particularly by the private banks. It has led to
the erosion of confidence of the common people in the banking system.
Moreover, there is lack of co-ordination between various agencies working
for rural development.
9.3.5. Procedural Issues
Illiteracy is the biggest hurdle in the development of the farming
community. The borrowers have to submit many documents and papers to
be obtained from different agencies for getting finance for agriculture
operations. They find it very difficult and sometimes simply get fed up with
the system and say no to loans. The concept of paperless office is still a
dream for the institutions.
9.3.6. Political Interference
Politics is still a dirty game and the influential politicians pressurize
the banking institutions in rural areas to give loans or extend moratorium
facilities to a particular group of farmers. In small villages ridden with
political and communal factionalism, commercial bank personnel are
bound to come under undesirable pressure which forces the institutions
to sacrifice the norms of sound creditability of farmers.
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9.3.7. Absence of Proper Control Mechanism
There is no effective control mechanism to check the diversion of
funds to purposes for which the loan is not granted. It has become very
common among the borrowers to siphon off the money for unproductive
purposes. It results in the lowering of the repayment capacity of the
borrower.
8.3.8. Inadequate Staff
The bank managers also complained about the shortage of staff to
implement the various schemes of banks effectively. They feel
handicapped by non-availability of adequate and competent staff,
particularly the field staff, at their branches.
9.3.9. Higher Transaction Cost
In recent years, the rural branches of commercial banks in general
and branches of RRB in particular, have been under severe financial
strain on account of higher transaction cost involved in handling of a large
number of small size loan accounts and somewhat lower interest income
as a result of concessional rates of interest on small size loans.
9.3.10. Lower Cash Deposit to total Deposit Ratio
The lower proportion of current deposits in total deposits of rural
branches has also placed them at a disadvantage with regard to the cost
of resources.
9.4. Summary of the Findings
The study reveals that although the institutional credit for
agriculture has increased rapidly in recent years in Punjab, it still lags
behind the productive needs of the Punjab farmers. They have to resort to
non-institutional sources to meet part of their productive as well as un-
productive needs. There are several irritating bureaucratic and other
hassles in obtaining an institutional credit. In spite of significant increase
in institutional lending, the mal-practices prevailing in the system make
the lending more cumbersome and costly. Therefore, it is high time to
address these inadequacies of the institutional sources.

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