This article is on Micro Credit- deals with problems & prospects in Rural Banking from the latest CAIIB Syllabus 2023.

Dear Future CAIIBs,

How have you been? Today, we have something to discuss in regard to Micro-credit, which you must have heard in your banks or working spaces often. Govt. comes up with schemes for the benefit of poor & today, we will read about it in some detail from the prospective of passing CAIIB’s elective paper of Central Banking for the June 2023 Exams under the new & latest JAIIB Syllabus 2023.

Without any delay, let us get into it one by one:


MICROCREDIT refers to credit and other financial services that are provided to the needy through Self Help Groups & NGOs.

Self Help Groups (SHGs) play a key role in meeting the credit needs of the poor by inculcating saving habits among rural households. Many of the farmers’ own funds are pooled to meet the financial needs of needy SHG members. Banks were linked to members of these groups.


In other words, SHGs enable economically disadvantaged individuals to develop power by joining a group. In addition, financing through SHGs reduces transaction costs for both lenders and borrowers. The National Bank for Agriculture and Rural Development (NABARD) has been instrumental in providing loans at concessional rates. Currently, more than 7000 SHGs are working in rural areas. Due to the informal mode of lending and minimal legal requirements, SHG programs are gaining popularity among small and marginal borrowers.

Moneylenders and dealers exploited small and marginal farmers and landless laborers at the time of independence by lending to them at exorbitant interest rates and manipulating their accounts to keep them in debt. But there was a huge shift after 1969 when India adopted social banking and a multi-agency approach to fully meet rural credit needs & later, in 1982, NABARD was established as an apex body to coordinate the activities of all rural financial institutions.

The Green Revolution ushered in huge changes in the credit system as it resulted in the diversification of rural credit portfolios towards production-oriented loans.



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So, moving on….

Credit plays an important role in rural development like any other sector:

  1. finance and
  2. Low income in rural areas often leads to low savings rates. It is extremely difficult for farmers to increase their production by investing in their farmland. In addition, the few banks that exist in rural areas prefer to lend to farmers with significant land holdings. Due to the difficulty of getting loans from banks, small and marginal farmers are easy targets for moneylenders. Credit infusion is critical to the growth of the agricultural sector, which leads to rural economic development.

The following points highlight the importance of credit for rural development:

  • Commercialization: Credit helps farmers commercialize their operations. In other words, commercial farming requires the use of credit. As small and marginal farmers produce mostly for subsistence, they do not earn enough surplus to reinvest in their fields, resulting in land degradation.
  • Initial Agricultural Input Needs: Crops have a long gestation period between sowing and harvest, farmers are given credit to meet their initial agricultural input needs such as seeds and fertilizers.
  • General & Specific Requirements: Credit enables farmers to break out of the cycle of poverty. Farmers need finance to meet both general and specific requirements. Credit will be used to meet these requirements.
  • Crop insurance and farm credit: Agriculture was constantly characterized by the vagaries of the weather as its the Farmers who suffer the most in the absence of a decent monsoon or crop failure. Crop insurance and farm credit play an important role in preventing such tragedies.


So, what are the types of agricultural credit that are available to rural population?

There are 3 types of credit requirements in agriculture.

  • Short-term loan: The term of a short-term loan is < 15 months. Farmers are looking for a short-term loan to meet their agricultural working capital needs. 

Example: they request short-term credit for the purchase of seeds, fertilizers, insecticides, bulls and other non-essential items. The short-term loan is repaid as soon as the production of the next crop is sold. The share of these loans is high compared to medium-term and long-term loans.

  1. Mid-term credit: The length of a medium-term loan ranges from 15 months to 5 years. Farmers require medium-term loans to buy livestock, implements and improve watercourses. The movable or immovable property of farmers is used as collateral for the loan.
  2. Long-term loan: A long-term loan is usually for > 5 years. In any sector, long-term investment is required to create permanent assets that provide profits over time. Long-term investments in agriculture include digging wells, leveling land, fencing and permanent landscaping, purchasing large machinery such as a tractor and its accessories such as carts, and establishing orchards such as mango, cashew, orange, pomegranate, coconut, chiku, guava and so on.


Credits are divided into 2 categories. They are:

Institutional resources

  • Cooperative Credit Societies: Cooperative Credit Societies are undoubtedly the cheapest and largest source of rural finance in India. Active Primary Agricultural Credit Societies (PACS) in India cover about 86 percent of India’s villages and represent nearly 36% of the country’s total rural population.
  • Commercial Banks: In the beginning, the commercial banks of our country will play only a small role in the development of rural finance. However, after the nationalization of commercial banks, they began to provide financial assistance directly and indirectly, both in the short and medium term.

Non-institutional sources:

  • Money lenders: Money lenders have been an important source of farm finance from the beginning. Moneylenders provided a large proportion of agricultural loans and engaged in unethical practices such as manipulation of accounts and charging a high rate of interest on their loans. As a result of all these reasons, the share of moneylenders in total agricultural credit fell dramatically.
  • Landlords: In India, small and marginal farmers, like tenants, borrow money from landlords to meet their financial needs. This site tracks all questionable actions of moneylenders, merchants and others.
  • Merchants and commission agents: Merchants and commission agents provide loans to farmers for productive purposes before the maturity of crops at very low interest rates and charge high commission.


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