How Do Farmers Obtain Capital?

Capital in farming refers to funds needed to carry out agricultural activities. Farmers require capital for:

1. Purchasing Inputs: • Seeds (high-yielding variety seeds) • Chemical fertilisers and organic manure • Pesticides and herbicides • Irrigation (diesel for pumps, electricity)

2. Buying or Hiring Farm Equipment: • Tractors, threshers, harvesters • Hand tools and implements

3. Land Improvement: • Levelling, bunding, and soil conservation works • Construction of wells and tube wells

4. Labour Costs: • Wages for hired farm labour during sowing and harvesting

5. Post-harvest Activities: • Storage, transport, and processing of produce

6. Livestock: • Purchasing cattle, poultry, or other farm animals

Types of Capital Needs: • Short-term credit: For seasonal inputs like seeds, fertilisers (repaid after harvest) • Medium-term credit: For farm equipment, minor irrigation works (repaid over 1–5 years) • Long-term credit: For land purchase, major irrigation, farm development (repaid over 5–15 years)

Medium and large farmers have multiple sources of capital:

1. Own Savings and Surplus Produce: • Large and medium farmers who produce surplus crops sell in the market and reinvest profits • They can use past savings to fund next season's farming • Self-financing is the most flexible and interest-free source

2. Commercial Banks: • Nationalised banks (SBI, Punjab National Bank, Bank of Baroda, Canara Bank, etc.) provide agricultural loans • Loans available: crop loans, farm mechanisation loans, land development loans • Interest rates are subsidised for priority sector agriculture lending

3. Cooperative Banks and Credit Societies: • Primary Agricultural Credit Societies (PACS) — village-level cooperative credit institutions • District Central Cooperative Banks (DCCBs) and State Cooperative Banks • Interest rates are generally lower than commercial banks • Easier access for rural farmers than commercial banks

4. Regional Rural Banks (RRBs): • Established to provide credit to small and marginal farmers in rural areas • Joint venture between the central government, state government, and a sponsor commercial bank • Examples: Prathama UP Gramin Bank, Andhra Pradesh Grameena Vikas Bank

5. NABARD (National Bank for Agriculture and Rural Development): • Apex institution for agricultural and rural credit in India (established 1982) • Does not lend directly to farmers; refinances cooperative banks, RRBs, and commercial banks • Promotes microfinance and Self-Help Groups (SHGs) in rural areas

Key Government Schemes that Help Farmers Access Capital:

1. PM-KISAN (Pradhan Mantri Kisan Samman Nidhi): • Launched: December 2018 • Direct income support of ₹6,000 per year (in 3 instalments of ₹2,000) to eligible farmer families • Covers small and marginal landholding farmer families • Amount directly transferred to farmers' bank accounts (DBT — Direct Benefit Transfer) • As of 2023, over 11 crore farmer families enrolled

2. Kisan Credit Card (KCC): • Introduced in 1998 by NABARD • Provides short-term credit to farmers at subsidised interest rates (around 7% per annum with interest subvention) • Covers crop loans, post-harvest expenses, produce marketing, and consumption needs • KCC holders can draw credit as needed, like a revolving credit line • Extended to allied activities like animal husbandry and fisheries

3. PM Fasal Bima Yojana (PMFBY): • Crop insurance scheme — compensates farmers for crop losses due to natural calamities • Reduces risk, indirectly helping farmers invest confidently

4. Agriculture Infrastructure Fund (AIF): • ₹1 lakh crore fund for post-harvest infrastructure and agri-logistics • Provides loans at subsidised rates for cold storage, warehouses, processing units

5. PM Kusum Scheme: • Subsidised solar pumps for irrigation, reducing energy costs for farmers

Informal Sources of Credit:

1. Money Lenders (Sahukars / Mahajans): • Traditional moneylenders have been a major source of rural credit in India for centuries • Advantages: Easily accessible, no paperwork or collateral needed, quick loan disbursal • Disadvantages: Extremely high interest rates (24%–60% per annum or more), exploitative terms • Often leads to a debt trap — farmers borrow to repay old loans • Government has worked to reduce dependence on money lenders through formal credit expansion

2. Traders and Intermediaries: • Farmers may receive advance payments from traders (commission agents) in exchange for selling produce at lower prices • Common in areas with poor access to formal credit

3. Relatives and Neighbours: • Informal interest-free or low-interest borrowing from family members

Challenges Faced by Small and Marginal Farmers in Accessing Capital:

1. Lack of collateral — small farmers often do not have assets to pledge as security for bank loans
2. Inadequate documentation — land records, identity proof issues
3. Low financial literacy — unfamiliarity with formal banking procedures
4. Branch accessibility — bank branches are often far from remote villages
5. Small loan amounts — banks find small agricultural loans less profitable
6. Risk aversion by banks — crop failure risk makes banks cautious

Government Measures: • Jan Dhan accounts — financial inclusion for rural poor • Doorstep banking and Business Correspondents (BCs) bring banking to villages • Priority Sector Lending mandates that banks lend a fixed percentage to agriculture