Introduction || APPENDIX (CH-4) || APPENDIX (CH-9) || ANNEXURE (CH-12) || APPENDIX (CH-14) || APPENDIX (CH-24) || APPENDIX (CH-29) || Conclusion
Chapter- 1 || 2 || 3 || 4 || 5 || 6 || 7 || 8 || 9 || 10 || 11 || 12 || 13 || 14 || 15 || 16 || 17 || 18 || 19 || 20 || 21 || 22 || 23 || 24 || 25 || 26 || 27 || 28 || 29 || 30 || 31 || 32 || 33 || 34 || 35 || 36 || 37 || 38 || 39

Chapter 16:
FINANCE FOR AGRICULTURE

Agricultural production in this country depends upon millions of small farmers. It is the intensity of their effort and the efficiency of their technique that will help in raising yields per acre. Because of inadequate financial resources and absence of timely credit facilities at reasonable rates, many of the farmers, even though otherwise willing, are unable to go in for improved seeds and manures or to introduce better methods or techniques. Works of minor irrigation like wells owned by the cultivators either get into disuse or are not fully utilised foi want of capital. The major object of the agricultural programme discussed earlier is to de /elop local resources of seeds, manures and irrigation and to provide other accessories of production. To utilise man-power and cattle resources more fully than is done at present, these aids to better and more intensive farming are essential. It is, therefore, of the utmost importance that- the financial requirements of the producers for these purposes should be adequately met. The achievement of targets in the agricultural sector which covers production of food. and essential raw material like cotton, jute and oilseeds, ought not to be allowed to suffer for want of adequate credit facilities. Provision of sufficient and timely credit at fab-rates of interest has, therefore,, to be considered as an integral part of the Plan. Assistance rendered by way of credit has, however, to be related to specific items of productive work or of essential costs of cultivation. For providing these facilities all the existing agencies e.g. money lenders, commercial banks, co-operatives and the State have to be integrated and harnessed to a common purpose. Such a comprehensive approach is essential for ensuring the best use of all the available resources of the nation.

Nature Of Requirements And Agencies Of Agricultural Credit

2, Finance required for production can be divided broadly into : (a) short-term (for periods up to 15 months) ; ( and ) medium-term (from 15 months up to 5 years) and (c) long-term (above 5 years). Short-term loans are required for purchasing seeds, manures and fertilizers or for meeting labour charges, etc. These are expected to be repaid after the harvest. Medium-term loans are granted for purposes such as sinking of wells, purchase of bullocks, pumping plants and other improved implements, etc. Loans repayable over a longer period (i.e. above 5 years) are classified as long-term loans. These are utilised for payment of old debts, purchase of the heavier machines, making permanent improvements and increasing the size of the holding. A quantitative assessment of the finance required under these three categories is extremely difficult as adequate data for the purpose are not available. It is hoped that the rural credit survey undertaken by the Reserve Bank will provide more reliable estimates on the basis of which policy can be formulated. It is, however, clear that there is a wide gap between funds at present available on reasonable terms and the requirements of the cultivators.

3. The following agencies provide finance to the cultivators :—

1. Private agencies : (a) money lenders and landlords ; (b) commercial banks.
2. Public or semi-public agencies : (a) the State ; (b) co-operative societies.

Until recently, at any rate, the money lenders and the landlords were the principal sources of rural credit. It is generally believed that the recent debt relief legislation, the system of licensing money lenders and restrictions on the use and transfer of land as security have led to a considerable decline in their operations. The abolition of all privileged tenures and the impending reforms both in zamindari and ryotwari areas have discouraged investment by the landlords and larger cultivators. No estimates are available regarding the extent to which the money lenders and landlords have been affected by these considerations or of the extent of the role that they now play as providers of credit. The findings of the rural credit survey may throw more light on this important aspect of the matter and provide the basis .for further thought and action. In the meantime, however, it is necessary to build up and expand the system of Government or co-operative credit so that the implementation of the Plan may proceed according to schedule.

State Loans.

4. As the finance provided from private sources was not adequate, the assistance rendered by the State in the form of taccavi loans had to be increased considerably during the last few years. The amount of taccavi loans sanctioned in 1949-50 was about Rs. 15 crores as against Rs. i crore in 1938-39. The State which formerly gave loans mostly for relieving distress or meeting the needs of a few indigent cultivators has now assumed increased responsibility for development finance especially as a result of the Grow More Food campaign. It is a matter of common complaint that the actual disbursement of these loans involves considerable delay and that the procedure connected with it causes considerable inconvenience to the cultivators. Our proposals regarding appropriate use of taccavi loans are discussed at a later stage in this chapter.

Loams by co-operative societies

5. Besides State loans, a significant share of the finance for agriculture is provided by co-operative societie- There were 1,42,394 agricultural societies which advanced Rs. 28-53 crores in 1949-50 as - _ -mst Rs. 6-75 crores advanced by 1,05,301 agricultural societies in the year 1938-39. Nearly two thirds of the total loans made by agricultural credit societies were granted in the two States of Bombay and Madras while 22 per cent of the funds were utilised by the societies in U. P., Madhya Pradesh and the Punjab. The credit movement in other areas has yet to be developed. Long-term loans extending upto a period of 20 years are provided by the 283 Land Mortgage Banks which advanced a sum of Rs i crore during the year 1949-50. A major part of the long term loans was taken up again by Madras and Bombay where the movement has progressed fairly well. Punjab and \vest Bengal have .ot yet recovered from the unsettling effects of partition. In many of the Part 'C' and the newly integrated Part 'B' States, co-operative structure at the Apex and district levels has yet to be created Reorganisation and adjustment are also necessary in other areas. The progress and achievements of the movement in Bombay, Madras and the other co-operatively advanced States prove that co-operatives are the most effective agency for providing finance for agricultural purposes. A co-operative society organised by the people for their economic and social welfare places proper emphasis on the character of a member without losing sight of his material security. Compared to State agency a co-operative can exercise better supervision and it can ensure utilisation of loans for productive purposes more effectively. Recovery of loans is also facilitated as, besides coercive action, public opinion is also brought to bear against . wilful defaulters. Co-operatives are also in a bstter position to mobilise local savings. It would, therefore, be advantageous to distribute even the State loans for development purposes through the co-operative societies. We recommend this policy.

6. As the major portion of the funds that they advance are derived by way of shares, deposits or loans, co-operative societies like other cred't agencies have to operate on recognised banking principles. To avoid a serious risk of losses they have to deal generally with creditworthy farmers. In addition to these, there are a large number of potentially credit-worthy cultivators in the rural areas who are just on the margin. Facilities granted to them either in regard to the terms of repayment or the rates of interest would go a long way to improve their productive capacity. It is consider'"'! desirable that the co-operaf ss should- handle the credit business of this class also, as a separate agency for them would not only be expensive but would also lead to an undesirable duplication because in practice, it is difficult to distinguish between the credit-worth^ and potentially credit-worthy 'people. Dealing with the lattet class, however, involves more risk than that normally covered by the societies. To the extent that the co-operatives incur losses on account of the additional risk they may have to be compensated. The same procedure can be adopted for providing finance in less developed areas. The uneconomic cultivators should not be denied the benefits of the movement.- In fact, it is difficult to maintain a distinction between economic and uneconomic cultivators as in the strict economic sense, mo-c of the Indian farmers would be classified only as potentially credit-worthy or uneconomic cultivators. Many of them receive and repay loans from the societies, and will have to continue to do so. In their case character will be a very important factor in determining their eligibility for loans and the State will have to share a major part of the risk involved in this work.

7. To take up the functions visualised above the co-operative credit structure has to be strengthened at various levels in each State. The manner in which this can be brought about depends upon the conditions prevalent as well as the needs of the State. The Co-operative Planning Committee (1946) recommended that 50 per cent of the villages and 30 per cent of the laral population should be brought in the ambit of primary societies within ten years. The programme for a national extension service discussed earlier also contemplates organisation of multi-purpose societies in every village or a group thereof and efforts should be made to reach by 1955-56 the target set by the Cooperative Planning Committee. However, a slower rat of progress would be preferable to hasty expansion.

8. The success of the programme outlined above as well as the management of the cooperatives largly depend upon personnel. The absence of adequate trained staff is at present a serious limiting factor in the growth of the movement. The necessity of proper training far all grades of administrative, managerial and field staff in the Co-operative Department and cooperative institutions is being increasingly realised. The Reserve Bank has recently organisad a special course of training for higher and intermediate personnel at the Cooperative College at Poona, which is conducted by the Bombay Provincial Co-operative Institute. A single institution, however, will not meet the needs of the country and similar facilities should be provided in other areas. We consider that there is scope for starting at least three more regional collegas almost immediately. Training for the subordinate personnel has also to be arranged simultaneously. We accord a high priority to the training programme and we have provided a sum of Rs. 10 lakhs in the Plan to subsidise a part of the expenditure. If the expenditure is to be put to good use, co-operative departments and institutions must increasingly appreciate the importance of employing trained staff and of deputing their employees for training .

9. Reorganisation and expansion of the movement in this manner for effectively carrying out the production programme will call for large scale investment. The co-operatives will have to initiate a drive for tapping local resources and for inculcating the habit of thrift in the local people. As the response to the savings campaign is, however, likely to be slow, finding adequate finance for the legitimate needs of their members may well prove to be beyond the resources of the co-operatives. Though ultimately the societies will have to build up adequate funds of their own, in the first instance they will need considerable financial and technical assistance from the Reserve Bank. The Bank has already taken a long step in this direction. Under the scheme of concessional finance it provides accommodation to the State Co-operative Banks for seasonal agricultural operations and marketing of crops at i^ per cent (i.e. 2 per cent below the current Bank rate). The period of re-payment has been extended by an amendment of the Reserve Bank of India Act from nine months to a maximum of 15 months. Several other facilities are also now offered by the Reserve 'Bank by liberalisation of the procedure for grant of advances.

10. As a result of this liberal attitude of the Reserve Bank irs advances to the Apex Cooperative Banks have increased from Rs. 1.5 lakhs in 1946-47 to Rs. 12.51 crores in 1951-52. At present these facilities have been availed of mostly by the developed Apex banks of two States, viz., Madras and Bombay. The Reserve Bank is taking an active interest in re-organising the co-operative movement in all States, especially the undeveloped States, on a sound footing. It has completed a study of the movement in practically all the States. In the light of these studies the Reserve Bank should b' in a position to suggest measures of improvement for adoption by the States concerned.

11. The Bank provides short term accommodation to the co-operative societies through the State Apex institutions which, in turn, make it available to the District Banks. The Apex Banks exist in the Part 'A' and a few important Part 'B' States, but some of them are not yet fully equipped to take up the increased responsibilities involved in borrowing from the Reserve Bank. In many of the Part 'B' and 'C' States the Apex agencies have still to be created. The Reserve Bank has devoted attention to this task as well. The problems involved in expanding the movement are : (a) Securing trained personnel, and (fc) finding adequate capital. As regards the capital it is likely that the funds necessary for organising or strengthening the Apex Banks may not be forthcoming in adequate measure from the local people or co-operative societies. State Governments which have an interest in creating these institutions and fostering their growth should subscribe a part of their capital and should be represented on their boards of management. The Apex agencies established in this manner would have greater stability and would give better results, even though such participation by the State would be a departure from the pattern hitherto favoured by most co-operators. While this effort to overcome the shortage of finance is underway, the State Governments may, if necessary, guarantee re-payment of the amount advanced by the Reserve Bank to the Apex Bank. This practice has already been adopted in a few cases. This must, however, be a temporary expedient and the movement should be able in the near future to secure its requirements on the basis of its own resources and the credit-worthiness of its constituents.

12. The essential characteristics of short term finance should be cheapness, elasticity and promptness. The concessional rate at which the Reserve Bank grants loans helps to reduce the interest rates charged to members. The characteristics of promptness and elasticity have remained comparatively neglected as the time lag and the rigidity of procedure associated with the whole mechanism of co-operative credit detract from the usefulness of the loans.

13. As the measures indicated above succeed in placing the credit structure in the States on a sound footing, the Reserve Bank and the Government should be able to provide even larger assistance. We are in agreement with the Grow More Food Enquiry Committee that in the next four years the advances to the cultivators through the institutional agencies should be steadily increased so as to reach the limit of at least Rs. 100 crores per annum by the fourth year. For achieving this and the other targets outlined later, it is necessary that a detailed plan of agricultural finance and co-operative development should be worked out by every State in consultation with the leaders of the movement, the Reserve Bank and the Central Government. The State plan will have to be broken down by districts keeping in view the main objective of the Plan in regard to its production targets and the relative priorities of its several parts.

Medium And long term loans

14. While short term loans meet the immediate and pressing needs of cultivation, medium term loans enable the farmer to raise the standard of his tillage and to bring about an improvement in yields. Much greater emphasis, has, therefore, to be placed on medium term loans than has been done hitherto and adequate accommodation should be provided for them. Precise estimates of the amount of such loans advanced by co-operative societies are not available. It is, however, known that the bulk of their advances are repayable soon after the harvest. This pre-occupation of the societies with short term loans is due firstly to their greater urgency and secondly to the very limited availability of funds (by way of long term deposits, etc.) which they can safely invest for a medium term, say upto five years. The comparative inability of the co-operatives to meet this demand of the cultivator deters many a credit-worthy person from seeking even short term loans as in this process he gets indebted to more than one creditor. The co-operatives will not, therefore, be really effective agencies for credit unless they are in a position to grant these so called medium term loans which are essential to large production. Medium term loans of the societies do not qualify at present for assistance from the Reserve Bank. Many leading co-operators feel that the Bank ought to be empowered to make medium term advance as well. We understand that the proposal has been accepted by the Reserve Bank, which has agreed to make such advances upto a limit ofRs. 5 crores. To enable the Bank to take up this work, amendment of the Reserve Bank Act is necessary. A Bill incorporating these and other changes has been placed before Parliament.

15. Medium term finance upto Rs. 5 crores provided by the Reserve Bank under the proposed arrangement will help the co-operatives in building up their business on a sounder and a more productive footing. Larger assistance from the Reserve Bank for short term loans will also release some of the medium term funds of the movement where they are at present utilised for crop loans. To the-extent that this occurs, the amount available for agricultural improvement will increase. However, in view of the fact that there is great demand as well as scope for productive investment in this sphere and also in view of the fact that the co-operative structure is being created and extended in areas in which cooperation has so far been less developed, it is to be expected that the sum ofRs. 5 crores to which the Reserve Bank has limited medium term finance will prove inadequate. It is essential that this limit should not be allowed to hamper the normal pace of production. We, therefore, recommend that a provision of Rs. 5 crores spread over the next three years should be made in the Plan to supplement the resources of cooperative banks or other credit agencies created as an interim arrangement. These reso;: rces will, of course, include the intermediate finance which the Reserve Bank will be able to supply after its statute has been amended. Taking into account this additional provision, the accommodation likely to be available from the Reserve Bank and the funds that may be found within the movement, we consider that the target for medium term finance. Government and co-operative, at the end of the present Plan might be placed at Rs. 25 crores per annum.

16. As regards long term loans, the responsibility for financing improvements of a long term character, which benefit the community or a group of villages, will increasingly devolve on the State and the need for individual loans may diminish to some extent. However, this can be only a gradual process and assistance to individuals or a group for schemes of a permanent nature will continue to be an important item of production programmes. Consolidation of holdings and other schemes for improving the productivity of agriculture by increasing the size of the unit of cultivation are bound to widen the scope for long term loans. It is, therefore, necessary to have an organization which will assess these requirements and be in a position to satisfy them. This function can be best discharged by the land mortgage banks which possess long term funds raised by shares, debentures and fixed deposits. These banks exist in only a few States, e.g. Madras, Bombay, Mysore and Madhya Pradesh. The two main difficulties responsible for the slow progress of land mortgage banks are the lack of trained personnel and the inability (legal) of the borrower to offer land as a security. As a result of recommendations made in this report elsewhere, these difficulties will soon be surmounted and we trust that as a part of the State Plan suggested in paragraph 12 of this chapter a long term agency will be created in more States. However, we do not deem it essential to have a separate land mortgage bank either at the State or district level in every case. Considering that the borrower and the security that he has to offer are generally the same for various types of loans, it has yet to be established that a separate agency for long term credit is invariably preferable to a single agency {or different types of credit.

17. A major part of the advances made hitherto by the land mortgage banks are for repayment of old debts. The funds obtained either from the State or the community need in future to be utilised for purposes which will step up production and thus create a surplus of savings out of which the old debts may be discharged. The land mortgage banks should hence-forward lay greater emphasis on this developmental aspect and should give preference to applicants who want to increase their resources for enhanced production.

18. Another difficulty encountered by these Banks relates to finance which is often raised by floating debentures. Recently, some of the Central Land Mortgage Banks have found it somewhat difficult to raise long-term funds at sufficiently cheap rates of interest in spite of the fact that their debentures were guaranteed by the State Governments concerned and that the Reserve Bank, in accordance with its recent practice, subscribed 20% of the value in practically all these cases. There is therefore some apprehension that land mortgage banks, as a structure for long term credit, may languish for want of funds. This would hardly be in consonance with the objectives of the Plan. We have, therefore, made a provision ofRs. 5 crores spread over the next three years to supplement the long-term resources of the co-operative movement. We consider that the target for long term finance. Government and co-operative together should be Rs. five crores per annum at the end of the present Plan.

19. In regard to the principles which ought to govern the actual disbursement of the amount of Rs. 5 crores each which we have recommended to supplement the medium-term and long-term resources of the co-operative agricultural credit system, the following recommendations are made :—

1. The loans made out of these amounts should in all cases be linked to the programme of increased agricultural production, and should therefore be subject to the same priorities as that programme.
2. Without prjudice to the above subject, the loans should be so distributed, with reference to regions and to classes of agriculturists, as to reach, by preference, areas and classes not served at present by the co-operative credit system.
3. In planning the distribution of credit among such areas and classes, forms of organization should, if possible, be devised (e.g. borrowers' groups in villages) which can be readily developed into, or eventually fitted in with, the co-operative type of organisation.
4. Where credit is disbursed in an area already served by the co-operativeorganization, the agency of that organization should be utilised as far as possible.
5. The contribution to long-term agricultural finance may, among other things, take the form of Government purchasing part of the debentures issued by land mortgage banks.
6. In regard to the implementation of these recommendations, a detailed plan should be chalked out by the Government of India in consultation with the Reserve Bank and other organisations concerned.

20. Finally, in putting forward the proposals outlined in this chapter we envisage them as helping in the realisation of the targets in the Plan and as a part of and a first step to a comprehensive and integrated policy of agricultural credit to be evolved as early as possible on the basis of the factual material which is expected to be furnished by the rural credit survey. At this stage we would only suggest that in the wider solution of the problem the integration of financial agencies would have to extend to all organisations—co-operative, commercial and other which act as repositories and suppliers of credit.

The history of agricultural development in all advanced countries shows that such an integrated system of credit laid the foundation for agricultural development and prosperity. Whether there should be a single agency dispensing all types of credit, or a separate agency for long term or for long anJ. medium term, what form this agency should take at the State level and whether the State agencies need to be integrated in a Central Agency at the All-India level, and what part the Agricultural Credit Department of the Reserve !..nk should play in this organisation, are matters which will have to be considered ii. the context of the wider issues referred to above.