Agricultural Finance: Meaning and Types of Loan in Agriculture

Table of Contents

• Introduction
• Meaning of Agricultural Finance
• Significance of Agricultural Finance
• Sources of Agricultural Finance
• Types of Loans in Agriculture
  • Livestock Loans
  • Farm Modernisation Loans
  • Warehouse Loans
  • Solar Pump Set Loans
  • Land Loans
  • Crop Loans
• Challenges in Agricultural Finance
• Government Initiatives
• Conclusion

Introduction

Agricultural finance is the key to agricultural development in any country. It is critical in a country like India, where more than 50% of the population derives their livelihood. Farmers require funds for various purposes, such as purchasing seeds, equipment, livestock, land maintenance, etc. Agriculture credit offers a lifeline to farmers by providing them with the necessary capital.

Meaning of Agricultural Finance

Agricultural finance, also known as Agri-finance, is a specialized branch of finance that deals with financial services and products intended to meet the unique needs of farmers and agribusinesses. The primary objective of agricultural finance is to ensure that farmers have access to suitable and affordable credit to support their farming activities. This is crucial for the growth and sustainability of agriculture, as it helps farmers overcome financial constraints and invest in their farms through these farm loans.

Significance of Agricultural Finance

The following are the significance of agricultural finance in India:

• Access to different types of agriculture credit in India enables farmers to adopt modern farming practices, increasing productivity, income, and overall economic growth.
• Adequate finance ensures farmers can sustain their livelihood and helps create rural employment opportunities.
• Affordable agriculture finance in India helps farmers purchase high-quality seeds, fertilizers, and equipment, resulting in increased agricultural production and improved food security.

Sources of Agricultural Finance

There are different sources of agricultural finance in India. These sources are scheduled commercial banks, specialised agricultural financial institutions like NABARD, and agriculture credit cooperative societies.

Types of Loans in Agriculture

When we ask what an agriculture loan is, we must understand the different types of agriculture credit available for farmers. Broadly, there are three types of agricultural credit available. These are:

• Short-term credit: It is given for a period of less than 15 months for the purchase of short term needs like buying fertilisers, seed, etc. Such loans are repaid generally after harvest only.
• Medium-term credit: It is given for a period ranging from 15 months to 5 years to meet the needs like buying cattle, pumping sets, etc.
• Long-term credit: Agriculture loan given for more than 5 years are called long-term credit. It is given for the purchase of tractors, implements, etc.

Agriculture loans can also be categorised based on purpose for which they are given. Following are the type of agriculture loans given for different purposes:

Livestock Loans

Livestock sector in India is an integral part of agriculture and livestock farming often requires substantial investment. Livestock loans are designed to help farmers acquire and manage their livestock effectively.

These loans can be used to purchase animals like cattle, poultry, goats, or sheep and to cover expenses related to their care, such as feed, veterinary services, and shelter.

Farm Modernisation Loans

Modern agriculture heavily relies on machinery and equipment to increase efficiency and productivity. Farm modernisation loans or farm mechanisation loans provide funds for farmers to purchase tractors, ploughs, harvesters, and other agricultural machinery. The most important component of such loans is the tractor loan.

Warehouse Loans

After harvest, farmers often store their produce in warehouses to wait for favourable market conditions or higher prices. Warehouse loans are one of the types of loans in agriculture that enable farmers to finance the storage of their crops, protecting them from spoilage and ensuring they can sell their produce at a better price later. The stored crops typically collateralize these farm loans.

Solar Pump Set Loans

Solar pump set loans help farmers install solar-powered irrigation systems. These systems are eco-friendly and cost-effective, reducing the dependence on traditional energy sources and increasing crop production through efficient irrigation. It is one of the important priority sector lending of agricultural finance that offers a boost to green energy usage.

Land Loans

The acquisition or expansion of agricultural land is a significant financial undertaking. Land loans are long-term loans that assist farmers in purchasing land for farming purposes. The major significance of agriculture finance here is that the land itself usually secures the loans and may have favourable interest rates, making it easier for farmers to acquire property.

Crop Loans

Crop loans are perhaps the most common type of agricultural finance. They are short-term agriculture credit in India provided to farmers to cover the cost of cultivation, including purchasing seeds, fertilizers, pesticides, and labour. These farm loans are usually repaid after the harvest when the crop is sold. Crop loans are crucial for ensuring that farmers can plant and cultivate their crops each season.

Challenges in Agricultural Finance

While agricultural finance is essential for the growth and development of the agricultural sector, it comes with its own set of challenges:

• Agriculture is highly susceptible to various risks like weather, pests, and market fluctuations giving rise to credit risk and the chances of loan default.
• In many developing countries, small-scale farmers often struggle to access formal financial institutions due to limited financial literacy and the absence of collateral.
• Agricultural income is often seasonal, making it challenging for farmers to meet regular loan repayment schedules.
• High-interest rates on agricultural finance can burden farmers, particularly in regions with limited access to affordable credit.
• In some regions, inadequate infrastructure can hinder the efficient distribution of credit and the provision of financial services to rural farmers.

Government Initiatives

Recognizing the importance of agricultural finance, government in India have initiated various programs and policies to support farmers:

• Subsidised Interest Rates: Many governments subsidise the interest rates on different types of loans in agriculture, making them more affordable for farmers in the form of agriculture term loans.
• Credit Guarantee Schemes: It provides financial institutions with guarantees for loans extended to farmers, reducing the risk for lenders, and encouraging them to provide more agriculture term loans.
• Microfinance: Microfinance institutions offer small loans to farmers, which falls under types of agriculture credit for those in remote areas where traditional banks may not have a presence.
• Farmers' Cooperatives: They pool resources and provide access to farmers loan in India and other financial services for their members.

Conclusion

Agricultural finance is a boon for the agricultural sector, empowering farmers to invest in their farms, increase productivity, and contribute to economic growth and food security. The various types of agriculture loan in India available in agricultural finance cater to the diverse needs of farmers, from purchasing livestock and machinery to securing their produce and acquiring land.

However, challenges such as credit risk, lack of access, and high interest rates persist, calling for government interventions and the development of innovative financial products to support farmers effectively. By supporting agriculture through robust financial mechanisms, we can help secure a sustainable future for both farmers and the global population.