Rural Credit: Meaning, Sources, Types and Role in Development

Rural credit means financial assistance mainly in the form of loans extended to individuals and businesses in rural areas for agricultural and other economic activities. It plays a significant role in promoting agricultural production, rural development, and poverty removal. Rural credit is a financial mechanism designed to provide financial support to individuals, farmers, and businesses in rural areas. This type of credit is essential for fostering agricultural development, promoting rural entrepreneurship, and improving the overall economic well-being of rural communities. Access to rural credit allows farmers to invest in seeds, equipment, and technology, empowering them to enhance productivity and contribute to the growth of the agricultural sector. This subject in UPSC covers the significance of extending finance to farmers and rural societies for improving agricultural productivity and economic growth.

It is a very vital topic for the commerce related exams such as the UGC-NET Commerce Examinations.There are different types of this credit that cater to the diverse needs of rural populations—ranging from seasonal farming support to long-term development loans.

In this article, the learners will be able to know about the following:

• What is Rural Credit?
• Institutional Sources of Rural Credit
• Objectives of Rural Credit
• Need of Rural Credit
• Problems of Rural Credit in India
• Rural Credit Agencies in India
• Non-Institutional Sources of Rural Credit
• Institutional vs Non-Institutional Sources of Rural Credit
• All India Rural Credit Survey Committee

Click Here to Download UGC NET Paper 1 Important Questions PDF

What is Rural Credit?

Rural credit is the finance that farmers and villagers borrow in order to assist them with farming or business. It is used to purchase seeds, tools, or machinery necessary for farming. This credit facilitates better farming so that farmers produce more crops and earn more money. Rural credit is significant as it assists rural dwellers to access money that they use to better their lives. It may be from various sources such as banks, co-operative societies, or even moneylenders.

Fig: rural credit

The types of rural credit can be broadly classified into institutional and non-institutional categories, each serving a different economic function. Institutional sources of this credit are government institutions such as banks and co-operatives which lend money to farmers and individuals in rural regions. These institutions assist individuals to access financial support for agriculture, business, and better living standards.

Commercial Banks

Commercial banks are large banks that provide loans to farmers and rural individuals for agriculture and other purposes. They provide loans at varying interest rates to enable people to purchase seeds, tools, and machinery. The loans enhance agriculture and businesses in villages. Commercial banks contribute significantly to the development of rural communities.

Co-operative Banks

Co-operative banks are unique banks owned by individuals belonging to the same community or group, usually in rural communities. They provide loans to small businesses and farmers at reduced interest rates. The objective of co-operative banks is to assist the local population and develop the economy of their community. Co-operative banks play a very significant role in offering cheap credit to rural communities.

Regional Rural Banks (RRBs)

Regional Rural Banks (RRBs) are government-established banks that provide rural people with financial assistance. RRBs lend loans to farmers at low interest rates, thus facilitating easy development of their farms. RRBs concentrate on assisting rural people, particularly farmers, in developing their crops and businesses. RRBs assist in making the economy stronger in villages by supplying credit.

NABARD (National Bank for Agriculture and Rural Development)

NABARD is a government agency that assists farmers and rural communities through loans and financial guidance. It funds projects that enhance agricultural and rural development. NABARD also assists banks and other agencies in ensuring that farmers receive the appropriate type of credit. It contributes significantly to enhancing the lives of rural people by assisting them in accessing the resources they require.

Objectives of Rural Credit

The different categories of rural credit are important because they can help align financial assistance with a specific financing objective. It can be used for agriculture, small businesses, or rural housing. The conventional objectives of this credit are to lend to the farmer and villager by lending money to develop their farms or set up little enterprises. With this kind of facility, funding is required to extend living standards and improve development in rural areas.

To Facilitate Agricultural Operations

Farmers must get credit to buy seeds, farm machinery, and tools for farming as one of the significant objectives for rural credit purposes. Loans can be used by farmers to adopt better farming practices, improve the soil, or buy machinery to get better farming. This financing will raise the amount an individual can produce, resulting in more revenue for farmers and, usually, more food for society.

To Encourage Small Businesses

Rural Credit is also useful for people who reside in villages to set up or expand into small enterprises. Loans allow one to purchase products, build stands, or uplift those businesses. Employment would lead to enhanced job opportunities resulting from having these microenterprises and helping improve the local economy. This will be used to reduce poverty in rural areas since people have better chances of generating incomes.

For the Purposes of Increasing Rural People's Livelihood Standard

Rural credit seeks to enhance the standard of living in villages by offering financial assistance for different purposes. Individuals can take loans for education, medical care, and constructing improved homes. Credit enables families to satisfy their basic needs and enjoy healthier, happier lives. 

To Lessen Reliance on Informal Lenders

One of the key aims of rural credit is to reduce people's dependence on high-interest moneylenders. It allows individuals to access low-interest loans from banks and co-operative societies and enables them to get the support they need without falling into debt. It makes it easy for individuals to get money at an affordable price to improve their living. It keeps individuals away from falling into debt traps with moneylenders.

Need of Rural Credit

There is a need for rural credit because most farmers and villagers do not have sufficient funds to purchase the equipment and materials they require for farming or operating a small business. It enables them to acquire the financial assistance they need to enhance their activities and earn a decent living.

For Better Farming

Farmers require this credit to purchase seeds, fertilizers, equipment, and machinery for agriculture. Without loans, most farmers are unable to purchase these essential items. With credit, they are able to produce more crops and earn more income. This enables them to feed their families and the community.

To Start or Expand Small Businesses

Rural credit is also required for individuals who wish to start or grow small enterprises in villages. They might require funds to purchase commodities, machinery, or open a shop. By taking loans, they can develop their business and employ others. This enhances the local economy and offers greater prospects for rural dwellers.

To Overcome Seasonal Problems

Farmers are usually subjected to weather conditions, like droughts or floods, that destroy their crops. Rural credit enables them to take loans during those difficult periods in order to purchase seeds, implements, or even feed for animals. This assistance enables them to bounce back from poor seasons and remain productive. It allows farmers to maintain their farms even when times are not good.

To Decrease Moneylender Dependence

Most people in villages borrow money from local moneylenders at very high-interest rates. It decreases this dependence by availing loans at reasonable interest rates. This enables individuals to borrow money without being caught up in debt. It assists farmers and others in the village to better their lives without fear of high charges.

Problems of Rural Credit in India

Despite the undeniable importance of this credit, many challenges still hinder its accessibility and effectiveness in India’s remote areas. Most farmers and people in rural villages in India have problems getting credit or loans for their use. Such problems limit them from improving their farming and businesses, hence their growth.

Unavailability of Banks

Most villages in India lack sufficient banks or financial institutions. This implies that individuals living in rural areas must go for long distances to access loans, which may not be easy. Even if there are banks, the process of accessing loans becomes complex and takes a lot of time. Therefore, most individuals in villages cannot access credit.

High-Interest Rates

When rural individuals do borrow loans, sometimes the interest rate is extremely high. This will mean that they have to repay much more than they took. This can be difficult for them to do. High interest charges can make it hard for farmers to earn enough to pay the loan back. This issue makes it more challenging for them to enhance their business or farms.

Lack of Collateral

Banks require collateral, such as land or property, before approving loans. The majority of the farmers and villagers lack sufficient land or property for use as security. Due to this, obtaining loans is difficult for them. This problem restrains their chances of expanding businesses or enhancing agricultural farming.

Over-reliance on Informal Sources

As access to loans from banks is not easy, many rural folks take loans from neighborhood moneylenders. But even they charge still higher interest and exploit poor peasants. This will make it inconvenient for farmers to make a profit. Relying on them can keep the people trapped in debt and fail to enhance the lives of such people.

Rural Credit Agencies in India

Different types of rural credit are facilitated by various agencies in India, including banks and co-operatives, each focusing on different borrower needs. There are various organizations in India which assist farmers and villagers to obtain the finance they require for small business and agriculture. These agencies offer loans and financing to enhance the standard of living of rural people.

Commercial Banks

Commercial banks are big banks that provide rural residents with loans. They lend money for agriculture, buying seeds, and establishing small-scale business. The loan is provided with fluctuating interest rates depending on the amount given. These banks contribute to increasing the economy of villages by giving people a chance to prosper and develop.

Co-operative Banks

Co-operative banks are unique banks that are owned by the community they serve, primarily in villages. They provide loans to farmers and small businesses at a low rate of interest. They are a vital component of rural credit as they assist local individuals in accessing the money they require for agriculture and other purposes. Co-operative banks concentrate on assisting people in rural areas to develop and prosper.

Regional Rural Banks (RRBs)

Regional Rural Banks were established by the government to provide loans to farmers and rural people. RRBs are established in villages and are within easy reach of people. RRBs provide low-interest loans to farmers so that they can cultivate their fields and enhance their farms. RRBs benefit rural people by extending credit which assists people to enhance their enterprises and lives.

NABARD (National Bank for Agriculture and Rural Development)

NABARD is a special government organization that works to improve agriculture and rural development. It provides loans to banks and financial institutions, who in turn provide loans to farmers and rural people. NABARD also helps in planning and financing rural schemes. It plays an important role in improving the rural economy and helping farmers get credit.

Non Institutional Sources of Rural Credit

The importance of rural credit becomes evident when we consider its role in enabling agricultural investment and reducing dependence on informal lenders. Besides banks, there are also other means by which individuals in rural areas can obtain loans. These are referred to as non-institutional sources since they are not government agencies or official banks.

Moneylenders

Moneylenders are individuals who provide loans to farmers or villagers against a charge or interest. They usually have very high interest rates, which it is hard for the borrower to pay back. Even though moneylenders are readily available, their loans result in debt issues for the borrower. Individuals tend to seek loans from moneylenders when they are unable to access loans from banks or other formal institutions.

Relatives and Friends

Most rural individuals take loans from their family members or friends when they require money. The loans can be without any official procedure, and the interest is minimal. But taking loans from friends or relatives can sometimes result in personal issues if the amount is not returned on time. It can also create tension if there is conflict regarding repayment.

Landlords

Farm landlords occasionally advance loans to their farm workers or tenants. The loans are usually made with the condition that the borrower will work for the landlord or repay the money with interest. Although the loans are more accessible, they make the borrower indebted to the landlord. This imbalances the situation such that the borrower is not able to pay off the loan.

Traders and Shopkeepers

Farmers in rural areas usually obtain credit from shopkeepers or traders to purchase items or supplies. The loans enable farmers to purchase what they want and settle the bill later. Nevertheless, the shopkeepers tend to overcharge for items or include interest in the loan. This makes it difficult for farmers to repay what they borrowed.

Fig: rural credit

Institutional vs Non-Institutional Sources of Rural Credit

Rural credit in India is broadly classified into institutional and non-institutional sources, based on the nature of the lender and regulatory control. Understanding the difference between these two helps in analyzing accessibility, interest rates, and impact on rural development.

All India Rural Credit Survey Committee

One of the greatest surprises of the survey was the limited role played by institutional credit sources, including cooperatives and commercial banks, in rural areas. The report noted that the institutions were not penetrating sufficiently into the rural population and that their coverage was not sufficient to satisfy the extensive and diversified credit requirements of rural people.

Conclusion

Rural credit is a key component in the provision of financial services for rural communities and the achievement of sustainable economic growth. Through the extension of credit to rural communities, governments, financial institutions, and organizations are able to empower farmers and rural businesspersons. This, subsequently, has various positive effects on the productivity of agriculture, level of income, and general health of rural economies.

It is a vital topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.