Institutional Setup for Rural Credit – Essay


Prior to our country attaining independence in 1947, rural credit was largely provided by informal agencies such as moneylenders and indigenous bankers; to a limited extent co­operative and commercial banks also provided rural credit.

Several measures were taken after independence to enhance the flow of institutional credit (i.e., finance from banks/co­operative societies, etc.) to the rural areas.

The more important of these were the setting up of the State Bank of India in 1955 with a specific direction to open branches in rural areas.


The nationalization of major commercial banks in 1969 primarily with a view to ensuring that the large resources commanded by them were used for socio-economic objectives and that they increasingly lend for priority sectors including agriculture, the establishment of Agricultural Refinance and Development Corporation in 1963.

The setting up of Regional Rural Banks from 1975 onwards to take care of the credit needs of the weaker sections in rural areas exclusively and formation of the National Bank for Agriculture and Rural De­velopment (NABARD) in 1982.

As a result of these and various other steps taken, the rural and semi-urban network of commercial banks (including Regional Rural Banks) under­went expansion on an unprecedented scale from 5,154 branches in June 1969 to 46,615 in March 1992 and further to about 46,900 in the beginning of 1999.

Even in developed coun­tries like Japan, France and Holland have created Agricultural Co-operative Banks espe­cially to finance farmers of their countries.


Rural credit in India is thus provided by a multi-agency system at present. This con­sists of 28 public sector banks, i.e., banks in which majority ownership is with Government of India, 196 regional rural banks, and 27 Indian commercial banks in the private sector.

Besides, a vast network of village level co-operative credit outlets also forms an integral part of the rural financing structure. The co-operative credit structure in India has two main wings-the long-term credit structure and the short-term credit structure.

Long-term credit is provided generally by a two-tier structure. The Land Development Banks, now known as Agriculture and Rural Development Banks which provide long-term loans for Development of Land and Agricultural Projects.

These institutions are generally, precluded from accepting deposits from public. The main source of funds of the Land Development Banks is debentures floated at relatively low rates of interest which are subscribed to by the NABARD.


The short-term co-operative credit structure has three-tiers. The Primary Co­operative Credit Societies operating at the grass root level are, by and large, conduits for flow of funds from the higher level financing agency to the borrower and vice versa, with practically little resources of their own or by means of public deposits.

The institutions at the two higher tiers mobilize resources, inter-alia, by way of deposits from general public. Even so the bulk of the short-term credit requirements of the co-operative structure are derived from funds provided at low rates by the Reserve Bank of India through NABARD under a system known as General Lines of Credit.

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