comparative cost of agricultural credit: borrowing...
TRANSCRIPT
Chapter – VI
COMPARATIVE COST OF AGRICULTURAL CREDIT: BORROWING ASPECTS
The cost of credit is interalia, a factor which may affect the extent of
utilization of credit by the farmers. The salient feature of a credit transaction is
that current claims over resources are exchanged for future ones, and the
delivery of future claims may not be fully assured (Bell, 1988). The transaction
costs include costs of information, negotiation, monitoring, coordination and
enforcement of contracts at various levels. The transaction cost theory has been
extended in imperfect information theory, which is a key to the institutions giving
various contractual arrangements under different circumstances. These
interlinked arrangements may arise when there are significant transaction costs.
North (1990) considers transaction costs as a part of costs of production.
What about transacting that is so costly? The information costs in ascertaining
the level of individual attributes of each unit exchanged defines the costliness of
transacting. Farmers may find their loans costly, moderately priced or relatively
cheap depending upon the magnitude of cost of credit. Similarly, credit
institutions have to bear delivery cost, administrative cost, management cost etc.
Hence, it becomes essential to examine the cost of credit involved in an
agricultural loan both from demand as well as supply side.
Bottomley (1964) has analyzed the monopoly profit as a component of
‘usurious’ rate of interest in underdeveloped areas. The component will
decrease with the availability of alternative options, increased awareness of
borrowers and also increase in value of collaterals. Thus, administration costs
per unit of loan will also fall alongwith the premium for risk as the acceptance of
collateral grows and also along with transaction cost to the farmer. So, increased
productivity will reduce the rate of interest.
Long (1968) way back examined the structure of Asian farm credit
markets and found that commercial lenders are charging higher rates than other
creditors. High rates of interest in Asia are attributed to the scarcity of capital,
228
costly administration of loans, uncertainties of agriculture leading to default,
seasonal demand for credit and social or religious prohibitions against lending.
Bardhan and Rudra (1978) studied the interlinkage of land, labour and
credit relations in East India to see the effect on terms and conditions of tenancy
contracts through credit contracts. But tenancy was found to be on decline also.
The incidence of usury was rare which hints at adaptation of share-cropping
tenancy to increase production and profitability. Harriss (1980) found that in
South India credit and money lending do not appear to be on the basis of
exploitative relationship. The average annual interest rate for loans (13-14%)
was slightly above the current legal ceiling (12%) due to combination of inelastic
and rising demand, the costs of borrowing and the costs and risks of credit
administration. The interest rates varied between 8.7 and 9.7 per cent per year
in case of institutional finance. But effective cost was about the level of private
sources because of the factors like lengthy procedures, untimely arrival of credit,
inflexibility of repayment plan, necessity of collateral proof as well as the cost of
bribes. Competition among trades for farm commodities leads to lending at low
interest rates, which helps small and marginal farmers. Braverman and Stiglitz
(1982) put forth that landlord can increase his expected income by
simultaneously controlling the credit market. Tenancy contracts not only
increase the returns but affect behaviour of the worker. A bonded labour clause
to the loan agreement is to increase the tenant’s efforts and to make him more
conservative, while the ‘bankruptcy’ clauses makes him a ‘risk lever’ from ‘risk
averter’. So, return to the landlord will depend on magnitude of borrowing. He,
who lends to his own tenants can get a higher return due to externality, than by
lending elsewhere. This is a motivation for interlinking the two markets. Basu
(1983) reported that the beginning of interlinkage or isolation between markets is
the presence of potential risk in the credit market. A labourer who is being
charged exorbitant interest by his landlord cannot turn to others for loan. So,
credit market has innate tendency to seek another market to get interlocked to
cover such risks and get insurance in the face of uncertainty.
Srivastava and Kumar (1985) reported that rate of interest charged by
relatives was almost double as compared to that of institutional agencies and that
229
charged by money lenders was twice as high as that charged by relatives. The
‘other costs’ were found to be absent in non-institutional sources. Higher the per
unit value of other costs, higher will be the per unit total cost of credit. However,
the borrower was still found to be better, when he availed credit from institutional
agencies. The view was supported by Islam (1985). The variation in the rate of
interest was reported to the tune of minimum 4 per cent (Primary Cooperative
Bank) to maximum 100 per cent (professional money lenders). The cost of
capital in all tenurial groups measured in terms of weighted average rate of
interest on loans from all sources was observed to be 56 per cent.
George et al (1985) have studied the farmer’s borrowing costs in Andhra
Pradesh and found that average borrowing costs on crop and term loans are
higher for marginal farmers than other categories. Also average borrowing costs
from institutional sources was found to be higher on term loans than that on crop
loans, but costs are higher on crop loans compared to term loans from non-
institutional sources.
Gangopadhyay and Sengupta (1986) have brought out that prices
transacted through interlinked markets differ from prices otherwise. It was found
that when both production and consumption loans are interlinked with the land
market, rate of interest on consumption loans does not deviate from the market
rate of interest, but the interest on production loans is less than (equal to) the
market rate. Also, if production and consumption loans are indistinguishable, the
rate of interest on loans is less than the market rate.
Rao and Dandekar (1989) studied the non-monetary transaction costs of
formal credit institutions and found that these are substantial and an inverse
relation with the size of the loan. No significant difference was found between
total transaction cost of the formal sector and the interest cost of the informal
sector. The borrower prefers moneylender because of simple methods and lack
of formalities.
Majumdar (1989) had laid stress on adequacy and timeliness of
availability of credit rather than prevailing administered interest rate structure.
Leakages are found in credit flow due to concessional rates. Besides prescribed
230
lending rates, hidden costs are found to be involved like cost of transportation,
documentation etc. increasing the cost of borrowing.
Rao et al (1989) found institutional finance is cheaper than non-
institutional finance. Also, marginal and medium farmers were found to be
incurring 29 and 34 per cent of subsidy as cost of borrowing credit. So amount of
subsidy left to the beneficiaries was less.
Shiyani and Bhatt (1990) found an inverse relationship between the
percentage share of cost of credit and face value of the loan. The average cost
incurred towards encumbrance certificate alone was 60 per cent of monetary
cost. About 80 per cent of the average other cost was shared by the insurance
charges only. The average cost of credit was worked out to be 3.82 per cent to
face value of the loan.
Singh and Mruthyunjaya (1990) found the cost of credit to be 14.54 per
cent in cooperatives and 21.88 per cent in RRBs. The ‘other charges’ in
obtaining the loan were non-existent in the non-institutional sources.
Sarap (1990) brought out the factors leading to higher transaction costs in
case of institution loans. There are bureaucratic and procedural formalities
required, asset-based lending policies and corruption prevailing in these
institutions, illiteracy, informal and oral nature of tenancy contracts. The higher
transaction costs also led to increase in effective rate of interest.
Rajasekhar and Vyasulu (1990) have brought about the structural
problems of banking system like indifferent attitude of bank officials, use of unfair
means, procedural difficulties, delays in sanction of loans and untimely sanction
of loans, thus leading to higher share of non-institutional sources of finance. So,
need is not of low interest rate lending, but adequate and timely lending.
Floro and Yotopoulos (1991) highlighted that high transaction costs in
informal rural credit markets include the costs of information, of monitoring, of
negotiation, and of enforcement. It was found that interest rates on loans that
are not linked to transactions in other markets are higher than interest rates on
interlinked loans.
Swaminathan (1991) found a clear demarcation between the formal and
informal sectors by the nature of collaterals accepted. Moveable assets other
231
than gold and promissory notes are not accepted as collateral in the formal
sector. It was also found that a high rate of interest was associated with a lower
level of marketability of the collateral offered. The value of land owned by a
borrower was found to be inversely related to the rate of interest and thus
borrower’s wealth was playing a direct role in the determination of interest rate.
Chadha and Bhaumik (1992) found that rate of interest charged by non-
institutional agencies was found to be six to seven times higher than that of
institutional sources. Recorded tenants are getting higher institutional credit and
unrecorded tenants depend on non-institutional sources. Eighty-two per cent of
the households are found to be getting loan against collateral.
Banik (1993) studied the operation of credit markets in Bangladesh and
found a variety of credit linked contracts. It was found that large borrowers are
not as effected by the transaction costs as the small borrowers. Thus, small
borrowers pay higher effective interest rate as compared to large farm holders in
the formal credit market.
Chaudhuri (2000) has undertaken a theoretical analysis of interest rate
determination in informal credit market and suggested to disburse the formal
credit to the farmers through informal sector lenders who will be financial
intermediaries. This will decrease the informal interest rate, increase the
agricultural productivity will ensure better borrowing terms to the farmer besides
increasing the degree of competitiveness among informal money lenders.
Petrick and Latruffe (2003) have studied the borrowing costs in Poland’s
agricultural credit market and found a discrimination against small farms by
formal lender. Use of screening techniques and stress on quality of borrowers
has led to reduction of borrowing costs. Cooperatives and government controlled
banks offer between 1.1 and 1.3 percentage point higher effective interest rates.
But subsidization of nominal interest rate was counteracted by increased
transaction cost. However, there is still a net reduction of the effective interest
rate by 1.4 per cent on average, as compared to non-subsidized loans.
In a Punjab based study, Gill (2004) reported that exorbitant rates of
interest are charged by the commission agents, who provide credit on the
collateral sale of crop. The crop payment was also routed through him, who
232
deduct their loan amount before finally paying the cultivators. The formal credit
supply was found to be inadequate along with procedural delays.
Gill and Singh (2006) also brought about the problems of institutional
credit agencies in terms of red tapism and lengthy paper work involved. The
additional costs decrease the attractiveness of institutional loans.
Sidhu and Gill (2006) found that in India the transaction cost in case of
commercial banks ranged between 3 to 5 per cent per annum while in case of
cooperatives it was lower than 3 per cent. The transaction cost was found to be
highest in case of RRBs due to small size of loans.
Kshirsagar and Shah (2007) evaluated the total transaction cost across
various lending institutions and found it at 6 per cent of loan borrowed from
commercial banks and RRBs and at 2 per cent for the cooperatives which was
higher than informal credit sources for landless labour category. So, it was
suggested that condition of ownership of land to avail the credit should be
replaced with group responsibility in lending.
Kumar et al (2007) reported that average rate of interest charged by
money lenders turned out to be 42 per cent in 2002-03, which was three times
higher than the institutional agencies. It was pointed out that borrowers needed
to be trained in procedural formalities of financial institutions to improve their
access to formal credit.
Singh et al (2007) analyzed the transaction costs of agricultural credit in
Punjab. A farmer on an average was found to be incurring Rs. 4016 for obtaining
commercial bank credit, which translates to 5 per cent of the total loan. In case
of cooperatives, the transaction cost worked out to be 1.2 per cent of the loan.
Cost of obtaining loans by the farmersThe rate of interest is taken as the measure of cost of obtaining credit, for
all practical purposes. However, the real cost of credit from financial sources
goes up due to the fact that debtors have to spend considerable time and money
by way of incidental charges in fulfilling the formalities required. This is true more
in case of institutional sources of finance as these being formal lending sources a
proper procedure including rules and regulations are followed in providing the
credit for different purposes. The transaction costs accruing to the farmers while
233
obtaining loans from different sources of finance have been discussed under
various item heads in Table 6.1. The analysis has been carried out across the
zones under different categories of farm-size holdings on per farm basis.
The average transaction cost of zone-I is Rs. 793 per farm. In this
amount, Rs. 56 per farm are spent on loan application formalities. The food cost
involved in the trips to lending source is Rs. 205 per farm. The average amount
paid as bribe during the loan case is Rs. 327 per farm. Rs. 44 per farm on an
average are incurred on procurement of documents. The expenses of witness
involved in the loan case are Rs. 39 per farm. The legal charges for the sampled
farmers in zone-I are worked out to be Rs. 61 per farm. The amount spent on
follow up of the loan case and loan collection is Rs. 20 per farm. The
miscellaneous amount spent on various items is Rs. 41 per farm. Thus total
transaction cost of obtaining loans from various sources of finance is found to be
directly related with size of the operational holding in zone-I.
In zone-II the average transaction cost is Rs. 893 per farm. The
application formalities required Rs. 65 per farm, while on food items Rs. 244 per
farm are spent during various visits to the lending source. The amount paid as
bribe to get the work done or to hasten the process is calculated as Rs. 346 per
farm. Procurement of required documents is an essential part of loan formalities.
On an average, Rs, 46 per farm are spent for this purpose. To present a witness
/ guarantor while obtaining the loan is a part of the procedure to get credit. This
formality cost the sampled farmers Rs. 44 per farm. Rs. 67 per farm are spent
on the legal aspects pertaining to the loan case. The average amount spent on
follow up of the case and collection of the loan amount is Rs. 37 per farm. The
expenditure incurred on miscellaneous item heads is worked out to be Rs. 46 per
farm. Thus, summing up the transaction cost at Rs. 893 per farm in this zone.
The average transaction cost in zone-III, is calculated at Rs. 866 per farm.
Out of this, Rs. 66 per farm are spent on loan application formalities. The food
cost is worked out to be Rs. 217 per farm. The average amount paid as bribe in
zone-III is Rs. 351 per farm. The papers needed to fulfil the requirement of loan
application are obtained at a cost of Rs. 48 per farm. The amount spent as
witness cost is Rs. 47 per farm. The legal charges of the loan case required an
234
expenditure of Rs. 66 per farm. Rs. 25 per farm are spent on follow up of the
loan case as well as collection of credit. On an average Rs. 47 per farm is the
miscellaneous expenditure, thus totaling upto Rs. 866 per farm.
Overall analysis of the state revealed that on marginal farms the
transaction cost is Rs. 454 per farm. Rs. 42 per farm are spent on application
formalities. The food expenses are calculated at Rs. 129 per farm. A sum of Rs.
157 per farm is paid as bribe to various officials involved. Procurement of
documents had cost Rs. 20 per farm here. The witness charges are put up at
Rs. 26 per farm. The sampled farmers had incurred an expenditure of Rs. 37 per
farm on legal aspects of the loan case. An amount of Rs. 17 per farm is spent on
follow up of the case and collection of the loan amount. The expenditure on
miscellaneous items is Rs. 27 per farm.
In small farm category of the state, Rs. 52 per farm is the expenditure
worked out for applying of loan. The food cost is calculated at Rs. 193 per farm
in the process of visiting the credit source. An amount of Rs. 307 per farm is
paid as bribe to hasten the loan process. On procurement of documents Rs. 37
per farm are spent by the sampled farmers. Rs. 35 per farm is the amount spent
on witness to fulfil the procedure. The legal charges of the loan case are worked
out to be Rs. 61 per farm. Follow up of the loan case and collection of credit
amount had cost the farmers Rs. 25 per farm. The miscellaneous expenses of
small farmers are put up at Rs. 38 per farm. In this way, total transaction cost for
this category is found to be Rs. 747 per farm.
Rs. 59 per farm are spent on application formalities in semi-medium
category of state. An expenditure of Rs. 234 per farm is undertaken on food
items while visiting the lending source. The various officials involved in the loan
case are bribed with an amount of Rs. 330 per farm to quicken the process. The
documents required as per the procedure are procured at Rs. 43 per farm. The
amount spent on witness again as a part of the loan process is Rs. 41 per farm.
Rs. 68 per farm are paid to fulfil the legal requirements of the process. On
following up of the loan case and collection of the loan amount, the farmers had
paid Rs. 28 per farm. The expenses incurred on miscellaneous item heads are
235
Rs. 42 per farm. Thus total transaction cost incurred by this category is Rs. 845
per farm.
In case of medium farm category, Rs. 74 per farm are spent on application
formalities. The food cost is put up at Rs. 262 per farm in the process of loan. A
sum of Rs. 389 per farm is paid in terms of bribe, so that delay can be avoided.
The documents needed for the loan application are procured by paying a sum of
Rs. 56 per farm. Rs. 51 per farm is the expenditure undertaken to fulfil the
requirement of presenting witness / guarantor to get the credit. The sampled
farmers are found paying Rs. 70 per farm for legal aspects of the loan case. A
sum of Rs. 34 per farm is spent on follow up the loan case and availing the
credit. This category had spent Rs. 51 per farm on the miscellaneous item
heads. This summed up the total transaction cost at Rs. 986 per farm on
medium farms.
This figure is higher at Rs. 1156 per farm in case of large farm category.
Out of this amount, Rs. 82 per farm are spent to fulfil the loan application
formalities. While visiting the credit agency, the food expenses are incurred to
the tune of Rs. 280 per farm. The large farmers had bribed the officials by paying
them Rs. 482 per farm at different stages of loan case to get the hassle-free
loans. Procurement of documents had required an expenditure of Rs 67 per
farm. The witness cost for large farmers is put at Rs. 60 per farm. An amount of
Rs. 81 per farm is spent on legal matters related to the loan case. The farmers
here, had spent Rs. 41 per farm on follow up to the loan case and collection of
the loan amount from the agency. The miscellaneous expenditure is Rs. 62 per
farm in this category of farms. Thus, the total of Rs. 1156 per farm.
Overall, for the state (Fig.13), average transaction cost is calculated at Rs.
861 per farm. Out of this amount, maximum is paid in the form of bribe, at various
stages of the loan case i.e. right from the village patwari, to the top officials of
institutional agencies. The farmers indulge in this practice to avoid the undue
delays and quicken the process. The second highest expenditure item head is
food expenses, while visiting the agencies. Most of the times, the farmers take
along one or two accompanying persons or some body having relations in the
agency. So, in every trip, they have to bear the food expenses of them as well.
236
This is followed by legal charges involving lawyer’s fee, stamp duties, registration
fee etc. and closely by application formalities. This includes, numbers of trips to
the agency firstly for procuring the application form, making several trips to other
related offices, getting the form filled, submission of form, removal of objection, if
any etc. Next is the procurement of documents i.e. land records, no-due
certificate from village cooperative society, from other banks of the area, non-
encumbrance certificate, sometimes the proof of particular trainings etc. The
miscellaneous times included quotation charges, photographs charges etc. and
are next in the item heads of importance. Then is the witness cost i.e. amount
spent on arranging for the witness / guarantor and making him physically present
before the agency. Though most of the farmers did not find it difficult, but a cost
is attached to it. Most of the times, the farmers getting loan is required to
entertain the witness, which added to the cost further. Then, is the cost of follow
up and collection of the loan amount. This cost is low for lower category of farms
as these are getting loans either from within the village or nearby places, but
higher categories are tapping even the distantly located commercial and
cooperative banks. Most of the farmers sought the credit from that agency,
where they know some one, have relations or some account or they go through
the agent. Thus less cost is incurred on follow up of the loan. Also only some
medium term loans like for irrigation equipments are disbursed in two to
maximum three installments. Other-wise farmers do not have to make too many
trips for the collection of loan, once sanctioned.
The analysis has brought out the fact that transaction cost of obtaining
loans is directly related to the size of operational holding i.e. with the increase in
the size of category it is found increasing. As the farmers in lower category, tap
only nearby sources of finance, but well-off farmers can afford to venture at
distant places.
The inter-zonal comparison revealed that transaction cost involved in
obtaining loans is maximum in zone-II, followed by zone-III and zone-I,
respectively. In all the three zones amount paid as bribe is maximum incurred as
cost, highlighting the dismal social scenario marred by corruption, but it is
maximum in zone-III, followed by zone-II and zone-I. Also expenses on
237
procurement of documents is maximum in zone-III and minimum in zone-I.
However, the expenses incurred on food during visits to the lending agency are
maximum in zone-II and minimum in zone-I. But again witness cost is highest in
zone-III, followed by zone-II and zone-I. The legal cost of the loan proceedings is
more or less equal in zone-II and zone-III, but lesser in zone-I. Similarly, cost
incurred on loan application formalities are almost equal in zone-II and zone-III
but lesser in zone-I. On the other hand, cost incurred on follow up of the loan
case and collection of the loan amount is much higher in zone-II than in zone-III
and zone-I. On the whole, the transaction cost of getting credit from financial
agencies is more than state average in zone-II and zone-III, but lesser in zone-I.
The inter-zonal and overall scenario of the state according to size of
operational holdings has been depicted in Table 6.2. The table has highlighted
the total transaction cost in obtaining the loans.
The analysis is carried on further and instead of depicting the transaction
cost in absolute figures, it is related with the amount of loan taken by the
sampled farmers. Table 6.3 presented the cost (other than interest) in obtaining
a loan of Rs. 1000 from institutional sources of credit. It is found that in marginal
farm category of zone-I, if a farmer has taken a loan of Rs. 1000, than
transaction cost other than interest, he would have to bear will be Rs. 8.99 , Rs.
6.93 for small farm category, Rs. 5.08 for semi-medium category of farms, Rs.
3.97 for medium farms and Rs. 3.60 for large farm category. The average cost of
obtaining a loan of Rs. 1000 in zone-I is Rs. 5.21. In zone-II, these figures are
Rs. 7.84, Rs. 9.08, Rs. 6.54, Rs. 4.54 and Rs. 2.43 per thousand rupees of loan,
respectively for the marginal, small, semi-medium, medium and large farm
categories. The average transaction cost for zone-II is Rs. 6.32 per thousand
rupees of loan. In zone-III, the costs are Rs. 16.23 per thousand rupees of loan
for marginal category of farms, Rs. 8.10 per thousand rupees of loan for small
farms, Rs. 5.76 per thousand rupees of loan for semi-medium category, Rs. 4.00
per thousand rupees of loan in medium farm category and Rs. 3.13 per thousand
rupees of loan in large farm category. The average cost in zone-III is calculated
at Rs. 6.20 per thousand rupees of loan. The analysis of the state showed the
cost for per thousand rupees of loan is Rs. 8.54 for marginal farm category, Rs.
238
8.43 for small farm category, Rs. 5.95 for semi-medium category of farms, Rs.
4.22 for medium farm category and Rs. 2.81 for large category of farms. The
overall state average cost is worked out to be Rs. 5.83 per thousand rupees of
the loan. The transaction cost per thousand rupees of loan to the farmer is found
to decreasing with increase in the size of the category. This is because loan
amount is higher in case of higher categories of farm holdings as compared to
lower categories. So, borrowing cost tended to spread according to size of the
loan.
The rate of interest charged by the lending source is a major part of the
borrowing cost borne by the farmers especially in case of non-institutional
sources of finance. So, in Table 6.4 total cost including rate of interest charged
is studied in obtaining a loan of Rs. 100 from institutional and non-institutional
sources of finance. The cost figures for non-institutional sources have been
taken as minimum equal to the rate of interest charged from the farmers.
The analysis of zone-I shows that the total cost comes to be 10.30 per
cent in case of marginal farm category while obtaining loan from institutional
sources of finance. It is 10.09 per cent in small farm category 9.91 per cent in
semi-medium category of farms, 9.80 per cent in medium farm category, 9.76 per
cent in large farm category and on an average, 9.92 per cent in zone-I.
However, if the farmer borrows the same amount from non-institutional sources
of finance, he has to bear a cost of 17.62, 14.56, 13.67, 12.28 and 12.16 per cent
of loan for marginal, small, semi-medium, medium and large categories of farms,
respectively. The average transaction cost from informal sources is calculated at
13.57 per cent of loan. While the scenario of zone-II reveals that transaction cost
of loan from institutional sources is 10.18, 10.31, 10.05, 9.85 and 9.64 per cent,
respectively for marginal, small, semi-medium, medium and large categories of
farms. On the other hand, if they borrow the same amount from non-institutional
sources, they have to shell out 16.53 per cent in marginal farm category, 18.62
per cent in small farm category, 15.84 per cent in semi-medium category of
farms, 13.51 per cent in medium farm category and 11.87 per cent in large farm
category, respectively. The average cost of borrowing from non-institutional
sources is 15.54 per cent of loan. In case of zone-III, for a loan of Rs. 100 from
239
institutional sources of finance, the total cost accrued to the farmers is 11.02 per
cent in marginal farm category, 10.20 per cent in small farm category, 9.98 per
cent in semi-medium category of farms, 9.80 per cent in medium farm category
and 9.71 per cent in large farm category. When the farmers borrows the same
amount from non-institutional sources of finance, the cost borne by him is 26.03,
18.55, 14.98, 13.21 and 12.68 per cent in marginal, small, semi-medium, medium
and large categories of farms, respectively. The average cost of borrowing from
informal sources is worked out to be 15.75 per cent of loan. For the state as a
whole, the cost of obtaining Rs. 100 from institutional sources of finance is 10.25
per cent in marginal farm category, 10.24 per cent in small farm category, 10.00
per cent in case of semi-medium farms, 9.82 per cent in medium farm category
and 9.68 per cent in the large farm category. On an average, the institutional
sources charge 9.98 per cent as total cost of loan. While, for a loan of same
amount from non-institutional sources, the farmers have to bear a cost of 18.76,
17.84, 15.03, 13.08 and 12.16 per cent of loan, respectively in marginal, small,
semi-medium, medium and large category of farms. The average cost of
borrowing from non-institutional sources is calculated at 15.10 per cent of loan
amount for the state as a whole on the basis of information provided by the
sampled farmers (Fig.14). In statistical terms, the difference between total cost
of borrowing from institutional sources of finance and that from the non-
institutional sources of finance is found to be significant as shown by the t-values
except for the large farm category (3.59 for marginal category, 3.47 for small
farm category, 2.11 for semi-medium farm category, 2.07 for medium farms, 1.59
for large farms and 3.07 on an average for the state).This brings out the fact that
despite the higher transaction cost incurred by the farmer while borrowing from
institutional sources, the total cost borne by him is significantly less in case of
institutional sources in all the categories except for the large farm category,
where it is found to be non-significant. The difference is highly significant in case
of marginal and small farm categories. Thus, the reason for strong presence of
non-institutional lending sources despite the various initiatives by the government
can be traced to other factors contributing towards social cost of borrowing from
240
institutional sources, psychological perceptions or some personal incapabilities
like illiteracy, easy attitude etc. on the part of borrower farmer.
However, the incidental transaction cost paid by the borrower is one time
cost, when he takes a loan. So, cost of borrowing per 100 rupees of loan from
institutional sources has been compared with that of non-institutional sources in
the state over synthetic / hypothetical situations assuming different tenures of
loan in Table 6.5. Thus, it is clear from the Table that the difference is non-
significant if the amount is borrowed for six months. But as the tenure of loan
increases the significance of t-value i.e. level of significance also increases,
showing the widening of the gap. This means non-institutional sources become
more costly in the long run due to exorbitant rates of interest. In the above
situations, the borrowing cost of non-institutional sources has been assumed to
be minimum equal to rate of interest. Thus, it is profitable for the farmer to
borrow long term loans from institutional sources despite the higher transaction
cost of borrowing.
Table 6.6 compares the borrowing cost incurred, while taking a loan
amount of Rs.100 from cooperatives and commercial banks by assuming the
synthetic situations for different tenures of loan. The cooperative society being
more accessible and lesser formalities accounts for Rs.0.49 per 100 rupees of
loan as the initial transaction cost incurred once on a loan, while for the same
amount of loan, a farmer has to spend Rs.0.67. So, for a loan of 6 months, if
farmer borrows from cooperative society, the total cost including interest is
Rs.4.16 per 100 rupees of loan, while for commercial banks, total cost is found to
be Rs. 6.40. As the tenure of loan goes on increasing, the gap between cost
incurred in case of two institutions also goes on increasing i.e. t-values and level
of significance goes on increasing. So, it is found that transaction cost is
significantly less in case of cooperatives as compared to commercial banks. As
these are located in close vicinity, so number of trips, expenditure on food items,
expenses incurred on taking the witness to agency and later on entertaining him,
are less in case of cooperatives, so his initial transaction cost declines to a large
extent in case of cooperatives as compared to commercial banks.
241
Thus, from the above analysis, it is clear that for the inter-zonal as well as
category-wise, the farmers had to bear higher cost per thousand rupees of loan,
when borrowed from non-institutional sources than from institutional sources of
finance. However, total cost per thousand rupees of loan is found to be declining
with the increase in category size of the farm holdings. This seems to make
sense because of lower proportion of cost of credit against the quantum of loan
coupled with increased bargaining power, timely repayments etc. Hence, there
appears to be an inverse relationship between the cost of credit and that against
per 1000 rupees of amount borrowed. But on average the total cost of borrowing
from institutional sources of finance is maximum in zone-II and minimum in zone-
I. On the other hand, the cost of borrowing from non-institutional sources of
finance is maximum in zone-III and minimum in zone-I. The scenario can be
explained in the light of extent of borrowing especially from the non-institutional
sources of finance. It is sort of compulsive nature in zone-III and zone-II due to
high production costs. Whereas in zone-I, the intensity of borrowing requirement
was less visible.
Time Factor in Loan Acquisition
Time factor is an important component of loan procedure and contributes
towards transaction cost. This also has a bearing on agricultural operations,
adversely affecting the crop yields. Timely availability of loan along with
adequacy of amount is one of the crucial factor that plays a dominant role in
higher production as well as productivity, as the saying goes, “credit delayed is
worse than credit denied, implies on utilization of loans and repayment
performance of the borrowers.
The procedure of loan advancement commonly in vague in case of
institutional agencies is complicated and time consuming. Many formalities like
filling of loan applications along with photographs, non-encumbrance certificate
from revenue officials, procurement of land records, no dues certificates from
other lending agencies in the area and completion of formalities regarding
registration of land, result in delay and prove to be expensive for the cultivators
and finally adversely affect the extent of borrowings. Most of the times, the
242
uneducated farmers are not aware of the prevailing complicated lending
procedure of these agencies and fail to avail the loan facilities from institutional
sources of finance. The farmers have to make many trips to complete the
formalities in case of borrowing from formal agencies which gets translated into
extra monetary costs other than interest charged by these agencies, which is
approximately negligible in case of non-institutional sources of finance.
For the state as a whole a farmer had to undertake 5.49 trips to the
institutional source and on an average 18.15 days are taken to complete the loan
procedure while borrowing from institutional sources. On the other hand, in case
of non-institutional sources of finance, the number of trips are 0.87 in case of
zone-I, 1.19 in zone-II and 1.41 in case of zone-III. The time taken to get the
loan from these informal sources was 2.55 days in zone-I, 3.64 days in zone-II
and 4.52 days in zone-III. For the state as a whole, the farmer had to undertake
1.17 trips and average time to acquire loan was 3.59 days from non-institutional
sources of finance (Table 6.7). This shows the ease, timeliness, convenience
attached to informal sources of finance and explains the reason for their non-
elimination from agricultural credit scenario.
Social Cost of Borrowing from Institutional Agencies
The social harassment faced by the borrowers in obtaining loan from the
different institutional agencies can be gauged from their responses in terms of
their perceptions regarding inconvenience, sacrifice, humiliation and bribe. Out
of the total sample of marginal farmers, 94.74 per cent found it inconvenient to
borrow from institutional sources, 92.11 per cent felt the sacrifice in terms of time
and money, 86.84 per cent felt humiliation and 81.58 per cent responded with
bribe payment must to get the loan. Out of total sample of small farmers, 92.19
per cent responded inconvenience, 90.63 per cent sacrifice, 84.38 per cent
humiliation and 79.69 per cent bribe payment as a social cost of borrowing from
formal sources.
Out of the total sample of farmers, 88.75 per cent responded
inconvenience, 87.50 per cent sacrifice in terms of time and money, 80.31 per
cent of humiliation and 75.63 per cent bribe payment accounted for the social
243
cost of borrowing from the institutional sources (Table 6.8). However, foregoing
analysis indicates that social cost was found to be decreasing with increase in
the size of operational holding because of the fact that low category farmers are
more uneducated, less resourceful, spent more money in obtaining credit from
the institutional sources. While higher category farmers have more resources at
their disposal, good social links have to bear lesser social cost. However, social
cost acts as stumbling block in the pace of rural development.
Reasons for Preference of the SourceThe reasons for the preference of the particular source from which the
farmer has procured the loan, is discussed for different categories of farmers
across the zones. This section pertains especially to the institutional sources
that why farmer has preferred a particular cooperative society, commercial bank,
regional rural bank or primary agricultural development bank.
The overall analysis of the sampled farmers for the state as a whole
revealed that easy accessibility is the dominant factor as cited by 73.44 per cent
of total farmers (Table 6.9). This is a dominant cause in zone-II and zone-III as
well as all the categories at state level. The dominant factor in zone-I is the
existence of old accounts with the lending source. It is also the second most
important factor for preference of lending source. A credit limit with the agency is
the third important cause of preference given by 57.8 per cent farmers in all.
55.31 per cent farmers selected the source having lesser formalities in providing
the loan. Timeliness of operations is also a significant factor influencing decision
of 53.75 per cent of farmers. Lower rate of interest is a cause cited by 39.69 per
cent of farmers. Personal relations with staff influenced the selection of 26.25
per cent of borrowers. 10.94 per cent farmers borrowed under some sponsored
scheme in all, but none from zone-I. Majority of these belong to zone-III. 10.31
per cent of farmers preferred the kind component of credit and selected the
source which is a supplier of inputs. 7.50 per cent of farmers selected the source
that can maintain the secrecy of borrowed amount. Only two farmers are lured
by the subsidy component of institutional credit while borrowing. Corruption free
working of the agency is the cause of preference of 0.94 per cent of borrowers,
244
while two farmers preferred a credit source due to involvement of same dealer in
borrowing.
So, main factors of preferring a source are found to be as accessibility of
the source which led to time and cost saving of the farmer and having an old
account or credit limit with the lending agency causes him convenience in
borrowing. Lesser rates of interest and personal relations are the factors in
favour of institutional sources of finance. On the other hand, timeliness and less
formalities are in favour of either primary agricultural cooperative societies or the
non-institutional sources of finance. Secrecy of borrowing is totally in favour of
non-institutional sources.
Procedure for Applying Loan and Time Taken in Processing of Loan
It is common observation that procedure for applying loan and time taken
in sanction of loan plays a role in deciding about the source of credit. The
general perception is that formal atmosphere, lengthy procedure and time taken
by the institutional sources of finance while processing of loan case are the
inhibiting factors due to which the farmer is hesitant to go to these institutions for
loans. So, sampled farmers are enquired about the initial procedure and also
time taken in sanctioning the loan by the credit source.
The overall complied scenario of the state as shown in Table 6.10a
revealed that there are seven respondents in marginal category of farms. All of
these had put up a formal application provided by the loaning agency to get the
credit. The medium of application form is reported as English by all the farmers.
100 per cent of the respondents found the size of the application form as large.
Also the proforma of loan application is filled by others for all the respondents.
The average payment for this purpose is worked out at Rs. 2.86 per form for the
whole category in the state. The time taken for processing of loan case is
worked out to be 30.57 days. In small category of farms, fifteen respondents are
found in the state. The procedure of applying for the loan is found to be same
here i.e. through formal application proforma provided by the lending source.
Four respondents quoted the language of the application form as Punjabi, while
for others (73.33%) it is in English. 93.33 per cent of the respondents in this
245
category considered that the application form is of big size. 100 per cent of the
farmers got it filled by others and Rs. 40 per form are reported to be paid on an
average for this purpose. 23.07 days are taken on average basis for the
processing of loan case. In semi-medium category of the state, twenty-five
sampled farmers answered the query. 100 per cent of these had sought the
credit, by applying through formal proforma made available by the credit source.
Eight farmers reported that application forms are in Punjabi, while others 68 per
cent found it to be in English. The size of the application form is considered as
large by 96 per cent of the respondents here. Only one farmer (4%) filled this
proforma himself, while rest of the 96 respondents got it filled by others. An
amount of Rs. 22 per form is reported to be paid for this purpose on average
basis. On an average, 17.40 days are taken in the processing of loan case here.
The number of respondents is thirty-nine on medium farm category of the state.
Following the same procedure, all of these had applied formally for the credit on
a prescribed format provided by the various agencies. Regarding language of
the application form, 23.08 per cent of the respondents found it in Punjabi, while
76.92 per cent reported that it is in English. But all of these respondents are of
the opinion that application form is of large size. Here also, only one farmer
(2.56%) reported the filling of form by himself, while for the rest (97.44%) it is
filled by others. An average sum of Rs. 16.67 per form is reported to be paid for
this purpose. The mean time taken in processing of loan is calculated at 17.59
days in this category of farms. In case of large farm category, a total of nineteen
farmers in all answered the query. The financial assistance is sought by these
for various purposes by applying on a proper format which is made available to
these loanees by these credit supplying agencies. Only one farmer in large
category reported that language of the farm is Punjabi, while 94.74 per cent of
the respondents found it to be in English. The application form is of large size is
the opinion expressed by all the respondents in this category. For 94.74 per cent
of the farmers, the form is filled by others, while only one farmer got it filled by
himself. The payment made for filling of the forms is worked out to be Rs. 5.26
per form. On an average, 11.84 days are taken in the processing of loan case in
case of large farm category. In all for the state, 105 farmers responded to the
246
query on procedure of applying for loan and other aspects attached to it. 100 per
cent of these seeking financial assistance had applied formally on a prescribed
format made available through the lending sources. 20.95 per cent of the
respondents in all said that language of the proforma is Punjabi, while 79.05 per
cent reported that the application form provided is in English language. It is felt
by 98.10 per cent of the respondents that the size of the application form is large.
Filling of forms it seemed is a major problem to the respondents in a sense that
97.14 per cent got it filled by others and only three farmers in all i.e. 2.86 per cent
filled it by themselves. This could be attributed to various reasons like literacy
level of farmers, language of the form, size of the application form or sheer a
general inhibition in dealing with lending institutions on the part of the farmers. A
sum of Rs. 19.24 per form is calculated as paid for filling of forms on average
basis. The mean time taken for processing of loan case in the state is 18.15
days.
The inter-zonal comparison showed that mean time taken is least in zone-I
and maximum in zone-III. No payment is made for filling up the application form
in zone-I, but it is made in four farm categories of zone-II and two farm categories
i.e. marginal and medium in zone-III. Average sum paid for the said purpose is
higher in zone-II than in zone-III. Otherwise, the procedure of applying for
financial assistance is found to be similar across all the zones in the state.
Processing of Loan CaseLoan processing is an important aspect of agricultural credit. As per the
common perception time taken in processing of loan case is lengthy in case of
institutional sources of finance as compared to non-institutional sources. This
amount to the procedural delay in getting the loan sanctioned and adds to the
cost of credit. It is often said the ‘loan delayed is loan denied’. The fact may lead
to further problem of misutilization of loans and thus rising burden of debt and
overdues. This may ultimately hamper the financial health of the lending source.
Different aspects related to processing of loan are studied and presented
in Table 6.10b. The analysis is carried out at two stages i.e. category-wise and
zone-wise to undertake inter-class and inter-zone comparisons and highlight the
problem if any.
247
The state level analysis revealed that out of seven respondents in the
marginal category, four (57.14%) farmers considered the processing delayed,
while three are sanctioned loan on time. Two farmers (28.57%) attributed the
delay to avoidable objections on loan application. All the seven respondents are
sanctioned the requested amount. However, six farmers found it sufficient as per
the needs, while for one it is inadequate. 85.71 per cent of the borrower
respondents reported providing the guarantee, by taking the guarantor to the
lending source. None of the borrower cited any problem in arranging the
security. Four farmers i.e. 57.14 per cent of respondents said that guarantor is
must in processing of loan. On small farms of the state, there are 15
respondents in all, eight considered the process as delayed, while seven farmers
are sanctioned the loan on time. Five farmers of delayed processing felt that the
objections on loan application are avoidable. Thirteen borrowers (86.67%)
considered the loan amount as sufficient, while two found that inadequate,
however, all the borrowers are provided the requested amount. The security is
provided by 93.33 per cent of the farmers, by taking the guarantor physically to
the source of credit. Two farmers (13.33%) faced the difficulty in arranging for a
guarantor. Six farmers considered in this category that guarantor is must in
processing of loan. In case of semi-medium farms, twenty-five borrowers
answered the query. Seven farmers (28%) reported a delay in processing of
loan application, while eighteen are sanctioned loan on time. Five farmers (20%)
attributed the delay to the objections which could have been easily avoided. The
sanctioned amount is taken as sufficient by twenty-three farmers i.e. 92 per cent,
on the other hand two farmers found it less to meet the needs. 96 per cent of the
borrowers are sanctioned the requested amount by the credit source. Nineteen
farmers (76%) reported of providing security / guarantee to get the loan
sanctioned and seventeen out of these had to take along the guarantor to the
lending source. None of the borrowers find it difficult to provide the guarantee.
Nine farmers (36%) opined that there must be a guarantor in the processing of
loan. On medium farms of the state, thirty-nine farmers answered the query.
Thirty-two borrowers (82.05%) are sanctioned loan on time, while seven farmers
(17.95) felt that the process is delayed. Loan cases of five are recommended
248
after the removal of objections, however, four out of these (10.26%) felt that the
objections are avoidable. All the borrowers in this category found the amount as
sufficient to meet their needs. Also 100 per cent of the respondents are
sanctioned the requested amount. Securities / guarantees are reported to be
provided by 84.62 per cent of the borrowers and 79.49 per cent had to take the
guarantor to the office of lending agency as a part of loan processing. Three
farmers (7.69%) complained that it is troublesome to arrange the guarantor and
take him to the lending source. Twenty-three farmers are in the favour of having
a guarantor in the loan procedure. The number of respondents is nineteen in the
large farm category. Three farmers (15.79%) considered the processing as slow,
while rest of the respondents i.e. 84.21 per cent found it normal. Two farmers
(10.53%) said that the objections on loan application are avoidable. All the
borrowers are sanctioned the loan amount as per their request and all of them
found it sufficient to cater to the requirements. Seventeen farmers (89.47%)
reported providing the security to get the loans and fourteen (73.68%) had to
physically take the guarantor along with them as a part of loaning process. One
borrower felt that arranging for the guarantor is problematic. However, twelve
large farmers are in the favour of having a guarantor in processing of loan
application. Out of the total sample size i.e. 320 farmers, one hundred and five
borrowers answered this query on processing of loan in the state. 27.62 per cent
reported the delayed processing of the application by the lending source. On the
other hand, 72.38 per cent reported the sanctioning of loan on time. Twenty
farmers reported that the loan cases are processed only after the removal of
objections laid on these. However, eighteen farmers considered these objections
as avoidable. 99.05 per cent of the farmers got the loan of same amount as
requested by them. And 95.24 per cent of the respondents considered the loan
sufficient to fulfil their requirements, while 4.76 per cent found the amount
inadequate. In all, eighty-nine borrowers had to provide securities / guarantees
to get the loan sanctioned and 78.10 per cent of the farmers had to make the
guarantor physically present before the lending source. However, only six
respondents i.e. 5.71 per cent found it difficult to arrange for the guarantor. But
249
51.43 per cent of the respondents considered the presence of guarantor as a
must in processing of loan.
Thus we can conclude that one-fourth of the borrowers considered the
processing of loan application as slow and attributed the delay to some
unnecessary objections. Also almost all the farmers are found to be getting the
requested amount as loan and majority of these considered the loan amount as
sufficient to fulfil their requirements. The majority of borrowers had to physically
provide the guarantor at the lending sources, still it is considered as a necessary
part of loan processing.
Mode of disbursement of credit and subsidy content: The analysis of the disbursement of loan and subsidy component has
been undertaken for the state and shown in Table 6.11. The average distance
traveled to the place of loan disbursement came to be 2.62 kilometers in case of
marginal category farms. The kind component of credit disbursed is availed by
56.52 per cent of farmers, while 82.61 per cent received the credit in terms of
cash in this category. The credit is disbursed to four marginal farmers through
cheque. Time of loan disbursal is found to be suitable to 95.65 per cent of the
farmers. No farmer received any subsidy component on marginal farm category.
Still, 69.57 per cent of farmers found the rate of interest charged as reasonable.
The technical / managerial assistance of any form is lacking in this category. The
credit utilization supervision is reported by only five marginal farmers. The rate of
diversion is found to be high and 43.48 per cent of farmers indulged in it.
The average distance to place of loan disbursement is worked out at 3.26
kilometers in case of small category farms. The loan disbursed to forty-four
farmers i.e. 83.02 per cent in terms of kind loan and 77.36 per cent in terms of
cash. The disbursal of credit to six farmers is through cheque. Cent per cent
farmers are found to be satisfied with the time of loan disbursement. The subsidy
component on the loan availed is found to be nil in this category. The rate of
interest charged is found to be reasonable by 96.23 per cent of the farmers. The
technical / managerial help to sampled farmers is found to be totally lacking even
in case of small farms. Only five farmers reported that their credit utilization had
been supervised by the lending source. So again, the diversion rate is high.
250
41.51 per cent farmers diverted the loan amount for purposes other than cited
and 58.49 per cent used it for the actual purpose.
In case of semi-medium category of the farmers of state, the farmers had
to travel on an average 3.68 kilometers to get the loan amount. 52.56 per cent of
the farmers availed the credit in terms of kind, while sixty-one farmers i.e.78.21
per cent availed it in terms of cash. The credit amount is disbursed to ten
farmers through cheques. By and large, the time of loan disbursal is found to be
suitable to the farmers in this category, as reported by 96.15 per cent of the
farmers. Only one farmer is to get the subsidy component of loan amount. 84.62
per cent of the sampled farmers thought that rate of interest is reasonable as
charged by the lending source. Four farmers in this category reported to have
received some technical / managerial help from the lending source while getting
the credit. Nine farmers of this category are reported to be supervised in their
credit use. The diversion decreased to some extent on semi-medium farms than
first two categories, as twenty-six farmers reported it i.e. 33.33 per cent and
66.67 per cent reported the utilization for actual purpose of loan procurement.
The average distance travelled to place of credit disbursement increased
to 4.77 kilometers on medium category farms. Forty-six farmers i.e. 56.79 per
cent availed of the credit in terms of kind, while 80.25 per cent received in cash
terms. The credit amount is disbursed to sixteen farmers through cheques. All
the farmers in this category found the time of loan disbursement as convenient to
them. On medium farms, two farmers are found to be receiving the subsidy on
loan amount. The rate of interest charged by lending source is taken as
reasonable by 88.89 per cent of the farmers, but rest found it to be high. Only
two farmers in this category i.e. 2.47 per cent reported to have received
technical/managerial help from the lending agency while obtaining the loan.
19.75 per cent of medium farmers responded that the agency monitored /
supervised their credit utilization by visiting them. In spite of this low supervision
fact, 71.60 per cent of the farmers utilized the loan amount for the purpose cited
and diversion rate further decreased to 28.40 per cent as twenty-three farmers
reported to have indulged in it.
251
The analysis of large farm size category of the state revealed that average
distance to credit source of loan disbursement came to be 3.83 kilometers. The
credit is disbursed to 55.81 per cent of the farmers in terms of kind, while 81.40
per cent of farmers availed in terms of cash. The credit disbursement took place
through cheques to ten farmers. All the farmers considered the time of loan
disbursal as convenient to them. Only one large farmer received the subsidy on
loan amount, out of the sampled farmers. Rate of interest charged by the lending
source is though to be reasonable by 90.70 per cent of the farmers. No farmer
received any technical / managerial assistance of whatsoever type while
obtaining the loan amount from the lending source. Only seven farmers reported
that their credit utilization had been supervised by the lending agency through
visiting the farm. However, the credit is utilized for the actual purpose by the
76.74 per cent of farmers in large farm category, while rest i.e. 23.26 per cent
diverted the loan amount for purpose other than cited.
In all there are 278 respondents to this aspect of credit in the state. The
average distance traveled by the farmer to place of loan disbursement is
calculated at 3.86 kilometers for the state as a whole. 60.43 per cent of the
respondents availed of the credit in terms of kind, while 79.50 per cent reported
to availing in terms of cash. Forty-six farmers received the credit disbursed in the
form of cheque mainly to the dealers of heavy machinery like tractors or to
dealers of livestock. By and large the farmers are found to be satisfied with the
time of loan disbursal and found it to be convenient to them as reported by 98.56
per cent of the respondents. The subsidy component on agricultural loans is
found to be low, as only four farmers in all received a subsidy on loan amount.
The rate of interest charged by the lending source is considered as reasonable
by majority of farmers i.e. 87.77 per cent. A total of six farmers in the state
reported receiving some technical / managerial help from the lending agency.
Supervision on credit utilization is reported by forty-two farmers in all i.e. 15.11
per cent. Still, the credit is utilized for the actual purpose as reported by 187
respondents i.e. 67.27 per cent. However, rest of the farmers i.e. 32.73 per cent
are found to be indulged in diverting the amount for purpose other than cited.
252
On the whole, it is found that average distance traveled to the place of
loan disbursement is less in zone-II i.e. central-plain zone as compared to other
zones. Also, it is least for marginal and small category of farmers as they
normally take credit from village level co-operative societies due to their less
holdings. The distance traveled is found to be maximum for medium farms,
followed by large farms as they indulged in borrowing from banks located in
nearby towns etc. The kind component of loan disbursement is quite substantial
as observed through the analysis. The credit disbursal through cheques is
limited to tractor loans or borrowing for irrigation structures. All the respondents
are found to be satisfied with the time of loan disbursal and no problem is found
to be existing related to this aspect. Against the conception that agricultural
loans are highly subsidized, the component is found to be very low among the
respondents. They are not found to be receiving any subsidy on credit availed.
The rate of interest charged by the lending source is also considered as
reasonable by the majority of the sampled farmers. This aspect has been found
to be lacking in agricultural credit are related to provide technical / managerial
assistance to the loanees and also the supervision of credit utilization by lending
agency, which can cause diversion of loan amount for purposes other than cited.
It is revealed that diversion is least reported in zone-III and maximum in zone-II.
Providing some technical / managerial assistance to the farmers while providing
credit can lead to proper utilization of credit and thus increasing the income of the
farmer achieving the objectives of agricultural credit.
Problems faced by the farmers regarding loansThe share of institutional sources of credit though has increased to a large
extent in the wake of various measures adopted by the government from time to
time, has not been able to replace the non-institutional sources of finance. It is
generally felt that resource poor, illiterate farmers face a host of problems in the
process of getting the loan sanctioned. So, the sampled farmers are asked
about the difficulties faced by them in the procedure or processing of loan. The
results of analysis have been depicted in Table 6.12.
The overall analysis of state revealed that in marginal category of farmers,
none of the respondent reported any problem in getting land records or copy of
253
account with the society. Only three farmers (7.89%) felt that loans get delayed
with institutional sources of finance. But six farmers (15.79%) considered the
loan amount provided by these agencies as inadequate. No one reported any
problem regarding repayment plan or providing of security for the loan. The cost
of borrowing is considered as high by three farmers in this category. 10.53 per
cent of the borrower reported difficulty in understanding the working of these
institutions. Same proportion of farmers considered the rate of interest prevailing
in these institutions as high. Use of contacts is viewed as effective in getting the
loans by four farmers (10.53%) in this category. Three farmers (7.89%) felt that
working is not transparent in these agencies, while four respondents complained
that these sources provide lesser details to prospective borrowers at the time
submission of loan application. In case of small farm category five farmers
(7.81%) faced problems in getting land records. 17.19 per cent are of the view
that loans are delayed in institutional sources of finance. The loan amount is
considered insufficient by 26.56 per cent of the sampled farmers. Three farmers
had problems with repayment plan of formal agencies. But no one found it
difficult to offer the security for the loan. Cost of borrowing as well as rate of
interest is taken as on higher side by six farmers i.e. 9.38 per cent. Four farmers
(6.25%) reported difficulty in understanding the plans and procedures of formal
lending sources. 20.31 per cent of the respondents are of the view that political
or other influential contacts can quicken the loan process in these institutions.
Five farmers (7.81%) thought that working of these agencies is not transparent,
while four farmers (6.25%) complained about getting lesser details from these
institutions. On semi-medium farms of the state 5.81 per cent of the farmers
faced problems in getting land records and four farmers found it difficult to get a
copy of account with the village society. It took longer to get a loan from
institutional sources, is the view expressed by 29.07 per cent of the farmers.
19.77 per cent of the respondents felt that loan amount is inadequate to meet the
requirements. Seven farmers here reported that repayment plans of these
agencies are faulty. Offering of security to get the loan is found to be a problem
by six farmers (6.98%). Five farmers in this category thought that cost of
borrowing is high with institutional agencies, while rate of interest is taken as high
254
by nine farmers (10.47%). 16.28 per cent of the respondents expressed the view
that processing of loan case can be hastened with the use of political / other
influences. The working of these agencies is not considered as transparent by
five farmers (5.81%). The agencies divulge in lesser details about the various
aspects of loan case is the complaint of five farmers in this category of farms. In
medium farms also, five farmers reported facing problems in procuring land
records from the revenue officials. 6.98 per cent of the farmers found it difficult to
get a copy of account with the village society. 45.35 per cent of the respondents
expressed the view that loans get delayed in formal lending sources. The loan
amount is considered as less than adequate to fulfil the needs by 36.05 per cent
of the sampled farmers. In this category, only two farmers are not satisfied with
the repayment plan of the institutions. One farmer also reported difficulty in
offering security for the loan. 12.79 per cent of the farmers are of the view that
cost of borrowing is high in these agencies and 9.30 per cent of the farmers
considered the rate of interest charged as high. Seven farmers (8.14%) found it
difficult to understand the procedures of institutional agencies. Loan could be
sanctioned quickly with the use of influence, this view is expressed by 26.74 per
cent of the respondents. Five farmers considered that the working of these
institutions is shady and not transparent. Seven farmers (8.14%) are not
satisfied with the details provided by these agencies, while applying for the loan.
In large farm category, two farmers (4.35%) are of the view that it is difficult to get
the land records from revenue officials. 50 per cent of the respondents
expressed the view that time taken is more in these institutions to sanction the
loan. Twenty-five farmers (54.35%) considered the loan amount of these
agencies as inadequate to cater to the purpose. 4.35 per cent of the farmers did
not considered the repayment plan as good. But none of the respondent found it
difficult to arrange for the security of loan. Cost of borrowing as well as charged
rate of interest by these institutions is considered as more by eight farmers
(17.39%) in this category. 10.87 per cent of the respondents expressed difficulty
in understanding the procedures followed by these agencies. Nineteen farmers
of this category thought that political or other links can get the work done quickly.
The working of these institutions is not considered as transparent by 32.61 per
255
cent of the large farmers in the state. And 41.30 per cent of these are not
satisfied with the details provided by formal agencies regarding loan processing.
Overall, for the state as a whole, it is found that 5.31 per cent of the farmers
considered it difficult to get the land records from the revenue officials. 3.13 per
cent of the respondents faced problems while procuring a copy of account with
the village cooperative society. One hundred and one sampled farmers i.e.
31.56 per cent are of the view that institutional agencies delayed the loan
processing. 29.68 per cent respondents in the state felt that loans sanctioned by
these sources are inadequate to meet the actual requirements and thus the
farmers had to resort to non-institutional sources of finance. However, farmers
by and large are satisfied with the repayment plans formulated by institutional
agencies and only 4.38 per cent of farmers found these plans as faulty that too
mainly because of rigidity of these plans. In non-institutional sources of finance
due to informal atmosphere in the dealings, there feel a certain degree of
flexibility in the repayment structure, which they found lacking with these
agencies. Also, arranging for security to get the loan as a mandatory condition
with institutional agencies, did not pose a major problem to the farmers and only
2.19 per cent of the total sample found it difficult to arrange for it. Against the
perception that majority of the farmers found it difficult to borrow from institutional
agencies due to procedural delays and formal atmosphere, it is found that 10.31
per cent are of the opinion that cost of borrowing is high in these agencies.
Almost same proportion of respondents i.e. 10.94 per cent considered the rate of
interest high as well in these institutions. Only 8.75 per cent of the farmers
expressed their lack of awareness i.e. difficulty in understanding the programmes
and procedures of these sources, as a cause of problem. Seventy-three farmers
in the total sample i.e. 22.81 per cent are of the opinion that political or other
influential contacts can quicken the loan processing. The working of these
institutions is not considered transparent by 10.31 per cent of the respondents.
11.87 per cent of the sampled farmers complained about theses agencies
providing lesser details to the prospective borrowers at the time of submitting the
loan application. This causes unnecessary delay and also more trips of the
256
farmer to these agencies than otherwise required. Thus increasing the cost of
borrowing in the sense that time, money and effort is wasted.
All these responses are not based on actual experiences of the
respondents. Some are their personal experiences in the past or in recent times,
but some responses are the perceptions formed on the basis of experiences in
their close circuit as all the respondents had not borrowed from institutional
agencies in the recent past. On the whole, the major problems faced by the
farmers while delaying with these agencies included delayed loans and
inadequacy of loans as per the requirements.
257
Table 6.1 Transaction cost incurred on obtaining loans by sampled farmers in Punjab
(Rs./farm)
Cost item Marginal Small Semi-Medium Medium Large Average
Zone-IApplication formalities 34 46 53 64 71 56Food 106 172 202 234 254 205Bribe 120 279 306 374 468 327Procurement of documents 14 37 41 52 63 44Witness 19 31 36 47 52 39Court charges 31 56 61 65 79 61Follow up & loan collection 10 12 17 24 32 20Misc. 20 31 37 48 59 41Total 354 664 753 908 1078 793Zone-IIApplication formalities 46 54 61 77 89 65Food 139 204 261 294 304 244Bribe 178 319 341 394 492 346Procurement of documents 21 36 43 63 69 46Witness 28 37 41 52 63 44Court charges 39 62 69 76 83 67Follow up & loan collection 21 32 37 44 49 37Misc. 30 39 44 53 64 46Total 502 783 897 1053 1213 893Zone-IIIApplication formalities 39 52 61 77 79 66Food 126 179 214 244 263 217Bribe 134 297 337 394 477 351Procurement of documents 21 39 47 51 69 48Witness 27 34 47 52 63 47Court charges 39 61 74 66 78 66Follow up & loan collection 12 19 22 29 37 25Misc. 26 39 44 52 63 47Total 424 720 846 965 1129 866StateApplication formalities 42 52 59 74 82 63Food 129 193 234 262 280 227Bribe 157 307 330 389 482 342Procurement of documents 20 37 43 56 67 46Witness 26 35 41 51 60 43Court charges 37 61 68 70 81 65Follow up & loan collection 17 25 28 34 41 30Misc. 27 38 42 51 62 45Total 454 747 845 986 1156 861
258
Table 6.2 Total Transaction Cost incurred in obtaining loan from the institutional sources by the sampled farmers in Punjab
(Rs. / farm)
Zone Marginal Small Semi-Medium Medium Large Average
Zone-I 354 664 753 908 1078 793
Zone-II 502 783 897 1053 1213 893
Zone-III 424 720 846 965 1129 866
State 454 747 845 986 1156 861
Table 6.3 Cost (Other than interest) in obtaining a loan of Rs. 1000 from institutional sources by the sampled farmers
Zone Marginal Small Semi-Medium Medium Large Average
Zone-I 8.99 6.93 5.08 3.97 3.60 5.21
Zone-II 7.84 9.08 6.54 4.54 2.43 6.32
Zone-III 16.23 8.10 5.76 4.00 3.13 6.20
State 8.54 8.43 5.95 4.22 2.81 5.83
259
Table 6.4 Total cost including interest in obtaining loan from institutional and non-institutional sources
(%age)
Zone Marginal Small Semi-Medium Medium Large Average
Zone-I : Institutional Sources 10.30 10.09 9.91 9.80 9.76 9.92
Non-Institutional Sources 17.62 14.56 13.67 12.28 12.16 13.57
Zone-II : Institutional Sources 10.18 10.31 10.05 9.85 9.64 10.03
Non-Institutional Sources 16.53 18.62 15.84 13.51 11.87 15.54
Zone-III : Institutional Sources 11.02 10.20 9.98 9.80 9.71 10.02
Non-Institutional Sources 26.03 18.55 14.98 13.21 12.68 15.75
State : Institutional Sources 10.25 10.24 10.00 9.82 9.68 9.98
Non-Institutional Sources 18.76 17.84 15.03 13.08 12.16 15.10
t-value 3.59*** 3.47*** 2.11** 2.07** 1.59 3.07***
** Significant at 5 per cent level
*** Significant at 1 per cent level
260
6.6
261
6.7
262
Table. 6.7 Time taken and number of trips to get loan
ZoneInstitutional loan Non-institutional loan
No. of trips Time taken (d) No. of trips Time taken
(d)Zone-I 4.26 12.48 0.87 2.55
Zone-II 5.11 16.54 1.19 3.64
Zone-III 7.49 24.03 1.41 4.52
State 5.49 18.15 1.17 3.59
Table. 6.8 Number of farmers borne the social cost in terms of inconvenience, sacrifice, humiliation and bribe
Farm Size Categories No. of farmers Inconvenience Sacrifice Humiliation Bribe
Marginal38 36 35 33 31
%age 94.74 92.11 86.84 81.58
Small64 59 58 54 51
%age 92.19 90.63 84.38 79.69
Semi-Medium86 78 75 71 67
%age 90.70 87.21 82.56 77.91
Medium
86 74 74 68 64
%age 86.05 86.05 79.07 74.42
Large
46 37 38 31 29
%age 80.43 82.61 67.39 63.04
Overall
320 284 280 257 242
%age 88.75 87.50 80.31 75.63
263