🏛Sources of Agricultural Credit - Cooperatives, Banks, RBI & NABARD

How Does Credit Reach the Farmer?

A rice farmer in Tamil Nadu walks into his village PACS (Primary Agricultural Credit Society) to get a crop loan. The PACS does not have unlimited funds — it borrows from the District Central Cooperative Bank (DCCB), which in turn borrows from the State Cooperative Bank (SCB), which gets refinance from NABARD. This chain — from NABARD down to the farmer’s village — is the institutional credit delivery system of India. Understanding this structure is essential for every agricultural finance exam.

---

Cooperatives in India

What is a Cooperative?

• A cooperative society is a basic institution for the socio-economic growth of villagers, bringing people together to pool resources and work collectively for mutual benefit.
• Founding principle: “Each for all and all for each”
• Minimum members required to register: 10
• Cooperatives originated in Europe; Britain is the homeland of the cooperative store movement

---

10 Principles of Cooperative Society ^{UPPSC 2021}

No.	Principle	Meaning
1	Open and voluntary association	Membership open to all without discrimination
2	Democratic organisation	One member = one vote, regardless of share capital
3	Service	Primary aim is serving members, not maximizing profit
4	Self-help and mutual help	Members help themselves and each other
5	Distribution of profits/surpluses	Surplus shared equitably among members
6	Political and religious neutrality	No alignment with any party or religious group
7	Education	Members educated about cooperative values
8	Thrift	Encouraging savings and prudent financial management
9	Publicity	Promoting awareness of the society’s activities
10	Honorary service	Office bearers serve voluntarily without compensation

[!TIP] Mnemonic — “OD SSEP PT H”: Open, Democratic, Service, Self-help, Equitable profit, Political neutrality, Thrift, Publicity, Honorary, Education. Group them: governance (O,D), purpose (S,S,E), neutrality (P), operations (T,P,H,E).

---

History of Cooperative Movement

[!IMPORTANT] Four Phases (Pre-Independence): Initiation (1904-1911) — Modification (1912-1918) — Expansion (1919-1929) — Restructuring (1930-1946)

Timeline of Key Events

Year	Event	Significance
1904	Cooperative Credit Societies Act	First cooperative law; only credit societies allowed
—	F. Nicholson	Father of cooperative movement in India; studied European cooperatives
1912	New Act passed	Provision for non-credit societies and central cooperative societies
1914	Sir Macglan Committee	Recommended cooperative education, cooperative banks, provincial societies, careful scrutiny before lending
1920	First mortgage bank	Established in Punjab
1929	Central Land Mortgage Bank	Established at Madras for centralizing debenture issuance
1939	Multipurpose Cooperative Societies	First established in Orissa
1942	Multi-unit Cooperative Societies Act	Governs cooperatives operating across more than one state
1944	Agricultural Finance Sub-committee	Under Prof. D.R. Gadgil — studied cooperative movement
1945	Cooperative Planning Committee	Submitted report in 1946
1951	All India Rural Survey Committee	Chairman: A.D. Gorwala — recommended large cooperatives, marketing cooperatives, SBI establishment
1954	Landmark year for rural credit	Recommended large-size cooperative societies; beginning of organized rural credit policy
1959	Nagpur Session of INC	Resolution on Agrarian Economy — radical change in cooperative policy
1962	NCDC Act	National Cooperative Development Corporation — plans, promotes, finances cooperative development

[!NOTE] Exam Quick Recall: Father of Indian cooperatives = F. Nicholson | Movement started = 1904 | Origin = Europe | Cooperative store homeland = Britain

---

Cooperative Credit Structure

The cooperative credit structure in India has two parallel streams:

Stream	Purpose	Structure
Short and Medium-term Credit	Crop loans, input purchase, working capital	PACS —> DCCB —> SCB
Long-term Credit	Land improvement, machinery, permanent assets	PCARDBs —> SCARDBs

---

a) Primary Agricultural Credit Society (PACS)

PACS is the foundation stone of the entire cooperative credit structure. It operates at the village level and is the farmer’s first point of contact.

Feature	Detail
Established since	1904 (first Cooperative Credit Societies Act)
Original objective	Provide cheap credit to free farmers from moneylenders
Level of operation	Village
Credit type	Short-term and medium-term loans

Functions of PACS:

1. Promote economic interests of members through cooperative principles
2. Provide short and medium-term loans
3. Promote savings habit among members
4. Supply agricultural inputs — fertilizers, seeds, insecticides, implements
5. Provide marketing facilities for agricultural produce
6. Supply domestic products — sugar, kerosene, etc. (PDS distribution)

Example: A wheat farmer in Madhya Pradesh gets a crop loan from his village PACS, buys subsidized fertilizer from the same PACS, and sells his wheat through the PACS-linked marketing cooperative — all under one roof.

---

b) District Central Cooperative Banks (DCCBs)

DCCBs form the middle tier linking PACS with SCBs.

Functions:

1. Meet credit requirements of member PACS
2. Perform banking business
3. Act as balancing centres — divert surplus funds from some PACS to those facing shortages
4. Guide and supervise the PACS
5. Undertake non-credit activities

---

c) State Cooperative Bank (SCB)

SCB is the apex institution at the state level, linking PACS with the money market, RBI, and NABARD.

Functions:

1. Act as bankers’ bank to DCCBs — supervise, control, and guide them
2. Mobilize financial resources and deploy them across cooperative sectors
3. Coordinate with development agencies and help government in cooperative planning
4. Formulate and execute uniform credit policies for the cooperative movement

---

d) Land Development Banks

Feature	Detail
First mortgage bank	1920 in Punjab
Central Land Mortgage Bank	1929 at Madras
Renamed to	Land Development Bank (LDB) — during 3rd Five Year Plan
Current names	SCARDBs (State level) and PCARDBs (District/Taluk/Block level)
Purpose	Long-term credit for durable farm assets and permanent land improvements
Repayment period	Up to 20 years in installments

What long-term credit is used for: Machinery purchase, livestock acquisition, well construction, land levelling and reclamation, farm building construction, pump-set installation, orchard establishment, redemption of old debts.

---

Sahakar-Se-Samriddhi (From Cooperation to Prosperity)

[!TIP] Cooperative Reach: 8.5 lakh registered cooperatives | 29 crore+ members | 98% villages covered by PACS | 19% of agriculture finance through cooperatives | Ministry of Cooperation established July 2021

Statistic	Figure
Registered cooperatives	8.5 lakh
Members	29 crore+ (mainly marginalized and lower-income rural groups)
Village coverage by PACS	98%
Share of agriculture finance	19%
Ministry of Cooperation	Established July 2021
Computerization target	63,000 functional PACS

Multi-State Cooperative Societies (MSCS):

• Governed by Multi-State Cooperative Societies Act, 2002 (replaced 1984 Act)
• 1,528 registered societies including 66 Multi-State Cooperative Banks with deposits of approximately Rs 2.6 lakh crore
• Maharashtra leads with 661 cooperatives, followed by Delhi and Uttar Pradesh

---

Other Cooperative Finance Institutions

LAMPS (Large-Sized Adivasi Multi-Purpose Cooperative Societies)

Feature	Detail
Recommended by	Committee under Shri Bawa (1971)
Operating area	Hill and tribal areas
Unique approach	Single-window service for all needs of tribal communities

Functions of LAMPS:

1. Provide all types of credit including for social obligations and consumer needs
2. Provide technical guidance for agriculture modernization
3. Supply inputs and essential commodities
4. Arrange marketing of agricultural produce, minor forest products, and subsidiary occupation products

---

FSS (Farmers’ Service Society)

Feature	Detail
Problem addressed	PACS were controlled by better-off sections; small/marginal farmers excluded
Recommended by	National Commission on Agriculture
Launched	1973
Detailed recommendation by	T.A. Pai committee (1974)
Purpose	Change power structure in favor of weaker sections while adopting commercial banking principles

Why FSS was needed: By the 1970s, multi-purpose PACS had failed to diversify operations, reach weaker sections, or become financially viable. Elite capture undermined the cooperative ideal of inclusive development.

---

Commercial Banks

Nationalization of Banks

Nationalization was the most significant event in Indian banking history — it redirected bank credit toward agriculture and priority sectors.

[!IMPORTANT] Bank Nationalization: First round: 14 banks in 1969 (deposits > Rs 50 crore). Second round: 6 banks in 1980 (deposits > Rs 200 crore). Currently 12 Public Sector Banks after mergers.

Round	Year	Banks Nationalized	Criterion
First	1969	14 banks	Deposits exceeding Rs 50 crore
Second	1980	6 banks	Deposits exceeding Rs 200 crore
After mergers	Present	12 Public Sector Banks	Consolidation for larger, stronger institutions

---

Regional Rural Banks (RRBs)

[!TIP] RRB Key Facts: Recommended by Narasimhan Committee (1975) | Established under RRB Act 1976 | PSL target = 75% (vs 40% for commercial banks) | Currently 43 RRBs | Share: Centre 50%, State 15%, Sponsor Bank 35%

Feature	Detail
Recommended by	M. Narasimhan Committee (1975)
Established under	20-point economic programme (1975) by Indira Gandhi
Legal basis	RRB Act of 1976 (ordinance of 26 September 1975)
Context	90% of India’s population was rural at that time
Main objective	Credit to small/marginal farmers, agricultural laborers, artisans, small entrepreneurs
Design concept	Combine local reach of cooperatives + professional management of commercial banks

Share Capital Structure:

Contributor	Share
Central Government	50%
Sponsor Bank	35%
State Government	15%

• Authorized capital: Rs 1 crore per bank
• Paid-up capital: Rs 25 lakh per bank
• PSL target: 75% (nearly double the 40% for commercial banks)
• Current count: 43 RRBs (reduced from 190+ through consolidation)

Evaluation: Prof. M.L. Dantwala committee (1977, report in 1980) confirmed that RRBs were essential for providing credit even in areas where PACS were already functioning.

---

Reserve Bank of India (RBI)

[!NOTE] RBI: Established 1st April 1935 (RBI Act 1934) | Nationalized 1st January 1949 | First Governor: Osborne A. Smith | First Indian Governor: C.D. Deshmukh | HQ: Mumbai | Governor’s term: 3 years | 4 Deputy Governors

Feature	Detail
Established	1st April 1935
Act	RBI Act, 1934
Nationalized	1st January 1949
First Governor	Osborne A. Smith (1 Jan 1935 - 30 June 1937)
First Indian Governor	C.D. Deshmukh
Headquarters	Mumbai
Governor’s term	3 years
Deputy Governors	4

Functions of RBI

Function	Relevance to Agriculture
Issue of currency	Sole authority for printing and distributing currency notes
Custodian of Forex	Maintains exchange rate stability affecting agricultural exports
Payment system regulation	Enables digital payments for farmers (UPI, NEFT)
Banking regulation	Directs banks to lend to agriculture through PSL norms
Monetary authority and credit control	Repo rate, CRR, SLR influence cost and availability of farm credit

---

State Bank of India (SBI)

Event	Year	Detail
Bank of Bengal	1806	One of three Presidency banks
Bank of Bombay	1840	Second Presidency bank
Bank of Madras	1843	Third Presidency bank
Imperial Bank of India	1921	Merger of all three Presidency banks
State Bank of India	1955	Nationalization of Imperial Bank via SBI Act 1955

SBI was created to extend banking to rural and semi-urban areas and serve as the principal agent of the RBI.

---

NABARD (National Bank for Agriculture and Rural Development)

[!IMPORTANT] NABARD: Established 12th July, 1982 under NABARD Act 1981 | Recommended by Sivaraman Committee (CRAFICARD, 1979) | HQ: Mumbai | Fully owned by Govt of India | Authorized capital: Rs 30,000 crore

Overview

Feature	Detail
Full name	National Bank for Agriculture and Rural Development
Nature	Apex development finance institution
Ownership	Fully owned by Government of India
Established	12th July, 1982
Act	NABARD Act, 1981
Headquarters	Mumbai
Authorized capital	Rs 30,000 crore
Initial paid-up capital	Rs 100 crore (50:50 by GoI and RBI)
Paid-up capital (March 2020)	Rs 14,080 crore

---

History — Why Was NABARD Created?

Before NABARD, three separate units of RBI handled rural credit:

RBI Unit	Function	Transferred to NABARD
Agricultural Credit Department (ACD)	Short-term refinance to cooperatives	Yes
Rural Planning and Credit Cell (RPCC)	Dealt with RRBs since 1979	Yes
Agricultural Refinance and Development Corporation (ARDC)	Medium and long-term agricultural refinance (originally ARC, est. 1963; renamed ARDC in 1975)	Yes

In 1979, the Sivaraman Committee (CRAFICARD) recommended creating a single apex institution to provide undivided attention and focused direction to agricultural and rural credit. This led to NABARD’s establishment in 1982.

[!TIP] Exam Mnemonic: NABARD took over ACD + RPCC + ARDC from RBI. Think: “A Rural Powerhouse” (ACD, RPCC, ARDC —> combined into NABARD).

---

Functions of NABARD

A. Finance

Direct Finance:

Fund/Scheme	Purpose
RIDF (Rural Infrastructure Development Fund)	Critical rural infrastructure projects
NIDA (NABARD Infrastructure Development Assistance)	Infrastructure support
PMAY-G (Pradhan Mantri Awaas Yojana - Grameen)	Rural housing
SBM-G (Swachh Bharat Mission - Gramin)	Sanitation
LTIF (Long-Term Irrigation Fund)	Irrigation projects
MIF (Micro Irrigation Fund)	Water-efficient irrigation (drip, sprinkler)
Warehouses, Cold Storage, Cold Chain	Reducing post-harvest losses
Food Processing Fund	Food processing units in designated food parks
DIDF (Dairy Processing and Infrastructure Development Fund)	Dairy infrastructure
CFF (Credit Facility to Federations)	Supporting farmer federations
DRA (Direct Refinance to DCCBs)	Short-term multipurpose credit
PACS financing	Strengthening village-level cooperatives
Producers’ organizations	Supporting FPOs and FPCs
UPNRM (Umbrella Programme for Natural Resource Management)	Watershed, soil, water conservation
AIFs (Alternative Investment Funds)	Strategic agricultural investments

Indirect Finance:

• Short-term loans (e.g., KCC refinance to banks for crop loans)
• Long-term loans (refinance for investment credit)

B. Supervision

NABARD conducts statutory inspection of StCBs, DCCBs, and RRBs to ensure their financial health and governance.

C. Developmental Functions

Activity	Purpose
Institution development	Improve health of RRBs, StCBs, DCCBs, PACS, SCARDBs, PCARDBs
Marketing initiatives	Rural haats, rural marts, exhibitions/melas, geographical indications
Financial inclusion	Ensuring every rural household has basic financial services
Watershed development	Soil and water conservation in rain-fed areas
Research support	Funding research in agriculture and rural development
Climate change adaptation	Promoting climate-resilient agriculture and rural livelihoods

---

Summary Table

Institution / Topic	Key Facts
Cooperatives	Origin: Europe; India: 1904; Father: F. Nicholson; Principle: “Each for all and all for each”; Min 10 members
PACS	Village level; foundation of cooperative credit; short and medium-term loans; multi-service centre
DCCB	District level; middle tier; balancing centre between PACS
SCB	State level; apex; links PACS to money market and RBI
LDB/SCARDB	Long-term credit; up to 20 years; first mortgage bank: Punjab (1920)
LAMPS	Tribal areas; Bawa Committee (1971); single-window service
FSS	T.A. Pai (1974); for weaker sections; replaced elite-captured PACS
Bank Nationalization	1969 (14 banks, >50 Cr) + 1980 (6 banks, >200 Cr) = now 12 PSBs
RRBs	Narasimhan (1975); RRB Act 1976; PSL 75%; 43 RRBs; Share: 50:35:15
RBI	1 April 1935; nationalized 1 Jan 1949; first governor: Osborne A. Smith; HQ: Mumbai
SBI	Imperial Bank (1921) nationalized in 1955; principal agent of RBI
NABARD	12 July 1982; Sivaraman Committee; HQ: Mumbai; apex for agri finance; took over ACD+RPCC+ARDC
Cooperative reach	8.5 lakh societies; 29 Cr members; 98% villages; 19% of agri finance
Ministry of Cooperation	Established July 2021
NCDC	Act of 1962; plans, promotes, finances cooperative development