Formal Credit and Small Farmers in India

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8
Formal Credit and Small Farmers in India
Pallavi Chavan, with T. Sivamurugan
India has a long and fairly illustrious history of the development of a formal
system of rural credit. It can be traced back to the formation of credit cooperatives
in the early twentieth century under state sponsorship, with watershed events
like bank nationalisation in 1969 and 1980 resulting in a massive expansion
of public banking in the rural areas. These policy measures were centered
around agriculture and within agriculture their focus was on small farmers, a
predominant but relatively underprivileged segment of India’s agrarian system.
The literature on credit-related issues concerning small farmers from
developing economies, including India, contains concerns of efficiency
and viability, vulnerability and equity. Although the definition of a small
farmer differs across studies, the literature views access to formal credit to be
an essential prerequisite for improving the efficiency and viability of small
farms (FAO 2013; Berdegue and Feuntealba 2011). In the absence of a social
security net, formal credit is also regarded as a means to tide over income
fluctuations for small farmers, and thus address the concerns of vulnerability
(Hulme and Mosley 1996; Clark and Dercon 2009).1 Notwithstanding these
arguments in favour of extending formal credit to small farmers, the literature
also highlights that their access to formal credit has generally been low (IFPRI
2010). The low access is posed in the literature more as a supply-side issue,
and hence is regarded as involuntary in nature.2
1 There is also a vast literature dealing with micro-credit that regards access to such credit as a means
to stabilise income and increase consumption among the poor; see Montgomery et al. (1996) and
Morduch (1998).
2 The issues relating to low access to credit for small farmers can be divided into two categories:
supply-side issues concerning lenders (formal credit agencies) and demand-side issues concerning
borrowers (small farmers themselves). Issues concerning lenders include: (a) high transaction costs
in administering and monitoring small amounts of credit to a large group of borrowers (IFPRI
2010; Datta and Sriram 2010); (b) lack of credit histories for borrowers resulting in information
asymmetries leading to risks of adverse selection (Narain 2010); (c) a focus – often associated with
(b) in certain studies – on high-value, marketable collateral such as land by formal credit agencies
(Swaminathan 1991). Issues concerning borrowers are relatively few and are associated more with
the nature of operation of formal agencies. For instance, studies discuss the bureaucratisation of
procedures resulting in high transaction costs for small farmers seeking formal credit (Dreze et al.
1998; Walker and Ryan 1990).

HOW DO SMALL FARMERS FARE?
2
This chapter analyses the access to and adequacy of formal sources in
meeting the credit needs, particularly agricultural credit needs, of small
farmers in India with the help of banking data, and data on the borrowing
profiles of these households collected through the village surveys of the Project
on Agrarian Relations in India (PARI).
Three major institutions provide formal credit in the rural areas of
India today: commercial banks, regional rural banks (RRBs), and credit
cooperatives. Commercial banks and RRBs – primarily sponsored by public
sector commercial banks – together control about three-fourths of total
agricultural credit.3 Despite being a late entrant into the field of rural credit,
the contribution of commercial banks, after nationalisation, to shaping the
history of development of rural and agricultural credit in India has been
overwhelming. In course of time they have overtaken credit cooperatives,
the oldest serving institution of rural credit, except in a few States where
cooperatives continue to predominate even today.4
It may not be correct, however, to assume that the contribution of
commercial banks to rural and agricultural credit has increased in a monotonic
manner since their nationalisation. There have been changes in the role played
by these institutions in the field of rural credit, following changes in banking
policy. Whether these changes have also meant a change in the supply of bank
credit to small farmers is an issue that is explored in this chapter along with
certain other research questions.
This chapter attempts to answer the following questions using banking and
village-level data sources:
1. What is the share of small farmers in formal agricultural credit, in particular
bank credit, in India, and how this has changed over time?
2. How do small farmers meet their various credit needs, particularly
agricultural credit needs?
3. What is the extent of access to formal credit (crop credit in particular) for
small farmers? What are its determinants?
4. Do small farmers receive crop credit in line with the stipulated scales of
finance or does the formal sector fail to adequately meet their credit needs?
5. What is the interest cost of credit, particularly agricultural credit, for small
farmers?
3 See Chavan (2013).
4 See NSSO (2005; 2013). This point will also be illustrated later in the chapter while discussing
village data.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 3
The chapter is divided into six sections including this introductory
section. The second section looks at the history of rural credit policy in India,
particularly rural banking policy, through the prism of small farmers and their
general credit needs, particularly agricultural needs. The third section examines
certain conceptual and methodological issues relating to data analysis of credit
for small farmers. The fourth section contains analysis of secondary data,
although limited, on credit flow to small farmers. The fifth section provides
insights into the debt profiles of small farmers, based on PARI village survey
data. The sixth section provides concluding observations based on the earlier
sections and discusses related policy implications.
RuRal CRedit PoliCy and Small FaRmeRS
A review of the history of rural credit policy suggests that it can be divided into
four broad phases: the phase of credit cooperatives prior to bank nationalisation;
the phase of bank nationalisation; the phase of financial liberalisation since the
early 1990s; and the phase of financial inclusion with a revival of some of the
developmental measures with regard to rural credit since 2005.
In the first phase preceding bank nationalisation, credit cooperatives were
envisaged as agencies of formal credit to farmers, particularly small farmers
(GIPE 1975; Nicholson 1960). However, as shown by the All-India Rural
Credit Survey (AIRCS) of 1951–52 – the first official nation-wide survey of
rural credit –- the degree of penetration of formal (read cooperative) credit in
rural areas in general, and among small farmers in particular, remained low
even after five decades of the development of cooperatives. Yet the AIRCS
Committee argued for an Integrated System of Rural Credit with cooperatives
as the central agency for financing agricultural production (RBI 1954). It
also argued strongly in favour of the crop credit system, which later became
the cornerstone of agricultural credit in India (ibid.). Credit for seasonal
agricultural operations was provided to cultivators under crop loans, not
against land owned by them but on the basis of their “repayment capacity”
(GoI 1945, p. 48). By shifting the focus of cooperative credit from land to
crops as security for credit, the crop credit system was expected to bring small
farmers, particularly tenant farmers, into the fold of cooperative credit in a
major way (GIPE 1975).
Under the Integrated Scheme, commercial banks were involved only at
the periphery to provide finance for agricultural marketing (RBI 1954). This,
however, changed radically with the nationalisation of 14 major banks in
1969, and six more banks later in 1980. From being urban-oriented credit
institutions, commercial banks under public ownership, guided by branch

HOW DO SMALL FARMERS FARE?
4
licensing and priority sector lending policies, came to be regarded as the
key agency of rural and agricultural credit (Narayana 2000).5 The primary
objective of banking policy during this phase – often referred to as the phase
of “social and development banking” – was redistribution, at the expense,
at times, of prudence and commercial considerations related to conventional
banking (Wiggins and Rajendran, 1987).6
Small farmers, being an integral part of India’s agrarian system as shown
in the earlier chapters of this book, figured prominently in the design of
rural banking policy during this phase. First, priority sector guidelines were
laid down in 1974 to direct a part of bank credit to certain sectors denoted
as priority sectors. In 1980, two separate sub-targets were laid down for
agriculture and “weaker sections” (constituting socio-economically backward
sections) (RBI 2015). Small farmers explicitly figured in the list of weaker
sections alongside landless labourers, Scheduled Castes (SCs), and Scheduled
Tribes (STs) (ibid.). They also implicitly figured as those who were eligible
for agricultural credit, particularly “direct” agricultural credit – that is, credit
given directly to cultivators.7
Secondly, a policy of administered interest rates was followed to ensure
adequate flow of bank credit to priority sectors at affordable rates (ibid.).
The scheme of differential rate of interest (DRI) was introduced in 1972 to
provide credit from public banks at a regulated rate of interest to individuals
below the poverty line (RBI 2008). Thirdly, a new public banking institution
was created in the form of the regional rural bank (RRB), to provide credit
exclusively to the poor and underprivileged sections including small farmers
(Regional Rural Banks’ Act, 1976, cited in Maheswari 1995).
Fourthly, following the recommendations of the All-India Credit Review
Committee (1969), a special agency in the form of the Small Farmers’
Development Agency (SFDA) was created in select districts of the country
in 1971 (it was merged with the Integrated Rural Development Programme
(IRDP) in 1979–80 – a credit-based poverty alleviation programme). The
objective of the SFDA was to enable small farmers to cope with the “non-
5 For the essentially urban-oriented nature of commercial banking in India prior to bank
nationalisation, see Goyal (1967). The literature on rural credit discusses the striking increase in
rural branches of commercial banks, and supply of bank credit to rural areas and agriculture during
this phase (Shetty 2005; Chavan 2005).
6 Wiggins and Rajendran (1987) have highlighted three aspects of conventional banking: “high
recovery rates,” “caution” in lending decisions, and “commercial stability through deposit
mobilisation.”
7 The other part of agricultural credit was “indirect” credit, which was given to institutions/
organisations that supported agricultural production, such as input dealers and warehouse operators.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 5
neutral-to-scale” nature of markets, extension services, and credit institutions
while adopting the new agricultural strategy (Desai 1979, p. 23).8
During the phase of financial liberalisation that began with economic
reforms in 1991, however, the profitability and commercial viability of
banks assumed more importance than redistribution. The Committee on the
Financial Systems (CFS) of 1991, one of the first committees to argue strongly
in favour of liberalisation of the banking sector, suggested that the objective
of redistribution should be pursued only as part of the fiscal policy and not
monetary policy (RBI 1991). As a result, this phase saw a reversal of many
of the developmental measures that were introduced in the earlier phase,
including complete liberalisation of the branch licensing policy.9
First, although the CFS argued for an initial reduction and eventual
removal of priority sector targets, these targets were neither removed nor
reduced. However, the definition of priority sectors, particularly in agriculture
(under both the sub-categories, direct and indirect agricultural credit), was
considerably widened during this phase (Ramakumar and Chavan 2007).
These changes primarily took the form of: (a) inclusion of several new heads
and sharp increases in the credit limits set for existing heads under indirect
agricultural credit (ibid.). However, while making these changes, the cap of 25
per cent on indirect agricultural credit was retained, ensuring that direct credit/
credit to farmers received due priority in the overall supply of agricultural
credit.10 (b) Inclusion of several new heads even under direct agricultural
credit. To cite an important change, a part of the loans to corporates involved
in agricultural production was included under direct agricultural credit, thus
essentially treating corporates on a par with farmers.11
It was argued that these changes were on account of a conscious shift in
public policy relating to agriculture, to promote large-scale, commercial,
capital-intensive forms of agricultural production and post-production
8 These agencies were to act as coordinators between small farmers, credit institutions, and
government departments. They were registered as societies, and were constituted by drawing
members from credit institutions and governmental departments, and small farmers themselves
(Singh 1979).
9 See Chavan (forthcoming 2017) for illustrations of the various measures taken to liberalise the
Indian banking sector during this phase, including liberalisation of the branch licensing policy,
partial privatisation of public sector banks, and granting licenses to more domestic and foreign
private sector banks.
10 Also see RBI (2004) for arguments in favour of retaining the cap on indirect credit.
11 All agricultural credit given to corporates up to a limit of Rs 10 million and one-third of the
credit with a limit of over Rs 10 million were categorised as part of direct credit, while the rest
was included under indirect credit. However, as per the modification in the guidelines in 2013, all
agricultural credit to corporates up to a limit of Rs 20 million was considered as part of direct credit
(www.rbi.org.in).

HOW DO SMALL FARMERS FARE?
6
activities during the period of economic liberalisation (Ramakumar and
Chavan 2007). However, this shift prompted questions about credit flow to
farmers in general and small farmers in particular.
Secondly, this phase also witnessed several changes relating to RRBs, which
had a direct impact on their contribution to rural credit, particularly to small
farmers (Bose 2005). For instance, these institutions were allowed to lend to
non-priority sectors from 1992.12 Also, the rates of interest charged by them
on loans were deregulated (ibid.).
Thirdly, the process of liberalisation affected credit cooperatives much
later than commercial banks and RRBs, but it had far-reaching implications
for the very survival of these institutions in many States. Prudential norms
(excluding capital adequacy) were made applicable to State and district central
cooperative banks in the second half of the 1990s.13 However, despite the
fact that cooperatives in most States had a weak capital base, they did not
receive any recapitalisation support to enable them to meet the new norms,
unlike commercial banks and RRBs.14 Although the situation did change
in 2008 when conditional capital support was granted to short-term credit
cooperatives, the support was (a) delayed15 and (b) not extended to long-term
credit cooperatives. The latter continued to struggle with a low capital base
and high levels of non-performing loans in most States.16 Further, interest
rates on advances charged by State- and district-level cooperative banks were
also deregulated.17
Although the period after 2005 saw a continuation of the policy of financial
liberalisation, there was a renewed commitment to bringing underserved
sections into the ambit of banking as part of a policy of “financial inclusion.”18
12 Priority sector targets for these institutions, however, were set at levels higher than those applicable
to commercial banks. See “Master Circular on Priority Sector Lending Targets and Classification
for RRBs,” available at www.rbi.org.in.
13 See www.nabard.org for details. These norms were not applied to primary cooperative societies.
14 This delay in recapitalisation was primarily because cooperation is a State subject (Sen 2005).
15 The conditional capital support was a result of the government accepting the recommendations of
the Task Force on Revival of Rural Cooperative Credit Institutions (headed by A. Vaidyanathan);
for details, see www.nabard.org. The damage to these institutions, however, had already been done
by then in terms of a fall in their credit growth; see Satish (2007), and Datta and Sriram (2010).
16 See the Report on Trend and Progress of Banking in India, issues after 2007–08, for a discussion on
the decline in the health and growth of long-term credit cooperatives in most States.
17 The interest rates were almost entirely deregulated except for a floor interest rate of 12 per cent.
See Subrahmanyam (1999).
18 Officially, financial inclusion was defined as the “process of ensuring access to appropriate financial
products and services needed by all sections of the society in general, and vulnerable groups, such as weaker
sections and low income groups in particular, at an affordable cost in a fair and transparent manner by
regulated, mainstream institutional players” (Chakrabarty 2013).

FORMAL CREDIT AND SMALL FARMERS IN INDIA 7
During this period, political changes at the centre with the formation of a
government supported by Left parties opened up some space for inclusive
economic policies (Ramachandran and Rawal 2010). The commitment to
inclusive finance can be regarded as a part of these policies.
In terms of its objective, the policy of financial inclusion seemed similar to
the policy followed after bank nationalisation. However, it was to be pursued
in the broader context of financial liberalization taking into account “business
considerations” to ensure the “long-term sustainability of the process” (RBI
2008, p. 304). Hence, this phase witnessed the come-back of a few, but not
all, policy mandates for the development of rural credit, but these mandates
had to be pursued in an environment of greater operational autonomy of
banks in the form of continuing interest rate deregulation and a broadening
of the definition of priority sectors.
First, apart from a renewed mandate to commercial banks to open at least
one-fourth of their total number of branches in a year in unbanked rural areas,
they were asked to double the flow of agricultural credit over the three-year
period from 2004–05 to 2006–07 as part of the “comprehensive credit policy”
(Ramakumar and Chavan 2007). Secondly, although interest rates on bank
advances were subjected to complete deregulation, an interest subvention
scheme was introduced in 2006–07 for direct agricultural loans (to farmers)
of up to Rs 0.3 million, which was expected to benefit small farmers given
their small credit needs (ibid.). Thirdly, Kisan Credit Cards (KCCs), which
were introduced as an innovative crop credit delivery mechanism during the
earlier phase, received considerable impetus during the phase of financial
inclusion.19 Fourthly, the category of weaker sections was broadened to include
joint liability groups (JLGs), for loans given by banks. This was expected to
primarily benefit small farmers and tenant cultivators in gaining access to
formal credit (NABARD 2014). Finally, in 2014, a separate sub-target of 8
per cent was introduced under agriculture for small farmers to ensure focused
attention on this class of farmers.20 However, while introducing this sub-
target, the distinction between direct and indirect credit was removed. Hence,
this change could be described as a mixed bag for small farmers. It, of course,
19 These cards were originally designed to meet the short-term crop credit needs of a farmer for the
entire year in one go, enabling the farmer to withdraw money as and when necessary. During the
phase of financial inclusion, not only were these cards made smart cards, further easing the access for
farmers, but the finance under these cards was broadened to include term credit and consumption
credit components. See the RBI Circular on “Revised Kisan Credit Card Scheme,” www.rbi.org.in.
20 This target was applicable to domestic banks by 2017 and foreign banks with 20 branches or
more from 2018; see “Master Circular on Priority Sector Lending Targets and Classification,” July
2016, www.rbi.org.in.

HOW DO SMALL FARMERS FARE?
8
recognised their due more formally than before; however, attainment of this
target appeared doubtful given the greater presence of corporate and other
entities under the combined category of agricultural credit. Moreover, even
if the target was attained, given the poor representation of small farmers in
agricultural credit in earlier years, it is difficult to regard this as a floor.
FoRmal CRedit to Small FaRmeRS:
iSSueS Related to data, methodology, and liteRatuRe
Data from secondary sources on formal credit available to small farmers are
scant and scattered. Formal credit to small farmers can be analysed in two
ways: by looking at (i) the share of formal sources in the debt profiles of small
farmer households; (ii) the supply of credit to small farmer households by
various formal credit agencies.
A key secondary source that provides household-level data over a long
time-horizon is the decennial All-India Debt and Investment Survey (AIDIS).
However, while this source provides data on the debt profiles of “cultivator
households” (that operated more than 0.05 acre of land during the survey
year), it offers no separate information on small cultivators/farmers.
It is possible to extract data from the Situation Assessment Survey (SAS)
of Farmer Households of 2002–03 on the debt profiles of small farmer
households, assuming a certain cut-off in terms of the size of landholding.
However, this was a one-off survey. Although the National Sample Survey
Organisation (NSSO) conducted another SAS in 2012–13, this survey was
titled the SAS of Agricultural Households as it canvassed information on
“agricultural households” – a category that was not comparable with “farmer
households” canvassed in the earlier round.21 Given this change in definition,
any comparison between the two rounds is not appropriate. Hence, this
chapter makes use of the 2002–03 round to offer limited insights into the
debt profiles of small farmer households.
There are several data limitations as regards (ii) mentioned above too. First,
there is no current source of secondary data on the credit flow to small farmers
21 Farmer households were defined as households that had at least one family member as a farmer.
A farmer was defined as a person who possessed some land and was engaged in agricultural activities
on any part of that land during the 365 days preceding the date of the survey (NSSO 2003)
Agricultural activities were defined as cultivation of field and horticultural crops, growing of trees
or plants, animal husbandry, fishery, bee-keeping, vermiculture, and sericulture, among others.
Agricultural household, on the other hand, was a much narrower category and included households
that annually produced agricultural output of more than Rs 3000 (NSSO 2013).

FORMAL CREDIT AND SMALL FARMERS IN INDIA 9
from credit cooperatives.22 Secondly, though the general availability of data
on commercial banks has been better than on credit cooperatives, there are
limitations again with regard to the data on small farmers. The key source of
data on commercial banks (including RRBs) is the Basic Statistical Returns of
Scheduled Commercial Banks in India (BSR), published by the Reserve Bank of
India (RBI) annually since 1972, which does not offer data on small farmers.
However, it offers data on small borrowal accounts (SBAs) under agriculture
– accounts with a credit limit of Rs 0.2 million.23 This category offers some
insights into the credit going to cultivators with small credit requirements,
who are expected to correspond closely but not exactly with small farmers.
In the literature, there are some studies based on secondary data from the BSR
on the flow of credit to small farmers. These studies point to a marginalisation
of small farmers in the distribution of formal credit to agriculture since
the initiation of financial liberalisation (Ramakumar and Chavan 2007;
Ramakumar and Chavan 2014). They point to a striking revival in the growth
of bank credit to agriculture in the 2000s after a steep fall in the 1990s, and
attribute it primarily to the comprehensive credit policy (Ramakumar and
Chavan 2007; Ramakumar and Chavan 2014). However, given the various
changes in the definition of agriculture, these studies raise questions about
how far the revival has helped small farmers (ibid.; GoI 2010).
Annual priority sector returns are another source of data on commercial
bank credit to small farmers. These returns also follow the conventional
definition of small farmers (as having an operational holding of up to 5 acres).
We have used these returns to bring out recent trends in the credit flow to
small farmers.24
22 Data on credit cooperatives were published through Statistical Statements Relating to Cooperative
Movement at a Glance, an annual publication of the National Bank for Agriculture and Rural
Development (NABARD), which included information on small farmers (defined as having an
operational holding of up to 5 acres). However, over time, the lag in frequency of this publication
has increased; and in order to minimise the lag, NABARD has often resorted to repetition of past
data, which raises questions about the reliability of this data source. For a discussion of the data
limitations related to cooperatives, also see GoI (2004). The last publication in this series, containing
repetitions for certain States, was for the year 2003–04 (NABARD 2010).
23 The limit was Rs 10,000 till 1983, Rs 25,000 between 1984 and 1998, and Rs 0.2 million since
1999.
24 The RBI also publishes data on agricultural credit to small farmers in its Handbook of Statistics
on Indian Economy (HBS). However, there are striking differences between the HBS data and data
published in the various official committee reports on agricultural credit which have been sourced
directly from the banks themselves (RBI 2015). As a result, in this chapter we have chosen not to
use the HBS data but instead draw data from the annual priority sector returns submitted by banks
and disseminated through the Database on Indian Economy by the RBI.

HOW DO SMALL FARMERS FARE?
10
In sum, there are limitations to any analysis of secondary data on formal
credit to small farmers, and primary surveys are a preferred option. This
chapter does use secondary data sources but in a limited way, to address
research questions (i) and (ii) raised earlier. Our focus here is the villages
surveyed as part of the Project on Agrarian Relations in India (PARI). Village
studies have been an important tool for understanding the rural credit system
in India. As compared to the 1970s and 1980s, however, village studies on
rural credit in the 1990s and 2000s are relatively few in number (Chavan
2012). Hence there appears to be a gap in the literature on the ground-level
situation concerning formal credit with regard to small farmers in the phases
of liberalisation of the banking sector and financial inclusion, which this
chapter sets out to address.25
Out of 15 PARI study villages (after excluding 25F Gulabewala, which is a
large farmer-dominated village with only two small farmer households), this
chapter makes use of data on 13 villages.26 The key criterion in selecting these
villages was that the survey year was a normal agricultural year for a given
village. This is because for analysing formal credit to small farmers, particularly
for agricultural purposes, it is essential that the given village had a normal
agricultural activity cycle during the survey year. Based on this criterion, we
shortlisted 13 villages; Gharsondi (Gwalior district, Madhya Pradesh) and
Rewasi (Sikar district, Rajasthan), which reported a drought-like situation
during the survey year, were excluded. We have used the data from these 13
villages to address questions (2), (3), (4), and (5).
However, for answering specific questions concerning crop credit in
relation to the crop credit estimate based on the scale of finance, we have used
case studies of small farmer households, and have reduced our sample further
to 11 villages – after excluding Siresandra (Kolar district, Karnataka) and
Zhapur (Kalaburagi district, Karnataka). This was because these two villages
showed a relatively small incidence of crop credit (from formal sources) among
small farmer households during the survey year, with only four and three
households, respectively, reporting a fresh loan from formal sources. These
25 The few studies available for these decades, however, suggest a diminishing role for formal credit
and the strengthening of informal lenders, giving rise to more oppressive debt-related practices
(Ramachandran and Surjit 2005; Rawal and Mukherjee 2005; Gill 2005; Ramachandran et al. 2010).
Interestingly, however, village studies from Maharashtra and Kerala, where credit cooperatives have
been a more dominant source of formal credit, have continued to show a remarkably high share
of formal sources in the total debt of small farmers (Ramakumar 2005; Rao and Charyulu 2007;
Chavan 2012).
26 All other details about these villages have been discussed in Chapter 2 of this volume.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 11
accounted for 22 per cent and 7 per cent, respectively, of the total size of small
farmer households in these villages.
While we have used data on debt outstanding (including interest and principal
outstanding) on the survey date to illustrate the stock of debt, the key variable of
analysis is fresh borrowings during the survey year (including amount borrowed
and repaid during the year itself). This reflects the flow of credit and it can
then be compared with other flow variables associated with agricultural activity.
To compare the flow of credit with crop credit estimate, we separated out the
investment credit component and worked out the crop credit taken for seasonal
agricultural production from formal sources by these households.
While we present village-level data to illustrate various trends in formal
credit, we have used pooled data (across all 13 villages) for the analysis of
access to formal credit. We resorted to pooling of data to overcome the
constraint of small-sized samples of small farmers across villages. Given that
the surveys were not conducted in one year, while pooling: (a) all variables
in value terms were normalised by a demographic or economic variable, and
were expressed as proportions; (b) State dummies were used to control for
State-specific factors affecting the access to formal credit. The access to formal
credit was modelled using a logistic model, details of which are given below
under the section titled “Analysis of Village Data.”
Apart from data on borrowing profiles extracted from the village surveys,
we also sourced data on crop-wise scales of finance for the respective survey
years. These data were collected from the lead banks for the various districts
to which the selected villages belonged.
tRendS in FoRmal CRedit to Small FaRmeRS: Some inSightS FRom
SeCondaRy data
Secondary data on the debt profiles of small farmers can be drawn from SAS
2002–03, taking a land size cut-off of 5 acres. This is the standard definition
followed in most official sources in India, but is different from the carefully
designed definition followed in this volume of 5 standard (irrigated) acres. It
shows that in 2003: (a) about half of the total debt of small farmer households
was raised from formal sources leaving the rest to be met by informal sources;
(b) the share of formal sources was lower for these households than for large
farmer households; (c) moneylenders accounted for about one-third of the
total debt of small farmer households; (d) commercial banks were the most
important formal source of credit for them (Table 1).
Data drawn from the annual priority sector returns of banks offer
more current insights into the flow of bank credit for agriculture to small

HOW DO SMALL FARMERS FARE?
12
farmers. In 2014–15, small farmers accounted for about 39 per cent of
the total agricultural credit from banks. Their share in direct agricultural
credit was 53 per cent. There was a falling trend in the share over the 1990s
and 2000s except for a spurt in 2004–05, the year the comprehensive
credit policy was introduced. Their share was on a recovery path only after
2009–10.
Notwithstanding these changes, it is evident that the share of small farmers
in total agricultural credit from banks has rarely been above 50 per cent during
this entire period. Further, their share in credit has lagged behind their share
in land operated. The availability of credit per hectare for small farmers too
has been much lower than for all farmers (Table 2).
Table 1 Share of debt by source, small farmer and other farmer households, 2003
Source Small farmer
households
Other farmer
households
All farmer
households
All formal sources 51.6 65.9 57.7
Government 3.1 1.7 2.5
Commercial banks 31.1 41.7 35.6
Credit cooperatives 17.5 22.5 19.6
All informal sources 48.4 34.1 42.3
Moneylenders 29.5 20.6 25.7
Traders 4.5 6.1 5.2
Relatives and friends 10.7 5.5 8.5
Others 3.6 1.9 2.9
Total 100.0 100.0 100.0
Source: Calculated from NSSO (2003).
Figure 1 Share of small farmers in total agricultural credit from banks
0
10
20
30
40
50
60
Per cent
Credit to small farmers in direct agricultural credit
Credit to small farmers in total agricultural credit
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Source: Database on Indian Economy, Reserve Bank of India (RBI).

FORMAL CREDIT AND SMALL FARMERS IN INDIA 13
Table 2 Share of small farmers in land operated and agricultural credit, 1995–96 to
2010–11
Size-class Year Small farmers All farmers
Percentage of landholding 1995–96 80.3 100.0
2000–01 81.8 100.0
2005–06 83.3 100.0
2010–11 85.0 100.0
Percentage of area operated 1995–96 36.0 100.0
2000–01 38.9 100.0
2005–06 41.1 100.0
2010–11 44.3 100.0
Percentage of agricultural (direct)
accounts
1995–96 60.6 100.0
(61.7) (100.0)
2000–01 40.5 100.0
(41.1) (100.0)
2005–06 43.6 100.0
(47.0) (100.0)
2010–11 47.7 100.0
(48.7) (100.0)
Percentage of agricultural (direct)
credit
1995–96 26.8 100.0
(30.4) (100.0)
2000–01 17.9 100.0
(26.2) (100.0)
2005–06 22.0 100.0
(31.7) (100.0)
2010–11 26.2 100.0
(36.9) (100.0)
Amount of deflated direct
agricultural credit per hectare (Rs),
(Compound annual rate of growth
(%))
1995–96 1378 1635
– –
2000–01 2017 2987
(3.9) (6.2)
2005–06 6248 8253
(12.0) (10.7)
2010–11 12808 15396
(7.4) (6.4)
Source: Agricultural Census of India, Database on Indian Economy, Reserve Bank of India (RBI).

HOW DO SMALL FARMERS FARE?
14
analySiS oF Village data
General Features of Village Credit Systems
Wide variation in development of formal sources
There was a wide variation across villages in terms of the development of
formal sources of credit.27 We used two indicators of development of formal
sources: (a) number of formal sources available to village households; (b)
percentage share of formal sources in fresh borrowings (columns 3 and 5 in
Table 3). The first indicator captured the availability of formal sources, while
the second showed the effective contribution of available formal sources to the
flow of credit in a village. Taking the two indicators together, Nimshirgaon
(Kolhapur district, Maharashtra), Warwat Khanderao (Buldhana district,
Maharashtra), Alabujanahalli (Mandya district, Karnataka), Bukkacherla
(Anantapur district, Andhra Pradesh), and Mahatwar (Ballia district, Uttar
Pradesh) had a well-developed formal credit system.
The remaining villages could be divided into the following two categories.
(1) Villages with fewer formal sources but contributing more than half to
total credit. These included Kothapalle (Karimnagar district, Telangana), and
Harevli (Bijnor district, Uttar Pradesh). (2) Villages having a large presence
of formal sources but these contributing less than half to the flow of credit.
These included Zhapur (Kalaburagi district, Karnataka), Siresandra (Kolar
district, Karnataka), Ananthavaram (Guntur district, Andhra Pradesh),
Panahar (Bankura district, West Bengal), Kalmandasguri (Koch Bihar district,
West Bengal), and Amarsinghi (Malda district, West Bengal). Given the
superiority of indicator (b) over (a), it could be said that villages in category
(1) had a relatively well-developed formal system of credit as compared to
villages in category (2). The backward nature of credit systems in Zhapur
27 Following the SAS and AIDIS, our definition of formal sources includes commercial banks, credit
cooperatives, regional rural banks, insurance companies, provident funds, government agencies, and
transport finance companies. Informal sources include all other sources, including micro-finance
institutions (MFIs) and self-help groups (SHGs). As illustrated in greater detail in Box 2, MFIs
include a few non-banking financial companies (NBFCs) which are registered as NBFC–MFIs with
the Reserve Bank of India, as well as a large number of non-governmental organisations, trusts, and
Section 25 companies, which are not under the purview of any uniform regulation. And hence, all
institutions operating in this sector have been treated as informal/semi-formal.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 15
Table 3 Basic indicators of borrowing profiles of all households, 13 PARI villages
Village State Number of
formal sources
available
to village
households
% of formal
sources in
total debt
outstanding
% of formal
sources
in fresh
borrowings
% of formal
sources in fresh
borrowings for
agriculture
Largest formal
source in total fresh
borrowing from all
formal sources (%
share)
Largest formal source
in total fresh borrowing
from all formal sources
for agriculture (%
share)
(1) (2) (3) (4) (5) (6) (7) (8)
Nimshirgaon Mah 31 92.6 75.9 97.3 Credit cooperative (73.1) Credit cooperative (70.5)
Warwat Khanderao Mah 20 84.2 66.8 69.1 Credit cooperative (73.8) Credit cooperative (84.7)
Alabujanahalli Kar 18 50.1 54.2 88.4 Commercial bank (68.4) Commercial bank (77.8)
Mahatwar UP 10 56.5 44.4 97.8 Commercial bank (96.2) Commercial bank (98.6)
Zhapur Kar 9 28.9 21.5 50.8 Commercial bank (97.6) Commercial bank (100.0)
Bukkacherla AP 8 45.0 61.1 87.6 Commercial bank (80.3) Commercial bank (77.0)
Ananthavaram AP 8 33.1 36.6 35.0 Commercial bank (83.6) Commercial bank (97.8)
Panahar WB 7 45.6 21.5 48.7 Commercial bank (85.8) Commercial bank (78.9)
Kalmandasguri WB 7 37.8 33.9 76.2 Commercial bank (81.9) Commercial bank (72.5)
Harevli UP 6 82.9 72.1 93.2 Commercial bank (86.7) Commercial bank (84.7)
Kothapalle TE 6 57.9 74.7 94.3 Commercial bank (99.3) Commercial bank (100.0)
Siresandra Kar 6 33.5 11.5 – Commercial bank (90.2) –
Amarsinghi WB 3 57.0 43.5 73.9 Commercial bank (89.9) Commercial bank (75.8)
Notes: 1. Agricultural credit refers to crop and investment credit taken for cultivation by a household.
2. Villages are arranged in descending order of column 3.
3. – Nil.
Source: PARI survey data.

HOW DO SMALL FARMERS FARE?
16
and Siresandra was also evident from the prevalence of interlinked credit and
labour transactions (Bhavani 2016).28
In most villages, the shares of formal sources in total debt outstanding were
observed to be higher than their shares in borrowings (columns 4 and 5 in
Table 3). This implies that formal sector contributed more to the stock than
to the flow of credit in these villages.
Importance of formal sources in meeting agricultural credit needs
In every village, without exception, formal sources were more active than
informal sources in meeting the agricultural credit needs of households.29 Of
the total amount borrowed for agriculture, more than 70 per cent was from
formal sources (column 6 in Table 3). This finds resonance with the literature
that discusses the focus of the formal sector on meeting production credit
needs, and thereby creating space for the informal sector to grow to cater to
consumption credit needs.
Commercial banks as key agencies of formal credit
In all except two villages, commercial banks (including RRBs) were the key
agency of formal credit. They accounted for a major part of the fresh flow of
formal credit, including the flow of formal credit to agriculture (columns 7 and
8 in Table 3). The two exceptions were Nimshirgaon and Warwat Khanderao
in Maharashtra, where credit cooperatives were a more dominant source of
formal credit in general, and formal credit for agriculture in particular (Box 1).
28 Such transactions were primarily seen among manual labour households, but also in the case of a
few small farmer households. These loans were taken for consumption purposes, including house
construction, marriage and medical expenses. The borrower had to work either for free or at a
lower wage rate than the prevalent village wage towards repayment of these loans. The lender was a
landlord/rich capitalist farmer either from the village or a neighbouring village. An implicit rate of
interest was tied to these loans (Bhavani 2016).
29 The “purpose” of credit in the PARI surveys, as in all credit-related surveys, is the “stated
purpose.” It is difficult to arrive at the exact amount of credit that actually gets used for agriculture.
This is because credit suffers from fungibility and hence, the “stated purpose” may be different
from the “actual purpose” of credit. In other words, some part of credit raised for agriculture can
be used for other purposes. Likewise, a part of the credit raised for other purposes can get diverted
to agriculture.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 17
Box 1: CRedit CooPeRatiVeS in mahaRaShtRa
Maharashtra ranks high in terms of the number of cooperatives and village
coverage of cooperatives – both credit and non-credit (production and
distribution) societies – among all Indian States (Chavan 2012). Studies have
attributed the development of cooperatives in the State to its pioneering role in
taking two major steps: adoption of the crop loans scheme and promotion of
cooperative sugar factories (Dalaya and Sabnis 1973; Majumdar 1993).
In consecutive rounds of the AIDIS, Maharashtra has consistently remained
in the top brackets when compared with other States in the share of formal credit,
spearheaded by cooperative credit (RBI 1965; RBI 1977; RBI 1989b; NSSO
1998b; NSSO 2006a). Moreover, following banking sector liberalisation, when
the share of formal sources in rural debt showed a fall in most States between the
two AIDIS rounds of 1991 and 2002, Maharashtra reported an exceptional rise
on account of an increase in the share of cooperative credit.
Among the villages discussed in this chapter, Nimshirgaon and Warwat
Khanderao in Maharashtra stood out on account of a remarkably high share
of formal credit in the borrowing profiles of village households in general, and
small farmer households in particular. This was attributed mainly to cooperative
credit. This commonality was despite the fact that Nimshirgaon belongs
to Kolhapur district in western Maharashtra, which is historically known
for a well-developed cooperative sector, while Warwat Khanderao is a dry,
cotton-growing village from Buldhana district in eastern Maharashtra where
cooperative development has received a setback since the early 1990s (Chavan
2016). The share of cooperatives in total borrowing by small farmer households
in Nimshirgaon and Warwat Khanderao was 72 and 83 per cent, respectively.
There were in all 20 cooperatives in Nimshirgaon (including four urban
cooperative banks, one DCCB, and seven non-agricultural societies/pat sansthas)
and in Warwat Khanderao the total was nine (including one urban cooperative
bank, one DCCB, and one pat sanstha).
Credit cooperatives in both villages could be classified into two broad
categories based on the nature of their operations (Swaminathan 2012). In the
first category, there were primary agricultural credit societies and DCCBs mainly
catering to agricultural (crop) credit needs of the landed sections through Kisan
Credit Cards (KCCs). Given their reliance on land as collateral, the agricultural
(crop) credit needs of the landless sections, including tenant cultivators, could
not be met by these societies. This distinction could be seen even among landed
and landless small farmer households, as shown later in the chapter while
discussing the issue of adequacy of crop credit.
As regards non-agricultural needs, including non-agricultural production
(setting up of telephone booths and shops, and purchasing trucks), house

HOW DO SMALL FARMERS FARE?
18
Key Features of the Borrowing Profiles of Small Farmer Households
Low incidence of formal sector borrowing
In each of the villages, at the most one-third of the small farmer households
reported a fresh formal sector loan during the survey year, indicating very low
incidence of formal credit (column 4 in Table 4).30 The proportion was even
lower for agriculture. At the most one-fourth of the small farmer households
reported a fresh agricultural loan from the formal sector in all villages (column
6 in Table 4).
The incidence of formal sector borrowing among small farmer households
was lower than, or at best comparable with, the average for all farmer households
in each of the villages (columns 3 and 4 in Table 4). A similar trend was
discernible when the incidence of formal sector borrowing for agricultural
purposes of small farmer households was compared with all farmer households
(columns 5 and 6 in Table 4).
More prominent presence of informal sources in meeting credit
needs other than agriculture
The percentage shares of formal sources in fresh borrowing by small farmer
households was less than or equal to 50 per cent, leaving the rest to be met by
informal sources in all villages excepting Nimshirgaon, Harevli, Bukkacherla,
Amarsinghi, and Warwat Khanderao (column 4 in Table 5).
Informal sources, thus, were a more dominant source of credit for small
farmer households in most villages. Details about the various types of informal
sources operational in these villages are discussed in Box 2.
30 A similar point is also noted in the literature; see villages studies discussed in Dreze et al, 1998;
Swaminathan, 1991; Sarap, 1990; Ramachandran, 1990.
construction/repair, and ceremonial expenses, village households relied mainly
on the second category of cooperatives, i.e. urban cooperative banks and non-
agricultural credit societies or pat sansthas. These societies relied on a host of
securities including land, property, and fixed deposits. Given the focus on land
by both types of cooperatives, their primary beneficiaries in both villages were
landed farmer households. The landless sections, including manual workers, also
borrowed from the cooperative societies, but loans taken by these households
were fewer in number and were from cooperatives belonging to the second
category. While the accessibility to cooperatives in the second category seemed
better for the landless sections, the rates charged by them were perceptibly higher
than the societies in the first category.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 19
Table 4 Incidence of borrowing, all farmer and small farmer households, 13 PARI villages
Village State % of households reporting at least one fresh
borrowing from formal sources
% of households reporting at least one
fresh borrowing from formal sources for
agriculture
All farmer
households
Small farmer
households
All farmer
households
Small farmer
households
(1) (2) (3) (4) (5) (6)
Bukkacherla Andhra Pradesh 42.9 33.3 28.6 27.8
Ananthavaram Andhra Pradesh 32.0 27.1 30.7 25.0
Alabujanahalli Karnataka 27.5 25.7 16.7 15.9
Warwat Khanderao Maharashtra 27.9 25.5 24.6 22.6
Nimshirgaon Maharashtra 35.4 24.2 27.1 15.2
Harevli Uttar Pradesh 33.3 22.2 24.6 13.3
Kalmandasguri West Bengal 22.1 22.1 19.1 19.1
Kothapalle Telangana 21.9 21.4 12.5 10.7
Amarsinghi West Bengal 14.8 14.8 13.0 13.0
Panahar West Bengal 13.8 11.8 12.5 11.1
Siresandra Karnataka 8.3 8.9 – –
Mahatwar Uttar Pradesh 9.5 7.2 9.5 7.2
Zhapur Karnataka 12.5 3.8 2.5 –
Notes: 1. Agricultural credit refers to crop and investment credit taken for cultivation by a household.
2. Villages are arranged in descending order of column 4.
3. – Nil.
Source: PARI survey data.

HOW DO SMALL FARMERS FARE?
20
Table 5 Basic indicators of borrowing profiles of small farmer households, 13 PARI villages
Village State % of formal
sources in fresh
borrowings
by all farmer
households
% of formal
sources in fresh
borrowings by
small farmer
households
% of formal
sources in fresh
borrowings for
agriculture by all
farmer households
% of formal sources
in fresh borrowings
for agriculture
by small farmer
households
% of formal sources in
fresh borrowings for
agriculture and allied
activities by small
farmer households
(1) (2) (3) (4) (5) (6) (7)
Nimshirgaon Maharashtra 95.9 77.2 97.0 76.0 76.0
Harevli Uttar Pradesh 77.1 57.8 98.4 96.3 96.3
Bukkacherla Andhra Pradesh 64.8 55.6 82.5 84.3 85.1
Amarsinghi West Bengal 50.3 50.3 77.2 77.2 75.2
Warwat Khanderao Maharashtra 73.1 50.0 76.9 67.2 67.2
Alabujanahalli Karnataka 64.2 46.8 91.0 87.4 87.4
Kalmandasguri West Bengal 39.9 39.9 74.7 74.7 74.7
Panahar West Bengal 22.5 38.9 48.4 47.9 47.9
Kothapalle Telangana 84.6 36.7 89.0 53.4 43.0
Mahatwar Uttar Pradesh 33.9 23.3 97.4 95.3 95.3
Ananthavaram Andhra Pradesh 38.9 17.9 40.3 19.6 18.5
Siresandra Karnataka 12.3 13.2 – – –
Zhapur Karnataka 24.6 12.4 41.7 – –
Notes: 1. Agricultural credit refers to crop and investment credit taken for cultivation by a household.
2. Villages are arranged in descending order of column 4.
3. – Nil.
Source: PARI survey data.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 21
Box 2: the SyStem oF inFoRmal/Semi-FoRmal CRedit FoR Small FaRmeR
houSeholdS
In the case of informal sources of credit, as the name suggests, the terms and
conditions of credit transactions lack any formalisation or standardisation. While
there may be certain State-specific laws regulating usury and bonded labour,
most informal sources, in practice, are not bound by any legislative control
(Swaminathan 1986). Similarly, they are outside the purview of monetary or
prudential regulations, such as rules governing interest rates. This gives them
complete freedom in negotiating the terms of credit. Hence, every informal
credit transaction turns out to be unique in nature (ibid.). It is influenced by a
variety of factors, such as “prior relation” between the lender and the borrower,
and asset-holding, caste, and gender of the borrower (Nagaraj 1981; Harriss-
White and Colatei 2004). This makes the credit relation invariably personalised
and, in many cases, power-based (Bhaduri 1982). Thus the persistence of an
informal sector is considered to be a feature of backwardness of a credit system.
And hence, the objective of rural credit policy in India since Independence has
been to countervail this sector (RBI 1956).
In the PARI study villages, informal sources operated in a number of guises,
including landlords, rich/medium peasants, professional moneylenders, input
dealers, and friends/relatives. While the presence of friends/relatives as an interest-
free informal source of credit for small farmer households could be seen in every
village, there was a distinct State-wise pattern that emerged with regard to the
nature of other informal sources. First, the control of landlords and rich/middle
peasants was prominent in villages of Andhra Pradesh, Telangana, Karnataka,
and Uttar Pradesh: Ananthavaram and Bukkacherla in Andhra Pradesh;
Kothapalle in Telengana; Alabujanahalli, Siresandra, and Zhapur in Karnataka;
and Harevli in Uttar Pradesh. Secondly, contrary to general belief, the presence
of professional moneylenders was less widespread and they were seen mostly in
the States of Andhra Pradesh and Karnataka (in Siresandra village, which had a
higher share of 20 per cent in total loans of small farmer households). Thirdly,
input dealers/traders were an important informal source for small farmer
households in all three villages from West Bengal (their shares in total loans
ranging between 48 and 76 per cent). Fourthly, in Nimshirgaon, Maharashtra,
with the significant spread of formal sources, informal sources operated primarily
in the form of friends/relatives, and there was very little presence of other types
of informal sources as seen elsewhere. In Warwat Khanderao (Maharashtra) too,
small farmer households mainly borrowed from friends/relatives, but some loans
were also reported from input dealers (both friends/relatives and input dealers
having shares of 22 per cent each in total loans).

HOW DO SMALL FARMERS FARE?
22
The terms and conditions of most informal sources except friends/relatives
were onerous. The rate of interest charged by professional moneylenders went
up to 120 per cent per year in some villages. There was one case of a small farmer
household in Alabujanahalli (Karnataka) which had borrowed from landlords/
rich peasants and committed to work for them at lower than the market rate.31
This suggested the presence of interlinked credit transactions among small
farmer households.32 Similarly, interlinkages with the product market could also
be seen in the West Bengal villages, where input dealers sold inputs at higher
than market prices to those small farmer households who bought them on
credit. These small farmer households also had to sell the produce to the same
input dealer immediately after the harvest. Although the prices were not fixed
in advance, small farmer households generally received prices lower than the
market prices (Bhavani 2015).
In some of the villages, micro-finance institutions (MFIs) and self-help
groups (SHGs) were also a part of the credit system. We define the micro-
finance sector as an informal or, at best, a semi-formal sector. This is because,
pending the passage of the Micro Finance Development and Regulation Bill, the
vast micro-finance sector comprising non-banking finance company (NBFC)–
MFIs, not-for-profit companies (Section 25 companies), not-for-profit non-
governmental organisations (NGOs)/charitable or investment trusts, and SHGs,
is not regulated by any uniform legislation. Moreover, except for NBFC–MFIs,
comprising large-sized MFIs which are registered with and regulated by the RBI,
the financials of other institutions are not regulated or supervised regularly by a
public authority.
Following the introduction of micro-finance in India in the early 1990s,
there emerged a concentration of MFIs in the southern region of the country,
particularly in the States of Andhra Pradesh and Karnataka. Accordingly, we
observed that MFIs and SHGs were an important source of credit for small
farmer households in all three study villages from Karnataka and in Kothapalle
from Telangana (earlier Andhra Pradesh), with the share ranging between 18 per
cent and 40 per cent of total loans taken by small farmer households. The MFIs
operational in these villages were SKS Micro Finance, Shri Chaitanya Finance,
and Spandana Spoorthy Financial Limited. We also observed that an MFI
(Bandhan Micro Finance) was a popular source of credit among small farmer
households in West Bengal villages, with the share in total loans ranging from 31
per cent in Kalmandasguri to 13 per cent in Panahar (Bhavani 2015).
31 The market wage rate was reported to be Rs 100 per day, while they received Rs 80 per day
with the rest deducted towards interest on the loan.
32 Such interlinked transactions were more commonly observed among manual worker
households in the village.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 23
A closer look at the operations of MFIs brought out their aggressive marketing
strategies, reliance on a wide network of agents, and carefully designed loan and
insurance products, which set them apart from other formal and informal sources
of credit.33 First, the agents of these companies played a vital role in making
assessments of the payment capacity and histories of the borrowers. MFIs also
employed collection agents who visited the villages for collection of repayments.
In case a borrower failed to repay, other borrowers from the village were required
to mobilise money for repayment. There were cases where borrowers had to sell
assets, including land, to make their weekly payments. Even if a borrower fled
the village, the MFI was able to trace him through its network of branches and
collection agents, and ensure recovery. Secondly, interest rates ranged between
27 per cent and 56 per cent per annum. Moreover, the repayment schedule
was designed in a manner such that the real interest rate worked out to be
much higher than when the entire loan was repaid at the end of the term of
the loan. Interestingly, many borrowers were not even aware of the actual rates
and often perceived the rates to be very low, underlining the role played by
agents in marketing the products. Loans were repaid through equalised weekly
instalments. Thirdly, there was a debt trap that the MFI engineered in such
a manner that once a loan was repaid, the borrower had to take another loan
immediately; failing to do so could result in cancellation of the membership
of the borrower. Finally, through compulsory savings schemes in which the
borrower was forced to invest, MFIs cushioned themselves against defaults.
33 These observations primarily relate to MFIs in West Bengal, as discussed in Ramachandran
(2013). However, we have also tried to include certain features of MFIs working in Andhra
Pradesh and Karnataka in our discussion.
Importantly, a comparison of the shares of formal sources in total borrowings
of small farmer households and all households in a village suggested that the
extent of development of a village credit system was neither a necessary nor a
sufficient condition for the formal sector to be more involved in meeting the
credit needs of small farmer households (read Table 3 with Table 5).
When compared with all farmer households too, the shares of formal
sources turned out to be lower for small farmer households (columns 3 and
4 in Table 5). There were three exceptions to this observation: the villages
of Amarsinghi, Kalmandasguri, and Panahar – all small farmer-dominated
villages in West Bengal (column 3 in Table 8).
Formal sources were more important for meeting the agricultural credit
needs of small farmer households. In nearly all the study villages except Panahar
(Bankura district, West Bengal) and Ananthavaram (Guntur district, Andhra
Pradesh), formal sources met more than half of the agricultural credit needs

HOW DO SMALL FARMERS FARE?
24
of these households (column 6 in Table 5). In the case of Ananthavaram, the
share of formal sources in total borrowings for agriculture was only about 20
per cent, mainly because of the large presence of tenant cultivators in the village
(Ramachandran et al. 2010). Small farmer households in Siresandra (Kolar
district, Karnataka) and Zhapur (Kalaburagi district, Karnataka) reported no
fresh borrowing for agriculture during the survey years. In Siresandra, apart from
agriculture, small farmer households were also involved in sericulture. However,
even for sericulture, no small farmer household in the village reported any fresh
formal sector loan. In other villages too, formal sector credit for allied activities,
including sericulture, dairying, poultry, and fishery, was almost close to zero; this
can be discerned from the fact that there is hardly any difference between columns
6 and 7 of Table 5 for most villages. Only in Amarsinghi (Malda district, West
Bengal), Kothapalle (Karimnagar district, Telangana), and Ananthavaram small
farmer households reported some borrowing for dairying (purchase of cows and
buffaloes), but this borrowing was entirely from informal sources.
The shares of formal sources in total borrowing for agricultural purposes by
small farmer households were either lower than or comparable with those for
all farmer households (columns 5 and 6 in Table 5). Evidently, small farmer
households relied more on informal sources for meeting their agricultural
credit needs than other farmer households. However, the gap between columns
3 and 4 was generally wider than that between columns 5 and 6 across the
villages. This implied that the reliance of small farmer households on informal
sources was greater in the case of consumption credit needs.
Higher interest cost of borrowing
The weighted average interest rate for small farmer households was higher
than for all farmer households except in the three West Bengal villages and
Siresandra in Karnataka, where small farmer households made up nearly the
whole of farmer households (columns 3 and 4 in Table 6). The weighted
average was worked out by weighing the interest rate on every fresh loan
contracted during the survey year by the share of its amount in total amount
borrowed irrespective of the source.34 Similarly, in the case of borrowing for
agriculture too, the weighted average interest for small farmer households was
generally higher than for all farmer households (columns 3 and 4 in Table 7).
A higher interest cost for small farmer households reflected the dominance of
informal sources in their borrowing profile as compared to other categories of
farmer households.
34 As the rates are nominal and pertain to different survey years, we refrain from a direct comparison
of the interest rates across villages here.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 25
The interest rates in the formal sector, even if deregulated, are governed
by set standards, as against completely non-transparent and arbitrary ways
of setting rates in the informal sector. As a result, borrowing from the formal
sector is expected to be cheaper than from the informal sector. Accordingly,
the weighted average rates on formal sector borrowings for agriculture were
also found to be significantly lower than the rates on total borrowings for
agriculture by small farmer households (columns 4 and 5 in Table 7).
Access to Formal Credit for Small Farmer Households
The access to crop credit from formal sources for small farmer households was
modelled using a logistic model. The binary dependent variable used in the
model is given below:
Crop Credit Accessi = {1 if a small farmer household reported at least one
crop loan from a formal source (commercial bank/credit cooperative/any other
formal source) during the survey year; {0 otherwise.
The results from the baseline model (model summarised in Appendix 1 and
results in Appendix 2) indicated a positive and statistically significant role of
Table 6 Weighted average interest rates on borrowings by all farmer and small farmer
households, 13 PARI villages
Village State Weighted average interest rate on
Fresh borrowings by
all farmer households
Fresh borrowings by
small farmer households
(1) (2) (3) (4)
Amarsinghi West Bengal 5.6 5.6
Panahar West Bengal 13.2 6.5
Kalmandasguri West Bengal 10.0 10.0
Mahatwar Uttar Pradesh 10.1 10.9
Nimshirgaon Maharashtra 11.5 13.8
Warwat Khanderao Maharashtra 12.9 14.2
Harevli Uttar Pradesh 14.0 15.9
Bukkacherla Andhra Pradesh 16.5 17.7
Ananthavaram Andhra Pradesh 17.4 19.0
Kothapalle Telangana 13.8 19.4
Alabujanahalli Karnataka 19.2 21.4
Siresandra Karnataka 25.4 24.6
Zhapur Karnataka 23.9 26.8
Note: Villages are arranged in ascending order of column 4.
Source: PARI survey data.

HOW DO SMALL FARMERS FARE?
26
land operated in determining the access to formal credit.35 This underlined the
point about collateral and a possible risk aversion on the part of formal sources
while extending credit to small farmer households. Similarly, the social group
status of a small farmer household also significantly determined the access to
formal credit; if a small farmer household belonged to a backward social group
(Scheduled Caste/Scheduled Tribe/Muslim), it was less likely to gain access to
formal credit, ceteris paribus. Apart from a social bias, the issue of social group
also relates to the lack of access to land as collateral for backward social groups.
It thus brings to the fore the debilitating role of caste in economic development.
35 There have been very few attempts to model the access to formal credit for small farmers in
India. Among these, the study by Sarap (1990) using data on small farmers (defined as households
operating less than or equal to 5 acres) from rural Orissa, similar to our study, found land operated
to be the most significant determinant of access to formal credit. He also found that caste had a
negative but not significant impact on access.
Table 7 Weighted average interest rates on borrowings by all farmer and small farmer
households for agriculture, 13 PARI villages
Village State Weighted average interest rate for
All farmer
households
on fresh
borrowings
for agriculture
Small farmer households on
Fresh
borrowings
for agriculture
Fresh
borrowings for
agriculture from
formal sources
(1) (2) (3) (4) (5)
Panahar West Bengal 38.7 7.9 7.0
Kalmandasguri West Bengal 7.9 7.9 7.0
Amarsinghi West Bengal 8.0 8.0 7.0
Alabujanahalli Andhra Pradesh 8.8 8.7 6.2
Harevli Uttar Pradesh 12.9 13.2 13.3
Bukkacherla Andhra Pradesh 14.2 14.2 12.3
Mahatwar Uttar Pradesh 12.0 14.2 12.5
Nimshirgaon Maharashtra 11.4 14.5 11.4
Kothapalle Telangana 13.2 17.1 12.0
Warwat Khanderao Maharashtra 15.8 17.6 12.4
Ananthavaram Andhra Pradesh 17.5 19.2 12.0
Zhapur Karnataka 25.9 – –
Siresandra Karnataka 6.9 – –
Notes: 1. Agricultural credit refers to crop and investment credit taken for cultivation by a
household.
2. Villages are arranged in ascending order of column 4.
Source: PARI survey data.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 27
The village-specific number of small farmer households was significant in
determining the access to crop credit; the higher the number of small farmer
households in a village, the higher was the average access to crop credit for
these households. This suggested the possibility of small farmer households
organising themselves into cooperatives/joint liability groups in order to gain
greater access to credit, if they were in large numbers in a given village.
The baseline model was augmented to test different hypotheses:
(1) We tested for the impact of tenancy status of small farmer households on
access (column 2 of Appendix 2). It showed that if a small farmer household
operated self-owned land, the probability of gaining access to crop credit was
higher than when it was a partly or fully tenant cultivator household.
(2) We then tested the hypothesis that greater crop diversification by a
small farmer household through better irrigation and commercial cropping
augured well for the access to crop credit. We observed that the controls for
crop diversification, although positive, were not significant in determining
access (column 3 in Appendix 2).
(3) The hypothesis of diversification outside agriculture in the form of allied
activities and non-agricultural employment facilitating access to crop credit for
small farmer households was also tested. This was because employment outside
agriculture, apart from offering newer avenues of income, could also open
up newer formal credit facilities to these households. While non-agricultural
employment had a positive impact on access, the presence of allied activities
diminished the access to crop credit (column 4 in Appendix 2). While crop
credit is short-term in nature, credit to allied activities figures under long-term
agricultural credit. Hence, this negative association could purely be a result
of the accounting of agricultural credit. However, the impact of both these
variables on access was not statistically significant.
(4) Finally, we tested the hypothesis of alternative/informal sources
of agricultural credit bringing down the access to crop credit from formal
sources. We observed that the incidence of informal credit for agriculture
brought down the access to formal credit, suggesting a substitution effect, but
the impact was not found to be statistically significant (column 5 in Appendix
2). In running each of these models, our baseline results held true and each of
the models passed the goodness of fit test.
Some Pointers about the Adequacy of Formal Credit for Small
Farmer Households
The question of adequacy of formal credit for small farmer households was
addressed using two basic indicators. First, following from the literature
(Randhawa and Sundaram 1990), the share of small farmer households in total

HOW DO SMALL FARMERS FARE?
28
borrowings from the formal sector in a village was compared with their share
in total land operated (columns 4 and 5 in Table 8).36 We also compared their
share in total crop credit from the formal sector with their share in total land
operated (columns 4 and 6 in Table 8). The shares in formal credit in general,
and crop credit in particular, for small farmer households were lower than
their share in land operated. The notable exceptions to this observation were
Amarsinghi, Panahar, and Siresandra, villages that had a high concentration of
small farmer households among farmers (column 3 in Table 8).
Secondly, using the scale of finance as a rough benchmark for the amount
of crop credit a household was entitled to, the crop credit estimate for a small
farmer household was worked out taking its crop-mix (excluding intercrops)
in the survey year. This estimate was then compared with the actual amount of
crop credit received by/sanctioned to the small farmer household, to work out
a ratio of actual crop credit to the crop credit estimate (column 6 in Table 9).
For this comparison, small farmer households in a given village were arranged
in an ascending order of the size of land operated, and the smallest two fully
owner-cultivator households were selected as case studies.
The comparison of actual crop credit with crop credit estimate brings out a
wide variation across villages irrespective of the crop-mix. However, the broad
observation was that small farmer households generally received an amount
that was lower than what they were entitled to, based on crop-mix and area
operated. The divergence in these two variables could have been on account
of many factors, including the lack of willingness of the formal agency to
sanction the amount that was due owing to the past credit history of a small
farmer household and the lack of adequate collateral in the form of land,
among others.
We also worked out the ratio of actual crop credit to crop credit estimate
for the smallest partly tenant and fully tenant small farmer household (column
6 in Table 10). It showed that the ratio was of course lower than 100 per cent,
but it was also significantly lower than that of fully owner cultivators as shown
in Table 9. Moreover, for fully tenant cultivator households, the ratio was zero
in all villages. This implied that notwithstanding the focus of the crop credit
scheme on crops cultivated and not land owned, landless tenant cultivators
did not receive any crop credit from formal agencies.
36 The literature uses the share of small farmers in total land operated as an indicator of the adequacy
of agricultural credit, particularly crop credit, to this segment (Randhawa and Sundaram 1990). This
is because given the low capacity of self-financing among small farmers, their credit requirements
for seasonal agricultural operations are expected to be comparable with the land operated by them
(ibid.).

FORMAL CREDIT AND SMALL FARMERS IN INDIA 29
Table 8 Basic indicators of small farmer households, 13 PARI villages
Village State Small farmer
households as %
of total number of
farmer households
% of land
operated by
small farmer
households
% of formal sector
borrowings by small
farmer households
% of formal sector
borrowings for crop
cultivation by small
farmer households
(1) (2) (3) (4) (5) (6)
Amarsinghi West Bengal 100.0 87.1 95.7 100.0
Kalmandasguri West Bengal 100.0 79.0 78.3 70.3
Panahar West Bengal 94.7 59.9 45.7 65.5
Siresandra Karnataka 93.3 69.5 91.7 –
Mahatwar Uttar Pradesh 93.2 48.3 17.0 45.8
Kothapalle Telangana 87.5 51.3 7.7 9.8
Warwat Khanderao Maharashtra 86.9 47.2 32.2 57.3*
Alabujanahalli Karnataka 81.9 48.8 25.7 46.1
Nimshirgaon Maharashtra 68.8 27.5 10.7 8.9
Harevli Uttar Pradesh 65.2 22.4 21.3 15.2
Zhapur Karnataka 65.0 25.3 9.0 –
Bukkacherla Andhra Pradesh 64.3 40.2 31.2 30.1
Ananthavaram Andhra Pradesh 64.0 20.9 12.2 14.8
Notes: 1. – no crop credit by small farmer households during the survey year.
2. Villages are arranged in descending order of column 3.
3. * This share is high on account of one small farmer household which had reported three formal sector loans for agriculture. After excluding this outlier, the
share was 43.3 per cent.
Source: PARI survey data.

HOW DO SMALL FARMERS FARE?
30
Table 9 Comparison of crop credit estimate with total crop credit received by small farmer households, 11 PARI villages, two case studies of smallest
owner cultivators (in terms of size of land operated)
No. Village State Crop credit estimate
based on scale of
finance (Rs)
Total crop credit
received during the
survey year (Rs)
Ratio (%) Crop-mix in the survey year
(1) (2) (3) (4) (5) (6=5/4) (7)
1 Alabujanahalli Karnataka 32,450 15,000 46.2 Sugarcane, mulberry, paddy
2 Alabujanahalli Karnataka 48,000 20,000 41.7 Paddy, sugarcane, mulberry
3 Ananthavaram Andhra Pradesh 9,500 9,000 94.7 Paddy, black gram
4 Ananthavaram Andhra Pradesh 12,700 8,000 63.0 Paddy, maize
5 Bukkacherla Andhra Pradesh 26,250 30,000 114* Groundnut, red gram
6 Bukkacherla Andhra Pradesh 15,000 12,000 80.0 Groundnut, red gram, green gram, cow pea
7 Kothapalle Telangana 20,575 6,000 29.2 Paddy, maize
8 Kothapalle Telangana 39,200 20,000 51.0 Cucumber, groundnut, paddy, maize
9 Nimshirgaon Maharashtra 32,625 20,000 61.3 Sugarcane, coriander, cluster beans
10 Nimshirgaon Maharashtra 12,970 10,000 77.1 Soybean, jowar
11 Warwat Khanderao Maharashtra 23,300 10,000 42.9 Cotton, sorghum
12 Warwat Khanderao Maharashtra 4,550 3,500 76.9 Cotton
13 Panahar West Bengal 104,045 40,000 38.4 Paddy, potato, vegetables
14 Panahar West Bengal 9,765 6,000 61.4 Paddy, potato sesame
15 Amarsinghi West Bengal 26,532 10,000 37.7 Paddy, mustard/rapeseed, paddy
16 Amarsinghi West Bengal 46,347 10,000 21.6 Paddy, mustard, potato, jute
17 Kalmandasguri West Bengal 41,827 15,000 35.9 Paddy, potato

FORMAL CREDIT AND SMALL FARMERS IN INDIA 31
18 Kalmandasguri West Bengal 10,000 10,000 100.0 Paddy, potato
19 Harevli Uttar Pradesh 56,430 20,000 35.4 Sugarcane, wheat
20 Harevli Uttar Pradesh 72,270 11,000 15.2 Sugarcane, wheat, sorghum
21 Mahatwar Uttar Pradesh 26,000 25,000 96.2 Paddy, pulses, wheat
22 Mahatwar Uttar Pradesh 37,198 4,500 12.1 Paddy, sugarcane, maize, pulses
Note: * The household reported two crop loans during the survey year.
Source: PARI survey data.

HOW DO SMALL FARMERS FARE?
32
Table 10 Comparison of crop credit estimate with total crop credit received by small farmer households, 11 PARI villages, case study of the smallest
partly and fully tenant cultivator (in terms of size of land operated)
No. Village State Crop credit estimate
based on scale of
finance (Rs)
Total crop
credit during
the survey year
(Rs)
Ratio (%) Crop-mix
(1) (2) (3) (4) (5) (6 = 5/4) (7)
Partly tenant cultivator households
1 Alabujanahalli Karnataka 51,500 10,000 19.4 Paddy, sugarcane
2 Amarsinghi West Bengal 31,870 18,000 56.5 Paddy, potato, jute
3 Ananthavaram Andhra Pradesh 59,530 7,000 11.8 Paddy, maize
4 Bukkacherla Andhra Pradesh 82,357 10,000 12.1 Groundnut, paddy
5 Harevli Uttar Pradesh 84,843 6,500 7.7 Sugarcane, wheat, paddy, lentil
6 Kalmandasguri West Bengal 87,381 20,000 22.9 Paddy, potato, jute
7 Kothapalle Telangana 29,000 0 0 Paddy
8 Mahatwar Uttar Pradesh 30,800 0 0 Sugarcane, paddy
9 Nimshirgaon Maharashtra 9,000 0 0 Sugarcane, soybean
10 Panahar West Bengal 17,950 3,000 16.7 Paddy, potato
11 Warwat Khanderao Maharashtra 42,400 16,000 37.7 Cotton, green gram, sorghum

FORMAL CREDIT AND SMALL FARMERS IN INDIA 33
Fully tenant cultivator households
1 Alabujanahalli Andhra Pradesh 32,000 0 0 Paddy, sugarcane, paddy
2 Amarsinghi West Bengal 8,000 0 0 Paddy
3 Ananthavaram Andhra Pradesh 26,000 0 0 Paddy, maize
4 Bukkacherla Andhra Pradesh 38,000 0 0 Paddy, groundnut
5 Harevli Uttar Pradesh 6,700 0 0 Paddy
6 Kalmandasguri West Bengal 24,400 0 0 Paddy, potato, mustard
7 Kothapalle Telangana 8,500 0 0 Paddy
8 Mahatwar Uttar Pradesh 23,200 0 0 Paddy, wheat
9 Nimshirgaon Maharashtra 7,000 0 0 Tomato
10 Panahar West Bengal 12,300 0 0 Potato, paddy
Note: There was no fully tenant cultivator household in Warwat Khanderao.
Source: PARI survey data.

HOW DO SMALL FARMERS FARE?
34
Our crop credit estimate was based only on the prevailing scale of finance
and area under cultivation of a given crop. However, as per the crop credit
scheme, formal agencies are expected to also add a component for post-
harvest/consumption requirements, maintenance expense on assets, and
small investment credit requirements while fixing the crop credit limit over
and above the scale of finance and area under cultivation.37 Hence, in all
likelihood, the ratio that we obtained might have been an overestimate, and
the gap between the actual crop credit and crop credit that was due could have
been even wider.
Whether or not the crop credit received is adequate to meet the credit needs
of small farmer households is a much broader issue. It may require more granular
data to ascertain whether or not the scales of finance fixed by formal agencies
are adequate to cover the going costs of cultivation, an exercise that cannot be
attempted here.38 Further, as we did not attempt a comparison for large farmer
households, it was also not possible to judge whether small farmer households
were being treated more unfairly than large farmer households in the provision
of crop credit. However, given that small farmer households are an integral
part of India’s agriculture, the inadequacy of the crop credit scheme in meeting
their credit requirements suggests the need for a relook at the scheme.
ConCluSionS and PoliCy imPliCationS
This chapter attempts to analyse the formal credit system in rural India from
the point of view of small farmers and their credit needs. Small farmers have
been at the centre of the design of credit policy even before Independence,
when credit cooperatives, institutions aimed at catering to the production
credit needs of small farmers, were formed. After bank nationalisation, when
commercial banks were roped into the provision of rural credit, small farmers
were identified as a sector of priority for these institutions as well. A number
of supporting policy measures were undertaken during this phase, including
the creation of RRBs and SFDA, to ensure enhanced flow of formal credit to
small farmers for agriculture at regulated rates of interest.
The initiation of banking sector liberalisation in the early 1990s altered
the social orientation of the banking system, and, as a result, a number of
definitional changes were brought about in the priority sectors identified
for banks. Small farmers continued to be a part of agriculture under priority
37 See “Revised Scheme for Issue of Kisan Credit Card (KCC) – May 2012,” www.rbi.org.in.
38 The existing field-level evidence on this issue suggests that scales of finance are themselves
underestimates and need to be raised to adequately cover the credit needs of farmer households; see
Samantara (2010).

FORMAL CREDIT AND SMALL FARMERS IN INDIA 35
sectors. However, changes in the definition of agriculture, with a thrust
on commercial and capital-intensive agricultural activities, seems to have
weakened the focus on small farmers. Also, a decline in the rural branch
network and fall in the growth of agricultural credit during this phase raised
questions about the actual flow of bank credit to small farmers.
The policy of financial inclusion pursued since 2005, along with the
comprehensive credit policy for agriculture, arrested the decline in the rural
branch network and revived the flow of formal credit to agriculture. Moreover,
credit to small farmers as part of priority sector lending was formalised by
setting a separate sub-target for this group of cultivators in 2015.
Whether these changes in rural credit policy also meant a change in the
flow of formal credit to small farmers on the ground requires to be established
through credible time-series data, which are not available from secondary
sources. The available banking data indicate that the growth of credit to small
farmers and their share in total agricultural credit were on a decline since the
early 1990s. The decline was arrested after 2005 and a rise in these variables
could be seen after 2010.
Notwithstanding these favourable changes over the second half of the
2000s, the PARI village data collected between 2005 and 2010 suggest a
general inadequacy of, and limited access to, formal credit for small farmer
households. In none of the villages surveyed did more than one-third of small
farmer households report fresh borrowing from formal sources during the
survey year. The weak access to formal credit for small farmer households was
also reflected in the relatively high interest costs for these households.
We drew data from a diverse mix of 13 villages belonging to five States –
Andhra Pradesh, Karnataka, Maharashtra, Uttar Pradesh, and West Bengal
– which showed a wide variation in the overall development of the formal
credit system. However, except for Nimshirgaon and Warwat Khanderao
in Maharashtra, in no other village did we find a direct correlation between
the overall development of formal sources in a village and the extent of
involvement of these sources in providing credit to small farmer households.
In Maharashtra, the fairly extensive reach of credit cooperatives – both
agricultural and non-agricultural societies – ensured better access to formal
credit for small farmer households. Hence, the overall development seemed
neither a necessary nor a sufficient condition to ensure the provision of formal
credit to small farmer households in a village. The most striking case in point
was in the villages of West Bengal, which had a relatively underdeveloped
formal credit system. However, the share of formal sources for small farmer
households was higher than that for all farmer households, suggesting better
availability of formal credit for small farmer households.

HOW DO SMALL FARMERS FARE?
36
The key to access to formal credit for small farmer households in all the
surveyed villages was the availability of owned land and the social group status
of the household. The larger the extent of land, the higher was the probability
of gaining access to formal credit for a small farmer household, ceteris paribus.
Juxtaposing this finding with the observation made in the foregoing paragraph,
it could be said that land reforms and the availability of land as collateral were
possibly factors that made a difference to the access of formal credit for small
farmer households in West Bengal.
Across villages, we observed that formal sources were mainly involved in
lending for agriculture, subject to, of course, an element of fungibility. Their
involvement in lending for the consumption-related needs of small farmer
households was limited. Notwithstanding the involvement of small farmer
households in allied activities, including dairying and sericulture, there was
hardly any formal sector credit reported even for these activities. This implied
that apart from the availability of collateral, the purpose of seeking credit was
also responsible for limited access to formal credit by small farmer households,
and a consequent perpetuation of informal sources in village credit systems.
Not only was access to formal credit limited for small farmer households,
but the extent of crop credit was also inadequate when compared with the
prevailing scales of finance.
This chapter, thus, suggests the need to expand the reach of formal credit
to small farmer households. Redistribution of land through land reforms is
a means of ensuring collateral for formal credit to small farmer households,
apart from the other economic and social benefits entailed in these reforms.
However, there is also a need to reform the formal credit system in general,
and crop credit system in particular, to broaden their reach and adequacy.
Apart from reducing the exclusive thrust on land as collateral and widening
the reach of formal credit to meet the consumption-related needs of small
farmer households, there is also a need to ensure that crop credit reaching
small farmer households is in line with the existing scales of finance.
The authors thank Madhura Swaminathan, Judith Heyer, Aparajita Bakshi, Shamsher
Singh, and Arindam Das for useful comments on an earlier draft. The views expressed
in this chapter are the personal views of the authors and not of the organisations to
which they are affiliated.

FORMAL CREDIT AND SMALL FARMERS IN INDIA 37
aPPendix 1: BaSeline model FoR aCCeSS to CRoP CRedit
Crop Credit Access
= C + β1 Land operatedi + β2 social groupi + β3 Average schooling yearsi + β4
Number of small farmer householdsi + ηi
where,
Number of small farmer householdsi captures the number of small farmer
households in a given village. It thus controls for the dominance of small farmer
households in a given village, which can have implications for the bargaining
power of these households in the credit system.
ηi = household-specific effect for idiosyncratic characteristics of household ‘i’.
The illustration of each of the variables used in the model and its descriptive
statistics are given Appendix 3 and 4 respectively. To minimise the presence
of multi-collinearity in the model, the correlation coefficients for each pair
of variables are worked out and are found to range between 0 and (+/–)0.5,
suggesting weak-to-moderate degree of correlation. See Jain et al. (2011).

HOW DO SMALL FARMERS FARE?
38
Appendix 2: Modelling access to crop credit from the formal sector for small farmer households, 13 PARI villages
Explanatory variable Dependent variable: CropCreditAccessi (Access to crop credit from formal sector during the survey
year – 0 if no access; 1 if access)
(1) (2) (3) (4) (5)
Baseline
model
Model II:
Control for
tenancy
Model III:
Control for crop
diversification
Model IV: Control for
diversification outside
crop cultivation
Model V: Control for
alternative sources of
agricultural credit
Land operatedi 0.231**
(0.094)
0.233**
(0.094)
0.209**
(0.096)
0.178*
(0.099)
0.185**
(0.100)
Social groupi 1.073***
(0.364)
0.899**
(0.372)
0.933**
(0.372)
0.916**
(0.375)
0.908**
(0.377)
Average schooling yearsi 0.017
(0.047)
0.002
(0.047)
0.0008
(0.048)
0.003
(0.048)
0.003
(0.048)
Number of small famer householdsi 0.790*
(0.450)
1.006*
(0.528)
1.744*
(0.938)
1.681*
(0.960)
1.650*
(0.959)
Tenancy statusi –0.667***
(0.228)
–0.633***
(0.231)
–0.637***
(0.231)
–0.628***
(0.232)
Irrigation indexi –0.039
(0.372)
–0.011
(0.381)
–0.035
(0.390)
Commercial crop cultivationi 0.622**
(0.311)
0.636
(0.425)
0.665**
(0.343)
Share of allied activities GVOi –1.084
(0.789)
–1.036
(0.778)
Share of non-agricultural employmenti 0.047
(0.742)
0.018
(0.735)

FORMAL CREDIT AND SMALL FARMERS IN INDIA 39
Incidence of informal sector borrowingi –0.260
(0.347)
Constant Yes Yes Yes Yes Yes
State dummies Yes Yes Yes Yes Yes
No of observations 744 744 744 744 744
P-value (Hosmer-Lemeshow c2)^ 0.40 0.61 0.76 0.57 0.52
Notes: Figures in parentheses are robust standard errors.
*** p <0.01, ** p<0.05, * p<0.1.
^ gives the p-value for the null hypothesis that the specified model fits the data.
Source: Estimated from PARI survey data.

HOW DO SMALL FARMERS FARE?
40
Appendix 3: Description of Variables Used in the Logistic Model
Nomenclature Description of the variable
Land operated Total area operated by a household during the survey year
Social group SC/ST/Muslim households = 0; Others = 1
Average schooling years Average years of schooling of all members in a household
Number of small farmer
households
Log (number of small farmer households in a given village)
Tenancy status Owner cultivator = 0; partly tenant cultivator = 1; fully tenant
cultivator = 2
Commercial crop
cultivation
If not cultivated commercial crop during the survey year (cotton,
sugarcane, jute, coffee) = 0; if cultivated = 1
Irrigation index Total area irrigated by a household/gross cropped area of the
household in the survey year
Share of allied activities
GVO
Amount of gross value of output (GVO) from allied activities
including animal husbandry and fishery/total GVO
Share of non-agricultural
employment
Number of adults employed in non-agricultural employment
(manual, salaried, self-employment/business)/total adults in the
household
Incidence of informal
sector borrowing
If loan not taken for agriculture from informal sources during
the survey year = 0; if taken = 1

FORMAL CREDIT AND SMALL FARMERS IN INDIA 41
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