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Panchayat Raj and Rural Development · Chapter 8

Rural Credit and Co-operatives

What to remember

  • Rural credit comes from institutional sources (co-operatives, commercial banks, Regional Rural Banks, NABARD refinance) and non-institutional sources (moneylenders, traders, relatives); the policy aim is to shift farmers to institutional credit.
  • NABARD is the apex development bank for agriculture and rural development; the three-tier co-operative credit structure runs from the State Co-operative Bank to District Central Co-operative Banks to Primary Agricultural Credit Societies (PACS).
  • The Kisan Credit Card (KCC) gives farmers timely, flexible, low-interest short-term credit, and microfinance and SHG bank linkage reach those with no collateral.

1. Why rural credit is needed

Farmers need money for seeds, fertiliser, labour, equipment, land improvement and household needs. Income comes only after harvest, so there is a gap that must be bridged by credit.

Types of credit by period:

TypePeriodUse
Short termUp to about 12-15 monthsSeeds, fertiliser, labour, pesticides
Medium term15 months to about 5 yearsPump sets, livestock, small machinery
Long termMore than about 5 yearsLand development, tractors, wells, major assets

2. Sources of rural credit

Non-institutional: village moneylenders, traders and commission agents, landlords, relatives and friends. Their interest rates are often very high, and they may exploit borrowers by tying loans to sale of crop at low prices.

Institutional: co-operative credit societies and banks, commercial banks, Regional Rural Banks (RRBs), small finance banks, NABARD (as refinancer), and government loans.

India's policy has been to expand institutional credit through:

  • co-operative societies from 1904,
  • nationalisation of 14 major banks in 1969 (more in 1980),
  • the Lead Bank Scheme (late 1960s) giving each district one lead bank,
  • RRBs from 1975,
  • establishment of NABARD in 1982,
  • Priority Sector Lending, under which banks must lend a set share to agriculture, small enterprises and weaker sections,
  • financial inclusion drives such as Pradhan Mantri Jan Dhan Yojana (2014) and business correspondents.

3. Reserve Bank and NABARD

The Reserve Bank of India (RBI) is the central bank. It regulates banks and fixes policy rates, and it advises on rural credit policy.

NABARD (National Bank for Agriculture and Rural Development) was set up on 12 July 1982 on the basis of the recommendations of the Shivaraman Committee. It took over the agricultural credit functions of the RBI and the refinance role of the Agricultural Refinance and Development Corporation. Main functions:

  • Provides refinance to co-operative banks, RRBs and others for farm and rural loans.
  • Supervises and inspects co-operative banks and RRBs.
  • Funds rural infrastructure through the Rural Infrastructure Development Fund (RIDF), started in the mid-1990s.
  • Promotes the SHG-Bank Linkage Programme (pilot 1992).
  • Supports watershed, tribal, farm and non-farm development, and gives training.
  • Provides development support to artisans and village industries.

4. Co-operative credit structure

A co-operative society is a voluntary association of people who pool resources for mutual benefit, on the principle of "one member, one vote".

The first co-operative law in India was the Co-operative Credit Societies Act, 1904, later replaced by the Co-operative Societies Act, 1912. The Rochdale pioneers (England, 1844) are regarded as the origin of the modern co-operative movement.

Constitutional status: the 97th Amendment (2011) made the right to form co-operative societies a fundamental right (Article 19(1)(c)), added a Directive Principle (Article 43B) and created Part IXB of the Constitution on co-operative societies.

Short-term structure (three tier):

TierBodyArea
TopState Co-operative Bank (apex)State
MiddleDistrict Central Co-operative Bank (DCCB)District
BasePrimary Agricultural Credit Society (PACS)Village or group of villages
  • PACS is the grass-roots unit and the one that deals directly with farmers. It gives crop loans, supplies inputs and often runs fair-price shops and storage. It is a member-owned society that borrows from the DCCB.
  • The DCCB is a federation of PACS and also deals directly with some customers.
  • The State Co-operative Bank balances funds among districts and links the system to NABARD and the RBI.

Long-term structure: Primary Co-operative Agriculture and Rural Development Banks (earlier called land development banks) give long-term loans for land improvement and assets; they are federated under State-level apex banks.

Other co-operatives in rural AP: dairy co-operatives, sugar co-operatives, marketing societies, weavers' societies, fishermen's societies, labour contract societies and consumer stores. The State has also developed mutually aided co-operative societies, which are member-run bodies with less government control.

Problems: loan default, political interference, weak management, low deposits, dormant societies. Reforms have focused on computerisation of PACS, multi-service role for PACS (godowns, custom hiring, common service centres), and better audit.

5. Commercial banks and RRBs

  • Commercial banks include public sector, private sector and small finance banks. They meet priority-sector targets, with a sub-target for agriculture.
  • Regional Rural Banks were set up in 1975 following the Narasimham Working Group and are governed by the RRB Act, 1976. Their ownership is shared among the Union Government, the State Government and a sponsor bank. They serve small and marginal farmers, artisans and rural labour. AP's RRBs were merged over time; under 'One State, One RRB' (1 May 2025) they became a single bank, Andhra Pradesh Grameena Bank.
  • Lead Bank Scheme: every district has a lead bank to co-ordinate credit planning. The State Level Bankers' Committee (SLBC) co-ordinates banks at State level, and the District Consultative Committee at district level.

6. Kisan Credit Card (KCC)

KCC was introduced in 1998 on the basis of a committee report and NABARD guidelines. Key points:

  • Gives farmers a revolving credit limit with a passbook or card for withdrawing as needed.
  • Meant for crop cultivation expenses, post-harvest needs, marketing loans and consumption needs.
  • Includes personal accident insurance cover for the cardholder.
  • Interest subvention (an interest concession from the Government) and prompt repayment incentive reduce the effective interest cost.
  • Extended later to those engaged in animal husbandry and fisheries.
  • Collateral-free up to a limit set by the RBI (check the latest official release for the limit).
  • Tenant farmers, oral lessees and sharecroppers are also eligible; AP has issued tenant-farmer cards to help them.

7. Microfinance

Microfinance means giving very small loans, savings and insurance to poor people who have no collateral. Models:

  • SHG-Bank Linkage: groups of women save, and banks lend to the group.
  • Micro Finance Institutions (MFIs): registered as companies (NBFC-MFI) or non-profits and lend to joint liability groups.
  • Grameen model: from Bangladesh, based on group lending and peer pressure.

AP has a special history here: SHG movement grew quickly in the State, and the 2010 crisis of MFIs, where borrowers had faced heavy repayment pressure, led AP to pass a special ordinance (and later Act) to regulate microfinance lending. This also pushed the RBI to bring in national MFI regulation.

8. Financial inclusion tools

  • Jan Dhan accounts with RuPay card and overdraft.
  • Business correspondents and Bank Mitra at village level.
  • Micro-insurance and pension schemes (PM Suraksha Bima, PM Jeevan Jyoti, Atal Pension).
  • Direct Benefit Transfer (DBT) into bank accounts.
  • Digital payments such as UPI.
  • Crop insurance (Pradhan Mantri Fasal Bima Yojana).

9. Recent trends

Computerisation of PACS and their working as multi-service centres (godowns, fertiliser outlets, custom hiring) is meant to make them stronger. Digital lending, e-KYC and online repayment have reduced paperwork. Credit guarantee schemes support small borrowers. Warehouse receipts allow farmers to borrow against stored produce. Farmer groups and joint liability groups are also financed by banks.

Exam traps

  • NABARD was set up in 1982; RRBs in 1975; first co-operative law in 1904; bank nationalisation in 1969.
  • PACS is the base tier; the State Co-operative Bank is the apex tier.
  • NABARD refinances; it does not usually lend directly to individual farmers.
  • RBI is the central bank; NABARD is the apex agriculture and rural development bank.
  • KCC is mainly for short-term crop credit; long-term loans go through other banks.
  • The 97th Amendment concerns co-operative societies; the 73rd concerns Panchayats.
  • Article 19(1)(c) gives the right to form co-operative societies; Article 43B is the Directive Principle.
  • SHG-Bank Linkage lends to groups; MFIs often lend to individuals within joint liability groups.

One-liners

  • 1. NABARD was established on 12 July 1982.
  • 2. The RRB Act dates from 1976.
  • 3. PACS is the village-level co-operative credit unit.
  • 4. The three-tier short-term co-operative structure is State Co-operative Bank, DCCB and PACS.
  • 5. The 97th Constitutional Amendment gave constitutional status to co-operatives.
  • 6. Co-operatives follow the principle of one member, one vote.
  • 7. KCC was introduced in 1998.
  • 8. KCC includes an accident insurance cover.
  • 9. Priority Sector Lending directs bank credit to farm and weaker sections.
  • 10. The Lead Bank Scheme gives each district a lead bank.
  • 11. RIDF is a NABARD fund for rural infrastructure.
  • 12. The SHG-Bank Linkage Programme began as a NABARD pilot in 1992.

Practice questions

  1. NABARD was established in

    1. 1991
    2. 1969
    3. 1975
    4. 1982
    Answer

    D. 1982

    NABARD was set up on 12 July 1982.

  2. NABARD is the apex institution for

    1. stock exchanges
    2. agriculture and rural development finance
    3. foreign trade
    4. insurance only
    Answer

    B. agriculture and rural development finance

    NABARD refinances rural credit institutions.

  3. The base tier of the short-term co-operative credit structure is the

    1. District Central Co-operative Bank
    2. Land Development Bank
    3. State Co-operative Bank
    4. Primary Agricultural Credit Society
    Answer

    D. Primary Agricultural Credit Society

    PACS works at village level.

  4. The apex tier of the short-term co-operative credit structure is the

    1. PACS
    2. DCCB
    3. RRB
    4. State Co-operative Bank
    Answer

    D. State Co-operative Bank

    The State Co-operative Bank is at the top.

  5. Regional Rural Banks were set up in

    1. 1949
    2. 1998
    3. 1982
    4. 1975
    Answer

    D. 1975

    RRBs began in 1975.

  6. The first co-operative law of India was passed in

    1. 1882
    2. 1912
    3. 1904
    4. 1947
    Answer

    C. 1904

    The Co-operative Credit Societies Act was passed in 1904.

  7. The Kisan Credit Card scheme was introduced in

    1. 2011
    2. 1982
    3. 1998
    4. 1969
    Answer

    C. 1998

    KCC dates from 1998.

  8. Nationalisation of 14 major banks took place in

    1. 1975
    2. 1949
    3. 1991
    4. 1969
    Answer

    D. 1969

    The first nationalisation was in 1969.

  9. Which Constitutional Amendment gave constitutional status to co-operative societies?

    1. 86th
    2. 97th
    3. 73rd
    4. 74th
    Answer

    B. 97th

    The 97th Amendment (2011) added Part IXB.

  10. The Directive Principle on co-operative societies is in Article

    1. 243-I
    2. 19(1)(c)
    3. 40
    4. 43B
    Answer

    D. 43B

    Article 43B promotes co-operatives.

  11. The guiding principle of co-operatives is

    1. one member, one vote
    2. one share, one vote
    3. one family, no vote
    4. one rupee, one vote
    Answer

    A. one member, one vote

    Co-operatives are democratic.

  12. The Lead Bank Scheme assigns to each district

    1. one stock exchange
    2. one lead bank for credit co-ordination
    3. one co-operative society
    4. one RBI office
    Answer

    B. one lead bank for credit co-ordination

    A lead bank co-ordinates credit planning.

  13. RIDF is a fund of NABARD for

    1. urban housing
    2. stock trading
    3. rural infrastructure
    4. foreign loans
    Answer

    C. rural infrastructure

    RIDF finances rural infrastructure projects.

  14. The SHG-Bank Linkage Programme began as a pilot in

    1. 1992
    2. 1969
    3. 1975
    4. 2005
    Answer

    A. 1992

    NABARD piloted it in 1992.

  15. Which one is a non-institutional source of rural credit?

    1. Co-operative bank
    2. Village moneylender
    3. Regional Rural Bank
    4. NABARD
    Answer

    B. Village moneylender

    Moneylenders are informal sources.

  16. Loans for pump sets and small machinery are generally

    1. short-term credit
    2. no credit
    3. only consumption credit
    4. medium-term credit
    Answer

    D. medium-term credit

    Medium term is about 15 months to 5 years.

  17. Loans for seeds and fertiliser are generally

    1. medium-term credit
    2. long-term credit
    3. short-term credit
    4. foreign credit
    Answer

    C. short-term credit

    Crop loans are repaid after harvest.

  18. The 'Priority Sector Lending' rule requires banks to

    1. avoid farm loans
    2. lend a set share to agriculture and weaker sections
    3. lend only to big industry
    4. buy gold
    Answer

    B. lend a set share to agriculture and weaker sections

    Banks must meet priority-sector targets.

  19. Which statement best describes the role of NABARD?

    1. It sets income tax
    2. It conducts elections
    3. It refinances banks that lend to rural borrowers
    4. It prints currency
    Answer

    C. It refinances banks that lend to rural borrowers

    NABARD mainly provides refinance and supervision.

  20. PACS directly serve

    1. farmer members in villages
    2. foreign investors
    3. central ministries
    4. stock brokers
    Answer

    A. farmer members in villages

    PACS give crop loans and supply inputs.

  21. Why are tenant farmers eligible for KCC under modern guidelines?

    1. Because they are bankers
    2. Because they pay no tax
    3. Because they have no crops
    4. To give access to credit even without owning land
    Answer

    D. To give access to credit even without owning land

    Tenants and sharecroppers can also get KCC.

  22. KCC provides farmers with

    1. a one-time grant
    2. a revolving credit limit
    3. land ownership
    4. free seeds only
    Answer

    B. a revolving credit limit

    The limit can be used and repaid again.

  23. Interest subvention on short-term crop loans means

    1. the Government pays part of the interest cost
    2. loans are written off
    3. banks charge more
    4. farmers pay double
    Answer

    A. the Government pays part of the interest cost

    Subvention lowers the effective interest.

  24. The main benefit of SHG-Bank Linkage to poor women is

    1. land grants
    2. government jobs
    3. credit without collateral through the group
    4. free loans forever
    Answer

    C. credit without collateral through the group

    Groups borrow on the strength of savings and discipline.

  25. An MFI mainly provides

    1. large corporate loans
    2. stock advice
    3. foreign exchange
    4. small loans to the poor
    Answer

    D. small loans to the poor

    MFIs focus on microcredit.

  26. Which body co-ordinates banks at the State level?

    1. Zilla Parishad
    2. Gram Sabha
    3. State Level Bankers' Committee
    4. Finance Commission
    Answer

    C. State Level Bankers' Committee

    SLBC is the State-level forum.

  27. The Rochdale pioneers are associated with the origin of

    1. the modern co-operative movement
    2. stock exchanges
    3. microfinance in India
    4. the RBI
    Answer

    A. the modern co-operative movement

    They founded a famous co-operative in England in 1844.

  28. A major problem of co-operative credit societies is

    1. too little interest
    2. too many branches
    3. no members
    4. overdue loans and weak management
    Answer

    D. overdue loans and weak management

    Defaults and weak management reduce performance.

  29. Business correspondents help in

    1. running courts
    2. delivering banking services in villages
    3. fixing taxes
    4. printing notes
    Answer

    B. delivering banking services in villages

    They extend bank reach.

  30. The long-term rural co-operative credit structure is run through

    1. PACS only
    2. agriculture and rural development banks
    3. commercial insurers
    4. post offices
    Answer

    B. agriculture and rural development banks

    Earlier called land development banks.

  31. Which crisis led AP to bring a special law to regulate microfinance?

    1. A cyclone
    2. Bank nationalisation
    3. A cotton price crash
    4. The 2010 repayment-pressure crisis in microfinance
    Answer

    D. The 2010 repayment-pressure crisis in microfinance

    AP passed an ordinance and then an Act.

  32. Which of the following is NOT a short-term co-operative bank tier?

    1. Land development bank
    2. DCCB
    3. PACS
    4. State Co-operative Bank
    Answer

    A. Land development bank

    Land development banks give long-term credit.

  33. Consider the statements: 1. NABARD was set up in 1982. 2. NABARD directly lends to every farmer. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    NABARD mainly refinances.

  34. Consider the statements: 1. RRBs were set up in 1975. 2. RRBs are governed by the RRB Act, 1976. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both statements are correct.

  35. Consider the statements: 1. PACS is the apex tier of co-operative credit. 2. DCCB operates at district level. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    PACS is the base tier.

  36. Consider the statements: 1. The 97th Amendment created Part IXB. 2. Article 19(1)(c) covers the right to form co-operatives. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  37. Consider the statements: 1. KCC includes accident insurance cover for the holder. 2. KCC was extended to animal husbandry and fisheries. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both statements are correct.

  38. Consider the statements: 1. SHG-Bank Linkage lends to the group. 2. SHGs need collateral for every loan. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    They borrow without collateral.

  39. Consider the statements: 1. The Lead Bank Scheme gives each district a lead bank. 2. The RBI is the lead bank in every district. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    A bank is assigned as lead bank.

  40. Consider the statements: 1. NABARD supervises co-operative banks and RRBs. 2. NABARD funds rural infrastructure through RIDF. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  41. Consider the statements: 1. The Co-operative Societies Act of 1904 was the first co-operative law. 2. It was passed after Independence. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    It dates from 1904.

  42. Consider the statements: 1. Commercial banks have a priority-sector target. 2. Moneylenders are institutional sources. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Moneylenders are non-institutional.

  43. Consider the statements: 1. Jan Dhan accounts promote financial inclusion. 2. Business correspondents help in remote service. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  44. Consider the statements: 1. Short-term credit is for seeds and fertiliser. 2. Long-term credit is for land development. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  45. Consider the statements: 1. Co-operatives follow one member, one vote. 2. Co-operatives are owned by the Union Government. Which of the statements is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    They are member-owned.

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