Agricultural Credit in Bangladesh

Agricultural Credit:

The credit needed by farmers to grow the agricultural sector is termed as Agricultural Credit.

Need For Agricultural Credit:

● Credit is required in every type of business and agriculture is not exception to it. The
land holding is very small. The population is growing at a fast rate. Agricultural labour is
often under employed.

● Production suffers from weather risks. The capacity of the farmers to save and invest is
very low. The agricultural productivity is low due to low use of in-puts. The farmers,
therefore, need credit to increase productivity and efficiency in agriculture.

● This need is increasing over the years with the rise in use of fertilizers, mechanization
and rise in prices. Briefly the need for agricultural credit can be summed up as under.

The following points reveals the need for agricultural credit:

1. Purchase of new inputs:

The farmers need finance for the purchase of new inputs which include seeds,
fertilizers, pesticides etc. if the seeds of high yielding varieties and other modern
inputs are made available to the farmers, they can increase productivity not only of
the land but also of labour.

2. Purchase of Implements:
Credit is required by the farmers for the purchase water pumping sets, tractors,
threshers etc. the use of appropriate machinery in land will increase production by
growing more than one crop on the same piece of land at the same time.
 3. Better Management of Risk:
Credit enables the farmers to better to manage the risk of uncertainties of price. they
can borrow money during bad years and pay back the loans during good years of crops.

4. Permanent Improvement in Land:

Credit also helps the farmers to make permanent improvements in land like sinking of
wells, land reclamation, etc.

5. Better marketing of Products:

if timely credit is available to the farmers, they will not sell the produce immediately
after the harvest is over. At that time the prices of agricultural goods are low in the
market. Credit enables the farmers to withhold the agricultural surplus and sell it in the
market when prices are high.

6. To Face Crisis:
The credit is required by the farmers to face crisis. The crisis can be caused by the failure
of crop, draught or floods etc.

7. Purchase of Cattle:
The farmer needs credit to purchase cattle. Because the farmers mostly remain free
after cultivating the farm, therefore they want to start off-farm business by purchasing
cattle.

8. Payment of ancestor’s Debt:

Most of the farmers remain in debt due to their ancestors. Therefore to retire the
ancestors debt, the farmers take loan from banks and other sources.

9. Consumption Expenditures:
the farmers need loans for getting married their children etc on which they spend a lot.

10. Civil and Criminal Suits:

in order to civil and criminal suits, farmers need credit.

Sources of Agricultural Credit:

• Credit in the farm sector is available from two sources

1. Non-Institutional Sources

2. Institutional Sources
non-institutional sources of farm credit:

The major non-institutional sources of farm credit are

1. Money lenders

2. Friends

3. Relatives

4. Landlords

5. Shopkeepers

6. Commission agents

The Money Lenders, mostly nonmuslims were the main suppliers of loans to the
farmers. However, their importance has decreased to a great extent now and the short-
term credit needs of the farmers are met from commission agents, friends and relatives
which supply roughly 50% of total rural borrowings.

The commission agents advance loans to the farmers for short-period. They force the
farmers to sell the produce to them which generally is purchased at low rates.

The lenders of the informal sources (friends, relatives etc) have certain advantages over
the formal credit sources.

• The informal lenders usually know the borrowers personally.

• They require little security for advancing loans

• The loans are provided for consumption as well as production purposes.

• The lenders are approachable at all times.

• They are also lenient in rescheduling loans.

Institutional Sources of Credit:

The major institutional sources of farm credit are

a. Bangladesh Krishi Bank

 b. 3 Nationalized Commercial Banks

c. Rajshahi Krishi Unnayan Bank

Difference Between Agricultural Finance and Rural Credit

• There is a difference between agricultural credit and rural credit. Agricultural credit is
linked with the growth of agriculture; whereas rural finance covers all the aspects of
socio-economic life of rural area. It covers a wide variety of farm and non-farm
productive activities such as agriculture, animal husbandry, fisheries forestry, small
agro-based industries as well as development of physical and social infrastructure in the
form of transport and communication, water and power education and health etc.

Agriculture Credit Lending Models

• Financial institutions are using various Credit Lending Models throughout the world.
Some of the models are listed below:
• 3.4. Bank Guarantees
• As the name suggests, a bank guarantee is used to obtain a loan from financial
institutions. This guarantee may be arranged externally (through a donor/donation,
government agency etc.) or internally (using member savings). Loans obtained may be
given directly to an individual, or they may be given to a self-formed group. Bank
Guarantee is a form of capital guarantee scheme. Guaranteed funds may be used for
various purposes, including loan recovery and insurance claims. Several international and
UN organizations have been creating international guarantee funds that financial
institutions can subscribe to lend or start agricultural credit programs.
• 3.5. Cooperatives
• A co-operative is an autonomous association of persons united voluntarily to meet their
common economic, social, and cultural needs and aspirations through a jointly-owned
and democratically-controlled enterprise. Some cooperatives include member-financing
and savings activities in their mandate.
• 3.6. Credit Unions
• A credit union is a unique member-driven, self-help financial institution. It is organized
by and comprised of
• International Journal of Business and Economics Research 2014; 2(1): 68-83 71
• members of a particular group or organization, who agree to save their money together
and to make loans to each other at reasonable rates of interest. The members are people
of some common bond: working for the same employer; belonging to the same church,
labor union, social fraternity, etc.; or living/working in the same community. A credit
union's membership is open to all who belong to the group, regardless of race, religion,
 color or creed. A credit union is a democratic, not-for-profit financial cooperative. Each
is owned and governed by its members, with members having a vote in the election of
directors and committee representatives.
• 3.7. Grameen
• The Grameen model emerged from the poor-focused grassroots institution, Grameen
Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the
following methodology: A bank unit is set up with a Field Manager and a number of
bank workers, covering an area of about 15 to 22 villages. The manager and workers start
by visiting villages to familiarize themselves with the local milieu in which they will be
operating and identify prospective clientele, as well as explain the purpose, functions, and
mode of operation of the bank to the local population. Groups of five prospective
borrowers are formed; in the first stage, only two of them are eligible for, and receive, a
loan. The group is observed for a month to see if the members are conforming to rules of
the bank. Only if the first two borrowers repay the principal plus interest over a period of
fifty weeks do other members of the group become eligible themselves for a loan.
Because of these restrictions, there is substantial group pressure to keep individual
records clear. In this sense, collective responsibility of the group serves as collateral on
the loan.
• 3.8. Group
• The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at
the individual level are overcome by the collective responsibility and security afforded by
the formation of a group of such individuals. The collective coming together of
individual members is used for a number of purposes: educating and awareness building,
collective bargaining power, peer pressure etc.
• 3.9. Individual
• This is a straight forward credit lending model where micro loans are given directly to the
borrower. It does not include the formation of groups, or generating peer pressures to
ensure repayment. The individual model is, in many cases, a part of a larger 'credit plus'
program, where other socio-economic services such as skill development, education, and
other outreach services are provided.
• 3.10. Intermediaries
• Intermediary model of credit lending position is a 'gobetween' organization between the
lenders and borrowers. The intermediary plays a critical role of generating credit
awareness and education among the borrowers (including, in some cases, starting savings
programs. These activities are geared towards raising the 'credit worthiness' of the
borrowers to a level sufficient enough to make them attractive to the lenders. The links
developed by the intermediaries could cover funding, program links, training and
education, and research. Such activities can take place at various levels from international
and national to regional, local and individual levels. Intermediaries could be individual
lenders, NGOs, microenterprise/microcredit programs, and commercial banks (for
 government financed programs). Lenders could be government agencies, commercial
banks, international donors, etc.
• 3.11. Village Banking
• Village banks are community-based credit and savings associations. They typically
consist of 25 to 50 low-income individuals who are seeking to improve their lives
through self-employment activities. Initial loan capital for the village bank may come
from an external source, but the members themselves run the bank: they choose their
members, elect their own officers, establish their own bylaws, distribute loans to
individuals, and collect payments and savings. Their loans are backed, not by goods or
property, but by moral collateral: the promise that the group stands behind each loan.

Problems of Agricultural Credit

The shortage of rural credit both in quantitative and qualitative terms continues to be a
limiting factor in the modernization and growth of production in agriculture. The major
problems which are being met by the farmers in the receipts of agricultural credit from
the institutional sources are summarized below:

1. Less Flow of Credit to Small Farmers:

There are millions of small farmers throughout the country. The gain has reached
more to the big landlords. It is therefore, an urgent need that the credit should reach
the small farmers who are the backbone of agricultural industry.

2. Complicated Procedure for Advancing Loans:

the procedure for advancing loans by institutional sources is quite complicated. The
loans are advanced to the farmers on the basis of pass books which contain the details
of land owned by the farmers. The procedure is quite complicated.

3. Delay in the disbursement of Credit:

the procedure involved for advancing loans to the farmers is cumbersome. Who-so-
ever succeeds in completing the documents is entitled to receive loans. It has been
observed that the disbursement of credit is delayed even after it has been approved. It
is a serious problem which the farmers are facing these days.

4. High Interest Rate:

The interest charted by the various institutions on farm credit is high. The low income
farmers can not bear it. As regards the interest-free loans, they are not reaching the
small deserving farmers.

5. Amount of bad debts is increasing:

The loans advanced particularly to the big landlords are not being repaid to the
 institutions. Since the big landlords have political influence, they, therefore, manage
to get them written off.

6. The credit agencies mostly do not take the risk of advancing loans to the farmers
because heavy rains and droughts etc can destroy the crops and thus the repayment
of loans may become difficult for the farmers.

7. Due to unstable prices of the agricultural products, there is instability in the income of
the agriculturalists. The credit institutions, therefore, hesitate to finance the farmers.

8. Most of the agriculturists who live on subsistence farm units do not have the
adequate information of the credit institutions which supply loans to the farmers.

9. The villagers do not know how to keep the records of the loans which is a necessary
element of proper credit analysis.