Agricultural Finance | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS

Agricultural Finance

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Agricultural finance refers to financial services provided for the agricultural sector including farmers, agricultural businesses, and rural enterprises. It encompasses short-term, medium-term, and long-term credit requirements to support crop production, farm machinery, irrigation, and risk mitigation.

Short-Term Loans

Short-term agricultural loans are generally provided for seasonal farming operations such as purchasing seeds, fertilizers, and pesticides. These loans are repayable within 12 to 15 months.

Example:

If a farmer borrows ₹50,000 at 7% interest for 1 year:

Interest = (₹50,000 × 7 × 1) / 100 = ₹3,500

Medium and Long-Term Loans

Medium-term loans (3–5 years) and long-term loans (above 5 years) help in acquiring fixed assets like tractors, tube wells, and land development.

Illustration:

A farmer takes a long-term loan of ₹2,00,000 at 9% interest for 6 years (simple interest):

Interest = (₹2,00,000 × 9 × 6) / 100 = ₹1,08,000

Total repayment = ₹2,00,000 + ₹1,08,000 = ₹3,08,000

Crop Loan

Crop loans are a type of short-term loan given to meet expenses of crop cultivation. They are usually covered under the interest subvention scheme by the Government of India.

Revised Scheme for Issue of Kisan Credit Card (KCC)

The KCC scheme, revised in 2012, provides timely credit support to farmers for crop production, post-harvest expenses, and working capital. It includes:

• ATM-enabled RuPay debit card
• Interest subvention up to ₹3 lakhs
• Flexible credit limit based on cropping pattern

Selected Activities Under Agricultural Financing

• Animal husbandry
• Dairy and poultry farming
• Fisheries and sericulture
• Horticulture and floriculture

Minimum Support Price (MSP) Scheme

MSP is a form of market intervention by the government to insure agricultural producers against any sharp fall in farm prices. It is declared for 23 crops before the sowing season.

Pradhan Mantri Fasal Bima Yojana (PMFBY)

Launched in 2016, PMFBY aims to provide insurance cover for crop losses due to natural calamities. Key features include:

• Low premium rates (2% for Kharif, 1.5% for Rabi)
• Coverage of post-harvest losses
• Use of technology like satellite imagery for assessment

Multiple Choice Questions (MCQs)

1. What is the typical tenure of short-term agricultural loans?
   A. Less than 6 months
   B. 12 to 15 months ✅
   C. 2 to 3 years
   D. Above 5 years
2. Kisan Credit Cards are primarily used for:
   A. Buying tractors
   B. Consumer loans
   C. Meeting crop cultivation expenses ✅
   D. Insurance premiums
3. What is the interest rate under PMFBY for Rabi crops?
   A. 5%
   B. 3%
   C. 2%
   D. 1.5% ✅
4. Which of the following is NOT a medium/long-term agricultural investment?
   A. Tractors
   B. Tube wells
   C. Seeds ✅
   D. Land development
5. Minimum Support Price (MSP) is declared for how many crops?
   A. 10
   B. 15
   C. 23 ✅
   D. 30
6. Which institution is responsible for implementing PMFBY?
   A. NABARD
   B. Ministry of Agriculture and Farmers Welfare ✅
   C. RBI
   D. Ministry of Finance
7. Which activity is typically financed under agricultural financing?
   A. Real estate
   B. Poultry farming ✅
   C. IT infrastructure
   D. Vehicle loans
8. Which of the following is a benefit under the revised KCC scheme?
   A. Free crop insurance
   B. ATM-enabled debit card ✅
   C. Cash disbursement only
   D. No interest subvention
9. Crop loans are usually covered under which scheme?
   A. Stand-up India
   B. PMFBY
   C. Interest Subvention Scheme ✅
   D. MUDRA
10. Which type of interest calculation was used in the long-term loan example?
    A. Compound Interest
    B. Floating Rate
    C. Simple Interest ✅
    D. Declining Balance