PhD

Capital has been one of the most limiting factors in crop production in India. Hence, institutional credit was evolved in India from the angle of liberating farmers from the clutches of private moneylenders by providing cheap, adequate and timely source of credit. With the advent of the high- yielding varieties programme, credit was expected to play the role Of production enhancement through the adoption of the modern technology. The credit policy in India had given special emphasis in giving preference to the small and marginal farmers and agricultural labourers in providing institutional credit.
Kerala ranked first among the Indian states with regards to the
growth in the flow of production credit. However, the increased flow
of institutional credit at concessional rates was accompanied by many
related issues such as inadequacy, misutilization and diversion of loan, lack
of timeliness in credit delivery and high credit transaction costs. The
mounting overdues level of the credit institutions has been a matter of
growing concern, which has directly or indirectly influenced the repayment
behaviour of the borrowers. It is in this context that the present study
attempted to examine the institutional credit supply and repayment
behaviour of farmers in Kerala.
The specific objectives of the study were :
1. to examine the growth in credit institutions, their disbursement and
recovery performance in Kerala

2. to study the economic characteristics of the borrowers and the extent
of their credit need in crop production
3. to examine the pattern of credit supply, timeliness. repayment
behaviour and overdues of the borrowers. and
4. to identify the factors influencing the overdues in order to screen
the potential defaulters and suggest suitable policy prescription.
Kottayam district in Kerala was purposively selected for the study because he district topped in the institutional credit disbursal to agriculture. Among the eleven blocks in the district, Madappally block was chosen for detailed investigation because of the higher target, achievement and credit absorption capacity with regards to crop loans. Finally, a cluster of four villages, viz., Changanasserry. Madappally, Trikkodithanurn and Vazhappally were selected based on concentration of lending, and a total of 160 crop loan borrowers were selected by stratified random sampling. Primary as well as secondary data were used for examining the objectives of the study. The time series data on agency-wise disbursal
of credit to agriculture was collected from the State Level Bankers'
Committee, Trivandrum to study the growth in the functioning of the credit
institutions in the state. Primary data on the various aspects of credit
at the household level were collected through personal interview of the
sample respondents with the help of a pre-tested, structured survey
schedule. The secondary data pertained to the period from 1985-86 to
1996-97. The primary data pertained to the agricultural year 1996-97.
The economic characteristics of the borrowers like farm size and
family composition, educational status. size group status, farming status,

investment pattern on capital assets, cropping pattern, working capital
requirements, gross income, gross margin and overdues level were examined by tabular analysis. Compound growth rates were worked out in nominal as well as real terms to study the growth in the functioning of the credit institutions in terms of number, deposits, advances and recovery levels. Production function analysis was carried out, using the Cobb-Douglas production function, to analyse the resources productivity among the various borrower groups and their allocative efficiencies were compared. Frequency distribution analysis was carried out to quantify the



farmers' perception to different dimensions of credit. The factors
influencing the repayment behaviour of crop loan borrowers were examined
using a logit model based on logistic cumulative distribution function.
Growth in Credit Institutions, Disbursement and Recovery Performance
in Kerala
The commercial banks were the major purveyors of agricultural credit
in Kerala, accounting for more than half of the total credit disbursed to
the farm sector. They could achieve a high growth rate in deposit
mobilisation and credit delivery through the proliferation of their branches
in the state during the eighties and the early nineties. On the other hand,
the growth in lending by the cooperatives appeared to be less attractive
than that of other financial institutions. The relative share of the
cooperatives in agricultural lending has been declining over the years. This
amounted to a role reversal considering the major role visualised for the
cooperatives in the multi-agency credit prpgramme in rural lending.
The inter-regional and inter-temporal variations in the flow of all
forms of institutional• credit, resulted in regional imbalances in credit

delivery.


Inter-regional differences existed in credit deepening also.



Eventhough the state received a high credit receipt of Rs. 2027 per hectare
of cropped area, only the districts of Kottayam, Alappuzha, Idukki,
Ernakulam, Palakkad, Kozhikkode, Wayanad and Kollam experienced credit
deepening in real terms.
The recovery of overdues to demand has been fluctuating from year
to year. On an average, the financial institutions in the state had an
overdues of 23 per cent to demand, with a loan recovery rate of 77
per cent. The recovery performance of the PACSs were better (79 per
cent) than that of the commercial banks and regional rural banks (68 per
cent) on account of the peer group pressure exerted by their democratic
mode of management.
Economic Characteristics of the Borrowers and the Extent of Their
Credit Need in Crop Production
There was not much pronounced variation in the size of family,
gender composition, experience in farming, educational status, size group
composition and cropping intensity among the defaulter and non-defaulter
group of farmers. However, the average size of operational holdings, share
of irrigated area, share of cash crops in the cropping pattern, investment
on fixed assets, and intensity of modern input use of the non-defaulter
borrowers were higher than that of the defaulter borrowers. The resource
productivity varied widely among the borrower groups. Production of major
crops like paddy, coconut, banana and rubber were labour intensive, and
they utilised the labour resource more productively. The better managerial
skills of the non-defaulter borrowers helped them in harnessing higher yield
and thereby higher gross profit. They depended more on agriculture for

the gross income (69 and 51 percentage of shares respectively), and hence
placed more importance on maintaining better customer relationship with
the credit institutions.
On an average, 88 per cent of the non-defaulter borrowers were
the small and marginal farmers while 94 per cent of the defaulter borrowers
formed small and marginal farmers. It amply illustrated the free access
of small and marginal farmers to institutional form of credit, thereby
indicating the effectiveness of the agricultural credit policy that placed
greater thrust on progressive improvement in accessibility of credit and
inputs to the small and marginal farmers.
However, the estimation of the working capital requirement and
comparison with the scale of finance showed that it fell short of the credit
needs of the farmers, particularly that of the small and marginal farmers.
It underlined the need for working out the scale of finance in a more
realistic and scientific manner, keeping the production requirements of the
farmers in the area.
Pattern of Credit Supply, Timeliness, Repayment Behaviour and
Overdues of the Borrowers
The analysis of the pattern of credit supply showed that not only
the scale of finance was inadequate with respect to the credit needs of
the borrowers, there was widespread credit rationing practised by both
commercial banks and PACSs from the level of approved scale of finance
as well. This led to acute shortage in working funds among all the
categories of borrowers who were driven to the private moneylenders to
meet the shortfalls. Thus, the basic objective of providing institutional
credit to wean away the cultivators from the clutches of village

moneylenders was defeated. While 10 per cent of the non-defaulters
depended on non-institutional sources of fund to meet the short fall caused
by credit rationing, it was as high as 35 per cent in the case of defaulters.
Another interesting finding that emerged out of the analysis was
the disbursal of kind components in proportions lower than the norm
prescribed by the scale of finance. There was considerable delay in the
disbursal of credit to the farmers by all sources of institutional credit to
the farmers. However, the delay was more pronounced in the case of
cooperative lending. It resulted in agricultural illusion among the borrowers,
who indulged in the diversion of loan availed for agricultural production
at concessional rate of interest for other non-productive purposes. The
extent of diversion was more in the case of defaulters than the non-
defaulters.
The credit acquisition cost of the defaulters were also higher
than that of the non-defaulters. The defaulters had to spend nearly
Rs. 15/- for transacting Rs. 100/- as loan while the non-defaulters could
transact a loan amount of Rs. 100 for Rs. 13/-. The commercial banks
could ensure credit to its borrowers at a lower credit transaction cost than
the cooperatives. The cooperatives could not dispense cheaper loans to
its member borrowers in spite of their interest subsidy facility.
The repayment obligation of the non-defaulter borrowers were higher
than that of the defaulters, indicating the higher volume of credit made
available to them. They could generate higher repayment capacity also,
thereby having a higher financial surplus after debt servicing. The analysis
also revealed that more than half of credit delinquency was due to wilful
default.

Among the factors perceived by the borrower farmers that influenced
their non-repayment decision, crop failure and diversion of loan for non-
productive purposes were the most important one. The agricultural debt
relief scheme, 1989 had given an impression of similar loan write-offs
in future also, thereby vitiating the recovery climate.
Factors Influencing the Overdues and Screening the Potential
Defaulters
The analysis of the factors influencing the repayment behaviour of
crop loan borrowers using logistic regression showed that the repayment
behaviour of the borrowers were conditioned by a host of factors like
operational expenses, per capita consumption expenditure, loan amount,
amount diverted to non-productive uses and credit acquisition cost.
There were differences in the economic characteristics and their
relative importance in influencing the repayment behaviour among the
borrowers of commercial banks and cooperatives. Higher share of cash
crops in the cropping pattern resulted in better recovery of commercial
bank loans whereas the experience in institutional credit, loan amount
diverted for other purposes resulted in lower recovery. On the other hand,
the per capita consumption expenditure resulted in better recovery of
cooperative credit. Higher credit acquisition cost, more delay in credit
delivery, more advanced age and more educational status contributed to
lower repayment of cooperative loans.
The farmers perception of improving the recovery performance of
credit institutions also showed that there were differences in the factors
influencing the repayment behaviour of borrowers of commercial bank and
PACSs. The borrowers of PACSs viewed that timeliness in credit disbursal,

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followed by the adequacy of loan amount and lower interest rates were
the more important factors influencing their repayment decision. The
borrowers of commercial banks, on the other hand perceived that the
adequacy of loan amount, followed by the timeliness in credit supply and
proper supervision of loans improved the recovery performance.
Rigid formalities in credit transaction was the most important limiting
factor faced by borrowers while dealing with the financial institutions.
Cumbersome procedures and pre-occupation with paper works were other
factors that made the agricultural banking less customer-friendly to the
borrower farmers.
Policy Implications
Based on the insights provided by the study, the following policy
measures are being suggested that could make the crop loan scheme more
efficient and meaningful.
Firstly, in view of the regional imbalances in credit delivery, concerted
efforts are required to reduce the regional imbalances in credit delivery
in the different districts of the state.
Secondly, the cooperatives played only a supplementary role to the
commercial banks in credit dispensation to the agricultural sector. Keeping
in view of the democratic nature of cooperative credit, they are to be
revitalised and geared to play the major role in the multi-agency approach
in agricultural finance.
Thirdly, the small and marginal farmers were receiving inadequate
credit matching to their credit requirement. Policy interventions are needed to correct credit gaps so created. Scale of finance shall also be evolved in a more realistic and scientific manner to meet the credit needs of the farmers, particularly that of the small and marginal size groups adequately.
Fourthly, credit rationing practiced by the financial institution defeated the very purpose of weaning the farmers away from the clutches of village moneylenders. Hence, policy perspectives need to be farmed to overcome this pitfall.
Fifthly, considering the higher incidence of diversion of production credit to non-productive purposes, effective supervision and followup of loans are needed to keep agricultural illusion at minimal levels.
Lastly, the practices and procedures followed by the financial institutions were cumbersome and rigid. It needs simplification to offer more customer –friendly banking facilities to the farmer borrowers.