Chapter – VII

COMPARATIVE COST OF AGRICULTURAL CREDIT : LENDING ASPECTS

LENDING COSTS OF INSTITUTIONSSupply aspect of credit is equally important in the holistic approach of

credit expansion as the demand aspect. Supply of credit comes at a cost i.e.

lending cost, be it institutional source of credit or non-institutional source of

credit. Total lending cost can be divided into two parts i.e. one is

transaction/administrative cost and the other is cost pertaining to bad debts.

Transaction cost comprises a major part of the total lending cost incurred by

various lending agencies. High susceptibility to risk, lack of tangible collateral,

low volume of business but high number of borrowers, imperfect knowledge on

the part of lender, lack of supervision of credit, difficulties in recovery of loan are

some factors contributing to transaction cost on the part of lending agency.

Public policy is aimed at ‘social’ and ‘development’ banking by reducing

the role of informal sector credit (Dev 2009). Due to differences in the

organizational ethos of institutional and non-institutional sources, there is

difference in the procedures and costs involved in the credit provided by the two.

So, this chapter brings out the lending aspects pertaining to formal and informal

sources of finance including the costs involved thereof in the study area.

Dhyani and Tewari (1988) found the process of evaluating loan

applications time consuming. To reduce the lender’s cost of transaction and

quicken the processing of loan applications, a numerical evaluation system was

suggested through risk indices. Higher farming efficiency and greater

employment of farm assets per unit of land indicate good credit risk, while

irregularity in bank consumership, outstanding debts, higher social status hint at

bad credit risk.

18

Ellinger and Barry (1991) indicated lower operating costs for banks

located in rural areas than near cities. Also, the operating costs were observed

to be low in banks with a higher concentration of agricultural loans.

Desai and Mellor (1993) based on time series data of nine major Asian

countries found that low income countries have lower unit transaction costs

(2.4%) than middle income countries (3.3%), African middle income countries

(3.1%) and Latin American and Caribbean middle income countries (2.8%).

Institutional lenders in Asian countries have succeeded in keeping their

transaction costs lower than other regions because these are multifunctional.

The average transaction cost of institutions was between 0.8 and 2.0 per cent,

whereas for private rural sources, it varies between 2.5 and 5.5 per cent. These

costs are less where their density, coverage and multifunctional roles are greater.

It was also found that sustained and disciplined institutional credit had led to

decline of 25 per cent in the interest rates of informal lenders between 1951 to

1975.

Yaron (1994) has reviewed some successful public sponsored

programmes in Asia. He found that the key to success of RFI appears to be the

introduction of a social mechanism that lowers transaction costs while supplying

effective peer pressure for screening loan applications and collecting loans.

Kumbhare et al (1994) have reported that the transaction and service

costs of institutions depend upon the size of institution, level of economic activity,

organizational structure etc. Where the business is less, loan size is small, there

transaction cost is high. It was suggested to simplify the loaning procedures to

decrease these costs, as low staff cost leads to low cost of servicing.

Besley (1994) has tried to justify the government intervention in the rural

credit markets on the basis of enforcement difficulties, imperfect information

scarcity of collateral, lack of complementary institutions like insurance markets,

high interest rate structure etc.

Satyasai and Badatya (2000) had found that cost of delivery of agricultural

credit can be reduced by changing the composition of working capital and

increasing the business base. Transaction costs of long term credit structure are

found to be high. Cost inefficiency was found to be negatively correlated with

19

loans to ultimate borrowers per rupee of expenses, staff density per lakh NSA

and positively correlated with branch network per million operational holdings.

The cooperative institutions enjoy the same advantage as of non-institutional

rural lenders i.e. close interface with the clientele.

Dubhashi (2001) while favouring the professional management of

cooperatives has stressed on activisation of dormant membership to expand the

volume of business, diversify the lending and to reduce the cost of transaction.

Sykuta and Cook (2001) have stressed on consolidation and coordination

throughout the agrifood system in the interest of trading parties in agriculture. It

was found that transaction costs in economic transactions are positive,

information is imperfect, costly and asymmetric. So, institutions are important in

minimizing the costs as competitive forces shape the structure of contracts.

Gloy et al (2005) have studied the costs and returns of agricultural credit

delivery. It was found to be more cost efficient to serve borrowers with larger

loans. But as the loan volume increases, interest rate margin (net earned

interest rate less the cost of funds) falls faster than servicing costs. So, little net

impact on profitability of the lender. The risky borrowers are charged highest

rates of interest. A fall was observed in the servicing and monitoring costs as the

length of the lender / borrower relationship increased. Also, costs are found to

be decreasing with increased concentration of borrowing i.e. borrower’s total

debt. But the impact of this lender / borrower relationship on magnitude of cost

decline was found to be small.

Certain important parameters in agricultural credit have been depicted

according to institutions in Table 7.1. It is found that average number of loans

per annum of cooperative societies are 504. Out of this number, agricultural

loans are 311 and rest are the non-agricultural loans. The average amount of

loan advanced by these societies is Rs. 1.70 crore per annum. A mean sum of

Rs. 1.26 crore pertained to agricultural loans, while in case of non-agricultural

loans, it is 0.12 crore. As the Table showed the coefficient of variation is

minimum for the amount of agricultural loans indicating more consistency in this.

20

Table 7.1 Institution-wise averages related to loan aspects of lending institutions in the area under study (2006-07)

Cooperative societies

Commercial banks CCBs PADBs RRB Overall

No. of loans / year 504(83.7)

166(64.8)

1858(49.7)

163(10.9) 150 557

(129.3)

Amount advanced / year (Rs. Crore)

1.70(85.8)

4.08(94.3)

12.01(57.3)

2.45(17.4) 2.00 4.17

(115.6)

No. of agricultural loans / year 311(99.7)

135(66.8)

1500(48.2)

153(10.2) 60 413

(139.7)

Amount of agricultural loan / year(Rs. Crore)

1.26(71.6)

3.31(84.5)

11.04(56.3)

2.31(16.0) 1.30 3.56

(121.0)

No. of non-agricultural loan / year (Rs. Crore)

193(146.3)

31(73.2)

358(84.4)

10(22.3) 90 143

(159.0)

Amount of non-agricultural loan / year (Rs. Crore)

0.12(84.8)

0.77(147.5)

0.97(97.1)

0.14(41.1) 0.70 0.49

(156.6)

Figures in parentheses indicate coefficients of variation

In case of commercial banks, the average number of loans sanctioned are

166 per annum and amount involved in these loans is 4.08 crore per year. 135

out of these loans sanctioned are agricultural loans with an average amount of

Rs. 3.31 crore per annum. The average number of non-agricultural loans

sanctioned are 31 per annum. The mean value of amount involved in these

loans is Rs. 0.77 crore per year.

The third institution studied is central cooperative banks. As these banks

are mainly involved in refinancing of cooperative societies, so number of loans

sanctioned is found to be large. On an average 1858 loans are sanctioned per

year. 1500 out of this number is of agricultural loans and rest are non-

agricultural loans. The total amount sanctioned by these banks is Rs. 12.01

crore per annum. The funds sanctioned through agricultural loans are to the

extent of Rs. 11.04 crore per year on an average whereas the average amount of

non-agricultural loans is Rs. 0.97 crore per annum.

The average number of loans sanctioned through primary agricultural

development banks included in the sample are 163 per annum. The total amount

21

of loans sanctioned by these is Rs. 2.45 crore per year. These banks mainly

provide long-term agricultural loans, so number of agricultural loans is 153 in a

year and average amount involved is Rs. 2.31 crore. On the other hand, number

of non-agricultural loans is only 10 per annum also the amount involved is less

i.e. Rs. 0.14 crore per year. Lower percentage of coefficient of variation explains

more persistency in the series.

One more institution taken up in the study is Regional Rural Bank. As

there is only one such bank in the study area, so information is collected from it.

On an average 150 loans are sanctioned by the institution in a year involving a

sum of Rs. 2.00 crore. The number of agricultural loans is 60 and average

amount sanctioned for the purpose is Rs. 1.30 crore per annum. For non-

agricultural purposes, 90 loans are sanctioned on an average per annum,

involving a sum of Rs. 0.70 crore.

The overall picture of all the sampled institutions combined revealed

average number of loans at 557 per annum with a sum of Rs. 4.17 crore in a

year. Out of this, 413 are agricultural loans sanctioned on an average per

annum. The mean sum sanctioned through these loans is Rs. 3.56 crore per

year. 143 per annum are the loans catered to by these institutions for non-

agricultural purposes. The average amount sanctioned for the same is Rs. 0.49

crore per year.

It is clear from the above analysis that number of agricultural loans are

higher in cooperative institutions be it primary agricultural cooperative societies

or PADBs than commercial banks. However, amount involved is higher in

commercial banks and PADBs than PACSs which deal mainly in crop loans.

Apart from providing finance to cooperative societies attached to these the

central cooperative banks (CCBs) are also providing loans for non-agricultural

purposes, though amount provided for the same is maximum in commercial

banks.

Total cost involved in providing agricultural loans is studied according to

the institutions involved in the sample in Table 7.2 and Fig.15. The lending cost

is split up into (a) establishment cost and (b) running expenses of the institution

on per annum basis.

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Table 7.2 Total cost of lending agricultural loans of various institutions in study area 2006-07

Establishment cost (Rs.) Running expenses (Rs.)Total cost (Rs.)

Total cost per Rs. 100 of Agril. loan

Total salary of

staff involved

Building rent

Electri-city

Total estt. cost

Vehicle/ taxi

Station-ary Stamps Tele-

phone Others Total

Coop. Society

135150 (92.3)

0(0)

3196(2.2)

138347 (94.4)

214(0.1)

4392(3.0)

120(0.8)

2590(1.8)

824(0.6)

8140(5.6)

146487(100.0) 2.08

Commercial Banks

682667(74.3)

78000(8.5)

41000(4.4)

801000(87.1)

51000(5.5)

18000(1.9)

5296(0.6)

20993(2.3)

23117(2.5)

118000(12.9)

919000(100.0) 5.18

CCBs 588000(78.4)

76000(10.1)

15000(2.0)

679000(90.4)

8000(1.1)

39000(5.2)

3890(0.5)

13000(1.7)

8064(1.1)

72000(9.6)

750000(100.0) 1.24

PADBs 840000(73.0)

53000(4.6)

15000(1.3)

907000(78.8)

160000(13.9)

22000(2.0)

4837(0.4)

12000(1.0)

44000(3.8)

244000(21.2)

1151000(100.0) 4.99

RRB 660000(89.8)

21000(2.9)

11000(1.5)

692000(94.1)

6000(0.8)

23000(3.2)

234(0.001)

14000(1.9)

0(0)

43000(5.9)

735000(100.0) 5.66

Overall 481000(77.3)

43000(6.9)

18000(3.0)

543000(87.2)

35000(5.6)

17000(2.7)

2852(0.5)

12000(1.9)

14000(2.2)

79000(12.8)

623000(100.0) 3.42

Figures in parentheses indicate percentages to total costs.

In case of cooperative societies, the average salary of the staff involved in

agricultural loans is Rs. 1.35 lakhs per annum accounting for 92.3 per cent of

total lending cost. The building rent in this case is reported as nil. The expenses

incurred for electricity used are Rs. 3196 per annum. Thus total establishment

cost is Rs. 1.38 lakhs i.e. 94.4 per cent of the total lending costs of PACs. So far

as running expenses are concerned, total amount is Rs. 8140 (5.6%) only. Out

of this POL / taxi accounted for Rs. 214 per annum (0.15%), stationery Rs. 4392

per annum (3.00%), stamps Rs. 120 per year (0.8%), telephone expenses Rs.

2590 per annum (1.8%) and others Rs. 824 per annum (0.6%). The total cost of

PACs is worked out to be Rs. 1.46 lakhs per annum. However, when calculated

at per 100 Rs. Of agricultural loan, this cost came to be Rs. 2.08 per annum.

The total salary of the staff involved in agricultural loans amounted to Rs.

6.83 lakhs (74.3%) in case of commercial banks. The average rent of building is

23

calculated at Rs. 0.78 lakhs per annum (8.5%). The electricity expenses are

0.41 lakhs per year (4.4%). Thus total establishment cost is calculated at Rs.

8.01 lakhs on average for the sample accounting for 87.1 per cent of the total

lending cost. Amongst the running expenses, POL / taxi charges are Rs. 0.51

lakhs (5.5%), stationery Rs. 0.18 lakhs (1.90%), stamps Rs. 5296 (0.6%),

telephone expenses Rs. 20993 (2.3%) and miscellaneous charges Rs. 23117

(2.5%) respectively on per annum basis. The average running expenses are Rs.

1.18 lakhs thus accounting for 12.90 per cent of the total cost. On the basis of

this the total cost is calculated at Rs. 5.18 per annum for per 100 rupees of loan

sanctioned for agricultural purposes for the commercial banks.

In the same analysis of central cooperative banks (CCBs), it is found that

total establishment cost on an average is Rs. 6.79 lakhs per annum i.e. 90.4 per

cent of total lending cost of agricultural loans. The split up of this cost revealed

that share of salary of the staff engaged is Rs. 5.88 lakhs (78.4%), building rent

on an average is Rs. 0.76 lakhs (10.1%) and electricity charges are Rs. 0.15

lakhs (2.00%) per annum. The average running expenses of these banks are

Rs. 0.72 lakhs (9.6%) per annum. Out of this, Rs. 8000 per annum is allocated

to POL / taxi (1.1%), Rs. 0.39 lakhs for stationery (5.2%), Rs. 3890 per annum on

stamps (0.5%), Rs. 0.13 lakhs annual telephone expenses (1.7%) and Rs. 8064

per annum for miscellaneous expenses (1.1%). Combined together total lending

cost is Rs. 7.50 lakhs per annum on an average. While for per 100 rupees of

agricultural loans sanctioned the lending cost is Rs. 1.24 per annum only.

For primary agricultural development banks (PADBs) the total lending is

calculated at Rs. 11.51 lakhs per annum. Out of this amount, the average

establishment cost is Rs. 9.07 lakhs per annum accounting for 78.8 per cent of

total cost. The annual salary of the staff is Rs. 8.40 lakhs (73.00%), the building

rent Rs. 0.53 lakhs on an average (4.6%) and electricity expenses Rs. 0.15 lakhs

(1.3%) respectively formed the establishment cost. On the other hand, running

expenses involved are Rs. 2.44 lakhs or 2.12 per cent of the total cost. This is

comprised of Rs. 1.60 lakhs per annum for POL / taxi, Rs. 0.22 lakhs for

stationery, Rs. 4837 for stamps, Rs. 0.12 lakhs for telephone bills and Rs. 0.44

24

lakhs against miscellaneous item heads. For an agricultural loan of rupees 100

each, the lending cost came to be Rs. 4.99 per annum in case of these banks.

There is only one regional rural bank (RRB) falling in the study area. Its

analysis revealed, total lending cost for it Rs. 7.35 lakhs per annum. When

worked out for per 100 rupees of agricultural loan, it came to be Rs. 5.66 per

annum. The establishment cost of this bank is Rs. 6.92 lakhs per year, thus

accounting for 94.1 per cent of the total cost involved. Out of this share of the

staff salary is Rs. 6.60 lakhs i.e. 89.8 per cent in a year. The building rent is Rs.

0.21 lakhs (2.9%) and electricity expenses are Rs. 0.11 lakhs (1.5%) per annum.

The running expenses of the bank are reported as Rs. 0.43 lakhs, accounting for

5.9 per cent of total cost. The share of POL / taxi is 0.8 per cent or Rs. 6000, of

stationery Rs. 0.23 lakhs (3.2%), on stamps only Rs. 234 and Rs. 0.14 lakhs on

telephone bills of the bank per annum.

Overall analysis of all the sampled institutions clubbed together calculated

the total cost on an average as Rs. 6.23 lakhs per annum. Per 100 rupees of

agricultural loan this cost came to be Rs. 3.42 per annum. The average

establishment cost in this is Rs. 5.43 lakh accounting for 87.2 per cent of the total

cost. This included salary of the involved staff Rs. 4.81 lakhs (77.3%), building

rent Rs. 0.43 lakhs (6.9%) and electricity expenses Rs. 0.18 lakhs (3.00%) on

per year basis. On the other hand, the average running expenses are Rs. 0.79

lakhs (12.8%) per annum. POL / taxi contributed Rs. 0.35 lakhs (5.6%),

stationery Rs. 0.17 lakhs (2.7%), Rs. 2852 for the stamps (0.5%), telephone

charges Rs. 0.12 lakhs and miscellaneous items Rs. 0.14 lakhs (2.2%) towards

the total running expenses.

Thus, it is found that share of establishment cost is higher to a large extent

than the running expenses of institutions. The major component of

establishment cost is comprised of the salary of staff engaged in agricultural

loans, though its share varied amongst the institutions. Its proportion is

maximum for PACSs and minimum for PADBs. Same is true for total

establishment cost. The running expenses are found to be maximum for PADBs,

followed by commercial bnks and minimum for PACSs in absolute terms. The

POL / taxi expenses are reported as maximum for PADBs leading to high running

25

cost. The miscellaneous item heads included repair charges, maintenance of

buildings, equipments etc., expenses on newspapers, pamphlets, public

broadcasting etc.

The inter-institution comparison revealed that total cost per 100 rupees of

agricultural loans is minimum in case of CCBs due to large amount of loans

involved, followed by PACSs, PADBs, and commercial banks. It is found to be

maximum for RRB studied. Thus, it can be concluded that total cost involving

establishment cost and running cost per 100 rupees of agricultural loans is lesser

in case of cooperative institutions as compared to commercial banks and

regional rural banks.

Other lending aspects related to the institutionsThere are many important aspects related to the lending procedure other

than the costs involved of institutions. Matters like formalities of the institutions,

time involved in the credit sanctioning, difficulties faced by institutions, mode of

disbursement, mode of repayment, default rate, supervision of credit etc. which

are highly important and affect the efficiency of credit delivery system. The

aspects mentioned are important not only for the institutions, but also for the

farmers served by these. So, all these points are discussed in detail with the

sampled institutions.

(a) Difficulty faced by the institutions in dealing with the farmers: All

other institutions reported no problem in this matter except one central

cooperative bank (CCB) faced difficulties in the recovery of loans.

(b) Loan formalities of the institutions: As these institutions are controlled

by different government departments / banks, so these are bound by certain

rules and regulations. Thus, a proper lending procedure is followed by various

institutions, which involves many formalities.

In case of primary agricultural cooperative societies, the farmer members

either hold passbooks of their accounts or they have credit limit made by these.

So, borrowers need to fill a simple proforma only which is in Punjabi language.

While seeking membership, farmers need to present certain documents i.e.

farad/jamabandi, ration card / identification proof etc. He needed to submit three

26

photographs to the society office. And also present security of two members and

two witnesses to the office.

The language of the form is reported as any two out of English, Hindi or

Punjabi in case of commercial banks. Different documents required to be

submitted by loan seekers are land records i.e. farad/jamabandi, ration card/any

id proof, mortgage deal or asset hypothecation depending on the volume and

purpose of loan. Two to three photographs are to be submitted along with

application form. Banks accept third party guarantee as security of loan or

hypothecation of asset like land / article. Two witnesses are to be provided i.e.

one can be village nambardar and the other account holder of the bank.

In central cooperative banks, the application form is generally bilingual i.e.

in Punjabi as well as English. Documents to be attached with application form

are farad/jamabandi, ration card/any other identification proof. Two to four

number of photographs are to be submitted with the form. Only land is accepted

as security here, which remained with the primary agricultural cooperative

societies. The borrower is to provide two witnesses, but there is no need of any

guarantor.

The primary agricultural development banks (PADBs) reported that their

application forms are also having both the languages i.e. Punjabi as well as

English. Farmers needed to provide land records, no due certificate from other

financial institutions of the area and three photographs, along with the application

form. Generally, land is accepted as a security of the loan. Two guarantors are

required i.e. one could be the account holder of the bank and the other to be

some influential person of the village like nambardar etc.

The RRBs i.e. regional rural banks are also providing bilingual application

proformas. The documents to be attached with it included land records, bank

agreement and no due certificate from other financial institutions. The borrower

needed to provide 3 photographs also. There is no need of witness here as

security requirement is a mortgage deed when amount of loan is more than fifty

thousand rupees and the third party guarantee with it.

27

Time taken to sanction the loan and trips undertaken by the farmers according to institutions: The general perception is that in institutional sources

of finance, the loan procedure is lengthy and takes a longer time in sanctioning of

loan. Thus farmers have to make several visits to these agencies to get the loan.

So, institutions are asked regarding these aspects and the findings are presented

as under:

Table 7.3 Institutions perception regarding time taken and visits of the farmers while sanctioning of loans

Agency Time to sanction loan according to Institutions

Visits of the farmers according to Institution

PACSs Nil - 10 days 1 - 2Commercial Banks 2 - 15 days 2 - 4CCBs 2 - 7 days 1 - 3PADBs 7 - 15 days 2 - 3RRB 3 - 4 days 2

The above Table had provided the range of figures i.e. minimum and

maximum as reported by various institutions. In case of PACS it is generally

within no time to 2 days, only one society reported the maximum limit of 10 days.

So, time taken is more in Commercial Banks and PADBs. The reason could be

that due to higher amount of loan involved these needed to verify the credentials

of the borrower. The visits of the farmer are also more in these banks.

Verification of farmer’s credentials: This aspect is also important for the

agency especially if the amount involved is large.

The cooperative societies reported providing credit only to the members.

Generally the credit limit fixed is as per the size of holding of the loan seeker.

For the commercial banks, the credit limits are fixed for various purposes.

These verified the credibility through market report of the borrower or checking

the land records or even by paying a visit at the farmers residence/fields.

In case of central cooperative banks (CCBs), the credit limits remain with

PACSs. These verified the land records or visited the farmers who had applied

for the loan.

PADBs sanctioned the loans according to the size of the holdings of the

borrowers. Normally it is under definite schemes like for dairy, for equipments or

28

for irrigation structures etc. The staff involved undertook pre-sanction visits to

the farmer, after going through the project report to check the viability of

investment.

At RRBs, the land records of the loan seekers are verified before

sanctioning of the loan.

Expenses incurred by the farmer in the loan case: The estimates of different

institutions are taken regarding this aspect, as it is felt that due to procedural

formalities of these formal agencies, farmers had to bear a high transaction cost

while seeking loans from these. The reported figures are presented as under:

Table 7.4 Institutions perception on expenses incurred by the farmers in the loan case

Agency Expenses incurred by the farmers (Rs.)

Cooperative Societies Nil 200-300 initiallyCommercial Banks 500 – 2000CCBs 500 – 2000PADBs 500 – 1000RRB 1500

The expenses are found to be varying with the volume and purpose of

loan.

Whether the requested amount is sanctioned? 25% of the sampled

cooperative societies reported to deny the requested amount and sanctioned

lesser than that according to the size of holding or credit limit of the farmer and

his previous record.

In case of commercial banks, 50 per cent of the sampled banks reported

sanctioning lesser amount than requested by the farmer. The amount

sanctioned is as per the credibility of the borrower or according to conditions. It

is felt that farmers generally overestimated the requirements.

Central cooperative banks are found sanctioning the requested amount

according to the credit limits fixed.

The requested amount is also sanctioned by PADBs as the lending is

under different schemes and programmes. So, if the report of Field Officer is

positive, the requested amount is sanctioned.

29

RRB also reported sanctioning of the requested amount as it is normally

according to limits fixed by the size of land holdings.

Adequacy of Loan AmountUnder supply as well as over supply of credit both had adverse

implications for the agriculture. The need is to supply proper amount of credit so

that resource starved farmers can fulfil their requirement from this cheap source

of credit. So, institutions are asked about adequacy of credit amount these are

supplying i.e. whether it is sufficient to meet the agricultural needs. All the

PACSs except one found it sufficient as the per acre limit of credit is fixed

according to the costs of farming. The commercial banks, CCBs and PADBs also

gave an affirmative response. But in case of RRB, it is considered less in

medium term loans where it is Rs. 45000 per acre.

Credit DenialAs the institutions provide credit according to well laid down rules and

regulations, so there could be denial to credit demanded if the borrower failed to

meet the criteria of these. These factors affecting decision of the formal agency

whether to provide loan or not, like market report of the borrower, his credibility,

past record of him, viability of credit proposal etc.

For 50 per cent of cooperative societies, the denial percentage is nil and in

the rest it is 1-4 per cent.

In 25 per cent of commercial banks, it is nil but for the rest it is 3-7 per

cent.

In CCBs, it is reported at 5 per cent. PADBs reported it between 2 to 5

per cent, whereas it is told to be 2 per cent in case of RRB.

Mode of DisbursementThis is in the sense whether credit disbursed is all cash, or all kind or both.

This had an implication on utilization of credit as the diversion of loan amount is

easier if received in cash.

In case of 30 per cent PACSs, 100 per cent of credit disbursal is in cash.

In 37.5 per cent it is 67 per cent cash and 33 per cent kind. In 16.5 per cent, it is

in ratio of 71:29 and in 16 per cent it is 59 per cent cash and 41 per cent kind.

30

The kind component is in various forms of inputs like fertilizers, pesticides, diesel

or equipments.

The commercial banks are not having kind component of credit. It is only

hard cash or through cheques.

The 33 per cent of CCBs are having 67/33 per cent proportion, while for

rest of 67 per cent, it is 100 per cent cash.

The PADBs are disbursing credit through a/c payee’s cheques, mostly

directly to dealers of machinery, equipments, provider of cattle etc.

It is 100 per cent cash in case of RRBs.

Place of DisbursementAs the loans are generally disbursed in installments, so, place of

disbursement adds to transaction cost of the farmer, as it means more trips to the

agency for the farmers. All the agencies are found disbursing credit at the place

of their office site only.

Rate of Interest Charged by the InstitutionsRate of interest charged by the lending source becomes a major

component of transaction cost borne by the farmer. Higher will be the rate of

interest, more expensive will be the credit. The reported rates of interest are as

under:

Table 7.5 Institution wise rate of interest structure (%)

Agency ST MT LT Consumption of loans

PACSs 7.00 - - 10.00 - 11.00

CBs 7.00 9.50 – 12.50 12.00 – 14.00 13.00 – 14.25

CCBs 4.50 – 9.50 8.50 – 11.00 8.50 – 12.00 8.50 – 10.00

PADBs - - 8.00 – 11.00 Nil

RRBs - 12.00 - 12.50

Table 7.6 Ranking of Rate of Interest charged by the Institutions

Agency / Banks Low(%)

Normal(%)

High(%)

PACSs 25 75 -CBs - 87.5 12.5

31

CCBs 33 67 -PADBs - 100 -RRBs - - 100

Form of Security Accepted by the InstitutionsOn what terms of security these agencies provide the loan for agricultural

purposes.

Table 7.7 Institution wise acceptable security for the loan

Agency Security acceptedPACSs Pernote / only membersCBs 12.5% -3rd party guarantee, 87.5% -land / assets CCBs Land / assetsPADBs LandRRBs LandWitness required to obtain loan from the institution

Table 7.8 Institution wise requirement of witness

Agency Witness Whom

PACSs 2 Guarantor / member

CBs 0-2 Bank account holder or known

CCBs 2 Account holder

PADBs 2 Guarantor / known

RRBs Nil / one for non-agricultural loan Account holder

Is witness must?Normally the agricultural loans are secured loans i.e. provided against

security, whether land or the asset. So, the formal agencies are questioned

about the need of witness. By and large, these are in favour of having witnesses,

mostly from social point of view. As in case of default, it is not easy to acquire

pledged asset. So, the agency can create some social pressure through

witnesses. But RRB is not in favour of having witness. 50% of PADB also

denied the requirement of earlier installments are on time.32

Is a known witness must?Table 7.9 Institution wise requirement of a known witness

Agency Response PACSs Yes (only members)CBs 25% no, 75% yesCCBs 33% no, 67% yesPADBs 100% noRRBs 100% no

Mode of repaymentRepayment of loans advanced is again an important aspect of credit

delivery system as it had an impact on financial health of the institutions. Poor

repayment or delayed repayment or total denial to repay, will hamper the further

credit flow from the agency. So, repayment plan had to be well laid out in

advance and should be convenient to both farmer as well as agency. So,

sampled institutions are asked about various aspects related to repayment of

loan.

How: All the agencies reported that repayment plan is in installments of the

amount advanced.

Table 7.10 Institution wise repayment schedule of loans

Agency Installment Amount of installmentST MT LT

PACSs 6 monthly - - FullCBs 1-12 monthly 12-60 monthly 6 monthly Full / proportion

according to loanCCBs 6 monthly Monthly-yearly 6 monthly ProportionatePADBs - - 6 monthly ProportionateRRBs - 6 monthly - Proportionate

Dates and time of installment:

33

All the agencies reported that farmers are given dates and time of

instalments due of repayment in advance. Also, these dates and time is reported

to be suitable to both agencies as well as to the farmers.

Default RateDefault is a major problem faced by the lending agencies. It could be

under compulsion or willful. But agencies faced huge losses in both the cases.

The rate of default reported by different agencies showed a lot of variation. In

PACSs the number of default cases is nil in 50 per cent societies, but it is as high

as 225 in 12 per cent of the sample. The amount involved is Rs. 3.5 lakhs in the

reported year. In short-term loans of commercial banks, default rate is 10 per

cent, in medium term loans it ranged between nil to 2 per cent, but in long term

loans the range of default rate is nil to 30 per cent. The amount involved is Rs. 5

to 6 lakhs. The rate of default reported by CCBs is 10 per cent. In PADBs,

medium term loans involved the default rate of 12-13 per cent involving an

amount of 1.5 lakhs, while in long term loans it is 2 per cent with an amount

involved to the tune of Rs. 5 lakhs. RRB reported nil default in the sample.

Penalty of late repayment:The various agencies resorted to different penalties in case of delayed

repayment of the instalment due. These are expressed as percentage of over

and above instalment due.

Table 7.11 Institution wise penalty charged on delayed repayment of loan amount

Agency Penalty imposedCooperative Societies Nil – 2%Commercial Banks 2%CCBs 1 - 3%PADBs 2%RRB 2%

Supervision of loan advancedThis segment is important in the sense of utilization of credit acquired by

the farmers. The formal agencies are required to supervise the credit advanced

to check the diversion / misutilization of it. The resource-crunched farmers are

34

easily tempted to divert the funds for other purposes, when they get the loan

amount. So, the sampled institutions are enquired about this aspect too.

All the institutions replied in affirmative regarding supervision of credit.

The agency-wise findings are as shown in the following table:

Table 7.12 Institution wise supervision cost of loan

Agency Y/N How Cost involvedTransport

(Rs.)Time TA

etc. (Rs.)

Staff engaged

(No.)

Other Total cost (Rs,)

PACSs 50% Y Visit / Advice

Nil 8 hrs/ month

Nil 1 0 0

CBs Y Visit 5516.67 5 days/ month

2100 1-4 0 151616.67

CCBs 67% Y Visit In total 7 days/ month

- 1-3 - 7333.33

PADBs 50% Y Visit Inclusive 10 days/ month

- 1-2 0 75000.00

RRBs Y Visit Inclusive 3-4 days/ month

- 2 5000 5000.00

Percentage diversion of loan:The institutions gave varied estimates of loan diversion by the farmers on

the basis of their observation and experience.

Table 7.13 Institution wise estimates of diversion of loans by the farmers(%age)

Agency Loans ST MT LT Consumption

PACSs 5-20 - - 15CBs 7-10 8-20 25 15CCBs 25-50 10-20 - -PADBs - - 10 -RRBs - 6 - 5

Action on Misutilization of Loans:

35

The agencies are asked about the action taken on their part. When loan

amount is found to be misutilized / diverted to purposes other than sought for.

Almost all the institutions showed a lenient attitude towards it. Only a minor cost

is given by these on the issuance of notices/warnings to such persons. These

agencies denied any indulgence in some sort of strict action against those

involved in diversion of funds.

Table 7.14 Institution wise cost incurred to check misutilization of loan amount

Agency Cost involved / annum (Rs.)PACSs 500CBs 400CCBs 50 – 500PADBs 250RRB Nil (only verbal)

Help in execution of farm plan after the provision of credit by the lending

agency is enquired. The responses are being presented in the following table:

Table 7.15 Institution wise assistance provided in execution of farm plan

Agency Yes / No How Cost involvedPACSs No Only advice NilCBs 35% Yes Expert guidance NilCCBs 33% Yes Advice NilPADBs No - -RRB No - -

So, it is found that there is no positive response by formal agencies in the

execution of farm plan, as most of the agencies clubbed this aspect in the

technical guidance provided by them. Thus, the cost involved in this segment is

also clubbed in the other aspect.

Technical guidance provided to the farmersMajority of the farmers seeking financial help are not well educated or

having any technical background. So, they are found lacking in adoption of latest

technologies, knowledge, machinery or new operations. They are still following

the age old experience and knowledge handed over by the forefathers or what

the others are doing in the village. So, for proper utilization of credit delivered,

36

some sort of technical guidance is must. So, the onus of imparting this type of

advice / guidance is also upon funding agencies to some extent. The responses

of sampled institutions are as under:

Table 7.16 Institution wise various aspects pertaining to technical guidance provided to the farmers

Agency Yes / No How Visits (No.)Staff

Involved(No.)

Cost involved

(Rs./annum)

PACSs 87.5% Yes

72% Camps / consultancy and

15.5% Equipment0.5 / month 1-3 800-1000

CBs 85% Visit/advice 1-2/annum 2-5 1500

CCBs Yes Project report/ consultancy 1/month 2 Nil

PADBs Yes Training/ advice 1/month 2 NilRRB Yes Kisan Club 1/month 4 12000

So, it is found that most of the agencies are involved in providing some

sort of technical guidance either through expert lectures in the camps, providing

consultancy, preparing the project report etc. Most of the time, the expenses of

such programmes are borne by the headquarters of respective agencies.

Staff involved in agricultural loansTable 7.17 Institution wise involvement of staff in agriculture loans

Agency No. of personsPACSs 1 – 3CBs 2 – 3CCBs 1 – 6PADBs 3RRB 3

Recovery of LoansThis is an important aspect of credit delivery system as it smoothens the

further flow of credit. A high recovery percentage reflects higher efficiency of the

agency. On the other hand, poor recovery rate leads to overdues and thus mars

the financial health of the agency. So, cost of recovery is an integral part of

lending cost.

The responses of various agencies are as shown in the following table:

37

Table 7.18 Institution wise cost incurred on recovery of loans

Agency Cost of recovery (Rs.)

Transport Time Others Total

PACSs Nil 30 days/ season

140.00 140.00

CBs 15333.33 60 days/ season

4566.67 19900.00

CCBs 4833.33 10-25 days/ season

1000.00 5833.33

PADBs 160000.00 20-30 days/ season

0 160000.00

RRB 16800.00 42 days/ season

0 16800.00

Other Financial Aspects of Sampled Financial InstitutionsSo far, various costs related to lending of credit are discussed. The other

aspects which reflect the financial health of the institutions are also enquired.

These are related to deposits with the agency and revenue earned by these

agencies during 2005-06. The position as stated by these institutions had been

depicted here on average basis.

Table7.19 Agency-wise deposits and revenue of sampled institutions (Rs. Crore)

Agency Deposits Total revenue

Revenue earned from

credit advanced

Revenue from other

sources

PACSs 2.27 0.07 0.066 0.006CBs 8.27 0.90 0.45 0.45CCBs 6.89 0.39 0.38 0.01PADBs Nil 0.30 0.30 0RRB 31.50 2.38 1.10 1.28Overall 6.41 0.56 0.33 0.23

Thus, maximum deposits are reported by RRB and nil by PADBs. Also

maximum revenue is earned by RRB, both from the credit advanced as well as

from other sources like commission on sale of inputs, penalty, income from hiring

out of equipment and machinery etc.

38

In all the cooperative agencies the majority of revenue earned is from the

credit advanced, while in commercial banks it is almost 50-50 per cent from both.

But in case of RRB, it is reported more from other sources.

Lending aspects related to non-institutional sources of finance:The non-institutional sources are those which are beyond the control of

any institution. These are not following any rules or regulations regarding

lending. The procedure adopted by these is informal. The sources included big

landlords, professional money lenders and relatives/friends. Big landlords play a

role in mainly small and marginal category of farms. Relatives/friends are an

important source in zone-I. Those providing financial assistance are having

generally NRI status. Respondents did not reveal much about this source in all

the zones. It is the professional moneylenders or arhtiyas who emerged an

important non-institutional source especially in zone-II and zone-III. So, these

important informal agencies are questioned regarding various aspects of lending

i.e. number of loans, purpose, criteria, various costs involved, procedures

adopted etc.

From the sampled commission agents studied across the zones, the

following information came to the light.

Table 7.20 Loan profile of sampled arhtiyas

No. of loans

Farmers serviced Total Loan sanctione

d Rs./annum

Share of consumption

of loansLoanees Others

Average 107 79 74 153 431767 50-60%CV 89.2 71,1 77.4 59.2 130.6

Thus it is clear that average number of loan cases handled by arhtiyas in

the year 2005-06 is 107. On the other hand 153 farmers availed the services

provided by them on an average. 79 out of these are those who owed them

money and 74 are others. The mean amount of loan sanctioned is Rs. 431767

per annum. Out of this 50 to 60 per cent is the share of consumption loans.

Purpose of LoanAll important purposes of borrowing are listed for which the farmers

generally borrow. The arhtiyas ranked these purposes according to the order of 39

importance i.e. the purpose for which the farmers borrow more or less. It

emerged that consumption needs and fertilizers amongst the productive uses are

most important purpose of borrowing by the farmers according to arhtiyas. The

other important input for which money is borrowed is chemicals/pesticides for the

crops. Seed purchases and investment motives are assigned least preference

on the list of commission agents as a cause of borrowing.

Criteria of CreditThis indicates the basis on which the arhtiyas prioritise the loans i.e. to

whom provide and to whom not. This acted as an index of selection of loanees.

It is revealed that reputation of person who has come to take loan matters the

most i.e. what others had to say about his character, dealings, social behaviour

etc. Next criteria in the list is credibility of the person in the market – his past

behaviour, soundness of his dealings, repayment capacity etc. Next is on the

basis of size of holdings in operation by the farmer. Generally income is

calculated on per acre basis, so size of operational holding is substituted as a

rough estimate of income of the farmer as most of the farmers market their

produce through these commission agents as well. Income from other sources is

assigned least importance as a yardstick for selection of persons seeking loans.

Other indicators reported are volume of crop, purpose of loan as well as an

important factor related to personal relations with the borrower. Personal links

are given importance in the sense that borrowers generally owed their loyalty to

the arhtiyas not only in present times, but over the generations.

Difficulty faced by the Commission Agents in dealing with farmersBy and large no arthiya reported any problem faced in dealing with the

loanees. Only 5 per cent of the sampled arhtiyas complained about recovery and

political pressures put on them to waive off the loans.

Formalities for CreditThere is simple procedure of getting credit. As such no proper application

proforma is found existing. 35.29 per cent of the sampled arhtiyas reported taking

signature/thumb impression for providing loans. While, 23.53 per cent of the

sample are entertaining verbal requests for loans. Whereas, 41.18 per cent of

40

the commission agents are accepting both types of requests i.e. written with

signature as well as verbal ones.

Security required to obtain credit82.35 per cent of the arhtiyas in the sample are demanding no tangible

security for any loan be it for agricultural purpose, consumption or any other.

However, 23.53 per cent reported pernote signing as a security. Enquiring about

the reputation of the borrower is a security for 5 per cent of arhtiyas. In purposes

other than agricultural or consumption or especially for the new borrowers, a

common link served as a security as told by 17.65 per cent of the commission

agents.

Time to Sanction LoanThere are varied responses to the query. According to respondents the

time varied as per the amount sought and intensity of need. Other factors

affecting it are estimation of potential yield i.e. future income of the loanees, his

past record etc. The responses are given in the following table:

Table 7.21 Time taken by the commission agents in sanctioning of loans

Time taken Percentage of arhtiyasNil 47.061 – 2 days 23.523 – 4 days 17.655 days 5.007 days 5.00

So, majority of the farmers reported taking no time in sanctioning of loan.

Trips of the FarmerThe trips of farmers add to their transaction cost of borrowing. More the

number of visits to borrow, higher will be the cost of borrowing to the farmers.

The responses of arhtiyas are shown in the following table:

Table 7.22 Sampled arhtiyas perception on trips undertaken by the farmers while obtaining the loans

41

No. of farmers’ visits Percentage of arhtiyas1 47.062 29.41>2 – 3 23.52

With the revolution in means of communication and reaching of mobile

networks in rural areas has decreased the number of trips undertaken by the

farmer as they enquire the status of loan, availability of arhtiya or the funds on

cell phones before proceeding to the person.

Farmers cost of borrowingThe arhtiyas perception is undertaken regarding the cost borne by the

farmers in borrowing from these:

Table 7.23 Sampled arhtiyas perception on farmers cost of borrowing

Time / trip of the farmer Cost in Rs. / trip Percentage of arhtiyas response

2 – 4 hours Nil 17.651.5 – 4 hours 20 47.062 – 3 hours 30 11.762 hours 15 – 25 17.65

So, according to sampled commission agents, a farmer had to spend

minimum 1.5 hours to maximum 4 hours per visit to them depending on distance,

business rush hours, availability of funds etc. The cost estimation according to

them is nil as minimum to maximum rupees 30 per visit including fare. Generally

no expenses are incurred on food during the visits, as the clients are served tea

by their respective arhtiyas.

Amount sanctionedIn response to this query regarding whether whole amount demanded by

the farmers is sanctioned or not, the responses are:

Table 7.24 Sampled arhtiyas response to sanctioning of requested loan amount

No Yes SometimesPercentage

response

47.06 29.41 23.52

42

The responses are overlapping. Those who responded that total amount

is not sanctioned also responded that sometimes it is. So, the tendency of

arhtiyas revealed thereof is providing less than the asked amount..

Why lesser amount is sanctioned?The reasons traced to this criteria are enlisted in the following table:

Table 7.25 Sampled arhtiyas reasons for sanctioning of lesser than requested amount of loan

Reason Percentage responsesReputation 41.17Low income 41.17Credibility doubts 29.41More rush of clients 5.00

Place of LoanBy and large loan is delivered by these arhtiyas at their office sites/shops

etc. In exceptional cases these are found delivering credit at hospitals or courts

complex etc.

Mode of disbursement of creditIt is important as these are providing all purpose credit to the borrowers.

The kind component is provided only by those who are dealing in other trades as

well.

Cash only 64.70 per cent

Cash and kind 35.30 per cent

What kind?33.30 per cent of those providing both are found providing inputs (seeds,

fertilizers, diesel) each. 33.30 per cent are providing clothing also. 33.30 per

cent are providing credit in terms of gold jewellery. 16.67 per cent reported

dealing in cotton ginning and providing the service to borrowers on credit.

Any agreement with the loanee?Whether these arhtiyas enter into any sort of agreement with the loan

seekers or not:

Response Percentage response

43

No 58.82Yes 41.18

What sort of agreement?71.43 per cent Pernote28.58 per cent Pernote / voucher14.29 per cent Advance cheques

Rate of interest chargedMost of the time non-institutional sources of finance (commission agents /

moneylenders) are criticized as these are considered as exploitative in nature i.e.

these loot the farmers by charging exorbitant rates of interest, which the farmers

failed to repay and became indebted for generations.

But with changing times, a fierce competition from institutional sources of

finance and under some regulations of the government, the rate of interest

charged by these sources had been modified to an extent. Still it is on the higher

side. The range of rate of interest charged is found to be between 12 and 24 per

cent per annum, varying with the period of loan, purpose of loan and risk involved

as reported by the sampled arhtiyas.

Table 7.26 Rate of interest charged by sampled arhtiyas

Rate of interest (%) Percentage of responses12 – 24 11.7616 – 18 29.4115.5 – 16.5 5.814 – 16 11.7612 – 15 29.4114.0 – 14.5 5.8

70.59 per cent of the respondents considered the rate of interest charged

by them as moderate/normal, while 29.41 per cent considered it as low.

Witness requirement for the loan47.06 per cent of the respondents denied the need of any witness while

providing the credit, however, 52.94 per cent reported to have a witness

especially if the loan seeker is a new client or the amount of loan is big.

Whether a known witness?

44

88.24 per cent of the sampled arhtiyas are of the view, that if the need be

then witness should be a known person only or should have some common link,

but 11.76 per cent of the respondents denied that they accept only known person

as a witness.

Repayment agreementRepayment plan is an important aspect of formal lending. But in informal

lending agencies, 76.47 per cent of the respondents denied having any written

repayment schedule/agreement with the farmer. Rest of the sample reported

having this agreement with the loanee. As in case of arhtiyas, majority of the

loanees market their produce through these, so these are not bothered about any

written agreement and used to recover the loan when the produce comes for

sale.

Repayment scheduleAs normally there are two crop seasons in the state, so accordingly all the

arhtiyas reported getting repayment seasonal/six monthly/as per the crop,

whether loan taken for any purpose.

Default rateThe arhtiyas reported the rate of default accordingly on season basis. It is

as high as 50 per cent as reported by 5.6 per cent of the sample and as low as 1

per cent only. However, 52.94 per cent of the sample quoted it between 10 to 25

per cent.

Amount involved in defaultThe average amount involved of the sample is calculated to be Rs.

335882 per season. But range of this amount is Rs. 50,000 to Rs. 22,00,000 per

season depending on the volume of business of the arhtiyas.

Penalty imposed94.12 per cent of the sample denied imposing any penalty for delayed

repayment, while 5.88 per cent reported a penalty at the rate of 1.5 per cent over

and above the amount due to be repaid.

Cost on recovery of loansThe findings are given in Table 7.27.

Table 7.27 Cost incurred on recovery of loans by sampled arhtiyas

45

Transportation cost

(Rs./annum)Time spent

Expenses incurred on

Musclemen Legal notice Others

Average 3724 1-2 visit/ month Nil Nil Nil

C.V. 157.8

The only cost incurred as reported by the sample is on transportation

during recovery. The time spent for recovery showed wide variations as 23.53

per cent of the respondents spent no time on the process. While 35.29 per cent

paid 1 visit/month to the loanees. 17.65 per cent reported 2 visits/month and

same percentage of the sample paid just 1 visit/season. All the respondents

denied any expenses incurred on musclemen, legal notices etc. for the recovery

of loans.

Supervision of loans100 per cent of the sampled arhtiyas denied any kind of loan supervision

or check on loan utilization. These are found totally indifferent regarding the use

of credit. So, the cost involved on supervision of credit is found to be nil.

Percentage diversion of creditThough, farmers seek the credit for all purposes, but tend to divert it for

other uses than cited purpose. But 52.94 per cent of the sample denied any

diversion of the loan amount. However, 17.65 per cent put the rate of diversion

at as high as 50 per cent, 11.76 per cent at 40 per cent, another 11.76 per cent

at 20 per cent and 5.88 per cent at 15 per cent of the loan availed.

Total lending cost incurred by commission agentsOn the basis of sampled data, the average cost involved in various items

is worked out and the findings are given in the following table:

Table 7.28 Total lending cost incurred by sampled arhtiyasRs./annum

Interest to others

Accountant

Book keeping

Miscellaneous Total

Average 16706 33941 4012 Nil 54659C.V. 151.4 55.3 133.5 - 72.2

46

The average interest paid to others, who have invested their capital in the

business of sampled arhtiyas is Rs. 16706 per annum. The services of

accountant / munshi are hired by all the respondents. The average salary paid is

Rs. 33941 per annum, but it is found to be as low as Rs. 10,000 per annum to a

high of Rs. 72,000 per annum depending on volume of business. On an

average, Rs. 4012 per annum are spent on book keeping/stationery etc. by the

sample arhtiyas. This expenditure ranged between Rs. 1000 and Rs. 20,000 per

annum. The average of total expenditure is put at Rs. 54659 per annum of the

sampled arhtiyas as the cost involved in the lending money to the farmers.

Other business undertaken by the sampleMany a times, the commission agents indulged in other business, which

are likely to expand their web around the farmers. 17.65 per cent of the

respondents are found dealing in agricultural inputs like fertilizers, seeds and

pesticides. 11.76 per cent are in the clothing business and same percentage is

having jewellery shops. However, none is found dealing in grocery items. Other

enterprises undertaken by the sample are mobiles (5.88%), cold drinks (5.88%)

and cotton ginning (5.88%) as reported.

Marketing to produce through the creditorIn response to this query, 100 per cent of the respondents gave a positive

reply. Regarding those farmers, who had taken loan from the sampled arhtiyas,

but did not market the produce through these, 47.05 per cent denied having any

such farmer. But 52.95 per cent put the proportion of such farmers between 1 to

10 per cent.

Recovery of the loanMost of the sampled arhtiyas are found recovering the loan amount, at the

time of sale of produce. On an average, 82 per cent of the loans are recovered

at that time. The recovery percentage is low at 70 per cent and maximum at 100

per cent as reported by the arhtiyas.

LENDING COSTS ON SHORT-TERM AND LONG-TERM LOANSIn agricultural credit, the loans are broadly classified as short-term loans

or crop loans and term loans. Crop loans are mainly provided for purchase and

use of variable inputs and term loans are for investment purpose of any kind.

47

The lending costs for these two types are separately calculated by depicting

these under broad item heads i.e. administrative costs – expenses incurred on

staff salary, building rent, stationery, electricity, telephone and supervision costs

– cost of transport and traveling, daily allowance of supervisory staff are clubbed

together and opportunity cost – the earnings on the total capital investment when

deposited in the bank i.e. rate of interest on one year’s fixed deposit. The

analysis of short-term loans is presented in Table 7.29.Table 7.29 Lending cost incurred on different heads in case of short-term

loan of Rs. 100

Cost item Institutional Non-institutional t-valueAmount %share Amount %shareAdministrative costs 3.71 40.28 1.56 22.10 3.72***Opportunity cost 5.50 59.72 5.50 77.90 Total lending cost 9.21 100.00 7.06 100.00 2.43**

The administrative costs in case of institutional loans are Rs. 3.71 per 100

rupees of short-term loan i.e. 40.28 per cent of total transaction cost of these

loans, whereas in case of non-institutional sources it is Rs. 1.56 per 100 rupees

of loan, which is 22.10 per cent of total transaction cost of these. Thus

administrative cost is found to be significantly higher in institutional sources as

compared to non-institutional sources of finance. The opportunity cost of the

capital provided as loan is put at Rs. 5.50 per 100 rupees of loan in both the

sources. In case of institutional sources, it formed 59.72 per cent of total

transaction cost, whereas in case of non-institutional sources it is 77.90 per cent

of the total transaction cost. Thus total transaction cost incurred by formal

agencies came to be Rs. 9.21 per 100 rupees of short-term loan, while it is Rs.

7.06 per cent per 100 rupees of loan in case of non-institutional sources, which is

significantly lower than the institutional sources of finance.

The split up of the transaction cost of short-term institutional credit is

undertaken between two important agencies i.e. Cooperative Institutions and

Commercial Banks in Table 7.30.

48

Table 7.30 Lending cost incurred on different heads in case of short-term loan of Rs. 100 by cooperatives and commercial banks

Cost itemCooperatives Commercial banks

t-valueAmount %share Amount %share

Administrative costs 2.08 27.44 5.18 48.50 5.52***

Opportunity cost 5.50 72.56 5.50 51.50

Total lending cost 7.58 100.00 10.68 100.00 4.37***

The administrative costs of primary agricultural cooperative societies (PACSs) is

worked out to be Rs. 2.08 per 100 rupees of short-term agricultural credit,

comprising 27.44 per cent of total transaction cost of these. The same cost for

commercial banks is calculated at Rs. 5.18 per 100 rupees of short-term loans

i.e. 48.50 per cent of the total transaction cost. Thus, it is clear that

administrative costs are significantly higher in commercial banks in comparison

with cooperative societies. The opportunity cost is taken as same i.e. Rs. 5.50

per 100 rupees of loan for both the institutions. This led to the total transaction

costs at Rs. 7.58 per 100 rupees of loan in case of PACSs and Rs. 10.68 per 100

rupees of loan in case of commercial banks due to high administrative costs as

compared to the cooperative societies. The value is found to be significant at 1

per cent level of significance.

The same analysis is also carried out for the long-term agricultural loans in

Table 7.31.

Table 7.31 Lending cost incurred on different heads in case of long-term loan of Rs. 100

Cost itemInstitutional Non-institutional

t-valueAmount %share Amount %share

Administrative costs 5.21 48.65 0.97 14.99 6.71***

Opportunity cost 5.50 51.35 5.50 85.01

Total lending cost 10.71 100.00 6.47 100.00 5.67***

The average administrative cost in case of formal lending institutions is worked

out to be Rs. 5.21 per 100 rupees of long-term loans. It accounted for 48.65 per

49

cent of the total transaction cost of the informal source. On the other hand, the

same cost is Rs. 0.97 per 100 rupees of loan in the long-term lending i.e. 14.99

per cent of the total transaction cost of this source. Thus it is clear that again the

administrative cost is significantly higher in case of formal lending agencies as

compared to informal agencies. With the inclusion of Rs. 5.50 per 100 rupees as

the opportunity cost, the total transaction cost is worked out to be Rs. 10.71 per

100 rupees of loan in institutional credit and Rs. 6.47 per 100 rupees of loan in

non-institutional sources. The total transaction cost is calculated to be higher in

institutional sources as compared to non-institutional sources. The value is

significant at 1 per cent level of significance.

The institutional total transaction cost for long-term purposes is further

split up between the two agencies i.e. cooperatives and commercial banks in

Table 7.32.

Table 7.32 Lending cost incurred on different heads in case of long-term loan of Rs. 100 by cooperatives and commercial banks

Cost itemCooperatives Commercial banks

t-valueAmount %share Amount %share

Administrative costs 4.99 47.57 5.66 50.72 1.53

Opportunity cost 5.50 52.43 5.50 49.28

Total lending cost 10.49 100.00 11.16 100.00 1.37

The administrative cost is calculated at Rs. 4.99 per 100 rupees of long-term

agricultural credit in case of cooperatives, while the same is Rs. 5.66 per 100

rupees of loan in case of commercial banks. With the adding up of opportunity

cost of Rs. 550 per 100 rupees, the total transaction cost for these agencies

came to be Rs. 10.49 and Rs. 11.16 per 100 rupees of long-term loans for

cooperatives and commercial banks respectively.

Gap between interest charged and transaction costThe gap is found out between the rate of interest charged by these

agencies providing agricultural credit to the farmer-borrowers and the transaction

cost incurred by these formal and informal agencies for various purposes of loan,

50

to know whether these gaps are in favour of interest charged or transaction

costs.

Table 7.33 highlights this gap according to source of loan and purpose of

loan. It is found that in short-term agricultural loans, institutions are charging Rs.

9.14 per 100 rupees of loan from the borrowers and these are bearing a

transaction cost of Rs. 9.21 per 100 rupees of loan. So, a gap of -0.07 per 100

rupees of loan is found to be existing. This showed that interest charged is 5.80

per cent higher than the transaction cost. In this way, the interest charged is

0.77 per cent less than the lending cost hence in favour of cost. On the other

hand, in case of non-institutional sources, the interest charged on short-term

credit is Rs. 18.52 per 100 rupees of loan and the transaction cost of these is

calculated at Rs. 9.21 per 100 rupees of loan. So, a gap is existing to the tune of

Rs. 11.46 per 100 rupees of loan with a positive sign. Here, interest charged is

about 62 per cent higher than the transaction cost, thus in favour of interest

charged.

Table 7.33 Gap between interest charged and cost of lending per 100 rupee loan by cooperative and commercial banks

Type of loan / source Interest charged Lending cost Gap

Short-term loan

Cooperatives 9.14 7.58 1.56

Commercial banks 9.14 10.68 -1.54

t-value 2.43**

Long-term loan

Cooperatives 11.37 10.49 0.88

Commercial banks 11.37 11.16 0.21

t-value 1.97**

In case of long-term agricultural credit, the institutions are found to be

charging Rs. 11.37 per 100 rupees of loan, while the transaction cost incurred by

these is Rs. 10.71 per 100 rupees of loan. So, there is a positive gap of Rs. 0.66

per 100 rupees of long-term loan. This showed that interest charged is 5.80 per

cent higher than the transaction cost. On the other hand, in non-institutional

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sources of finance, the interest charged from borrower is same i.e. Rs. 18.52 per

100 rupees of loan, while the cost borne by these is Rs. 6.47 per 100 rupees of

loan, thus indicating a gap of Rs. 12.05 per 100 rupees of loan i.e. 65.06 per cent

in favour of interest. The gaps in favour of interest are significantly higher in non-

institutional sources as compared to institutional sources on short as well as

long-term loans. The gaps indicated that institutional sources are having losses

in short-term lending and some profit in long-term loans. On the contrary, the

non-institutional sources are having significant profits in both short-term as well

as long-term lending.

These gaps are also calculated for cooperative institutions and

commercial banks to calculate the relative profitability of these. The results have

been presented in Table 7.34.

Table 7.34 Gap between interest charged and cost of lending per 100 rupees of loan

Type of loan / source Interest charged Lending cost Gap

Short-term loan

Institutional 9.14 9.21 -0.07

Non-institutional 18.52 7.06 11.46

t-value 7.98***

Long-term loan

Institutional 11.37 10.71 0.66

Non-institutional 18.52 6.47 12.05

t-value 0.55***

It is found that in short-term lending, the cooperatives are charging an interest

rate of Rs. 9.14 per 100 rupees of loan from the farmers, while the transaction

cost of these agencies is Rs. 7.58 per 100 rupees of loan. This indicated a

positive gap of Rs. 1.56 in favour of interest charged i.e. the interest charged is

17.07 per cent more than the transaction cost of cooperative institutions. On the

other hand, the commercial banks are also charging the same rate of interest on

an average i.e. Rs. 9.14 per cent in short-term lending. But the lending cost of

these is Rs. 10.68 per 100 rupees of loan, thus providing a gap of Rs. 1.54 per

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100 rupees of loan in favour of transaction cost or the interest charged is 16.85

per cent less than the transaction cost. The reason for this could be traced to

higher administrative costs in commercial banks as compared to PACSs. Thus,

the existing gap between the two agencies is found to be significant at 5 per cent

level of significance.

In case of long-term loans, the rate of interest charged by cooperatives is

Rs. 11.37 per cent per 100 rupees of loan, but the transaction cost is Rs. 10.49

per 100 rupees of loan. Thus, the gap is in favour of interest charged by Rs.

0.88 per 100 rupees or it can be said that the interest charged is 7.74 per cent

higher than the transaction cost. While in commercial banks, the interest

charged is same, but the total transaction cost increased to Rs. 11.16 per 100

rupees of loan. Thus, a gap of Rs. 0.21 per 100 rupees is found to be existing in

favour of interest charged. The gap is significantly higher in case of cooperatives

as compared to commercial banks.

So, it is clear that the cooperatives are having profit both in short-term as

well as long-term lending but commercial banks are incurring losses in providing

short-term credit to the borrowers, but having some profit in long-term lending.

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