ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
-A A +A

Are Gold Loans Glittering for Agriculture?

Meenakshi Rajeev ( and Pranav Nagendran ( are with the Institute for Social and Economic Change, Bengaluru.

Credit is essential for small and marginal farmers in India, whose low incomes limit savings, making them more vulnerable to several risks. Priority sector lending norms have channelled more formal credit to this sector. The interest subvention scheme for short-term crop loans makes formal credit more economical for farmers. However, there are issues of accessibility, most notably arising out of difficulties in presenting documentation, giving rise to a prevalence in the use of gold/jewellery as collateral. Loan data from three districts in Karnataka has highlighted some important lessons. The use of gold tends to exclude poorer farmers from availing all the benefits of the scheme, and poses issues of accessibility to formal credit. Digitisation of land records and farmer information, coupled with reduced recognition of gold loans in priority sector lending can be valuable to the Indian agriculture sector.

The authors express their gratitude towards the Reserve Bank of India for its support in funding a research project in this area. The support of the Indian Council for Social Science Research and the Institute for Social and Economic Change in conducting this research is also acknowledged. The authors are also grateful to B P Vani. Views expressed in the paper are those of the authors and not of RBI or any other organisation.

India’s banks are in trouble. Mounting unpaid debt has led to an unsightly mass of non-performing assets (NPAs) in the sector, which have to be dealt with. Surprisingly or unsurprisingly, the most recent data from the Reserve Bank of India (RBI 2017) show that it is industries (micro, small, and medium enterprises or MSMEs and large, though the rise in default is more prominent among the latter) and infrastructure that constitute the greatest increases and percentages of loan default. In spite of the accessibility of this sector to banks (since large industries are likely to be prominent and located in urban areas), recovery of loans remains poor. Yet, the caution that should have been exercised in giving loans to this industrial group possibly has instead been directed towards sectors such as agriculture, as we observe that farm sector NPA levels have remained fairly constant over the last four years (RBI 2017).

The farm sector in India is characterised by a prevalence of small and marginal farmers. This farmer group, which cultivates 85% of operational holdings in India (GoI 2014), tends to have low incomes owing to a small scale of operation (Mishra 2007), and consequently, most earn barely enough to cover basic consumption needs (NCEUS 2008). In turn, they possess low or non-existent savings, and thereby, an inability to invest in capital for increasing the capacity to generate income.

It is here that credit plays a crucial role. Timely credit is essential for purchasing vital inputs for sowing crops, since farmers lack the savings to purchase these in time themselves and incomes from crops are only earned post harvest. Complications in accessing credit are bound to affect small and marginal farmers the most, and consequently, empirical evidence indicates access to formal credit is one of the underlying causes of differences in farm productivity in India (Kochar 1997; Rajeev and Vani 2011). Issues of access to formal credit are bound to carry weight since differential access to credit in
rural financial markets of low income countries have been found to result in regressive income redistributions (Gonzalez-Vega 1984), and lack of access to credit can constrain agricultural output (Das et al 2009).

However, for much of history in India, credit was controlled by village moneylenders who provided credit at excessive interest rates and with other provisions that were unfavourable
to the farmers (Mohan 2006). To reduce the dependence of agriculture on informal sources of credit, the Indian government has made continued attempts to expand the formal banking system into rural areas to support farming activity (Mohan 2006; Sidhu and Gill 2006). Government intervention in agricultural credit markets has subsequently reduced average interest rates at which farmers borrow (Binswanger and Khandker 1995).

While government intervention may have made formal credit available to farmers, the procedural complications in availing agriculture credit remained. Significant delays in the disbursement of formal credit were found to have led to an increase in the interest rates charged by the informal sector (Chaudhuri and Gupta 1996), on whom farmers are forced to rely for urgent credit needs. Nevertheless, priority sector lending norms have led to a much higher share of agricultural credit being provided by the formal sector.

To further incentivise the use of formal loans and provide aid to the agricultural sector, the Government of India has introduced the Interest Subvention Scheme (ISS) in 2006–07, under which, a part of the interest rate charged on short-term crop loans up to₹ 3 lakh is paid for by the government. The allocation to the ISS has also been increasing over the years, showing increasing government focus on making this type of credit available to farmers (Figure 1).

While this is a much needed support to farmers, when we examine the implementation of this scheme, we are led to question whether it is truly helping the poor and needy. Thus, in this paper, we question the relevance of priority sector lending norms if they are unable to prioritise lending to farmers who need it the most and can derive the maximum benefit from such loans. The current paper analyses the issue of farmers’ accessibility to credit based on NSSO data as well as field level experiences through visits to agricultural households (randomly sampled) and bank branches in selected districts of Karnataka. Our results bring to light certain significant lacunas in the implementation front.

Next, we present an analysis of National Sample Survey Office’s (NSSO) 70th round unit record data, which is the most recent available survey on this topic, to provide a macroeconomic perspective on accessibility to credit.

Farmers’ Access to Credit in India

To understand the Indian agricultural credit market, we make use of the 70th round All India Debt and Investment Survey (AIDIS), conducted by the NSSO in 2012–13. This survey provides data upon the credit situation among representative households in India. For the purpose of the following analysis, we have classified households as being cultivators if they have been recorded as having carried out any cultivation activity in the 365 days prior to the survey date. In this data set, 43,254 households were cultivators.

This survey was conducted by collecting data in two visits to each household, with the first carried out between January and July 2013, and the second between August and December 2013. The liabilities of the household were ascertained with reference to a fixed date (that is, 30 June 2012 for the first visit, and 30 June 2013 for the second visit).

We begin with an investigation into the incidence of indebtedness (IoI) across agricultural households. This figure measures the percentage of members of a group (that is, farmers in a state/NSSO region) that have outstanding credit in relation to the total number of members in that group. In India, we observe that this figure varies with agricultural development of a region and the richer states are seen to have a higher IoI than the poorer ones. Similarly, richer farmers and better social classes are observed to have better IoI, pointing to this being an indicator of accessibility to credit rather than representing a distress situation even though this latter possibility cannot be ruled out.

Looking at the overall figures, our analysis reveals that 34 million out of 97 million farmer households are indebted, giving rise to an IoI of 35% at the all-India level (both from formal as well as informal sources). More than half of the households surveyed had accessed at least one loan (formal or informal) since 2000. The average credit extended to farm households (total) stood at₹ 77,089, and indebted households had borrowed an average of₹ 2,20,280 per household. Andhra Pradesh and Telangana displayed the highest access to credit (IoI), and all the southern states had an IoI greater than 50%. Considering paid up loans, we find that these states also had relatively high incidence of borrowing (IoB) (percentage of households that have accessed loans since 2000) among Indian states as well.

A more revealing analysis of credit patterns can be discerned through a study of credit accessed by farmers with different land sizes. Table 1 is presented to show the disparities in credit access by different farmer groups in India.

Marginal and small farmers can be immediately observed to have lower accessibility to credit than medium and large farmers. The IoI curve also appears to be inverted U-shaped, revealing that those in the middle categories of landholdings have the greatest access to credit. A similar story can be discerned in the case of percentage of households that have ever taken a loan (since 2000), with a significantly lower chance of those in the small and marginal categories having taken a loan. The size of loan disbursed too is directly related to landholdings size.

Indeed, the data also suggests that it is not only economic but also social disadvantage that contributes to lower access to credit. From Table 2, we can observe that those in Scheduled Tribes have a much lower incidence of indebtedness and incidence of borrowing than those in other groups. However, the difference in IoI and IoB does not appear to be as pronounced in the case of those in Scheduled Castes, but these groups have received lower average amount of credit than those in the general and Other Backward Classes (OBC) categories. Gender-wise disparity in access to credit is another phenomenon to be noted in this context (for details, see Vani et al 2011).

However, the analysis up until this point has covered loans acquired from all sources, formal and informal. The picture of deprivation and inequality in access becomes clearer when we begin to focus on the formal sector. Here, we can observe that disparities in access between different farmer groups are more sharply defined (Table 3).

Small and marginal farmers can be observed to have significantly lower access to institutional credit than those with larger landholdings (Table 3). This drives them to access the informal sector for credit needs, which can have the effect of driving them further into poverty and deprivation as they get into a state of perpetual indebtedness.

While the concerns of credit accessibility can be easily identified from this analysis, what remains unclear are the reasons for it. In order to acquire a more in-depth understanding of the problem, we conducted interviews with bank officials and farmers, and additionally collected certain information from bank branches on short-term crop loans forwarded in selected districts of Karnataka. We have identified some of the concerns that have given rise to such disparities, and subsequently, made gold loan1 to emerge as a major type of short-term crop loan under priority sector lending.

Accessibility to Credit

The above analysis shows that access to formal credit is lower for economically deprived classes such as small and marginal farmers. What is interesting is that it points towards a continued reliance on the informal sector despite extensive forays of the formal financial network into rural areas (analysis of NSSO data has shown that the modal interest rate for small and marginal farmers is more than double of what is paid by large farmers). Among the farmers who have taken a loan, almost half still access informal credit, and one-third of the credit is still supplied by moneylenders at a high interest rate, even though credit from the formal sector has been made available at a subsidised rate.

To provide subsidised credit, the ISS was introduced in the Finance Minister’s 2006–07 budget address. Under this scheme, the Government of India has directed that an interest subvention of 2% per annum will be made available to scheduled commercial banks (SCBs) towards loans forwarded by rural and semi-urban branches for short-term cropping purposes (short-term crop loans) up to₹ 3 lakh, provided that banks make credit up to this amount available to farmers at the ground level at an interest rate of 7% per annum.

To encourage prompt repayment of short-term crop loans, a further interest subvention of 3% has been made available to farmers who repay the entire loan by the due date fixed by the bank, provided it is within one year of the disbursement date. That is, if farmers repay the loan on time and not more than one year after availing the loan, they are eligible for a further interest rate subvention of 3% on the loan. Thus, the cumulative interest subvention for loans returned promptly is 5% and farmers making prompt repayments avail credit for short-term cropping at an effective interest rate of 4% per annum.

In spite of this emphasis on making formal credit available and more attractive to the agricultural sector, our analysis reveals that informal credit is still prevailing. What are the reasons behind this phenomenon? We delve into these issues subsequently.

No Due Certificates, Land Records, Tenant Farmers

Through the ISS, subsidised loans for cropping can be obtained by farmer households through the provision of certain documents. These documents include a certificate of “Record of Rights, Tenancy, and Crop Inspection” (RTC), which proved that the farmer owned and operated a parcel of agricultural land, as well as “no due certificate” from all bank branches in the vicinity (taluk) of the branch from which the loan was sought. The no due certificate states that a farmer does not have an outstanding loan from any of the other branches in that area for that particular parcel of land.

The RTC certificate is issued by a relevant authority in the name of the buyer of a parcel of agricultural land. In India, however, mutations (transference of land between generations after the death of a farmer to his sons) do not occur automatically, and instead requires bureaucratic procedures to be complied with before transference. Land which has been inherited often remains in the name of the farmers’ antecedents and does not provide sufficient proof of ownership for an RTC certificate. In this way, several farmers are disallowed from obtaining loans (subsidised or not). This issue is bound to be more prominent among small and marginal farmers (Deshpande 2017), among whom a lower level of literacy (Dev 2012) leads to a reduced ability to navigate bureaucratic systems and successfully transfer property into their name for use as collateral.

This is further exacerbated in the case of landless or tenant farmers, who operate rented land and therefore do not possess documentation of ownership either. This deters their access to formal credit, and this class of farmers who are the most economically deprived are also the most harmed by the existing procedures since they are forced to rely on the informal sector. Stringent tenancy laws in operation creates further barriers for such farmers from availing loans from the formal sector for fear of losing their tenancy rights over land because of having provided the required documentation.

This is a deeply concerning issue, since it is likely to be chronic as more and more farmers in the country find themselves without adequate claims on their farm property owing to generational divisions over existing land. Naturally, this leads them to further rely on gold to acquire loans, which is both inadequate to cover all cropping expenses, and favours wealthier farmers.

For those farmers that have an RTC certificate in their names, there remains yet another hurdle from accessing formal credit. To be sanctioned a short-term crop loan by a bank, one important formality revealed by our field survey was that farmers are required to procure a no due certificate from every bank branch in the taluk of the branch from which a loan is being sought. Such a procedure is designed to protect the bank from lending to farmers who already have such a loan, because if a farmer has two or more short-term crop loans, then the probability of repaying any of the loans reduces since the cultivation area (and thereby, productivity and income, ceteris paribus) remains unchanged. However, for farmers, this procedure is: (i) cumbersome, since it requires physical visits to each bank branch, which can be crowded, and includes costs of travel and other sundry expenses as well as the opportunity cost of time foregone; and (ii) expensive, since in addition to travel and time costs, each certificate costs a certain amount of money (₹ 50/certificate or sometimes more), which has to be paid at each bank branch. One can see that this will make smaller loans unviable since the total costs of borrowing (including interest, transactions, and opportunity) will be relatively high in comparison to the size of the loan. This, naturally, affects small and marginal farmers more than others due to smaller loan requirements.

Failure of Digitisation

In recent years, Indian policymakers have been placing an overwhelming focus on the importance of digitisation. Demonetisation and the subsequent encouragement of digital payment mechanisms have been adopted presumably so as to reduce tax evasion and bring a greater portion of the country into the formal sector. However, there are certain critical areas that need urgent attention in the digitisation drive.

Taking the case of RTC-based loans, we can see that mutations do not automatically take place in a time bound manner. However, a desired level of focus on this area, which would
be of benefit to farmers as well as other landowners in the country, has yet to be made.

Digitisation can also be a powerful tool to effect welfare improvements in the area of no due certificates. Banks can establish a database of loans containing information upon each farmer/farm-holding’s loans in the district and automatically share this information. Such a system can also guard against the risk of giving loans to farmers who obtain spurious certificates, and would be beneficial to banks as well.

In our survey, we found that digitisation had simply not taken place in these areas, in spite of the penetration of other digital technologies such as mobile telephony. We are led to question whether the process of digitisation can truly reach its potential for creating welfare improvements if such important areas are left without digital aid is spite of years of policy focus on the area of digital adoption.

Interestingly, in addition to RTC-based loans, short-term crop loans can be disbursed using gold as collateral, and these loans are considered towards fulfilling priority sector lending norms. Under this route, minimal documentation is required, and loans are also disbursed fairly quickly. Farmers only need to show a proof of cultivation activity (at times, even a signed letter from the tahsildar was deemed sufficient), and post some gold as collateral, against which a loan commensurate with the value of the posted gold would be forwarded. This has led to significant changes in the paradigm of short-term cropping loans, which are discussed in greater detail in the following subsections.

Prevalence of Gold Loans in Karnataka

Banks can be expected to prefer gold-backed loans over the alternative, since gold loans are backed by a tangible form of collateral that covers the risk of default, while RTC-based loans do not allow for this.2 Since either type of loan goes towards fulfilment of priority sector lending norms, banks would prefer the less risky route since the interest rate charged in both cases remains the same.

For farmers, even though gold loans are riskier as they would involve loss of assets in case of crop failure and loan default, this has emerged to be the preferred route owing to the procedural complications involved in obtaining an RTC-based loan. It was observed from the field survey that gold loans were the most prominent in the short-term crop loan market.

Data collected on bank borrowings between 1 March 2014 and 29 May 2015 from a survey of banks from three districts in Karnataka (we will refer to these as: high income, middle income, and low income)3 showed that 86.2% of all short-term crop loans forwarded by the surveyed banks were provided using gold as collateral (Rajeev and Vani 2017). That is, out of 5,807 loans disbursed during this period, 5,006 were forwarded with gold. Details of jewel loans based on the information collected from the high income district yielded some additional information, and is displayed in Tables 4 and 5, where 3,716 loans were disbursed using gold and only 17 loans were give using RTC alone. Importantly, one can observe that small and marginal farmers have a greater share of credit when it comes to RTC-based loans and the amount of loan they are able to get is also relatively much higher.

It is to be noted that banks do not record information in terms of whether a farmers is marginal or small and we have made this somewhat ad hoc classification (for Table 4) based on the average loan size.

This overwhelming presence of gold loan has had some important implications on accessibility to formal sector credit and are discussed below.

Experiences from Karnataka

The popularity of gold loans in short-term cropping credit has far-reaching implications. It hassled to widespread issues of accessibility, and to understand the issue of accessibility to credit in the context of gold better, we would benefit from understanding the purpose for which banks in India require collateral/security/records to forward loans for short-term cropping. Literature suggests three broad categories of reasons indicating why collateral is required for forwarding loans to potential borrowers in a situation of asymmetric information (Coco 2000).

First, one use of collateral may be to add an additional clearing mechanism to rationed loan markets in which interest rates cannot efficiently balance supply and demand for loans owing to its adverse effects upon the pool of potential borrowers (Coco 2000). Second, potential applicants for loans can also be “screened,” through the use of contracts structured to provide specific incentives which act as signals regarding the quality of borrowers, as shown by Spence (1973), and Rothschild and Stiglitz (1976). Third, collateral can also be employed to reduce moral hazard on the part of borrowers. Entrepreneurs can be imagined to be able to “control” the riskiness of their projects (in terms of expected returns) by choosing different levels of effort during project execution (Watson 1984; Clemenz 1986; Boot et al 1991).

We may rule out the possibility of collateral being used to increase effort on the part of farmers. In the case of small and marginal farmers, it is often true that their production is at the bare subsistence level required for survival, and such farmers would always cultivate the entirety of their land, since they would not be able to support themselves otherwise. Even for larger parcels of land, short-term cropping costs are directly related to land size and productivity depends on factors outside a farmer’s control and thereby, this cannot be the reason for employing collateral.

This leaves us with the use of collateral (gold) as a screening mechanism between different, otherwise indistinguishable, farmers, or as a means to balance demand and supply without changing interest rates. In regards to the latter, the jury is split. Consider the study by Jain et al (2015) of 100 bankers, which revealed that only 35% of respondents found agriculture to be the easiest to lend to among the different priority sectors, and 27% found agriculture to be the most difficult to lend to (the second highest percentage out of the different categories), so while some bankers find it easy to lend to agriculture (that is, there is excess demand for farm loans), others find it difficult (excess supply).

Given the priority nature of these loans, a regressive distribution of credit brings into question the effectiveness of this scheme, and implies that it is not reaching its true potential in terms of welfare improvements given the expenditure by the government, and is instead simply going towards benefiting those who are already in a status of privilege among the agricultural class. This is concerning since the ISS is presumably aimed at making formal credit more easily accessible to farmers that need it the most, that is, those in the small and marginal farmers category.

Such a process has led to widespread exclusion of poorer farmers from the formal financial network in India. Allowing gold loans to constitute fulfilment of priority sector lending norms has certainly been an important step towards making the formal financial system more accessible to the agricultural class. However, it has the adverse effect of disallowing poorer farmers (who may not possess enough gold to avail a gold backed loan) from obtaining credit in time or at all, due to the difficulties involved in obtaining RTC-based loans. This also makes them more vulnerable to agricultural hazards (such as crop failures) as it essentially bottlenecks their access to formal credit, while propagating income inequalities among agriculturists as banks will lend more to richer farmers. It may also push marginal farmers towards borrowing from the informal sector, which creates even more vulnerability to loss of assets among this group. Indeed, our analysis of NSSO data points to far lower access to credit among small and marginal farmers.

The use of gold as the prominent collateral also provides a second challenge towards inclusive development of the agricultural sector. This challenge lies in the fact that the criteria to determine the loan amount forwarded differs based upon whether gold or land is being used as collateral. Loans based upon RTC certificates are dependent on the “scale of finance” of the farmer, which is a fixed amount of credit to be provided per acre, varying by the type of crop cultivated in that land. When utilising gold, however, the loan amount is dependent only on the amount of gold posted as collateral, and our experiences from the field indicate that the average loan amounts tend to be significantly lower.

Collected data on borrowings in the high-income district shows that the average gold loan disbursed amounts to₹ 55,000, whereas the average RTC-based loan size is₹ 2,36,470.6, which is more than four times greater. Considering that 88% of farmers availing RTC-based loans here were in the small and marginal category, as opposed to only 43% of those availing jewel loans being small and marginal farmers, this disparity highlights the deficiency in lending through the jewel loan route.

The scale of finance method is computed as per the approximate amount required to cultivate a particular crop in an acre of land, and given that there is a direct relationship between inputs and area cultivated, it is unlikely that farmers can achieve full cultivation of an area with a lower amount. Thus, it is evident that gold loans are inadequate to finance input purchase costs, and it is likely that farmers will have to turn to the informal sector to make up the credit shortfall.

The reliance on gold to forward short-term crop loans thus continues to expose farmers to the informal sector in spite of formal credit being made more accessible and inexpensive, and moneylenders are often far more forceful than banks in ensuring repayment.

What remains most surprising is that gold does not appear to be quintessential to forward loans. This is illustrated by our finding that in the low income district (Table 6), most of the loans forwarded were RTC-based, presumably because of the lower wealth of farmers leading to lower possession of gold in agricultural households. Here, it appears that farmers who took loans also undertook the required procedures to acquire documentation for RTC-based loans, and relied little on gold loans. In the richer districts, however, gold loans are far more prevalent, and it can also be expected that farmer households there possess relatively more gold owing to higher district wealth.

Thus, in the absence of sufficient borrowers with gold in a district, banks are likely to forward loans through the RTC route owing to priority sector lending norms, but in richer districts, gold becomes the de facto collateral used to avail subsidised loans. The reasons for this probably arise both from the banks’ side (if banks are faced with a pool of richer borrowers who are able to post gold as collateral, they may tend to choose them, as opposed to when most borrowers are unable to post gold as collateral) as well as from the farmers’ side (the reduction in procedural complications concomitant with gold loans over RTC-based ones creates incentives to utilise the former rather than the latter when possible).

This indicates that poor farmers do certainly need loans for their cropping expenses. However, in the middle and high income districts, there is a possibility that gold loans are crowding out RTC-based loans. From the point of view of loans, relative poverty has an effect on access to formal credit. This is a sad state of affairs in a country where poverty and income inequalities exist, especially in the agricultural sector.

Conclusions and Policy Suggestions

Our illustrations make it clear that gold loans are not the optimal choice of disbursing credit to the priority sector under the present circumstances from the point of view of farmers’ welfare. The prevalence of gold loans ends up blocking access to essential credit for small and marginal farmers and making them more reliant on the informal credit sector, in which agents can forcefully repossess land and crops, and enforce strict and unfavourable lending terms. However, gold loans remain popular from both the banks’ and the farmers’ side, at least in richer districts. Due to this, gold loans has a tendency to crowd out RTC-based loans in richer districts, and creates barriers for small and marginal farmers in accessing formal credit.

Insufficiency of credit acquired under gold loans potentially drives farmers towards the costly and foreboding informal sector, and is certainly one of the important issues to be tackled. This arises from the fact that gold loans are commensurate with the value of the gold posted, and not according to the actual needs of farmers (that is, the scale of finance). Methods to address this problem are required.

Protection of banks’ capital forwarded through the RTC route can take the form of insurance schemes that compensate banks for interest lost during crop failures, thus reducing farmers’ liability and vulnerability during this period, while also allowing them to more easily make use of owned land as collateral. This would expand access to formal credit by the small and marginal farmer group, who undoubtedly need it the most.

Developments in regional inter-bank networking to record loans can also go a long way in reducing hassles for farmers in accessing formal credit. If banks developed information sharing networks, then this could eliminate the need for farmers to manually obtain no due certificates, which can reduce their travel time and expenses, while also reducing the risks of banks being exposed to forged certificates. A dedicated portal should be created, which links loanee farmers through their Aadhaar numbers or a similar identification mechanism. Such a system is already in place for the Pradhan Mantri Mudra Yojana through the National Payments Corporation of India, and is thus eminently possible for the short-term crop interest subvention scheme as well. This type of database could also benefit greatly from storing land records of farmers to better enable loan disbursement.

One modification to improve its access by this section of farmers would be to further mandate that certain reasonable percentage of total loans be forwarded without the use of gold as collateral (that is, through the RTC route).

Further, policy changes could be effected so that land mutations take place automatically from generation to generation, thus more easily allowing farmers to access the collateral value of owned land without becoming entangled in bureaucratic webs. Alternatively, banks could also be directed to accept proof of landownership by ancestors alongside other adequate documentation.

In conclusion, the prevalence of gold loans definitely reinforces income inequalities and cuts off access to formal credit by groups for whom it is most vital. Steps to reduce its usage are important in improving the development of Indian agriculture while keeping in mind farmer welfare, especially among small and marginal landholders. Even though the government has been encouraging India’s financial system to become more and more digital in nature, some of the basic areas of digitisation that can go a long way in alleviating agricultural woes, such as farmer credit, remain untouched by this drive and are seen to have major problems in terms of digital connectivity. This paper has taken the case of farm loans as an example of the problem of a lack of digitisation and has shown how it has deterred the poor from accessing credit.


1 In this paper, we use the word “gold” to refer to gold, jewels, and other bullion that are used as collateral in availing loans.

2 Banks are bound to operate solely through legal channels for recovering loans, and in India, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI Act, 2002), governs loan recovery mechanisms. However, as detailed in Section 31(i), the provisions of the act do not apply to “security interest (collateral) created in agricultural land,” including the provisions of Section 13(a), which allows creditors to enforce repossession of security interest. Therefore, when agricultural land is used to acquire a loan, there is no legal recourse for loan recovery through repossession of land by banks.

3 To maintain confidentiality, names of the districts have not been revealed and only average figures are obtained by us.


Binswanger, H and S Khandker (1995): “The Impact of Formal Finance on the Rural Economy of India,” Journal of Development Studies, Vol 32, No 2.

Boot, A W A et al (1991): “Secured Lending and Default Risk: Equilibrium Analysis, Policy
Implications, and Empirical Results,” Economic Journal, Vol 101, No 3, pp 458–72.

Chaudhuri, S and M R Gupta (1996): “Delayed Formal Credit, Bribing and the Informal Credit Market in Agriculture: A Theoretical Analysis,” Journal of Development Economics, Vol 51, No 2, pp 433–49.

Clemenz, G (1986): “Credit Markets with Asymmetric Information,” Lecture Notes in Economics of Mathematical Systems, Berling-Heidelberg, Springer.

Coco, G (2000): “On the Use of Collateral,” Journal of Economic Surveys, Vol 14, No 2, pp 191–214.

Das, A et al (2009): “Impact of Agricultural Credit on Agriculture Production: An Empirical Analysis in India,” RBI Occasional Paper Series, Vol 30, No 2, pp 75–107.

Deshpande, T (2017): “State of Agriculture in India,” PRS Legislative Research, New Delhi,

Dev, S M (2012): “Small Farmers in India: Challenges and Opportunities,” IGIDR Working Paper WP-2012-014, Indira Gandhi Institute of Development Research, Mumbai.

Gonzalez-Vega, C (1984): “Cheap Agricultural Credit: Redistribution in Reverse,” Adams et al (ed), Undermining Rural Development with Cheap Credit, Boulder: Westview Press.

GoI (2014): “All-India Report on Number and Area of Operational Holdings,” Agriculture Census 2011–12, Ministry of Agriculture, Government of India,

Jain, S et al (2015): “Rethinking Priority Sector Lending for Banks in India,” IIBF,

Kochar, A (1997): “Does Lack of Access to Formal Credit Constrain Agricultural Production? Evidence from the Land Tenancy Market in Rural India,” American Journal of Agricultural Economics, Vol 79, No 3, pp 754–63.

Mohan, R (2006): “Agricultural Credit in India: Status, Issues, and Future Agenda,” Economic & Political Weekly, Vol 41, No 11, pp 1013–23.

Mishra, S (2007): “Risks, Farmers’ Suicides and Agrarian Crisis in India: Is There a Way Out?” IGIDR Working Paper WP-2007-14, Indira Gandhi Institute of Development Research, Mumbai.

NCEUS (2008): “A Special Programme for Marginal and Small Farmers,” National Commission for Enterprises in the Unorganized Sector, Government of India,

RBI (2017): “Report on Trends and Progress of Banking in India December 2017,” Reserve Bank of India, Mumbai.

Rajeev, M and B P Vani (2011): “Farm Sector in Karnataka: Farmers’ Indebtedness and Risk Management,” Project No CESP/93, Institute for Social and Economic Change, Bengaluru.

— (2017): “Interest Subvention for Short Term Crop Loan in Karnataka,” Project Report, ISEC CESP/128.

Rothschild, M and J Stiglitz (1976): “Equilibrium in Competitive Insurance Markets: The Economics of Imperfect Information,” Quarterly Journal of Economics, Vol 90, pp 629–49.

Sidhu, R S and S S Gill (2006): “Agricultural Credit and Indebtedness in India: Some Issues,” Indian Journal of Agricultural Economics, Vol 61, No 1, pp 11–35.

Spence, A M (1973): “Job Market Signaling,” Quarterly Journal of Economics, Vol 87, No 3, pp 355–74.

Vani, B P et al (2011): “Credibility of Equal Access to Credit: Does Gender Matter?” Economic & Political Weekly, Vol 46, No 33, pp 76–79.

Watson, H (1984): “Credit Markets and Borrower Effect,” Southern Economic Journal, Vol 50, pp 802–13.

Updated On : 5th Jul, 2018


(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top