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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.
22
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
52
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.
53
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