Agricultural Finance
Principles & Practices of Banking | Unit C · Chapter 37
Chapter 36 covered Priority Sector Lending norms. This chapter goes deeper into agricultural finance — the largest component of PSL. It covers the two broad categories of agricultural credit (short-term and medium/long-term), the Kisan Credit Card (KCC) scheme in detail (credit limit formula, KCC for Animal Husbandry & Fisheries, disbursement channels), selected agricultural activities, the MSP Scheme, and PMFBY crop insurance.
📌 Why This Chapter Matters in JAIIB
Expect 6–8 questions from this chapter. Key focus areas: KCC credit limit formula (scale of finance × area + 10% post-harvest + 20% farm maintenance + insurance); 10% annual escalation for 5 years; marginal farmer Flexi KCC (₹10,000–₹50,000; ≤1 ha land); margin norms (nil ≤ ₹1.6L; collateral discretionary above ₹1.6L non tie-up / ₹3L tie-up); KCC eligibility — owner cultivators, tenant/oral lessees/sharecroppers, SHGs/JLGs; MSP — 25 crops, FCI as nodal agency; and PMFBY — basic cover (area-based, non-preventable risks) vs add-on cover; Aadhaar mandatory.
Key Facts & References — Chapter 37 at a Glance
Introduction, Loan Types & Crop Loan
FreeNearly 70% of India's population depends on agriculture. Agricultural credit is met through direct finance (to farmers) and indirect finance (to input suppliers, electricity boards, storage agencies, etc.). Based on tenure, direct finance is classified as short-term or medium/long-term.
Short-Term Loans (≤ 18 months)
- ▸Crop loans for seasonal farming expenses (seeds, fertilisers, pesticides, irrigation).
- ▸Kisan Credit Card (KCC) scheme for raising crops.
- ▸Loans against gold ornaments for agricultural purposes.
Medium / Long-Term Loans (> 36 months)
- ▸Minor irrigation, farm/land development, farm mechanisation.
- ▸Plantation and horticulture.
- ▸Allied activities: dairy farming, sheep/goat rearing, piggery, rabbit farming, poultry farming.
- ▸Fisheries, sericulture, bee-keeping, mushroom cultivation, bio-gas plants.
- ▸Indirect: fertiliser/pesticide distribution, Rural Electrification (REC), storage facilities.
37.4 Crop Loan
A crop loan is extended to facilitate agriculturists to meet expenses for raising seasonal crops — including cost of seeds, fertilisers, pesticides, and irrigation charges. The loan amount is worked out based on the cost of cultivation (Scale of Finance) assessed by the District Level Technical Committee (DLTC) per hectare for different crops.
Kisan Credit Card (KCC) — Eligibility & Credit Limit
FreeKCC is a single-window credit facility for farmers covering cultivation expenses, post-harvest needs, household consumption, maintenance of farm assets, and allied agricultural activities.
37.5.3 Eligibility
37.5.4 Credit Limit Fixation
Definitions: Marginal Farmer = land ≤ 1 hectare | Small Farmer = land > 1 ha to ≤ 2 ha
Formula — Short-Term Limit (1st Year)
Year-on-Year Escalation (Years 2–5)
Each year, the previous year's limit is increased by 10% for cost escalation / increase in scale of finance. The same cropping pattern is assumed.
| Year | Crop Loan Limit |
|---|---|
| Year 1 | Base limit (formula above) |
| Year 2 | Year 1 limit + 10% of Year 1 |
| Year 3 | Year 2 limit + 10% of Year 2 |
| Year 4 | Year 3 limit + 10% of Year 3 |
| Year 5 | Year 4 limit + 10% of Year 4 |
Term Loan Component
Added to the crop loan component to cover investment needs: land development, minor irrigation, purchase of farm equipment, allied activities. The term loan is based on unit cost of assets and the farmer's repayment capacity.
Maximum Permissible KCC Limit = Crop Loan Component (A) + Term Loan Component (B)
Illustration Summary
| Farmer Type | Land | Crop Loan (A) | Term Loan (B) | KCC Limit (A+B) |
|---|---|---|---|---|
| Small Farmer (Illus. I) | 2 acres | ₹63,000 | ₹70,000 | ₹1,33,000 |
| Large Farmer (Illus. II) | 10 acres | ₹4,09,000 | ₹7,00,000 | ₹11,09,000 |
| Marginal Farmer (Illus. III) | 1 acre | — | — | ₹36,000 (Flexi KCC) |
Marginal Farmer — Flexi KCC
For farmers with land ≤ 1 hectare, a flexible limit of ₹10,000 to ₹50,000 is provided (Flexi KCC) based on land holding, crops, post-harvest needs, consumption requirements, and small term investments (mini dairy, backyard poultry). The composite KCC limit is fixed for 5 years without relating it to the value of land. A higher limit may be sanctioned if cropping pattern changes.
KCC — Animal Husbandry, Fisheries & Operational Features
Members Only37.5.5 KCC for Animal Husbandry & Fisheries
KCC covers short-term credit for rearing of animals, birds, fish, shrimp and other aquatic organisms, and capture of fish. Scale of finance is fixed by DLTC based on per acre/per unit/per animal/per bird cost.
Fisheries Eligibility
- ▸Must own or lease fisheries-related assets (ponds, tanks, open water bodies, raceways).
- ▸Inland: individual fishers, fish farmers, SHGs, JLGs, women groups.
- ▸Marine: must own/lease a registered fishing vessel/boat and hold necessary license/permission.
Poultry / Small Ruminant
- ▸Individual or joint borrower poultry farmers.
- ▸Joint Liability Groups for rabbit and other small ruminant rearing.
- ▸Must own, rent, or lease sheds.
Dairy
- ▸Individual or joint borrower dairy farmers.
- ▸JLGs and SHGs including tenant farmers.
- ▸Must own, rent, or lease sheds.
37.5.6 Disbursement Channels
The short-term component is a revolving cash credit facility with no restriction on the number of debits and credits. Farmers may draw via:
37.5.7 Electronic KCC
All new KCC must be issued as a smart card cum debit card. NPCI has designed the KCC card format to be adopted by all banks with their own branding. Until composite software is in place, two separate cards may be issued for the crop loan and term loan sub-limits.
37.5.8 Periodic Review
Banks must periodically review KCC for continuation, enhancement, or cancellation based on change in cropping area/pattern and borrower performance. In case of natural calamity, the review period is extended.
37.5.9 Documentation
One-time documentation at first availment. From the second year onwards, only a simple declaration about crops raised/proposed is required — keeping in view the limitation period.
37.5.10 Rate of Interest
As per RBI Directions on Interest Rates on Advances — applicable to agricultural advances. Short-term crop loans covered under Interest Subvention / Prompt Repayment Incentive scheme.
37.5.11 Repayment Period
Fixed as per the anticipated harvesting and marketing period for the given crops. Different norms apply to short-term and term loan components.
37.5.12 Margin & Security
| Loan Amount | Margin | Security |
|---|---|---|
| Up to ₹1.60 lakh | Nil (no margin required) | Hypothecation of crop; no collateral needed |
| Above ₹1.60 lakh (non tie-up farmers) | As decided by bank | Collateral at bank's discretion |
| Above ₹3.00 lakh (tie-up arrangement) | As decided by bank | Collateral at bank's discretion |
37.5.13 Other Features
Insurance
Option to take Assets Insurance, Personal Accident Insurance Scheme (PAIS), and Health Insurance — premiums paid through KCC. Crop insurance is mandatory; other insurance requires farmer's consent.
Interest Subvention
Farmers must be informed about Interest Subvention / Prompt Repayment Incentive available from Central/State Government. All Short-Term Crop Loans eligible for subvention are extended only through KCC.
NPA Classification
IRAC and provisioning norms apply to KCC loans — same as other bank loans.
Warehouse Receipts
KCC can be linked with crop loan account. Credit against warehouse receipts may be considered as per procedure, and crop loan outstanding can be settled on disbursal of pledge loan.
Selected Agricultural Activities
Members Only37.6.1 Agricultural Term Loans
37.6.2 Land Development
37.6.3 Minor Irrigation
37.6.4 Farm Mechanisation
37.6.5 Finance to Horticulture
37.6.7 Dairy Farming
37.6.8 Sericulture
37.6.9 Drip, Sprinkler & Lift Irrigation
37.6.10 Land Purchase
MSP Scheme & PMFBY
Members Only37.7 Minimum Support Price (MSP) Scheme
37.8 Pradhan Mantri Fasal Bima Yojana (PMFBY)
Basic Cover (Mandatory)
Area-based approach — loss of yield to standing crop from sowing to harvesting due to non-preventable risks:
- ✓Drought / dry spells
- ✓Flood / inundation
- ✓Widespread pest and disease attack
- ✓Landslides
- ✓Natural fire due to lightning
- ✓Storm, hailstorm, cyclone
Add-On Coverage (Optional — State Govt. choice)
- ✓Prevented sowing/planting due to deficit rainfall or adverse seasonal conditions.
- ✓Post-harvest losses (2 weeks) for crops in cut-and-spread condition — against cyclone, cyclonic rains, unseasonal rains.
- ✓Adverse seasonal conditions during crop season.
- ✓Localised risks — hailstorm, landslide, inundation, cloud burst, natural fire.
- ✓Crop loss due to attack by wild animals.
Exclusions under PMFBY
Losses from war and nuclear risks, malicious damage, and other preventable risks are excluded.
Chapter Summary & Flashcards
Members OnlyChapter 37 in 6 Lines
- Agricultural credit is classified as short-term (≤18 months — crop loans, KCC, gold ornament loans) and medium/long-term (>36 months — irrigation, mechanisation, dairy, sericulture).
- KCC credit limit = Scale of Finance × area + 10% (post-harvest/consumption) + 20% (farm maintenance) + insurance. The limit escalates by 10% each year for 5 years. Total KCC limit = Crop Loan + Term Loan.
- Marginal farmers (≤1 ha) get Flexi KCC (₹10,000–₹50,000 for 5 years). No margin below ₹1.6L; collateral at bank discretion above ₹1.6L (non tie-up) / ₹3L (tie-up).
- KCC covers AH&Fisheries; short-term component is revolving cash credit; new KCCs must be issued as smart card cum debit card (NPCI design); documentation is one-time, then annual declaration.
- MSP Scheme: 25 crops announced for Rabi and Kharif seasons; FCI is nodal agency; NAFED for oilseeds/pulses; PM-AASHA has three sub-schemes (PSS, PDPS, PPPS).
- PMFBY (2016): replaced NAIS; basic cover for non-preventable risks (area-based); add-on cover includes wild animal attack, post-harvest, localised risks; Aadhaar is mandatory.
Flashcards — Chapter 37
1. What is the maximum tenure for short-term agricultural loans?▼
2. What body determines the Scale of Finance for crop loans?▼
3. What are the three components added to the Scale of Finance to arrive at the KCC short-term limit?▼
4. By what percentage does the KCC crop loan component escalate each year?▼
5. What is the total KCC limit for a small farmer with Crop Loan component of ₹63,000 and Term Loan of ₹70,000?▼
6. What is a Marginal Farmer and what is their KCC limit?▼
7. Who is eligible for KCC — name the three categories.▼
8. What is the margin requirement for KCC loans up to ₹1.6 lakh?▼
9. Above what limit is collateral required for non-tie-up KCC borrowers?▼
10. Above what limit is collateral required for tie-up KCC borrowers?▼
11. What type of card is mandatory for all new KCC issuances?▼
12. What documentation is required for KCC from the second year onwards?▼
13. Is crop insurance under KCC mandatory or optional?▼
14. What is the minimum land holding required for a bank to finance a tractor?▼
15. What is the maximum margin and repayment period for farm mechanisation loans?▼
16. Name the 4 phases of sericulture.▼
17. For land purchase loans to marginal farmers, what is the repayment structure?▼
18. How many crops does the MSP Scheme cover and when are prices announced?▼
19. What are the three sub-schemes under PM-AASHA?▼
20. What is PMFBY and what are the risks covered under the basic cover?▼
Practice Test Available
Chapter 37 Mock Test — 50 Questions
Test your knowledge with 50 exam-standard MCQs on Agricultural Finance — KCC credit limit formula, eligibility, margin norms, farm mechanisation, sericulture, MSP (25 crops), PM-AASHA, and PMFBY. Timed, graded, PRO.
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