Unit 4: L.T. Credit
L.T. Credit (Long-Term Credit)
Long-Term (L.T.) Credit is credit provided for long-duration agricultural and rural development purposes, usually ranging from 5 to 20 years.
Purpose of L.T. Credit
Used for activities that need large investment and give returns over a long period, such as:
- Land development
- Wells, tube wells, irrigation projects
- Purchase of tractors, machinery, and equipment
- Horticulture, plantations
- Dairy, poultry, fisheries
- Farm construction (godowns, sheds)
- Rural infrastructure development
Need for a Separate Agency to Provide L.T. Credit
Agriculture requires both short-term (for seeds, fertilizers) and long-term credit (for capital investment).
But earlier, cooperative credit institutions mainly provided short-term loans only.
Reasons why a Separate Agency was Needed
- Long gestation period: LT loans take many years to repay, unlike short-term crop loans.
- Large capital requirement:Farmers require big investments for land improvement and equipment.
- Risk is higher: LT loans involve risks like crop failure, climate issues, market fluctuations.
- Specialized supervision required: Long-term projects need technical evaluation and continuous monitoring.
- Short-term cooperative institutions can’t handle long-term liabilities: PACS, DCCBs, and SCBs focus mainly on seasonal/crop finance.
Conclusion: Therefore, India created a separate two-tier structure for long-term cooperative credit.
Structure of Long-Term Cooperative Credit
India adopted a two-tier system:
- State Cooperative Agriculture and Rural Development Banks (SCARDBs) (State-level apex institutions)
- Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) - (District/Taluk/Block-level institutions)
Constitution and Working of Primary Cooperative Agriculture and Rural Development Bank (PCARDB)
(Also known as Primary Land Development Bank / Primary ARDB)
(a) Constitution
- Registered under State Cooperative Societies Acts.
- Operates at taluk / block / district level.
- Membership: Individual farmers, rural entrepreneurs, cooperative societies.
Governing Structure:
- General Body
- Managing Committee/Board
- Chairman
- Secretary/Manager
(b) Sources of Funds
- Loans and refinance from SCARDB
- Share capital from members
- Debentures issued by SCARDB
- Government guarantees and contributions
- Reserves and deposits
(c) Functions / Working
1. Providing L.T. Credit to Farmers- Land improvement, well/tube well construction
- Purchase of tractors, pumps, machinery
- Construction of farm buildings
- Dairy, poultry, horticulture projects
- Technical feasibility study
- Security: usually land mortgage
- Long repayment period (5–20 years)
3. Recovery of Loans
- Installment-based repayment
- Monitoring of borrower’s progress
4. Promotion of Rural Development
- Helps increase agricultural productivity
- Supports self-employment in rural areas
Constitution and Working of State Cooperative Agriculture and Rural Development Bank (SCARDB)
(Also known as State Land Development Bank / State ARDB)
(a) Constitution
- Apex body at state level.
- All PCARDBs are affiliated to SCARDB.
Governing Bodies:
- General Body
- Board of Directors
- Chairman/Vice Chairman
- Managing Director
(b) Sources of Funds
- Issue of long-term debentures (main source)
- Refinance from NABARD
- Share capital from PCARDBs
- Government contribution
- Reserves
(c) Functions / Working
1. Mobilizing Long-Term Funds- Issues debentures guaranteed by State Govt.
- Raises funds for long-term credit supply.
2. Refinance to PCARDBs
Provides funds to PCARDBs for distribution to farmers.
3. Supervision & Guidance
- Ensures financial discipline in PCARDBs.
- Provides technical assistance, training, auditing.
4. Coordination with NABARD & State Govt.
- Implements rural development projects
- Ensures flow of funds for long-term agricultural needs
5. Evaluation and Monitoring of L.T. Projects
- Periodic inspection
- Project performance review
Importance of ARDBs (PCARDB + SCARDB)
- Provide long-term capital for agricultural modernization.
- Help increase productivity through mechanization.
- Support rural infrastructure creation.
- Promote sustainable rural development.
Summary
| Topic | Key Points |
|---|---|
| L.T. Credit | Long-term loans (5–20 years) for capital investment in agriculture |
| Why Separate Agency? | High risk, long repayment, large investment needs → specialized institutions required |
| PCARDB | Primary-level bank; gives LT loans to farmers; land mortgage-based loans |
| SCARDB | State-level apex bank; raises funds via debentures; refinances PCARDBs |
Debentures in Cooperative Credit System
Debentures are long-term borrowing instruments issued by State Cooperative Agriculture and Rural Development Banks (SCARDBs).
These are bonds sold to raise funds, mostly guaranteed by the State Government.
Debentures help cooperatives provide long-term agricultural loans to farmers.
Types of Debentures
1. Ordinary Debentures
- Issued regularly by SCARDBs.
- Usually guaranteed by the State Government.
- Repaid over 10–20 years.
- Interest paid annually or half-yearly.
2. Rural Debentures
- Meant specifically for financing rural development projects.
- Purchased by banks, LIC, NABARD, and government institutions.
3. Land Mortgage Debentures
- Secured by mortgages of borrowers’ land.
- PCARDBs mortgage farmers' land → SCARDBs issue debentures.
4. Special Debentures
- Issued for special purposes like famine relief, drought rehabilitation, well construction, etc.
- Government usually provides full guarantee.
5. Floating Debentures
- Issued from time to time without a fixed repayment period.
- Repaid gradually from loan recoveries.
Procedure of Issuing Debentures (Simple Steps)
Step 1: Assessment of Fund Requirement
SCARDB identifies how much money is needed for long-term loans.
Step 2: Approval from Government
State Government gives guarantee → increases investor confidence.
Step 3: Drafting and Registration
Debenture document is prepared, stating:
- Interest rate
- Maturity period
- Guarantee terms
- Repayment plan
Step 4: Issue to Investors
Debentures are sold to:
- Commercial banks
- LIC, GIC
- NABARD
- Provident funds
- Other financial institutions
Step 5: Utilization of Funds
Funds are given to PCARDBs, which lend to farmers.
Step 6: Repayment
SCARDB repays principal + interest over scheduled time.
Problems in Debenture Issue
1. Overdependence on Government Guarantee
Without government guarantee, investors do not trust buying debentures.
2. Poor Recovery from Farmers
Low repayment → SCARDB faces difficulty repaying debentures.
3. Financial Weakness of PCARDBs
Weak operations affect the entire chain.
4. High Overdues and NPAs
Improper monitoring → delays in repayment → affects credibility.
5. Procedural Delays
Debenture sanctioning and guarantee process often slow.
6. Weak Sinking Fund
Some banks fail to maintain proper sinking funds → repayment pressure increases.
Sinking Fund
A sinking fund is like a savings account created to repay debentures.
Purpose
- To ensure timely repayment of long-term debentures.
- To reduce burden at maturity.
How It Works?
- Every year, SCARDB deposits a fixed amount into a sinking fund.
- The fund is invested and earns interest.
- When debentures mature, money from the fund is used to repay investors.
Benefits
- Reduces risk of default
- Builds investor confidence
- Ensures financial stability
National Federation
National Federation of State Cooperative Banks (NAFSCOB)
- Apex national body for state cooperative banks and district central cooperative banks.
- Provides guidance, training, and develops cooperative banking policies.
- Represents cooperatives at national & international levels.
- Works closely with RBI, NABARD, and Ministry of Cooperation.
Single Window Cooperative Credit Delivery System
It is a system where both short-term (ST) and long-term (LT) credit are given to farmers through one single agency instead of multiple institutions.
Earlier System
- PACS → Short-term crop loans
- PCARDB → Long-term loans
Farmers had to visit two different institutions.
Single Window System
One institution provides all types of loans:
- ST crop loans
- MT machinery loans
- LT land development loans
Benefits
- Convenient for farmers
- Reduces administrative cost
- Faster delivery of credit
- Better monitoring and recovery
Multi-Agency Approach
Under this system, multiple financial agencies provide credit to the agricultural sector.
Agencies Involved
- Cooperatives – PACS, DCCB, SCB
- Commercial Banks
- Regional Rural Banks (RRBs)
- NABARD
- Government Schemes
Why Needed?
- Agriculture needs huge credit → One agency alone cannot meet demand.
- Risk sharing
- Wider coverage and more accessibility
Advantages
- Farmers get credit from many channels
- Competition improves service quality
- Reduces monopoly of one institution
- Prevents overburdening any single agency
Challenges
- Coordination problems
- Duplication of credit
- Difficulty in monitoring
- Default risk increases if farmer borrows from many agencies
Quick Revision Summary
| Topic | Key Points |
|---|---|
| Debentures | Long-term bonds issued by SCARDB to raise funds |
| Types | Ordinary, Rural, Land Mortgage, Special, Floating |
| Procedure | Govt Guarantee → Issue → Sale → Loan distribution → Repayment |
| Problems | Poor recoveries, weak sinking fund, delays, dependence on govt |
| Sinking Fund | Annual savings to repay debentures |
| National Federation (NAFSCOB) | Apex body of state and district cooperative banks |
| Single Window System | One agency gives ST + LT loans |
| Multi-Agency Approach | Credit provided by many institutions (Coops + Banks + RRBs) |