The key problem of Indian agriculture is finance. Several weaknesses of the rural financial delivery system, have not been corrected even after almost 40 years of bank nationalization of 1969 which focused on enhancing the outreach and access to rural credit in India. In addition to reviewing agricultural credit policies followed in India and assessing the trends and progress in the credit flow and access, this paper aims at examining the suitability of government-directed microfinance activities as an alternate tool to the formal credit delivery mechanism in rural areas. Drawing upon the field surveys conducted in four districts of two federal states in India, the paper not only indicates the wide recognition the program has gained within the rural community but also reflects the inequitable impact of microfinance initiative, and highlights a few prominent flaws in program implementation and administrative mismanagement which reduce the effectiveness of the program. While the survey findings reveal the main problem areas like unfriendly attitude of bank officials, inaccessible bank branches, non-availability of timely and adequate credit, sub-optimal selection of key economic activities and marketrelated problems, the regression result points out that land-based activities are not remunerative for the microfinance beneficiaries. This analysis also indicates that literacy, interest rate on loanable funds, ownership of productive assets and savings are the major determinants of the income function. The paper concludes with some policy implications for improving the design for implementing the program. The paper adds to the extant knowledge about microfinance programs by comparing the performance of formal banking with the informal banking through microfinance initiatives in a developing country like India.

The contribution of primary sector to India’s Gross Domestic Product (GDP) declined from 56.2% in 1951-52 to 17.5% in 2007-08. Despite this, the primary sector still provides livelihood support to about half of the country’s rural and poverty-stricken population primarily engaged in farming on small landholdings and allied activities.

TThe key problem of the rural poor is non-availability of credit at reasonable and affordable rates of interest. The three-tier cooperative credit structure that had been in operation in India since the country’s independence in 1947, was found to be inadequate in meeting the credit requirements in the rural areas. Accordingly, the Government of India (GoI) nationalized 14 of the largest commercial banks in 1969 with the purpose of rapid expansion of bank branch network in semi-urban and rural areas so as to meet the credit requirements of ‘priority sector’, including small farmers and artisans. Since 1969, the government-controlled banks’ branch network had increased from 7,015 to 64,670 in 2007, of which 45.7% were in rural areas as against ‘nil’ earlier. However, the traditional concern about non-accessibility of credit to the needy rural inhabitants is still alive. Although the government banks have been offering credit at reasonable and affordable rates of interest, the major problems faced by the rural poor in accessing the timely credit are related to loan documentation, collateral, and general indifference of the bank officials.

In this backdrop, this paper tries to review the trend, status and issues of agricultural credit in India and explores whether the present day formalization of informal microfinance can increase universal access and bring in efficiency and cost-effectiveness to loan financing in rural areas.

Agricultural Economics Journal, Rubber Production, Nontraditional Areas, Capital Investment, Government Agencies, Community Processing Centers, Rubber Plantation, Government Forest Lands, Goalpara District, Economic Empowerment.