Since the banking reforms, banks credit to various sectors has gone up, but the credit to agriculture sector has declined from 37% in 199798 to 35% in 200304. While in the recent past, the Central Government and RBI has tried to push the agriculture credit as banks are not even able to meet the 18% target suggested by the advisory committee. Therefore, major thrust is needed from commercial banks and RRBs to increase the rural credit.

The banking sector has undergone through waves of changes after the economic reforms have started. In the pre-reforms period there was a regime of directed credit delivery system to the priority sector. The rationale behind the government policy was, as this sector was long neglected in terms of delivery of institutional credit, to serve this sector on priority basis. On the other hand, the social return on investment in this sector is also very high. Unfortunately, commercial banks did not take adequate interest in advancing credit to this sector until there was a directed system of credit delivery by the government before the nationalization of banks. The government directed that banks should advance 40% of their total credit to the priority sector among which direct advance to agriculture would be 18% per annum. The Narsimham Committee Report on financial sector reforms (1991) pointed out that directed lending had reduced the income of banks which had high administrative costs and interest rate was far below the commercial rate of credit. The Committee recommended a gradual phasing out of Directed credit and to reduce it to 10% from 40%. The government did not accept the recommendations, instead continued with the 40% of bank credit as far as allocation of credit was concerned.

Before we go further into this matter, we have to see the institutional structure of rural credit that has been created in the plan period. Imperial Bank was nationalized in 1956 and was renamed as State Bank of India in 1956 to serve the credit needs of the neglected sectors of the economy. Government in its institution building program kept the question of agricultural finance at the forefront. Cooperative credit societies were formed to provide loan to agricultural sector. Regional Rural Banks (RRBs) were established in 1975 to serve exclusively the rural sector, particularly agricultural and agro-based activities. All these institutions have been engaged in advancing institutional credit.

Professional Banker Magazine, Banking Reforms, Agricultural Credit, Agriculture Sector, Economic Reforms, Narsimham Committee Report, Financial Sector Reforms, Regional Rural Banks, RRBs, National Bank for Agricultural and Rural Development, NABARD, Government Policies, Commercial Banks, Rural Infrastructure Development Fund, RIDF, Non-Performing Assets, NPAs .