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Banking on 'Baniyas' for Credit

Marginal farmers in rural West Bengal, as seen from a field survey carried out in the Hooghly district, are increasingly relying on the trader class as a major source of credit for working capital, as opposed to traditional moneylenders or the formal sector. The repayment rates by these farmers are also better than that of the comparatively better off farmers.

Banking on ‘Baniyas’for Credit

Marginal farmers in rural West Bengal, as seen from a field survey carried out in the Hooghly district, are increasingly relying on the trader class as a major source of credit for working capital, as opposed to traditional moneylenders or the formal sector. The repayment rates by these farmers are also better than that of the

comparatively better off farmers.


ven with the growing share of the tertiary sector in the Indian economy, the importance of agriculture in its development cannot be understated. While agricultural production and productivity for parts of the country are still constrained by inadequate water resources, the state of West Bengal is fortunate enough to enjoy comparatively satisfactory surface and groundwater resources and good rainfall ranging between 1,300 mm to 1,750 mm. In spite of possessing favourable prerequisites like alluvial soil and good climatic conditions, the state lagged behind other states till the 1970s with regard to agricultural production or productivity. The phenomenon of poor growth in agricultural production in the state before 1980 has been examined in detail by Boyce (1987) who found that the estimated growth rate of agricultural output in West Bengal was as low as

  • 1.74 per cent per annum during 1949-80. It is important to note that this rate of growth in agriculture was below the rates of increase of rural and total population in the state, which were 2.31 per cent and
  • 2.42 per cent respectively during 1951 to 1981 [Deb 2003]. Over time however, the situation has changed for the better and the growth rate of agricultural output reached 6.4 per cent during 1981-82 to 1990-91 [Saha and Swaminathan 1994]. Not withstanding the fact that the growth rate of production has fallen in the recent years, increasing trends in total foodgrain and rice production are prominent in the state.1 More importantly, productivity is far above the all-India level in certain crops that the state specialises
  • in (like rice or potato) and reveals an increasing trend.

    It has been observed by many authors [Deb 2003] that amongst other reasons (including institutional changes and land reform programmes),2the adoption of high yielding varieties and fertilisers and other such improved inputs contributed significantly towards the improvement of both production and productivity. However, for inputs to be available to the farmers, efficient delivery of agricultural credit becomes a necessary prerequisite. Furthermore, as a consequence of land reforms, there emerged a large number of marginal and small farmers who needed agricultural credit in small volumes but on a timely basis. This brings us to the credit delivery system in the agricultural sector in the state. The figure shows that West Bengal ranks nineth amongst 17 major states in terms of agriculture credit disbursement by the public sector banks (per thousand hectares of gross cropped area).

    Thus the state is almost at the middle as far as total flow of credit from the public sector banks are concerned. However, there exist significant variations in flow of funds across different sections of farmers.

    As is well know, optimisation exercises of commercial banks often turn them away from the group of small and marginal farmers due to the high transaction costs involved in lending to them. This in turn forces these farmers to depend on the informal credit market. Secondary sources of data with regard to rural credit market cover only the formal sources of credit. However, perception of the rural credit market remains incomplete unless one captures the informal market as well and the understanding of the latter calls for a primary survey. This becomes all the more important in the face of the rationalisation policy adopted by public sector banks after liberalisation. Against this backdrop, the current study carried out a field survey in the Hooghly district of West Bengal.

    Experiences from the field reveal that with the improvement of agricultural production in West Bengal, leading to an increased demand for credit, a new set of creditors have emerged, who especially serve the small and marginal farmers. They are the input traders who have almost replaced the traditional moneylenders in the rural sector. It goes without saying that such informal credit market flourishes due to the inadequacies of the formal lendinginstitutions. Therefore, to understand the rise of this informal credit market

    Economic and Political Weekly January 27, 2007






    0.1 0

    Figure: Agricultural Credit from Public Sector Banks in 2000-01

    (Rs crore for ‘000 hectare of gross cropped area)





    PradeshBihar (Incl.Jharkhand)






    Himachal Pradesh Andhra Pradesh

    Punjab (u)

    Source: Computed using data from

    dominated by the traders, it is necessary to examine the role of the formal lending institutions in our area of study. This is done by first studying a sample of farmers selected at random from the set of borrowers who took agricultural loan from the lead bank of this area (United Commercial (UCO) Bank). This part of the study revealed that 87 per cent of the marginal farmers and 21 per cent of the small farmers supplemented their credit from the formal sector by taking loans from the traders as well. Middle-income farmers, however, are not seen to be dependent on this trader-cum-lender class. A second sample is drawn from the set of all farmers (both borrowers from formal and informal sectors), to comprehend the extent and problems of accessibility of formal credit by the comparatively poorer section of farmers.

    Selection of Samples

    We took up the Hooghly district of West Bengal as our study area because of a number of factors. Agricultural productivity of the district has been increasing consistently over the years and the district is dominated by the largest number of marginal farmers.3 During 1985-86 to 1990-91, the number of holdings belonging to the marginal farmers increased in the district from 2,48,599 to 3,49,900, while the total area of such holdings increased from 94,059 hectares to 1,36,565 hectares. On the other hand, the number of large farmers has declined considerably from 95 to 96 [Deb 2003]. Furthermore, cultivators experiment with a variety of crops and thus multi-cropping pattern is quite marked in the district.

    To select the second sample, altogether 150 households were chosen from two blocks of the district. One of them is an agriculturally advanced block (Tarakeswar) and the other is a backward one (Chanditala). Households in each block are selected in proportion to the total number of households in each block. First a village was selected through systematic sampling and then households from the village are selected randomly.

    To select a sample of farmer households who borrowed any time during the last two years from the formal sector, we took help of the ledgers of the UCO Bank branches operating in our study area. In Tarakeswar block there are 90 villages; drawing every 8th village we selected 12 villages altogether. Similarly, drawing every 8th village from the Chanditala block, seven villages were chosen. From the list of borrowers obtained from the UCO Bank branches, 20 households were selected per village to arrive at a sample of 380 households. After obtaining information through structured questionnaires from selected households, certain features were observed with regard to the marginal and small farmers.

    Borrowers from the Formal Sector

    Since we have selected one sample from a population of borrowers from commercial banks, automatically, all the sample members of this particular sample were found to avail formal sources of credit. Interestingly, however, farmers encounter different levels of hardship, depending on their economic status, while availing formal sources of credit. While the entire set of medium farmers, i e, 100 per cent of them, could avail loan within a period of one month, this percentage declined to 83 for the small farmers and 75 to the marginal ones (Table 1). As these loans were crop loans, one can easily imagine the problem of delayed disbursement. In particular, 4 per cent of the marginal farmers needed to wait for six months for the disbursement of loans. Later, our discussions with the bank officials brought out the suggestion that adoption of simplified forms may be of help to the poor farmers.

    Another indicator that further strengthens our hypothesis that the comparatively poorer farmers incur higher transaction costs in availing funds is the “number of visits to the bank”. While the small and medium farmers require to visit twice (Table 2), 29 per cent of the marginal farmers visited the bank premises more than five times (each such visit involves opportunity cost for the farmers). While this may be partly due to the fact that marginal farmers are educationally backward,4 it is a comment on the free flow of necessary information to the borrowers.

    Possibly due to information asymmetry and associated transaction costs, marginal farmers usually need to depend on the informal sources of credit. Even when they get the opportunity to borrow from the formal sector, it is found that they often need to supplement their loan from the informal sector funds. It is interesting to note that 87 per cent of the marginal farmers who took credit from the formal source also availed loan from the traders. This percentage declined to 21 for the small farmers and the medium farmers seemed to manage only with the bank loans.

    While the above findings give an idea about formal sector credit delivery, to get an overall picture of the reach of the formal sector and the presence of informal lending institutions , as mentioned above, a set of households have been selected at

    Table 1: Time Taken to Avail Bank Loans

    (Percentage of farmers)

    Time Taken (in Months) Marginal Small Medium
    0-1 1-3 3-6 6-12 75 14 7 4 83 17 0 0 100 0 0 0

    Notes: Marginal: 0-2.5 acres, small: 2.5-5 acres, medium: 5-10 acres, large: 10 acres or more.

    Source: Field Survey, 2002-03.

    Table 2: Number of Visits to Banks

    (Percentage of farmers)

    Number of Visits Marginal Small Medium

    2 times 52 100 100 3 times 19 0 0 More than 5 times 29 0 0

    Source: Field Survey.

    Economic and Political Weekly January 27, 2007 random who are not necessarily borrowers from the formal sources. Some of the findings from this sample, as discussed below, reveal that the reach of the marginal farmers with regard to the formal sector loan is in fact limited.

    Sources of Rural Credit

    Since the district of Hooghly comprises a large percentage of marginal farmers, they are well represented in both the samples.5 As far as lending institutions for these farmers are concerned, on the institutional front, primary agricultural credit societies (PACS) or cooperative societies are the principal purveyors of institutional credit in the survey area; they extend crop loans to almost 79 per cent of the marginal farmers. The role of commercial banks in the study area has not been found to be substantial in our sample, 35 per cent of the total households depended on commercial banks for credit.

    On the non-institutional front the role of moneylenders appeared to be fading away. Only 19 per cent of the farmers took loan from this class for agricultural purposes. Borrowings from traditional landlords have been found to be nil. Interestingly, however, the dealers of inputs like seeds, fertilisers and insecticides have emerged over time as an important source of rural credit. Above 80 per cent of the small and marginal farmers borrowed from this source

    – in kind and not in cash (Table 3).

    Thus for the small and marginal farmers the commercial bank is not a vital source of credit in our sample. For medium farmers on the other hand, the formal sector plays a significant role. The cooperative banking system has been found to be particularly strong in our area of study. Ironically, however, repayment rates of loans from the cooperative banks are observed to be extremely low (close to 0) which raises a doubt about their sustainability. It is also interesting to note that small and marginal farmers supplement their credit from the traders of inputs, who are emerging as a key source of credit. This finding led us to take a closer look at this source of credit.

    of cash but in terms of inputs that need to be repaid after harvest in terms of cash or kind (output). Thus the concept of tied loan appears to be prevalent [Bardhan 1989 and Bell and Srinivasan 1989]. These traders being from the local area not only have lower monitoring costs than the formal sector, but they can also give credible threat to the farmers of not renewing credit in future, which in turn ensures timely repayment [Ranade, Rajeev and Deb 2006]. Thus if we look at the repayment profile, we observe high repayment rates enjoyed by the traders as opposed to low repayment rates by the formal sector (Table 4).

    This is especially true for cooperative banks, which calls for urgent attention to improving non-performing asset profile for sustainability of these banks. Interestingly, however, traditional moneylenders also face high rate of default, while the traders of inputs experience comparatively much better rate of repayment. As mentioned above, this is mainly due to the fact that marginal farmers need to depend on them constantly and without timely repayment and reputation building such facilities will not be available to them. On the contrary, timely repayment of credit from the formal sector does not necessarily ensure fresh credit the following year. Secondly, as mentioned above, transaction costs remain high for marginal farmers for availing formal sector loan. Furthermore, as our survey reveals, the belief of the farmers that if a loan is not paid back, the government will eventually waive it, adds to the high default rate.

    If we look at the borrowings of the small farmers from the traders, 50 per cent of them are found to be defaulters, which is higher than the corresponding figure for the marginal farmers. Though the small farmers being economically better off possess higher capability to pay back loans, they can also afford to be lax due to the “trust” they earn from traders owing to their economic status. Furthermore, as they are not entirely dependent on traders for credit, the threat mechanism does not work well.

    Medium farmers do not appear to depend on traders possibly because they are capable of financing inputs from their own sources and access to formal sector credit is not difficult as well. In fact, the loan amounts of traders are rather modest in size; the average loan size of the borrowing farmer is mostly within Rs 5,000 (Table 5). The implicit rate of

    Table 5: Loan Size of the Traders

    Loan Size Percentage of Farmers

    Below Rs 1000 17 Rs 1000-2000 2 9 Rs 2000-3000 2 5 Rs 3000-5000 1 9 Rs 5000-7500 5 Rs 7500 and above 5

    Source: Field Survey.

    Table 6: Actual Use of Fertilisers

    (in Tarakeswar B Block, averaged over respondent farmers)

    Crops Required Quantity kg/hect N P K Actual Quantity kg/hect N P K
    Potato Rice 60 40 60 10 60 10 96 60 105 28 75 28

    Source: Field Survey.

    Table 3: Holding-wise Borrowing Farmers from Different Sources

    (Per cent of farmers)

    Type of Commercial Cooperatives Moneylenders Friends and Traders/Dealers Farmers Bank Relatives of Inputs

    Marginal 35 79 19 10 84 Small29 57 29 0 86 Medium 100 100 0 0 0

    Source: Field Survey, 2002-03.

    Table 4: Landholding-wise Rate of Default

    (Per cent of farmers)**

    Category Commercial Cooperative Moneylender Friends and Traders Bank Bank Relatives

    Marginal 88 100 89 86 30

    Input Traders as an Alternative

    Small 100 100 100 0 50

    Source of Credit

    Medium 100 100 0* 0* 0* Total 89 100 73 86 32

    Traders have emerged as principal sup-

    Notes: * Not borrowed from this source.

    pliers of inputs of credit during the last 20 ** Considering all loans taken two years ago. years or so. Credit is usually not in terms Source: Field Survey, 2002-03.

    Economic and Political Weekly January 27, 2007

    interest which we have estimated from the higher price of inputs one needs to pay while buying them on credit, turns out to be 5 per cent to 10 per cent for a period of four months, which is higher than the formal sector’s interest rate.

    Since the loans are disbursed in kind, one important question that arises at this juncture is, whether the traders try to push more credit to the farmers in order to enhance their sales. Presence of such motive would in turn imply overuse of inputs like fertiliser, which has long-term impact on soil fertility. We tried to probe this aspect in some detail.

    Overdose of Fertiliser Application?

    We attended one ‘krishak sabha’ (farmers’ meeting) in Tarakeswar and interviewed farmers about the use of fertilisers. Our findings support the fact that owing to prevalent misconception, commercial advertisement and easy availability of chemical fertilisers from the dealers, farmers are prone to apply more fertilisers in their fields in expectation of higher productivity. Overdose of fertiliser application is a common problem in all the districts, which is supported by the data in Table 6. The first three columns reveal standard requirement of Nitrogen, Phosphorus and Potassium content in the fertiliser used per hectare of cultivated land, whereas, the last three columns represent the actual quantity of these three components in the fertiliser used per hectare by our respondent farmers. The table clearly reveals that the fertiliser applied in our study area is more than the required level and this phenomenon of excessive fertiliser use can be attributed to some extent to the fact that farmers get the input in kind through credit from the dealers.

    Of late, however, application of fertiliser as an input is showing a diminishing return to scale. Despite being the leading agricultural district, Hooghly has not been able to extricate itself from this trend. Though the farmers have started realising the harmful effect of chemical fertilisers, they are not able to switch over to alternatives like use of biofertilisers in a substantial manner. One of the most important reasons is easy accessibility of the same at a reasonable price. Further, certain concerns such as the use of biofertiliser might affect the size of their produce adversely, which in turn will affect their sales volume, created negative impacts on the use of the same.


    With the improvements in agricultural production and productivity, small and marginal farmers in West Bengal are depending on a new class of lenders for their working capital. This class makes credit available in terms of inputs on a timely basis and more importantly without any formal collateral. Since their primary motive is to run their trading businesses (which is possible only if farmers can cultivate their land), they are comparatively much more considerate and do not charge a too high interest rate like some other classes of lenders (for example, traditional moneylenders). A moneylender disburses credit only against a collateral and often operates with a motive of acquiring the mortgage rather than recovering the loan. The rate of interest charged by a moneylender, therefore, is comparatively higher as s/he prefers a default [Stiglitz and Weiss 1981]. Fortunately, traders cannot charge very high input prices or low output prices (in case of interlinked trade) as in addition to the reason mentioned above they also need to abide by certain norms of the gram panchyat. They are the holders of trade licences issued by the respective gram panchayats.

    Moreover, unlike moneylenders, dealers are not monopolists or duopolists. They face much more competition from other traders. Thus they are definitely a better alternative for farmers compared to the traditional moneylenders of agricultural loan. However, it goes without saying that the best alternative for the farmer would always be an efficient formal sector.

    While the formal sector often complains about non-performing assets arising out of priority sector lending, recovery can be improved by assuring quick renewal of credit after repayment. In fact, this has been confirmed through our interviews with bank officials who admit that easy access to loans after one repays a previous loan plays a significant positive role in loan recovery. Interestingly, the manager of a cooperative bank, Kultighari Samabay Krishi Unnayan Samiti, Tarekeswar block, asserted that repayment of loans was almost 100 per cent (in spite of a bad harvesting year) once he had given an assurance that a fresh loan would be immediately disbursed on repayment [Rajeev and Deb 1998]. While after the financial sector reforms the profit motive becomes primary for public sector banks, such an approach appears to be necessary to serve the rural sector effectively.




    [We thank G K Karanth for useful suggestions.]

    1 See the data from the ‘Bureau of Applied Economics and Statistics, Government of West Bengal’.

    2 For a discussion on ‘Operation Barga’ see Bandyopadyay 2003.

    3 A marginal farmer is defined as the one who possesses 0 to 2.5 acres of land.

    4 Thirty-five per cent of the marginal farmers are illiterate in our sample, while only 6 per cent of the small farmers are so.

    5 Out of the total number households selected, 90 per cent have turned out to be from the marginal farmer category, while 9 per cent are from the small-farmer and 1 per cent from the medium-farmer category. Thus our sample also seems to fulfil our objective of studying credit availability to the marginal and small farmers.


    Bandyopadyay, D (2003): ‘Land Reforms and Agriculture: The West Bengal Experience’, Economic and Political Weekly, March 1, Vol XXXVIII, No 9, pp 879-84.

    Bardhan, P (ed) (1989): The Economic Theory of Agrarian Institutions, Claredon Press, Oxford, NY.

    Bell, C and T N Srinivasan (1989): ‘Some Aspects of Linked Products and Credit Market Contracts among Risk Neutral Agents’ in Bardhan (ed), 1989.

    Boyce, J K (1987): Agrarian Impasse in Bengal: Agricultural Growth in Bangladesh and West Bengal, 1949-1980, Oxford University Press, NY.

    Deb, Sharmistha (2003): ‘Credit Flows and Agricultural Growth: An Inter-Block Study of Institutional and Non-Institutional Finance in Hooghly District’, unpublished thesis.

    Rajeev, Meenakshi and Sharmistha Deb (1998): ‘Institutional and Non-Institutional Credit in Agriculture: Case Study of Hooghli District in West Bengal’, Economic and Political Weekly, Vol XXXIII, No 47, pp 2997-3002.

    Ranade, Ranjeet, Meenakshi Rajeev and S Deb (2006): ‘Why Do Poor Farmers Default Less? Case of Indian Informal Credit Market: A Game Theoretic Exploration’, Pre-print.

    Saha, A and M Swaminathan (1994): ‘Agricultural Growth in West Bengal in the 1980s: A Desegregation by Districts and Crops’, Economic and Political Weekly, 29, March 26.

    Stiglitz, J E and A Weiss (1981): ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review, 71, 393-410.

    Economic and Political Weekly January 27, 2007

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