What is agricultural finance?

What is agricultural finance?
What is agricultural finance?

What is agricultural finance?

Meaning of Agricultural Finance

Agricultural finance, in general, refers to the study, examination, and analysis of the financial aspects of the farm business, which is the economy’s key sector. Money concerns connected to agricultural product production and disposal are included in the financial elements. When we talk about financial aspects of agriculture, we’re talking about the capital required for agriculture, the essential finances raised, and the pattern of use of those monies. Agricultural finance is also a part of agricultural economics that deals with the provision of bank services and financial farm units, as well as their management.

Macro and Micro Aspects of Agricultural Finance

Agricultural finance is examined from both a macro and local perspective. Macro finance is concerned with the various sources of funding for agriculture as a whole in the economy, as well as lending procedures, laws, regulations, monitoring, and controlling procedures of various agricultural institutions. Macro finance is concerned with the agricultural sector’s total credit demands, the terms and conditions under which credit is available, and the way of utilizing total credit for agricultural development. Microfinance, on the other hand, refers to the financial management of a single agricultural enterprise.

Nature and Scope of agricultural finance :

Agricultural financing is investigated on a micro and macro scale. Microfinance is concerned with many sources of funding for agriculture as a whole in the economy. It also deals with the lending process, laws, and regulations, as well as the monitoring and management of various agricultural credit institutions. As a result, macro-finance is linked to aggregate farm financing. Financial management of individual farm business units is referred to as micro-finance. It is also concerned with the study of how a single farmer analyzes multiple sources of credit, the amount of credit to be borrowed from each source, and how he allocates the credit among the farm’s numerous uses. Microfinance is concerned with many sources of funding for agriculture as a whole in the economy. It also deals with the lending process, laws, and regulations, as well as the monitoring and management of various agricultural credit institutions. As a result, macro-finance is linked to aggregate farm financing. Financial management of individual farm business units is referred to as micro-finance. It is also concerned with the study of how a single farmer analyzes multiple sources of credit, the amount of credit to be borrowed from each source, and how he allocates the credit among the farm’s numerous uses. It’s also concerned about how the money will be spent in the future. As a result, macro-finance is concerned with the agricultural sector’s total credit needs, the terms and conditions under which credit is available, and the method of using total credit for agricultural development, whereas micro-finance is concerned with the financial management of individual farm businesses.

Features of Agricultural Finance

The following are some of the unique features of agricultural financing, which are outlined and explored below:

  • Risks in Agriculture:

It is difficult to predict risks and uncertainties in the agriculture business. A farmer faces numerous risks and uncertainties, such as droughts, floods, and other natural disasters, all of which can cause significant damage to the farmer. Furthermore, due to a lack of suitable storage facilities to hold back surplus when supply exceeds demand, agricultural produce tends to deteriorate in storage. It leads to even more problems. With so many unknowns, agriculture has traditionally been a difficult business for commercial banks and insurance firms to handle.

  • Difficulties of Co-operation in Agriculture:

There is virtually limited room for cooperation in the agricultural industry. This is because farmers are mostly individualistic and distrustful of working together for a common goal. This makes it harder for farmers to obtain low-cost borrowing.

  • Economic Lags in Agriculture:

There is a considerable time between reward and work in the agricultural production process, especially during the period when costs are incurred. Demand for agricultural products may fluctuate throughout this time, causing farmers’ financial arrangements to be disrupted. Farmers will have to deal with yet another source of uncertainty as a result of this. Credit supplying organizations use this as a justification to withhold credit for farm activities.

  • Credit for Consumption Purpose:

Credit is needed by Bangladeshi farmers not just for production but also for consumption. Small farmers require financing in the event of crop failure, which they use to meet their consumption needs. Furthermore, Bangladeshi farmers are accustomed to overspending on social and religious events. In addition to all of this, litigation is a significant non-productive financial demand.

  • Small Size of Farm:

Farms in Bangladesh are modest in contrast to the amount of labor engaged and the amount of capital invested. Furthermore, the yield and quality of the products are uncontrollable. As a result, there is a scarcity of security to be supplied as collateral for loans.

  • Lack of Proper Securities:

Large farmers have their own resources, allowing them to borrow money from financial organizations. Small farmers have a difficult time obtaining credit to meet their demands. It’s because small farmers don’t have adequate collateral to put up as collateral for loans, nor do they have the financial means to repay them. As a result, small farmers are forced to seek financial assistance from money lenders.

  • The complex of Many Industries:

Agriculture is a diverse industry with many different types of production and marketing. The number of landholdings and the types of land tenure vary by region. These disparities result in a variety of intricate relationships amongst farmers, making funding the agricultural sector problematic.

Challenges of Agricultural Finance

Governments in Bangladesh have been working to enhance the availability of loans to the agriculture sector. However, there are some issues with agricultural loans that must be addressed. As a result, the following issues are highlighted:

  • Complicated Procedures of Loans:

It has been discovered that a number of requirements must be accomplished in order to obtain credit. The vast majority of farmers are uneducated and unable to provide the necessary information. As a result, farmers prefer to borrow money from money lenders and pay a higher interest rate. Furthermore, there is a significant time gap between the submission of a loan application and the approval of the loan.

  • Wastage of Time and Man Power:

The majority of financial institutions, including commercial banks and state cooperative banks, are located in urban areas. Farmers must visit bank offices several times to complete a multitude of requirements that lead to loan approval. As a result, time and main power are wasted.

  • Lack of Co-ordination:

Another issue with agricultural finance is the lack of coordination between co-operatives and commercial banks when it comes to credit planning. As a result, credit flows to those places where the due credit structure is robust, while areas with limited credit availability remain deprived. As a result, a lack of cash has been a major factor in low agricultural yield and, as a result, cultivator poverty.

  • Improper utilization of Loans:

In the agricultural industry, there is a discrepancy between payout and demand. When farmers misuse the loans they have been given, the situation becomes much more pitiful. In other words, the loans are being used for non-productive uses in the country’s rural areas.

  • Inefficient Administration:

Another issue is that cooperatives and commercial banks are run by ineffective and inept individuals. These organizations have weaknesses that are tough to overcome. Clearly, they are not working for the benefit of the farming community. Rather, they are concerned with their own personal advantages.

  • Mounting over dues:

Agriculture’s slowdown has resulted in a rise in overdue. Efforts to cancel loans in various sections of the country should be taken seriously. In fact, it has set an unfavorable precedent that will stymie future agricultural progress.

  • No Provision of Consumption Loans:

Due to the seasonal nature of farm revenue, peasants require credit for both the production and purchase of durable commodities, but this facility is only available in metropolitan regions. As a result, farmers are forced to borrow money from money lenders for their consumption needs, who suck their blood through deception.

  • Low Rate of Share in Development:

Agriculture’s low productivity has resulted in a little percentage of the economy’s development. This is due to a lack of technological uptake. This information demonstrates that commercial banks continue to view industry and trade as the safest area in which to invest rather than agriculture. Furthermore, wealthy farmers take a big portion of total loan facilities, leaving impoverished farmers at the whim of unscrupulous money lenders. Loan disbursement by co-operatives, which are managed by well-to-do farmers, follows a similar pattern.

  • Lack of Savings:

In the country, there is a scarcity of rural savings. Rural savings are insufficient to meet rural demands, resulting in a larger need for outside financing in rural sections of the country. It is the efforts to make rural savings conceivable, not the mobilization of rural savings, that are required.

  • The predominance of Private Agencies:

There are private agencies in Bangladesh. There is a pressing need to replace private agencies, as we have been able to achieve in the country’s industrial finance sector. Institutional credit can be private or public, but continuing to use professional money lenders as the primary source of rural finance would not solve the problem.

Suggestions to Improve Agricultural Finance

It is impossible to overstate the importance of increasing institutional lending to the agriculture sector and modernizing it. To this goal, some recommendations for improving agricultural finance are presented.

  • Repayment of Loans:

In this instance, the government should take strong and substantial steps to provide suitable repayment facilities and offer required assistance to institutional credit agencies in the recovery of loans. Credit institutions should be able to provide additional loans to farmers as a result of this.

  • Reduction in Regional Imbalance:

To eliminate disparities between rural and urban areas, new bank branches should be established in rural areas, and banks should be directed to make loans to only small and marginal farmers at lower interest rates.

  • Provision of Consumption Loans:

To counteract money lenders’ exploitation, cooperatives, and commercial banks should step forward to offer rural residents consumption loans. They will think to sell their produce at market price after they are free of the exploitative tendencies of money lenders, which will aid to increase their farm income.

  • Co-ordination of Credit Agencies:

In this circumstance, genuine efforts should be made to coordinate the operations of diverse cooperative societies and commercial bank institutions. These organizations may be able to work together to satisfy the needs of the rural agricultural community. Farmers will undoubtedly adopt moderate and sophisticated agriculture technology as a result of this approach.

  • Proper Utilisation of Loans:

This may result in increased crop productivity. A separate unit should be established in all financial institutions to ensure proper loan utilization by farmers or cultivators. They should maintain a tight eye on the loans to make sure that they are being used for the intended purpose.

  • Suitable Representation:

Small and marginal farmers will feel more responsible if they are properly represented in the management of cooperative institutions. In this scenario, they are watching out for the interests of their community in order to give loans.

 

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Md. Masudul Hassan
CEO & Chairman of this Portal. Md. Masudul Hassan is an Assistant Professor and Coordinator of a Reputed University in Bangladesh. Member of Agrilinks is part of the U.S. Government's Feed the Future initiative. He Performed Numerous Research Regarding Agribusiness.