Agricultural credit and insurance

The first principle

A farmer spends on seed, fertiliser and labour months before the harvest pays him, and the harvest itself depends on rain, pests and prices that he cannot control. Credit bridges the gap in time and insurance shares the risk, and without both a single bad season pushes a family to the moneylender and into debt that outlasts the drought. Banks and insurers hesitate to serve small farmers because loans are small, collateral is weak and information about each farm is costly, which is why the state steps in.

The core

Institutional credit

• Two kinds of farm credit. Short term crop loans pay for inputs and are repaid after the harvest, while investment credit pays for wells, machines, orchards and animals over years. Investment credit builds future output, yet crop loans rose from 51 per cent of farm credit in 2000 to 75 per cent in 2018 (RBI Internal Working Group, 2019).
• The multi agency approach. Credit reaches farmers through commercial banks, which give the largest share, regional rural banks (from 1975) and cooperatives, whose short term credit runs in three tiers: primary agricultural credit societies (PACS), district central cooperative banks and State cooperative banks.
• NABARD. The National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 under an Act of 1981, on the advice of a committee chaired by B Sivaraman. It refinances banks that lend to agriculture, supervises regional rural banks and cooperative banks, and lends to States for rural infrastructure through the Rural Infrastructure Development Fund (RIDF, 1995-96).
• Priority sector lending (PSL). The Reserve Bank of India (RBI) requires domestic commercial banks to lend 40 per cent of adjusted net bank credit (or of the credit equivalent of off balance sheet exposure, whichever is higher) to priority sectors, of which 18 per cent must go to agriculture and 10 per cent to small and marginal farmers. A bank that falls short deposits the shortfall in funds such as the RIDF at low interest.
• Scale. Ground level agricultural credit reached Rs 25.48 lakh crore in 2023-24, against a target of Rs 8 lakh crore in 2014-15 (PIB, January 2025). Yet in the Situation Assessment Survey of 2019, 50.2 per cent of agricultural households were in debt (average Rs 74,121), and only 69.6 per cent of that debt was institutional.

The Kisan Credit Card and interest subvention

• The Kisan Credit Card (KCC), introduced in 1998 on the recommendation of the R V Gupta committee, gives a farmer a revolving limit fixed from his crop area and the scale of finance, so he draws and repays as the season needs. Since 2019 it has also covered animal husbandry and fisheries, and from January 2025 loans up to Rs 2 lakh need no collateral.
• The Modified Interest Subvention Scheme (MISS) lets banks lend short term crop loans up to Rs 3 lakh at 7 per cent, because the Centre pays them 1.5 per cent of the loan, and gives farmers who repay on time a further 3 per cent, so their effective rate is 4 per cent. The Budget of 2025-26 announced raising the limit to Rs 5 lakh.
• Worked example. A farmer borrows Rs 3 lakh on his KCC for a year. The bank charges 7 per cent, or Rs 21,000, and receives another 1.5 per cent, Rs 4,500, from the Centre, so it earns 8.5 per cent in all. If the farmer repays on time, the Centre credits him 3 per cent, Rs 9,000, so he pays Rs 12,000, or 4 per cent. The Centre spends Rs 13,500, or 4.5 per cent, and a loan this cheap invites diversion to other uses.
• Reach. By December 2024, 7.72 crore farmers held operative KCC loans with more than Rs 10 lakh crore outstanding, against Rs 4.26 lakh crore in March 2014.

Crop insurance: the Pradhan Mantri Fasal Bima Yojana

• The design problem. Insuring each farm on its own yield invites moral hazard (a careless farmer still gets paid) and costs too much to assess. Area yield index insurance instead pays every insured farmer in a notified area by that area's yield, measured by crop cutting experiments; its cost is basis risk, since a farmer whose own crop failed may get nothing.
• The Pradhan Mantri Fasal Bima Yojana (PMFBY), launched in 2016 in place of the earlier national schemes, covers the crop from prevented sowing to post harvest losses and assesses localised calamities such as hailstorm farm by farm. Farmers pay 2 per cent of the sum insured for kharif food and oilseed crops, 1.5 per cent for rabi food and oilseed crops and 5 per cent for annual commercial and horticultural crops. The rest of the actuarial premium, bid by insurers, is shared equally by the Centre and the State, and 90:10 for the north eastern States (from kharif 2020) and the Himalayan States.
• How a claim is paid. Threshold yield = average yield of the best five of the last seven years × indemnity level (70, 80 or 90 per cent). Claim = (threshold yield − actual yield) ÷ threshold yield × sum insured.
• The changes of 2020. From kharif 2020 the scheme became voluntary for all farmers, including those with crop loans, and the Centre limited its share of the premium subsidy to premium rates of up to 30 per cent for unirrigated and 25 per cent for irrigated areas.

Dimensions

• Economic. Cheap crop loans invite diversion more than investment, and the shrinking share of investment credit keeps farm capital formation low.
• Social. Tenants, sharecroppers and women rarely hold land titles, so they cannot pledge land or claim insurance in their own name.
• Regional. Credit relative to farm output is high in the south and very low in the central, eastern and north eastern regions (RBI Internal Working Group, 2019).
• Fiscal and federal. Subvention, premium subsidies and waivers are recurring budget costs, and waivers fall mainly on States, which then cut capital spending. Some States, such as Bihar in 2018 and Gujarat in 2020, left PMFBY to run schemes of their own.
• Climate. More frequent droughts, floods and heat waves raise both loan defaults and insurance premiums.

The economics of farm loan waivers

• What a waiver does. The government repays a farmer's institutional loan to the bank from its budget, giving quick relief after a drought or price crash, which is why waivers are announced mostly near elections.
• Its costs. It creates moral hazard, because farmers who could repay wait for the next waiver, and banks then lend less there. It leaves out the poorest, who owe moneylenders, and tenants, who never got bank loans. The money comes from State budgets: since 2014-15, ten States announced waivers worth about Rs 2.4 lakh crore (RBI Internal Working Group, 2019).
• The national waiver of 2008. The Agricultural Debt Waiver and Debt Relief Scheme of 2008 cost about Rs 52,500 crore, and a 2013 audit by the Comptroller and Auditor General found ineligible beneficiaries and eligible farmers left out.

In practice

• PMFBY in numbers. By August 2025 the scheme had insured 78.41 crore farmer applications and paid claims of about Rs 1.83 lakh crore since 2016, and 4.19 crore farmers enrolled in 2024-25, the highest so far (PIB, August 2025). In January 2025 the Cabinet continued PMFBY and RWBCIS to 2025-26, with an outlay of Rs 69,515.71 crore for 2021-22 to 2025-26.
• New covers. From kharif 2026, crop loss from wild animal attacks is covered as a fifth add on under localised risks, and paddy inundation is again covered as a localised calamity; the farmer reports the loss within 72 hours with geotagged photographs, and States notify the animals and districts.
• Credit reforms. The RBI Internal Working Group of 2019 advised against waivers, asked that subvention loans go only through the KCC, and pressed States to digitise land records and reform tenancy on the lines of the Model Land Leasing Act, 2016. The computerisation of PACS, approved in 2022, puts village societies on one platform with their banks.

Issues and way forward

• Credit to the wrong farmer and purpose. Subsidised crop loans favour larger farmers, are diverted and crowd out investment credit; subvention only through KCCs, digitised land records and targets for investment credit would correct this.
• Tenants and landless farmers. Without recorded tenancy they stay outside credit and insurance, so legal leases, joint liability groups and lending through self help groups are the way in.
• Delayed claims. Late State premium shares and disputes over yield data delay payment, so yield estimation by remote sensing under the Yield Estimation System based on Technology (YES-TECH) and penalties for delay are being pushed.
• Basis risk and trust. A farmer whose crop failed while his area's did not gets nothing, so smaller insurance units and farm level assessment by remote sensing are needed.
• Waivers instead of reform. Waivers treat the symptom; income support, timely insurance, better markets and restructuring of loans after a notified calamity are the lasting answers.

Common confusions

• Interest subvention and prompt repayment incentive. Subvention (1.5 per cent) is paid to the bank so it can lend at 7 per cent, while the prompt repayment incentive (3 per cent) is paid for the farmer, and only if he repays on time.
• Loan waiver and debt restructuring. A waiver cancels the debt and the government pays the bank, while restructuring reschedules the debt over a longer period, often with a moratorium, and the farmer still repays.
• PMFBY and the Restructured Weather Based Crop Insurance Scheme (RWBCIS). PMFBY pays on measured area yield, while RWBCIS pays on a weather index such as rainfall at a station, which is faster but may miss losses the weather data do not capture.

For the exam

• Keyword bank: institutional credit, multi agency approach, NABARD, Rural Infrastructure Development Fund, priority sector lending, Kisan Credit Card, interest subvention, prompt repayment incentive, investment credit, moral hazard, farm loan waiver, area yield index insurance, threshold yield, basis risk, Restructured Weather Based Crop Insurance Scheme.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: Half of India's agricultural households were in debt in 2019, and about 30 per cent of their debt was still owed to non institutional lenders (NSS 77th round, Situation Assessment Survey).
  • Introduction with a report: The RBI Internal Working Group of 2019 found that ten States had announced farm loan waivers of about Rs 2.4 lakh crore since 2014-15 and advised that they be avoided.
  • Conclusion: Cheap credit and subsidised insurance protect farmers only when they reach the tenant and the small farmer, are paid on time and do not crowd out investment in the farm.
  • Conclusion: India needs to move from waivers after a crisis to protection before it, through investment credit, timely insurance and income support.