Impact of institutional finance on farm production, income and asset holding in selected blocks of Coimbatore district---a disequilibrium credit market approach

Government financial intermediation in rural economics is geared to mobilize savings and investment via lending. There is a growing body of literature that has focused on the linkages between credit market development and economic growth, the role of financial institutions in mobilizing savings and the effect of credit on agricultural investment and output (Goldsmith (1969).;In India, commercial banks, co-operatives and Regional Rural banks were the main conduit for providing agriculture credit. Though the total agricultural credit of institutional agencies had increased from Rs.885 crore in 1970-1971 to Rs.1,25,309 crore in 2004-2005, till the year 2003-2004, the private sector and public sector commercial banks did not achieve the target lending (18 percent net bank credit) to the agricultural sector fixed by the Reserve Bank of India. Around 60 percent of the working capital of the farmers was not financed by the financial institutions and remained as institutional credit gap. The proportion of long term credit in the private capital formation ranged between 33 percent and 80 percent during 1974-2004. The above facts brought out the presence of institutional credit gap in the agricultural sector lending and substantiated for disequilibrium credit market condition in agriculture. The share of agriculture and allied activities in the total gross domestic product had declined from 54.56 percent in 1951-1952 to 31.14 percent in 1989-1990 and 21.9 percent during the period 2000-2001 to 2005-2006. It showed the slow down in the share of agricultural production to total gross domestic product (National Accounts Statistics, 2006).;In this backdrop, the studies in India by Kochar (1997) and in other countries by Feder et al. (1991), Diague et al. (2000), Diague and Zeller (2001), Foltz (2004) and Nuryartono et al., (2005) analyzed the extent of credit constraint and the impact of credit on production, farm income and asset holding based on the approach of Feder et al. (1990).;The above studies did not analyse the impact of agricultural credit on the technical efficiency of farmers under disequilibrium credit market condition. Moreover, the studies in India on extent of credit constraint and the impact of agricultural credit on agricultural sector in a disequilibrium market condition are very limited (Kochar, 1997). The present study tries to cover these gaps. The major objective of the present study is to analyse the impact of agricultural credit on farm production and technical efficiency under disequilibrium credit market condition. The farm asset, income and the production functions were specified as endogenous switching regression model. Both production function and technical inefficiency equations were estimated, simultaneously in one step as it is more efficient than two step method (Coelli, 1996).;From the findings of the study, it may be concluded that the adequate availability of credit to the credit unconstrained farmers uplifted them from the suboptimum allocation of farm inputs to optimum level. The adequate availability of credit enabled them to earn higher amount of gross and net farm income and improved the economic condition of the credit unconstrained farmers.;The financial institutions fixes the scale of finance based on target oriented approach rather than cost of production and investment. Hence, it was evident that credit advanced by the institutional agencies was not adequate to all farmers to cover cost of production and farm investment. The inadequacy of credit and credit constraint associated with credit constrained farmers led them to allocate agricultural inputs to suboptimum level. The inadequacy of credit deprived them to earn less amount of gross and net farm income. Hence, the removal of capital constraint by pumping the required amount of credit could add the gross and net farm income and improve the technical efficiency of farmers who are credit constrained. The government should evolve appropriate policy measures in such a way that the institutional finance should reach the needy farmers. If the institutional credit reaches the farmers who are not in need, expanded credit will be diverted in part to consumption. So the likely income and technical efficiency effect will be smaller than that which is expected.