Determinants of Formal Agricultural Credit Flow to Districts in India: An Econometric Analysis

Aims: This study investigates the determinants of formal agricultural credit flow at the district level in India, using region-wise fixed effects models.

Study Design: Panel data regression technique.

Place and Duration of Study: Data from districts across Indian states from 2000 to 2021 were analyzed.

Methodology: Districts categorized into high, medium, and low credit exposure groups based on average outstanding agricultural credit by Scheduled Commercial Banks (SCBs) through a clustering technique. One district from each category in each state was selected for analysis. The study examined outstanding agricultural advances by SCBs, the number of SCB branches, gross sown area, gross irrigated area, area under commercial crops, and annual rainfall using an unbalanced panel model.

Results: The findings reveal that an increased number of SCB branches in a district significantly enhances agricultural credit availability. The share of gross irrigated area positively impacts credit flow, especially in the southern, western, and central regions, highlighting the importance of irrigation in accessing credit for high-value crops. In contrast, a higher share of area under commercial crops negatively affects credit flow in the southern and western regions, possibly due to limited financing for rainfed commercial crops. Rainfall was found to have no significant impact on agricultural credit at the district level. Additionally, there is a noticeable trend of increasing urban branches, particularly in the southern, northern, and northeastern regions, alongside a decline in rural branches in most regions except the eastern region.

Conclusion: The study emphasizes the need for targeted policy measures to improve agricultural credit distribution. Policymakers should focus on the number of SCB branches, the share of irrigated area in total sown area, and address the rural-urban branch shift while considering region-specific agricultural requirements to ensure equitable and efficient credit allocation.