Rural credit cooperatives—some of which are over 120 years old—remained a crucial pillar of formal financial support to farmers for decades until India’s banking network spread wider. Despite this, the Reserve Bank of India’s Report on Currency and Finance 2023-24 shows that despite the progress in outreach of institutional finance in rural areas, roughly one-third of agricultural credit needs are still met through informal sources. This share tends to increase significantly during droughts. Addressing this gap is crucial in what is expected to be another drought year in many parts of the country.
According to the India Meteorological Department, while the overall southwest monsoons deficit reported a slump of 13 percent this year, it varied extremely across regions with central India's share cut to half by September-end. The deficit exceeds half in certain sub-divisions and regions. According to India Drought Monitor, drought conditions are reported in over two-thirds of the country. In such a state, formal credit outreach from institutions with well-established community linkages like cooperatives can be more effective and efficient—especially to small and marginal farmers. Hence, there is an urgent need to strengthen and revitalise rural credit cooperatives with requisite measures addressing the existing challenges.
Despite an extensive presence in rural areas, the share of cooperative credit declined drastically due to various challenges. The share of cooperative credit collapsed from around 50 percent in the 1990s to around 9 percent in the 2020s. Considering the importance of primary agricultural cooperative-credit societies (PACs) with strong grassroots linkages, the government initiated various measures during the last five years or so to modernise and expand PACS into multi-level service centres. Nevertheless, the growth in agriculture credit from cooperatives remained muted due to persisting challenges.
One of the major challenges of rural credit cooperatives is their deteriorating financial health. The significant slowdown in the growth of mobilisation of deposits has led to decline in internal funding and increased dependence on external funding and refinancing. In addition, the slow recovery of loans due to frequent crop failures also led to increased non-performing assets for rural credit societies. The increased dependence on external funding has, in turn, led to increased cost of funds and thereby affecting their profitability and long-term viability. As a result, the non-profitable rural credit cooperatives or PACS tend to lose the confidence of their members and depositors, as well as borrowers and external financiers or lenders.
Lack of effective governance is another important constraint for efficient functioning of rural credit cooperatives. Unlike commercial banks, the governance of rural credit societies is not by the financial professionals but by the elected members. As a result, the functioning of rural cooperatives is often subjected to influence and interference of local member interests and politics. In addition, overlapping and dual control of state and central governments is also an important issue in the management of rural credit cooperatives.
Another major challenge is the operational inefficiencies and inadequacies in terms of digital technologies and capacity-building. The human resource capacity development is lagging in many rural credit cooperatives largely confining to short-term lending for crop loans. With limited financial profitability and resources, technological upgrade for computerisation and digitalisation is also a major challenge for rural credit societies. As a result of such lack of technological upgrade and human resource capacities, rural credit societies are lagging behind banks not only to raise deposit growth but also to diversify their lending portfolios.
The last three years have witnessed considerable progress in digitisation with nearly 60 percent of PACs migrating to networked national software by March 2026. Such support and measures need to be further scaled up and accelerated to extend the digital transformation and modernisation to all PACS in the country.
In addition, to compete with commercial banks and other financial institutions, there is an urgent need to strengthen human resource capacities of rural credit cooperatives in line with the changing dynamics of rural banking preferences and demand. Further, there is a need to ensure effective governance with measures like mandatory training of members especially in managerial positions.
Upgrading PACS into multi-level service centres with diversified business activities may not only revitalise them with additional income but also help rural communities with added services and employment opportunities. But at the same, it is essential to ensure that the primary objective of efficient credit delivery to farmers remains a priority.
With their extensive networks, grassroots linkages and wider accessibility to small farmers, rural cooperative credit societies can enhance the outreach of institutional credit, especially under drought conditions. With growing risks from climate change and increasing occurrence of localised weather incidences, there is an urgent need to strengthen and revitalise the rural credit cooperatives not only with technological upgrade and business diversification but also with effective governance and resource capabilities for enhanced credit delivery.
A Amarender Reddy | Joint Director, ICAR-National Institute of Biotic Stress Management, Raipur
(Views are personal)