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In almost all the models of growth and development, capital accumulation is pivotal because it raises the productive capacity of the sector in which it takes place. The capital accumulation depends on the rate of investment, which in turn depends on the rate of savings. The financial institutions play a dominant role in mobilising savings and then channelising those savings for investments into productive economic activities. Therefore, the role of financial institutions is crucial in the development of any sector and agriculture is no exception to it. Rather the development of agriculture sector is more dependent on banking sector because 80 per cent of the farmers are small and marginal farmers, who are unable to save and invest due to their low levels of income. Further, about 70 per cent of the population in India lives in rural areas contributing about 24.2 per cent to gross domestic product (GDP) and forms the largest consuming market leading to income and employment generation through multiplier effects. Banking sector helps in the monetisation of the rural economy, which is useful in achieving the multiplier effect to the maximum benefit. Agriculture sector is the most crucial sector of the Indian economy because the main objectives of economic policy of output growth, price stability and poverty alleviation are best sub-served in this sector. There is thus a need to increase the credit flow to agriculture, raise productive capacity of land and enhance the potential of water resources as well its use efficiency for agricultural development.
A tremendous increase in the production of foodgrains has been witnessed from 82 million tonnes in 1960-61 to 212 million tonnes in 2003-04. This growth was made possible by the adoption of high yielding varieties especially wheat and rice crops, expansion in irrigation, higher use of modern inputs and development of infrastructure and institutions like power, village roads, agricultural market infrastructure, minimum support price policy and institutional agricultural credit. Agricultural credit in itself is not an input but it helps in creating environment for the adoption of modern production technology and encouraging private investments on the farms. Recognising the importance of credit, the National Agricultural Policy adopted in July 2000 envisages a growth of 4.0 per cent of agriculture to achieve 8 per cent economic...