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Dynamics of banks' lending practices to farmers in India

Navjot Sandhu (Finance, Birmingham City University, Birmingham, UK)

Journal of Small Business and Enterprise Development

ISSN: 1462-6004

Article publication date: 21 October 2020

Issue publication date: 19 January 2021




This paper aims to evaluate whether small marginal farmers in India have financial constraints and to examine how bank managers make lending decisions.


A survey approach was employed, using semi-structured questionnaires with a sample of 42 banks and 185 farmers from the state of Punjab in India. The questionnaires and semi-structured interviews were carried out on a one-to-one basis and in focus groups, and their responses were analysed from the supply (banks) and demand (farmers) side regarding access to finance.


The results indicate that the Indian farming sector is a complex and multidimensional one that has dependency on both the private and public sectors because of its national importance to varying degrees. Financial lending decisions are dependent upon several non-quantifiable factors (culture, caste, family size, education) and relational bank lending practices. Such practices have an adverse impact on bankable loan applications, and this gives rise to moral hazards. Relational banking and recommendations minimise default rates, but this does not minimise information asymmetry. Subjectivity in decision-making persists, which is compounded by underdeveloped financial markets for small farmers, giving rise to financial exclusion and negatively impacting on economic growth. To overcome information asymmetry, banks rely on the qualitative factors and an excessive level of collateral when making lending decisions. The findings provide valuable insight into how banks make lending decisions and evaluates a complex matrix of relationships between farmers and providers of debt finance in a developing economy such as India.

Practical implications

Policy makers nationally and internationally could use the results of this research to develop relevant and targeted policies to promote the agricultural sector through adopting efficient provision of finance for farmers. A major contribution of this research is to provide a fundamental evaluation of the issues facing farmers in accessing finance in developing countries.


This study provides an original empirical insight into a sector of the economy that has implications for food security for a country. The study has relevance for a wide range of stakeholders and policy makers of both developed and emerging economies in the world.



Sandhu, N. (2021), "Dynamics of banks' lending practices to farmers in India", Journal of Small Business and Enterprise Development, Vol. 28 No. 1, pp. 102-120.



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