Agricultural Refinance Corporation (ARC)

The Agricultural Refinance Corporation (ARC) was a specialised financial institution established in India to strengthen the flow of institutional credit to agriculture and allied activities. It played a crucial role in the evolution of India’s agricultural finance system during the post-independence period, particularly by refinancing agricultural lending institutions and supporting the objectives of planned economic development. ARC represented an important link between banking, finance, and the Indian economy, especially in the context of rural credit expansion and agricultural modernisation.
The creation of ARC must be understood against the backdrop of India’s agrarian structure, where a large proportion of the population depended on agriculture, yet access to formal credit remained limited. By addressing the long-term and medium-term credit needs of agriculture through refinance support, ARC contributed to institutionalising rural finance and reducing dependence on non-institutional sources such as moneylenders.

Background and Rationale

At the time of independence, Indian agriculture was characterised by low productivity, fragmented landholdings, inadequate irrigation, and chronic indebtedness of farmers. Although cooperative credit institutions existed, they were financially weak and unable to meet the growing demand for investment credit. Commercial banks, on the other hand, had minimal involvement in agricultural lending prior to bank nationalisation.
The Reserve Bank of India (RBI), as the central banking authority, recognised the need for a specialised agency to provide refinance support to institutions engaged in agricultural credit. The objective was not to lend directly to farmers, but to strengthen the capacity of existing institutions by providing them with long-term and medium-term funds. This policy framework led to the establishment of the Agricultural Refinance Corporation in 1963 under an Act of Parliament.

Establishment and Organisational Structure

The Agricultural Refinance Corporation was established in July 1963 as a statutory body wholly owned by the Reserve Bank of India. Its headquarters were located in Mumbai, and it operated through regional offices across the country. Being a subsidiary of the RBI gave ARC financial credibility and policy alignment with national monetary and credit objectives.
ARC was governed by a Board of Directors consisting of representatives from the RBI, the Government of India, state governments, cooperative institutions, and experts in agriculture and finance. This composition ensured coordination between banking policy, agricultural development goals, and institutional credit delivery.

Objectives and Functions

The primary objective of the Agricultural Refinance Corporation was to promote the development of agriculture by providing refinance facilities to eligible lending institutions. Its functions were closely linked with strengthening the institutional framework of agricultural credit.
The major functions of ARC included:

• Providing medium-term and long-term refinance to cooperative banks, land development banks, and later commercial banks for agricultural lending.
• Supporting investment in agriculture, including irrigation, land development, farm mechanisation, and plantation crops.
• Encouraging diversification into allied activities such as animal husbandry, fisheries, and horticulture.
• Assisting state governments and cooperative institutions in improving the financial health of rural credit agencies.
• Promoting sound lending policies and appraisal standards in agricultural finance.

By focusing on refinance rather than direct lending, ARC acted as a wholesale financing institution, enabling primary lenders to expand their outreach to farmers.

Role in Agricultural Credit and Rural Development

ARC played a significant role in expanding the availability of institutional credit for agriculture during the 1960s and 1970s. Its refinance operations were particularly important for long-term investments, which were often neglected by short-term cooperative credit societies.
The corporation supported:

• Irrigation projects, including minor irrigation works such as wells, tube wells, and lift irrigation systems.
• Land development activities, including soil conservation, reclamation of wastelands, and bunding.
• Farm mechanisation, by refinancing loans for tractors, pump sets, and agricultural implements.
• Plantation and horticulture, which required longer gestation periods and patient capital.

These investments contributed to productivity enhancement and laid the foundation for the Green Revolution, especially when combined with technological inputs and institutional reforms.

ARC and the Banking System

The functioning of ARC marked an important phase in the integration of agriculture with the formal banking system. Initially, refinance support was largely extended to cooperative banks and land development banks, which were the primary rural lending institutions at the time. Over time, commercial banks also became eligible for refinance, particularly after the nationalisation of major banks in 1969.
ARC’s refinance mechanism improved liquidity and reduced risk for lending institutions, encouraging them to allocate a higher proportion of their loan portfolios to agriculture. It also helped standardise credit appraisal procedures and repayment structures, thereby improving credit discipline.
From a banking perspective, ARC strengthened the link between central banking policy and sectoral credit allocation, aligning agricultural finance with broader economic planning objectives.

Transformation into NABARD

Despite its achievements, the scope of ARC was limited by its narrow mandate and institutional fragmentation in rural finance. By the late 1970s, it was increasingly recognised that a more comprehensive apex institution was needed to oversee not only refinance but also policy planning, supervision, and development of rural financial institutions.
Consequently, in 1982, the Agricultural Refinance Corporation was reorganised and reconstituted into the National Bank for Agriculture and Rural Development (NABARD). NABARD absorbed the functions of ARC as well as those of the RBI’s Agricultural Credit Department and the Agricultural Refinance and Development Corporation (ARDC).
This transformation marked a significant milestone in India’s financial architecture, with NABARD becoming the apex development bank for agriculture and rural development. ARC thus served as an institutional precursor to NABARD.

Significance in the Indian Economy

The significance of the Agricultural Refinance Corporation in the Indian economy lies in its contribution to the structural development of agricultural finance. By facilitating long-term investment credit, ARC addressed a critical gap in rural financial markets and supported capital formation in agriculture.
Its operations had wider macroeconomic implications:

• Strengthening agricultural productivity contributed to food security and price stability.
• Increased rural investment supported employment generation and income growth.
• Expansion of institutional credit reduced exploitation by non-institutional lenders.
• Integration of agriculture with the banking system promoted inclusive economic growth.

ARC’s role aligned closely with India’s planned development strategy, where agriculture was viewed as the foundation of overall economic progress.

Limitations and Criticism

While ARC made notable contributions, it was not without limitations. Its dependence on refinance meant that its effectiveness was closely tied to the performance of primary lending institutions, many of which suffered from poor recovery rates and weak governance. Regional imbalances persisted, with better-developed states benefiting more from refinance facilities.
Critics also pointed out that credit expansion did not always translate into equitable outcomes, as small and marginal farmers sometimes faced difficulties in accessing institutional loans. These challenges highlighted the need for a more holistic approach to rural finance, eventually leading to institutional reforms.