Small and Marginal Farmers (SMFs)

Small and Marginal Farmers (SMFs) constitute the most significant segment of India’s agrarian economy and play a central role in shaping rural livelihoods, agricultural output, and financial inclusion. Defined by the size of landholdings, SMFs are both critical contributors to food security and among the most financially vulnerable groups in the country. Their interaction with banking and financial systems has profound implications for credit delivery, rural development, poverty reduction, and overall economic stability in India.

Definition and Structural Characteristics

In the Indian context, small and marginal farmers are classified based on landholding size. Marginal farmers typically own or cultivate less than one hectare of land, while small farmers hold between one and two hectares. Together, they account for the vast majority of agricultural households in India and cultivate a substantial proportion of the country’s agricultural land.
SMFs are characterised by fragmented landholdings, dependence on monsoon rainfall, limited mechanisation, and low surplus generation. These structural features directly influence their income stability, productivity, and capacity to access formal finance.

Importance in the Indian Economy

Agriculture remains a major source of employment in India, and SMFs form the backbone of this sector. Their contribution extends beyond crop production to allied activities such as dairy, fisheries, and horticulture. Despite operating on a small scale, their collective output is vital for domestic food supply and price stability.
From a macroeconomic perspective, the economic wellbeing of SMFs affects rural consumption, inflation trends, and social stability. Distress among small farmers often translates into broader economic and political challenges, underscoring the importance of targeted financial and institutional support.

Access to Banking and Institutional Credit

Access to timely and affordable credit is one of the most critical challenges faced by SMFs. Due to small landholdings, lack of formal documentation, and irregular income flows, many SMFs struggle to meet conventional banking requirements.
Institutional credit to SMFs is primarily channelled through:

• Commercial banks.
• Regional rural banks.
• Cooperative credit institutions.

Policy guidance and refinancing support from institutions such as Reserve Bank of India and National Bank for Agriculture and Rural Development have been central to expanding agricultural credit coverage. Priority sector lending norms mandate banks to allocate a portion of their credit to agriculture, with a specific focus on small and marginal farmers.

Role of Kisan Credit and Crop Loans

Crop loans and revolving credit facilities tailored for agricultural needs have significantly shaped the financial relationship between banks and SMFs. These instruments are designed to meet seasonal input requirements such as seeds, fertilisers, and labour costs.
For SMFs, such credit mechanisms reduce dependence on informal moneylenders, who often charge exorbitant interest rates. However, issues such as delayed loan disbursement, inadequate credit limits, and procedural complexities continue to limit their effectiveness.

Financial Inclusion and Digital Banking

Financial inclusion initiatives have aimed to integrate SMFs into the formal financial system by providing access to bank accounts, insurance, pensions, and direct benefit transfers. The use of banking correspondents and mobile banking units has improved outreach in remote rural areas.
Digital financial services have gradually expanded among SMFs, enabling direct transfer of subsidies, crop insurance claims, and income support. However, digital literacy gaps, limited connectivity, and trust issues still constrain full adoption.

Risk Exposure and Agricultural Finance

SMFs face high levels of risk due to weather variability, price fluctuations, pest attacks, and market access constraints. These risks directly affect their repayment capacity and increase the vulnerability of agricultural lending portfolios.
To address this, financial systems have incorporated risk mitigation mechanisms such as crop insurance, interest subvention, and loan restructuring during natural calamities. While these measures provide temporary relief, long-term risk reduction depends on improved productivity, diversification, and market integration.

Indebtedness and Credit Stress

Indebtedness among SMFs is a persistent concern in the Indian economy. Low and uncertain incomes often compel farmers to borrow repeatedly, leading to cycles of debt. Formal banking credit, when insufficient or delayed, is frequently supplemented by informal sources.
From a banking perspective, high levels of agricultural credit stress affect asset quality and necessitate policy interventions such as loan waivers and restructuring. While such measures offer immediate relief to farmers, they can weaken credit discipline and strain public finances if used excessively.

Role in Rural Development and Inclusive Growth

Supporting SMFs is central to India’s strategy of inclusive growth. Improved access to finance enables investment in better inputs, irrigation, and technology, which can enhance productivity and income levels.
Financial empowerment of SMFs also stimulates rural demand for goods and services, creating multiplier effects across the rural economy. In this sense, agricultural finance serves not only as a social obligation but also as an economic growth driver.

Policy Challenges and Structural Constraints

Despite extensive policy focus, several challenges persist in integrating SMFs effectively into the formal financial system. These include land record issues, regional disparities in credit flow, limited financial literacy, and weak market linkages.
Balancing credit expansion with risk management remains a key challenge for banks. Excessive caution can exclude vulnerable farmers, while indiscriminate lending can undermine financial stability.