Rural Finance, Capital Constrained Small Farms, and Financial Performance: Findings from a Primary Survey

Abstract

Capital and credit constraints limit the small farm’s ability to adequately use resources for optimum performance. Farmers’ access to capital is constrained in multiple ways, including price factors, risk factors, and transaction factors, as well as access to and ease of rural agricultural financing. Using a primary survey data of small farms in Tennessee, we analyzed factors influencing credit constraint and its impact on farm performance. Farm operators’ gender, off-farm work, land acreage holdings, farm specialization, and the use of smart phone with Internet significantly influenced credit constraint. We found that the financial performance of credit constrained small farmers was significantly lower than that of unconstrained small farmers—an adverse impact of constrained capacity to credit could result in up to $51,000 lower in gross farm sales. Additionally, our reason-specific results within credit constraint suggested that around $32,000 to $39,000 lower performance in gross sales can be attributable to the constrained borrowing with deficit to obtain agricultural loans at required or desired level.

Dynamics of banks' lending practices to farmers in India

“…Such practices will give rise to duality, where wealthy farmers will enjoy growth through the use of modern technology, whereas SMFs will underperform. There is evidence of a rise in productivity for those who had better access to finance and modern technology (Cuffaro, 2001;Patel, 2004;Jodhka, 2006;Purohit et al, 2015;Bhattacharya, 2017;Khanal and Omobitan, 2020). In the case of India, wealthy farmers will become wealthier, whereas SMFs farmers will decline in numbers because of their inability to use appropriate technology and to obtain loans at competitive rates from formal institutions (Sharma and Chamala, 2003;Srivastva and Basu, 2004;Vaidyanathan, 2006).…”

“…Although a multiagency, approach was envisaged to cater for the diverse credit needs of rural people. It has been suggested (Satyasai, 2008;Golait, 2007;Singh et al, 2009;Kumar et al, 2010;Sandhu Banks' lending practices et al, 2015;Bhattacharya, 2017;Khanal and Omobitan, 2020) that in reality, the rural clientele hardly benefited from multiple providers of finance as the system suffered from many infrastructural deficiencies. These structural and operational framework changes facilitated the process of institutionalisation and the regulation of the rural financial market in India to some extent.…”

“…The role and importance of financial institutions in agricultural and economic development is well documented in literature (Lewis, 1954;Fei and Ranis, 1963;Karshenas, 2001;Koivu, 2002;D'Souza, 2020). Many empirical studies have tended to concentrate on the factors associated with the requirement and importance of credit in agriculture (Karshenas, 2001;Mfuga, 2004;Bhattacharya, 2017;Kumar, 2017;Khanal and Omobitan, 2020). There are several studies that reported that technical change is crucial for agricultural development; the availability of credit acts as a catalyst in the adoption of new technology (Chaudhary, 1987;Sidhu et al, 2008), to increase agricultural production and reduce poverty.…”

“…The growth of the farming sector is intertwined with economic stability and development, provides critical support and a resource base for economic prosperity. The emerging evidence suggests that poor farmers' financial needs are not met due to sector-specific and systematic problems in the functioning of the financial sector (Duggal and Singhal, 2002;Talule and Rasal, 2008;Sidhu et al, 2008;Singh et al, 2009;Memmel et al, 2019;Khanal and Omobitan, 2020). Imperfections in the financial sector adversely impact on the efficient functioning and performance of the agricultural sector, limiting the potential for economic and financial prosperity.…”

Bank Credit and Trade Credit After the Financial Crisis: Evidence From Rural Galicia

“…For Western countries, however, there is less research. Examples are Besser and Miller (2013) on U.S. rural entrepreneurs, Civelek et al (2019) on Slovak weak funding bias compared to Czech Republic, and Khanal and Omobitan (2020) on factors influencing credit constraints of farms in the U.S.…”