AF Practical 9: Credit Requirement PDF

Econ-205 Agricultural Finance and Co-operation (2+1) Practical 9: Estimation of Credit Requirement  Modern business with agriculture being no exception depends for its financial...

Econ-205 Agricultural Finance and Co-operation (2+1) Practical 9: Estimation of Credit Requirement  Modern business with agriculture being no exception depends for its financial requirements largely on credit with the introduction of improved techniques of production/cultivation becoming more and more capital Introduction intensive. An overview of futures Farmer’s own trading capital resources are turning out to be insufficient. They have to therefore, depend to a large extent on borrowed funds. If credit is not available, it is not possible for the farmer to adopt improved production techniques.  Hypothetical data of a farmer for operating expenses Portugal has an absolute superiority in production of both cloth and wine. Law of comparative advantage indicates that a country should specialise in the production of that commodity in which it is more efficient and leave the other commodity to other country. The two nations will then have more of both goods by engaging in trade.  This example indicates that even by adopting existing techniques, farmers have insufficient capital. So, how can we expect him to adopt new techniques of farm business? So, for adopting modern technology, he needs sufficient amount of capital which he can acquire from banks or other institutions to fulfill his requirements of credit. To work out the credit requirement, generally paid out costs (variable costs) which has to be paid in cash during the production process are taken into consideration. Farmers need money in the form of cash for paying labour, purchase of seeds, insecticides/pesticides etc. Credit need is therefore considered the total of all variable costs i.e. cost 'A'.  COST 'A' :- 1) Value of hired human labour 2) Value of hired bullock labour. 1. 3) Value of owned bullock labour. Cost of 4) Value of use of owned machinery. 5) Hired machinery charges. Cultivation 6) Value of seed (both farm produced and purchased). 7) Value of manure (own farm & purchased). Approach 8) Value of fertilizer. 9) Value of insecticides & pesticides. 10) Irrigation charges. 11) Depreciation of farm buildings & implements. 12) Interest on working capital. 13) Other paid out expenses (if any). Total Capital Need As farmers are not paying depreciation cost in cash, therefore, while estimating the credit requirement of the farmer, value of depreciation of farm building and implements etc. are subtracted from cost 'A’. TOTAL CAPITAL NEED = COST A – DEPRECIATION Example (for small farmer).. (Hired) 15 6, 000 Total Capital Need = Cost A – Depreciation = (24,387 – 450) = Rs. 23,937  Micro model to assess short term credit need requirement of an individual farmer: 2. Proportionate Formula: CF = PiJ * Area * Cost A Cost Approach Where, CF=Credit requirement of an individual farmer PiJ=Proportion of credit requirement of small, medium or large farmer PiJ for, Small Farmer = 0.55 or 55% Medium Farmer = 0.45 or 45% Large Farmer = 0.35 or 35% Now, for small farmer, CF = PiJ * Area * Cost A = 0.55 * 1.25 * 24,387 = Rs. 16766.06 Thank you Dr. Sanjeev Kumar [email protected] +91 8219271814