Finance and credit are the two essential requirements for rural development. The rural areas often suffer from low income leading to low rate of savings. Farmers find it very difficult to increase their productivity by investing on their farm lands. Further, the limited number of banks that are available in the rural areas prefer to forward credit to the farmers with large land-holdings. Getting credit from banks being difficult, the small and marginal farmers fall easy prey to the money lenders. The importance of credit in rural development is highlighted in the following points:
1. Credit helps the farmers to commercialize their farming. In other words, commercial farming requires funds that are provided via credit. As the small and the marginal farmers produce only for their subsistence, they fail to generate sufficient surplus to reinvest on their lands leading to degradation of the land.
2. Secondly, given the long gestation period between sowing and harvesting of the crops, credit is extended to the farmers for meeting their initial requirements of farm inputs like seeds, fertilizers, etc.
3. Credit saves the farmers from the vicious circle of poverty. The farmers require funds for meeting their general and specific needs. These needs are to be fulfilled via credit.
4. Lastly, agriculture has always been dependent on the climate. In the absence of good monsoon or crop failure, farmers are worst hit. Thus, in order to save them from such tragedy, crop insurance and farm credit plays a vital role.