Analysis of Farm Credit Disbursed by State Banks in Ampara District, Sri Lanka

Abstract

Credit is the precursor for investment and modernization of production, whilst also helping to create rural employment opportunities. The objective of the study is to analyze credit disbursed by state banks for rural development, the rate of defaults by borrowers and factors affecting loan repayments. Seventy five respondents who had obtained loans from the Bank of Ceylon and Peoples Bank were randomly selected from the Ninthavur DS area in the Ampara district. They were interviewed using a pre-tested structured questionnaire. Majority of the borrowers were small-scale farmers (92%), while the rest were involved in other occupations. Credit obtained was used for investment purpose (56%) and for cultivation purposes (38.7%). Almost 34.67% of borrowers from the banks were loan defaulters, who differed from non-defaulters in terms of lower age, educational levels and farm income. It was also found that defaulters had a significantly higher amount of indebtness compared to non-defaulters. A regression analysis showed that amount of outstanding loans was significantly affected by the amount of loan granted, crop yields, other indebtness and annual income. State banks should improve their services to clients to access credit easily and look for the socio-economic characteristics that significantly influence loan repayment by borrowers before granting loans to farmers to reduce the incidence of loan delinquencies or credit risk.