The first modern legal system governing agricultural credit in India began in colonial times. A colony being a creation of largely economic interests, agricultural policy in colonial India followed the ‘revenue model’, which saw in agriculture and land tenure an opportunity to augment the colonial state’s exchequer. The zamindari model of land tenure was an extremely effective method of taxing land and agricultural produce, which, in a vast country with an economy dominated by agriculture, was a lucrative revenue source. However, with farmers having to pay most of their incomes to meet the government’s revenue requirements, agricultural growth, land improvement and food security suffered tremendously and the situation soon deteriorated into famine. This is in opposition to the contemporary ‘planned production model’, which has attended to national objectives such as agrarian growth, domestic food security and profitable exports.

Following the disastrous famines at the end of the nineteenth century and the consequent reports of the famine commissions appointed to look into their causes, the colonial government enacted two laws that formed the basis of agricultural credit in the country: the Land Improvements Loans Act, 1883, and the Agriculturists Loans Act, 1884. The 1883 Act provided for a system of credit advancement by authorised “companies” in compliance with government guidelines. All loans were made repayable in instalments, in the form of an annuity or otherwise, within a notifiable period (ordinarily within thirty five years). Village communities could also borrow for which they were jointly and severally liable with their individual liabilities certified by the loan disbursing officer. The enactment gave wide rule-making powers and discretion to local governments.
The Agriculturists’ Loans Act, 1884, repealed existing ‘takkavi’ laws in the country that only provided for the recovery of a loan’s principal amount and not the interest on the loan or the cost incurred by the government in advancing the loan. The existing law also did not provide for loans to members of a village community. The new Act allowed the local governments to make rules for credit advancement to landowners for any purpose not covered by the Land Improvement Loans Act but nonetheless connected with agriculture. All loans were made recoverable, with all interest chargeable and costs incurred, from the borrower, as arrears of land revenue; and, the borrower’s surety, as arrears of land revenue.

The first Cooperative Societies Act was enacted in 1904 to establish and incorporate credit societies outside the procedures of the Companies Act, and was applied to only those societies dedicated to cooperative credit. Societies were divided into rural and urban categories with the former vested with unlimited liability. This Act of 1904 was replaced by the Cooperative Societies Act, 1912, which governed all cooperative societies irrespective of their purpose. This legislation distinguished between societies on the basis of their liability, and required all agricultural societies to have unlimited liability and restricted the profits of their members.

The enactment of the Usurious Loans Act, 1918, gave courts suo motu powers to initiate proceedings to deal with usury. Section 3 of the Act authorises courts to reopen loan transactions and relieve the debtor’s of any liability arising out of excessive interest if the court is satisfied that:
- The interest levied is excessive; or,
- The transaction was substantially unfair.
Courts were also given power to deem an interest rate excessive. Interest alone was sufficient evidence to prove substantial unfairness of the transaction.

Since rural welfare was central to the Indian national movement, it is not surprising that the next large steps taken to protect the interests of Indian agriculture came from the newly elected provincial assemblies elected after the passage of the Government of India Act, 1935. Important steps were taken by several States to protect farmers from excessive interest rates on loans, both from banks and moneylenders. In 1936, the Madras Legislature amended the Usurious Loans Act to introduce two significant provisions. There was a rebuttable presumption of the substantial unfairness of a transaction if the interest was excessive; and an irrebuttable presumption of excessive interest if compound interest is charged on an agricultural loan. Curbing rural indebtedness was clearly a priority for these governments and many of their laws continue in operation today, albeit with several modifications.
The Madras Debtors Protection Act, 1934, was amended by the Legislature in 1936 to provide for a presumption of usury and substantial unfairness where the interest rate was excessive. Compound interest on agricultural loans was declared usurious and prohibited. The Andhra Pradesh (Andhra Area) Debtor’s Protection Act, 1934, was amended on identical lines. The practice of dam dupat was prohibited by the Punjab Relief of Indebtedness Act, 1934, which disallowed courts to decree a debt for a sum double the principal amount; and, made such debts voidable at the instance of the debtor.

Clearly, therefore, there is a historical and accepted difference between agricultural credit and commercial credit.