Rural Finance in an Indian Economy

Rural Finance In Indian Economy

o To revise the financial capability of the lending agencies in rural ares to

analysis the drawbacks & advantage of flow of credit in rural areas.

o The rural credit system should be strengthen

o To study the role of rural finance in Indian Economy.

Assigned project task is completed by going through various books,

committee reports regarding Indian agriculture & non-farming sector, also role of

various financial institutions in this grassland.

The project report entitled here is purely study project and does not include

any predictions or forecast regarding the future trends in the rural sector.

The project is based on various references taken from book & reports

mentioned in the bibliography at the end of the assign project.

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1.0 Meaning of an Underdeveloped Economy:

There is a big difference between underdeveloped and developed countries.

The United Nations group of experts states, “We have had some difficulty in

interpreting the term ‘underdeveloped countries’. We frankly consider that, per capita

real income is low when compared with the per capita real incomes of the United

States of America, Canada, Australia & Western europe. Briefly a poor country.

The term ‘underdeveloped countries’ is relative. In practical, those countries

which have real per capita incomes less than a quarter of the per capita income of the

United States, are underdeveloped countries. But recently UN publication prefer to

describe them as ‘Developing economies’. The term ‘developing economies’ signifies

that though still underdeveloped, the process of development has been initiated in

these countries. Thus, we have two economies ‘developing economies’ & ‘developed

economies’. The World Bank issued in its World Development Report (1991)

classified the various countries on the basis of Gross National Product (GNP) per

capita. Developing countries are divided into: (a) Low income countries with GNP

per capita of $580 and below in 1989; and Middle income countries with GNP per

capita ranging between $ 580 and $ 6,000. As against them, the High-income

Countries which are mostly members of the Organisation for Economic Co-operation

and development (OECD) and some others have GNP per capita of more than $

6,000.

The above data given in the table noted that in 1989 low income countries

comprise nearly 57 percent of the world population (2,948 million), but account for

only 5 percent of total world GNP. The middle income countries, which are less

developed than the highly developed than the low income countries comprise about

21 percent of world population but account for 11 percent of world GNP. Taking

these two groups which are popularly described as developing economies or

‘underdeveloped economies’, it may be stated that they comprise over three-fourths of

the world population but account for about one-sixth of the world GNP. Most

countries of Asia, Africa, Latin America and some countries of Europe are included in

them.

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Distribution of World Population & World GNP among various groups of

Countries in 1989

GNP

(Billion

US $)

Total

Population

(million)

GNP Per

Capita

(US $)

1. Low Income Economies 981 (4.7) 2,948

(56.6)

330

2. Middle Income

Economies

2,253

(10.9)

1,105

(21.2)

2,040

3. High Income Economies 15,230

(73,4)

831 (16.0) 18,330

4. Other Economies ___ 323 (6.2) ___

World 20,736

(100.0)

5,206

(100)

3,980

India 283 (1.4) 832 (15.9) 340

India with its population of 832 million in 1989 and with its per capita income of

$340 is among poorest of the economies of the world. It had a share of 15.9 per cent

in world population, but a little more than 1 percent of world GNP.

Three observation made here regarding the U.N. classification of developed

and developing countries on the basis of per capita income. First, there is gross

inequality of incomes between the rich and the poor countries. Second, the gap in per

capita income (and naturally in the level of living) between the rich and poor

countries is even widening over the years—the annual rate of growth of per capita

income of the rich countries was higher during 1965-89 as compared with the poor

countries. More recently, the growth rate among low-income countries has also

shown an increase and if this is sustained, the gap may show a decline over a period.

Third, all the high income countries are not necessarily developed countries. For

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instance, the high income oil-exporting countries have high per capita income but this

is mainly due to their exports of oil; really speaking, they are not developed

economies. Recently, with a decline in world oil prices, the GNP per capita has

started showing a decline in this group.

Definition:

“A country which has good potential prospects for using more capital or more

labour or more available natural resources, or all of these, to support its present

population on a higher level of living or if its per capita income level is already fairly

high, to support a large population on a not lower level of living.” As per this

definitions the problem of development is mainly the problem of development is

mainly the problem of poverty and prosperity. The basic criterion then becomes

whether the country has good potential prospects of raising per capita income, or of

maintaining an existing high level of per capita income for an increased population.”

1.1 Basic Characteristics Of The Indian Economy As An Underdeveloped

Economy:

India is an underdeveloped economy. Its is a vast country having an area of

3.3 million sq. km. It has almost 5,76,000 villages. The population of India is widely

scattered over villages and towns. Nearly 75% of the population lives in rural & semi

urban areas, while the rest lives in towns. There is doubt that the bulk of its

population lives in conditions of misery. Poverty is not only acute but is also a

chronic malady in India. At the same time, there exist unutilized natural resources. It

is, therefore, quite important to understand the basic characteristics of the Indian

economy, treating it as one of the underdeveloped but developing economies of the

world.

1. Low per capita income:- Underdeveloped economies are marked by the

existence of low per capita income. The per capita income of an India is

lowest in the world. The per capita income in Switzerland in 1989 was about

88 times, in West Germany about 60 times, in U.S.A. 61 times and in Japan 70

times of the per capita income in India. It is also important that developed

economies are growing at a faster rate than the Indian economy and as a

consequence, the disparity in the levels of income has become wider during

period 1960-89.

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2. Occupational pattern:- Primary producing. One of the basic characteristics of

an underdeveloped economy is that it is primary producing. A very high

proportion of working population is engaged in agriculture, which contributes

a very large share in the national income. In India, in 1981, about 71 per cent

of the working population was engaged in agriculture and its contribution to

national income was 36 per cent. In Asia, Africa and Middle East countries

countries from two-thirds to more than four-fifths of the population earn their

livelihood from agriculture, and in most Latin American countries from two-

thirds to three-fourths of population engaged in agriculture in developed

countries is much less than the proportion of population engaged in agriculture

in underdeveloped countries.

3. Heavy Population pressure:- The main problem in India is the high level of

birth rates coupled with a falling level of death rates. The rate of growth of

population which was about 1.31 per cent per annum during 1941-50 has risen

to 2.11 per cent during 1981-91. The chief cause of this rapid spurt to

population growth is the steep fall in death rate from 49 per thousand during

1911-20 to 9.6 per thousand in 1990; as compared to this, the birth rate has

declined from about 49 per thousand during 1911-20 to 29.9 per thousand in

1990. The fast rate of growth of population necessitates a higher rate of

economic growth in order to maintain the same standard of living of the

population. To maintain a rapidly growing population, the requirements of

food, clothing, shelter, medicine, schooling, etc. all rise. Thus, a rising

population imposes greater economic burdens and, consequently, society has

to make a much greater effort to initiate the process of growth.

4. Prevalence of chronic unemployment and underemployment: In India labour is

an abundant factor and, consequently, it is very difficult to provide gainful

employment to the entire working population. In developed countries,

unemployment is of a cyclical nature and occurs due to lack of effective

demand. In India unemployment is structural and is the result of a deficiency

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of capital. The Indian economy does not find sufficient capital to expand its

industries to such an capacity that the entire labour force is absorbed.

5. Low rate of capital formation: Another basic characteristic of the Indian

economy is the existence of capital deficiency which is reflected in two ways

— first, the amount of capital per head available is low; and secondly, the

current rate of capital formation is also low. Following table reveals that gross

capital formation in India is less than that of developed countries.

Gross Domestic Investment and Saving (As per cent of Gross Domestic Product)

Gross Domestic Gross Domestic

Investment Saving

1965 1989 1965 1989

Japan 28 33 30 34

Australia 26 26 23 23

Germany 23 22 23 27

U.S.A. 12 15 12 13

U.K. 13 21 12 18

India 17 24 15 21

As per Colin Clark to maintain the same level of living a country requires an

additional investment of 4 percent per annum if its population increases at the rate of

1 percent per annum. In a country like India where the rate of population growth is

2.11 percent (during 1981-91), about 8 percent investment is needed to offset the

additional burdens imposed by a rising population. Thus, India required as high as 14

percent level of gross capital formation in order that it may cover depreciation and

maintain same level of living. A still higher rate of gross capital formation alone can

give a way for economic growth to improve living standard of the population.

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2.0 History Of The Rural Economic Structure Of India

2.1 Indian Economy in the Pre-British period:-

The Indian economy in the pre-British period consisted of isolated and self-

sustaining villages on the one hand, and towns, which were the seats of

administration, pilgrimage, commerce and handicrafts, on the other. Means transport

& communication were highly underdeveloped and so the size of the market was very

small..

a. The structure and organization of villages: The village community was based

on a simple division of labour. The farmers cultivated the soil and tended

cattle. Similarly, there existed classes people called weavers, goldsmiths,

carpenters, potters, oil pressers, washer men, cobblers, barber-surgeons, etc.

All these occupations were hereditary and passed by tradition from father to

son. Most of the food produced in the village was consumed by the village

population itself. The raw materials produced from primary industries were

the feed for the handicrafts. Thus interdependence of agriculture and hand

industry provided the basis of the small village republics to function

independently. The villages of India were isolated and self-sufficient units

which formed an enduring organization. But this should not lead us to the

conclusion that they were unaffected by wars or political decisions. They did

suffer the aggressors and were forced to submit to exactions, plunder and

extortion, but the absence of the means of transport and communications and a

centralized government helped their survival.

b. Classes of Village India: There were three distinct classes in village India: (i)

the agriculturists, (ii) the village artisans and menials, and (iii) the village

officials. The agriculturists could be further divided into the land-owning and

the tenants. Labour and capital needed was either supplied by the producers

themselves out of their supplied by the producers themselves out of their

savings or by the village moneylender. These credit agencies supplied finance

at exorbitant rates of interest but since the moneylender and the landlord were

the only sources of credit, the peasants and even the artisans were forced to

depend on them. The village artisans and menials were the servants of the

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village. Most of the villages had their panchayats or bodies of village elders

to settle local disputes. The panchayats were the court of justice.

2.2 Industries & handicrafts in Pre-British India:

The popular belief that India had never been an industrial country, is incorrect. It

was true that agriculture was the dominant occupation of its people but the products of

Indian industries enjoyed a worldwide reputation. The muslim of Dacca, the calicos

of Bengal, the sarees of Banaras and other cotton fabrics were known to the

foreigners. The chief industry spread over the whole country was textile handicrafts.

The textile handicrafts includes chintzes of Lucknow, dhotis and dopattas of

Ahmedabad, silk, bordered cloth of Nagpur and Murshidabad. In addition to cotton

fabrics, the shawls of Kashmir, Amritsar and Ludhiana were very famous. India was

also quite well-known for her artistic industries like marble-work, stone-carving,

jewellery, brass, copper and bell-metal wares, wood-carving, etc. The cast-iron pillar

near Delhi is a testament to the high level of metallurgy that existed in India. In this

way Indian industries, “Not only supplied all local wants but also enabled India to

export its finished products to foreign countries”.

Decline Of Indian Handicrafts And Progressive Ruralisation Of The

Indian Economy:

Before the beginning of Industrial Revolution in England, the East India Company

concentrated on the export of Indian manufactured goods, textiles, spices, etc., to

Europe where these articles were in great demand. But the Industrial Revolution

reversed the face of Indian’s foreign trade. Tremendous expansion of productive

capacity of manufactures resulted in increased demand of raw materials for British

industry and the need to capture foreign markets. Following principal causes that led

to the decay of handicrafts were as follows:-

a. Disappearance of Princely courts: The growth of industries is only possible

due to patronage of nawabs, princes, rajas & emperors who ruled in India. The

British rule meant the disappearance of this patronage enjoyed by the

handicrafts. Cotton and silk manufactures suffered especially.

b. Competition of machine-made goods: The large-scale production that grew as

a result of Industrial Revolution meant a heavy reduction in costs. It also

created a gigantic industrial organization and, consequently, the machine-

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made goods began to compete with the products of Indian industries nad

handicrafts. This led to the decline of textile handicrafts. Whereas the British

emphasized the free import of machine-made manufactured goods they did not

allow the import of machinery as such. The decline of Indian handicrafts

created a vaccum which could be filled by the import of British manufactures

only.

c. The development of new forms and patterns of demand as a result of foreign

influence: With the spread of education, a new classs grew in India which was

keen to imitate western dress, manners, fashions and customs so as to identify

itself with the British officials. This led to a change in the pattern of demand.

Indigenous goods went out of fashion and the demand for European

commodities got a fillip. Besides, there was a loss of demand resulting from

the disappearance of princely courts and nobility. Thus, the British rule,

silently but surely, alienated the Indians not only from Indian culture but also

diverted in its favour their form and pattern of demand for goods.

2.3 Indian Population an Overview:-

India is one of the most populated countries in the world, next only to China.

Although India occupies only 2.4% of the total area of the world it supports over 15%

of the world population, as revealed by statistics. India is land of diversity, spread

across its cultures, landscape, languages and religion. India has been invaded from the

Iranian plateau, Central Asia, Arabia, Afghanistan, and the West. The Indian people

have absorbed these influences producing a remarkable racial and cultural synthesis.

Religion, caste, and language are major determinants of social and political

organization in India today. The government has recognized 16 languages as official;

Hindi is the most widely spoken.

Although Hinduism is the popular religion, comprising 83% of the population,

India is also home to one of the largest population of Muslims in the world--- more

than 120 million. The population also includes Christians, Sikhs, Jains, Buddhists, and

Parsis. The caste system reflects Indian historical occupation and religiously defined

hierarchies. Traditionally, there are four castes identified, plus a category of outcastes,

earlier called "untouchables" but now commonly referred to as "dalits," the oppressed.

In reality, however, there are thousands of sub-castes and it is with these sub-castes

that the majority of Hindus identify. Despite economic modernization and laws

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countering discrimination against the lower end of the class structure, the caste system

remains an important factor in Indian society. Poverty is one of the major problems

facing India. An estimated 30-40 percent of the population lives in poverty. Four out

of five of India's poor live in rural areas. About 70% of the people live in more than

550,000 villages, and the remainder in more than 200 towns and cities.

Statistics

Population: 966,783,171 (July 1997 est.)

Age structure: 0-14 years: 35% (male 173,420,822; female 163,433,648)

15-64 years: 61% (male 304,048,569; female 281,625,342)

65 years and over: 4% (male 22,536,104; female 21,718,686) (July 1997est.)

Population growth rate: 1.72% (1997 est.)

Birth rate: 26.19 births/1,000 population (1997 est.)

Death rate: 8.87 deaths/1,000 population (1997 est.)

Net migration rate: -0.08 migrant(s)/1,000 population (1997 est.)

Sex ratio: at birth: 1.05 male(s)/female

under 15 years: 1.06 male(s)/female

15-64 years: 1.08 male(s)/female

65 years and over: 1.04 male(s)/female

total population : 1.07 male(s)/female (1997 est.)

Infant mortality rate: 65.5 deaths/1,000 live births (1997 est.)

Life expectancy at birth: total population: 62.41 years male: 61.68 years female: 63.18

years (1997 est.)

Total fertility rate: 3.29 children born/woman (1997 est.)

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3.0 Natural Resources In Process Of Economic Development In Rural

India:

To ahieve the development in national output, it is essential to combine natural

resources, human resources & capital. The existence or the absence of favourable

natural resources can facilitate or retard the process of economic development.

Natural resources include land, water resources, fisheries, mineral resources, forests,

marine resources, climate, rainfall and topography.

1. Land Resources: The total geographical area of India is about 329 million

hectares, but statistical information regarding land classification is available

for only about 305 million hectares; this information is based partly on village

papers and partly on estimates. We can explain land utilization pattern from

the following table:-

Land utilization pattern, 1986-87 (million hectares)

Particulars Area Percent

1. Total geographical area 329 --

2. Total reporting area 305 100

3. Barren land not available for cultivation 41 13

4. Area under forests 67 22

5. Permanent pastures and grazing land 12 4

6. Culturable waste lands, etc. 19 6

7. Fallow lands 26 9

8. Net area sown 140 46

9. Area sown more than once 37 12

10. Total cropped area (8+9) 177 58

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2. Forest Resources: Forest are an important natural resource of India. They

have a moderating influence against floods and thus they protect the soil

against erosion. They provide raw materials to a number of important

industries, namely, furniture, matches, paper, rayon, construction, tanning, etc.

The total area under forests was 67 million hectares in 1986-87 which was

about 22 percent of the total geographical area, a recent estimate has put it at

75 million hectares or 23 percent of the total geographical area. Forests in

India are mostly owned by states (95%); a small portion is under the

ownership of corporate bodies and private individuals.

3. Water Resources: India is one of the wettest countries in the world, with

average annual rainfall of 1100 m.m. India’s water policy, since

Independence, has mainly concentrated on highly visible large dams,

reservoirs and canal systems, but has ignored minor water works such as

tanks, dugwells and tubewells.

4. Fisheries: Broadly speaking, fishery resources of India are either inland or

marine. The principal rivers and their tributaries, canals, ponds, lakes,

reservoirs comprise the inland fisheries. The rivers extend over about 17,000

miles, and other subsidiary water channels comprise 70,000 miles. The

marine resources comprise the two wide arms of the Indian Ocean and a large

number of gulf and bays along the coast. About 1.8 million fishermen draw

their livelihood from fisheries, though they generally live on the verge of

extreme poverty. Out of a total catch of 3 million tones of fish in 1988-89,

over 1 million tones came from inland fisheries and nearly 2 million tones

from marine sources. India is the seventh largest producer of fish in the world

and is second in inland fish production, which contributes 45 per cent of total

production in the country. Fish production reached the level of 5.4 million

tonnes in 1997-98, comprising 3.0 million tonnes of marine fishery and 2.4

million tonnes of inland fishery and is expected to reach 5.6 million tonnes in

1998-99 with 3.0 million tonnes of marine fishery and 2.6 million tonnes of

inland fishery, respectively. During 1998-99, the export of marine products

came down to US$ 1,038 million from US$ 1,208 million during 1997-98

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3.1 Infrastructure In Process Of Economic Development In Rural India:

The prosperity of a Rural India depends directly upon the development of

agriculture and industry. Agricultural production, however, requires power, credit,

transport facilities, etc. Industrial production requires not only machinery &

equipment but also skilled man-power, management, energy, banking facilities,

marketing facilities, transport services which include railways, roads, shipping,

communication facilities, etc. All these facilities and services constitute collectively

the infrastructure of an economy and the development and expansion of these

facilities are an essential pre-condition for increasing agricultural & industrial

production in a rural area.

Types of Infrastructural facilities—often referred towards economic and social

development of rural India:

1. Energy: The most important single factor which can act constraint on

economic growth of a country is the availability of energy. There is a direct

correlation between the degree of economic growth, the size of per capita

income and per capita consumption of energy. Since energy is an essential

input of all productive economic activity, the process of economic

development inevitably demands increasing higher levels of energy

consumption. There are broadly two sources of energy commercial energy &

non-commercial energy. Following are the various commercial energy:- coal

& lignite, Oil & gas, Hydro-electric resource, Uranium. & non-commercial

energy are Fuelwood, Agricultural wastes, Animal dung.

2. Power: Electric power, which is one form of energy, is an essential ingredient

of economic development and, it is required for commercial and non-

commercial uses. Commercial uses of power refer to the use of electric power

in industries, agriculture and transport. Non-commercial uses include electric

power required for domestic lighting, cooking, use of mechanical gadgets like

the refrigerators, air conditioners, etc. With the growth of population and with

the increase in the use of modern gadgets in daily life, it is quite natural that

the demand for electricity for domestic use should grow at a fast rate.

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3. Transport: If agriculture and industry are regarded as the body and the bones of

the economy, which help the circulation of men and materials. The transport

system helps to broaden the market for goods and by doing so, it makes

possible large-scale production through division of labour. It is also essential

for the movement of raw materials, fuel, machinery etc., to the places of

production. The more extensive and continuous the production in any branch

of activity the greater will be the need for transport facilities. Transport

development helps to open up remote regions and resources for production.

Regions may have abundant agricultural, forest and mineral resources but they

cannot be developed if they continue to be remote and inaccessible.

Modes of transport & communication facilities:

Indian Railways: The most important form of transport system in India is the

Indian railways, which is also the country’s largest single undertaking with a

capital investment of around Rs. 15,000 crores. In 1950-51, railway route

length was 53,600 kms but by 1990-91 it had increased to nearly 62,400 kms-

an increase at the rate of 0.4 percent per annum.

Roads & Road Transport: Road transport plays an important role in rural

economy of country, since it is most suitable for short distances. It has also the

advantage of door-to-door service, flexibility, speed and reliability. The utility

of other modes of transport such as railways, internal waterways, ports, etc.

increase when linked to the road transport system. Road construction and

maintenance generate sizeable employment opportunities—factor of great

importance in the context of growing population and growing unemployment

in the country. The rural road network now connects about 70 percent of our

villages.

Inland water transport: Inland water transport is the cheapest mode of

transport, for both long and short distances, so far as the points of origin and

destination of traffic are concerned. It is cheap as energy consumption is low.

India has over 14,500 kms. Of navigable inland waterways comprising a

variety of river systems, canals, backwaters, creeks, etc.

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4. Communications: The communication system comprises posts and telegraphs,

telecommunication system, broad casting, television and information services.

By providing necessary information about the markets and also supplying

necessary motivation, the communication system helps to bring buyers and

sellers together effectively and helps to accelerate the growth of the economy.

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4.0 Microfinance In An Indian Context:-

Microfinance institutions (MFIs), specialised financial institutions that serve

the poor, derive from the success of some micro enterprise credit programmes

performed mainly by practitioners in developing countries. microFinance (mF) is

being practiced as a tool to attack poverty the world over. During the last two

decades, substantial work has been done in developing and experimenting with

different concepts and approaches to reach financial services to the poor, thanks

mainly to the initiatives of the Non-Governmental Organisations (NGOs) and banks

in various parts of the country.

Despite having a wide network of rural bank branches in the country and

implementation of many credit linked poverty alleviation programmes, a large

number of the very poor continue to remain outside the fold of the formal banking

system. Various studies suggested that the existing policies, systems and procedures

and the savings and loan products often did not meet the needs of the hardcore and

assetless poor. Experiences of many anti-poverty and other welfare programmes of

the state as well as of international organisations have also shown that the key to

success lies in the evolution and participation of community based organizations at

the grassroots level.

Micro-finance and Poverty Alleviation:

Most poor people manage to mobilize resources to develop their enterprises

and their dwellings slowly over time. Financial services could enable the poor to

leverage their initiative, accelerating the process of building incomes, assets and

economic security. However, conventional finance institutions seldom lend down-

market to serve the needs of low-income families and women-headed households.

They are very often denied access to credit for any purpose, making the discussion of

the level of interest rate and other terms of finance irrelevant. Therefore the

fundamental problem is not so much of unaffordable terms of loan as the lack of

access to credit itself.

The lack of access to credit for the poor is attributable to practical difficulties

arising from the discrepancy between the mode of operation followed by financial

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institutions and the economic characteristics and financing needs of low-income

households. For example, commercial lending institutions require that borrowers have

a stable source of income out of which principal and interest can be paid back

according to the agreed terms. However, the income of many self employed

households is not stable, regardless of its size. A large number of small loans are

needed to serve the poor, but lenders prefer dealing with large loans in small numbers

to minimize administration costs. They also look for collateral with a clear title -

which many low-income households do not have. In addition bankers tend to consider

low income households a bad risk imposing exceedingly high information monitoring

costs on operation.

In other words, although microfinance offers a promising institutional

structure to provide access to credit to the poor, the scale problem needs to be

resolved so that it can reach the vast majority of potential customers who demand

access to credit at market rates. To be successful, financial intermediaries that provide

services and generate domestic resources must have the capacity to meet high

performance standards. They must achieve excellent repayments and provide access

to clients. And they must build toward operating and financial self-sufficiency and

expanding client reach. In order to do so, microfinance institutions need to find ways

to cut down on their administrative costs and also to broaden their resource base. Cost

reductions can be achieved through simplified and decentralized loan application,

approval and collection processes, for instance, through group loans which give

borrowers responsibilities for much of the loan application process, allow the loan

officers to handle many more clients and hence reduce costs.

Savings facilities make large scale lending operations possible. On the other

hand, studies also show that the poor operating in the informal sector do save,

although not in financial assets, and hence value access to client-friendly savings

service at least as much access to credit. Savings mobilization also makes financial

instituttions accontable to local shareholders. Therefore, adequate savings facilities

both serve the demand for financial services by the customers and fulfill an important

requirement of financial sustainability to the lenders. Microfinance institutions can

either provide savings services directly through deposit taking or make arrangements

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with other financial institutions to provide savings facilities to tap small savings in a

flexible manner.

Convenience of location, positive real rate of return, liquidity, and security of

savings are essential ingredients of successful savings mobilization. Once

microfinance institutions are engaged in deposit taking in order to mobilize household

savings, they become financial intermediaries. Consequently, prudential financial

regulations become necessary to ensure the solvency and financial soundness of the

institution and to protect the depositors.

Governments should provide an enabling legal and regulatory framework

which encourages the development of a range of institutions and allows them to

operate as recognized financial intermediaries subject to simple supervisory and

reporting requirements.

One way of expanding the successful operation of microfinance institutions in

the informal sector is through strengthened linkages with their formal sector

counterparts. A mutually beneficial partnership should be based on comparative

strengths of each sectors. Informal sector microfinance institutions have comparative

advantage in terms of small transaction costs achieved through adaptability and

flexibility of operations. They are better equipped to deal with credit assessment of

the urban poor and hence to absorb the transaction costs associated with loan

processing. On the other hand, formal sector institutions have access to broader

resource-base and high leverage through deposit mobilization.

Therefore, formal sector finance institutions could form a joint venture with

informal sector institutions in which the former provide funds in the form of equity

and the later extends savings and loan facilities to the urban poor. Another form of

partnership can involve the formal sector institutions refinancing loans made by the

informal sector lenders. Under these settings, the informal sector institutions are able

to tap additional resources as well as having an incentive to exercise greater financial

discipline in their management. Microfinance institutions could also serve as

intermediaries between borrowers and the formal financial sector and on-lend funds

backed by a public sector guarantee.

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Weaknesses of Existing Microfinance Models

One of the most successful models discussed around the world is the Grameen

type. The bank has successfully served the rural poor in Bangladesh with no physical

collateral relying on group responsibility to replace the collateral requirements. The

brief idea about Grameen is given in the next part of this report. This model, however,

has some weaknessed. It involves too much of external subsidy which is not

replicable Grameen bank has not oriented itself towards mobilising peoples'

resources. The repayment system of 50 weekly equal instalments is not practical

because poor do not have a stable job and have to migrate to other places for jobs. If

the communities are agrarian during lean seasons it becomes impossible for them to

repay the loan. Pressure for high repayment drives members to money lenders. Credit

alone cannot alleviate poverty and the Grameen model is based only on credit. Micro-

finance is time taking process. Haste can lead to wrong selection of activities and

beneficiaries.

Another model is Kerala model (Shreyas). The rules make it difficult to give

adequate credit {only 40-50 percent of amount available for lending). In Nari

Nidhi/Pradan system perhaps not reaching the very poor. Most of the existing

microfinance institutions are facing problems regarding skilled labour which is not

available for local level accounting. Drop out of trained staff is very high. One

alternative is automation which is not looked at as yet. Most of the models do not lend

for agriculture. Agriculture lending has not been experimented.

Risk Management : yield risk and price risk

Insurance & Commodity Future Exchange could be explored

All the models lack in appropriate legal and financial structure. There is a need

to have a sub-group to brainstorm on statutory structure/ ownership control/

management/ taxation aspects/ financial sector prudential norms. A forum/ network of

micro-financier (self regulating organization) is desired.

19


5.0 Rural Market Contribution In Total Indian Economy

When you consider a rural market then the measure part of the rural buiness directly

or indirectly connected with agriculture. In this condition,whenever you study about

rural market you have to consider the impact of agriculture towards Indian Economy.

5.1 Profile of Rural people:-If we classify the rural people by their occupation, we

find cultivators as the predominant occupation group who account 72% of rural

households.

Distribution of rural households by their profession or business activity

Occupation Percentage of Households

Cultivators 72

Agricultural labourers 15

Other non-cultivators 11

Artisans 2

All house holds 100

However this group of cultivators contain both prosperous and well as marginal

cultivators within itself. This is rural India’s picture where 20% of rural households

(mostly cultivators) control about 66% of assets in rural India. In this way rural

population broadly divided into 6 categories:

1. Proprietors of land includes feudal tribute gatherers like zamindars, rich moneylenders and traders who acquire large tracts of land and companies or persons who own large populations.

2. Rich farmers who belong to dominant caste of the area.

3. Small peasants or marginal farmers owning uneconomic land holdings.

4. Tenant farmers operating on rented lands belonging to large land holders and working on small uneconomic land holdings.

20


5. Agricultural labourers who work on lands of landlords and rich farmers.

6. Artisans and others, which include the unemployed also.

5.2 Stastitical Profile Of The Rural Business in India

TABLE: VILLAGE & SMALL INDUSTRIES (Production)

Industry Unit # <-------------------- Production --------------->

1973-74 1979-80 1984-85 1985-86 1990-91 1995-96!

Traditional Industries:

Khadi M.Sq.Mtres 56.00 82.00 103.98 108.58 1088.8 1052.63

Value (Rs. crores)

33.00 92.00 157.62 186.30 285.95 353.49

Village Value 122.00 348.00 807.06 900.38 1994.06 356216

Industries (Rs. crores)

Handlooms Mill Meters 2100.00 2900.00 3600.00 3692.00 4888 7020

Value (Rs. crores)

840.00 1740.00 2880.00 2953.60 3633

SericultureLakh Kgs. of raw

29.00 48.00 76.70 78.97 12836 13909

silk

(value Rs.crores)

63.00 131.00 345.69 310.14 868

Handicrafts Value 1065.00 2050.00 3500.00 3800.00 11325 25200

(Rs. crores)

CoirLakh tonnes of

1.50 1.85 1.49 1.83 2.11 2.63

fibre

21


Value(Rs. crores)

60.00 86.00 100.50 139.51 161.00

Sub-total (A)Value (Rs. crores)

21.83 4447.00 7790.87 8289.93 16272.95 25553.489

Modern Industries:

Small Scale Industries

Value (Rs. crores)

7200.00 21635.00 50520.00 61228.00 155340 219968

Powerlooms Mill Meters 2400.00 3450.00 4930.00 5886** 10988 17201

Value (Rs. crores)

1980.00 3250.00 6423.00 7668.51 12337

Sub-total (B)Value (Rs. crores)

9180.00 24885.00 56943.00 64768.51 167677 219968

Total (VSI)(Rs. crores)

11353.00 29332.00 64733.87 73058.44 183949.95 245521.48

TABLE: VILLAGE & SMALL INDUSTRIES (Employment)

Industry Unit # <-------------- Employment (Lakh persons) -------->

1973-74 1979-80 1984-85 1985-86 1990-91 1995-96

Traditional Industries:

Khadi M.Sq.Mtres 8.84 11.20 13.05 15.00 14.15

Value (Rs. crores)

N.A.

22


Village Value 9.27 16.13 24.84 25.50 34.42

Industries (Rs. crores)

Handlooms Mill Meters 52.40 61.50 76.80 73.70 96.87 128.00

Value(Rs. crores)

SericultureLakh Kgs. of raw

12.00 16.00 20.43 53.60 52.00 59.50

silk

(value Rs.crores)

Handicrafts Value 15.00 20.30 27.40 28.00 43.84 65.50

(Rs. crores)

Coir Lakh tonnes of 5.00 5.59 5.89 8.00 5.46

fibre N.A.

Value (Rs. crores)

Sub-total (A)Value (Rs. crores)

102.21 130.72 168.41 203.80 246.74 253.00

Modern Industries: 39.65 67.00 90.00 96.00 124.3 152.61

Small Scale Industries

Value (Rs. crores)

Powerlooms Mill Meters 10.00 11.00 32.19 35.32 55.00 N.A.

Value (Rs. crores)

5.3 Agricultural Impact on National Economy:

Agriculture is a backbone of the Indian Economy. It is important to note that

importance is given to industrialization in last four decades, agriculture is largest

industry in the country.

23


5.4 Agricultural Production

The agricultural sector as a whole is estimated to record a

real growth rate of 6.6 per cent during 1998-99. The

overall growth in agricultural production during 1998-99

has been provisionally estimated at 6.8 per cent, as against

a negative growth rate of (-) 5.4 per cent during 1997-98.

In spite of the damage caused to the cotton crop in Punjab by excessive rains and

unexpected cyclonic storms in Andhra Pradesh in October 1998, cotton production

was estimated to be higher at 13.3 million bales in 1998-99, as against 11.1 million

bales produced in 1997-98. Similarly, the sugarcane output is expected to touch 282.7

million tonnes during 1998-99, compared to 276.3 million tonnes during 1997-98.

The production of oilseeds is also likely to be higher at 25.3 million tonnes during

1998-99, as against 22.0 million tonnes during 1997-98.

Foodgrains Production

The production of kharif foodgrains estimated at 102.5

million tonnes during 1998 showed a marginal growth of

1.4 per cent over the production achieved (101.1 million

tonnes) in 1997. The rabi foodgrains production for 1998-

99 is expected to go up to 98.4 million tonnes compared to

91.3 million tonnes in 1997-98. The foodgrains production is estimated to be 200.9

million tonnes in 1998-99 compared to 192.4 million tonnes during 1997-98,

recording an impressive increase by 4.4 per cent (Advance Estimates). During 1998-

99, efforts have also been initiated by various government agencies to double the food

production in the next decade.

During 1998-99 rice production is estimated to increase to 84.5 million tonnes from

82.3 million tonnes produced in 1997-98, while the wheat production during 1998-99

is estimated at 70.6 million tonnes, compared to the previous year's level of 65.9

million tonnes, an increase by 7.1 per cent. Production of pulses in 1998-99 is

expected to be around 15.2 million tonnes, as against 13.1 million tonnes during

1997-98.

24


Agricultural Production-Major crops (in million tonnes)

Year 1995-96 1996-97 1997-98 1998-99

Crops Achiev-ement

Target Achievement

% change over

1995-96

Target Achiev-ement

% change over

1996-97

Target

Produ-ction

(Adv. Est.)

% change over

1997-98

Rice

77.0 81.0 81.7 6.1 83.0 82.3 0.7 84.2 84.5 2.7

Wheat

62.1 65.0 69.4 11.8 68.5 65.9 (-) 5.0 70.0 70.6 7.1

Coarse Cereals

29.0 29.0

32.5

34.1 17.6 33.5 31.1 (-) 8.8 34.3 30.6

Pulses

12.3 15.0 14.2 15.4 15.0 13.1 (-) 7.7 15.5 15.2 16.0

Total Foodgr-ains

180.4 193.5 199.4 10.5 200.0 192.4 (- 3.5 204.0 200.9 4.4

Oilseeds

22.1 23.0 24.4 10.4 25.5 22.0 (-) 9.8 27.0 25.3 15.0

Sugarca-ne

281.1 270.0 277.6 (-) 1.2 280.0 276.3 (-) 10.5 300.0 282.7 2.3

Cotton* 12.9 13.0 14.2 10.0 14.8 11.1 (-) 21.8 14.8 13.3 19.8

* Million bales of 170 kg. each.

Agricultural Exports and Imports

The share of exports of agriculture and allied products in the total exports

had declined marginally, from 18.9 per cent during 1997-98 to 17.8 per cent during

1998-99. During the same period, the value of exports of agriculture and allied

products amounted to US$ 5,994 million, showing a decline of 9.6 per cent from a

level of US$ 6,634 million in 1997-98. Major items of agricultural exports were

25


basmati and non-basmati rice, raw cotton, meat, oilmeals, tea, coffee, unmanufactured

tobacco, cashew, spices, fresh and processed fruits and juices, vegetables and marine

products, etc.

Agricultural imports related to food and other items constituted 5.8 per cent of

the total imports during 1998-99, as against 4.0 per cent during corresponding period

of the previous year. Important agricultural items imported during the year were

vegetable oils (edible), sugar, wheat and fruits & nuts. During 1998-99, the volume of

agricultural imports aggregated US$ 2,409 million, as against US$ 1,678 million

during the corresponding period of the previous year, recording a growth of 43.6 per

cent.

Agricultural markets:

There were 7,062 agricultural regulated markets operating in India, 162

agricultural commodities considered for grading standards and 3,253 cold storage

with capacity of 8.73 million tonnes as on end March 1998. With the introduction of

economic reforms, futures trading was permitted in coffee, cotton, castor oil and jute

goods during 1997-98. Earlier futures trading were permitted in gur, potato, castor

seed, pepper, turmeric, etc. Further, during 1998-99, futures trading was introduced in

oilseeds, oil cakes and edible oils. A network of co-operatives at the national, state

and primary level operates to help farm producers with access and further reach for

sale of produce. As per the Annual Report (1998-99) of Ministry of Agriculture,

Government of India, the value of agricultural produce marketed through co-

operatives has registered a remarkable growth of 21.6 per cent, from Rs.9,500 crore in

1994-95 to about Rs.11,551 crore in 1995-96.

26


5.5 Agriculture role in Indian Economy

Agriculture for Industrial Development:

Indian agriculture has been the source of supply of raw materials to our

leading industries. Cotton and jute, textiles, sugar, plantations— all these directly

depend on agricultural output. There are many industries, which depend on

agriculture indirectly. Many of our small scale and cottage industries like handlooms,

oil crushing, etc depend on agriculture for their raw materials.

But then, in recent years, agriculture is losing its significance to industries

such as iron and steel, engineering, chemicals, etc. However in recent years, the

importance of food processing industries is being increasing recognized both for

generation of income and generation of employment.

Agriculture in economic planning:

Importance of agriculture in the national economy is indicated by many facts.

For example, agriculture is main support for transport sector as railways and

roadways secure bulk of their business from the movement of agricultural goods.

Further it is seen that good crops implying large purchasing power with the farmers

lead to greater demand for manufactures and therefore better prices. In other words

prosperity of farmers is also the prosperity of the industries and vice-versa.

Agriculture is backbone of the Indian economy and the prosperity of agriculture can

also stand for the prosperity of the economy. At the same time it is true that per

capita productivity in agriculture is less than in the industry. Many scholars think that

so long as the Indian Economy is dominated by agricultural activity, per capita

income will not rise to an extent, which is necessary and desirable.

27


5.4 Capital Formation in Agriculture

The Gross Capital Formation in agriculture, at 1993-94 prices, increased from

Rs.18,214 crore in 1994-95 to Rs.20,995 crore in 1997-98. The share of private sector

investment in agriculture has been registering an increasing trend over the last four

years. It increased from Rs.13,244 crore in 1994-95 to Rs.15,555 crore in 1996-97 and

further to Rs.16,579 crore in 1997-98. The rising trend in the private investment in

agriculture is attributable mainly to accelerated flow of institutional credit. It is

explain graphically as follows:

The public sector capital investment in agriculture which has been declining from Rs.

4,970 crore in 1994-95 to Rs.4,776 crore in 1995-96 and further to Rs.4,347 crore in

1996-97 showed an increase from Rs.4,347 crore in 1996-97 to Rs.4,416 crore (at

1993-94 prices) in 1997-98.

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6.0 Changing Scenario Of Rural Credit

Indian rural credit structure is regarded all over the world as quite unique and

innovative. It required a careful feasibility study to understand rural structure.

Evolved over a period of last eight decades, it can perhaps claim the honour of being a

very important constituent of the most complex rural economy in the third world

countries. In India there is different caste, religion of people living together, the

language of every state, caste is different than each other. The land, weather, water

availability is different in different area, which give lots of problem in applying

various policies. One of the distinguishing features has been its ability to adapt itself,

without much turmoil and stress, to the socio-economic dynamics of the rural

scenario. Over the years it has developed into a multi faceted structure to service

almost the entire cross-section of rural population spread thoughtout the length and

breadth of our country.

In rural areas the indigenous moneylenders continued to be the banker in need.

Since these money-lenders had virtual monopoly in supplying credit in rural areas, the

poor were often subjected to exploitation. With the overriding monopoly the money-

lenders often resorted to usurious practices--- levying the exobirant rate of interest,

demanding gift/contribution to the temple funds out of the amount of credit,

demanding advance interest, etc. Besides, often the money-lenders resorted to

unethical practices like taking thumb impression on a blank paper for inserting some

arbitrary amount, manipulation of account to inflate the balance due. The poor

villager could not escape the clutches of these indigenous bankers as they had to keep

on borrowing from them under distress since they were the only source of credit for

all type of requirements--- production and consumption. The conditions of the poor

peasantry were perpetually so pathetic that an adage—“they are born in debt, they live

in debt & die in debt” was the usual description of their plight.

To mitigate the sufferings of the poor farmers the infrastructure of co-

operative credit was brought into being in the matter of agricultural finance. The Co-

operatives Societies Act of 1904 provided the formation of primary agricultural co-

operatives credit societies. Later in 1912, the co-operative movement was extended to

formation of non-agricultural co-operative credit societies also.

29


The commercial banks on the other hand were participating in rural banking

only as an alien since they were programmed for meeting the financial requirements

of trade and commerce. In a view of the huge gap in rural credit from institutional

sources and in a bid to meet the growing needs of financial assistance to modernizing

farming, the government adopted the multi-agency approach. This was intended to

increase the farm productivity and thus raise the living standards of the poor farmers.

The formation of State Bank Of India which was formed my taking over the Imperial

Bank of India by the Government was with a objective of “extension of banking

facilities on a large scale more particularly in the rural and semi-urban areas and for

other diverse purposes.” This was an important milestone in the banking of rural

India. Momentum was gained more prominently after the concept of “Social control”

over commercial banks was propagated in 1967. With the setting up of National

Credit Council in 1968 to asses the demand for bank credit for various sectors of

economy and to determine priorities for the grant of loans, etc. it came to be felt

increasingly that banks should become instruments of economic and social

development.

To this effect nationalization of 14 major Indian commercial banks in July

1969 can be described as a major landmark in the history of Indian financial system

and a big leap towards rural banking. With emphasis on lending to priority sector—

agriculture, rural artisans and handicrafts, small scale industries, small business and

retail trade and other weaker sections of the society— rural banking came to the fore.

The step was initiated to utilize effectively the professional skills and acumen

developed by the banking system for achieving the basic objective of balanced socio-

economic development.

Both the Co-operative and Commercial banks made substantial development

in providing credit to agricultural and rural economy. The total share of co-operatives

in total borrowing of the rural household grew from 5,204 in july 1964 to 12,065 in

Dec 1974. But still it was noticed that two-thirds of the total credit was taken from

non-institutional sources. The demand for rural credit was on the increase owing to

adoption of modern agriculture, which increasingly required larger amounts of capital

both short term & long term.

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6.1 Structure of Rural Credit In India

“In the village itself no form of credit organization will be suitable except the Co-

operative Society—Co-operation has failed, but co-operation must succeed.”

--All-India Rural Credit Survey

National Policy & Its’s Aim:

Agricultural credit is one of the most crucial inputs in all agricultural development

programmes. From olden days private money-lenders are main sources of credit

towards agricultural or rural products. After independence multi-agency approach

consisting of co-operatives, commercial banks and regional rural banks are adopted

due to its cheaper and adequate credit to farmers. The major policy in the sphere of

agricultural credit has been its progressive institutionalization for supplying

agriculture and rural development programmes with adequate and timely flow of

credit to assist weaker sections and less developed regions.

The basic aim of this Policy are as follows:-

a. To ensure timely & sufficient flow of credit to the farming sector;

b. To avoid money-lender chain from rural scene.

c. To reduce regional imbalance through their credit facilities.

d. To provide larger credit support to areas covered by special programmes. e.g.

National Oilseeds Development Project.

31


Need of Credit for Farmers:-

Farmers need finance mainly for the following things—to pay current

expenses of cultivation such as the purchase of seed, manures, etc.; the purchase of

cattle, implements and raw materials; acquire new land; or improve land by irrigation,

drainage, wedding and planting; pay up old debts to build and repair houses, to

purchase food stuffs and other personal necessaries; pay land revenue to the

Government; meet expenses connected with marriage and other social events in the

family, but jewellery and conduct law suits. The credit need of agriculturists can,

therefore, be broadly divided into directly productive & indirectly unproductive

expenses. Unfortunately fact is that underdeveloped and old countries are in need of

both the types of credit.

32


7.0 Sources Of Rural Credit

There are mainly two sources available to the farmers private agencies &

institutional. Private agencies means relatives, landlords, agricultural moneylenders,

professional private moneylenders, traders & commission agents, others. Where

institutional agencies are a. commercial banks, b. the state bank, c. co-operative

societies & land mortgage banks d. agricultural finance Corporation.

Private agencies giving 93% of the total credit requirements in 1951-52 and

institutional sources including government giving for only 7% of the total credit

needs. But in 1960-61, the share of private agencies came down to 81.3 which was

as follows:- Relatives 8.8%, Landlords 0.6%, Agricultural moneylenders 36.0,

Professional private moneylenders 13.2%, traders & commission agents 8.8%, other

sources 13.9. that time institutionals sources were 18.7 and the break up was

government 2.6%, Co-operative 15.5%, Commercial banks 0.6%. As per the All India

Debt and Investment Survey (1981), estimated that the share of private agencies had

further slumped to about 37% & share of institutional credit jumped to 63% break up

was 30% of co-operative & 29% of commercial banks. Government & Reserve Bank

of India is supporting commercial bank & co-operatives to meet the growing demand

for agricultural credit.

8.0 Private Agencies Sources:

Money lenders: Though there are drawbacks, moneylenders are by far the most

important source of agricultural credit in India. That we have already seen before,

It is therefore, clear that the basic problem of the agricultural economy of India is

the huge indebtedness of farmers and their exploitation by private moneylenders.

For that government of India make provisions in act as follows a. maintenance of

accounts in prescribed forms, b. furnishing of the receipts and periodical

statements, c. fixing of maximum rates of interest, d. Protection of the debtors

from molestations and intimidations, e. licensing of moneylenders, and f. penalties

for infringement of the provisions. The basic objectives of such legislative

enactments can be stated as: I. To bring about an improvement in the terms on

which private credit was available to agriculturists and to place legal restrictions

on the unreasonable exactions of moneylenders, II. To enable civil courts to do

33


greater justice as between lenders and borrowers than was possible in the

prevailing circumstances under the ordinary Code of Civil Procedure.

Traders & commission agents: Traders & commsiion agents supply funds to

farmers for productive purposes much before the crops mature. They force the

farmers to sell their produce at low prices and they charge a heavy commission for

themselves.

Landlords & others: Farmers, predominantly small farmers & tenants, depend

upon landlords and others to meet their financial requirements. This source of

finance has all the defects associated with moneylenders, traders and commission

agents. Interests rates are exorbitant. Often the small farmers are cheated and

their lands are appropriated. What is worse, this source of finance is becoming

more important—from 3.3 percent in 1951-52 to 14.5 percent in 1961-62 but

declined to 8.8 percent in 1981.

9.0 Institutional sources of credit:

These are the funds made available by co-operative societies, commercial banks,

& regional rural banks & state governments also. The need for institutional credit

arises because of the weakness or inadequacy of private agencies to supply credit to

farmers. Private credit is defective because:-

I. It is based on profit motive &, therefore, it is always exploitative.

II. It is very expensive and is not related to the productivity of land.

III. It does not flow into most desirable channels and to most needy persons.

IV. It is not available for making agricultural improvements—and much of the

necessary improvements are not undertaken as funds are not available for long

periods at low rates of interest

V. It is not properly integrated with the agriculturists other needs.

Problems in Institutional sources:

34


The government was of the view that multi-agency approach to rural credit was the

real solution to the emancipation of small farmers from the clutches of the money-

lenders. But withing a short period, number of problems have surfaced such as:

a) There was no coordination between different agencies operating in the same

area and, as a result, there was multiple financing, over-financing in some

areas and under-financing in others.

b) Despite the adoption of lead bank scheme and district credit plans, the

different agencies often failed to formulate and develop meaningful

agricultural credit programmes in given blocks and districts.

c) Despite guidelines issued by RBI, different agencies adopted different

procedures and policies in the matter of providing loans and their recover.

The result was unnecessary competition among the different agencies.

d) There were practical problems in the recovery of loans when different

agencies had lent to the same person against the same securities. Ultimatlely,

there were heavy overdues.

The major problem faced by lending institutions, particularly co-operatives, is

the most unsatisfactory level of overdues. The ration of overdues to that of demand is

around 40 to 42 percent in the case of co-operatives and 47 percent in the case of

Regional rural banks. Accordingly, health of rural credit institutions, both co-

operative and commercial banks, is in a very sad state in several parts of the country.

1. Co-operative credit societies [9.1]

It is the cheapest and the best source of rural credit. The rate of interest is low. Since

1951, the co-operative credit movement has started helping the farmers in a big

manner. During 1989-90 there were about 88,000 primary agricultural credit societies.

The stranglehold of the moneylenders on the peasants is not met by the co-

operatives. Besides, the small farmers find it difficult to meet all their credit

requirements from the co-operatives.

Primary Agricultural Credit Society:

35


The co-operative movement was started in India largely with a view to providing

agriculturists funds for agricultural operations at low rates of interest and protect them

from the clutches of moneylenders. The organization of the co-operative credit for

short period may be briefly outlined as follows:

A co-operative credit society, commonly known as the primary agricultural

credit society (PACS) may be started with ten or more persons, normaly belonging to

a village. The value of each share is generally nominal so as to enable even the

poorest farmer to become a member. The members have unlimited liability, that is

each member is fully responsible for the entire loss of the society in the event of

failure. This will mean that all the members should know each other intimately. The

management of the society is under an elected body consisting of President, Secretary

& Treasurer. The management is honorary, the only paid member being normally.

Loans are given for short periods, normally for one year, for carrying out agricultural

operations, and the rate of interest is low. Profits are not distributed as dividend to

shareholders but are used for the welfare of the village. In the construction of a well,

or maintenance of a school, and so on. The usefulness of the primary credit societies

has been rising steadily. In 1950-51, it advanced loans worth Rs.23 crores; this rose

to Rs. 200 crores in 1960-61, and to Rs. 4200 crores in 1988-89.

Financial Strength of PAC’s.: To make all primary agricultural societies viable and

ensure adequate and timely flow of co-operative credit to the rural areas the Reverse

Bank of India, in collaboration with State governments, had been taking a series of

steps to strengthen weak co-operative banks and to correct regional imbalances in co-

operatives development. Steps were taken to reorganize viable PACs and for

amalgamation of non-viable societies with farmer’s service societies or large sized

multipurpose societies. These efforts are being intensified by providing larger funds

to weak societies to write off their losses, bad debts and overdues.

PAC’s and Weaker Sections: The major objective of the co-operative development

programmes is to ensure that the benefits of co-operative activities flow increasingly

to weaker sections including scheduled castes and scheduled tribes. The government

seeks to achieve this through expanding the membership of the weaker sections in the

existing PACs and ensuring larger flow of funds and services to them. In the tribal

36


areas, large sized multipurpose societies are being organized mainly for the benefit of

the tribals.

Co-operative Central Banks: These are federations of primary credit societies in

specified areas normally extending to the whole district meance they are sometimes

called as district co-operative banks. These banks have a few private individuals as

shareholders who provide both finance of management. Their main task is to lend to

village primary societies, but they were expected to attract deposits from the general

public. But the expectation has not been fulfilled and many of the co-operative

central banks act as intermediaries between the State Co-operative Bank on the one

hand and the village primary credit societies on the other.

State Co-operative Bank: This bank forms the apex of the co-operative credit

structure in each state. It finances and controls the working of the central co-

operative banks in the State. It serves as a link between the Reserve Bank of India

from which it borrows and the co-operative central banks and village primary

societies. The State Co-operative Bank obtain its working funds from its own share

capital and reserves, deposits from the general public and loans and advances from the

Reserve Bank now NABARDhas formulated a scheme for the rehabilitation of weak

central co-operative banks. NABARD is providing liberal assistance to the State

Governments for contributing to the share capital of the weak central co-operative

banks selected for the purpose. The State Co-operative bank is not only interested in

helping the co-operative credit movement but also in promoting other co-operative

ventures and in extending the principles of co-operation.

Problem of overdues to Co-operative credit

A highly distressing fact of co-operative credit is the heavy overdues of co-

operative credit institutions, now estimated between Rs.9,000 crores to Rs.10,000

crores. According to the RBI study team on overdues “lack of will and discipline

among cultivators to repay loans was the principal factor responsible for the

prevalence of overdues of co-operatives. Defective lending policy pursued by co-

operatives, the apathy of management in taking quick action against recalcitrant

members and absence of favourable climate were other contributing factors.”

37


Apart from these commonly factors normally responsible for a high level of

overdues, intervention of external forces such as loan waivers, concession in various

forms towards repayment of principal and interest has also affected the recovery

performance of credit institutions to a significant extent. The problem is further

aggravated on the account of the state governments in ability to meet the financial

commitments to co-operative banks.

In recent years, the farmers are getting organized and one of their chief demands

of the farmer union is to cancel their debts to the co-operative societies and banks.

States have meekly surrended to such demands to write off the debts in a matter of

extreme concern, as it hampers the recovery of dues from the farmers. The problem

of loan overdues is a matter of serious concern, as it affects the recycling of funds and

credit expansion on one hand and economic viability of the lending institutions,

specially the co-operatives and RRBs, on the other.

2. Land development banks[9.2]: The need for long-term loan is being satisfied

by land development banks (formerly the were called land mortgage banks).

The objective of such banks is to provide long-term credit to the cultivators

against the mortgage of their lands. The loans from the land development banks

are quite cheap and are spread over a long period of 15 to 20 years. It is,

therefore, convenient ot borrow from these banks if previous debts have to be

cancelled or if additional land is to be purchased or if improvements have to be

made. Though land development banks have been making considerable

progress in recent years in this country, they have not really contributed much to

the financial need of the farmers. Most farmer are not even aware about this

bank & 70% of the land development banks are located in the three South Indian

States of Tamil Nadu, Andhra Pradesh & Karnataka. The loan sanction by this

bank has been increase annually from Rs. 3 crores to Rs. 770 crores between

1950-51 and 1989-90. major drawback of this bank is they lend against the

security of land, and big landlords have taken advantage of them and, by and

large, small peasants have not benefited from them.

The Structure of LDBs:- The long term credit structure consists of the central

land development banks (generally one for each State) and primary land

38


development banks. In some States, there are no primary land developments

banks but in their place, there are branches of central land development banks.

Problems of LDBs:- Land development banking is yet to take strong roots in

India barring few States. However, LDBs have contributed in large measure to

agricultural development by lending specially for minor irrigation. All their

loans are for productive purposes benefiting mostly the small farm holders.

Though land development banking has made considerable progress in recent

years, it has not really contributed much to the improvement of the financial

position of the farmers. A large number of factors are responsible for the

relative ineffectiveness of LDBs.

Overdues Problems:- mounting overdues in most of the LDBs have crippled

the structure badly, in recent years. Overdues at the level of primary land

development banks have been put between 42 to 44 percent. Overdues have

caused innumerable financial problems besides limiting the capacity of LDBs to

lend and operate as viable units. The financial discipline imposed on the banks

in the matter of eligibility to undertake fresh lending based on recovery

performance has been the main limiting factor quantitative growth of credit

operations. To some extent, the banks themselves are to be blamed for this

predicament due to faulty loaning policies, inadequate supervision, over-

utilisation of loans, ineffective measures for recovery etc. Which have

contributed to the deterioration in recovering the loans.

3. Commercial Banks[9.3]: The commercial banks in India have long confined

their operations to urban areas, receiving deposits from the urban public and

financing trade and industry in urban public and financing trade and industry in

urban areas. Commercial banks are extending financial support to agriculture

both directly and indirectly Direct finance is extended for agricultural operations

for short and medium period. Indirect finance to farmers is made through

providing advances for the distribution of fertilizers, other inputs, etc, and also

through financing primary agricultural credit societies. Financing of investment

in agriculture is a major aspect of the farm credit activities of banks Credit needs

of service units providing services for warehousing, processing, marketing,

transporting, and repairing of tractors etc.

39


Direct Finance by Commercial Banks:- At the time of bank nationalization, it

was clearly conceded that the commercial banks did not have the necessary

experience or the personnel to deal with the farmers directly. While the co-

operative had been specializing in rural credit since the beginning of the century.

Even then the nationalized banks were expected to go vigorously in the support

of the farmers in general and the small cultivators in particular. In the initial

stages, for obvious reasons the nationalized banks concentrated their attention

on large cultivators and other special category farmers such as those engaged in

raising high-yielding varieties of food-grains. At present short term crop loans

accounted for nearly 40 to 45% of the total loans disbursed by the commercial

banks to the farmers.

Term loans for varying periods for purchasing pump-sets, tractors and

other agricultural machinery, for construction of wells and tube-wells, for the

development of fruit and garden crops, or leveling and development of land, etc.

are provided. These term loans accounted for about 35 to 37% of the total loans

disbursed by commercial banks. Finally, commercial banks extend loans for

such activities such as dairying, poultry farming, piggery, bee keeping, fisheries

and others— these loansaccount for 15 to16%. Region wise, southern region

accounts for the bulk of credit disbursed by commercial banks viz. 52% of the

total credit extended.

Indirect Finance by Copmmercial Banks: Even though the scope for direct

financing by commercial banks would be limited for some years to come, there

is a considerable scope for indirect financing by commercial banks. For

instance, commercial banks are financing co-operative societies to enable them

to expand their production credit to the farmers. More especially they

increasingly finance co-operatives engaged in marketing and processing of

agricultural produce or in the activities ancillary to agriculture such as dairy

farming, poultry farming, etc. In this connection, the Stated Bank of India and

its subsidiaries are already playing an active role in financing co-operative

marketing and processing. Commercial banks are providing indirect finance for

the distribution of fertilizers and other inputs.

40


Commercial banks extend credit to manufacturing or distribution firms

and agencies and co-operatives engaged in the supply of pump-sets and other

agricultural machinery on the hire-purchase basis. They finance the operations

of the Food Corporation of India, the state governments and others in the

procurement, storage and distribution of food grains.

Finally, commercial banks increasingly subscribe to the debentures of

the central land development banks and also extend advances to the latter. This

enables land development banks to expand their medium and long-term

advances to farmers for the purpose of land improvement and land development.

Commercial Banks & Small Farmers: It has been estimated that nearly 70

percent of farmers owning less than 2 hectares of land are not getting bank

credit; only large landowners have been found creditworthy and suitable for

banks advances. But such a situation cannot continue for long. Under the

direction of the Planning Commission, Small farmers Development Agencies

have been set up to identify small farmers and work out economically viable

schemes of agricultural development. Commercial banks have to group them

into various categories for credit support so as to enable them to become viable

cultivators. For instance, in areas where the subsoil water table is high, the

small cultivator has to be helped by banks to convert his dry holding into wet

holding. With pump set loan, the cultivator can change the cropping pattern into

double or even multiple cropping activity. As regards small cultivators near

urban areas and with irrigation facilities, commercial banks can help them to go

in for poultry farming and maintaining one or two vegetable cultivation or

combine it with small milch cattle.

Problems of Commercial Banks in Agricultural Credit:- The credit needs of

the agricultural sector in the next few years are estimated to rise to Rs.50,000 to

Rs.60,000 crores. To meet the needs is an enormous task, and responsibility

will have to be borne by co-operatives and commercial banks. As resources

available to commercial banks in the agricultural sector will naturally be limited,

it is important that every commercial bank attempts to make optimum use of its

limited resources in this sector. In the field of financing of agriculture, the

problem is not merely quantitative but also of coverage vis-à-vis the

41


organization and the personnel available to the nationalized banks. The majority

of the rural population consists of small farmers. Further, there are 5,50,000

villages spread throughout the country. To reach all of them with only about

47,000 banking offices is, no doubt, a stupendous task. Even with the

completion of branch extension programmes of the commercial banks now in

hand or those which may be undertaken during the next 5 to 10 years,

commercial bank may not be in a position to cover many of the villages.

Moreover in recent years, the rural branches of commercial banks in general and

branches of RRB in particular, have been under severe financial strain on

account of higher transaction cost involved in handling of large number of small

size loan accounts and somewhat lower interest income as a result of

concessional rate of interest on small size loans.

The lower proportion of current deposits in total deposits of rural

branches has also placed them at a disadvantage with regards to cost of

resources. Finally, the presence of overdues, particularly after the

implementation of Agricultural and Rural Credit Debt Relief Schemes, 1990 has

further adversely affected the viability of rural branches of commercial banks.

Under these conditions, if the development of agriculture is not to

suffer for want of credit and if there has to be some improvement in the lot of

innumerable small farmers, new dimensions will have to be given to schemes of

financing agriculture.

4. Regional Rural Banks [9.4]: These banks were first set up in 1975 specifically

to give direct loans and advances to small and marginal farmers, agricultural

labourers, rural artisans and other of small means. The loans are given for

productive purposes. There were 196 RRBs which have been lending around

Rs. 3600 crores annually by way of loans to rural people. Over 90 percent of

the loans of RPBs are given to the weaker sections in rural areas. The regional

banks, though basically scheduled commercial banks, differ from the latter in

certain respects:

The area of regional rural banks is limited to a specified region comprising

one or more districts of a State.

42


The regional rural banks grant direct loans and advances only to small and

marginal farmers, rural artisans and agricultural labourers and other of small

means for productive purposes.

The lending rates of the regional rural banks should not be higer than the

prevailing lending rates of co-operatives societies in any particular State. The

sponsoring banks and the Reserve Bank of India provide many subsidies and

concessions to RRBs to enable the latter to function effectively

Concessions to RRBs: From the beginning, the sponsor banks have continued

to provide managerial and financial assistance to RRBs and also other

concessions such as lower rate of interest on the latter’s borrowing from sponsor

banks. Further, the cost of staff deputed to RRBs and training expenses of RRB

staff are borne by the sponsor banks. The Reserve Bank of India has been

granting many concessions to RRBs.

Progress of RRBs: There are now 196 regional rural banks in 23 States with

14,500 branches. As at the end of September 1990 the regional rural banks had

advanced Rs.3,560 crores by way of short-term crop loans, term loans for

agricultural activities, for rural artisans, village and cottage industries, retail

trade and self employed, consumption loans etc. Nearly 90 percent of the loans

of RRBs, were provided to the weaker sections. State wise Uttar Pradesh found

large number of offices.

Objectives of RRBs:

RRBs had followed instructions given by RBI and Government of India

regarding loan policies, procedures, etc.

The basic aim of setting up RRBs viz, developing the rural economy by

providing credit for the development of agriculture, trade, commerce industry

and other productive activities in rural areas, was being fulfilled and

RRBs had successfully maintained their image as a small man’s bank by

confining their credit facilities to the target groups viz, small marginal farmers,

agricultural labourers, artisans and small enterprises for productive activities.

43


The recovery position on the whole was not satisfactory.

Problems in functioning of RRBs:

a. On account of the many restrictions place on the business they can

undertake, RRBs have lowearning capacity.

b. The wage and salary scales of RRBs have been rising and, in fact, with the

recent award of a tribunal, their scales would approximate those of

commercial banks; with the increase in salary scales, an important rationale

for the setting up of RRBs has ceased to exist.

c. The sponsoring banks are also running their own rural branches in the very

area of operations of the RRBs; this has given rise to certain anamolies and

to avoidable expenditure on controls and administration.

5. Reserve Bank of India [9.5]:

RBI had shown keen interest in agricultural credit and maintained a separate

department for this purpose. RBI extended short-term seasonal credit as well

as medium-term and long-term credit to agriculture through State level co-

operative banks and land developments banks. RBI had also set up the

Agricultural Refinance Development Corporation (ARDC) to provide

refinance support to the banks to promote programmes of agricultural

development, particularly those requiring term credit. With the widening of

the role of bank credit from “agricultural development” to “rural

development” the Government propo9sed to have a more broad-based

organization at the apex level to extend support and give guidance to credit

institutions in matter relating to the formulation and implementation of rural

development programmes. A National Bank for Agriculture and Rural

Development (NABARD) or National Bank was, therefore, set up to take over

the agricultural credit functions of RBI on the on hand and the refinance

functions of ARDC on the other.

44


9.5.a N A B A R D: an Overview-

NABARD is an apex institution accredited with all matters concerning

policy, planning and operations in the field of credit for agriculture and

other economic activities in rural areas.

NABARD operates throughout the country through its Head Office at

Mumbai, 25 Regional Offices and on Sub-Office, located in the capitals of

all the states/union territories. It also has 4 training establishments.

It is an apex refinancing agency for the institutions providing investment

and production credit for promoting the various developmental activities in

rural areas.

It takes measures towards institution building for improving absorptive

capacity of the credit delivery system, including monitoring, formulation

of rehabilitation schemes, restructuring of credit institution, training of

personnel, etc.

It co-ordinates the rural financing activities of all the institutions engaged

in developmental work at the field level and maintains liaison with

Government of India, State Governments, Reserve Bank of India and other

national level institutions concerned with policy formulation.

It prepares, on annual basis, rural credit plans for all districts in the

country; these plans form the base for annual credit plans of all rural

financial institutions

o It undertakes monitoring and evaluation of projects refinanced by it.

o It promotes research in the fields of rural banking, agriculture and rural

development.

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10.0 Schemes & Facilities from the various banks

10.1 NABARD:-

RURAL NON-FARM SECTOR FINANCE SCHEME

Rural Non Farm Sector (RNFS) holds the key to faster

economic development of the country. It has potential and

promise for generating employment and increased income

in the rural areas. Hence, NABARD has identified

financing, development and promotion of RNFS as one of

its thrust areas.

Schemes from NABARD for non-farming sector:

1. COMPOSITE LOAN SCHEME (CLS) - under ARF

Borrowers: Rural artisans, handicraftsmen, small entrepreneurs, groups of

individuals, partnership firms, co-operative societies, NGOs, etc.

Refinance ceiling -Maximum of Rs. 10 lakh per borrower.

Repayment period -3 to 10 years with suitable need based moratorium not exceeding

18 months.

Eligible activities -All manufacturing, processing, and approved service activities.

46


2. INTEGRATED LOAN SCHEME (ILS) - under ARF

Borrowers: Individuals, artisans, groups of individuals, associations (formal and

informal), proprietary/ partnership firms/ co-operative societies, registered

institutions/ trusts, voluntary agencies, private and public limited companies, etc.

Refinance Repayment period 3 to 10 years with suitable need based moratorium not

exceeding 18 months.

Eligible activities Manufacturing, processing and approved service activities in the

cottage, village and tiny industry sector and modernization/ renovation/ expansion/

diversification of existing units.

3. Small Road and water Transport Operators SCHEME (SRWTO) - Under

ARF

Borrowers Individuals, groups of individuals, including partnership/ proprietary

firms and co-operative enterprises. The borrowers should be from the rural areas and

should utilise the vehicle mainly for transportation of Rural Farm and Non-Farm

Products and inputs and passengers to/ from marketing centres. The borrower or his

employee should possess a valid driving licence and the vehicle should be duly

registered with the Regional Transport Authority as public transport vehicle.

Refinance ceiling Maximum of Rs.15 lakh per borrower

Repayment period 5 years with moratorium of 6 months.

Eligible vehicles Transport vehicles including Light Motor vehicles, Jeeps,

Autorickshaws, Water transport units (boats, launches etc.)

4. Schemes under pre - sanction procedure

(i) Term Loan to SSI units (through CBs & Scheduled PCBs )

Borrowers : Individuals, Proprietary / Partnership concerns, Private/ Public Limited

Companies, Promotional/ Developmental Organisations, State Level Federations/

Corporations, Joint Sector Undertakings.

47


(ii) Term Loan to Industrial Co-operatives (through SCBs)

Borrowers : Industrial Co-operative Societies identified as viable/ potentially viable

by the State Government.

iii) Project Finance for Agro-Industries (through CBs, Scheduled PCBs and

SCBs)

Borrowers

1. State level corporations such as agro-industries corporations, forest/ tribal

development corporations, KVIC/ KVIB, state level cooperative societies/

federations, co-operative marketing/ processing and industrial societies, joint

sector undertakings, registered societies in KVIC/ KVIB fold.

2. Public/ private limited companies, partnership firms and proprietary concerns.

Repayment period: 3 to 10 years with moratorium of 12 months.

5. Soft Loan Assistance Scheme for Margin Money

Beneficiaries and purpose: Entrepreneurs having necessary talent/ skills, but who

lack monetary resources to meet the margin requirements stipulated under the relevant

schemes covering both ARF and prior sanction.

Purpose To set up new units as well as for modernisation/ renovation/ expansion/

diversification of existing units even if the units were not initially refinanced by the

Bank.

Eligibility criteria Refinance will be available on the banks' satisfying the eligibility

criteria based on recovery performance/the position of NPAs, as prescribed by

NABARD from time to time.

FARM SECTOR FINANCE SCHEME:

A) Refinance Assistance for financing farm mechanization

i) Tractors:

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(a) The quantum of refinance in respect of financing for acquisition of second tractor

has been enhanced from existing level of 40% to 90% ( 95% in case of SCARDBs) of

the loan amount as in the case of first tractor.

(b) Though the minimum land holding required for financing tractors is 8 acre

perennially irrigated land, necessary discretion has been given to banks to evolve their

own area specific norms, if need be, and report such norms evolved by them to the

concerned RO of NABARD.

(c) Refinance facility for financing purchase of second hand tractors has been

extended to Gujarat in addition to Punjab, Haryana and Rajasthan.

ii) Power Tillers:

(a) Though the minimum land holding required for financing power

tillers is 6 acres of perennially irrigated land, necessary discretion

has been given to banks to evolve their own area specific norms, if

need be, and report such norms evolved by them to the concerned

RO of NABARD.

(b) Banks have also been advised to give focused attention on

financing power tillers by preparing a three year banking plan for a

compact area for the benefit of the small farmers.

C) Swarnajayanti Gram Swarozgar Yojana (SGSY)

SGSY, formed by restructuring ongoing self employment programmes, viz. IRDP,

TRYSEM, DWCRA, etc., is under implementation from 01 April 1999. The

programme envisages formation of SGSY Groups and their linkage with the banks.

Individuals as also SGSY group members, below poverty line are assisted under the

programme

D) Scheme for setting up of Agriclinic and Agribusiness centers

In pursuance of the announcement made by the Union Finance Minister in the budget

speech for the year 2001-02, National Bank in consultation with the Ministry of

49


Agriculture, GOI and select banks formulated a scheme for financing Agriculture

Graduates for setting up Agriclinics and Agribusiness Centres The scheme aims at

supplementing the existing Extension Network to accelerate the process of technology

transfer to agriculture and supplement the efforts of State Agencies in providing

inputs and other services to the farmers.

E) Scheme for financing farmers for purchase of land for Agricultural purposes

In response to the Hon'ble Union Finance Minister's emphasis on the need to step up

priority sector lending and to examine financing farmers for purchase of land for

agricultural purposes, the Working Group constituted by Indian Banks Association

formulated a above scheme in consultation with the Government of India, RBI and

NABARD.

The objective of the Scheme is to finance the farmers to purchase, develop and

cultivate agricultural as well as fallow and waste lands as also consider financing

purchase of land for establishing or diversifying into other allied activities.

Eligibility (i) Small and marginal farmers i.e.. those who would own maximum of 5

acres of non- irrigated land or 2.5 acres of irrigated land including purchase of land

under the scheme and (ii) Share croppers / Tenant farmers are eligible.

F) Central Sector Capital Subsidy scheme for Investment Promotion (IPS)

A Central Sector Capital Subsidy scheme (Investment Promotion Scheme)

launched by the Government of India in collaboration with NABARD for

development of privately owned non-forest wastelands in the country is under

implementation since 1998. Of the 40 schemes covering about 1500 ha sanctioned till

date, the coverage is mostly confined to the States of Tamil Nadu, Andhra Pradesh

and Maharashtra, with Tamil Nadu accounting for more than 20 schemes. The scheme

provides for subsidy upto 25% of bank loan with a ceiling of Rs. 25 lakh for taking up

plantation and other on-farm developments in private wastelands. In view of the

availability of substantial area under non-forest wasteland in all States and the need to

develop them, a nationwide awareness and publicity campaign was launched by the

50


Government of India in association with NABARD for popularizing the Investment

Promotion Scheme (IPS). As a part of this effort, workshops are being organized by

NABARD in different States/ regions.

G) Refinance Scheme for financing Farmers Service Center (FSC)

NABARD has decided to extend 100% refinance facility to banks for financing

Farmers Service Centres (FSC) set up in collaboration with Mahindra Shubhlabh

Services Ltd (MSSL) for providing various extension services to farmers including

supply of agri-inputs. FSC is intended to benefit farmers by way of higher yields and

productivity through private sector participation in technology transfer and extension

services.

Scheme for Rural Finance [10.2]:

SBI Caters to the needs of agriculturists and landless agricultural labourers

through a network of 6600 rural and semi-urban branches.There are 972 specialized

branches which have been set up in different parts of the country exclusively for the

development of agriculture through credit deployment.These branches include 427

Agricultural Development Branches (ADBs) and 547 branches with Agricultural

Banking Divisions (ADBs) and 2 Agricultural Business Branches at Chennai and

Hyderabad catering to the needs of hitech commercial agricultural projects.

The Bank has achieved tremendous growth in agricultural credit.As on March

2001 ,it has covered 48 lakh farmers with loan outstanding of Rs. 14962 crores ,

accounting for 28% of total agricultural advances of Public Sector Banks (PSBs)

Crop Loan

SBI offers financial assistance to meet cultivation expenses for various crops as

short Term Loan. With a repayment period not exceeding 18 months, the Crop Loan

is extended in the form of direct finance to cultivators.

51

http://www.sbi.co.in/default.asp


Eligibility-Agriculturists, Tenant farmers and Share Croppers who actually cultivate

the lands are eligible for these loans. All categories of farmers - Small/Marginal

(SF/MF) and others are included.

Produce marketing loan scheme

The Bank extends financial assistance to help farmers store produce on their own

to avoid distress sale. The repayment period of the produce marketing loan (PML)

does not exceed 6 months. Further, this facilitates immediate renewal of crop loans

for next crop.

Eligiblity-All categories of farmers - Small/Marginal (SF/MF) and others - are

eligible.

The Bank verifies the following aspects before granting the loan:

1) Service Area Approach.

2) Stocks at the borrowers' residence/godown.

3) Stock statement for valuation.

Loan Amount Security to be furnished

Upto Rs.25,000 DPN, DPN take delivery letter Hypothecation of stocks.

Above Rs.25,000 Hypothecation of stocks.Mortgage of properties.

Kisan credit card scheme

The SBI offers the Kisan Credit Card for farmers under short-term credit

introduced as per RBI/NABARD guidelines, providing a running account facility

tofarmers to meet their production credit need and contingency needs.

Eligibility-All agricultural clients having good track record for the last two years are

eligible for the Kisan Credit Card. Minimum credit limit: Rs.3000/- New borrowers

requiring crop loans can also avail this product.

52


Credit limit is based on operational land holding, cropping pattern and scale of

finance. Withdrawals can be made using easy and convenient withdrawal slips. The

Kisan Credit Card is valid for 3 years, subject to annual review.

Agriculture term loans

SBI gives agricultural term loans in the form of direct finance to cultivators to

create assets facilitating crop production/income generation. Repayments span not

less than 3 years and not exceeding 15 years. Activities broadly covered are land

development, minor irrigation, farm mechanization, plantation and horticulture,

dairying, poultry, sericulture, dry land, waste land development schemes, etc.

Eligibility-All categories of farmers-small/medium-and agricultural labourers are

eligible for agricultural term loans, provided they have necessary experience in the

activity and the required land area.

Land Development Schemes

The SBI gives credit solutions for land development programmes in the form of

direct finance to cultivators aimed at better productivity. Loans under this head cover

various activities like land clearance (removal bushes, trees, etc.), land leveling and

shaping, contour/graded bunding, bench terracing for hilly areas, contour stone walls,

staggered contour trenches, disposal drains, reclamation of saline/alkaline soils and

fencing.

Eligibility:Loans cover various activities like digging of new wells (open/bore wells),

deepening of existing wells (traditional/inwell bore), energisation of wells (oil

engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation

system and lift irrigation system.

Minor Irrigation Schemes

SBI provides credit for creating new source of irrigation by exploiting

underground water, energisation of wells, conveyance of water, judicious use of

available water, etc.

53


Loans cover various activities like digging of new wells (open/bore wells), deepening

of existing wells (traditional/inwell bore), energisation of wells (oil engine/electrical

pump set), laying of pipe lines, installing drip/sprinkler irrigation system and lift

irrigation system.

Farm Mechanisation Schemes

SBI provides credit for purchase of farm equipment and machinery for

agricultural operations.

This mode of finance covers activities ranging from: Purchase of tractors, trailers,

cultivators, cage wheels, power tillers, combine harvesters, power sprayers, dusters,

etc.

Eligibility- is ascertained on the basis of minimum area requirements: Tractors - 8

acres of irrigated area Power tiller - 5 -6 acres Combine harvester - 20 acres

Financing of Combine Harvesters:

o A farmer should own minimum 8 acres of irrigated land.o Non-farmer entrepreneurs capable of utilizing combine harvester for custom

hiring work are also eligible.o Combine harvester should be utilised for a minimum of 1000 hours of

productive work in a year.o Unit cost will include cost of combine harvester and accessories, if any.

Kisan Gold Card Scheme:

Eligibility-Farmers with excellent repayment record for at least past 5 years. New

farmers are not eligible for the product.

Purpose-Investment credit for which term loans are ordinarily sanctioned. The

54


scheme also includes major family expenditures like marriages and education of

children.

Land Purchase Scheme:

Eligibility-Small/marginal farmers, tenants, share-croppers owning less than 5

acres of unirrigated / 2.5 acres irrigated land in their own name and landless

agricultural labourers are eligible to avail loan under the scheme, provided they

are our existing borrowers with record of prompt repayment of loans. Own land

before and after purchase should not exceed 5 acres irrigated / 2.5 acres

irrigated.

Security-Land to be purchased with Bank finance will be mortgaged as security.

No other security will be insisted upon.

Repayment-Entire loan will be repayable in 10 years in half-yearly instalments.

Adequate gestation period will be allowed for development of land for

cultivation.

Self Help Groups (SHGs)

SHGs are self managed homogeneous groups of economically backward people that

promote savings among themselves and pool the savings. These pooled resources are

supplemented by external resources i.e. bank credit when these groups gain

experience. The Self Help Groups Linkage Programme of SBI is under

implementation since 1992. At the end of March 2001, the Bank has financed 25,000

self-help groups with aggregate credit limit of Rs 46 crore.

10.3 Various Finance Scheme Offered From Government:

Maharashtra Rural Credit Project (MRCP) - India - Out line of the project

features and Impact

General: Access to credit has long been considered a major poverty alleviation

strategy in India. A variety of credit-linked programmes supplemented by subsidies

55


have been implemented. The Integrated Rural Development Programme (IRDP)

operating since 1978-79 has been a major national rural poverty alleviation

programme with a large credit component. Under this programme, nearly 53 million

families below poverty line were assisted with bank credit of Rs.31 billion and

subsidy of Rs. 10.5 billion upto 31st March 1998, but its impact had not matched the

resources spent. This was due to reasons like provision of supply rather than demand-

led credit, loans not tailored to meet needs of individual enterprises, lack of aftercare

support, weak linkages lack of supervision over loan utilisation etc. Further, there was

no effective involvement of the people at any stage of implementation of the

programme. As a result, the incidence of high overdues and high transaction cost for

the banks in financing the rural poor became a matter of concern for the policy-

makers.

Maharashtra Rural Credit Project (MRCP)

Against this backdrop the MRCP supported by IFAD was evolved as an innovative

approach to poverty reduction with people’s participation. The strategy for

implementation of this project has been devised in such a manner that the rural poor

assume centre-stage and their participation ensured at all stages of the project viz.

planning, implementation and monitoring. The experience gained shows that once the

people’s participation is invoked at the planning stage itself a strong sense of

ownership of the project develops among the people which stimulates them to actively

involve in the subsequent phases of the project.

The MRCP being implemented with an outlay of US$ 48.35 million is financed by an

IFAD loan of US$ 29.2 million supplemented by a contribution of US$ 14.97 million

from Government of India/Government of Maharashtra and US$ 1.65 million from

participating banks. The Project which is implemented by a number of banking

institutions, Government agencies and Non Governmental Organisation (NGOs) since

1994-95 was designed with the principal goal .

Credit-Cum-Subsidy Scheme for Rural Housing.

56


Introduction:- The Credit-Cum-Subsidy Scheme for Rural Housing has been

conceived for rural households having annual income upto Rs.32,000/-.

Objective- To enable/facilitate construction of houses for all rural households who

have some repayment capacity.

Target Group- The target group under the scheme will be the rural households

having an annual income of Rs. 32000/- only. However preference will be given to

rural households who are below poverty line.

Salient Features:-

Subsidy upto Rs.10,000/- per eligible household in plain areas and Rs.11,000/-

in hilly/difficult areas.

Loan upto Rs."2"0,000/- per household.

Sanitary latrine and smokeless chulha are integral part of the house.

Achievement

The scheme has been launched with effect from 1 April, 1999 and is in the process of

implementation.

Funding Pattern

Funds are shared by the Centre and State in the ratio of 75:25.

Implementing Agency

The Implementing Agency for the Credit Cum Subsidy Scheme for Rural Housing

may be the State Housing Board,State Housing Corporation, specified Scheduled

Commercial Bank, Housing Finance Institution or the DRDA/ZP.

Council for Advancement of People’s Action & Rural Technology (CAPART)

Recognising the need for an organisation that would coordinate and catalyse

the development work of voluntary agencies in the country, particularly to ensure

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smooth flow of benefits to the underprivileged and socio-economically weaker

sections of society, Government of India, in September, 1986 set up the Council for

Advancement of People’s Action and Rural Technology (CAPART), a registered

society under the aegis of the Department of Rural Development, by merging two

autonomous bodies, namely, People’s Action for Development of India (PADI) and

Council for Advancement of Rural Technology (CAPART).

The main objectives of the CAPART are :-

To encourage, promote and assist voluntary action for the implementation of

projects intending enhancement of rural prosperity.

To Strengthen and promote voluntary efforts in rural development with focus

on injecting new technological inputs;

To act as a catalyst for the development of technology appropriate for rural

areas.

To promote, plan, undertake, develop, maintain and support projects/schemes

aimed at all-round development, creation of employment opportunities,

promotion of self-reliance, generation of awareness, organisation and

improvement in the quality of life of the people in rural areas through

voluntary action.

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Agriculture and its associated activities are found constituting the economic

base and the main source of livelihood and employment for the people in the state.

However, unprecedented growth of population on one hand and decreasing rate of

available agriculture land along with degradation of supporting natural resources as

required for sustaining crop productivity on the other have been seriously forcing the

problems of sustaining livelihood for farming communities. It is becoming difficult to

do the farming activity without external or internal sources. In this context the

significance of extending non-farm sector becomes only alternative but it also

required finance assistance for its development.

Means a lot of hard work & government awareness is required to flow the

finance assistance in Rural Economy. But various scheme which are provided by the

various banks & government should be specific in its eligibility criteria to stop the

misuse of these funds by large farmers and to ensure that the credit reaches the

farmers who is in need of finance.

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As per the above evaluation of the major problems and issues relating to the

rural financial system I can submit the following observations & recommendations:

Interest rates: Interest rates must be different for different categories. First it

should be concessional rate exclusively for small and marginal farmers at

1.5% to 11.5% & Secondly, there should be a higher rate of interest applicable

to the rest of the agricultural borrowers upper limit for it is15.5%

Infrastructure Development: tempo of agricultural lending has been low in the

eastern regional states like Bihar, Orissa and West Bengal & in the North

Eastern States. So Agricultural and Rural Infrastructure Development

Corporation should be setup in these area which will concentrate on building

up necessary backward and forward linkages and supporting services as well

as formulate location specific schemes for accelerating the transformation of

agriculture and to arrange for funding of the schemes.

Insurance scheme: Crop insurance scheme which was introduced in India

from Kharif 1985 covering major cereal crops, oilseeds and pulses. The sum

insured was limited to Rs.10,000 per farmer irrespective of quantum of crop

loan and the total sum insured would be limited to 100 percent of the crop loan

disbursed. Proper research should be done by statutory crop insurance

corporation.

Recovery of dues: Recovery is important for survival of the banks, it is

important that a common legal framework covering cooperatives and

commercial banks for recovery of dues for the country as a whole should be

formulated. & The government should setup State level tribunals for

adjudication.

Rationalisation: In present scenario each village is allotted to a commercial

bank branch under the Service Area approach. As per the analysis each block

should be allotted to a bank which has the largest presence in the block

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through its branches. Which will reduce the cost of supervision, improve

quality of monitoring and be beneficial to the customers.

Bibliography

Sr.No. Name Author

1. Indian Economy Ruddar Datt.

K.P.M. Sundharam.

2. State Bank of India journals

3. Agricultural Financing In

India

S.N.Ghosal

4. Economic Survey, 1998-99. Monthly Review of the Indian

Economy, CMIE, March-April 1999

5. Rural Marketing Romeo S. Mascarenhas

Webliography

www.nabard.org

www.rbi.gov

www.sbi.co.in

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Documents

Rural Finance in an Indian Economy