PROJECT REPORT ON:

AGRICULTURE BANKING

SUBMITTED BY:

DEEPINDER SIDHU

T.Y. BANKING & INSURANCE (SEMESTER V)

SUBMITTED TO:

UNIVERSITY OF MUMBAI

PROJECT GUIDE:

DR NISHIKANT JHA

ACADEMIC YEAR:

2015-2016

1

CERTIFICATE

This is to certify that the project entitled is successfully done by DEEPINDER SIDHU during

Third Year FIFTH SEMSETER of B.COM (BANKING & INSURANCE) under the University

of Mumbai through the Thakur College of Science and Commerce, Kandivali (E) Mumbai-

400101.

Co-ordinator Project Guide Principal

Date:

Place:

Internal Examiner External Examiner

2

DECLARATIONS

I DEEPINDER SIDHU from THAKUR COLLEGE OF SCIENCE & COMMERCE, student of

T.Y. BANKING & INSURANCE (SEMESTER V), hereby submit my project report on

AGRICULTURE BANKING.

I also declare that this project, which is the partial fulfilment of the requirement for the degree of

T.Y.B.Com (Banking & Insurance) of the MUMBAI UNIVERSITY, is the result of my own

efforts with the help of experts.

DEEPINDER SIDHU

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ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project of AGRICULTURE BANKING.

Firstly, I take the opportunity in thanking our very dear principal DR. C.T. CHAKRABORTY.

I would also like to thank The Almighty and my parents without whose continuous blessings; I

would not have been able to complete this project.

I would like to thank my project guide DR Nishikant jha and Course coordinator Prof. Nirav

R. Goda for their valuable help, opinions, advice and support, giving me encouragement and for

providing me with the material and knowledge to make this project a success. I convey my deep

appreciation to them for sparing their valuable time and efforts, so has to make me capable of

presenting this project.

I am thankful to our college for all the possible assistance and support, especially our library by

making available the required books and the internet room which have been useful to me in

successful completion of my project.

I hope that I have succeeded in presenting this project to the best of my abilities.

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INDEX

Sr. No. Particulars Page No

1 INTODUCTION 7-12

2 REVIEW OF LITERATURE 13-15

3. OBJECTIVES & HYPOTHESES 16

4. RESEARCH METHODOLOGY 17

5 IMPORTANCE OF AGRICULTURE IN GROWTH OF INDIA 18-22

6 PROBLEMS IN THE AGRICULTURE SECTOR 23-25

7 FINANCING THE AGRICULTURE SECTOR 26-32

URBAN COOPERATIVE BANKS

REGIONAL RURAL BANKS

8 GOVERNMENT/POLICY SUPPORT TOWARDS AGRICUTURE

SECTOR

34-38

NATIONALISTION OF BANKS

KISAN CREDIT CARD

PRIORTY SECTOR LENDING

9 IMPACT OF GLOBALISATION IN AGRICULTURE SECTOR 39-40

10 ANALYSIS OF SECONDARY DATA 41-45

11 ROLE OF INSISTUTIONS 46-50

ROLE OF NABARD

ROLE OF COMMERICIAL BANKS

ROLE OF PUBLIC SECTOR BANKS

ROLE OF RBI

ROLE OF SELF HELP GROUP 51

5

CONCLUSION

6

ABSTRACT

Regional rural Banks plays a vital role in the agriculture and rural development of India. The

RRBS have more reached to the rural area of India, through their huge network. The success of

rural credit in India is largely depends on their financial strength. RRBs are key financing

institution at the rural level which shoulders responsibility of meeting credit needs of different

types of agriculture credit in rural areas. At present, most of the regional rural banks are facing

the problems of overdue, recovery, nonperforming assets and other problems. Therefore, it is

necessary to study financial performance of RRBs in India. This paper attempts to analyze the

current status with financial performance of RRBs in India as on 31st March 2011. The study is

based on secondary data collected form annual reports of NABARD and RBI. An analytical

research design of Key Performance Indicators Analysis such as number of banks and branches,

deposits, loans, loans, investments and growth rate index is followed in the present study. The

study is diagnostic and exploratory in nature and makes use of secondary data. The study finds

and concludes that performance of RRBs has significantly improved.

7

INTRODUCTION

In developing countries like India, the agriculture sector assumes significance for a variety of

reasons. It is still a source of livelihood for a majority of people in rural areas and there is a need

for ensuring sustainability in these livelihoods. Recent Population Census (2011) reveals that

there are 18.20 crore cultivators and agricultural workers. It is noteworthy that the agriculture/

rural sector provide demand for industrial goods and in India whenever agriculture sector has

grown at the annual rate of 3-4 percent; other sectors have shown healthy growth. In fact, the

required growth of productivity in agriculture means that more capital must be invested in it.

Farmers’ need much more capital than they can afford to save and small and marginal farmers

with meagre savings require a higher input of capital. Credit is a condition that enables a person

to extend his control over his ownership of resources. Indian agriculturist is not only capital

starved, but faces vagaries of nature too; irrigated agriculture is roughly 33 percent of total

cropped area. Agriculture, thus is, a high- risk area. It is also observed that Indian agricultures’

investments requirements fluctuate as incremental output ratios have varied significantly. In fact,

it is not only the availability of credit but also the access to adequate institutional credit that

matters, since most of those who are engaged in agriculture belong to the marginal and small

farmer categories.

Agriculture sector credit flow has been influenced by fallout of implementation of various

accounting and statutory norms without taking into account the ground level realities, which led

to irreparable damage to the rural financial architecture in the post liberalization era. The

agriculture finance is being viewed as a risky proposition now. This has led to piquant situation

where the share of small and marginal farmers in total credit flow has declined when share of

this group of farmers in operational holdings over the period has increased. Besides, dalit and

tribal farmers are largely observing declining share in credit flow. We encounter a situation when

these farms have increased their contribution in agricultural production thereby immensely

contributing to food security and attaining food self-sufficiency, the share in total credit has

declined.

8

The main challenge faced by agricultural credit involves not only ensuring flow of credit to small

and marginal farmers and dalit and tribal farmers, but designing policies and credit delivery

systems that have relevance in the present context in terms of production and demand for

agricultural products. Such policies have to consider the need for agricultural credit due to crop

diversification. The present multi-agency approach is inadequate to tackle the pressing need for

finance of agricultural extension services too. We need to tackle the issue of how to channel the

resources of commercial banks in sustainable and viable manner in order to fund the

development of a wide range of allied activities. It is also felt that tenancy laws also hinder flow

of credit to tenant and sharecroppers despite guidelines issued by Reserve Bank of India. The

specific needs of the agricultural sector to financial services demand a broader systemic

approach. Need is to understand the extent of availability and distribution of productive

resources, along with their distribution, legal and social structures governing their use, cropping

patterns, current and emerging technologies and dynamics of rural markets and so on to gauge

the credit requirements. This would improve the flow of credit to agriculture, especially small

farmers. A critical determinant for agricultural credit is the commercialization of subsistence

farmers. Development of efficient marketing system would result in the commercialization of

subsistence farmers by providing outlets and incentives for increased production.

Critical issues of rural agricultural infrastructure and institutions need to be addressed as credit

can only be the facilitator. Investments are required in irrigation, rural roads and other

infrastructure. One argument is that farmers’ need to be provided incentives to adopt market

based solutions for input procurement and marketing of output through autonomous cooperatives

and other forms of organization. Does integration of crop and investment credit and scales of

finance used reviewed and readjusted in line with the requirements of modern, market-oriented

capital intensive agriculture using newer technologies and superior inputs? Is rising cost of

production is factored in? The new technologies and production cycles are high cost and risky

proposition for such farmers and market volatility harms them the most and policies and state

role need to take cognizance of these factors. Such farmers have no protection against natural

calamities and are most vulnerable. These farmers have limited ability to manage interest rate

risk. Most of these farmers lack the absorptive capacity both in terms of cost and the size of

loans and advances, which are of cost effective size to be handled by the banks. It has to be

9

recognized that business of farming is not just an issue of individual livelihood but is also

critically related to national food security.

Therefore farmers must have access to credit .In Indian agriculture, even small and marginal

farmers and dalit and tribal farmers whether owning land or not, are risk taking entrepreneurs

contributing to economic growth. Farmer is an important player in the financial, labor, inputs and

commodity markets, who because of the size of transactions in the market place does get

marginalized. Livelihood diversification can help in greater credit absorption at lower end of

farming community. Besides, increased public investment in agricultural infrastructure, research

and extension services is required. Need is also felt for developing post-harvest technologies and

marketing facilities that can reduce frequent risk and losses faced by farmers.

Banks play an important role in mobilization and allocation of resources in any country. Rural

people in India are facing problems in the inadequate supply of credit. The major source of credit

to rural households, particularly-low income working households, has been the informal sector.

Informal sector advances loans at very high rates of interest; the terms and conditions attached to

such loans have given rise to an elaborate structure of intimidation of both economic and non-

economic conditions in rural population in India.

Agriculture continues to be an important sector of the economy with 18 per cent share in the

Gross Domestic Product (GDP), provides employment to nearly 2/3rd of the work force in the

country. Agriculture at present has undergone a significant shift from the subsistence level of

production to market oriented production. The much needed food security is reflected in the

abundant buffer stocks of grains build up out of the surplus production. Diversification and

commercialization in agriculture have resulted in shifting of cropping pattern from traditional

crops to high-value crops and new markets.

Institutional credit, which played a very important role in the development of agricultural sector

was instrumental in development of Indian agriculture. It showed all signs of resilience to natural

shocks like droughts and famines. In fact, credit acted as a means to provide control over

resources to enable the farmers to acquire the required capital for increasing agricultural

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production. It enabled the farmer to go for short-term credit for purchase of inputs and other

services and the long-term credit for investment purposes. Thus, credit played an important role

by facilitating technological up-gradation and commercialization of agriculture. The success of

Green Revolution in Indian agriculture to a large extent laid on

institutional credit support to agricultural sector in terms of expansion in inputs like fertilizers,

irrigation, private capital formation, etc.

Institutional credit dispensation system for agriculture in India has only a brief history starting

with the setting up of cooperative credit societies in 1904. However, coverage of these societies

to meet the credit requirement was so limited in certain pockets and negligible that almost entire

credit requirement of the farming community was met by informal money lending sources till

1950s. The recommendations of All India Rural Credit Survey Committee (1951-54) has laid the

foundation of the institutional framework for establishing a sound credit delivery system for

financing agriculture and allied activities.

A major shift in the short-term credit product was the introduction of crop loan system. An

action programed in 1963 was laid down by the Central Government for implementation by the

State Government. Till the end of the 1960s, to be more specific, up to the social control

introduced on the commercial banks, cooperative structure was assumed the sole responsibility

of providing production credit to the farmers. The entry of commercial banks with bank

nationalization in 1969 and the emergence of Regional Rural Banks (RRBs) in 1975 gave wider

reach to the short-term credit delivery system in the country. The entry of commercial banks and

RRBs, brought in a sea change in the financing pattern of the farm sector as the credit of the

Indian farmers were increasingly met by the institutional sources. However, such a quantitative

improvement in the coverage could not be achieved in the case of quality of credit products

provided by the banks especially to the priority sector.

Though several suggestions for provision of credit through single source, including by The

National Commission for Agriculture, the basic characteristic of the credit dispensation system

in India remained as multi product and multi-agency approach especially in 1970 and 1980s. The

credit product was targeted to cater to the stipulated and specific production investment needs

11

within that specific sector activity, presuming that the economic function of that activity is

independent of other economic activity of the same farm enterprises.

Under the system each farmer had the flexibility to approach an agency of his choice for an

investment as per the standard stipulations laid down by the agency. Again, component of

investment credit or production credit would exclude the maintenance cost as it presumed that

maintenance is a recurring cost which the farm enterprises can meet out of its operational

surplus. It was also presumed that the credit need (investment/production) of the firm and that of

the investor (consumption) are independent and mixing up of the same will adversely affect the

economics of the firm; hence, no effort was made to cover the later by the institutional credit

along with the former. Another set of explanation is that whether surplus income generated from

the investment within the economic life of the investment is sufficient to repay the debt burden

of that particular investment.

The functioning of multi credit product approach has a number of intrinsic and structural

rigidities, making most of the products inefficient and reducing its utility to sub-optimal level.

Very often the line of credit was made supplier friendly so as to make its operation to the

minimum. Production credit, for example, as stipulated by Date Committee and further modified

by Kaila Committee was available on crop season basis. Major economic impact of the system

was high procedural formalities in the system and the lack of timeliness in loan sanction and

disbursement and inadequacy of the loan amount. Quite often, farmer has to approach various

agencies; with different package of credit, with different interest rate and with differing and

cumbersome sanction procedures and norms to meet is entire credit needs and economic cost of

his time spend on this account was neglected. The complicated credit environment created by the

multiple credit delivery systems in rural areas duplicated workload increasing the social cost

associated with it. Absence of maintenance package in the individual credit product often made

farm investment infructuous for the remaining economic life for want of smell repairs, creating

conditions for perpetual indebtedness for them.

The structure of the Agricultural Credit Delivery System (ACDS) in the country, evolved over

the years, comprises of institutions in the formal and informal sectors. In the formal sector, a

multi-agency approach has been adopted and includes Co-operatives, Commercial Banks (public

12

and private sectors) and the Regional Rural Banks. The informal sector operates through non-

institutional sources like the moneylenders, traders, merchants, commission agents, friends and

relatives, etc.

13

REVIEW OF LITERATURE

A number of studies have been conducted to see the functioning and performance of regional

rural bank in the country. The literature available in the working and performance of RRBs in

India is a little limited. The literature obtained by investigators in the form of reports of various

committees, commissions and working groups established by the Union Government, NABARD

and Reserve Bank of India, the research studies, articles of researchers, bank officials,

economists and the comments of economic analysts and news is briefly reviewed in this part.

Some of the related literatures of reviews are as follows. NABARD (1986) published “A study

on RRBs viability”, which was conducted by Agriculture Finance Corporation in 1986 on behalf

of NABARD. The study revealed that viability of RRBs was essentially dependent upon the fund

management strategy, margin between resources mobility and their deployment and on the

control exercised on current and future costs with advances. The proportion of the establishment

costs to total cost and expansion of branches were the critical factors, which affected their

viability. The study further concluded that RRBs incurred losses due to defects in their systems

as such, there was need to rectify these and make them viable. The main suggestions of the study

included improvement in the infrastructure facilities and opening of branches by commercial

banks in such areas where RRBs were already in function.

In the year 1989 for the first time, the conceptualization of the entire structure of Regional Rural

Banks was challenged by the Agricultural Credit Review Committee (Khusro Committee), which

argued that these banks have no justifiable cause for continuance and recommended their

mergers with sponsor banks. The Committee was of the view that “the weaknesses of RRBs are

endemic to the system and non-viability is built into it, and the only option was to merge the

RRBs with the sponsor banks. The objective of serving the weaker sections effectively could be

achieved only by self-sustaining credit institutions.” The Committee on Financial Systems,

1991 (Narasimham Committee) stressed the poor financial health of the RRBs to the exclusion of

every other performance indicator. 172 of the 196 RRBs were recorded unprofitable with an

aggregate loan recovery performance of 40.8 percent. (June 1993). The low equity base of these

banks (paid up capital of Rs. 25 lakhs) didn't cover for the loan losses of most RRBs. In the case

14

of a few RRBs, there had also been an erosion of public deposits, besides capital. In order to

impart viability to the operations of RRBs, the Narasimham Committee suggested that the RRBs

should be permitted to engage in all types of banking business and should not be forced to

restrict their operations to the target groups, a proposal which was readily accepted. This

recommendation marked a major turning point in the functioning of RRBs.

The contemporary literature on banking efficiency spells out two distinct approaches to measure

efficiency (1) accounting measure (2) economic measure. Accounting measure refers to the use

of various financial ratios that focus on one or more outputs and their relevant inputs to measure

the performance of a banking unit. The financial ratio approach has been widely used by the

researchers and working groups/committees to analyze the performance of RRBs. Most of the

studies on the performance evaluation of RRBs concentrated on the banks in particular

state/region. Some of the studies are: Singh (1992) analyzed the performance of RRBs banks in

Punjab. Prasad (2003) evaluated the performance of RRBs in India. Moreover, Pati (2005)

developed the performance of RRBs in the north-east region. The study of Bagchi and Hadi

(2006) concentrated on the performance of regional rural banks in West Bengal. Few studies also

exist in the literature which concentrated on the efficiency of a single regional rural bank. Some

of the studies conducted so far are: Sudhaker et al., (1984) evaluated the performance of Cauvery

Grameen Bank in Mysore district; Parmar (1986) assessed the performance of Banaskantha

Mehsane Grameen Bank in Gujarat; Sangwan (1988) analyzed the performance of Chattanja

Grameen Bank in Andhra Pradesh; Jagadeesha et al., (1990) evaluated the performance of

Tungabhadra Garmeen Bank in Karnataka. Further, Hosamani (2002) explored the performance

of Malaprabha Garmeen Bank in Karnataka and Yadappanvar and Nath (2003) assessed the

performance of Aurangabad and Jalna Grameen Bank in Maharashtra.

Though financial accounting ratios are simple to use and relatively easy to understand, but their

use to measure bank performance is plagued by various problems. As a precautionary measure,

regulatory frame works (such as CAMEL rating) based on these ratios has been put in place in

most of the supervisory systems across the globe. Further, Sherman and Gold (1985) noted that

financial ratios do not capture the long-term performance. This measure also helps in the analysis

of bank’s performance in terms of individual parameters determining the overall efficiency level

15

as it is difficult to precisely measure the efficiency of banks. Therefore, in recent years, there is

a trend towards measuring bank performance using economic measure. This measure provides

accurate, composite and precise estimate of efficiency of banks comparing each bank against the

top performers in the banking industry.

A scan of the existing literature on the efficiency of Indian banks provides that there exists

various studies that analyzed the efficiency of Indian commercial banks using most popularly

used parametric technique of Stochastic Frontier Analysis (SFA) and non- parametric technique

of Data Envelopment Analysis. The notable studies belonging to this group are: Noulas and

Ketkar (1996), Bhattacharyya et al., (1997), Das (1997), Saha and Ravisankar (2000), Mukherjee

et al., (2002), Kumar and Verma (2003), De Kumar (2004), Chakrabarti and Chawla (2005), etc.

To the author’s knowledge, there is virtually no study except Reddy (2005), Khankhoje (2008),

Sathye (2008) and Mahindra (2011) which analyzed the performance of RRBs by using Frontier

and Data Envelopment Analysis approach respectively.

16

OBJECTIVES

The objective of this project is to measure the productive efficiency of banks in a developing

country that is India. Some of the objective are as follows:

1. To know the lending practices of cooperative banks in India.

2. To know the satisfaction level of the customer from bank lending policies.

3. To know different type of loans preferred by different sets of customer.

4. To measure and compare the efficiency of regional rural banks.

5. To make important suggestion to improve the working of RRBs.

17

HYPOTHESES

H1 It is assumed that Cooperative banks provide better loan facilities.

H0 It is assumed that cooperative banks doesn’t provide better loan facilities.

H1 Loan is provided at lower rate of interest.

H0 Loan is provided at higher rate of interest.

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RESEARCH METHODOLOGY

Descriptive research is used in this study in order to identify the lending practices of Regional

Rural Banks. The study is done by primary data &secondary data. The secondary data have been

collected from journals like the banker and the journal of Indian Institute of bankers have also

been referred, books, articles and research papers, internet, manual of instructions on loans and

advances. The method which is used in collecting primary data are:

Observation method

19

IMPORTANCE OF AGRICULTURE IN GROWTH OF INDIA

There have prevailed various inter-state differences in the access to institutional credit as the

loan amount obtained by farm households even for the same size class of land holding. Owing to

which, an analysis of status and performance of agricultural credit has been the major concern of

the available literature on agricultural finance. Such literature facilitated policy makers in taking

review of progress already made and thereby it helped them in taking the appropriate corrective

action.

There appeared a large number of studies that have examined this aspect. Sahu (2008), for

example, analyses the trends in the supply of agricultural credit by institutional agencies in

fourteen major Indian states. It observes that the growth rate of agricultural credit was higher

during per-reform period compared to the reform period in most of the states. It also observes

that the growth rate of agricultural credit was higher during pre-reform period compared to the

reform period in most of the states. It notes the unevenness in the growth rate of agricultural

credit during the sub periods as well as across the states. Similarly, Mohan (2006) examining the

performance of the flow of institutional credit finds that despite the increase in the overall flow

of institutional credit over the years, there has taken place several gaps in the system like

inadequate provision of credit to small and marginal farmers, paucity of medium and long-term

lending and limited deposit mobilisation and heavy dependence on borrowed funds by major

agricultural credit purveyors. All these have major implications for agricultural development and

the well-being of the farming community. It urges for taking serious efforts to address and rectify

these issues.

In the 1960s, the Green Revolution allowed less developed countries, such as India, to overcome

chronic food deficits. Basically, the Green Revolution stands for producing more food and other

agricultural products from less land. Modernization is one of the main concepts in the Green

Revolution. The practices were made up of using high-yielding varieties of seeds, modifying

farm equipment, and substantially increasing chemical fertilizers. This allowed growth and

sustainability. At the beginning of the Green Revolution, there was a large growth in Indian

20

agriculture however, instability arose and the Green Revolution was on a rapid decline. In the

end, it caused a shortage of water. When water is the primary source of survival, life seems

difficult when there is a large shortage of the one thing that can make assurance of life. Before

the Green Revolution was introduced prior to the 1960s, farmer’s main goal was to produce

wheat and rice. These varieties had a low yield per hectare, which means that these crops took

one year to produce and in order for farmers to increase production, there would have to be a

change. The change would have to consist of irrigation facilities, fertilizers, and pesticides. In

order for these changes to work properly, there would have to be a sufficient quantity of water

and fertilizers. At the beginning, many farmers thought if they could double their production of

crops in one season that they would do whatever they could do increase crop production.

Improving high yielding varieties of wheat was a major factor, which finally led to the Green

Revolution.

The introduction of high-yielding varieties of seeds and the increased use of chemical fertilizers

provided the agriculture industry in India an increase in production. The Green Revolution was

thought to pave the way for rapid industrial growth, but in the end it did exactly the opposite. It

created a shortage. At the time, when the Green Revolution first began, it was considered one of

the most significant technological achievements in the agricultural industry. The Green

Revolution dramatically increased global food production over the next two decades, particularly

in India. Green Revolution Leader Mankombu Sambasivan Swaminathan is an Indian genetics

and international administrator who took the leading role in India’s Green Revolution. His main

goal was to eliminate world hunger and poverty, especially in India by using environmentally

sustainable agriculture, sustainable food security and the preservation of biodiversity. He called

the preservation of biodiversity the evergreen revolution. Swaminathan was a part of the Indian

Council of Agricultural Research and he was the administrator of Agriculture from 1979- 1980,

which is when his early work was started in the involvement of the Green Revolution. M.S.

Swaminathan was hailed as the father of the Green Revolution in India. Impacts the increase

production of wheat fueled a self sufficiency of food for India. The high yielding seeds and

irrigation facilities, brought enthusiasm too many farmers in India. By seeing better profits from

the Green Revolution, the farmers began to enjoy life more with better earnings, knowing that

21

they had the ability to provide for their family. Unfortunately, with the rise in use of chemical

pesticides and fertilizers, there were many negative effects on the soil and land.

Double cropping was a primary feature of the Green Revolution. The idea was for farmers to

have two crop seasons within one year. This meant that the crop production would double within

one year. This was based primarily on the natural one monsoon per calendar year. For farmers to

have to double the crops per season there would have to be one artificial monsoon. These were

created from a large irrigation facility. Dams were built in rural areas to collect large volumes of

monsoon rainwater. Before the Green Revolution, this water was wasted. This was a simple

irrigation technique that rural farmers adopted. However, in a year without monsoon, this led to

failure. Consequences, Damage and Results The consequences of the Green Revolution to the

rural farming areas, dating significantly from the ‘year of the drought’. There were flaws in the

technological achievements, which created this drought in India. The new technologies relied on

the monsoon seasons every year for the water supply in reassuring to keep up with increased land

use and production. When the monsoon failed in 1972-73, the ‘year of drought’ occurred; this

had a major effect on the Green Revolution. There was much damage caused by the Green

Revolution. There was an excessive amount of fertilizers and pesticides used which polluted

waterways and poisoned agricultural workers. The beneficial wildlife and insects that lived in the

farming areas were also killed which made the land not as healthy for farmers to work with.

There are four main economic results of the Green Revolution. The crops were under high-yield

varieties and needed more water, fertilizers, pesticides, and other chemicals. This stimulated

growth of the local manufacturing sector. For example, the industrial growth created new jobs

and contributed to the country’s GCP. There was an increase in irrigation, which created a need

for new dams to collect the monsoon water. The water was stored and used to create hydro-

electrical power. This boosted the industrial growth, created new jobs, and improved the quality

of life within the people living in the villages. India paid back all of their loans from the World

Bank to create the dams in rural areas. By an outside view, this looks good on behalf of India for

paying back such a large loan and it looks good in the eyes of other lending agencies.

22

The irrigation and growth of wheat and rice are very important to the economy and production of

livelihood in India. These are the main products that most families can afford and live off on a

daily basis. Both wheat and rice varieties require carefully controlled irrigation. About 75% of

cropped land is devoted to food grains such as rice, wheat, maize, and barley. Rice and wheat

contribute to approximately 70%-90% of the food requirements for the people of India. Because

of the high yielding varieties, the soils are too dry when the monsoon season fails when the

agricultural industry needs an adequate amount of water for the rice and wheat to grow properly,

but that water is not available, it poses a great problem to the success of the Green Revolution.

Countries involved in the Green Revolution have subsidies in part with the prices of the

fertilizers, pesticides and the production of wheat and rice.

In the last five decades, the Government’s objectives in agricultural policy and the instruments

used to realize the objectives have changed from time to time, depending on both internal and

external factors. Agricultural policies at the sectorial level can be further divided into supply side

and demand side policies. The former include those relating to land reform and land use,

development and diffusion of new technologies, public investment in irrigation and rural

infrastructure and agricultural price supports. The demand side policies on the other hand,

include state interventions in agricultural markets as well as operation of public distribution

systems. Such policies also have macro effects in terms of their impact on government budgets.

Macro level policies include policies to strengthen agricultural and non-agricultural sector

linkages and industrial policies that affect input supplies to agriculture and the supply of

agricultural materials.

During the pre-green revolution period, from independence to 1964-1965, the agricultural sector

grew at annual average of 2.7 per cent. This period saw a major policy thrust towards land

reform and the development of irrigation. With the green revolution period from the mid-1960s

to 1991, the agricultural sector grew at 3.2 per cent during 1965-1966 to 1975-1976, and at 3.1

per cent during 1976-1977 to 1991-1992. Acharya (1998) explains that the policy package for

this period was substantial and consisted of: a) introduction of high-yielding varieties of wheat

and rice by strengthening agricultural research and extension services, b) measures to increase

the supply of agricultural inputs such as chemical fertilizers and pesticides, c) expansion of

23

major and minor irrigation facilities, d) announcement of minimum support prices for major

crops, government procurement of cereals for building buffer stocks and to meet public

distribution needs, and e) the provision of agricultural credit on a priority basis. This period also

witnessed a number of market intervention measures by the central and state Governments. The

promotional measures relate to the development and regulation of primary markets in the nature

of physical and institutional infrastructure at the first contact point for farmers to sell their

surplus products. Acharya (1998) also notes that the rate of growth of productivity per hectare of

all crops taken together increased from 2.07 per cent in the decade ending 1985-1986 to 2.51 per

cent per annum during the decade ending 1994-1995. Similar evidence of an increase in yields, a

partial measure of productivity gains given by output per unit of land area is seen below for

various crops.

24

PROBLEMS IN THE AGRICULTURE SECTOR

Despite the early benefits, it became apparent that there were many negative impacts from the

green revolution. After the Green Revolution began in India, there was a change in the land use

patterns, known as the degradation of land. Whereas primarily there were only one crop planted

per year, before the Green Revolution. There were two to three crop rotations every year, the

land quality diminished and the land quality had suffered. Due to the impute of heavy chemical

fertilizers, a strain on the carbon material within the soils were created. There also has been a

loss in bio diversity in farm lands because since there has been an increase in chemical pesticides

and fertilizers, many insects have been killed and the birds that create homes in rural areas have

found new areas to live because of the negative side effects that the pesticides give off to the

environment. As a result of chemical use in the land, contamination of ground water affected the

health of the people who are consuming the agricultural goods that now contained pesticides and

chemicals. This directly affected the health of Indians, who were not used to putting such

chemicals in their bodies.

It was not only the environmental and health problems that arose; there were also many social

problems that occurred in the late 20th century because of the green revolution. Since the

farming industry was booming and farmers had higher incomes, there was an increase demand

for more land which created more demand for farm families who took on more farming land that

they could manage. Critics believe that the Green Revolution resulted in environmental

degradation, increased income inequality, inequitable asset distribution, and worsened poverty

levels in India. The majority of the large farmers were able to adapt to the new technologies

because they had better irrigation, fertilizers, and seeds.

However, the Green Revolution affected just as many of the smaller farmers during the Green

Revolution. It is believed that the Green Revolution encouraged mechanization, which pushed

down rural wages and employment, and increasingly impoverished small farmers. When the

Green Revolution occurred, there was a spread only in irrigated and high-potential rained areas,

which created many villages without sufficient water. Even though there were more employment

opportunities and cheaper food, not having a sufficient amount of water in a village is crucial for

25

survival. There was some retreating of water from natural watersheds; this was replenishing

water, which was pumped from areas that can be quickly replenished by the rainwater, however,

there was not a sufficient amount of water for survival.

At the beginning, there were no problems with the Green Revolution until the farmers and

government started to see problems arising. The sudden change in agricultural techniques

developed caused a rapid change creating economic imbalance among farmers, which

contributed to large interregional agricultural disparities. It has been brought to the attention of

many farmers that crop productivity needs to increase in order to keep up with the competitive

agricultural market. In order to survive the market, may need to increase productivity in order to

keep an income coming in for a family. This requires new technology being brought into their

farms to succeed in the agricultural industry in India, and yet not all farms can afford this new

technology. There has been an ongoing debate in India surrounding the survival of farmers:

whether to increase agricultural productivity or improve food quality. Ever since the Agreement

on Agriculture was created in 1999 from the World Trade Organization this has been a topic

surrounding not only farmers but this problem affects mostly everyone living in India. This idea

was created to replace agriculture price support with direct payments to farmers from production

dates.

One would think that protests to get people’s attention about the growing problem from the green

revolution would not be wasting food, however, that is not the case. In the district in Andhra

Pradesh, farmers had dumped cartloads of tomatoes on the streets to express their struggles as

farmers. With the price of tomatoes increasing for a normal family, it was almost impossible for

farmers to keep producing these goods and selling them at a reasonable price. In another instance

near Punjab, potato farmers demonstrated their negative views towards the Green Revolution by

throwing potatoes onto highways to get people in the community to start talking about the

agricultural problem arising. It is believed that the productivity will bring more income to

farmers, which will no doubly be true, however, the factors of the environmental issues because

of the over productivity does not come into place.

26

Suicide has become common in rural farms on the outskirts of major Indian cities. The pressure

farmers have to produce a certain amount of crops yearly puts many stresses on top of their busy

lives. Farmers who cannot produce a certain amount of crops, they believe that the stress about

not being able to provide for their families, which they believe life not worth living any longer.

In 2002, there were over 1000 suicides reported from 12 districts of Maharashtra, India. The

rising amount of debt that farmers collect from having to purchase fertilizers and pesticides puts

a large strain on themselves. Within the process of producing the second round of crops within

one year, when the second round does not produce as quickly or they do not have the same

quality, farmers get very distressed that they will not be able to sell these crops. The government

in India has been in denial about the number of suicides that have occurred since 1987, which

has arisen to over 10,000 suicides committed by farmers. This is within the same time that the

Green Revolution began to tumble and not be as successful. Food Security At this time in India,

during the food crisis, farmers cannot pay the wages. There is a shortage of farm laborers

because of the higher prices that the farmers need to pay the laborers. The increasing price from

seeds, fertilizers and water, cause the wages to increase and it will make growing food more

expensive. Small farmers cannot afford this especially since they need to provide for their

family.

27

FINANCING THE AGRICULTURE SECTOR

Agricultural finance is a sectorial concept which comprises financial services for agricultural

production, processing and marketing, such as short, medium and long-term loans, leasing, and

crop and livestock insurance. Recently, the concept of agricultural value chain finance was

introduced to emphasis the vertical dimension of agricultural finance to and between different

segments of agricultural value chains. Although agricultural finance can largely be regarded as a

subset of rural finance, some larger companies operating on both ends of agricultural value

chains are also located in bigger towns and cities recent growth of Indian economy has been

primarily service-led. The service sector has completely replaced agriculture, which has been

traditionally the largest contributor to India’s GDP.

However, the fact that agriculture has a small share of 14 percent in GDP today comparing to a

share of more than 50 percent in total GDP, does not belittle its importance for the Indian

economy. This is because first, agriculture remains the largest employer having a share of around

60 percent; second, it holds the key to creation of demand in other sectors and remains by far an

important indirect contributor to India’s GDP growth. Commercial banks have played an

important role in financing the needs of agricultural sector. With the aim of facilitating timely

and adequate credit flow to agriculture, the sector has been targeted as a part of the priority

sector lending programed introduced after nationalization of banks in 1969. Since then, banks

have become gradually an important source of agricultural credit, although the growth in their

share has not been monotonic during 1980s.

In the first half of 2000s, there has been a steep rise in the share of commercial banks in total

agricultural credit. Starting 1990s, the share of short-term agricultural credit in total agricultural

credit has been going up. Newer credit delivery systems in the form of Kisan Credit Card (KCC)

were introduced to provide easy access to credit. Banks like NABARD has grown and evolved

over the last three decades from a uni-dimensional apex financing agency into a multi-

dimensional institution for shaping and implementing the country’s overall rural credit policy. In

the first two decades after independence, the conduit for institutional credit to agriculture was the

28

cooperative sector. Although sound in concept, the cooperative sector failed to live up to

expectations.

With the nationalization of commercial banks, the decade of 1970 marked the entry of

commercial banks into agricultural credit. Over the last 40 years, there has been a striking

increase in the credit intensity of agriculture as measured by the ratio of agricultural credit to

agricultural GDP. The credit intensity increased from 12 percent in the early 1970s to 67 percent

by 2010-11 (Subbarao, 2012).

Capital formation in agriculture has been another aspect that has attracted the attention of

researchers. A study by Karmakar (1998) has examined the growth trends in capital formation in

agriculture in both public and private sectors. It finds the declining trend in both the public and

private sources of capital formation. In fact, as per his study, the share of gross capital formation

had declined from 15 percent in 1980-81 8 percent in 1990-91. It finds that the real gross capital

formation in agriculture sector showed negative growth rates of 2 percent per annum during the

sixth plan and 1.4 percent per annum during the seventh Plan. Correspondingly, the share of

agriculture sector as percentage of total investment in economy had also declined from 18.2

percent in fifth plan to 15.1 percent in the sixth plan and further to 11.9 percent during the

seventh Plan.

The impact of agricultural credit policy and credit disbursements on crop productivity is also

examined by numerous studies. Kannan (2011), for example, by focusing on the state of

Karnataka finds that the disbursement of credit through institutional sources had a large impact

on improving agricultural productivity. However, it points at its inadequacy and thereby urges

for widening its coverage both in terms of the amount of credit and the coverage of more number

of marginal and small farmers. Similarly, Das et al. (2009) examine the role of direct and indirect

agricultural credit on agricultural production by taking care of regional disparities in agriculture,

credit disbursement and agricultural production in an economic framework using Dynamic Panel

Data Analysis. It finds that the direct agriculture credit has a positive and statistically significant

impact on agricultural output and its effect is immediate.

29

India has long experience of using development banks and cooperative institutions to deliver

agriculture credit to farmers. Cooperative credit for crop production is being administered

through primary cooperative societies, which have farmers as members. Credit, as one of the

critical non-land inputs, has two dimensions in the context of its contribution to the augmentation

of agricultural growth. These are availability of credit (quantum) and the distribution of credit. In

this section, we look at sources of agriculture credit. There have prevailed various inter-state

differences in the access to institutional credit as well as the loan amount obtained by farm

households even for the same size class of landholding. Owing to which, an analysis of status

and performance of agricultural credit has been the major concern of the available literature on

agricultural finance. Such literature facilitated policy makers in taking review of progress already

made and thereby it helped them in taking the appropriate corrective action. There appeared a

large number of studies that have examined this aspect. Sahu (2008), for example, analyses the

trends in the supply of agricultural credit by institutional agencies in fourteen major Indian

states. It observes that the growth rate of agricultural credit was higher during per-reform period

compared to the reform period in most of the states. It also observes that the growth rate of

agricultural credit was higher during pre-reform period compared to the reform period in most of

the states. It notes the unevenness in the growth rate of agricultural credit during the sub periods

as well as across the states. Similarly, Mohan (2006) examining the performance of the flow of

institutional credit finds that despite the increase in the overall flow of institutional credit over

the years, there has taken place several gaps in the system like inadequate provision of credit to

small and marginal farmers, paucity of medium and long-term lending and limited deposit

mobilisation and heavy dependence on borrowed funds by major agricultural credit purveyors.

All these have major implications for agricultural development and the well-being of the farming

community.

Urban Cooperative Banks

Co-operative banks are small-sized units organized in the co-operative sector which operate both

in urban and non-urban regions. These banks are traditionally centered on communities,

localities and work place groups and they essentially lend to small borrowers and businesses.

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary

cooperative banks located in urban and semi-urban areas. These banks, until 1996, could only

30

lend for non-agricultural purposes. As at end-March 2011, there were 1,645 UCBs operating in

the country, of which majority were non-scheduled UCBs. Moreover, while majority of the

UCBs were operating within a single State, there were 42 UCBs having operations in more than

one State. However, today this limitation is no longer prevalent. While the co-operative banks in

rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery,

personal finance, etc. along with some small scale industries and self-employment driven

activities, the co-operative banks in urban areas mainly finance various categories of people for

self-employment, industries, small scale units and home finance.

These banks provide most services such as savings and current accounts, safe deposit lockers,

loan or mortgages to private and business customers. For middle class users, for whom a bank is

where they can save their money, facilities like Internet banking or phone banking is not very

important. Although they are not better than private banks in terms of facilities provided, their

interest rates are definitely competitive. However, unlike private banks, the documentation

process is lengthy if not stringent and getting a loan approved quickly is rather difficult. The

criteria for getting a loan from a UCB are less stringent than for a loan from a commercial bank.

In India rural people such as small and marginal farmers, landless agricultural laborers, artisans

and socially and economically backward castes and classes they have been exploited in the name

of credit facility by informal sector. The rural credit market consists of both formal and informal

financial institutions and agencies that meet the credit needs of the rural masses in India. The

supply of total formal credit is inadequate and rural credit markets are imperfect and fragmented.

Moreover, the distribution of formal sector credit has been unequal, particularly with respect to

region and class, cast and gender in the country side.

Regional Rural Banks

Regional Rural Banks have been in existence for around 36 years in the Indian financial scene.

The institution of Regional Rural Banks (RRBs) was created to meet the excess demand for

institutional credit in the rural areas, particularly among the economically and socially

marginalized sections. The Banking Commission (1972) recommended establish an alternative

institution for rural credit and ultimately Government of India established Regional Rural Banks

31

as a separate institution basically for rural credit on the basis of the recommendations of the

Working Group under the Chairmanship of Shri M. Narashimham. In order to provide access to

low-cost banking facilities to the poor, the Narashimham Working Group (1975) proposed the

establishment of a new set of banks, as institutions which “combine the local feel and the

familiarity with rural problems which the cooperatives possess and the degree of business

organization, ability to mobilize deposits, access to central money markets and modernized

outlook which the commercial banks have”. Subsequently, the Regional Rural Banks were setup

through the promulgation of RRB Act of 1976. The RRBs Act, 1976 succinctly sums up this

overall vision to sub-serve both the developmental and the redistributive objectives. The RRBs

were established “with a view to developing the rural economy by providing, for the purpose of

development of agriculture, trade, commerce, industry and other productive activities in the rural

areas, credit and other facilities, particularly to small and marginal farmers, agricultural

labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental

thereto”.

Regional Rural Banks were established under the provisions of an Ordinance promulgated on the

26th September 1975 and the RRB Act, 1975 with an objective to ensure sufficient institutional

credit for agriculture and other rural sectors. The RRBs mobilize financial resources from

rural/semi-urban areas and grant loans and advances mostly to small and marginal farmers,

agricultural laborers and rural artisans. For the purpose of classification of bank branches, the

Reserve bank of India defines rural area as a place with a population of less than10, 000. RRBs

are jointly owned by Government of India, the concerned State Government and Sponsor Banks;

the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35%

respectively.

The financial viability of RRBs has engaged the attention of the policy makers from time to time.

In fact, as early as 1981, the Committee to Review Arrangements for Institutional Credit for

Agriculture and Rural Development (CRAFICARD) addressed the issue of financial viability of

the RRBs. The CRAFICARD recommended that ‘the loss incurred by a RRB should be made

good annually by the shareholders in the same proportion of their shareholdings’. Though this

recommendation was not accepted, under a scheme of recapitalization, financial support was

32

provided by the shareholders in the proportion of their shareholdings. Subsequently, a number of

committees have come out with different suggestions to address the financial non-viability of

RRBs. For instance, the Working Group on RRBs (Kelkar Committee) in 1984 recommended

that small and uneconomic RRBs should be merged in the interest of economic viability. Five

years down the line, in a similar vein, the Agricultural Credit Review Committee (Khusro

Committee), 1989 pointed out that ‘the weaknesses of RRBs are endemic to the system and non-

viability is built into it, and the only option was to merge the RRBs with the sponsor banks. The

objective of serving the weaker sections effectively could be achieved only by self-sustaining

credit institutions’. The Committee on Restructuring of RRBs, 1994 (Bhandari Committee)

identified 49 RRBs for comprehensive restructuring. It recommended greater devolution of

decision-making powers to the Boards of RRBs in the matters of business development and staff

matters. The option of liquidation again was mooted by the Committee on Revamping of RRBs,

1996 (Basu Committee).

The Expert Group on RRBs in 1997 (Thingalaya Committee) held that very weak RRBs should

be viewed separately and possibility of their liquidation be recognised. They might be merged

with neighboring RRBs. The Expert Committee on Rural Credit, 2001 (Vyas Committee I) was

of the view that the sponsor bank should ensure necessary autonomy for RRBs in their credit and

other portfolio management system. Subsequently, another committee under the Chairmanship of

Chalapathy Rao in 2003 (Chalapathy Rao Committee) recommended that the entire system of

RRBs may be consolidated while retaining the advantages of regional character of these

institutions. As part of the process, some sponsor banks may be eased out. The sponsoring

institutions may include other approved financial institutions as well, in addition to commercial

banks. The Group of CMDs of Select Public Sector Banks, 2004 (Purwar Committee)

recommended the amalgamation of RRBs on regional basis into six commercial banks - one each

for the Northern, Southern, Eastern, Western, Central and North-Eastern Regions. Thus one finds

that a host of options have been suggested starting with vertical merger (with sponsor banks),

horizontal merger (amongst RRBs operating in a particular region) to liquidation by different

committees that have gone into the issue of financial viability and restructuring strategies for the

RRBs.

33

More recently, a committee under the Chairmanship of A.V Sardesai revisited the issue of

restructuring the RRBs (Sardesai Committee, 2005). The Sardesai committee held that ‘to

improve the operational viability of RRBs and take advantage of the economies of scale, the

route of merger/amalgamation of RRBs may be considered taking into account the views of the

various stakeholders’. Merger of RRBs with the sponsor bank is not provided in the RRB Act

1976. Mergers, even if allowed, would not be a desirable way of restructuring. The Committee

was of the view that merging a RRB with its sponsor bank would go against the very spirit of

setting up of RRBs as local entities and for providing credit primarily to weaker sections. Having

discussed various options for restructuring, the Committee was of the view that ‘a change in

sponsor banks may, in some cases help in improving the performance of RRBs. A change in

sponsorship may, inter alia; improve the competitiveness, work culture, management and

efficiency of the concerned RRBs’. Against this backdrop, a number of issues need empirical

probing. Such as, which are the RRBs that need focus and whether for them the sponsor bank has

really to be made accountable. All these issues fall under the broader questions of what factors

drive the performance of RRBs? And do the sponsor banks have a role to play?

34

GOVERNMENT/POLICY SUPPORT TO AGRICULTURAL SECTOR

Indian Banking history can be traced to 19th century. During the colonial era many Indian banks

were founded either by the Presley States or by wealthy individuals. The primary aim of most of

the banks was to cater financial needs of trade and industry in that locality. During this period the

banking services became the privilege of big business firms and wealthy individuals. Masses

were denied easy credit and banking services. Agriculture and rural small scale industries did not

have access to credit facilities and banking services. They depended on village money lenders

and other private financiers to fund their activities. These local financial prodders exploited the

rural population by charging enormous interest rates and harsh repayment conditions.

Nationalization of banks in India by then Indian Prime Minister Indira Gandhi wrote a new

chapter in Indian Banking history. The nationalized banks in India were compelled to focus on

rural and agricultural sectors as a part of their social responsibility. Their resources were utilized

to empower farmers and agricultural laborers in order to free them from the clutches of money

lenders.

NATIONALISATION OF BANKS

Nationalization of banks in India was done in two phases. The first phase of nationalization

started in 1955 when the erstwhile Imperial Bank of India became State Bank of India with an

Act of parliament. During 1959, seven subsidiaries were nationalized and associated with State

Bank of India one by one. This heralded a new beginning in Indian banking system. The State

Bank group became the largest bank in India serving 90 million customers with a network of

over 9000 branches in nook and corners of the country. The second phase of nationalization

started in 1969 with the nationalization of 14 major commercial banks in India. In 1980, 6 more

commercial banks were nationalized and became public sector banks. After this period the Public

Sector Undertaking banks expanded their reach and grew in leaps and bounds. The nationalized

banks in India expanded their branches and spread their activities across the country. The PSU

banks introduced new schemes and programs to cater all sections of the society. Thus the

nationalization of Banks in India helped the masses to avail banking services at affordable cost.

KISAN CREDIT CARD

35

Honourable Union Finance Minister announced in his budget speech for 1998-99 that NABARD would

formulate a Model scheme for issue of Kisan Credit Cards to farmers, on the basis of their land holdings, for

uniform adoption by banks, so that the farmers may use them to readily purchase agricultural inputs such as

seeds, fertilisers, pesticides, etc. and also draw cash for their production needs. NABARD formulated a Model

Kisan Credit Card Scheme in consultation with major banks. Model Scheme circulated by RBI to commercial

banks and by NABARD to Cooperative. Banks and RRBs in August 1998, with instructions to introduce the

same in their respective area of operation.

OBJECTIVES

As a pioneering credit delivery innovation, Kisan Credit Card Scheme aims at provision of adequate and timely

support from the banking system to the farmers for their cultivation needs including purchase of inputs in a

flexible and cost effective manner.

CONTENTS OF CREDIT CARD

Beneficiaries covered under the Scheme are issued with a credit card and a pass book or a credit card cum pass

book incorporating the name, address, particulars of land holding, borrowing limit, validity period, a passport size

photograph of holder etc., which may serve both as an identity card and facilitate recording of transactions on an

ongoing basis. Borrower is required to produce the card cum pass book whenever he/she operates the account.

SALIENT FEATURES OF THE KISAN CREDIT CARD (KCC) SCHEME

Eligible farmers to be provided with a Kisan Credit Card and a pass book or card-cum-pass book.

Revolving cash credit facility involving any number of drawls and repayments within the limit.

Limit to be fixed on the basis of operational land holding, cropping pattern and scale of finance.

Entire production credit needs for full year plus ancillary activities related to crop production to be

considered while fixing limit.

Sub-limits may be fixed at the discretion of banks.

Card valid for 3 years subject to annual review. As incentive for good performance, credit limits could be

enhanced to take care of increase in costs, change in cropping pattern, etc.

Each drawl to be repaid within a maximum period of 12 months.

Conversion/reschedulement of loans also permissible in case of damage to crops due to natural calamities.

Security, margin, rate of interest, etc. as per RBI norms.

36

Operations may be through issuing branch (and also PACS in the case of Cooperative Banks) through other

designated branches at the discretion of bank.

Withdrawals through slips/cheques accompanied by card and passbook.

ADVANTAGES & BENEFITS OF THE KISAN CREDIT CARD SCHEME

1. Advantages:-

Advantages to farmers

Access to adequate and timely credit to farmers

Full year's credit requirement of the borrower taken care of.

Minimum paper work and simplification of documentation for drawl of funds from the bank.

Flexibility to draw cash and buy inputs.

Assured availability of credit at any time enabling reduced interest burden for the farmer.

Sanction of the facility for 3 years subject to annual review and satisfactory operations and provision for

enhancement.

Flexibility of drawls from a branch other than the issuing branch at the discretion of the bank.

2. Benefits:-

Reduction in work load for branch staff by avoidance of repeat appraisal and processing of loan papers under

Kisan Credit Card Scheme.

Minimum paper work and simplification of documentation for drawl of funds from the bank.

Improvement in recycling of funds and better recovery of loans.

Reduction in transaction cost to the banks.

Better Banker - Client relationships.

COVERAGE OF CROP LOANS DISBURSED UNDER KCC

Under the Rashtriya Krishi Bima Yojna (RKBY)GIC has agreed that the crop loans disbursed for eligible

crops under the Crop Insurance Scheme will be covered under the CCIS, now under Rashtriya Krishi Bima

Yojna. However, the banks are expected to maintain all back up records relating to compliance with "RKBY"

and its seasonality discipline, cut-off date for submitting declarations and end use, etc. as in the case of

normal crop loans.

37

Objectives of the Scheme:-

To provide insurance coverage and financial support to the farmers in the event of failure of crops as a result

of natural calamities, pests and diseases.

To encourage farmers to adopt progressive farming practices, high value inputs and higher technology in

agriculture.

To help stabilise farm incomes, particularly in disaster years.

To support and stimulate primarily production of food crops and oilseeds.

Farmers to be covered: All farmers (both loanee and non-loanee irrespective of their size of holdings)

including sharecroppers, tenant farmers growing insurable crops covered.

Sum insured: The sum insured extends up to the value of threshold yield of the crop, with an option to cover

up to 150% of average yield of the crop on payment of extra premium.

Premium subsidy: 50% subsidy in premium allowed to Small and Marginal Farmers, to be shared equally by

the Government of India and State Government/Union Territory. Premium subsidy to be phased out over a

period of 5 years.

MAJOR STEPS TAKEN BY NABARD

A Brochure on KCC Scheme highlighting the salient features, advantages and other relevant information

about the Scheme was brought out by Head Office and ROs were asked to circulate the brochure to State

govt. departments, Commercial Banks, Cooperative Banks, RRBs and other concerned agencies/officers so

as to generate wider awareness about the Scheme.

Floor limit of Rs.5000/- for issue of KC Cards stands withdrawn.

Studies on KCC Scheme have been entrusted to BIRD and NABARD Staff College to facilitate feedback on

the ground level issues/problems so that changes, where necessary, could be considered.

Studies on the implementation of the Scheme undertaken by NABARD periodically.

On the lines of instructions of RBI to Commercial Banks, Cooperative Banks and RRBs have been advised

that they may, at their discretion, pay interest at a rate based on their perception and other relevant factors on

the minimum credit balances in the cash credit accounts under the Kisan Credit Cards of farmers during the

period from 10th to the last day of each calendar month.

Regional Rural Banks (RRBs) were advised to initiate innovative publicity campaign in each area of

operation in order to cater all eligible farmers under KCC.

Progress in implementation of the Scheme:-

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Since launching in August 1998, around 2.38 crore Kisan Credit Cards issued up to 31 March 2002 by

Cooperative Banks, Regional Rural Banks and Commercial Banks put together.

Scheme implemented in all States and Union Territories (except Chandigarh, Daman & Diu and Dadra &

Nagar Haveli) with all Cooperative Banks, RRBs and Commercial Banks participating.

Agency-wise/State-wise progress in issue of cards by all banks during 2001-02 and since inception of

Scheme.

IMPORTANT INITIATIVES BY NABARD

1) Institutional Strengthening Initiatives:-

Preparing Institution Specific Development Action Plans (DAPs) and entering into MoUs with

Cooperative Banks and RRBs Facilitating State-specific reform packages for Cooperative Banks ODI

Intervention and Training and capacity building in RFIs Support for improvement of business, system, HRD,

etc. of cooperatives Social Re-engineering through Vikas Volunteer Vahini (VVV) Institution of Awards for

good performing Cooperative Banks Assistance for Business Development Cells (BDC) in Co-operative and

RRBs

2) Micro Finance Innovations and Strategies:-

Grant support to Self Help Promoting Institutions (SHPIs) to improve access to credit for rural poor

Capacity Building of partner institutions in micro Finance Supporting and upscaling of SHG-bank linkage

programme

3) Research and Development Initiatives:-

Support to Research activities in areas of agriculture and rural development Support for seminars,

conferences & workshops Conducting institution/area/sector/project-specific studies Dissemination of

findings of studies and research and innovative models and practices

4) Supervision:-

On-site inspection and off-site surveillance of RFIs Issue of warning signals to banks showing deterioration

in financial position and adverse features taking preventive and revival measures for weak banks

5) Institution of purpose-specific funds in NABARD:-

1) Watershed Development Funds (WDF)

2) Co-operative Development Funds (CDF)

3) Rural Promotion Corpus Fund (RPCF)

4) Credit and Financial Services Fund (CFSF)

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5) Micro-Finance Development Fund

6) Soft Loan Assistance for Margin Money Fund

7) National Rural Credit Operation Fund

8) National Rural Credit Stabilisation Fund

9) Agriculture and Rural Enterprises Incubation Fund

The KCC came into existence in 1998-99 as a credit product that allowed farmers the required

financial liquidity and avail credit when it was absolutely needed, providing in the process

flexibility, timeliness, cost effectiveness and hassle free services to the farmers. Since almost one

decade has been passed since the implementation of KCC scheme in 1999, it was felt by the

NABARD to (i) critically examine the difficulties and operational problems / bottlenecks

encountered by the farmers as well as the implementing agencies, (ii) critically review the

progress of the scheme, particularly from the angle of its geographical spread, bank-wise

progress and coverage of different categories of farmers. Recognizing the limitations of multi-

credit product and multiagency approach, a stronger view emerged among policy makers,

particularly since the early nineties, on the need for an ‘integrated credit’ product for accelerating

sector/area/activity specific development process.

The introduction of a new credit product called ‘Kisan Credit Card’ (KCC) in 1998-99 with three

different sub-limits viz. production, assets maintenance and consumption needs is a step in this

direction. This brings integration into the multi-credit product system by offering farm

entrepreneurs a single line of credit through a single window for multiple purposes. These

include acquisition of farm assets, maintenance thereof and meeting families intervening

consumption needs. The Kisan Credit Card Scheme was a step towards facilitating the access to

short-term credit for the borrowers from the formal financial institutions. The scheme was

conceived as a uniform credit delivery mechanism, which aimed at provision of adequate and

timely supply of short-term credit to the farmers to meet their crop production requirements. The

KCC instrument would allow farmers to purchase agriculture inputs such as seeds, fertilizers,

pesticides and also allow them to withdraw some cash for meeting their other crop production

related requirements. Under the old system short-term credit was disbursed either through a

40

demand loan or through a system of loans known as crop cash credit mechanism9. In the

demand-based system, loans were granted on crop specific basis against execution of fresh

documents each season. The sub limit was fully used up only credits were permitted, but

withdrawals were not allowed. Withdrawals under these limits were permitted either in cash

through debit slips or through banker’s cheques for the kind component. As a result the

withdrawals were usually bunched at the beginning of crop season and repayments at the end of

the season when farmers were able to generate cash after harvesting and marketing their produce.

Since then, the scheme of KCC is under implementation by State Cooperative Banks (SCBs)

through DCCBs and PACS as also the Regional Rural Banks (RRBs) and Commercial Banks

(CBs) under the aegis of NABARD. As on 31 March 2009, 828.7 lakh farmers were issued

KCCs by various banks. Co-operative banks have the largest share (62%), followed by

commercial banks (30%) and RRBs (8%). The performance in the implementation of the KCC

scheme has been impressive10 in the states of Andhra Pradesh, Gujarat, Haryana, Karnataka,

Maharashtra, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttaranchal. A personal

accident insurance scheme has also been introduced from the year 2001-02 for all KCC holders

against accidental death/ permanent disability. The scheme has become popular both amongst

farmers and bankers.

PRIORITY SECTOR LENDING

The financial sector reforms have observed changes in priority sector lending across states. Over

the years the stipulation for lending to the priority sector has been retained though its scope and

definition has been fine-tuned by including new items. Based on the recommendations of the

Working Group set up by the RBI2, the priority sector norms were revised in April 2007. As per

the revised norms, the sectors of the society/ economy that impact large segments of the

population, the weaker sections and the sectors which are employment-intensive such as

agriculture and micro and small enterprises, have been retained as priority sector in the revised

guidelines, which came into effect from April 30, 2007. Agriculture, small enterprise, micro

credit, retail trade, education loans and housing loan up to Rs.20 lakh are the broad categories

included in the priority sector.3 However, under the revised norms effective since April 30,

2007, priority sector lending proportion is calculated as a percentage of adjusted net bank credit

41

(ANBC) or credit equivalent amount of off-balance sheet exposure (OBE), whichever is higher,

instead of net bank credit (NBC). ANBC includes NBC plus investments made by banks in non-

SLR bonds held in HTM category.

Narasimham committee had recommended a reduction in priority sector lending, but political

compulsions did not allow the government to reduce the lending from existing 40 percent and

that of agriculture of 18 percent. Under the priority sector lending, direct institutional credit to

agriculture sector includes loans sanctioned for small and marginal farmers for purchase of land

for agricultural purposes. Distressed farmers indebted to non-institutional lenders can obtain

loans against appropriate collateral and group security. As per the new guidelines, individual

farmer can avail of loans up to Rs.10 lakh against pledge/hypothecation of agricultural produce

(including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the

farmers were given crop loans for raising the produce or not. This policy is exclusionary as small

and marginal farmers get excluded. They are not in a position to pledge produce.

For instance in 1996-97, share of agriculture was 12.14 percent that fell to 10.98 percent in 2002-

03 (table 2.7). It recovered in next year, a year before the base year of doubling of credit flow to

agriculture and has continuously risen since then, but never touched 18.0 percent. This is despite

the fact that policies reflect pro-agriculture shift in the recent times, the focus in the 11th five-

year plan is to achieve 4 percent growth in agriculture. Reforms have had a varied impact on

formal sector finances across states in India. However, it may be mentioned here that in quantum

terms the credit flow across the sectors and states has gone up significantly since the reforms.

The gross bank credit during 1996-97 and 2008-09 grew at the rate of 22.25 percent, which is

marginally lower than the growth of priority sector lending. However, agricultural credit grew at

slightly higher rate of 23.13 percent. Low interest rates may have primarily influenced this

positive trend.

The non-fulfilment of priority sector lending is the result of cautious approach adopted by

bankers to avoid bad loans, which may affect their non-performing assets. The scope of priority

sector lending has also been widened over the years. The interest deregulation has imparted more

flexibility to priority sector lending and the bankers have really used it to direct credit to sectors

42

that reduce their cost of delivery rather than follow the dictum of timely credit delivery. The new

guidelines are supposed to aim at overcoming the crowding out effect against small loans,

particularly to agriculture, only one-third of amount of the big-ticket loans/ advances can be

classified as direct agriculture.

43

IMPACT OF GLOBALISATION ON AGRICULTURE

Globalization in the context of agriculture can be best discussed in the context of three

components – improvement of productive efficiency by ensuring the convergence of potential

and realized output, increase in agricultural exports and value added activities using agricultural

produce, and finally, improved access to domestic and international markets that are either

tightly regulated or are overly protected. These components are linked in various ways. For

example, productive efficiency would enhance value added activities in agriculture through agro-

processing and exports of agricultural and agro-based products. These activities in turn would

increase income and employment in the industrial processing sector. Thus globalizing agriculture

has the potential to transform subsistence agriculture to commercialized agriculture and to

improve the living conditions of the rural community. However, economic reforms within India

are necessary to pave the path to successful globalization.

The stated objective of the new economic policy is to raise the economy’s growth rate from the

current 5.5 per cent achieved over 15 years to about 7 or 8 per cent per year. Ahluwalia (1996)

explains that this indirectly requires an improvement in agricultural growth from between 2 and

3 per cent in the past to about 4 per cent per year. Although initially, with respect to agriculture,

there was no major policy reform package in the 1990s, it was however anticipated that the

opening up of the agricultural sector to foreign trade, the move to a market determined exchange

rate and reduction of protection for industry would, over time, benefit the agricultural sector.

Manmohan Singh (1995), the then Finance Minister, in his inaugural address at the 54th Annual

Conference of the Indian Society of Agricultural Economics, brought to notice that a policy of

heavy protection of the industrial sector operated to the disadvantage of the agricultural sector

when industrial prices were raised relative to world prices and thus the profitability of investing

in industry was raised relative to agriculture. This would lead to a shift of resources from

agriculture to industry.

A policy of heavy industrial protection also led to an appreciation of the exchange rate.

Ahluwalia (1996) noted that over-valuation of the exchange rate (before the Indian rupee was

devalued by 18 per cent in two phases starting in July 1991) discouraged agricultural exports

44

more than industrial exports because Indian industrial policy had sought to offset the constraints

faced by industries via a system of export incentives for market support. Agricultural exports on

the other hand were denied any such incentives as they did not use imported inputs. Ahluwalia

(1996) argued that in the past, the agricultural sector was negatively protected because of the

above two reasons and the fact that farmers were denied access to the world markets due to trade

barriers.

Exports of plantation crops and a few commercial crops were free from export restriction but

exports of essential commodities, particularly food products, were subject to bans, quotas and

other restrictions. Interestingly, Kruger and others (1991) showed that while many developed

countries continue to protect agriculture, developing countries do not do so. However, no formal

attempt or theoretical framework has yet been used to assess the extent of negative protection in

Indian agriculture. The implementation of economic reform in the Indian agricultural sector has

been a gradual process. These include an 87 per cent cut in tariff on agricultural products,

sustenance of high-yield crop varieties, removal of minimum export price on selected

agricultural products, a lift on quantity restrictions on the export of some crops and various land

reforms related to tenancy rights and land ceilings.

45

ANALYSIS OF SECONDARY DATA

Regional rural banks

Balance sheet operations

Regional rural banks (RRBs) maintained stable growth in assets around 16 per cent during 2013-

14. Major sources of growth were borrowings and capital infusion by NABARD and sponsor

banks on the liabilities side and loans and advances on the assets side.

Profitability

As per the provisional results, all the 57 RRBs reported profits in 2013-14 with their net profit is

going up by 18.5 per cent during the year. Net margin (net interest income as per cent of average

total assets) also recovered from previous year.

Trend in profitability of RRBs

46

Return on asset and net interest margin of LABs

Local area banks

Balance sheet operations and profitability

Four local area banks (LABs) are currently operational. During 2013-14, they witnessed an asset

growth of 20 per cent. The decline in net profits by over 21 per cent, can be attributed to growth

in interest expenses outpacing the increase in their income.

Urban co-operative banks

Balance sheet operations

The balance sheets of urban co-operative banks (UCBs) showed stable growth in 2013-14.

Growth in liabilities was driven by an increase in their other liabilities and deposits.

47

Following consolidation, the number of UCBs came down marginally to 1,589 in 2013-14 from

over 1,600 a year ago. In 2013-14 UCBs’ C-D ratio declined by about 2 percentage points and

the investment-deposit ratio also showed a small contraction.

Number of UCBs and their asset growth

Long-term rural credit co-operatives

State co-operative agriculture and rural development banks

Balance sheet operations

48

There was continued deceleration in balance sheet growth of state co-operative agriculture and

rural development banks (SCARDBs) in 2012-13; this was contributed to by all major

components on the liabilities and assets sides.

Trends in balance sheet indicators of SCARDBs

Profitability

Apart from the continued decline in their asset sizes, SCARDBs also incurred losses to the tune

of Rs.1.0 billion in 2012-13. These losses were primarily on account of large provisioning

towards loan losses.

Asset quality

There was a decline in the asset quality of SCARDBs in 2012-13 taking their GNPA ratio to a

high of 36 per cent.

49

Primary co-operative agriculture and rural development banks

Balance sheet operations

The asset growth of primary co-operative agriculture and rural development banks (PCARDBs)

further declined to 1.7 per cent in 2012-13 from 5.5 per cent during the previous year. These

institutions also showed weak growth in owned funds (including capital and reserves) as well as

negative growth in credit outstanding during the year.

Profitability

The number of loss making PCARDBs marginally increased to 318 during 2012-13. On

aggregate basis, PCARDBs reported losses in 2012-13.

Profitability indicators of PCARDBs

Asset quality

50

The asset quality of PCARDBs continued to be fragile with their GNPA ratio increased to 37 per

cent in 2012-13.

51

ROLE OF INSTITUTIONS

ROLE OF NABARD

The National Bank for Agriculture and Rural Development (NABARD) is the apex organization

with respect to all matters relating to policy, planning and operational aspects in the field of

credit for the promotion of, agriculture and allied activities in rural areas. The bank provides

refinance to various banks for their term lending operations for the purposes of agriculture and

rural development. The National Bank of Agriculture and Rural Development (NABARD) has

emerged as an apex refinancing institution for agricultural and rural credit in the country since

July, 1982. It has taken over the refinancing functions from the Reserve Bank of India with

respect of State Cooperative Banks and Regional Rural Banks. It has also taken over the ARDC

(Agricultural Refinance and Development Corporation), developing a strong and efficient credit

delivery system which is capable of taking care of the expanding and diverse credit needs for

agriculture and rural development was a task that received the attention of NABARD.

NABARD, is involved in the implementation of projects assisted by World Bank and its affiliate,

the International Development Association (IDA). There are some other International Aid

Agencies which provide assistance to NABARD in respect of various projects. NABARD has

been associated with the implementation of 42 projects with external credit out of which 38

projects are assisted by World Bank and its affiliate, i.e. IDA and International Bank for

Reconstruction and Development (IBRD).

Agricultural credit is considered as one of the most basic input for conducting all agricultural

development programmes. In India there is an immense need for proper agricultural credit as the

economic condition of Indian farmers are very poor. From the very beginning the prime source

of agricultural credit in India was money lenders. After independence the Govt. adopted the

institutional credit approach through various agencies like co-operatives, commercial banks,

regional rural banks etc. to provide adequate credit to farmers, at a cheaper rate of interest.

Moreover with growing modernization of agriculture during post-green revolution period the

requirement of agricultural credit has increased further in recent years.

52

Now a days the long term and short term credit needs of these institutions are also being met by

National Bank for Agricultural and Rural Development (NABARD). It is the evolution of

agricultural finance. It was established in the year 1982, with head office at Mumbai and 16

regional offices throughout the country. It has the objective of promoting the health and the

strength of the credit institutions which are in the forefront of the delivery system namely,

cooperatives, commercial banks and regional rural bank. It is, in brief, an institution for the

purpose of refinance; with the complementary work of directing, inspecting and supervising the

credit- flows for agricultural and rural development. The scope of the operations of NABARD is

large indeed. Besides providing finance to credit institutions, it is providing innovations in regard

to formulation of schemes, monitoring of implementation, evaluation of results and evolution of

suitable supporting structures of all kinds of agricultural activities. It is performing the various

functions assumed by it smoothly and efficiently. A rural infrastructural development fund

(RIDF) was established under NABARD in 1995-96. Every year the resources of RIDE have

been augmented to finance rural infrastructure development project by States. The outstanding

refinance from NABARD by State Co-operative Banks, RRBs and State Governments was Rs.

7,075 crore as at end June 2002, which was a little higher than Rs. 6,857 crore as at end June

2001. Farm mechanisation got the highest amount of assistance and the second place went to

minor irrigation. The rest of the amount was distributed for forestation/Plantations, Land

Development, sheep-rearing, poultry farming, dairy farming etc. The National Bank has

vigorously continued its efforts for promoting investments in the agricultural sector in the less

developed/under banked states. U.P., Bihar, M.P., Rajasthan and Orissa in that order, have been

the biggest beneficiaries. Thus NABARD is taking the necessary steps to revitalise and

rejuvenate the rural economy of India by developing agriculture, small scale and cottage

industries and trading activities in all possible ways.

In earlier years, sums aggregating Rs. 1500 crore was received from RBI and Government of

India as advance towards capital. But in 2001-02 by a notification of GOI, these amounts were

credited to capital account of NABARD. It was proposed to increase it further to Rs. 2000 crore

in future. It performs the various functions. i. It provides refinance facilities for agriculture, small

scale industries, artisans; cottage and village industries, handicrafts and other allied economic

activities so that production may be increased. ii. It can borrow from RBI and the Government of

53

India. It can arrange funds from the World Bank and other multilateral and bilateral financial

agencies. iii. It can advance loans up to a period of 20 years to State Governments so that they

may participate in the share capital of cooperative credit societies. It can provide credit facilities

for the short, medium and long term to State Co-operative Banks, Commercial Banks, Regional

Rural Banks and other financial institutions. iv. It coordinates the work of the Government of

India, Planning Commission and State Governments for Village and small scale industries. v. It

finances research on agriculture and rural development. vi. It supervisor the work of Regional

Rural Banks, Commercial Banks and other Cooperative Bank. In this way NABARD acts as an

apex body for the development of agriculture and other activities related to agriculture sector.

ROLE OF COMMERCIAL BANKS

Commercial banking system is expected to play an important role in forecasting the future

framework of institutional finance in agriculture. Before nationalization in 1969, the commercial

banks in India had confined their banking operations mainly in urban areas by receiving deposits

and financing trade and industry. One of the long standing complaints against commercial banks

was their failure in financing agriculture. Before their nationalization in 1969, they were hesitant

to provide short term, medium and long term credit for agricultural purposes. The uncertain

character of Indian agriculture, small amounts of individual loans, inadequate security for loans,

difficulty in recovery of loans' from farmers and lack of business experience of working with

rural sector, were some of the factors which discouraged the commercial banks from taking

interest in agricultural finance. Farmers‟ needs for funds were mainly met by the private money

lender and co-operative credit institutions. The co-operative credit societies, Land Mortgage

Banks, Land Development Banks and the Government Taccavi loans were the main sources of

institutional credit available to the farmers. These agencies, however, did not have enough

resources to meet all the requirements of the farmers which had increased with introduction of

new farm technology. Recognizing that capital was one of the most limiting-factors hindering the

adoption of new farm technology, fourteen commercial banks in India were nationalized in July,

1969. These banks included, Bank of India, Central Bank of India, Bank of Baroda, Punjab

National 'Bank, United Bank of India, Canara Bank, United Commercial Bank, Union Bank of

India, Indian Overseas Bank, Indian Bank, Dena Bank, Bank of Maharashtra, Syndicate Bank

and Allahabad Bank. Six more commercial banks viz. Punjab and Sind Bank; New Bank of

54

Commerce, Andhra Bank, Corporation Bank, Vijaya Bank, Oriental Bank of Commerce were

nationalised in 1980.

The role of Commercial Banks in financing the agricultural sector has been very small. Of the

total agricultural credit their share was as low as 0.9% in 1951-52 and 28% in 1981-82. Since the

nationalisation of Banks, this share has been increasing. There has also seen a phenomenal

increase in the number of branches of commercial banks in rural areas. The proportion of new

rural branches to the total number of new bank offices has increased. The percentage of rural

branches on 30th June, 2003 was 49% of the total branches of all commercial banks in the

country.

ROLE OF PUBLIC SECTOR BANKS

The public sector banks have increased their lending under priority sector advances since June

1969. The amount outstanding under this head has increased from Rs. 441 crore at the end of

June 1969 to Rs. 2, 57,916 crore at the end of March 2002. The share of priority sector lending in

total banks credit was 34.6% as an end March 2002.

ROLE OF RBI

The Reserve Bank of India being the Central Bank of the country does not provide finance

directly to the farmer, but it provides the facility of agricultural credit through State Cooperative

Banks. The Reserve Bank of India provides two types of short-term financial assistance to the

State Cooperative banks: - a. Short-Term credit, and b. Rediscounting Facilities. Both these

facilities are provided at a concessional rate of two per cent below the bank rate. Loans are made

against specified Government Securities, approved debentures of recognised Rural Development

Banks, (formerly Land Development Banks) promissory notes of Approved Cooperative

Marketing Societies endorsed by the State Cooperative Banks, etc. Short-term loans are granted

by the Reserve bank of India to the State Cooperative banks for seasonal agricultural operations

and marketing of crops.

Besides this, Reserve bank of India also gives medium-term loans to the State Cooperative

Banks for being advanced to the farmers for such purposes as construction of wells, minor

55

irrigation schemes, purchase of machinery and agricultural tools. The Reserve Bank of India has

also started undertaking long-term financing for agricultural purposes, though indirectly, by

subscribing to debentures of the Rural Development Banks, which are guaranteed by the State

Governments. The Reserve bank of India also undertakes research investigations and surveys

relating to rural finance. The bank has been giving very valuable advice to the Central and State

Governments and to the State Cooperative Banks on matters relating to rural finance. With this

aim in view, the Reserve Bank of India has set up a separate Agricultural Credit Department

whose functions are as follows:

1. To maintain the expert staff for studying all the problems of agricultural credit and to provide

expert advice to the Central and State Governments, State Cooperative Banks and other banking

organizations.

2. To finance the movement of agricultural crops and other agricultural operations through the

medium of State Cooperative Banks and other agencies of rural credit. In addition to financial

assistance, the RBI has also played an important role in conducting research on rural credit

problems. Thus, we may conclude that the Reserve Bank of India has been playing an important

role in meeting the country's need in respect of rural credit and in making the position of State

Cooperative Banks and Rural Development Banks strong. In order to benefit fully from the

services of the Reserve Bank of India, the government must have a properly organized rural

banking system. The State Governments have assigned due place to these institutions in the

planning process. IN the early years of their evolution Central Ranks all over the world evinced

little interest in rural finance. The smallness of individual loans, the poor value of the securities

offered, the difficulties involved in the marketing of the collaterals and, consequently, the greater

risk involved in agricultural loans accounted for the reluctance of Commercial as well as central

banks to take an active part in the provision of rural finance. As agricultural loans do not

conform strictly to the canon of 'shift ability without loss' it is understandable that: commercial

batiks are not interested in agricultural finance, especially in countries where the agriculture is

backward. But for this reason Central Hanks cannot keep away from the field of rural finance.

In India the need for the Central Bank to participate in rural finance was felt as early as in 1930

when the Central Ranking Enquiry Committee expressed the hope that the proposed Reserve

Bank "would tend to increase the volume of credit available for trade, industry and agriculture

and to mitigate the evils of fluctuating and high charges for the use of such credit''. Five years

56

later, the Agricultural Credit Department of the Reserve Rank was inaugurated. Among its

functions were: maintaining an expert staff to study all questions of agricultural credit, making

itself available for consultation by the Government and other interested organisations, and

coordinating the Ranks operations with those of Stale cooperative hanks and other agencies

engaged in agricultural credit.

During the next two years, the Rank submitted two reports in compliance with Section 55 (1) of

the Reserve Bank of India Act (1934). The first Report set out, in the words of Sir James Taylor,

"the problems in their proper perspective with a view to eliciting practical and constructive

suggestions". The second report, commonly known as the statutory report, was submitted in

December 1937. After drawing attention to the predominance of moneylenders and the

exorbitant interest rates charged by them un funds supplied to agriculturists, the report suggested

legislation for the regulation of moneylending and emphasized that "the cooperative movement

must be reconstructed and revitalized". An idea of the rigid attitude of the Reserve Rank to rural

finance that prevailed then can be had from the report which stated that "it is obviously

impossible for the Reserve Rank to lend to agriculturists direct or to advance large sums to

cooperative banks or indigenous bankers for being lent out to cultivators as a matter of course.

The Reserve Rank can come into picture only when the ordinary pool of commercial credit

appears inadequate to meet the reasonable requirements of the country . . . . All that the Reserve

Bank can do is to help the provincial cooperative banks to tide over a temporary shortage of

funds and as the funds advanced must be repaid within the time limit allowed by the Act, the

cooperative banks cannot make use of them for the purpose of continuing finance.... These

conditions may seem stringent but.... the Reserve Bank has to work within the limitations

imposed on. It by the essential conditions of sound central banking and expressed in its

constitution"'.

Rediscount Facilities On the basis of the report, the Reserve Rank devised a scheme in January

1938 by which it offered to rediscount at concessional rates, through scheduled banks, the bills

of approved money lenders drawn for making advances to agriculturists against the security of

agricultural produce on the condition that the benefit of the low rate was passed on to the

agriculturists. The scheduled banks, however, did not take advantage of the scheme for a number

of reasons. The Reserve Rank soon after issued a circular to the cooperative banks asking them

to make use of the financial facilities provided by the Reserve Bank by maintaining adequate

57

reserves, separating short-term from long-term loans, showing clearly the proportion of overdues

and bad debts to total loans, effecting a business-like distribution of their assets, keeping 1 per

cent and 2.1 per cent of their time and demand Liabilities respectively with the Reserve Bank,

preparing their balance sheets in proper form, submitting audit notes and permitting inspection

by the Rank's officers. This too proved futile as the majority of the State co-operative banks

regarded the Reserve Rank's conditions as being too stringent.

ROLE OF SELF HELP GROUP

A self-help group (SHG) is a village-based financial intermediary usually composed of between 10-20 local

women. Most self-help groups are located in India, though SHGs can also be found in other countries,

especially in South Asia and Southeast Asia. Members make small regular savings contributions over a few

months until there is enough capital in the group to begin lending. Funds may then be lent back to the

members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery

of microcredit. SHGs are member-based microfinance intermediaries inspired by external technical support

that lie between informal financial market actors like moneylenders, collectors, and ROSCAs on the one

hand, and formal actors like microfinance institutions and banks on the other. Other organizations in this

transitional zone in financial market development include CVECAs and ASCAs.

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous

social and economic backgrounds, voluntarily coming together to save regular small sums of money,

mutually agreeing to contribute to a common fund and to meet their emergency needs on the basis of mutual

help. Also it is a group of people who pool in their resources to become financially stable by taking loans

from the money collected by that group and by making everybody of that group self-employed. The group

members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment.

This system eliminates the need for collateral and is closely related to that of solidarity lending, widely used

by microfinance institutions. To make the book-keeping simple enough to be handled by the members, flat

interest rates are used for most loan calculations.

GOALS

Self-help groups are started by non-profit organizations (NGOs) that generally have broad anti-poverty

agendas. Self-help groups are seen as instruments for a variety of goals including empowering women,

developing leadership abilities among poor people, increasing school enrolments, and improving nutrition and

the use of birth control. Financial intermediation is generally seen more as an entry point to these other goals,

rather than as a primary objective. This can hinder their development as sources of village capital, as well as

58

their efforts to aggregate locally controlled pools of capital through federation, as was historically

accomplished by credit unions.

NABARD's 'SHG Bank Linkage' program

Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program, borrow from

banks once they have accumulated a base of their own capital and have established a track record of regular

repayments. This model has attracted attention as a possible way of delivery microfinance services to poor

populations that have been difficult to reach directly through banks or other institutions. "By aggregating their

individual savings into a single deposit, self-help groups minimize the bank's transaction costs and generate

an attractive volume of deposits. Through self-help groups the bank can serve small rural depositors while

paying them a market rate of interest. NABARD estimates that there are 2.2 million SHGs in India,

representing 33 million members that have taken loans from banks under its linkage program to date. This

does not include SHGs that have not borrowed. "The SHG Banking Linkage Programme since its beginning

has been predominant in certain states, showing spatial preferences especially for the southern region –

Andhra Pradesh, Tamil Nadu, Kerala and Karnataka. These states accounted for 57 % of the SHG credits

linked during the financial year 2005-2006."

Advantages of financing through SHGs

An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces

transaction costs for both lenders and borrowers. While lenders have to handle only a single SHG account

instead of a large number of small-sized individual accounts, borrowers as part of an SHG cut down

expenses on travel (to & from the branch and other places) for completing paper work and on the loss of

workdays in canvassing for loans

DESIGN FEATURES OF THE PRODUCT

The product design features combine the collective wisdom of the poor, the organizational capabilities of the

social intermediary and the financial strength of the Banks. Its features are 

1. Small and fixed savings at frequent intervals:

Small and fixed savings made at regular intervals coupled with conditions like compulsory attendance, penal

provisions to ensure timely attendance, saving, repayment etc. forms a deterrent for the rich to join the SHG

system- thereby enables exclusion of the rich    

2. Self-selection:

59

The members select their own members to form groups. The members residing in the same neighbourhood

ensure better character screening and tend to exclude deviant behaved ones.    

3. Focus on women:

As regular meetings and savings are compulsory ingredients in the product design, it becomes more

suitable for the women clients- as group formation and participatory meetings is a natural ally for the women

to follow.    

4. Savings first and credit later:

The saving first concept enables the poor to gradually understand the importance of saving, appreciate the

nuances of credit concept using their own money before seeking external support (credit) for fulfilling future

needs. The poor tend to understand and respect the terms of credit better.    

5. Market rates of interest:

Self-determined interest rates are normally market related. Sub-market interest rates could spell doom;

distort the use and direction of credit.    

6. Intra group appraisal systems and prioritization:

Essentials of good credit management like (peer) appraisal for credit needs (checking the antecedents and

needs before sanction), (peer) monitoring- end use of credit; (peer sympathy) reschedulement in case of crisis

and (peer pressure) collateral in case of wilful non-payment etc. all seems to coexist in the system making it’s

one of the best approaches for providing financial services to the poor.    

7. Credit rationing:

The approach of prioritization i.e.: meeting critical needs first serves as a useful tool for intra –group lending.

This ensures the potential credit takers/users to meticulously follow up credit already dispensed, as future

credit disbursals rely on repayments by the existing credit users.    

8. Shorter repayment terms:

Smaller and shorter repayment schedule ensures faster recycling of funds, greater fiscal prudence in the poor

and drives away the slackness and complacency that tends to set-in, in long duration credit cycles.    

9. Progressive lending:

The practice of repeat loans and often-higher doses - is followed by SHGs in their intra-group loaning,

thereby enticing prompt repayments.    

10. A multiple-eyed operation:

60

The operations of the SHG are transacted in group meetings thus enabling high trust levels and openness in

the SHG system. SHG members facilitating openness and freedom from unfair practices also generally

conduct the banking transactions.

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CONCLUSION

To conclude, the rapid expansion of RRB has helped in reducing substantially the regional

disparities in respect of banking facilities in India. The efforts made by RRB in branch

expansion, deposit mobilization, rural development and credit deployment in weaker section of

rural areas are appreciable. RRB successfully achieve its objectives like to take banking to door

steps of rural households particularly in banking deprived rural area, to avail easy and cheaper

credit to weaker rural section who are dependent on private lenders, to encourage rural savings

for productive activities, to generate employment in rural areas and to bring down the cost of

purveying credit in rural areas. Thus RRB is providing the strongest banking network.

Government should take some effective remedial steps to make Rural Banks viable.

Regional Rural Banks plays a key role as an important vehicle of credit delivery in rural areas

with the objective of credit dispersal to small, marginal farmers & socio economically weaker

section of population for the development of agriculture, trade and industry .But still its

commercial viability has been questioned due to its limited business flexibility, smaller size of

loan & high risk in loan & advances. Rural banks need to remove lack of transparency in their

operation which leads to unequal relationship between banker and customer. Banking staff

should interact more with their customers to overcome this problem.

Banks should open their branches in areas where customers are not able to avail banking

facilities. In this competitive era, RRBs have to concentrate on speedy, qualitative and secure

banking services to retain existing customers and attract potential customers.

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