A

Report On

Regulation of Rural Financial Services

Submitted to

INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (IIIM)

PGDM PREGRAMME

Under the Guidance of

Ms. Pinky Talaty

May 2013

Charotar University of Science and Technology

(CHARUSAT)

PGDM (11-13) Quarter- 6

Prepared by:

Naiya Patel

ID NO.:11PGDM007

Overview

Sr. No Title Page No.

1) Objectives

2) Introduction

3) Overall Set up of Rural Financial

Institutions (RFIs)

4) Function and Policies of RBI in Rural

Banking

5) Organizational Set up of NABARD

Objectives

• How the institutional credit system for rural sector was built in India

• Function and Policies of RBI in Rural Banking

• Functions, Credit facilities and Scheme and services area approach

Rural Banking Introduction

Institutional credit system for rural sector in India started with the organization of

cooperative credit societies in 1904 to emphasize thrift and mutual help. The cooperative

credit system was refurbished in the mid-50s according to the recommendations of all-

India Rural credit Survey Agriculture has been the basic means of survival since time

immemorial. Effective utilization of the available resources such as land, water, cattle

forestry; etc. for meeting the human requirements is important. Agriculture forms the

back-bone of the Indian economy and despite efforts of industrialization, during the last

four decades agriculture continues to be the basis of economy. Agriculture is the largest

and the most important sector as about 70 per cent of populations depend upon it as

against three per cent in United States four per cent in Canada and five per cent in

Australia. Agriculture has always been a way of life rather than a business, particularly,

in the developing countries like India. Agriculture tries to take the man back to the nature

while the modern industry takes him away from the nature. Various experts in this field

have expressed different views regarding the role of agriculture in the society. In this

regard the simple explanation is that because the agriculture feeds the world, it is the

basis of the existence of the human sector.

In spite of good efforts, cooperative credit agencies did not develop into strong

institutions, except in a few states. in the meantime advent of green revolution with

technological advancement created increased demand for credit, which cooperatives

could not meet, so the commercial banks were inducted into the field of agricultural

credit under the policy of ‘social control’ in 1967.The aim of this move was to creat

healthy competition between commercial and cooperative banks. This approach was

known as ‘multi-agency approach’. In 1975, a new organization, Regional Rural Bank

(RRB) was established in select areas with exclusive focus on small/marginal farmers.

The overall set up of Rural financial institutions include cooperatives, commercial banks

including RRBs.

Overall set up of rural financial Institutions(RFI)

Under the multi-agency approach, cooperatives and commercial banking sectors services

active financial and non-financial support from the central and state governments. RBI,

NABARD, AFC, SIDBI and NCDC also provide support to RFIs.

Function and Policies of RBI in Rural Banking

Introduction

The main functions of the Reserve Bank of India (RBI), established on april 1, 1935, are

to act as the note issuing authority, banker’s bank and banker to government, and to

promote the growth of the economy within the framework of the general economic policy

of the government consistent with the need for maintenance of price stability. After

setting up Agricultural Credit Department (ACD) in 1935, RBI initiated several policy

measures in the area of rural credit. In this section, the historical background, growth and

Reserve Bank’s function and policies in relation to rural banking until NABARD’s

formation in 1982 are discussed.

Role of RBI in Rural Credit

A special feature of the RBI Act was provision for granting financial accommodation to

the cooperative banking sector and schedules banks. Section 17 of the Act envisaged the

provision of agricultural credit by the Bank for seasonal agricultural operations and the

marketing of crops. The broad functions of ACD were:

i. To maintain an expert staff to study all questions of agriculture credit and be

available for consultation by the central Government, State Government, State

Government, State CO-operative Banks and other banking organization, and

ii. To co-ordinate the operations of the bank in connection with agricultural credit

and its relations with the State Cooperative Banka and other banks or

organizations engaged in the business of agricultural credit.

In the first 20 years from 1935 to 1934, the role of ACD was

confined to conducting studies and advising State Government. In May 1938, the Reserve

Bank examined financial status and creditworthiness of the provincial Cooperative Banks

and land mortgage banks with a view to providing a line of credit to cooperatives. RBI’s

role in the sphere of agriculture credit entered an active phase in the late forties.

Accommodation availed by cooperative banks from the RBI increased from a little over

Rsr.1 lakh in 1945-46 to Rs. 5.37 crore in 1950-51.

Setting up of the State Bank of India

The Rural Credit Survey Committee recommended creation of the state Bank of India as

a very crucial part of the integrated scheme of Rural Credit. The proposed bank was to

provide remittance facilities for cooperative and other banks and be responsive to the

needs of Cooperatives connected with credit. Thus, the imperial Bank of India was

converted into the state Bank of India in July 1955. The Reserve Bank was the major

shareholder in the state Bank.

Agriculture Refinance and Development Corporation

RBI established the Agricultural Refinance Corporation in 1963, as its associate.

Subsequently, it was renamed as agricultural Refinance and Development Corporation

(ARDC). ARDC was primarily a refinancing agency to makes available term credit for

agriculture development for compact area development schemes.

During its 19 years of existence, the cumulative refinance disbursed by the corporation

was Rs. 2808 crore.

Rural Credit Review Committee

On the basis of the recommendation of the all India Rural Credit Review Committee

(1969), the Rural Electrification corporation was set up in July 1969 to finance rural

electrification schemes and Small Farmer Development Agency (SFDA) and Marginal

Farmer and Agriculture Laborers Projects (MFAL) were set up deal with the problems of

small farmers and agricultural labourers and to ensure availability of agricultural inputs,

services and credit.

RBI and Regional Rural Banks

Based on the recommendation of a Working Group on Rural Banks, the Regional Rural

Banks (RRBs) were established on 20 October 1975 in five selected districts of the

country. The objective of RRBs was to provide credit facilities to the rural poor, namely,

the small and marginal farmers, agricultural labourers, rural artisans and small

entrepreneurs.

Formation of NABARD

The RBI at the instance of GOI appointed the Committee to Review Arrangements for

Institutional credit for Agriculture and Rural Development (CARFICARD) in March

1979.

The main functions of NABARD were: a) to provide refinance to eligible institutions,

viz., SLDBs, SCBs, scheduled CBs and RRBs for supporting production and investment

credit for development activities in rural areas, b) to improve the absorptive capacity of

the credit delivery system through institution building by monitoring, formulating of

rehabilitation schemes, restructuring of credit institutions and training of personnel, c) to

coordinate the activities of different agencies engaged in development work at the field

level and to keep liaison with GOI, state Government and EBI and other national level

institutions connected with policy formulation, and d)to undertake monitoring and

evaluation of project refinance by it.

Role of RBI after NABARD’s formation

The Reserve Bank of India’s role in rural credit relating to its promotional, finance and

regulatory functions has undergone a change with the formation of NABARD.

o Promotional Role

RBI continued to initiate necessary steps to promote credit flow to agriculture and rural

development by commercial banks. According to the NABARD Act, 1981, NABARD

was to work under the RBI’s general guidance and would receive support from RBI.

o Provision of Finance

NABARD provide refinance facilities to rural credit institutions and State Governments.

To enable NABARD to discharge its credit functions, RBI was providing finance to

NABARD borrowed from RBI funds required for its short term operations for agriculture

and development. From 1988-89 instead of single General Line of Credit, GLC i (for

seasonal agriculture operations) and GLC ii (for other short-term purposes) were

sanctioned for various short term purposes.

o Regulatory Functions

Even after the formation of NABARD, the Reserve Bank continued to be regulatory

authority for the co-operative Regional Rural Banks by issuing license to cooperative

banks and giving permission for the opening of branches, issuing directive and getting the

statutory returns prescribed under the RBI Act and the BR Act. Inspection of cooperative

banks (other than Primary Cooperative Banks) and Regional Rural Banks were with

NABARD, but retained its powers to conduct inspections wherever necessary.

Organiz ational set up of NABARD

NABARD operates through its Head Office at Mumbai, 28 Regional Offices and two

sub-offices in the country. The Regional Offices of NABARD are assisted by District

development offices. The bank’s six training establishment provide training to its own

staff members as also members of client organization.

I. Sources and Uses of Funds

NABARD’s main sources of funds for its activities of credit and developmental,

are capital and own funds, domestic borrowings, International borrowings and deposits.

The major purposes of development of fund can be categorized as: 1) Loans and

Advances, and 2) Investment.

Loans and advances

The loans and advances comprise: (a) schematic lending (refinance support against

disbursements made under project lending by credit agencies), (b) non- schematic lending

(to SCB and RRBs for short term loans, medium term loans and medium term loans for

conversion of production credit into MT loans), (c) loans to state government (non-

project loans for contribution to the share capital of cooperative credit institutions and

project loans under Rural Infrastructure development fund for completion of projects

undertaken by state government with a view to creating infrastructure for supporting

agriculture and rural development) and(d) other loans extended out of various funds, such

as, CDF, AREIF and RPCF.

The total financial support extended bu NABAED increased by 30 per cent and stood at

Rs.50, 577 crore during 2008-09 as against Rs. 38,767 crore during 2007-08.

Investments

NABARD invests its short-term surplus funds in Bills rediscounting, call and short term

money market and GOI securities. NABARD also places funds in deposits with

commercial banks on short term basis and certificate of deposits.

II. Functions of NABARD

The various functions of NABARD can be broadly grouped as credit dispensation and

non-credit, promotional/developmental and institutional developmental.

Credit Dispensation

NABARD is empowered to provide short term, medium term and long term financial

assistance by way of refinance or otherwise to different institutions. The refinance

facilities provided to different credit agencies by NABARD are guided by the following

objectives:

o To support national policies for increasing agricultural production and employment

through efficient use of locally available resources.

o To achieve reduction in regional imbalance in development

o To ensure growth equity by extending credit support to weaker sections of the society

through government-sponsored programmes like the integrated Rural Development

Programme.

o Laying emphasis on assessing the credit requirement of women and SC/ST

beneficiaries.

o To supplement resources for the credit system for meeting credit needs of its clientele

as adequately as possible by providing refinance.

o For ensuring simultaneously the building up of a sound, efficient and viable credit

structure for purveying credit in the rural sector of the economy.

Institutional Development Role

NABARD’s role in institutional development related to: (1) improving credit absorptive capacity including formulation of institutional development programme, monitoring and training of personnel, (2)coordinating the rural financing activities of the institutions engaged in developmental work at the field level, and (3) maintaining liaison with GOI, state government, RBI and other national level institutions concerned with policy formulation.

o Cooperative Development Fund

Realizing that the cooperative institutions were not able to implement certain measures such as professionalization of management, improving recovery climate, streamlining the system and procedures and building up of proper management information system without external financial support, NABARD established the ‘cooperative development fund’ during the year 1992-93 with an initial corpus of Rs. 10 crore.