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RURAL FINANCE
Unit Structure
1.0 Objectives
1.1 Introduction
1.2 Features of Rural Finance
1.3 Problems of Rural Credit in India
1.4 Measures taken to Improve Credit Flow to Agriculture
1.5 Types of Rural Credit
1.6 Importance of Rural Credit in Indi a
1.0 OBJECTIVES
1) Understanding features of Rural finance.
2) Understanding the problems of Rural Credit in India.
3) Understanding the Improve Credit flow to Agriculture.
4) Studying the types of Rural Credit.
1.1 INTRODUCTION
Finance has been recog nized as the life blood of all economic activities.
Like all other producers agriculturist also need credit. Generally, in
underdeveloped countries farmers cannot expert their credit needs to come
from saving. It is so because their income farm operations are sufficient to
provide minimum necessities of life. Therefore, they have to rely upon
outside finance. Modern agriculture is a costly affair. Credit is needed to
adopt new farm technology resulting in ushering of green revolution. In
India, it has two f old necessities. Firstly crop productivity is very low due
to traditional methods of cultivation and secondly, there is an urgent need
to enhance agricultural.
Production to get self -sufficiency and save valuable foreign exchange. In
short, effective ar rangements are needed to provide credit facilities so that
agriculturist may adopt better techniques of production.
The different studies conducted show a strong positive relationship
between agricultural growth and availability of credit. Broadly, credit in
agricultural sector may be divided into short -term loans to meet the input
expenses and medium and long -term loans to facilities the development of
fixed farm assets such as land. munotes.in
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2 Agriculture is a productive occupation and such one of the essentials of
agricultural production is capital. This may provided by the cultivator
himself or like other business; he may borrow it from someone else and
repay it from the output of the field in which it has been invested. The
problem of agricultural finance relates to i) capital needs of the farmer, ii)
agencies of credit and iii) the repayment of loans. Thus the all India Rural
Credit Survey Committee observed that, Agricultural credit is a problem
when it cannot be obtained: it is also a problem when it can be had but in
such a form that on the whole it does more harm than good. It may be said
that, in India, it is this two fold problem of inadequacy and unsuitability
that is perennially presented by agricultural credit.
1.2 FEATURES OF RURAL FINANCE
In our country , rural finance has the special features which are discussed
below in detail.
1. Agriculture Development
2. Productive Credit
3. Unproductive Credit
4. Loan for Agro -based Industries
5. Loan for Agro -processing Industries
6. Loan for Rural and Small scale Industries
7. Commerc ial Agriculture Loan
8. Rural Development
1.3 PR OBLEMS OF RURAL CREDIT IN INDIA
1. Insufficiency:
In spite of expansion of rural credit structure, the volume of rural credit in
the country is still insufficient as compared to its growing requirement
arising out of increase in prices of agricultural inputs.
2. Inadequate Amount of Sanction:
The amount of loan sanctioned to the farmers by the agencies is also very
much inadequate for meeting their different aspects of agricultural
operations. Considering the a mount of loan sanctioned as inadequate and
insignificant, the farmers often divert such loan for unproductive purposes
and thereby dilute the very purpose of such loan.
3. Lesser Attention of Poor Farmers:
Rural credit agencies and its schemes have failed to meet the needs of the
small and marginal farmers. Thus, lesser attention has been given on the munotes.in
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Rural Finance
3 credit needs of the needy farmers whereas the comparatively well -to-do
farmers are getting more attention from the credit agencies for their better
credit wo rthiness.
4. Growing Over -dues:
The problem of over -dues in agricultural credit continues to be an area of
concern. The recovery of agricultural advances to various institutions is
also not at all satisfactory. In 1997 -98, the recovery of agricultural
adva nces of commercial banks, co -operative banks and regional rural
banks were 63 per cent, 66 per cent and 57 per cent respectively. Such
growing over -dues has also been resulted from poor repaying capacity of
farmers. As a result of that, the credit agencies are becoming wary of
granting loan to farmers.
5. Inadequate Institutional Coverage:
In India, the institutional credit arrangement continues to be inadequate as
compared to its growing needs. The development of co -operative credit
institutions like Prima ry agricultural credit societies, land development
banks, commercial banks and regional rural banks, have failed to cover the
entire rural farmers of the country.
6. Red Tapism:
Institutional agricultural -credit is subjected to red -tapism. Credit
instituti ons are still adopting cumbersome rules and formalities for
advancing loan to farmers which ultimately force the farmers to depend
more on costly non -institutional sources of credit.
1.4 MEASURES TAKEN TO IMP ROVE CREDIT FLOW
TO AGRICULTURE
In order to imp rove the flow of credit to agriculture, the Government
has intro duced the following measures in 1998 -99:
(i) Procedural simplification for credit delivery has been made (as per
R.V. Gupta Committee Report) through rationalization of internal
returns of b anks.
(ii) More powers have been delegated to branch managers to raise the
credit flow to agriculture.
(iii) Introduction of composite cash credit limit to farmers, introduction of
new loan products with saving components, cash disbursement of
loans, dispe nsation of no due certificate and discretion to banks on
matters relating to margin security requirements for agricultural loans
above Rs. 10,000.
(iv) Introduction of at least one specialized agricultural bank in each state
to cater to the needs of high t ech.
(v) Introduction of cash credit facility. munotes.in
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4 (vi) Insuring Kisan Credit cards to farmers to draw cash for their
production needs on the basis of the model scheme prepared by
NABARD.
(vii) The Government has made arrangement for hassle free settlement of
disputed cases of over dues.
(viii) To augment Rural Infrastructural Development Fund (RIDF) with a
corpus of Rs. 10,000 crore with NABARD to finance rural
infrastructure development projects by states.
Thus, the flow of institutional credit for agricultur e and allied activities
which was Rs. 31,956 crore in 1997 -98 is estimated to have increased to
Rs. 64,000 crore in 2001 -02. The total credit now from all agencies is
projected to reach the level of Rs. 82,073 crore by 2002 -03. The total
credit now to agri culture during the period 1997 -2002 is likely to be of the
order of Rs. 2,33,700 crore which is close to the Ninth Plan projection of
Rs. 2,29,750 crore.
For the Tenth Plan period (2002 -07) the credit flow into agriculture and
allied activities from all ba nking agencies is projected at Rs. 7,36,570
crore, which is more than three times the credit flow during the Ninth
Plan.
Farm Credit Package:
The Government of India announced the “Farm credit package” in June
2004 which aimed at doubling the flow of insti tutional credit for
agriculture in the ensuing three years. Accordingly, the credit to the farm
sector got doubled during two years, i.e., from Rs. 86,981 crore in 2003 -04
to Rs. 1,80,486crore in 2005 -06, as against the stipulated time period of
three year s. The credit flow continued to increase at Rs. 2, 29,400crore in
2006 -07 and then to Rs, 2,64.455crore in 2008 -09.
1.5 TYPES OF RURAL CREDIT
Classification of Rural Finance
Purpose Length of period Security Needs
a) Agriculture a) Short Period a) Farm mortgage credit
b) Non-farm business b) Medium period b) chattel or collateral
Credit
c) Family expenditure c) long period c) Personal period
a) Productive Credit b) Unprodu ctive credit munotes.in
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5 A) According to Purpose:
Following the Reserve Bank’s classification of agriculture credit by
purpose, we may say that such credit is required to purchase land to effect
permanent improvement on it.
1. For Agricultural purpose:
Such credit is need ed for the purchase of seed, manure and fodder,
payment of rent, wages, revenue, cess and other charges, irrigation of
crops, hire charges of pumps and purchase of water, purchase of live -stock
and effecting other land improvements . Repaired of agricultur al
implements, machinery, transport equipment’s, farm houses, cattle sheds,
repairs of wells and other irrigation services, laying of orchards, for
reclamation of lands and construction of irrigation wells, tanks and other
capital expenditure on agricultur e.
2. For Non -Farm Business purpose:
Such credit is needed for repair of production and transport equipment and
furniture, current expenditure in non -farm business, purchase, construction
and repair of building or non -farm business, purpose of farm equipment
and other capital expenditure on non -farm business.
3. For meeting Family Expenditure:
Such credit is needed for purchase of domestic utensils and clothing’s,
playing for medical, educational and other family expenses, purchase
construction and repair of re sidential houses and expenses relating to death
and marriage and other ceremonies and litigation expenses.
4. Other purposes:
These include purchase of building and ornaments, share and debentures
of cooperative societies, deposits with cooperatives societie s, private
money lenders and traders, unspecified purposes and payment of old
debts.
B) According to the Length of the Loan period:
From the point of view of the length of the loan period, agricultural credit
may fall into three categories, viz.
1. Short -term credit:
This is needed normally for short period of less than 15 months to meet
current expenses of cultivation, to facilitate production and for meeting
domestic expenses. For example, a farmer may need credit to buy seeds,
fertilizers and fodder for cat tle. He may also require funds to support his
family in those years when the crops have not been good or adequate for
the purpose. Such short -term loans are normally repaid fully after the
harvest. They are recoverable out of the sale proceeds of the crops
concerned.
According to the recommendations of V. L. Mehta committee on
Cooperative Credit, short -term production loans should be advanced on
the basis of sureties only. In some states such as M.P, Kerala and Orissa, munotes.in
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6 however, even such loans are being pr ovided on mortgage of land. In
Bihar and W. Bengal a member can borrow up to Rs.200/ - only on surety
basis and has to offer mortgage security for loans exceeding this amount.
2. Medium -term loans:
Which are required for medium period ranging between 15 month s and 5
years for the purpose of making some improvement on land, buying cattle,
agricultural implements, gardening, fencing, plantation etc?Purchase of
shares in cooperative sugar factories, pig breeding sheep and goat rearing,
purchase of storage bins an d purchase of rubber rollers under agricultural
machinery.
These loans are larger than short term loans and can be repaid over a
longer period of time. The period of loan is generally linked up with the
period of serviceability of the assets to be procure d with the loan but
normally it does not exceed 5 years.
3. Long -term loans:
Which the farmer need for the purchase of buying additional land, to make
permanent improvements on land like reclamation and bunding,
construction of farm house, cattle and machine -sheds, horticulture,
tractors, oil engines, machinery for crushing sugarcane, manufacturing of
gur, consolidation of holdings, purchase or acquisition of title of
agricultural lands by tenants, etc. to pay off old debts and to purchase
costly machinery. S uch loans can be repaid only out of the extra income
secured by the investment on land. Therefore, these loans are for long
periods of more than 5 years, ranging from 15 to 20 years.
It may be observed that almost all types of credit are needed by the far mer
at different stages of farming. But the pressing need is the provision of
long and medium term credit as the same is not readily available to him.
C) According to security:
On the basis of security offered, agricultural credit can be classified into
following categories.
1. Farm Mortgage Credit:
This is secured against land by means of a mortgage of land.
2. Chattel and collateral credit:
The farmer is given on the security of the farmer’s livestock, crops or
warehouse receipts and the latter on the security of other kinds of property
such as shares, bonds and insurance policies.
3. Personal Credit:
This is advanced on the promissory or personal notes of the farmer with or
without another’s security or guarantee. The rural credit survey committee
found that abo ut 50 % of the families surveyed were willing to offer their
immovable property as security, of the rest about 25 p.c indicated personal munotes.in
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7 security and remaining families did not specify the type of security which
they had to offer.
D) Productive and Unproduct ive credit needs:
Agriculture may require credit for the purpose of production and
consumption. In other words, credit needs of the farmers can be classified
into two parts -
i) Credit needed for productive purpose:
The loans which are used in productive oper ation of agriculture are called
the productive credit. However, productive requirements of the farmers
are loans for purchase of cattle, implements, fertilizers, inputs, better seeds
and requirements of the farmers are loans for purchase of cattle,
impleme nts, fertilizers, inputs better seeds and machinery etc.
ii) Unproductive credit needs:
On the contrary, farmers need credit for consumption purpose. The loans
which are used for consumption purposes are called the unproductive
credit. Between the movement of marketing of agricultural produce and
harvesting of next crop, there is a long interval of time. Most of the
farmers do not have sufficient income to sustain them through this period.
Therefore, they have taken loans for meeting their consumption needs. I n
the times of drought or flood, when the crops are damaged, the farmers
have also to insure such loans. In fact, unproductive loans are taken for
also taken for social purposes like birth of a male child, marriage or death
of persons in the family. Litiga tion too forces the farmers to borrow.
1.6 IMPORTANCE OF RURAL CREDIT IN INDIA:
1. Agricultural Development.
2. Development of Rural Industry.
3. Increasing Economic and Social Background of Agricultural Farmer.
4. Development of Agro Based Industries.
5. Increasing the Employment in Rural Area.
6. Commercial Agricultural Farming.
7. Development of Rural Economy.
8. Control of Poverty in Rural Area.
9. Increasing the Institutional Credit.
10. Rural Industrialization.
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8 2
RURAL INDEBTEDNESS
Unit Structure :
2.0 Objectives
2.1 Introduction
2.2 Causes of Rural Indebtedness
2.3 Consequences of Rural Indebtedness
2.4 Measures for Eradicating Indebtedness
2.5 Sugg estions for Removing Rural Indebtedness
2.0 OBJECTIVES
1) Understanding cause of Rural Indebtedness
2) Understanding Consequences of Rural Indebte dness
3) Studying measures and Suggestions for Removing Rural
Indebtedness
2.1 INTRODUC TION
Rural indebtedness has been the ever green companion of the Indian
peasants. According to a well-known saying, the Indian peasant is born
in debt, lives in debt and dies in debt. The prevalence of poverty
among agricultural labouring households is unde rlined by the prevalence
of the rural indebtedne ss. With the increase in the level of poverty, the
level of debt increases.The burden of debt passes on from generation
to generation. The number of those in the grip of this vicious problem is
even now very large, despite vigorous attempts to solve it. Rural
indebtedness has eaten into the very vitals of our rural social structure.
Hence it has drawn the att ention of sociologists, economists, planners,
bureaucrats and others since long time past.
While borrowing money the borrower does not pay attention to his
repaying capacity and for him even a little debt becomes a trap o ut of
which he cannot come out. Loans from the money- lender support
the farmer as the hangman’s rope suppo rts the hang ed.
Rural borrowing and rural debt signify two different things. There is
nothing wrong in borrowing especially when the funds are required for
agricultural operations. But indebtedness arises when the income of the
farmer is not sufficient to repay the debt incurred or when he spends his
income for unproductive purposes and does not save for the purpose of munotes.in
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9 paying off his debt. When the borrower fails to repay the loan in time
and the loan goes on accumulating, he becomes indebted.
2.2 CAUSES OF RURAL INDEB TEDNESS
The factors accounting for rural indebtedness are many and varied. They
are as follows:
1. Poverty of the farmers:
The basic cause of the rural indebtedness in India is the extreme
poverty of the farmers. The farmers being poor have to borrow for various
purposes. Sometimes, the crops fail because of the failure of monsoons, or
because of floods etc. They have to purchase seeds, implements, cattle
etc. and since they have no past savings to draw upon, they are
forced to bo rrow. Just as poverty forces him to borrow, it is his
poverty again which forces him to have so little for paying off his debt.
2. Passi on for land:
The farmers in the Indian context have a tremendous passion for
land. They are keen to make improvements on land. They do it mostly
through borrowing.
3. Ancestral debt:
The most important cause of the existing rural indebtedness is the
ancestral debt. Many agriculturists start their career with a heavy burden
of ancestral debt and drag the loan for the whole of their lives, taking it to
be a religious and social obligation.
This increases the debt burdens on the inheritors, every time the debt is
thus passed on. The Royal Commission on Agriculture has aptly
described this situation, in its observation that the farmer “is born in
debt, lives in debt and dies in debt.”
4. Ease of taking loan:
Institutional agencies have fixed hou rs and stipulate that some
formalities should be observed before the loans are sanctioned
and then paid. On the other hand, a money lender has been easily
approachable even at odd hours. This encourages borrowing.
5. Litigation:
Litigation, civil or criminal, is another cause of rural indebtedne ss.
Agriculturists of standing are gene rally involved in various kinds of
disputes such as intra-family disputes, inter-family disputes, and disputes
over bounda ry lines, theft of crops, and division of ancestral lands etc.
which often force them to go to courts of law. Such prolonged
litigations involve heavy expenditure and to meet these expenses,
farmers take a loan which further aggravates the burden of rural
indebtedness. munotes.in
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10 6. Small sized holdings:
Approximately 72.6 per cent of the operational holdings in India are less
than 5 acres in size. When the holdings are small, modernization of
agriculture becomes impossible. The cultivation ceases to be
economical even in the best of years and the yield from land becomes
insufficient for the maintenance of the farmer and his family. On
account of this reason the farmer incur debt.
7. Illiteracy and ignorance:
The illiteracy and ignorance of the peasants stand in the way of
improving the economic conditions. They are not conscious about the
utility of small family norms. In view of the large size of the family,
they are compelled to borrow money for fulfilling the basic
necessities of life.
8. Extravagant expenditure:
Being bound to customs and tradition, the ruralites consider the expenses
on the occasion for marriage, birth, death, and caste dinners on auspicious
occasions and on some religious observance as unavoidable. Being poor,
they have no reserve to fall back upon. This makes them to borrow.
They borrow at least for two reasons. In the first place, if they do
not spend on these occasions, their image in the public eyes will be
tarnished. Secondly, they have ambition to excel others in pomp and
grandeur.
9. Malpractices of the money-lenders:
The private money -lenders are known to have adopt ed various
malpractices.
(a) They have been charging exorbitant rates of interest varying between
40 to 60 per cent per annum.
(b) They have also been found keeping false accounts.
(c) They are more interested in forcing the borrowers to part with their
land by encouraging the farmers to borrow from them and get their
lands mortgaged to them.
(d) They have been purchasing the crops of the farmers at very low price
when the latter approach them for selling their crops in order to
repay their debts.
(e) When the farmers’ debt has accumulated to a sufficient amount, they
take away the land of the borrowers. Like a fly in the cobweb, which
can rarely escape, similarly, the farmer once caught by the money-
lender can rarely come out of his clutches.
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11 10. High rates of interest:
The high rates of interest also compel the cultivators to borrow. The
rates vary from state to state but due to the poor economic condition
of the peasants, the interest accumulates every year. Quite often it is
extremely difficult to clear up even interest charges alone. The Bombay
Banking Committee rightly observes, “It is not that the agriculturist”
repays too little, he often repays too much. It is the high rate of interest
and the malpractices followed by the money-lenders that tend to
perpetuate his indebtedness.”
2. Pulls of high standard of living:
Sometimes high standard of living constitutes the cause of indebtedne ss.
Of late, the benefits of urbanization have reached the doorsteps of the
ruralizes. Poor peasants have fallen a prey to the cons meristic culture.
They are attracted by the temptations of the amenities of city life. They
are induced to buy them even if there is no great need for them.
12. Exce ssive burden of land revenue and rent:
During the British rule, the land revenue was fixed high. So the farmers
were not able to pay in time. Hence, they were forced to borrow. Even
in the Post-Independent India excessive land revenue with its rigid
procedure of collection is squarely responsible for aggravating the
problem of rural indebtedness.
The rent is tasking for the small and marginal farmers. The dues being
fixed, they are bound to pay even when production suffers during
conditions of flood and drought. Therefore, the farmers are forced
to take loans to make these payments. Consequently the burden of
indebtedness increases.
13. Addiction to drinking:
Drinking leads to rural indebtedness in two ways. In the first place, it
gives rise to a number of quarrels and crimes resulting in litigation.
Litigation as all of us know entails unnecessary expenditure.
Secondly, drinking is itself an expensive habit and a good share of the
peasant’s income is spent for drinking.
14. Inflation:
Inflation una ccompanied by corresponding increase in the income of
the ruralites compels them to bo rrow to meet their basic nee ds.
15. Inadequate infrastructural facilities and institutional
arrangements:
Inade quate infrastructural facilities stand in the way of improving the
economic condition of the farmer. Due to inadequate marketing facilities,
he has no other alternative but to sell away the produce imme diately after
harvest at the unreasonable prices. The heavy indebtedness of the farmer munotes.in
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12 also makes it difficult for him to store the produce for sale on favourable
terms at a later date.
2.3 CONSEQUENCES OF RURAL INDEBTEDNES S
Rural indebtedness is dysfunctional for the rural society in more ways
than one. Some of its evil consequences are as follows:
1. From the economic point of view, increasing rural indebtedness leads
to growing pauperisation of the small and marginal farmers. They
mortgage their landed property to the money-lenders and ultimate ly lose
it to the latter.
In th is way, they join the ranks of the landless labourers. The small
farmer gets a low price while selling his produce and pays high prices
for bu ying inputs. Hence rural indebtedness is both the cause and effect of
the growing poverty of the Indian farmers.
2. Increasing rural indebtedne ss has also undesirable social consequences.
In the first place, it creates a class of landless labourers and tenants in the
place of independent farmers.
Secondly, the heavily indebted farmers are forced to pledge their own
person and become bonded slaves to the landlords and money-lenders.
Somet imes their women fall prey to money-lenders’ caprice and vice.
This has led to moral degradation of rural society.
Thirdly, in many parts of the country, the small peasants who have lost
their land to the money-lenders have revolted against the latter in a
violent manner. The problem is particularly serious in some parts of
Bihar, Orissa and Andhra Pradesh. In such states the high caste money-
lenders have exploited the innocent and illiterate advises and have
deprived them of their meager land ownership.
Quite naturally this has been the direct cause of Naxalite movements in
these areas. Dr. Thomas aptly observes, “A society steeped in debt is
necessarily a social volcano. Discontent between classes is bound to arise
and shouldering discontent is always dange rous.”
3. Rural indebtedness has far-reaching political implications for the rural
society. The money-lenders become unscrupulous politicians and e xploit
the heavily indebt ed farmers when elections to village Panchayats, co-
operative societies, state assembly and LokSabha are held. Democracy
becomes a mockery.
4. From the psychological angle we observe that the borrowers are always
a frustrated lot. They always remain in the grip of worry and te nsion.
5. Deterioration of agriculture:
As a result of indebtedness, the condition of agriculture also deteriorates.
Two reasons may be attributed to this state of affairs. In the first place,
the heavily indebted farmers because of paucity of funds are not in a munotes.in
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13 position to mode rnize agriculture. This would cripple their capacity to
increase their income level. Secondly, most of the farmers have to work
on the moneylender’s land as servants. Obviously they lack interest in
work.
6. Low standard of health:
The farmers burdened with a heavy debt grow weaker because they are
beset with the problem of repaying it. They work hard to repay the loan
which somet imes tell upon their health. They also cannot afford to have
medical facilities for themselves and for their children. They cannot have
any nourishing diet. All these lead to the lowering of their health
standards.
2.4 MEASURES FOR ERADICATING INDE BTEDNESS
The Government has undertaken several measures since long to put an
end to rural indebtedness. They are as follows:
1. (a) Removing the need for borrowing:
(i) Steps have been taken to reduce the effective burden of land revenue
and to ma ke its payment convenient through greater elasticity in its
administration and collection.
(ii) Adequate irrigation facilities have been provided to the farmers. (iii)
Inputs have been made available at cheap rates.
(iv) Agro-based industries have been promoted in the rural areas.
(v) Improvement has been effected in the sphere of means of
communication and transportation. Better marketing facilities have
been made available to the peasants.
(b) Protecting the assets of the agriculturists from passing into the
hands of moneylenders:
For this purpose various Acts have been passed in the past e.g. the Land
Alienation Acts, the Encumbered the Estates Relief Act of 1876 etc.
(c) Regulation of the activities of moneylenders:
For this purpose various legislative measures have been enacted. They are
as follows:
(i) The Deccan Agriculture Act, 1879:
Under this Act the courts were allowed to go behind the contract of
debt and to modify it in favour of the borrower.
(ii) The Various Loans Act, 1918:
This Act tried to improve the legal position of the borrower.
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14 (iii) The Regulation of Accounts Act, 1930:
It aimed at protecting the debtor from manipulated accounts by
prescribing forms of accounts and insisting on the debtor being supplied
with these regularly.
(d) The Punjab Relief of Indebtedness Act, 1934:
It drew a distinction between secured and unsecured loans for purposes
of rate of interests.
(e) Various Acts like the Punjab Registration of Mon eylenders Act,
1938 provided for the registration and licensing of money lenders.
(f) The Acts like the Punjab Restoration of Mortgaged Lands Act and
the Punjab Debtor’s Protection Act provided for restoration of mortgaged
lands on p ayment of nominal compensation and exempted ancestral
property from attachments as also standing crops.
2. Nationalisation of Commercial Banks:
The commercial banks were nationalised in 1969. Since then special
efforts have been made to increase the involvement of public sector
banks in the development of agriculture and other associated activities
in the rural areas. At present, the commercial banks are mand ated to
earmark 18% of their total annual lending to agricultural sector as part of
priority sector lending.
They have also been associated with the rural finance through some
other important schemes such as the Lead Bank Scheme, Village
Adoption Scheme, Service Area Plan, Intensive Centre Scheme,
Agricultural Finance Corporation etc.
3. Regional Rural Banks:
Regional Rural Banks have been established since 1975 as a new source
of finance in the rural areas. The main objective of these banks is to
provide credit and other facilities to the small and marginal farmers,
agricultural labourers, artisans and small entrepreneurs. These banks are
sponsored by the nationalised commercial banks. So far as the area of
operation is concerned, such a bank covers one or more districts of a
state.
At present, there are 196 Regional Rural Banks in the country and
these have about 14500 branches.
4. Twenty-Point Economic Programme:
Under the 20- point programme launched in July, 1975, the government
had declared a moratorium on the recovery of debt by money-lenders
from farmers, landless labou rers and rural artisans. Liquidation of rural
indebtedness and abolition of bonded labour were two dynamic
aspects of the old 20-point economic programme. munotes.in
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15 5. Co-operative Credit Institutions:
Co-operative finance is the best and the cheapest source of rural credit.
It is because loans are advanced for productive activities and also at
very low rates of interest as compared to those charged by the money -
lenders and various other institutions. The P rimary Agricultural Co-
operative Credit Societies generally advance short- term and medium-
term loans to the farmers, the Primary Land Development Banks cater
to the long-term financial requirements of the farmers.
6. Report of the Sivaram Committee:
In its report submitted in Ap ril, 1976 the Sivaram Committee outlined the
following proposals pertaining to rural indebtedness.
(a) Consumption loans for marriages, births and deaths, religious
expenses, medical expenses, education etc. should be provided by the
government corporations and nationalised banks to small farmers,
landless labourers and artisans.
(b) Banks and Co-operatives should provide similar loans to
marginal farmers.
(c) Schemes should be devised to enable these classes of people to
return these loans.
7. National Bank for Agriculture and Rural Development:
NABARD was set up by the Government of India on 12th July, 1982
with an authorised capital of Rs. 500 crore and a paid up capital of Rs.
100 crore. It plays the role of a catalyst of rural resurgence through
injection of adequate finance for approved development projects. It is an
apex institution entrusted with the responsibility of bringing about rural
prosperity.
The number of schemes sanctioned as well as the financial assistance
extended by the Bank for these schemes has been constantly increasing.
NABARD has been paying special attention in extending credit facilities
in less developed banked areas like Bihar, Rajasthan and Orissa.
Of late, the b ank has been taking special steps for augme nting
credit flow to the North East Region.
The role of NABARD in providing funds for the promotion of self-help
groups, especially the ‘Rural Women’s Development and Empowerment
Scheme’ is, indeed, commendable.
Recently, the bank prepared a model scheme for the commercial banks to
issue ‘Kisan Credit Cards’ to the farmers. The purpose of the KCC
scheme is to facilitate short term credit to the farmers. The scheme has
gained popularity and its implement ation has been taken up by 27
commercial banks, 187 Regional Rural Banks and 334 Central
Coope rative Banks. munotes.in
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16 Since its inception till the end of March 2004, more than 41 million
KCCs have been issued and total loans sanctioned amount ed to
Rs. 97,710 crores. KCC holders are also provided personal accident
insurance cover of Rs. 5,000 for death and Rs. 25,000 for disability.
2.5 SUGGESTIONS FOR REMOVING
RURAL INDE BTEDNESS
Several suggestions have been made for eradicating rural
indebtedne ss. Of them, major ones are the following:
1. Measures should be devised for cancelling old debts.
2. Measures should be adopted for limiting fresh borrowing to the
minimum necessary and to the productive type.
3. The government should make arrangements for giving loans to the
farmers at low rates of interest.
4. In order to make loans available to the villagers, the formal procedure
for the grant of loans in the co-operative societies and banks should be
made as simple as possible.
5. The laws preventing money-lender to take possession of farmer’s
land should be strictly put to practice.
6. Efforts should be made to desist ruralizes from undertaking
unproductive and wasteful expend iture. Hence they ought to be
educated about the harmful consequences of unproductive debts.
7. In order to reduce the dependen ce of the ruralizes on local
money-lenders, the network of institutional credit structure
comprising cooperatives, commercial banks and regional rural
banks should be rapidly expand ed throughout the country to cater to
the credit needs of the small farmers and artisans.
8. There should be a check on the practice of private money
lending. The account register of the moneylenders should be
checked to find out how far they have increased their landed
property during the period under review. Besides, only the
registered and license holders should be allowed to advance loans.
In fine, the problem of rural indebtedness is linked with the larger issue
of rural poverty. Poverty alleviation measures have to be taken up on
a war footing to augment the income of the ruralizes. Mobilization of
local, social and e conomic resources, an equitable distribution of
benefits of new agricultural strategy and establishment of a good
number of co-operatives and commercial banks will go a long way in
mitigating the magnitude of rural indebtedne ss from the rural social
matrix.
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17 3
SOURCE S OF RURAL CREDIT IN INDIA
Unit Structure :
3.0 Objectives
3.1 Introduction
3.2 Sources of Rural Credit in India
A) Non institutional sources
1) Money-lenders,
2) Traders and commission agents,
3) Relatives and landlords.
B) Institutional sources:
i) Government
ii) Co-operative societies
iii) Commercial banks
iv) Regional rural banks (RRBs)
v) NABARD.
vi) Lead Bank Scheme
vii) Kisan Credit Card scheme
viii) Farmer Service Societies
ix) Agricultural Finance Corporation (AFC)
x) State Bank of India (SBI)
3.0 OBJECTIVES
1) Understanding the sources of Rural Credit in India.
2) Understanding the sources of Non- Institutional credit
3) Understanding the sources of Institutional credit
3.1 INTRODUC TION
Credit needs of the In dian farmers can be classified into three types
depend ing upon the period and the purpose for which they are required: munotes.in
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18
a) Farmers need funds for short periods of less than 15 months for the
purpose of cultivation or for meeting domestic expenses. For e.g.,
they want to buy seeds, fertilizer’s, fodder for cattle, etc. They may
require funds to suppo rt their families in those years when the crops
have not been good or adequate for the purpose.
b) The farmers require finances for medium period ranging between
15 months and 5 years for the purpose of making some improvement
on land, buying cattle, agricultural implements, etc. These loans
are larger than short-term loans.
c) The farmers need finances for the purpose of buying additional land,
to make payment improvements on land, to pay off old debt and to
purchase costly agricultural machinery. These loans are for long
periods of more than 5 years.
3.2 SOURCES OF RURAL CREDIT IN INDIA
There are two sources of credit available to farmers:
A) Non institutional sources: Private or Non institutional sources
include
a) Money-lende rs,
b) Traders and commission agents,
c) Relatives and landlords.
Non institutional sources accounted for 93 percent of the total credit
requirements in 1 951-52 and institutional sources including the
government accounted for only 7 percent of the total credit needs in that
year.
B) Institutional sources:
Institutional credit refers to loans provided to farmers by
i) Government
ii) Co-operative societies
iii) Commercial banks
iv) Regional rural banks (RRBs)
v) NABARD.
vi) Lead Bank Scheme
vii) Kisan Credit Card scheme
viii) Farmer Service Societies munotes.in
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Sources of Rural Credit in
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19 ix) Agricultural Finance Corporation (AFC)
x) State Bank of India (SBI)
A) Non institutional sources:
Source: All India debt and Investment Survey.
a) Money Lenders: are of two types:
i) Landlords or rich farmers:
Who combine farming with money lending and professional money
lenders? The cultivators depend upon the money-lenders for their
requirements of cash. The moneylenders freely supplies credit for
productive and non-productive purposes. They provide credit for
short term as well as long term requirements of the farmers. The
moneylende rs are easily accessible and maintain a close and personal
contact with the borrower, often having relation with family extending
over gene rations. His methods of business are simple and elastic. He
has local knowledge and experience and therefore can lend against
promissory notes. He knows how to protect himself against default,
through legal and illegal methods.
ii) Landlords and others:
Traders and commission agents supply funds to farmers for productive
purposes much before the crop matu re. They force the farmers to sell their
produce at low prices and they charge a heavy commission for th eir
dealings. Farmers often borrow from their own relatives in cash or in kind
for their temporary requirements. They carry low or no interest and
they are returned soon after the harvest. Farmers, particularly small
farmers and tenants, depend upon landlords and others to meet their
financial requirements for they charged exorbitant interest rates. Non
institutional
sources: 1951
-52 1961
-62 1971
-72 1981
-82 1991-
92 2010-
2011
Money
Lende r 69.7 49.2 36.1 16.1 17.6 18.2
Traders
and
Commission
agen ts 5.5 8.8 8.4 3.2 2.5 4.8
Relatives 14.2 8.8 13.1 8.7 5.5 4.4
Land lords. 3.3 14.5 10.7 8.8 4.3 5.7
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20 Despite rapid development in rural branches of different institutional
credit agencies, village money lenders still dominate the scene.
Money lende rs are of two types- agriculturist money lenders who
combine their money lending job with farming and professional
money lende rs whose sole job is money lending. A number of reasons
have been attributed for the popu larity of moneylenders such as: (a)
they meet demand for productive as well as unproductive requirement;
(b) they are easily approachable at odd hours; and (c) they require
very low paper work and advances are given against promissory
notes or land. Money lenders charge a very high rate of interest as
they take advantage of the urgency of the situation. Over the years a
need for regulation of money lending has been felt. But lack of
institutional credit access to certain sections and a reas had facilitated
unhindered operation of money lending. Cooperative credit and self-
help groups can play a major role in control of money lending.
b) Traders and Commission Agents:
Traders and commission agents advance loans to agriculturists for
productive purposes ag ainst their crop without completing legal
formalities. It often becomes obligatory for farmers to buy inputs and sell
output through them. They charge a very heavy rate of interest on the
loan and a commission on all the sales and purchases, making it
exploitative in nature. It an important source of finance in case of cash
crops like cotton, tobacco and groundnut.
c) Relatives:
Farmers also borrow from their own relatives in cash or kind. These loans
are taken for the short period in order to tide over temporary difficulties.
These loans are generally contracted in an informal manner, the carry
low or no interest and they are returned soon after the harvest. But this
source of finance is uncertain and with increasing needs of modern
agriculture, the farmer cannot depend upon this source to any large
extent. Moreover, the importance of this source in the total borrowing of
the cultivators was 14.2 percent in 1951-52 which declined to 8.8 per
cent in 1961-62.
B) Institutional sources:
The need for institutional credit arises because of the weakness or
inadequacy of private agen cies and their exploitative nature of credit. The
basic motive of Institutional credit is to he lp the farmer to raise his
productivity and maximize his income. The rate of interest is not only
relatively low but can be different for different groups of farmers and for
different purposes.
As far as institutional sources are concerned, the first institutions
established and promoted was the institutions of Cooperative credit
institutions. History of co-operative credit is very old in India. The
organization of rural co-operative credit institutions in India can be
clear from this chart. munotes.in
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Sources of Rural Credit in
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21 Co-operative Credit Institutions
Rural Institutional sources: (%)
Institutional
sources: (%) 1951-52 1961-62 1971-72 1981-82 1991-92 2010-2011 Government 3.3 15.5 7.1 3.9 6.1 7.8
Co-operative Credit 3.1 2.6 22.0 29.9 27.6 24.9
Commercial Banks 0.9 0.6 2.6 29.4 33.7 27.1
Other - - - - 2.7 7.1
Total 7.3 18.7 31.7 63.2 70.1 66.9
Source: All India debt and Investment Survey and NSSO.
Rural Co-operative Credit
Institutions (95,765) Urban Co-operative Credit
Institutions Short Term (95,048) Long Term (717)
State Co-operative
Banks (31) District Central Co-
operative Banks (370) Primary Agricultural
Credit Societies (94 ,647)
State Co-operative Agricultural &
Rural Developments Banks (20) Primary Co-operative Agricultural
& Rural Developments Banks (697)
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22 Rural Institutional sources: (Rs in crores)
Year Co-
operative
Banks Share in% RRBS Share in% Commercial Banks Share
in% Total Institutional Credit
1984-85 3440 55 - - 2790 45 6230
1991-92 5800 52 596 05 4806 43 11202
2001-02 23604 38 4854 08 33587 54 62045
2002-03 23716 34 6070 09 39774 57 69560
2003-04 26959 31 7581 09 52441 60 86981
2004-05 31424 25 12404 10 81481 65 125309
2005-06 39404 22 15223 08 125859 70 180486
2006-07 33987 24 15170 10 100999 67 150156
2007-08 35875 20 17989 10 128876 70 182738
2008-09 36165 19 19325 10 132761 71 188251
2009-10 32871 18 23984 13 121879 69 178734
2010-11 70105 18 43988 10 332708 74 446779
2011-12 53187 20 29073 11 179869 69 262129
Source: Econom ic Survey and NABA RD various issues
1) The Government :
These are both short term as well as long-term loans. These loans are
popu larly known as “Taccavi loans” which are generally advanced in
times of natural calamities. The rate of interest is low. But it is not a
major source of agricultural finance. The government provides finance
indirectly as well as indirect.
1. Indirect financing indirect credit is provided through the co- operative
societies.
2. Direct financing The govt. has been financing farmers directly.
Agricultural credit from the govt. is calls “taccavi' and has a long
history in India, it is provided under Land Improvement Loan
Act of 1883 and the agricultural Loans Act of 1884. The government
gives “taccavi loans” to the farmers which are disbursed at the time of
distress famines, flood etc. At a low interest rate of 6 percent and the
repayment schedule is very convenient.
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Sources of Rural Credit in
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23 2. Rural Co-operative Credit Institutions:
The rural co-operative movement was started in over 100 years back
largely with a view to providing agriculturists funds for agricultural
operations at low rates of interest and protect them from the clutches of
money lenders.
The organisation of the co-operative credit for short period is as
following,
A. Short Term Rural Credit :
a) Primary Agricultural Credit Society (PACS):
It may be started with ten or more persons, normally belonging to a
village. The value of each share is generally nominal. PACS deal
directly with farmer - borrowers, grant short term and medium term
loans and also unde rtake distribution and marketing functions. The
management of the society is under an elected body consisting of
President, Secretary and Treasurer. Profits are not distributed as
dividends to shareholders but are used for the welfare of the village
.The usefulness of PACS has been rising steadily.
In 1950-51, they advanced loans worth Rs. 23crores, which increased to
Rs. 200crores in 1960-61 and further to Rs. 34,520 crores in
2000-01. This progress has been spectacular but not adequate
considering the demand for finance from farmers.
The number of PACS had come down from 2,12, 000 in 1960 61 to
1,61,000 in 1970-71 and recently number of PACS are 94,647. At the
end March 2006 with estimated membership of over 10 crore farmers.
Most of the PACS are dependent on the finance provided by Central
Cooperative Banks (CCBs). In case the CCBs are weak, the PACS are
starved of finance which affects the credit functions of PACS. At the end
of March 2006, the loans and advances outstanding for PACS were about
Rs. 51,780 crores.
b) District Central Co-operative Banks (DDCBs):
These are federations of primary credit societies in specified areas
normally extending to a whole district. These banks have a few private
individuals as shareholders who provide both finance and
management. They m ay accept deposits from the general public but
their main task is to lend to village primary societies.
By the end of March 2007, there were 370 District Central
Cooperative Banks. The loans outstanding came to Rs.
79,200crores. They acts as an intermediaries between the State Co-
operative Bank on the one hand and the village primary credit societies on
the other.
The Reserve Bank – now NABARD has formulated a scheme for the
rehabilitation of weak central co-operative banks. NABARD is providing munotes.in
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24 liberal assistance to the State Governments for contributing to the share
capital of the weak Central Cooperative Banks selected for the purpose.
c) State Co-operative Banks (STCBs):
The STCB finances and controls the working of the District Central
Cooperative banks in the State. It serves as a link between NABARD
from which it borrows and the cooperative central banks and village
primary societies. There are 31 State Cooperative Banks (STCB) in
the country.
The State Coope rative Bank not only interested in helping the rural
cooperative credit movement but also in promoting other co-operative
ventures and in extending the principles of cooperation. During 2005-
06 the 31 state cooperative banks had lent about Rs. 48,260crores to
District Central Co-operative Banks.
B. Long Term Rural Credit:
Cooperative Agriculture and Rural Development Banks (CARDBs) :
The long term requirements of the farmers were traditionally met by the
money-lende rs. Initially, land mortgage banks were organised for the
purpose of providing long term credit to farmers. These banks were later
called land development banks. In recent years, they have been renamed
as Cooperative Agricultural and Rural Development Banks (CARDBs).
These were classified into;
Primary Co-operative Agricultural and Rural Development Banks
(PCARDBs)
State Co-operative Agricultural and Rural Development Banks
(SCARDBs).
The number of PCARDBs and their branches increased from 286 in
1950-51 to 697 in 2006-07, while that of SCARDBs increased from
5 to 20 during the same period. Total loans advanced by PCARDBs
during 2005-06 were Rs. 2,250 crores and the loans outstanding at the
end March was Rs. 12,740 crores. On the other han d, SCARDBs had
sanctioned loans worth Rs. 2,900crores in 2005 -06 and the amount
outstanding at the end March 2006 was Rs. 17,710crores.
Finance and Loan operations of CARDBs:
CARDBs obtain their funds from share capital reserves, deposits and
issue of bonds or debent ures. Debentures are long term loans which
are issued by SCARDBs, carrying fixed interest and for fixed periods,
generally up to 20 years. They are subscribed
by the LIC, the commercial banks, the State bank of India and its
subsidiaries and by the Reserve Bank of India. SCARDBs also float rural
debentures for periods up to 7 years which are subscribed by farmers and
panchayats and by the Reserve Bank of India. munotes.in
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Sources of Rural Credit in
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25 CARDBs provide credit for a variety of purposes such as redempt ion of
old debts, improvement of land, purchase of costly agricultural
equipment, construction of wells and erection of pumps, etc. Though land
development banking has made considerable progress in recent years, it
has not really contributed much to the improvement of the financial
position of the farmers.
3. Role of Commercial Banks in Rural Credit:
In the initial period of nationalisation, the banks concentrated their
attention on large cultivators and other special category farmers such
as those engaged in raising high-yielding varieties of food grains. At
present short term crop loans account for nearly 42 to 45 percent of the
total loans disbursed by the commercial banks to farmers. Term loans
for varying periods for purchasing pump sets, tractors and other
agricultural machinery, for construction of wells and tube-wells, for
development of land for the purchase of fruit and garden crops, or
leveling and development of land for the purchase of plough animal, etc.
are provided. These term loans accounted for 35 to 37 percent of the total
loans disbursed by the commercial banks.
Commercial banks extended loans for activities like dairying, poultry
farming, piggery, bee keeping, fisheries and ot hers which accounted for
15 to 16 percent. Commercial banks are financing co-operative
societies to enable them to expand their production credit to the farmers.
Commercial banks are providing indirect finance for the distribution of
fertilisers and other inputs.
Commercial banks also extend their credit to manufacturing or
distribution firms and agencies and co-operatives engaged in the supply
of pump sets and other agricultural machinery on a hire purchase
basis. They finance operations of the Food Corporation of India, the
State Government and others in the procurement, storage and
distribution of food grains. Finally commercial banks subscribe to the
debent ures of the central land development banks and also extend
advances to the latter.
There are 5, 50,000 villages spread throughout the country. To reach all
of them with only about 47,000 banking offices is a difficult task. To
overcome from this problems commercial banks have introduced some
unique schemes to reach to the farmers in rural areas.
4. Regional Rural Banks (RRBs):
In pursuance of the aspect of the New Economic Programme
that the Government of India set up Regional Rural Banks. The main
objective of the RRBs is to provide credit and other facilities
particularly to the small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs so as to develop agriculture, trade,
commerce, industry and other productive activities in rural areas.
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26 Initially, five RRBs were set up on October 2, 1975 in Uttar Pradesh,
Haryana, Rajasthan and west Bengal. Each RRB had an authorised capital
of Rs. 1crore, and issued and paid up capital of 25 lakhs. The share
capital was subscribed by the Central Government (50%), the State
Government concerned (15%) and the sponsoring commercial bank
(35%).
Change In Relative Share of Institutions:
After the nat ionalisation of 14 major banks in 1969, the commercial
banks have consistently increased their share in institutional credit to
agriculture from 38.4% in 1980-81 to 74.3% in 2010 -11.As a result the
relative share of co-operative institutions has declined from 61.6% in
1980-81 to 15.7% in 2010-11.RRBs have contributed about 8 to 10
% of agricultural credit over the years ,it is shown in table no-4.1.
Table no- 4.1
Institutional Credit to Agriculture: Relative Share of Different
Institutions
Year Scheduled Commercial Banks Co-Operative Societies RRB s
1970-71 - 100.00 -
1980-81 38.4 61.6 -
1990-91 47.4 49.0 3.4
2000-01 52.6 39.4 8.0
2004-05 65.0 25.0 10.0
2007-08 71.1 18.9 10.0
2008-09 75.8 15.3 8.9
2009-10 74.3 16.5 9.2
2010-11 74.5 15.7 9.8
Source: Econom ic Survey 2011-3.
5. ROLE OF NABARD IN RURAL DEVE LOPMENT
A National Bank for Agricultural and Rural Development (NABARD) or
the National Bank was set up in July 1982 by an Act of Parliament to
take over the functions of the Agricultural Refinance
Development Corporation (ARDC) and the refinancing functions of
RBI in relation to co-operative banks and RRBs. NABARD is linked
originally with the RBI by the latter contributing half of its share capital
and the other half being contributed by the Government of India and
nominating three of its Central Board Directors on the board of munotes.in
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Sources of Rural Credit in
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27 NABARD, besides a Deputy Governor of RBI being appointed as
Chairman of NABARD.
Resources of NABARD:
The autho rised share capital of NABARD was Rs. 500crores and its paid-
up capital was Rs. 100crores, contributed equally by the Central
Government and the Reserve Bank. The resources of the National
Agricultural funds were transferred to NABA RD. World Bank and IDA
have also been providing funds to NABA RD for implementation of the
projects financed by them. The most important source of
NABARD‘s funds is RIDF deposits, closely followed by market
borrowings.
Functions of NABARD:
NABARD has a dual role to play (a) as an apex institution and (b) as
a refinance institution. NABA RD has inherited its apex role from RBI
i.e. it is performing all the functions formerly performed by RBI
with regard to agricultural credit. At the same time, NABARD has
taken over the functions of ARDC and thus provides refinance
facilities to all banks and financial institutions lending to agriculture and
rural development.
i) NABARD services as a refinancing institution for all kinds of
production and investment credit to agriculture, small scale
industries, cottage and village industries, handicrafts and rural crafts
and real artisans and other allied e conomic activities with a view to
promoting integrated rural development.
ii) It provides short term, medium term and long term credit to State Co-
operative Banks (SCBs), RRBs, LDBs and other financial institutions
approved by RBI.
iii) NABA RD gives long term loans (up to 20 years) to State
Governments to enable them to subscribe to the share capital of co-
operative credit societies
iv) NABARD gives long term loans to any institution approved by the
Central Government or contribute to the share capital or invests in
securities of any institution concerned with agriculture and rural
development.
v) NABA RD has the responsibility of co-ordinating the activities of
Central and State Governments, the P lanning Commission and other
all India and state level institutions entrusted with the development of
small scale industries, village and cottage industries, rural crafts,
industries in the tiny and decentralized sectors, etc.
vi) It has the responsibility to inspect RRBs and co-operative banks, other
than primary co-operative societies. munotes.in
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28 vii) It maintains a Research and Development Fund to promote
research in agriculture and rural development, to formulate and
design projects and programmes to suit the requirements of different
areas and to cover special activities.
Working of NABARD:
NABARD is performing the various functions assumed by it smoot hly
and efficiently. It sanctioned short term credit limits worth Rs. 8,820
crores during 2003-04 and Rs. 16,100 crores during 2006 - 07 for
financing seasonal agricultural operations at the concessional
rate of 3 percent below the Bank rate. During 2010-11 NABARD
sanctioned total credit limit aggregating 35,273 crores Rs. as against
25,661 core Rs. During 2009-10 for various short-and medium-term
purposes to S TCBs and RRBs and long-term loans to the state
government.
NABARD has attempted to en sure the flow of credit to weaker
sections of society under the new 20-point programme by making it
obligatory for banks to disburse a specified percentage of short term loans
to small and marginal farmers and other economically weaker sections.
NABARD provides two types of refinance. The first is extended to
RRBs, Apex Rural Credit Institutions, viz., State Cooperative Banks and
state Governments. The second type of refinance is extended to provide
resources for ground level deployment of rural credit. Purpose-wise,
minor irrigation has continued to occupy an important place in scheme
lending of NABARD i.e. about 13 percent of the schemes sanctioned in
recent years consisted of minor irrigation works.
NABARD has vigorously continued its efforts in promoting investments
in the agricultural sector in the less developed / under– banked states –
U.P., Bihar, M.P., Rajasthan and Orissa have been the biggest
beneficiaries.
NABARD and Rural Infrastructure Development Fund (RIDF) RIDF
–I was established in 1995-96with the major objective of providing
funds to state governments and state owned corporations to enable them
to complete various types of rural infrastructure projects. RIDF has
been continued on an annual basis. The annual allocations of funds
under the RIDF has gradually increased from Rs.2000 crore in 1995-96
to Rs.18000 crore in 2011-3. Aggregate allocations have reached Rs.1,
34,000 crore .The budget allocation for RIDF for 2012-13 has been
raised further to Rs.20, 000 crore.
As against the total allocation of Rs.1,34,000crore ,encompassing RIDF-I
to RIDF-XVII ,sanctions aggregating Rs.1,32,808 crore have been
accorded to various state governments and an amount of Rs.86, 631
crore disbursed up to end December 2011. This shows that the
proportion of disbursements in relation to sanctions has been only 65
%. munotes.in
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Sources of Rural Credit in
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29 6. Lead Bank Scheme.
6.1 introduction :
In the previous unit, we saw the different functions performed
by commercial banks for industry, trade etc. Recognizing the role that
these banks can play, Govt. of India imposed social control over them in
1967. The main intention was to accelerate rate of growth, providing
banking facilities to the rural areas and extending loan assistance to the
important sectors. However, as govt. realized that social control will
not be enou gh to fulfill the objectives, a decision of nationalizing 14
main commercial banks was taken on 19th July 1969. Setting up of Lead
banks is also an important decision taken for the development of the
country.
6.2 Objectives :
i) Understanding the background of Lead Bank Scheme.
ii) Understanding the meaning and objectives of Lead Bank
Scheme.
iii) Studying functions and working of Lead Bank Scheme.
iv) Studying the problems/drawbacks of Lead Bank Scheme.
6.3 Background of lead bank scheme :
A study group under the Chairmanship of Dr. Dhananjayrao Gadgil was
formed by the National Credit Corporation for making suggestions to
remove regional inequality and imbalance. The group submitted its
report in 1969. At that time, comme rcial banks accounted for 83% of total
loan allocation, but 5000 villages had not received banking facilities.
As a result, the study group recommended that commercial banks
should adopt regional approach. It implies that commercial banks should
pay attention to the social justice and consider district as the focus area
for their activities. Overall economic and social development of the
district should be their top most objective. After the report of the
study group was submitted to RBI, RBI set up a committee under the
Chairmanship of F.K.F.Nariman. This committee also upheld the
recommendations of Gadgil group and floated the concept of Lead Bank.
Finally, RBI announ ced the Lead Bank Scheme at the end of 1969.
6.4 Meaning :
The basic idea behind the lead bank scheme is that a bank should lead
and take initiative for the development of a district. Lead banks are
suppo sed to function in co-ordination with other banks and financial
institutions in the district in de signing and implementing schemes of
economic development.
This scheme was introduced at end of 1969 in 336 districts, excluding
metropolitan cities like Mumbai, Kolkata, Chennai and Union munotes.in
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30 Territories like Delhi, Pondecherri and Goa. They were allotted to
14 Nationalised Banks, State Bank and its seven associate banks and
3 private banks. The field of the bank was decided on the basis of the
size of the bank, availability of the resources with the bank and
affiliation to the district etc. Lead bank is supposed to condu ct a survey
of the district, check the possibility of developing agriculture, industry
(small or large) and other businesses and take a lead in meeting total
credit needs of the district.
6.5 Objectives Of Lead Bank Scheme :
1) Bringing co-ordination in the functioning of commercial banks,
co-operative banks and other financial institutions operating in the
district.
2) Bringing effectiveness in branch expansion, guidance and
monitoring.
3) Establishing close relationship between loan business and
banking business.
4) Encouraging saving by condu cting survey of district’s resources.
5) Assisting in the development of agriculture and agro-based and small
industries of the district.
6) Removing hurdles in the development of district.
7) Accelerating the pace of economic activities at district level.
8) Establishing close relations and co-ordination between district
level govt. officials and banking institutions.
6.6 Functions Of The Lead Bank :
Lead bank, as a consortium leader, performs following functions :
1) Pr eparing economic report of the district : This is an
important function of the lead bank and helps in taking important
decisions like where to open new branches in the district, how much
deposits could be collected from a region, which parts will see
industries flourishing, and how much credit is needed in a region
etc.
2) Continuity in economic survey : The lead bank should take the
responsibility of conducting economic survey of the district every
year. Continuity will help in knowing the extent of progress and also
the shortcomings in it.
3) Preparing District Credit Plan : Lead bank initiates preparing the
district credit plan in association with the commercial banks and govt.
banks. District credit plan is a prediction about how much credit will
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31 year. Lead bank must ensure that e very bank from the district will share
the responsibility of meeting the credit requirements.
4) Appointing an Advisory Committee at district level : A committee
consisting representatives of credit societies, banks and govt. officials
(representatives from Panchayat Samiti and Zilla Parishad) is formed.
District Collector is the oxofficer Chairman of this committee. The
committee has following two responsibilities:
a) Coordinating the activities of commercial banks, co-operative banks
and other financial institutions from the district.
b) Coordinating the developme nt accounts of commercial banks, co-
operative banks and other financial institutions from the district.
6.7 Working Of Lead Bank Scheme :
The scheme has been implemented since 1970. In the beginning, due to
ambiguous nature of the scheme, banking sector went through chaos.
However, as the details were made available, the scheme started
functioning. By March 1978, every lead bank had prepared the district
credit plan. However, it was criticized on several grounds.
i) Agriculture did not receive proper place in credit schemes.
ii) Co-operative institutions were not given proper place and
importance in the credit plan.
iii) Credit plan was not consistent with the district development scheme.
In 1981-82, RBI published guiding principles for preparing district credit
plan. Banks were asked to consider following things :
i) Making efforts to reduce unemployment and under employment in
the district.
ii) Raising income levels of people living below poverty line. iii)
Initiating labour intensive projects in the district.
iii) Making efforts for raising agricultural productivity.
iv) Preparing a scheme for the progress of small & marginal
farmers.
v) Preparing development plans for landless labourers, backward caste
people.
vi) Credit plan should be based on strong economic and technical
foundation.
vii) Of the total agricultural credit in the district, 50% should flow to
small and marginal farmers. In the rural areas, credit deposit
ratio should be maintained at 60%. munotes.in
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32 Until 2001, 576 districts were brought under the purview of lead
bank scheme. Lead banks have done far better than the objectives of
lead bank scheme. Public sector banks have been instrumental in
implementing the scheme.
6.8 Shortcomings Of The Lead Bank Scheme: Following Are Main
Shortcomings :
1) Impractical Credit Plan: The credit plans prepared by lead
banks are said to be impractical, as these are not based on scientific
foundation. The credit plan should be prepared taking into consideration
total number of banks and financial institutions, their credit creation
capacity, possibility of economic expansion etc.
2) Lack of Coordination: Lead banks have been criticized on the ground
that they have failed in coordinating the activities of commercial banks,
co-operative banks and other financial institutions from the district.
3) Lack of Basic Facilities: Many districts lack the basic facilities
required for carrying out developmental work. Lead banks have
attained limited success due to lack of facilities like transport,
communication, storage faciltity, insurance companies markets etc.
4) Lack of Enterprise: For the successful implementation of credit plan,
creative leadership and enterprise is required. However, many districts
lack such leadership and enterprise.
5) Lack of Trained Experts and Experienced Staff: Many commercial
banks find it difficult to get trained experts and experienced staff required
for implementing new schemes.
6) Flawful Technical and Economic Survey: Lack of trained staff
creates difficulties in conducting technical and economic survey.
7) Non-cooperation from other banks: Under the scheme, lead bank
takes lead, but if other banks do not coope rate implementation
of the credit plan will suffer.
8) Unfair Distribution of the Districts: If the allotted district is
unknown to the bank, it becomes difficult for the lead bank to work in
such district.
Despite these short-comings, lead bank scheme can be highly
successful if survey of the district is done properly and if other
banks cooperate with the lead
7. Kisan Credit Card Scheme
In spite of various measures to rejuvenate farm credit, the flow of
credit remained quantitatively and qualitatively poor. The institutional
sources of credit meet only 51 per cent of the credit requirements of farm
sector. The non-institutional sources were mainly reached by farmers
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33 procedures and malpractices adopted by institutional lending agencies.
With a view to inquire into the reasons for the problems of the farm
credit and suggest measure for improving the delivering system, RBI set
up a one man Committee of Shri R. V. Gupta to in December 1997.
The Committee submitted its report in April 1998. It was against this
background that RBI directed all Public Sector Banks (PSBs), RRBs
and cooperative banks to introduce “Kisan Credit Card Scheme
(KCCS)” on the lines of the model scheme formulated by NABARD and
in due course of time the KCCS was adopted by all the directed
agencies.
The KCCS aims at adequate and timely support from banking system
to the farmer for crop production and ancillary activities. The credit limit
(loan) is sanctioned in proportion to the size of the owned land but
some flexibility is provided for leased-in land in addition to owned land.
The borrowing limit is fixed on the basis of proposed cropping pattern.
Most of the banks are adhering to Scales of Finance (SOF) decided by
the State Level Bankers
Committee (SLBC) but some banks have fixed their own SOF. The nature
of credit extended under KCCS is revolving cash credit i.e., it provides
for any number of withdrawals and repayments within the limit. This
feature would provide flexibility and reduce the interest burden upon
KCCS bene ficiary. Security and margin norms would be in conformity
with the guidelines issued by RBI and NABARD from time to time.
With effect from 2001-2002, it was made obligatory for the
implementing agencies to operate the KCCS with an in-built
component of life-insurance for KCCS beneficiary. The KCCS as
envisaged has substituted all other existing institutional modes of short
term credit delivery.
8.Farmers Service Societies (FSS)
Farmers Service societies are registered coope rative bodies based on
the principles of cooperation and governed by cooperative by-
laws. Since the PACS are biased towards affluent sections of rural areas,
a need for a special body to serve weaker sections was felt. FSS were
organized in 1971, on the lines of Cooperative to provide integrated
credit services to the weaker sections of rural areas i.e., small and
marginal farmers, rural artisans and agricultural laborers. The specific
function of the FSS is:
i) To supply all types of loans to weaker sections viz. crop loans,
medium term loans and long term loans;
ii) To provide adequate supply of requisite inputs and technical guidance
for the development of agriculture on timely and regular basis;
iii) To encourage dairy, fisheries, poultry, farm forestry and other
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34 iv) To make arrange ments for bringing about improvements in
agricultural markets; and
v) To mobilize deposits and small savings from weaker
sections through incentives.
8.1 Area of operation: The societies have been launched in selected
districts. Each society has a jurisdiction of a block or a portion thereof. A
district union of these societies is there at the district level to suggest
ways and means for improving and organizing these societies for
executing specific activities. The membership of these societies is open
to those who are eligible to get assistance under Small Farmers
Development Agency (SFDA) and Marginal and Small Farmers
Development Agency (MFAL) programmes. Others may be a ssociate
members without any voting rights.
Sponsorship: The lead bank of the district generally sponsors the FSS
in financial matters
Capital Structure: The various sources for funds are: share capital,
loans, funds contributed by commercial banks, coope rative societies,
subsidies from SFDA and MFAL and commissions accrued to the
society through supply of essential inputs and interest on advances.
Share capital is contributed by its members, lead bank and the State
Government.
Management: The number of the members of the B oard of
Directors varies from 9 to 13 depend ing upon the size of the
society. One full-time managing director is deputed by the lead
bank. Five directors will be elected from the members of the society of
which three are from small and marginal categories and two from other
farmers. The remaining directors are representat ives of financial
institutions. Block Development Office, Department of Agriculture and
Cooperative societies.
8.2 Farmer’s Service Societies:
The National Commission on Agriculture has recommended the
organization of Farmer’s Service Societies (FSS), one for each
block or any other viable unit of convenient size. The strength of FSS
lies in the fact that they take into account, a comprehensive view of the
problems of the small farmers. As is well known, the small and
marginal farmers require not only credit but timely availability of inputs
and ancillary services, along with technical advice and services such as
storage, transportation, processing and marketing, preferably through a
single contact point. These societies have been organized since 1973-74
to meet the above mentioned requirements of poor farmers. The National
Commission on Agriculture has recommended a programme of
establishing 2,500 such societies over a period of six years, commencing
from 1974 with a capacity to form new societies at the rate of 1,000 per
years. However, by the end of June, 1979, there were only 1,200 FSSs in
the country. munotes.in
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35 9. Agricultural Finance Corporation (AFC)
Agricultural Finance Corporation (AFC) was incorporated on April 10,
1968 by the Indian Banks‟ Association in order to provide advisory
services to commercial banks in matters related to financing
agriculture. Basically, AFC is a consortium of comme rcial banks
established under the Indian Compan ies Act 1956 to provide Agricultural
Credit Management 126 consultancy services to member banks in
matters related to projects for agriculture and rural development.
Scheduled commercial banks numbering 37, notified under RBI Act of
1934 had subscribed to the share capital of the corporation. The
authorized share capital of AFC was Rs 100 crores and the issued share
capital was Rs 10 Crores.
The Corporation has two distinct roles: financing the individual
institutions/organizations/individuals involving agricultural development
and p romot ing commercial bank advances for agricultural development.
The financing roles included – (a) sinking, deep ening and energizing of
irrigation wells; (b)production, distribution and marketing of agricultural
inputs such as seeds, fertilizers, insecticides, machinery and implements;
(c) construction of storage structures for food grains and fertilizers ; and
(d) establishments of agricultural service units. The promotional role
included– (a)commercialization and industrialization of agriculture (b)
formulation of potential projects to be financed by banks and removal of
various handicaps and difficulties experienced by commercial banks and
farmer-borrowers; and (c) development of cooperation, coordination
and consortium arrangement among different lending agencies and co-
operatives involved in agricultural financing.
In recent years AFC has assumed only consultancy roles extending
project consultancy services to banks, Central/State Governments,
NABARD, cooperatives, private sector and international funding
agencies. It also undertakes surveys and research studies including, socio-
economic, market, baseline, concurrent and impact evaluation surveys,
credit demand studies, farm management studies, MIS studies and
resource management studies both at national and international levels
10. State Bank Of India
The State Bank of India opened specialized branches known as
‘Agricultural Development Branches’ (ADBs) at selected intensive
centres’ for catering exclusive to the credit needs of agricultural and
allied activities.
These ADBs provide a package of assistance, which decides credit-
suppo rt including technical and ot her facilities. These ADBs commence
with bu siness plans for their areas of operations covering a period of 2
to 3 years, to start with. These plans are based on the development
plan prepared with reference to the potential and local resource of the
area and the progress of the plan is reviewed at regular intervals. munotes.in
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36 The State Bank of India was formed on 1 July, 1955, with the passing
of the State Bank of India Act, 1955, by taking over the assets and
liabilities of the Imperial Bank of India.
10.1 Functions:
1. The bank performs the general commercial bank functions such as
accepting depo sits, giving loans, providing remittances, issuing
letters of credit etc.
2. It acts as the agent of the Reserve Bank in places where there are
no branches of the RBI.
3. It acts as an agent of the registered co-operative banks.
4. It is authorized to purchase and sell of gold and silver.
5. It underwrites the issue of stocks, shares and other securities.
Lending for Rural Development: Commercial banks are endea voring
not only to fill the credit gaps in the field of agriculture arising out of
the inadequate development of co-operatives but are also seeking to
contribute to agricultural development by systematically preparing
programmes of development suitable to the resource - base of the area.
During the last few years, they have contributed substantially to the
development of irrigation, mechanization, land development programmes
as also to activities allied to agriculture such as horticulture dairying,
etc. For this purpose, the commercial banks have appointed a large
number of Technical experts for systematically studying the
problems of agricultural growth and rural development.
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37 4
CO-OPERATIVE FINANCIAL
INSTITUTION S
Unit Structure :
4.0 Objectives
4.1 Introduction
4.2 Structure of Co-Operative Credit Institutions
4.2.1 Short term Co-Operative Credit
a) Primary Agricultural Credit Societies: (PAC’S)
b) District Central Co-operative Banks:
c) State Co-operative Banks:
4.2.2 Long Term Agricultural Rural Co-operative Credit
Institutions in India:
a) Land Development Banks:
4.4 Achievements of Co-operative Credit Movement:
4.5 Weaknesses of Co-operative Credit:
4.0 OBJECTIVES
1) Understanding the Structure of Co- operative credit Institutions
2) Understanding the working of PACCS
3) Understanding the functions of DCC B
4) Understanding the functions of SCB
5) Understanding the long tern credit structure.
4.1 INTRODUC TION
Agriculture is an important industry and it requires capital. Due to
uncertainty in production, low returns, small-divided plots, cultivators
cannot manage their living, without borrowings. Agriculturist’s capital is
locked up in his land and stock, hence borrowing is a necessity to the
farmer. In India, agriculture provides employment to 60 % of the
population and amounts 26 % of our national wealth, and accounts 20%
of the total export earnings, for stimulating the tempo of agricultural munotes.in
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38 production farmers must be provided adequate and timely credit to
buy fertilizers, seeds,
modern tilling equipment’s, pay for irrigation facilities etc. The use of
greater and better quality of inputs, there is always a greater demand for
rural credit. In underdeveloped country like India, the need for credit is
more pressing, where the farmers are without liquid resources, and
credit on reasonable terms, to finance the preparation for ne xt crop.
Therefore, co-operative institutional credit supply becomes recognized
as a basic condition for agricultural progress.
4.2 STRUCTURE OF CO-OPERATIVE CRED IT
INSTITUTIONS
Sources: Co-operative perspective –MNI March 2011. Issues.
Figures in bracket indicate number of banks of that type.
Primary Co-operative
Agricultural and Rural
Development Bank (PACARDBs) State Co-operative
Agricultural and
Rural Development Bank (SACARDBs) Structure of Co-operative Credit Rural Co-operative credit Urban Co-operative Banks Short term Long Term District central
Co-operative State Co -
operative
Primary
Agricultural
Credit Societies munotes.in
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39
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40
4.2.1 Short term Co-Operative Credit
A) Primary Agricultural Credit Societies: (PAC’S)
Primary Agricultural Credit Societies (PACS) are the grass root level
arms of the short term co-operative credit structure. They deal directly
with farmers and give short term and medium term loans.
The ma jor objectives of co-operative development programs are to
provide bene fits of co-operative activities to weaker sections of the
society.
Functions of PACS:
1. To associate and encourage to raise Agricultural production and
welfare programme. To promote the economic interests of the
members.
2. Give and sanction land loans to farmers for short term and
medium term.
3. To cater the needs of small farmers and agricultural labours also
and disbursement of credit to members.
4. To borrow from central agen cies.
5. To supervise the use of loans and to recover the loans
disbursed.
6. To distribute fertilizers, seeds implements etc.
7. Wherever necessary these societies can purchase store and sell the
produce.
District Central
Co-operative Banks
Primary Agricultural Credit Societies State
Co-operative Banks Short Term Structure (Pyramid)
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41 Performance and Progress of Agricultural Credit Societies:
PACS in Maharashtra:
I 1981 1991 2001 2010 2012
Primary Co-operative Society 18389 18433 20619 21243 21402 Total No. of members (lakh) 5391 7507 10121 13853 14230 Total loan disbursement 24993 76855 373412 698884 805762 Loan Recovered (Lakh) 20044 78417 2765509220239 668991 Outstanding (Lakh) 35345135192 5308271024119 1089116
Problems of Primary Agricultural Credit Societies: (PAC’S):
1. Non-viable Units:
According to all Ind ia Rural Credit Review Committee (1969) a large
number of primary societies a re neither viable nor potentially
viable and must be regarded as inadequate and unsatisfactory agencies
for disbursing production oriented credit.
2. Uneven Growth:
It can be seen from the figures that 86% in Karnataka, 69% in Tamilnadu,
and 52% in Maharashtra, rural population was served by co-
operatives. While in Assam, Bihar, Manipur, the said percentage was
around 10% to 15% only.
3. Inadequate Credit Supplied:
On an average each society has given Rs.1100 only per member
which is by no means fairly satisfactory even. A large number of societies
do not advance loans which can be substantiated by figures. 32 %
members only borrowed from agricultural societies in 1981-82. Thus, it
is rightly said by rural Credit Review Committee.
4. Defective Loan Policies:
Agriculture Credit Societies in mo st of the states have not restructured
loan policies suitable to crop loan system. There are various defects
like, improper Timing of loans, entire loan is given in lump sum, kind
loan not given, and security against loan is insisted.
5. Delay in loan Disbursement:
Actual disbursement of loan is inordinately delayed. Entire process takes
6 to 8 months also.
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42 6. Inadequate Supervision and defective Audit:
Even today there is no strict supervision and proper checking of the
working of the primary societies the RBI has revealed that around 30 %
loans are not used for the same purpose for which
it was asked. So also there is frequent renewal of the same loan.
7. The Attitude of the Government:
The Government attitude approach is quite encouraging; however, the co-
operatives work like a Government depa rtment with all rigidities and
short-sightedness associated with Government Department.
8. Ineffective Management:
In many village societies political interference, exits, annual meetings are
not conducted but shown on paper only; particular local groups dominate
the societies in respective of their knowledge in the field.
9. Neglect of small farmers:
A major defect of these societies is that they never cared for small
farmer persons. Only recently Government of India has asked, Apex
Institutions to look into their problems. Now the total share at least on
paper, stands, around 40 %.
10. No linking of credit with Marketing:
It is a sad experience that even today credit has not effectively been linked
with marketing. During 1979-80 only Rs. 9 crores were recovered
through marketing linkage.
Suggestions to improve the working:
1. Societies should Develop into Rural Banks:
If societies develop beyond minimum standards, and develop into
rural banks accepting all types of deposits, extending the banking
services, offering credit facilities, including non- cultivators also, then
credit structure would become a sound one.
2. Reorganization and Revitalization:
The planning commission actually suggested the revitalization based on
sound leadership, which must be carried out quickly as expected.
3. Emphasis on deposit Mobilization:
Actually primary societies should concentrate on collecting deposits and
should educate the rural peop le relating importance of thrift. But
unfortunately many of the societies have not gained that confidence in
society.
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43 4. Reducing Overdues:
Serious efforts should be made to reduce the overdue. The collection
drive should be launched in all states. Coercive should be taken
against willful defaulters.
5. Effective Supervision and Audit:
For efficient working of the societies, co-operative bank,
effective supervision, inspection and audit is necessary. Efficient
management is also a necessary condition.
6. Linking of Credit with Marketing:
The problem of recovery is most serious problem before the primary
societies, so effective linking of credit with marketing is always beneficial
to sort out this problem.
7. Better Service to Small Farmers:
The basic objectives of co-operatives movement are to serve the small
farmers and weaker sections of the society. The Co- operative credit
institutions therefore, reorient and redesign their credit policies hereafter.
8. Implementations of Crop Loan System:
Crop loan system should be introduced in all the rural areas and the scale
of finance be decided according to the acreage under different crops.
There should also be this loans given in kind, should not be restricted so
rigidly to fixed areas and of fixed qua ntities.
B) District Central Co-operative Banks:
The co-operative primary societies federated into a central society are
named as central bank. There are 369 District Central Banks in India
which are federations of primary credit societies normally working in
a district. Therefore, they are also known as district Central Co-operative
Banks. These banks have a few private individuals as the shareholders
and remaining funds come from primary credit societies or Government
provides finance, purchases shares, collect deposits etc. The main
task of these central co-operative banks is to lend loans to village
primary societies. The District Central Co-operative Banks act as
intermediaries between the State Co-operative banks on the on hand
and the village primary credit societies on the other. The success of the
co-operative credit movement largely depends on their financial
strength of DCC ’s. The Central Co-operative Banks occupy very
important position in the co-operative credit structure.
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44 Functions of the Central Co-operative Banks:
The main functions of Central Co-operative Banks are as follows:
1. To meet the credit requirement of the primary credit societies for
production, marketing and sales and supply operations by providing
them a regular flow of credit.
2. To carry out ordinary commercial banking business. The Central Co-
operative Banks accepts deposits from the peop le, collect bills,
cheques, bundies, railway receipts, sales of securities and advancing
loans to me mbers against fixed depo sits, against gold, silver, etc.
in rural areas.
3. To undertake non-credit activities such as supply of seeds, fertilizers,
manures, food-stuffs and consumer goods.
4. To maintain close contact with primary societies, work as
intermediary between State Co-operative Bank and Primary Co-
operative Credit Societies (PCCS), at village level.
5. To provide a safe place for investment of funds of primary Co-
operative credit societies.
6. To act as friend, philosopher and guide to the primary societies and to
make them available surplus funds in their time of need.
7. To develop co-operative movement in the district on sound lines and
extend banking facilities to the members and to the rural areas etc.
Area of Operation:
The area of operation of Central Co-operative Banks varies from taluka to
district. Normally, as per Maclagan Committee report, the area of
operation is supposed to be one revenue district so that it will be strong
economic unit.
Sources of Finance:
The Central Co-operative Banks raise funds by way of share capital,
deposit from the public, borrowing from the state co- operative Banks,
grant loans from the Government.
Loan Policies of the Banks:
The loan are advanced to primary credit societies for financing
agriculture such as cultivation expenses, purchase of seeds and to
meet seasonal need of agricultural operations. The loans given for land
reclamation, building of Cattle sheds, purchase of Cattle, purchase of oil
pumps etc. are regarded as medium term loans. Loans granted consisting
of land assets are known as long term loans. The most unfortunate and
disquieting trend in the working of these banks is the rise in the
percentage of over dues. munotes.in
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45 Growth and Developm ent of Banks:
The first central bank was opened up in U.P in 1916 as a primary credit
society. Then similar types of banks were opened up in Madhya Pradesh
and Rajasthan. In 1910, the central banks did increase from 233 in 191 9-
20 to 588 in 1929-30. Their membership increased to 2 lakh and depo sits
33 crores in 1945-46. In planning period, progress was fast in second
plan. The principle of one central bank for each district was followed in
all states as per the recommendations of rural credit survey committee
report. As a result of reorganization policy the number of central banks
fell from
505 in 1950 -51 to 280 in 1960-61. In 1976-77, there were 342
banks. Today there are 367 banks with 13000 offices and the membership
is 2.20 million whereas the total share capital comes to 40000 million.
The total working capital is 12 lakhs cores rupees. The above table
is self-explanato ry explaining the growth and development of central co-
operative banks in the recent past.
Loans and advances for agricultural purposes accounted a very large
share. The medium term loans are gene rally given for the pu rchase of
bullocks and for the improvement of land and irrigation. But the medium
term loans account for only purpose of advance. This rate varies
between 8 to 15 % and the margin retained by Central Co-operative
Banks on these advances arrives to the extent of 1.5%.
There was a declaration in growth of the districts central co- operative
banks (DCCBs) in 2012-13 which is proved by decline in asset growth to
4.3 per cent during the year from 14.5 per cent during 2011-12.
Problems and Weaknesses of the District Central Co-operative
Banks in India:
The Central Co-operative Banks suffer from the following
weaknesses:
1. Uneven Expansion of Credit :
These banks have not provided credit to almost all states on a uniform
basis. This has been due to weak structure and inadeq uate coverage of
villages. There are large numbers of dormant societies.
2. Defective Loan Procedure:
Large advances granted to individual mem bers, bad and doubtful debts,
ill-equipped staff and undertaking of trading activities by the banks.
3. Difficulty in mobilizing the resources:
Central Banks have not succeeded in mobilizing savings because of
severe competition from the commercial banks. munotes.in
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46 4. Heavy Over dues:
The banks suffer from heavy over dues. Presently the over dues are
to the extent of 32 % which is all time high. The situation of over dues is
worst in the states like Assam, M.P., Orissa, Rajasthan and Bihar and
the reasons are poor recovery, inefficient managem ent, untrained staff,
lack of supervision and defective loan policy.
5. Delay in Sanctioning loans:
It has been noticed that there is unusual delay in the sanction of loans.
Applications are unnecessarily kept pending as the full board of
directors cannot meet once a qua rter. Some of the banks do not make
any distinction between short term loans and long term loans. There are
also malpractices which help to conceal the real position of the banks.
6. Defect in investment policy:
There is a tendency among some Central Co-operative Banks to keep
fund in current and call deposits with commercial banks far in excess
of actual requirements. There is also increasing tendency on the part of
Central Co-operative Bank to invest in share of other co-operative
institutions, particularly in sugar factories, spinning mills etc.
7. Defects in Management:
One of the important defects in manag ement is that there are still large
numbers of representative of individuals and therefore the
management of these banks is still conducted by untrained staff. Most of
the d irectors are busy politicians and they do not take much interest in the
problems of the bank. District Central Co-operative Banks have become
the hot beds of politics.
8. Other defects:
1. The Central Co-operative Banks failed to establish a close link
with primary co-operative credit societies.
2. They do not provide sufficient loans to industrial consumers or other
non-credit societies.
3. The banks cannot offer guidance to the primary credit societies
in the matter of the operational policies.
4. Quantitatively their position is unsatisfactory because in many
states only C-types banks predominate and hence there is no effective
supervision and control.
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47 Suggestions for Improvement in the working of Co-operative
Banks:
1. Increase the Deposits:
The Co-operative banks should try to increase their depo sits by opening
up their branch offices in business areas, improve the services to their
clients, offer competitive rates of interest and introduce the schemes
like p igmy deposits, automatics extension deposits, social security
deposits, recurring deposits etc. simplify the account procedures and
provide free services for collection of local and outstation cheques.
2. Improve loans policies:
The banks should change their loan policies on the basis on the crop loan
system. There should be proper link between advancing of the
loan and repayment of the loan in sowing and harvesting seasons.
3. Recovery of over dues:
The bank should drop a scientific method to recovery over dues. The
borrowing societies should recover loans from members and play it
back to Central Co-operative Bank. The Central Co- operative Bank must
maintain up to date record on a daily basis.
4. Other Measures:
1. The Central Co-operative Banks should maintain adequate liquid
resources.
2. An a dequate margin should be kept between borrowing and lending
rates so as to build a strong reserve fund.
3. Proper scrutiny and provision should be made for bad and doubtful
reserve.
4. Business should be confined generally to short-term loan.
5. Sepa rate record should be kept of long term loans and over dues of
principal and interest.
6. In the interest of the efficiency of the organization properly qualified
and trained personnel should be appointed.
7. Adequate investment depreciation reserve should be created to cover
the gap between the market value and face value securities in which
banks have investment their funds
8. Adequate provision out of the p rofits should be made for bad and
doubtful debts.
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48 Rural Credit Review Committee’s (1969) Suggestions:
1. Increase in state contributions to the share capital of central bank in
areas of poor performance.
2. Where agricultural credit societies are dormant, there for reactivation
central co-operative bank m any finance non- defaulter members of the
societies.
3. It was advised that the staff should be augmented, training facilities
should be giving a training of new agricultural and techniques should
be provided.
4. Special grants by the state Government to employ right quality
staff and to write-off bad loans.
5. State Government should make long deposits so as to enable
central co-operative banks to absorb over dues.
6. Special drive to recover over dues.
7. Special officers for small cultivators.
8. Decentralization of loan sanctioned powers.
C) State Co-operative Banks:
The State Co-operative Banks is a central institution at the state level
which works as a final link between small primary societies on the
one hand and the m oney market on the other hand. It takes-off the
idle money in the slack season from the Central Co-operative Banks
and supplies the money to the Central Co-operative.
Banks in busy season. There are presently 30 State Co- operative
Banks in India. They form Apex co-operative credit structure in each
state. The Apex Bank controls the working of Central Co-operative
Banks in the State. It serves as a link between National Bank of
Agriculture and Rural Development (NABARD) on one hand (formerly
RRBI) and on the other hand, co-operative Central Bank and Village
primary societies. The state Co-operative Bank is not only interested in
helping the rural co-operative credit movement but also promotes other
co-operative ventures.
Objectives and functions of Apex Banks:
The following are chief objectives of the Apex Banks:
1. They act as banker’s bank to the Central Co-operative banks in the
districts. These banks not only mobilize the financial resources
needed by the societies but they also deploy them properly among the
various sectors of the movement.
2. They co-ordinate their own policies with those of the co-
operative movement and the Government. munotes.in
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49 3. They form a connecting link between the co-operative credit
societies and the commercial money market and the R.B.I.
4. They formulate and execute uniform credit policies for the co-
operative movement as a whole.
5. They promote the cause of co-operation in gene ration by granting
subsidies to the Central Co-operative Banks for the Development
of Co-operative activities.
6. They act as a clearing house for capital i.e., money flows from the
Apex Banks to the central Banks and from the Central Banks to
the rural societies and from them to individual bo rrowers.
7. They supervise, control and guide the activities of the Central Bank
through regular inspections by t heir inspection they rectify the
defects in the ir work. Thus they act as their friend, philosopher
and guide.
8. They also perform general utility functions such as issuing drafts,
cheques and letters of credit on various centers and thereby help
remittance of funds.
9. They collect and discount bills with the permission of the
registrar.
10. In certain places they also provide safe deposit lockers and facilities
for safe custody of valuables.
11. They help the state government in drawing up Co-operative
development and other development plans and in their
implementation.
Resources:
State co-operative banks draw their funds from various sources
comprising of share capital, reserve fund, cash credit, overdraft from
commercial banks etc. But a major part of the funds of S tate Co-
operative banks comes from the Reserve Bank of India. As regards the
channelization of funds, these banks channel them via central bank.
Lending Policies:
As an Apex Bank, State Co-operative Banks provide short term loans for
twelve months both to finance agricultural operations as well as for the
marketing of crop and distribution of controlled commodities. Moreover,
medium term loans are granted for purchase of cattle and
machinery, reclamat ion of land, sinking and renovation of irrigation wells,
construction of farm sheds, godowns etc.
The Working and progress of the Sate Cooperative Banks:
There is only one Apex Bank in each state but some states like
Maharashtra, M.P., Punjab, and A.P. have got more than one Apex Banks. munotes.in
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50 The membership of these banks is opened up to all Central Co-operative
Banks and some societies are also allowed to have direct dealing.
Regarding the sources of finance the primary source is working capital of
these banks and share capital, reserve fund, deposit from membe rs,
borrowing from Reserve Banks, State Banks etc. The share capital of
Apex banks is increased from Rs.
18 crores in 1960-61 to Rs. 100 crores in 1980-81 to Rs.400 crores in
1997-98 and now Rs. 500 crs.
The Apex banks provided short term loans for a period of 12 months for
financing agricultural operations, also provides loans for marketing of
crops and distributions of controlled commodities. Medium-term loans
are granted for purchase of cattle and machinery, reclamation of
land, sinking and renovation of irrigation wells, bundling, fencing,
construction of fa rm sheds, godowns, renewals of machinery and
equipment’s.
The loans are granted to the member societies through their main
branches. In 1960-61, Rs. 260 crores were disbursed while in
1995 -96, 22145 crore rupees loan advances were sanctioned. Above
three tables clearly indicate the working of state co-operative Banks and
the fast progress they have made in distributing agricultural loans,
medium-term loans through district central co- operative banks.
State Co-operative Banks and priority sector Lending:
Improving credit delivery and financial inclusion have become key
priority of Reserve Bank of India. In this direction RBI introduction
biomet ric smart card system (Kisan Credit Card (KCC)). Priority
sector, lending aims at encouraging and enhancing credit availability to
priority sectors of the e conomy. The target for advances to the priority
sector is 40% of adjusted Net Bank Credit (ANBC) to decide the nature
and structure of priority lending Malegam committee was appointed and
submitted its report in Feb.2012.
Major Recommendation of Malegam Committee on Priority
Sector Lending:
1. 1. Overall Priority sector lending should be 40% od adjusted net
bank credit for domestic banks, agriculture microcredit,
2. education, housing, export credit were treated as a pa rt of
priority sector.
3. Lending to agricultural sector should be around 18% of ANBC
(adjusted Net Bank Credit) retained as target for Agri. Sector.
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51 4. 9 % of ANBC should be given as loans to small and marginal
farmers, by 2015-16.
5. 7% of ANBC should be given to micro- enterprises.
Problemmes and Weaknesses of the State Co-operative
Banks:
The State Co-operative Banks suffer from the following defects:
1. Poor Deposit Mobilization:
These banks have not been successful in raising, deposit as even
now, individual deposits from less than 25 per cent in many Stats.
2. Ineffective supervision and inspection:
Many of the banks have not taken up th is work in right spirit. Some of
the banks have not adequate staff for th is work. Officers of these
banks sometimes pay only hurried visits.
Book Adjustments:
Book adjustments are often made regarding repayment of loans. The
State Co-operative Banks have failed to check wrong transactions of the
Central Co-operative Banks.
3. Undesira ble Investment of Funds:
Deposit the advice of NABA RD, a cautious policy is not being allowed
in the matter of investment of the funds which are even now utilized for
the purchase of share in other co-operative institutions, or in making huge
advance to the primary co- operative societies.
4. Increasing Over dues:
The over dues of the banks have been showing a rising trend of
32 %. This is due to the fact that these banks have not followed the
prescribed loaning procedure and recovery efficiency over dues estimated
to Rs. 10000 crores by 2004.
5. Failure to assess Genuineness of Borrowing:
The banks are unable to assess the genuineness of the borrowing of
the Central Co-operative Banks.
Remedies for Improvement:
1. Opening of Branches:
In areas where a Central Co-operative Bank is virtually inoperative and
unable to finance the agricultural credit societies, the SCB should
establish a branch and finance societies till separate central bank is
organized. Recently because of various restrictions brought by RBI the munotes.in
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52 over dues position is showing declining trend. Which is definitely
showing improvement in the performance of SCBs.
2. Wide Membership:
The membe rship of the SCB should be open to all Central banks and such
other co-operative credit institutions which extend same work.
Restrictions should be imposed on the individual membership.
3. Qualified Managerial Staff:
Manage rs of these banks should be qualified and t rained. No Co-operative
should be allowed to begin operations until a qualified manager is
appointed who commands the confidence of the people and is able to
build the organization.
4. Withdrawals of privileges for Non-co-operation:
Central Co-operative Banks which refuse to co-operative with SCB in
the matter of supervision and inspections should be disaffiliated from
the state Co-operative Banks and denied privileges.
5. Effective Supervision:
The State Co-operative Ba nks should try to improve their operational
efficiency, exercise effective control over branches and the supervisory
staff and make continuous effort for the recovery of loans.
4.2.2 Long Term Agricultural Rural Co-operative Credit
Institutions in India:
a) Land Development Banks:
Land Development Banks are the institutions providing long term credit
to the agriculturists. The ordinary cooperative credit societies and central
co-operative banks cannot afford to lock up their funds for long
periods. Commercial Banks also refrain from lending for long period
even for business purposes. Therefore, they cannot be expected to take
a lead in long-term loans for agricultural purposes. In view of this, land
development banks were organized for providing long-terms credit
facilities to farmers. They grant loans to the landowners on the security of
land mortgaged to them. Such banks may be organized on a co-operative
or quasi-co-
operative basis. In the later, besides the co-operative element, private
individuals are also included. This form is more prevalent in India in
order to att ract initial capital as well as business talent and organizing
capacity. These banks are now renamed as CARDB’s, i.e. Co-operative
Agriculture and Rural Development Banks.
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53 Need for Land Development Banks:
The need for Land development Bank arose due to the following
reasons:
1. The primary cooperative societies cannot possibly give loans to the
cultivators for long period.
2. The work of marketing long term loans on the basis of landed
property requires expert assistance for valuation.
3. The abolition of Zamindari system and the restrictions put on the
dealing of money-lenders made it difficult for the cultivators to get
long term loans for their day to requirements.
4. In crease in agricultural production and productivity of land
required long term finance which was not available from the
commercial banks till recently.
Structure of Land Development Banks:
The organizational structure of Land Development Bank is not
uniform all over the country. But, it falls into one or other of the
following categories:
a) Federal Type:
A majority of the states have the federal set up with central land
development bank at the state level affiliated primary land development
bank at the district or lower levels. The federal type of organization is
found in 12 states, viz., Andh ra Pradesh, Assam, Haryana, K erala,
Madhya Pradesh, Maharashtra, Mysore, Orissa, Punjab, Rajasthan, Tamil
Nadu and West Bengal.
b) Unitary Type:
In some states, the structure is of unitary type, the operational
units below the central development being its branches. In four States,
Viz., Bihar, Gujarat, Jammu and Ka shmir and Uttar Pradesh, the structure
is of the unitary type. The same is also true for the union territories.
c) The Central Land Development Bank operates through
branches as well as primary Land Development Bank.
Objectives and Functions:
The main objective of Central Land Development Bank is to provide
long term finance either through the primary land
Development Banks affiliated to them or the finance directly
through the branches.
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54 1. They grant loans to primary Land Development Banks or to its
branches on the mortgage or unen cumbered property to which the
borrower member has a clear title.
2. They inculcate the spirit and practice of thrift, mutu al help and
self-help among the members.
3. They float debentures for raising necessary funds for which the state
Government guarantee for the repayment of principal and interest.
4. They mobilize rural savings and to stimulate capital formation in the
agricultural sector by the issue of debentures.
5. They protect fanner from the grip of money lenders.
6. They supervise, inspect and guide the primary Land
Development Banks, and verify utilization of loans.
7. They act as a link between long-term banking of RBI and the
Government.
8. They establish branches, sub-officers to facilities its business.
Area of Operation:
The area of operation of LDBs is neither too large as to become
unwieldy nor too small to be uneconomic. In some states viz.,
Maharashtra. Tamil-Nadu and Karnataka, the banks work at taluka level.
In ot her states, primary Land Development Banks have open ed branches
at district level. Only the state of Gujarat has branches extending up
to taluka level.
Management:
The Manage ment of Land Development Banks vests in the hands of
board of Directors comprising 7 to 9 members. Generally,
2 to 3 directors are nominated by the Government. In the case of Primary
Land Development Bank, one director is nominated by the Central Land
Development Bank. The members of the Board work for three years.
Financial Resources:
Land Development Banks attain their funds from share capital,
reserve, deposits and issue of the Central Land Development
Banks. It has fixed rate of interest for certain period, gene rally up to 20
years. These debe ntures are guaranteed by State Government in
respect of payment of interest and repayment of principal. They are
subscribed by LIC, the Commercial Banks, and the State Bank of
India. Besides, Ordinary debentu res, the Land Development Bank have
been floating rural debentures since
1957 for a period up to 7 years which are subscribed by fanne rs and
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55 Loaning Policy:
The main objectives of Land Development Bank (LED) are to grant loans
on security of agricultural properties. As they grant loans for several
years, strict rules are laid down with regard to the security against which
they can advance loans. They generally lend up to 50 per cent of the value
of security.
The Land Development Bank (LED) provides credit for a variety of
purposes such as redemption of debt, improvement of Land, Purchase of
costly ag ricultural equipment, construction of wells and pumps and so
on. At one stage, redemption of old debts was the most important. But, in
recent years, farmers have been borrowing from LDBs mainly for the
purpose of land improvement and Development including sinking of
wells and purchase of Agricultural machinery.
As a policy, the government attaches considerable importance to
agriculture and our successive plans to provide larger financial
allocations and to accord highest priority for agricultural development
programs. The main thrust continues to be on development of minor
irrigation.
Growth and Progress: Problems of LDBs:
1. Problems of Over dues:
Mou nting over dues have crippled the Land Development Banks in recent
years. Over dues is highest one of the extent 40 %. The financial
discipline imposed on these banks is the main cause for highest over
dues. In addition to that, Faulty loan policies, inadequate supervision,
overutilization of loan, less recovery, over dues affected due to national
calamities caused to initiate the highest over dues.
2. Lack of Trained Manpower:
Land Development Banks have grown in number, but enough attention
was not given to build up capable manpower shouldering increasing
volume of business and to face the challenges.
3. Diversification of Loans:
For the success of banks, diversification is very necessary. e.g. Loan
should be given on the security against hypothecation of assets, charge
on land, Government guarantee, personal surety. There is good scope
for financing agro-processing industry and cottage industry sectors.
4. Management Structure in not uniform:
Absence of elected member, irregular meet ing of the committees, and lack
of interest in the working create problems.
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56 5. Excess ive delay in granting loans:
In many cases loans are sanctioned not even in 8 to 9 months,
ignorance of borrowers, lack of frequent meeting, non- compliance of
conditions create the problems I timely granting the loans.
6. High cost of credit:
It is a serious defect of Land Development Banks. Farmers suffer due to
excessive interest rates and cost of recording of credit instruments is high.
7. Lack of Supervision and Inspection:
The machinery for supervision is inadequate so also the secretaries and
managers are untrained.
8. Small Farmers are not Benefitted:
These banks do not give the loans to small farmers at the loans to small
farmers at the moderate rate of interest. Most of the loans are given to
the land holders who have more than acres of land.
9. Adverse Effect of Land Reforms:
Due to tenancy legislation in state like Ma harashtra, tenants could not
offer land to the banks as a security which adversely affected the
expansion of rural credit and recovery of past loans.
10. Unhelpful Attitude of Registrars:
In many states, the officers like registrars, sub-registrars do not co-
operative which create delay in scrutiny of applications and the grant of
loans.
Suggestions for Improvement:
1. Uniform Structural pattern:
The structural pattern of LDBs should be made uniform throughout the
country. There should preferably be one Central Land Development
Bank at the state level and one at the taluka level. The area of
operation should be such that bank should have close contact with the
borrowers, to make LDBs a viable unit.
2. Trained field staff and proper Supervision:
The LDBs must have trained field staff do that the staff members will
have direct contact with the borrowers and they will supervise regularly
how the things are going on.
3. Loaning policy should be production Oriented:
Presently, the loan policy is mostly security oriented rather than
production oriented. This must be changed. munotes.in
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57 4. State Government’s Guarantee to Principal Amount of
Debentures:
It is expected that the State Government should provide every
guarantee for the payment of principal and interest on deben tures of
Central Land Development Banks. So also provision should be made to
meet the losses arisen due to exempt ion of stamp duty, registration
fees. Special finance should be provided to the banks working in under-
developed areas to meet the administration cost.
5. Delay in Granting loans be removed:
Most of the applicants do not know the procedures how to fill up the loan
applications, unnecessary time is taken at every stage, the procedure of
granting loans is unknown to borrowers and Government departments
also do not extend good co-operation to the borrowers. All these factors
lead to undue delay. Such delay should be avoided.
6. Timely Recovery:
To attain the goal of timely recovery of loans, promote recovery, better
supervision, fixing dates of recoveries to match harvests, launching of
recovery drive etc. are the important things which need to be looked after
carefully.
7. Accurate land Valuation:
Success of Land Development Banks depends on accurate land valuation
offered as security, on which repaying capacity of the borrower depend s.
8. Other Measures:
The other measures include LDBs drive for mobilization of rural saving,
incentives to the age ncies canvassing for LDBs deben tures, high
contribution to share capital etc. The present lending policies and
procedures of LDBs should be reviewed in a comprehensive manner to
bring them in line with the requirements of sound investment credit and
ensure optimum use of scarce long term resources.
4.3 ACHIEVEMENTS OF CO-OPERATIVE CRED IT
MOVEMEN T
The Co-operative has made land mark progress to provide loan facilities
to small cultivators in the country. The major achievements of co-
operative credit since the inception of freedom have been
summarized.
1. Fairly Satisfactory Expansion:
Credit cooperative have made remarkable progress since independence.
The short, medium and long term loans issued by primary credit societies
have risen from Rs. 34 crores in 1951-52 to Rs. 1601 crores in 1981-82
and further to 3115 crore in 1992-93. The percentage of such loans munotes.in
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58 to total agricultural credit requirements has risen from about 3 per
cent to about 35 per cent during this period.
2. Supply of Credit to Related Activities:
Co-operative banks have also been financing agricultural marketing and
processing activities. Co-operative credit supplied for marketing and
processing activities amounts to Rs. 105 crores and Rs. 228 crores in
1992-93 in the case of State Co-operative Banks and about Rs. 107 crores
and about Rs. 84 crores in case of Central Banks respectively. Both the
activities are expected to grow in future and credit co-operatives will have
to accept larger responsibilities for financing these activities.
3. Supply of credit to small Farmers and weaker sections:
It is significance to note that about 40 per cent of co- operative
credit goes to small and marginal farmers. The rates of interest charged by
credit co-operatives have always been lowest in the markets. The interest
rates charged at present vary between 9 per cent to 13 per cent. Some of
the States and Districts Co- operative Banks have also been implementing
a scheme of differential interest rates.
4. Crop Loan system:
Co-operative has developed the ‘crop loan system’. Accordingly, loans
are given on the basis of crops to be grown and the acreage under the
crop. These loans are given in anticipation of the crop and are recovered
after the harvest.
5. Cash Credit System:
It is significant that the bulk of the short term credit is production
oriented and not security oriented. Besides, in some states such as
Punjab, Kerala, Maharashtra and Andhra Pradesh, Cooperative banks
have also introduced the cash credit system in selected areas and for
selected crops so facilitate continuous borrowing and repayment of
borrowers.
6. Supply of Farm Inputs:
The Co-operative credit societies provide the cultivators improved and
better manures and implements at reasonably low prices. The
multipurpose co-operative societies make agriculture a profitable concern.
7. Social Benefits:
Co-operation strengthens the social consciousness in man. Unlimited
liability all members to supervise the activities of others. Moreover, a
part of the benefits viz., construction of Panchayatghars, clearing
drains etc.
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59 8. Educational and Moral Benefits:
The Co-operation develops the intellect of the members who learn the
way of business and credit on the basis of democracy. They avoid
litigation, extravagan ce and gambling etc. It inculcates honesty and
capitalist honesty that loans are given on personal security of the
members.
4.4 WEAKNESSES OF CO-OPERATIVE CRED IT
Co-operative credit structure suffers from various problemmes in the
country. Some of the major problemmes are discussed as unde r:
1. Regional Imbalances:
One of the weaknesses of the co-operative is the regional imbalances. Out
of the total outstanding loans of Rs. 1601 crores nearly 70 per cent is
accounted for by only eight states- Maharashtra, Gujarat,Tamil
Nadu, And ra Pradesh, Karnataka, Punjab, Haryana and Kerala. The
large majority of other states such as Orissa, Bihar, Assam, U.P.,
West Bengal, M.P., etc., are left with comparatively small amount of
loan as well as deposits.
2. Reliance on External Resources:
Unduly large reliance on external resources is another weakness of credit
coope ratives. It is important to note here that the Reserve Bank of
India has been extending credit cooperatives very large financial
assistance for various purposes. Moreover the ARDC and Government
have also been extending financial suppo rt to co-operatives with the result
that the borrowing of co-operatives have increased considerably.
3. Defective Lending Policies:
It is heartening to note that there are willful defaulters those who can pay
but do not pay. It is due to the lack of will and discipline among
cultivators. The defective lending policy has been other contributory
factor to increase the magnitude of over dues and unpaid loans.
4. Lack of Efficiency:
Some states have introduced cadre system to improve the working
efficiency of co-operatives. Moreover, a program for rehabilitation of
district co-operative banks has also been
unde rtaken during the last ten years. Some district Central co- operative
banks have come out of the rid but a large number of them still
continue to be weak.
5. Organizational Inadequacy:
Another weakness of co-operatives relate to organizational inadequacy. A
large number of credit primaries are dormant and numerous district co-munotes.in
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60 operative banks are weak. Therefore, attempts are being made on behalf
of the RBI to reorganize the primaries into viable units so that they can
afford a full time secretary.
6. Lack of public Coordination:
The cooperative movement has not been voluntary. It took the shape
of government depa rtment. The credit societies were through to be
government lending agencies. Government officials are interested in
showing quantitative result. In order to expand the co-operative credit
institutions, the movement was left in the hands of bureau crafts, who
themselves were ignorant of the ideals of co- operatives.
7. Political Interferences:
The All India Rural Credit Survey Committee has observed that political
instances have begun to affect the working of the institution in many
ways. As a result credit was given to certain groups or to be provided to
others against coordination of the rules in force or causing repayment of
co-operative dues to be delayed or ignored. Thus, political framework and
other considerations sometimes led to facile financing as also to the
failure to make a determined drive for recoveries.
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61 5
NATIONAL BANK FOR AGRICULTURE
AND RURAL DEVELOPMENT
(NABARD)
Unit Structure :
5.0 Objectives
5.1 Introduction
5.2 Establishment of NABARD
5.3 NABARD’S Capital
5.4 Management Of NABARD
5.5 Objectives
5.6 Functions of NABARD
5.7 Role of NABARD in Rural Development
5.8 NABARD’S Performance
5.9 Evaluation off NABARD
5.10 Questions
5.0 OBJECTIVES
Know the background of establishment of NABARD.
To Understand capital structure of NABARD.
To Understand the management of NABARD.
To Study the functions and p rogress of NABARD.
5.1 INTRODUCTION
Indian agriculture received loan assistance indirectly from the RBI. An
independent department was set up for providing agricultural credit. In
1963, Agriculture Refinance and Development Corporation was
constituted to make refinance facility available. Yet, there were many
problems in the allocation of agricultural credit. As a solution, a
recommendation to set up a bank at national level was made by a
committee set up by RBI.
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62 5.2 ESTABL ISHMENT OF NABARD
The existing i nstitutional credit flow from commercial banks (public &
private), co -operative banks to the agriculture and rural sector was
inadequate. A need was felt to have an apex bank for agricultural and rural
development in an agrarian country like India. Expert Committee had also
recommended for the same. As a result, NABARD was established
through a separate bill presented in the Parliament on 12th July 1982. It
was expected to provide loan assistance to small, handicraft and village
industries and to take over the agricultural credit function of RBI.
NABARD functions as an apex body in the co -operative credit structure in
India.
5.3 NABARD’S CAPITAL
NABARD had an authorized share capital of Rs.100 Crores and paid -up
capital of Rs.100 Crores. It was raised to Rs .2,000Crores in 1999.
NABARD’s capital is subscribed by RBI and Central Govt., 50% each. It
receives finance from Central Govt. and World Bank. It can also raise
capital from the open market. NABARD also receives funds from
National Agriculture Credit Fund (Stabilization fund). It is dependent on
RBI for short term and working capital requirement. During last few
years, NABARD’s capital & funds have increased enormously.
5.4 MANAGEMENT OF NABARD
NABARD’s management consists of 16 directors. They are appoin ted in
the following manner :
RBI’s deputy governor is the Chairman of the bank,RBI appoints 3
directors,Central Govt. appoints 3 directors, 2 experts from co -operative
banks and 1 from commercial bank are appointed as directors.State
Govts.appoint 2 direc tors.2 Experts from the area of rural economy and
rural development.1 Managing Director.1 Full time Director. The Bank
has head office at Mumbai and other 16 Regional offices and 7 sub -offices
in India.
5.5 OBJECTIVES
1. To Refinance State land Developme nt Banks, State Co -operative
Banks, Scheduled Commercial Banks and Regional Banks for
supporting production and Investment credit for Development
activities.
2. To co -ordinate the activities of different agencies engaged in
developmental activities and wit h RBI, Central Government etc.
3. To modify the present structure of credit institutions, and to arrange
training of the personnel.
4. To undertake evaluation of the projects refinanced by it. munotes.in
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National Bank For Agriculture
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63 5.6 FUNCTIONS OF NABARD
Functions of NABARD
Financing Funct ions Coordinating and Advisory
Functions
1. Production and marketing credit 1. Coordinating Several
Institutions.
2. Conversion of loans. 2. Research Activities.
3. Rescheduling loans. 3. Inspection Activities
4. Sanctioning Investment Credits.
5. Loans to State Govt. for share Capital.
6. Other functions.
A) Financing Functions :
1. Production and marketing credit :
It is the most important function of NABARD. It inc ludes refinance, loans
and advances given for agricultural purpose, marketing purposes etc. It
gives loans for marketing activities of artisans and small -scale industries
also, including village and cotton industries.
2. Conversion of loans:
Under conditions of drought, famine or other natural calamities and also in
military operations, short term loans are converted into medium term loans
are converted into medium term loans for a maximum period is also seven
years.
3. Rescheduling loans:
In unforeseen circu mstances the bank is authorized to reschedule the loans
made to artisans, small -scale industries, villages/cottage industries etc.
Such period is also seven years maximum.
4. Sanctioning Investment Credits:
For promoting agriculture and Rural Development the NABARD extends
investment credit to Regional Rural Banks, State Co -operative Banks and
Land Development Banks etc.
5. Loans to State Govt. for share Capital:
The Banks contributes to the share capital and can purpose or sell
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64 6. Other functions:
In an effort to promote agricultural and rural development the bank also
grants direct loans for a maximum period of 25 years. It can extend
guarantee for purchase of capital goods also, on deferred payment basis. It
provides securi ty for loans with prior approval of the Central Government.
B. Coordinating and Advisory Functions
1. Coordinating Several Institutions.
NABARD is also entrusted with the task of coordinating the operations of
several institutions engaged in the field of rural credit.
2. Research Activities.
NABARD maintains a Research and Development Fund to help and to
promote research activities in Agricultural sector and rural development
sector. It gives grants also for Research work under section 38.
3. Inspection Act ivities:
NABARD undertakes the inspections of Regional Rural Banks (RRB’S)
and the Co -operative Banks etc. These banks are asked to furnish the
copies of the returns.
5.7 ROLE OF NABARD IN RURAL DEVELOPMENT
1) It provides refinance to agriculture, small an d village industries,
handicrafts etc.
2) It provides short, medium and long term loan assistance to RBI
approved State Co -operative banks, rural development banks, land
development banks and other institutions.
3) NABARD provides long term loans (20 year s maturity) to state govts.,
so that they can subscribe to the share capital of co -operative credit
societies.
4) It provides long term loans and helps in raising capital to those
institutions, which are working for agricultural and rural development
and a re approved by Central Govt.
5) NABARD plays the role of a coordinator among the activities of
Central Govt., State Govts., and planning commission so as to develop
the rural economy.
6) NABARD is entrusted with the responsibility of inspecting the
workin g of RRBs, co -operative banks and primary co -operative
institutions.
7) It has instituted ‘research and development fund’ for financing the
agricultural and rural development related research.
8) It also provides financial assistance on a large scale for mechanization
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65 5.8 NABARD’S PERFORMANCE
NABARD functions as an apex bank among the institutions providing
credit for the development of agriculture, small and village industries,
handic rafts etc. NABARD’s performance is described below :
i) Short term loans - NABARD’s short term loan assistance to
agricultural sector was Rs.8,160 Crores in 1999 -2000, which increased to
Rs.8,820 Crores in 2003 -04. the rate of interest charged on these lo ans is
3% less than the regular one.
ii) 20 point programme - Under the new 20 point programme, banks are
provided loan assistance so that they can lend to small and marginal
farmers and economically weak units. Such a lending is to be done at a
specific r ate of interest.
iii) Medium -term loans - Medium term loans are provided for the
development of agriculture.
iv) Long -term loans - NABARD extends long -term loans to state govts.,
so that they can subscribe to the share capital of co -operative institutions.
v) Increase in refinance - NABARD provides refinance to state co -
operative banks and regional rural banks for the short and medium -term.
By the end of 2002, it had provided refinance assistance to the tune of
Rs.6,590Crores to state co -operative banks and RRBs. State Govts.,also
receive special assistance from NABARD for purchasing shares of weak
cooperative institutions and banks.
During 2001 -02, NABARD had provided refinance of Rs.12,000Crores to
weaving institutions and industrial co -operative instituti ons for purchasing
fertilizers and other inputs, stocking and distribution as also for production
and sale.
vi) Assistance under Integrated Rural Development Programme : It
provides refinance to weak units for minor irrigation, animal husbandry,
fishing bu siness, small business etc. under IRDP.
vii) Priority to agricultural mechanization: NABARD has given
priority to mechanization of agriculture. Nearly 28% of its loans have been
given for this reason.
viii) Development of backward regions: NABARD has provi ded special
attention for increasing agricultural investment in those states, which have
less developed agricultural sector. Backward states have received 50% of
loan assistance provided by NABARD. U.P., Bihar, Rajasthan, Madhya
Pradesh, Orissa are the mai n beneficiaries.
ix) Establishment of Rural Infrastructure Development Fund: Rural
Infrastructure Development Fund was established by NABARD with the
help of Central Govt., in 1995 -96. This fund is meant for financing
development of rural infrastructural p rojects like major irrigation, roads,
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66 During 1995 and 31st March 2004, this fund had provided
Rs.16,300Crores for the construction of roads and bridges, Rs.12,140
Crores for irrigation and Rs.6,240 Crores for other reas ons, that is, a total
of Rs.34,680 Crores. During 2003 -04, Rs.7,605Crores were spent on 7,827
schemes.
x) Efforts for re -structuring of co -operation: NABARD has made
efforts for restructuring co -operation in the country. Primary Agricultural
Credit Societi es were restructured. It also provided help for rehabilitation
of district central co -operative banks.
5.9 EVALUATION OF NABARD
The Khusro Committee set -up for the evaluation of NABARD has stated
that it has done a commendable job in the sphere of refinan ce. The loan
assistance provided by NABARD has helped in the development of
agriculture, small and village industries and the rural sector as a whole.
However, NABARD has failed in preventing the laggardness of co -
operative banks. It has done an appreciabl e task in some states, while in
other states; its performance has been very poor. In sum, NABARD has
been playing an important role in the development of agriculture and rural
sector.
Check Your Progress:
Q.1 Answer in one sentence.
i) When was NABARD e stablished?
ii) Who provides capital to NABARD?
iii) How many members does NABARD’s board consist of?
iv) Which fund was set -up by NABARD for rural infrastructure
development?
Q.2 State whether true or false.
i) NABARD functions as an apex institution i n the co -operative
credit structure.
ii) Govt. of India and RBI contribute 50% each in NABARD’s
capital.
iii) NABARD depends on state govts., for short -term and working
capital.
iv) RBI’s deputy governor is the Chairman of NABARD.
v) NABARD provides o nly long -term loan assistance.
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National Bank For Agriculture
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67 5.10 QUESTIONS
A. Long answer questions.
i) Describe in detail functioning of NABARD.
ii) Explain NABARD’s contribution in agriculture and rural
development.
B. Write short notes.
i) NABARD,
ii) NABARD’s performanc e,
iii) NABARD’s capital structure and management.
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68 6
REGIONAL RURAL BANKS
A) REGIONAL RURAL BANKS (RRBS)
Unit Structure :
6.1 Objectives
6.2 Introduction
6.3 Establishment and Nature of RRBs
6.4 Responsibility of RRBs
6.5 Capital of RRBs
6.6 Management of RRBs
6.7 Objectives of RRBs
6.8 Functions of RRBs
6.9 Progress of RRBs
6.10 Problems of RRBs
6.11 Measures
6.12 Check your Progress
6.13 Questions
6.1 OBJECTIVES
Study the establishment & nature of RRBs
To Understand the responsibility of sponsor bank
To Understand capital structure and managem ent of RRBs
To Study objectives & functions of RRBs
To Study progress and problems of RRBs
Study the measures adopted to solve the problems of RRBs
6.2 INTRODUCTION
Nearly 70% of India’s population lives in rural sector. So, economic
development of India in true sense is possible only if rural sector develops,
and that is possible only if the institutional credit reaches the countryside. munotes.in
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Regional Rural Banks
Regional Rural Banks (RRBS)
69 The ‘Banking Commission’ of 1972 floated the concept of rural banks. A
study group on rural banks, chaired by M. Narasim ham, upheld the
concept and recommended establishment of rural banks. In 1976,
‘Regional Rural Banks Act’ was passed.
6.3 ESTABLISHMENT & NATURE OF RRBS
5 RRBs were set up on the occasion of Mahatma Gandhi’s birthday 2nd
October. These were established at Moradabad and Gorakhpur in U.P., at
Bhivani in Haryana, at Jaipur in Rajasthan, and at Malada in West Bengal;
and were sponsored by Syndicate Bank, State Bank of India, Punjab
National Bank, United Commercial Bank and United Bank respectively.
Regional Ru ral Banks are set up on the initiative of State and Central
Govt., sponsored by a bank and work in the rural areas. Their operation
area is limited to either one or two districts. These banks lend to small and
marginal farmers, rural artisans, agricultural labourers etc. and charge
interest rate, which should not be more than the one charged by primary
agricultural credit societies (PACS) in the State.
6.4 RESPONSIBILITY OF RRB
As per the amendment of 1987, the sponsoring bank should guide in the
area of c apital raising, employee recruitment, training, managerial advice,
etc.
Sponsoring banks provide help to RRBs in the following areas :
i) Contributing in the capital of RRB.
ii) Providing managerial help
iii) Making required staff available
iv) Financing t raining expenses
v) Providing financial help under refinance
vi) Providing guidance for the investment
Though the above types of help is to be provided during first 5 years,
sponsoring banks are found to be continuing the same even after 5 years.
6.5 CAPIT AL
Every regional bank has an authorized capital of Rs.1 crore, with 1 lakh
shares of Rs.100 each. The issued and paid up capital is of Rs.25 lakhs; of
which 50% is contributed by sponsoring bank, 35% by central Govt. and
15% by state Govt. An amendment of 1987 raised authorized capital to
Rs.5 Crores and paid -up capital to Rs.1 Crore.
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70 6.6 MANAGEMENT
Board of Directors, which consists of 9 members, is responsible for day -
to-day working of RRBs. Of the 9 directors, 4 are appointed by the central
govt., o f which 1 is elected as Chairman. Two directors are appointed by
State Govt. and remaining 3 by sponsoring bank. The total number of
directors should not cross 6. RBI and NABARD are allowed to appoint
one director each. The tenure of the board of directors is 5 years. After the
establishment of NABARD, all the powers regarding RRBs have been
transferred to it.
6.7 OBJECTIVES OF RRBS
Following are the objectives of RRBs:
i) Extending loan assistance to small & marginal farmers, artisans, small
entrepreneurs , traders and agricultural labours.
ii) Helping in accelerating the growth of rural sector.
iii) Developing saving habits among rural people.
iv) Freeing the rural people from the clutches of moneylenders.
v) Removing regional imbalances.
Characteristi c Features of RRBs:
The RRBs have the following Characteristic Features:
1. The areas of operation of the Regional Rural Bank are broadly
confined to a district. A district is a well -established administrative
entity. Normally one RRBs is expected to cover a population of 10 to
15 lakhs.
2. RRBs have an authorized Captial of 1 crore and an issued capital of
Rs. 5 lakhs. The issued capital was subscribed by the Government of
India, the sponsoring bank and the concerned state government in the
proportion of 50 % , 35 % and 15 % respectively.
3. RRBs are usually sponsored by the public sector banks. The RRBs
enjoy the status of public sector banks, they get direct access to the
RRBs refinance facilities.
4. The Management of RRBs vests with the board of directors headed b y
the chairman who is usually an officer of the sponsor bank but
appointed by Govt. of India.
5. The RRBs are free to recruit their own staff -clerks, subordinate staff
and accounts. munotes.in
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Regional Rural Banks
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71 6. For collecting deposits from the rural areas, RRBs have been allowed
to offer slightly a higher rate of interest on their deposits as in the case
of co -operative banks.
7. The RRBs keep their deposits with the sponsor banks or with the
public sector banks.
8. For their loan operations, the RRBs mostly depends upon sponsor
banks and RB I (now NABARD) for finance.
6.8 FUNCTIONS OF RRBS
RRBs perform following functions:
1. The RRBs are mainly required to open branches in the rural areas. The
RRBs are expected to spread their branch network in remote rural
areas.
2. The RRBs are required to mobi lize deposits as far as possible from the
small men living in remote rural areas. The aim is to promote saving
and investment habit of the rural people who were earlier lacking these
habits.
3. Providing individual or group loans to rural people.
4. Ensuring tha t financial activities are productive and viable.
5. Devising new schemes of credit allocation to people from back ward
castes (i.e. S.C.s &S.T.s ) and generating self -employment
opportunities to them.
6. Making efforts for the upliftment of the economically weak people by
introducing special credit allocation schemes for them.
7. Accepting deposits and other banking functions are also performed by
RRBs.
6.9 PROGRESS OF RRBS
RRBs have played an important role in increasing the flow of institutional
credit to the rur al sector since inception. At present, 196 RRBs are
working in 23 States with a network of 14,500 branches. 95% of their loan
assistance is given to weak units and 90% branches have been opened in
those areas, which were not served by banks earlier. The pr ogress card of
RRBs is described below :
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72 Progress of RRBs :
1991 1995 1999 2003 2005 2010 2011 2012 2013
No. of
RRBs 196 196 196 196 196 82 82 64 57
No.of
Branches 14527 14509 14999 14500 14484 15480 16909 17861 19082
Deposits
(Rs.in
Crores) 27065 48500 186336 211488 239494
Loans
(Rs.in
Crores) 11355 21773 116385 137078 159406
Source : NABARD Annual Report 2013 -14
6.10 PROBLEMS OF RRBS
RRBs face following problems:
1. Inadequate Deposit Mobilization: The deposit mobilization of RRBs
has rem ained at a very low level. The area of operation for each RRB
is confined to a district only. The weaker section population in the
rural areas who have very low saving capacity, the deposit
mobilization stands at a lower level.
2. Organizational problems: The performance of the RRBs is
adversely affected by the lack of co -ordination between those, which
control it (i.e. sponsoring bank, NABARD, Central and State Govt.).
Further, their area is limited to one or two districts. Shortage of expert
staff is also a problem.
3. Problem of recovery: These banks have not been successful in
recovery of loans. In case of some banks, the recovery percentage is
55. Faulty allocation, absence of monitoring, misuse of funds, political
interference, and natural calamities are r esponsible for poor recovery
percentage.
4. Huge losses: Finance minister, in his 1994 -95 budget, stated that 150
RRBs out of 196 were in loss at least once during first 5 years. The
reasons responsible include poor recovery percentage, increase in
expenditu re due to continued branch expansion, less than
proportionate increase in income and lack of skilled manpower.
5. Management problems: RRBs are small institutions working at
district level. The sponsoring bank appoints the managerial staff,
which can’t take d ecisions on its own. Board of Directors, do not meet
regularly and control from multiple entities creates delays in
decision -making.
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73 6. Lack of local Participation:
RRBs have not received sufficient local participation. The RRBs have
been thrust upon the rural people from above without involving local
people in its operation and management.
7. Absence of Suitable Staff:
The RRBs are not manned by adequate staff. The Managers and field
officers belong to the rank of deputed staff of the sponsor bank. Most
of the staff recruited by RRBs lack proper training and guidance.
MEASURES TO IMPROVE THE WORKING OF RRB:
1. Uniform Policies :
The loan policies and credit procedures of Regional Rural Banks
should be uniform, simple and flexible. Beside credit, the RRBs
should provide a package of services like Marketing and distribution
of inputs, storage and godown facilities.
2. Prompt Recovery :
There is need for quick and prompt recovery of loans by RRBs. For
this they should have adequate trained and expert field staff to
undertake field supervision and end use credit.
3. Support of Government :
State Government need to support the RRBs in a big way. It is the
responsibility of state governments to provide infrastructural facilities,
transport and communication network, regulat ed markets, Schools and
medical facilities in the rural areas.
4. Deposit Mobilization :
The RRBs need be encouraged to provide even to borrowers other than
small borrower. This would increase the profitability of the banks.
5. Rationalize credit Supply :
It is further suggested that the RRBs need to supply credit uniformly to
benefit all the sector of rural economy. It is observed that RRBs
mainly concentrate their loan operations in agriculture. Sectors like
village and cottage industries, retail traders and professionally self -
employed workers get very little credit from RRBs.
6. Proper Co -ordination:
There is need for proper coordination between RRBs and other
institutional financing agencies operating in the rural areas like
commercial banks and co -operative banks.
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74 6.11 IMPORTANT MEASURES
Narsimham Committee, and the Agricultural Credit Review Committee,
chaired by Khusro have recommended that RRBs be merged with either
sponsoring banks or other commercial banks. However, M.L.Dantwala has
opined that this i s not the solution to the problems of RRBs.
Following measures have been recommended for solving the problems
and making RRBs strong.
i) RRBs be allowed to function beyond their jurisdiction
ii) Separate machinery be formed to monitor their functioning
iii) New capital be injected in them
iv) These banks should attempt to develop saving habits among rural
people and link their loans to the savings
Govt. should pay more attention to the problems of RRBs as these can
play very important role in rural developm ent.
6.12 CHECK YOUR PROGRESS
Q.1 Answer the following in one sentence.
1) When was the RRBs Act passed?
2) How many RRBs were set up in the beginning and where?
3) Whom can the RRBs tend to?
4) How are the RRBs managed?
5) How man y RRBs are there in India at present?
Q.2 State whether true or false.
1) Every RRB has its sponsoring bank.
2) The area of RRBs is very wide.
3) The sponsoring bank does the functions like capital raising,
recruitment of employees, training , managerial advice etc. during
initial 10 years.
4) RBI contributes 50% of the capital of RRBs.
5) Authorized capital and paid -up capital of RRBs was raised to Rs.5
Cr. & Rs.1 Cr. respectively since 1987.
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Regional Rural Banks
Regional Rural Banks (RRBS)
75 6.13 QUESTIONS
A) Long answer type q uestions.
i) Explain in detail the objectives and functions of RRBs.
ii) Evaluate the working of RRBs
iii) What are RRBs? Explain their problems and measures.
B) Write short notes.
i) Regional Rural Banks.
ii) Functions and progress of RRBs.
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76 7
LINKAGE BETWEEN BANKS AND SHGS
Unit Structure :
7.0 Objectives
7.1 Introduction
7.2 Initiatives by NABARD
7.3 Refinance Assistance Provided by NABARD
7.4 Role of Government Organization
7.0 OBJECTIVES
1) Studying the linkage between Banks & SHGS
2) Understanding the Initiatives of NABARD for Improving SHGS.
3) Understanding the role of Government organization to improve SHGS.
7.1 INTRODUCTION
NABARD continues to provide 100 percent refinance to banks at an
interest rate of 6. 5 percent per annum. Other support measures include
facilitating training of the bank officials and the field staff of the NGOs.
The federation of NGOs/SHGs and other related institutions through
financial assistance, faculty support and the like. As many as 550 NGOs
are participating in the programme of them. Women SHGs constituted
about 94 percent. On the whole, the programme benefited 5.60 lakh rural
poor families in 280 districts. The southern region continues to dominate
the linkage programmes with sha re of 65 percent followed by the Western
(11 percent), the Eastern (11 percent), the Central (10 percent) and the
Northern Region 8 percent. Andhra Pradesh, Karnataka and Tamil Nadu
states has taken the lead in promoting the SHGs and in establishing the
bank SHG linkage, the bank linkage is generally established after the
successful functioning of individual groups for six months to a year. The
concept of the SHGs has not been as successful in the north -east and some
of the eastern states. Area specific pro gramme need to be formulated to
meet the varying socio -cultural practices.
After successful experimentation in couvery - Grameen Bank, Mysore
(Karnataka) in association with an experienced NGO, namely MYRADA,
more and more RRBs are involving themselves as SHGs. Some
government agencies like Zillah Panchayat have also taken initiatives to
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Linkage Between Banks And Shgs
77 assistance in organizing training programmes for the staff.
Notwithstanding 100 percent refinance from t he NABARD, commercial
banks perceive this activity as unprofitable. Hence, only Regional Rural
Bank and cooperative banks take up such financing. The RBI has been
preventing upon the commercial bank to formulate their respective
policies on micro credit an d promotion of SHG. The NABARD has been
organizing the SHGs workshop involving bankers and development
personnel to accelerate the process of SHG bank linkage. The RBI has
issued circular to the commercial banks to reckon micro credit extended to
individua l borrower or the tough intermediaries as parts of their priority
sector lending. The circular also stated that micro credit should forms an
integral part of the corporate credit plan of the bank and should be
received at the biggest level on a quarterly b asis.
The RBI issued a circular dated July 24, 1991, to the commercial banks
advising them to participate actively in the pilot support for linking self
help groups with banks. The NABARD, after consultation with a few
interested banks and voluntary agenci es, issued a set of guidelines on
February 26, 1992, which, while being adequately comprehensive were
kept flexible enough to enable participate banks and field level bankers to
involve and to contribute to strengthening the project concept and strategy.
When the pilot project was initiated by the NABARD, the self help groups
model was adopted and was called as an Indian model, later, in the early
nineties, the NABARD called it the SHG -Bank linkage model.
The SHG -Bank linkage programme was show to take off, but has been
speeding along since 1999. But it grew rapidly over the years reaching
1,079091 SHGs in 2003 -04 in India, of these about 1.6 millions are linked
to banks.11 5.9 Evolution of Self Help Groups in India In India, soon
after independence, the re has been an aggressive effort on the part of the
government, which was concerned with improving the access of the rural
poor to formal credit system. Some of these measures have been
institutional, while some others were through implementation of focuse d
programmes for removal of rural poverty. Reaching out of the far -flung
rural areas to provide credit and other banking services to the hitherto
neglected sections of the society is an unparallel achievement of the Indian
banking system. The main emphasis is the spread of the banking network,
introductions of new instruments, credit packages and programmes These
were to make the financial system responsive to Provide credit to the
weaker sections in the society. Comprising small and marginal farmers,
rural artisans, landless agricultural and non -agricultural labourers and
other small borrowers falling below poverty line. With the implementation
of the above policies, further Government of Indian its developmental
planning emphasized the promotion of agricul ture and other allied
economic activities through credit intervention for ensuring integrated
rural development and securing the prosperity of the rural areas. In
pursuance of this, formal credit institutions have been guided by the
principle of growth wit h equity and a large share of the credit disbursed
for various activities was channelized towards the weaker sections of the
society. munotes.in
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78 Consequently, by the implementation of several poverty alleviation
programmes, the number of people below the poverty line has declined
from 272.7 million in 1984 -85 to 210.8 million in 1989 -90. In 1991 -2000,
which constitutes over 21 percent of the population. The number of
operational holdings is expected to have crossed the 100 millions mark
with more than 80 percent bein g small and marginal holdings. The
institutional credit system needs to meet the challenges of delivering credit
to an ever -increasing number of rural people who need greater access to
formal credit. It may have to reinforce its own structure at the grass root
level and also have to devise new ways of reaching out of the rural poor.
As a result, the experience of implementation of the above discussed
poverty alleviation programmes lead to the introduction of the Integrated
Rural Development Programme (IRDP) on 2nd October, 1980 with the
specific objectives of raising the poor rural families above the poverty
line. Such families considered credit support from banks as an important
input in taking up economic and gainful activities. In spite of these
impress ive achievements in the expansion of the credit delivery system
and special programmes, nearly half the indebted rural households are still
outside the ambit of the institutional system. They approach the
moneylenders for meeting their consumption and prod uction in the
absence of institutional support. Some of the poor who have not been
reached even by the vast network of the institutional credit delivery
system, have organized themselves into self -help groups (SHGs) and
many such groups have come into exis tence either spontaneously or with
the active involvement of the voluntary agencies which motivated the rural
poor to pool their meager financial resources for meeting their small and
frequent consumption and production credit needs.
7.2 INITIATIVES BY NAB ARD
NABARD has been playing the role of propagator and facilitator by
providing conducive policy environment, training and capacity building
besides extending financial support for the healthy growth of the SHG
linkage programme. Over the years, various st eps have been taken in this
regard may be enumerated as under : -
1. Conceptualization and introduction of pilot programme in February
1992 for linking 500 SHGs with banks after consultations with
Reserve Bank of India, Banks and NGOs.
2. Introduction of bulk lending scheme in 1993 for encouraging the
NGOs which were keen to try group approach and other financial
services delivery innovations in the rural areas.
3. Developing a conducive policy framework through provision of
opening savings bank accounts in the names of SHGs (through they
are informal groups),relaxation of collateral norms, simple
documentation and delegation of all credit decisions and terms to
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Linkage Between Banks And Shgs
79 Training and awareness building among the stakeholders.
Provision of capacity building su pport of NGOs/SHGs/Banks.
Mainstreaming the SHG linkage programme as part of corporate
planning and normal business activity of banks in 1996 and
internalizing, training, monitoring and review mechanism.
Encouraging banks (RRBs and DCCBs) for promotion of SHGs.
Financial support to NGOs for promotion of SHGs.
Encouraging rural individual volunteers in promotion and nurturing of
SHGs.
Close monitoring.
Dissemination through seminars, workshops, occasional papers and
print media.
Constitution of High Powered Task to look into the aspects of policy
and regulation of microfinance and suggest policy, legal regulatory
measures for smooth and unhindered growth of microfinance sector.
Setting up a microfinance development fund in NABARD for meeting
the promotional c osts of up -scaling the microfinance interventions.
The funds has since been redesigned as microfinance development and
equity fund.
Initiating the credit rating of the microfinance institutions through
accredited credit rating agencies of India by meeting 75 percent of the
cost of the rating as grant. This is done to enable the microfinance
institution to approach banks for commercial borrowing and extending
micro -credit to the poor.
7.3 REFINANCE ASSISTANCE PROVIDED BY
NABARD
Self Help Group is a visible o rganized setup to disburse micro credit to the
rural women and encourage them in entrepreneurial activities. SHGs and
micro -credit are the solutions to speed up the socio -economic
development of poor women. NABARD has been working as a catalyst
in promot ing and linking more and more SHGs to the banking system. A
Microfinance Development Fund has been constituted in NABARD. This
would be utilized for scaling up the SHG -linkage programme and
supporting other microcredit initiatives. Special emphasis is prov ided for
building the capacities of the poor with particular emphasis on vulnerable
sections including women, scheduled castes and scheduled tribes. The
refinance assistance provided by NABARD with regard to microcredit
presented in.
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80 7.4 ROLE OF GOVERNME NT ORGANIZATION
An SHG is a small affinity group of 10 -20 members from homogenous
strata. It is formed and groomed by an NGO or bank branch or a
government agency called self help promoting institution (SHPI). The
members of the group are encouraged to col lect regular thrift on a weekly
or fortnightly or monthly basis and use the pooled resources to give
interest bearing small loans to needy members. The SHPI trains the
members to maintain simple accounts of the collected thrift and loans
given to members. The regular meetings also provide them a platform to
discuss and resolve many social and common issues, thus fortifying their
togetherness. A savings bank account is opened with a bank branch and
regular thrift collection and loaning to members build up th e financial
discipline among the members to encourage the bank to provide larger
loans to the group.
Government organizations are as follows :
1) District Rural Development Agency (DRDA)
2) Krishi Vidyan Kendra (KVK)
3) Mahila Arthik Vikas Mahamandal (MAVI M)
1) District Rural Development Agency (DRDA) : -
The Swarnajayanti Gram Swarozgar Yojana (SGSY) has been launched
with effect from 1.4.1999 as a new self -employment programme for the
rural poor. The SGSY is being implemented by the DRDA through the
Block Development Office. The SGSY programme replaces the self -
employment and allied programmes - Integrated Rural Development
Programme (IRDP), Training of Rural Youth for Self -employment
(TRYSEM), Development of Women and Children in Rural Area
(DWCRA), the Ga nga Kalyan Yojana (GKY) as well as Million Scheme
(MWS) are no longer in operation. The salient features of the Swarn
Jayanti Gram Swarozgar Yojana are given below.
The Swarn Jayanti Gram Swarozgar Yojana (SGSY) aims at
establishing a large number of mic ro-enterpries in the rural areas,
building upon the potential of the rural poor.
The SGSY emphasis on the cluster approach for establishing the micro
enterprises. For this 4 -5 key activities have to be identified in each
block. The major share of SGSY assi stance has to be in activity
clusters.
The SGSY adopts a project approach for each key activity. Project
reports are to be prepared in respect of each of the identified key
activities. The banks and the financial institutions have to be closely
associated and involved in preparing these project reports, so as to
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81 The existing infrastructure for the cluster activities should be reviewed
and gaps to be identified. Critical gaps in investment h ave to be made
up under SGSY, subject to a ceiling of 20 percent of the total
allocation made under the SGSY for each district. This amount is
maintained by the DRDAs as SGSY – Infrastructure fund and which
can also be utilized to generate additional fundi ng from other sources.
The assisted families may be individuals or groups (Self Help Groups)
the SGSY, however, favours the group approach.
The SGSY seeks to lay emphasis on skill development through well
designed training courses. Those who have been sanc tioned loans, are
to be assessed and given necessary training. The design, duration of
the training and the training curriculum are tailored to meet the needs
of the identified key activities. DRDAs are allowed to set up to 10
percent of the SGSY allocatio n on training. This may be maintained as
SGSY training fund.
The SGSY provides for promotion of marketing of the goods produced
by the SGSY swarozgaries, which involves provision of market
intelligence, development of markets and consultancy services, as w ell
as institutional arrangements for marketing of the goods including
exports.
The SGSY is a credit -cum-subsidy programme. However, credit is the
critical component of the SGSY, subsidy a minor and enabling
elements. Accordingly, the SGSY envisages great er involvement of
the banks.
Subsidy under SGSY is uniform at 30 percent of the project cost,
subject to a maximum of Rs. 7500. In respect of SC/STs, subsidy is 50
percent and Rs.10,000/ - respectively. For Self Help Groups, the
subsidy is at 50 percent of the cost of the scheme, to a ceiling Rs. 1.25
lakh. There is no monetary limit on subsidy for irrigation projects.
SGSY particularly focus on the vulnerable groups among the rural
poor.
Funds, under the SGSY are shared to central and state governments in
the ratio of 75:25.21 As on March, 2011, 12171 self help groups
organized by DRDA in the Amravati district. For the year 2010 -11
revolving fund assistance had been released to 11215 groups and loan
assistance for economic activity has been released to 571 groups. For
the year 2009 -10, the programme aims to cover 11217 groups with
revolving funds assistance and economic assistance for 9250 self help
groups.
2) Krishi Vidyan Kendra (KVK) : -
Krishi Vidhan Kendra was started in 1996 as a first KVK of the count ry
with a view to update the technical skill of the farm public, to train the
farmers, farm women and rural youth in scientific farming, to provide in munotes.in
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82 service training to the staff of developmental departments and to evolve
new varieties of crop plants sui ted to the region.
This Kendra was administered by State Government. The technical and
administrative control of this center have been taken over by the
Maharashtra Government and this Kendra is registered as a society. This
Kendra is financed by the ICAR as well as by the Maharashtra
government.
Under ICAR programmes, this KVK is carrying out the activities as per
the mandates of KVK which are as follows.
Conducting on -farm testing for identifying technologies in terms of
location specific sustainable land use systems.
Organize training to update the extension personnel with emerging
advances in agricultural research on regular basis.
Organize short and long term vocational training courses in agriculture
and allied vocations for the farmers and rural youth s with emphasis on
learning by doing for higher production on farms and generating self
employment.
Women cell is functioning at this Kendra for the welfare of farm women.
As on March, 2010, 101 self help groups were promoted under women
cell in various vi llages. The leaders and members of these SHGs are
trained on various aspects of agriculture and allied fields so as to enable
them to start self -employment units. To fetch additional income for their
families and improve nutritional and health like educati onal field,
agriculture field is also developing and expanding in this age of
information and technology. Krishi Vidnyan Kendras is not only limited to
education and research but have been also become centres for creating
employment and entrepreneurs.
3) M ahila Arthik Vikas Mahamandal (MAVIM) : -
MAVIM is the state women's development cooperation of Maharashtra,
established on the 24th February 1975 on the occasion of International
Women's year. The mission of the corporation is "To bring about gender
justice and equality for women, investing in human capital and the
capacity building of women, thus making them economically and socially
empowered and enabling them to access sustainable livelihood."
The corporation has the objective of bring about women's em powering by
mobilizing women and building organization of women, enhancing their
capacities by training, increasing their self confidence and strengthening
entrepreneurship among women and making credit and market accessible
to women. The corporation also seeks to improve women's access to
education, and increase their participation in decision making and
governance.
MAVIM's head office is situated in Mumbai and the corporation has
34district offices across the state of Maharashtra. MAVIM has munotes.in
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Linkage Between Banks And Shgs
83 professionally qualified personnel trained in social science in its head
office and in district offices. MAVIM promotes self help group in villages
its (1350) field workers known as Sahayoginies and through its 4
contracted NGOs. Reorganization of MAVIM from a commercia l
company under the company Act 1956 to being registered in September
2005 under section 25 of the company's Act as a not for profit company.
Work for following five component i.e.
1) Formation of SHG 2) Entrepreneurship development
3) Gender sensit ization 4) Functional literacy
5) Social awareness
For fulfillment of above component MAVIM has appointed qualified and
experienced staff and doing with NGO for the fast mobilization.
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84 8
IMPACT OF SELF -HELP GROUP IN
SOCIO -ECONOMIC
DEVELOPMENT OF INDIA
Unit Structure
8.0 Objectives
8.1 Introduction
8.2 Shortcomings’ of the Self -Help Group In India
8.3 Suggestions to Improve Self -Help Group in India
8.0 OBJECTIVES
1) To Understanding the impact SHG in Socio - Economic Development
of India.
2) Understanding the Short coming of SHG in India.
3) Understanding to improve the Self - Help Group in India.
8.1 INTRODUCTION
Self - Help group is a method of organizing the poor people and the
marginalized to come together solve their in divided problem. The SHG
method is used by Govt., NGO, and other worldwide. SHG have bred
playing considerable role in infrastructure development, marketing,
technology support Communication leve l of member, confidence family
violence, interaction. changing saving pattern. social justice, community
action, sustainable development etc
1.Saving and Financial Decision Making
One of the primary benefits of participation in a SHG is the opportunity to
save regularly, access formal savings institutions and participate in the
management of these savings. They save regularly, have their own bank
accounts and make deposits into these accounts. SHG is having a good
impact on members, in their ability to sav e their hard earned money.
2. Access to credit
A corollary of participation in SHGs is an improvement in a woman’s
access to credit. Since the project is perhaps too early in its
implementation to directly improve women s access to credit. The
financial mobility due to participation in the SHG has led to an
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85 groups. Overall, many families were able to address their basic needs
better than before. Some of NGOs reports have shown that the record on
the repayment of loans by women was often better than that of men, and
that women were also more likely to spend the income earned, on their
families, leading to improved health and nutrition of the poor popul ation
and for improving the quality of their lives.
3. Employment:
The implementation of SHG has generated Self -employment opportunities
for the rural poor. The progress of the programme since inception assisted
in formation of 35.7 lakh SHGs; assisted 1 .24 Cr. Swarozgaris in
establishing their own micro -enterprises. The Government of India
released Rs.11, 486 Crore under the programme; bank credit mobilization
is Rs.19, 017; Total subsidy provided is Rs.9, 318 Cr. The program helped
many participants in improving their economic conditions. Another good
accomplishment of the program is that it has adopted the SHG strategy.
The number of assisted SHG/ group Swarozgaris has increased from
35,000 in 1999 – 00 to 1.15 million in 2007 – 08. At the same time the
number of assisted individual Swarozgar has declined from 586 thousand
in 1999 – 00 to 254 thousand in 2007 – 08. The National Bank for
Agriculture & Rural Development (Nabard) will create a Rs.15 billion
fund to cater women's Self -Help Groups in economic ally weaker districts
in the country, After joining the Self Help Group the women are
economically and socially empowered. This empowerment cannot be
transformed or delivered it must be self generated such that it enables
those who are empowered to take control over their lives.
4. Decision -making within the household
The social impact of the SHG programme increased involvement in
Decision -making, awareness about various programmes and organisations,
increased access to such organisations, increased expenditure on Health
and Marriage events, there is a Change in the attitude of male members of
the families, Now they are convinced about the concept of SHG and
encourage women to participate in the meetings and women reported that
they have savings in t heir name and it gives them confidence and
increased selfrespect. Within family the respect and status of women has
increased. Children Education has improved significantly. Especially girl
education was very low but now SHG members are sending their child ren
including girls to school. The Sanitation in members households has
improved and it has led to better health in members families. Now
women are taking treatment from qualified doctors, even if they have to
travel to nearby towns. Members are now confident enough to raise social
status.
5. Participation in local government because of SHG,
Women know about their local political institutions such as the Gram
Panchayats and have better knowledge of where to report certain types of
grievances. As part of the political empowerment process, it is a pertinent
fact that many women have not only been elected to the Grama munotes.in
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86 Panchayats but have become the role holders too. In a majority of the
cases, the women perceived themselves as now having some influence
over decisions in the political life of village, and in a smaller number of
cases, the women named their participation and influence in village
political life as an important and note -worthy change. However, in
general, the opportunities available to the women to participate in village
life were limited, as mos t of the village processes were still being male -
dominated and patriarchal. Though the SHGs generate positive impact on
the rural economy through empowering women and enhancing the rural
income of those participant households, the issue of group size has b een of
long standing concern.
6. Communication Level of Members
Microfinance movement is having a good impact on members, in their
ability to express their feelings and has made people more confident to
express themselves.
7. Self Confidence among Me mbers
The group formation brought out the hidden talent and leadership
qualities among the members. Therefore, it can be concluded that after
joining the SHG the members have improved their status in family,
become helpful in family finance and sometimes helped others too. Now,
most of the SHG people feel that they get more respect; not only in the
village, but our own family members treated us more respectfully. People
of the village now invite us for social and community functions. Now our
family memb ers value our opinions whereas earlier they had no use for it.
They encourage us and support us in our activities”. “Now they get
respected in the village society and have a definite identity in society.
Family members think of them as a working woman and encourage them
in their work”. Improve their knowledge of banking, of how to undertake
the different banking transactions, as also of dealing with government
officials. They now feel confident about these things. They too feel an
improvement in their socia l status. Family members changed their
attitudes towards them after they started participating in the SHG. They
now regard them brave women. The people of the village too give much
more respect than before”. Family members seek her opinion in many of
the family decisions. Moreover, people from the society in general respect
them.
8. Change in Family Violence
Involvement with SHG has reduced this violence in 25 per cent cases
especially due to reduction in economic difficulties. In most of cases the
memb ers revealed that their husbands should also be involved in SHGs.
8. Frequency of Interaction with Outsiders
Members generally, got lesser opportunity to interact with bankers,
Government officials, NGOs and others in the Pre -SHG period. It can be
seen that in the Pre SHG period 25 per cent of the members were not munotes.in
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87 interacting with officials whereas after associating with SHGs, 91 per cent
members had interacted with the outsiders and out of total 44 per cent
have interacted more than 4 times with outsid ers. This interaction helped
them to articulate their problems and improved their self -confidence.
10. Status of Access to Amenities
Since SHG programme has economic as well social implications. It can be
seen that there has been an increase of 40 per ce nt in SHG members in
terms of their status of access to amenities factors. Therefore, it can be
concluded that after joining the SHG the members have improved in
getting access to amenities like medical, sanitation, education, market,
water supply, transpo rt. 1.17. Community Participation SHG members
undertook a lot of community activities which they earlier could not have
imagined themself to have done. They distributed school uniforms to poor
students; they undertook a plantation drive, distributed pen a nd notebook
sets to poor students and donated some money to a charity during a
national calamity. They participated in several social initiatives like the
“Clean Village Drive” and other such social upliftment programmes since
their involvement in the SHG. They organized a small function on India s
Republic day. Perspective of the Social Worker Women who have
participated in this have benefited economically. They are now able to buy
household goods like televisions, furniture, telephones, jewellery and most
importantly are able to save for the fu ture. “Now they are much more
confident in their dealings with government officials, bank officials,
electricity board officials, Medical officers, the revenue officer, health
scheme officials etc. They also participate in elections. Moreover, they
make us e of the various government welfare schemes available”. Howover
the years, women who have barely completed their schooling, who could
earlier barely step out of their houses to talk to government officials or
other village men, are today stepping out and c aring for themselves and
their communities with confidence. An interesting development is that the
men, unlike earlier, are now encouraging women to step out of their
houses to work and participate in these social and community events.
Whether this is a w elcome change or not needs to be understood. It has to
be understood why they are doing so. One reason they could be doing so is
because of the increased household incomes and ready access to credit that
the SHG participation of the women is resulting into . Sometimes this
situation can be exploited if the men are alcoholic, so that the credit is
actually wasted away. In this regard, however, the women are alert and
aware and the SHG participation has given them the collective strength to
stand up to it. The y collectively stop any man from abusing his wife under
the influence of alcohol. Now they are able to meet each other and discuss
their problems. They understand each other’s viewpoints and problems.
Interaction with other women has resulted in building c ongenial
relationships and has ensured fewer conflicts. It has also had the multiplier
effect of spreading the SHG movement. Awareness of health related
issues, personal hygiene, communicable diseases; effects of malnutrition,
environmental issues, and san itation have also increased as a result of
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88 11. Increased Nutritional status
They find positive impacts on empowerment and nutritional intake.
Female social and economic empowerment in pro gram areas increased
irrespective of participation status. Evidence of higher consumption is not
income or asset formation. the program's main economic impact had been
through consumption smoothing and diversification of income sources
rather than exploita tion of new income sources.
12. SHGs and Environmental Management
Research and policy has tended to focus on the relationship between
poverty and environmental degradation in terms of pointing out that the
poor are both victims and agents of environmen tal degradation. They are
victims in that they are more likely to live in ecologically vulnerable areas,
agents in that they may have no option but deplete environmental
resources thus contributing to environmental degradation. As a result of
increasing aw areness, social conditions and poverty alleviation, are
necessary to support environmental sustainability (SIDA 1996; Leach and
Mearns 1991; UNEP 1995).Today SHGs have a role to play in poverty
alleviation through empowerment of women in India. Moreover, w omen
tend a greater involvement in environmentally sustainable activities and
environmental management than men. Therefore, involvement of women
in development programmes through SHGs can effectively increase
awareness of society to ward environmental sust ainability.
8.2 SHORTCOMINGS’ OF THE SELF -HELP GROUP IN
INDIA
Though it was considered as a wonderful program by many stakeholders,
the program failed on many counts is provided as follows:
1. Challenge of take off
The program supported promotion of 292 thousand SHGs in the first year,
i.e. 1999 – 00.The number remains around this level in all subsequent
years with wide fluctuations from year to year. Similarly, 214 thousand
groups passed Grade – I, in the second year of the program, i.e. 2000 – 01.
It remains around this level in all subsequent years. Though there is
significant growth in the number of groups that passed Grade – II, groups
which have taken up economic activities are less. In total only 685
thousand groups have taken up economic activit ies. It is a little over one -
fifth of groups promoted in the scheme.
2. Funds allocation and utilization
The allocation of funds for the SGSY scheme by both central and state
governments was Rs.1, 472 cr. in 1999 – 00, the first year of the
programme. In the subsequent 7 years, the allocation remained below that
of the first year. It was nearly half of the first year allocation in 2001 – 02
and 2002 – 03. The total amount allocated for the programme during 10
years is Rs.14, 467 cr. It is less than half of the budgetary allocation of munotes.in
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Impact of Self -Help Group
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89 Rs.30, 100 cr. for NREG in just one year, i.e. 2009 – 10. The principal
reason for stagnation in funds allocation is non -cooperation of banks. The
allocated meagre amounts were not fully utilized even in one year during
the last 10 years program period. Total utilization is 74% of funds made
available. However, the utilization ratios are increasing over the years. It
has increased from 49% in 1999 – 00 to 86% in 2003 – 04. It remains well
over 80% in the subsequent years. Th ough there is provision for utilizing
of 10% of allocated funds for training and another 20% for development
of critical infrastructure, utilization of funds in these two activities is quite
less and relatively more funds were used for providing subsidies and
grants to SHGs and individual Swarozgaris. As a result the program is
often known as subsidy oriented programme.
3. Credit mobilization
Mobilizing bank credit is a major challenge of the program, due to which
the governments at centre and states cou ld not increase the allocations
over the years. In total, the target of credit mobilization is Rs.29, 831 cr.
But little over half of that amount was mobilized during the last 10 year.
However, the proportion of actual mobilization to target is increasing over
the years. It is a healthy sign. Because of lower than targeted mobilization
of bank credit and allocation of a relatively higher proportion of funds for
subsidy, the ratio of credit to subsidy was about two during the period and
did not vary much fr om year to year. Thus, the credit subsidy ratio
remained much below the target ratio of 3:1 (GoI, 2009). It also resulted in
less than planned investment per Swarozgar.
4. Challenge to target the real poor and vulnerable sections
A comprehensive study b y BIRD, 2007 on coverage of SCs/ STs in
SGSY, which covered 10,848 Swarozgaris and non -Swarozgaris (control
sample), pointed out exclusion of SCs and STs in the following ways and
for the following reasons. Physical exclusion – by not being accepted as
group members, Financial exclusion by denial of their due share either by
group leaders or by implementing bank or block officials, Exclusion
because they are already covered under some state government sponsored
programs (often implemented by state (ST/ SC corporations) and in many
cases are already defaulters of bank loans (BIRD, 2007). About 60% of
the non -Swarozgaris (control sample) were found to be sure about their
inclusion in the BPL list (BIRD, 2007). A more dismal picture is provided
by a MoRD (2007 ) briefing, which shows that SGSY covers only 1% of
the relevant household population, and only 33% of its beneficiaries are
drawn from the poorest quintile, whereas as many as 14% are from the
richest and 26% are from the two richest quintiles. Further, the total
benefits are even more inequitably distributed with the richest quintile
receiving as much as 50% as compared to 8% for the poorest (as quoted in
Tankha, et al. 2008). The annual report of MoRD 2002 – 03, reported that
in most of the areas, esp ecially in Bihar and Uttar Pradesh, influential
persons in villages were found to own a group (as quoted in GoI, 2009).
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90 5. Low survival rate of promoted micro -enterprises
Many assisted Swarozgaris are either reluctant to create or acquire the
planned assets or were disposing them immediately after acquiring.
According to BIRD s study “in northern states, the success rate in terms
of whether units exists or not in case of units financed to group
Swarozgaris turned out to be even worse than that in case of individual
Swarozgaris as only 17.7% units were found to be existing in case of
group Swarozgaris as against the 31.11% units intact in case of individual
Swarozgaris.The results indicate just opposite pattern to what most of us
believe/ perceive that group approach of financing is better than the
individual financing. However , in case of southern states, 76.6% units
were found to be existing at the time of field visits which shows the better
care by the government department as far as monitoring of units is
concerned” (BIRD, 2007). The present author observed that in Andhra
Pradesh some groups manipulated acquiring of assets/ livestock.
According to the group members, they sent their buffaloes to their
relatives'/ friends' houses a day before the proposed transaction. The next
day they acted as if purchasing (their own) lives tock from their relative/
friend in front of the officials. The Government of AP noticed these kinds
of problems long ago and converted capital subsidy into interest subsidy in
2004. Now one hardly hears words like SGSY, subsidy and revolving fund
among SH Gs in rural areas of Andhra Pradesh. One can only hear the
words „PavalaVaddi or „3% interest loans . In other states, many
studies reported that groups focus is on subsidy. They dispose the
capital/ livestock immediately, repay the bank loan and distrib ute the
subsidy amount (see e.g. APMAS, 2008; Tankha, et al, 2008; BIRD,
2007).
6. Low realized incremental income from Income generating activities
The program envisaged that Swarozgaris would realize about Rs.2, 000
per month from the investment of abo ut Rs.25, 000. Except a few case
studies, no major evaluation study reported additional income anywhere
close to Rs.2, 000 per month. In 2002 – 03, only 43% of the assisted
Swarozgaris reported an increase in their income (as quoted in GoI, 2009).
A rigor ous study by Pathak and Pant (2006) in Jaunpur district of UP
shows that SGSY has not contributed significantly to the change in the
level of income of the beneficiaries (as quoted in Tankha, et al, 2008).
According to a NIRD (2008) study, even in the be tter performing State of
Andhra Pradesh the income gain to a Swarozgar from enterprise activities
under SGSY was a mere Rs.1,228 per month (as quoted in GoI, 2009).
BIRD presented an even grimmer picture. According to their study the
poor income generation in both the cases of individual Swarozgaris (Rs.9,
391) and The group members shared these old stories (6 to 7 years old),
since then they have repaid their loans and all officials got transferred.
swarojgaries (Rs.6, 916 in northern states and Rs.11, 089 in southern
states) per member per annum suggests for serious thinking about
implementation of the program in its present format. Certain success
stories, here and there should not be read as final outcome of the program
and at the best, these can be doc umented and evaluated so that the reasons munotes.in
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91 for success can be internalized into the future policy guidelines. The
program also breaks the great myth that „group approach of lending is
always better than the individual approach of financing (BIRD, 2007).
Needless to say, that the above figures are only of surviving units. If failed
units were also included, the average incremental income would be around
a few hundred rupees or less. It may be recalled that about 50% of the
Swarozgaris have taken up dairy. Ab out another quarter has taken up other
livestock rearing, including poultry and other primary activities. It is
surprising to note that Indian villagers need training in activities like
livestock rearing, the primitive and primary occupation in the country
8.3 SUGGESTIONS TO IMPROVE SELF -HELP
GROUP IN INDIA
1. Suggestions for designing the NRLM
As three -fourths of households in the country are either poor or
vulnerable, NRLM may cover all willing rural households, irrespective
their BPL or APL status, i n the SHG program for effective financial
inclusion. It may be divided into two sub -programs, viz. Financial
Inclusion and Livelihood promotion. Two programmes may be
implemented sequentially. The first five years may be totally focusing on
promotion an d strengthening of SHG institutions and later focus may be
on setting up of small and medium enterprises under SHG federations.
2. Suggestions to promote Financial Inclusion
1. SHG banking may be allowed to function as core banking activity
without any outside interference like target fixing, interest cap, loan
size, etc.
2. The Government may promote quality SHGs through village/ cluster
level; sub -district/ block level and district level federations.
3. Wherever banks are not accessible or not respon sive, federations may
be prepared to take up financial intermediation
4. Promoting agencies play a crucial role in developing quality
institutions. Promoting agencies may be given adequate financial and
capacity building resources and timeframe. Available evidence
indicate that investment of about Rs.15,000 per SHG for 8 to 10 years
is required to promote quality SHGs with strong federations and
effective livelihood opportunities.
5. Promoting agencies should have a clear role transformation strategy
and should implement the same in letter and spirit
6. NRLM may work on sensitization and orientation to bankers about the
commercial value of SHG banking.
7. NRLM may understand the banks concerns such as quality of groups,
political interference in funct ioning of federations, wrong signals like
loan waivers, etc and address them.
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92 3. NRLM may provide interest subsidy as given in AP.
Suggestions for promotion of small and medium enterprises
To obtain desirable employment transformation and to take ful l advantage
of booming secondary and tertiary sectors, NRLM may focus on
manufacturing and service sectors. The small and medium enterprises may
be promoted to village/ cluster; sub -district/ block and district level SHG
federations.
1. The potential units could be agro -processing units; milk processing
units; common service providing units; cold storages; rural
warehouses; market yards to organize weekly markets; etc
2. Appropriate institutions like „commodity cooperatives and
„producer companies may be promoted under SHG federations to
take up small and medium enterprises as per the pattern of the
borrowing from the SHGs.
3. The federations could be assisted to have state of the art units by hiring
professional consultancy firms , who can provide these units on turnkey
basis.
4. NRLM may provide investment and working capital to the federations
to set up these units
5. If banks are non -responsive, the apex financial institutions like state
finance corporations/ SIDBI/ NABARD co uld be accessed.
6. Acquired units could be pledged as security to the banks and financial
institutions.
7. These units would result in development of entrepreneurship in
federations, provide a large number of regular employment
opportunities to the memb ers and boost the rural economies.
8. SHG concept should target the holistic development of women
members. The ministry may bring out publications pertaining to
different aspects of SHG and its development / empowerment.
8. It is felt that efficiency an d effectiveness of SHG should be regularly
monitored by a qualified and designated body to give corrective input
wherever necessary as well as encourage the deserving ones.
10. Timely release of adequate loans and the eligible subsidy is important.
SHG member education and awareness on the high poverty regions
should be viewed as long term investment in human capital
development. All stakeholders should invest their time for capacity
building, handholding and development support.
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93 9
MICRO FINANCE
Unit Structure
9.0 Objective
9.1 Micro Finance and Micro Credit
9.2 Challenges ahead for Microfinance in India
9.3 Conclusion
9.0 OBJECTIVES
Micro Finance is a movement which aims at providing financial services
to those who do not have access to Finance or are neglected by the
commercial banks and financial institutions. For some, micro finance is
used to describe the supply of financial services to low income groups
who typically lack collateral, steady employment and a verifiable credi t
history. The promoters of micro finance generally believe that provision of
a wide range of financial services, especially savings accounts, to the poor
will lead to generation of self -employment income and to help the poor
people to come out of poverty.
In some regions, micro finance is a movement whose object is “a world in
which as many poor and near -poor households as possible have permanent
access to an appropriate range of high quality financial services including
not just credit but also savings, insurance and fund transfers.” For others,
micro finance is an effective tool to fight poverty and a way to promote
economic development, employment and growth through the support of
micro -entrepreneurs and small businesses. In short, micro finance is a
novel approach to “Banking with the poor.”
9.1 MICRO FINANCE AND MICRO CREDIT
Very often the terms ‘Micro finance’ and Micro Credit’ are used as
synonyms phrases. But it needs to be mentioned that micro finance is a
broad category of services which includes micro credit. Micro credit is
provision of credit services or extension of very small loans to poor
customers. In other words, micro finance is a broad concept and includes
wide range of services to the poor, while micro credit is one of the aspects
of mic ro finance and refers to the provision of micro loans (very small
loans) to those who would otherwise have no access to banks and financial
institutions. Micro credit thus, is a part of micro finance and micro credit,
very often, as stated earlier, the two terms are used interchangeably.
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94 a) Features of Micro Credit Institutions:
Micro credit, as stated earlier, is the extension of micro loans to very poor
persons for generation of self -employment and income. Financial and
Business services provided by Mic ro Finance Institutions (MFIs) generally
include saving and credit. The main features of micro credit institutions
which differentiate it from other commercial institutions are:
i) It is an alternative to informal credit and a substitute for the ‘loan
sharks’ who charge exorbitant interest and exploit the clients.
ii) Requires no security or collateral to put up against loans.
iii) Requires less paper work or documentation and have simple
procedures.
iv) Have very simple, easy and flexible repayment terms and simplified
procedures.
v) Generally assistance of members of group in case of a critical situation
or a household emergency.
vi) The most neglected and deprived segments of the population are
efficiently targeted.
vii) Groups interaction with each other’s and maintaining close co ntacts.
b) Objectives of Micro Credits Programmes:
The main objectives of micro credit programmes can be briefly
summarized as under:
i) To safeguard the interests of the poor and to stop their exploitation
caused by expensive informal credit.
ii) To provide micr o loans to the poor and low income groups at
relatively cheaper rates as compared to accessible informal credit.
iii) To finance such projects which are economically and socially viable
but cannot be financed otherwise.
iv) To empower women within households as dec ision makers and in
society through economic participation.
v) To tap all available resources to create maximum employment
opportunities for the rural poor.
vi) To generate self -employment and make people self -sufficient.
vii) To eradicate poverty, accelerate the pac e of growth and improve the
living standards on sustainable basis.
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95 c) Micro Finance in India:
The origins of micro credit in its presence from can be linked to be
“Grameen Bank” in Bangladesh, which is the oldest and perhaps the best
known micro finance institution in the world. Muhammad Yunus a Nobel
Prize winner introduced the concept of micro finance in Bangladesh and
established the “Grameen bank” in 1983. The National Bank for
Agriculture and Rural Development (NABARD) took this idea and started
the concept of micro finance in India. In this concept, there exists a link
between Self Help Groups (SHG), Non -Government Organizations
(NGOs) and Banks. The SHG –Bank linkage programme , introduced and
encouraged by NABARD since 1992 in India is the ‘larges t and fastest’
growing micro finance programme in the world’ and is being implemented
by more than 30,000 branches of commercial banks, Regional Rural
Banks (RRBs) and Co -operative banks in over 520 districts of the country.
d) Progress of Microfinance in India
The institutions which engage in microfinance services in India follow
three types of approaches namely
i. The Grameen Bank approach
ii. The Cooperative Societies (which are members of a cooperative bank)
approach
iii. The SHG Programme approach.
In the four years between 2003 and 2007, small borrower bank accounts
(credit) i.e. uptoRs 25,000 increased marginally from 36.9 million to 38.6
million, while SHGs ‘borrowing members grew from 10 million to 40.5
million and MFIs borrowers grew from 1.1 m illion to 8 million’. In 2007 -
08, MFIs have added 6 million clients increasing their outreach to 14
million as per data brought out by Sa Daan.An innovative scheme in rural
delivery system launched by NABARD is the linking of SHGs of the poor
with banks an d bulk lending through NGOs. NABARD considers SHGs a
pre-microenterprise stage for a majority of the rural population. The
linkage project envisages active involvement of NGOs who play a crucial
role in formation, nurturing, stabilising and guiding the SHG s into
cohesive and dynamic groups inculcating the habits of thrifts and credit
management and ultimately establishing linkage with the banks. Under the
SHG -bank linkage programme, three linkage models have broadly
emerged. Under the first model , banks directly link SHGs without the
intervention of the NGOs. In the second model, banks provide credit to
SHGs and NGOs act as Self Help Promoting Institutions (SHPIs).
Under the third model, NGOs act both as SHPIs and financial
interm ediaries for channelising credit from banks to SHGs. The SHG -
Bank Linkage Programme implemented by commercial banks, RRBs and
cooperative banks has emerged as the major micro - finance programme in
the country. Under the SHG -Bank Linkage Programme, as on Ma rch 31,
2009, 61,21,147 SHGs held savings bank accounts with total savings of Rs
5,545.62 crore as against 50,09,794 SHGs with savings of Rs 3,785.39 munotes.in
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96 crore as on March 31, 2008. Thus more than 8.06 crore poor households
were associated with banking agenci es under the SHG - Bank Linkage
Programme. The table one clearly shows the progress under SHG Bank
Linkage programme in India.
* From 2006 -07 onwards, data in respect of number of SHGs financed by
banks and bank loans are inclusive of SHGs financed under the
Swarnajayanti Gram SwarozgarYojana (SGSY) and the existing groups
receiving repeat loans. Owing to this change, NABARD discontinued
compilation of data on cumulative basis from 2006 -07. As such data from
2006 -07 onwards are not comparable with the data of the previous years.
# Provisional
Source: GoI, 2009
As on March 31, 2009, commercial banks had the maximum share of
SHG savings with savings of 35,49,509 SHGs (58 per cent) amounting
to Rs 2,772.99 crore (50 per cent); this was followed by RRBs with
savings bank accounts of 16,28,588 SHGs (26.6 per cent) and savings
amount of Rs1,989.75 crore (35.9 per cent) and cooperative banks with
savings bank accounts of 9,43,050 SHGs (15.4 per cent) and savings
amount of Rs 782.88 crore (14.1 per cen t).
The share of the Swarnajayanti Gram Swarozgar Yojana (SGSY) in
SHG savings accounts was 15,05,581 SHGs, forming 25 per cent of the
total SHGs having savings accounts in banks. During 2008 -09, the average
savings per SHG with all banks increas ed from Rs 7,556 as on March 31,
2008 to Rs 9,060 as on March 31, 2009, varying between a high of Rs
12,218 per SHG with RRBs and a low of Rs 7,812 per SHG with
commercial banks. As on March 31, 2009, the share of women SHGs in
total S HGs with savings bank accounts was 48,63,921, accounting for
79.46 per cent as compared to the previous year’s share of 79.56 per cent.
During 2008 -09, banks financed 16,09,586 SHGs, including repeat loans
to existing SHGs, as against 12,27,770 SHGs during 2007 -08, a growth of
31.1 per cent (number of SHGs).
As on March 31, 2009, 42,24,338 SHGs had outstanding (cumulative)
bank loans of Rs 22,679.85 crore as against 36,25,941 SHGs with
outstanding bank loans of Rs16,999.90 crore as on March 31, 2008(Table
5.9). This included 9,76,887 SHGs (6.5 percent) with outstanding
bank loans of Rs 5,861.72crore (21.7per cent) under the SGSY as
against 9,16,978 SHGs with outstanding bank loans of Rs 4,816.87 crore
as on March 31, 2008. Commercial banks had the maximum share of
around 70 percent of outstanding bank loans to SHGs followed by
RRBs with a share of 23 per cent and cooperative banks with the balance.
As on March 31, 2009, the average bank loan outstanding per SHG was
Rs 53,689 as against Rs 46,884 as on March 31, 2008. It varied from a
high of Rs 57,037 per SHG in the case of commercial banks to a low of Rs
31,460 per SHG in the case of cooperative banks. Financial Inclusion in.
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97 9.2 CHALLENGES AHEAD FOR MICROFINANCE IN
INDIA
An evaluation of SHGs carried out by the regional offices (ROs) of the
Reserve Bank revealed that there was scope for improvement in the
area of maintenance of book s of accounts. It also brought out that
rotation of group leaders w as generally not followed by SHGs.
However, other best practices like strict adherence to attendance of
group meetings, recording minutes of the meetings and prompt repayment
of bank loans were being followed. The momentum of growth in the
micro-finance sector has brought into focus the importance of regulating
the sector to function in an efficient and orderly manner. There
would be need for greater transparency in their functioning and for
facilitating their reach to un -banked population of the country Interest
rates in the microfinance sector have to be significantly higher than in the
banking sector reflecting the much higher cost of doing business. This
attracts criticism but it is important to remember that mos t
microfinance institutions charge rates which are much lower than rates
charged by money lenders. Borrowers stand to benefit from the
experience of micro -finance institutions as these provide competition
to money lenders (Planning Commission , 2006).
Over the past two decades, institutions that make microloans to low -
income borrowers in developing and transition economies have focused
increasingly on making their operations financially sustainable by
charging interest rates that ar e high enough to cover all their costs. They
argue that doing so will best ensure the permanence and expansion of the
services they provide. Sustainable (i.e., profitable) microfinance providers
can continue to serve their clients without needing ongoing i nfusions of
subsidies, and can fund exponential growth of services for new clients by
tapping commercial sources, including deposits from the public. MFIs on
average have higher returns on assets than commercial banks do, but
MFIs produce lower r eturns on equity for their owners. The median
return on MFI owners equity in 2006 was moderate —12.3 percent,
roughly 4 percent lower than the return for banks (Rosenberg, et al.).
There have been incidents of state governments imposing restrictions on
micro -finance institutions in a manner which does not reflect an
appreciation of the realities on the ground. Excessive regulation and
control of this sector may be particularly dangerous as it can prevent the
development of a healthy and c ompetitive micro finance sector which
could compete with usurious money lenders (Planning Commission,
2006).
9.3 CONCLUSION
Finance is the lubricant, which oils the wheels of development. All
economies rely upon the intermediary function o f finance to transfer
resources from savers to investors. In market economies, this
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98 capital markets. In many developing countries, capital markets are at a
rudimentary stage, and commercial banks are reluctant to lend to the poor
largely because of the lack of collateral and high transaction costs.
The poor would borrow relatively small amounts, and the processing
and supervision of lending to them would consume administrative
costs disproportionate to the amount of lending. Extending the reach of
financial services to the poor through new technologies and simplified
branch regulations hold promise. Bringing financial services to rural
clients is the biggest challenge in the quest for broad -based financial
inclusion. Often the main barrier to financial inclusion in rural areas is the
great distances that rural residents must travel to reach a bank branch.
Poor infrastructur e and telecommunications, and heavy
Branch regulation, also restrict the geographical expansion of bank
branch networks. In many developing countries there are fewer bank
branches per rural resident than per urban resident. Non bank
financial institutions like microfinance institutions help to fill this gap.
Even though, in India, the microfinance model extends credit and savings
to the poor, the challenges faced by the industry has to be rectified in due
course for the effective working of the model.
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RURAL MARKETING AND FINANCE
Time 3 hours Marks : 70
Instructions - 1. All questions are compulsory.
2. All questions carry equal marks
Q.1. Explain the concept of rural finance and explain the types of rural finance.
OR
Explain the importance of rural finance
Q.2. State the causes of rural indebtedness.
OR
Explain the objectives of Regional Gramin Bank.
Q.3. Explain the need of a cooperative finance supply
OR
Explain the importance of crop insurance.
Q.4. Explain the function of Bhuvikas Bank.
OR
Explain the importance of Self Help Group in rural development
Q.5. Write any two short notes from the following
A. Objectives of NABARD
B. Characteristics of self-help group
C. Microfinance and development of the poor
D. Problems of Agricultural Finance
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