Rural Finance In An Indian Economy

Rural Finance In Indian Economy

o To revise the financial capability of the lending agencies in rural ares to analysis the drawbacks & advantage of flow of credit in rural areas. o The rural credit system should be strengthen o To study the role of rural finance in Indian Economy.

Assigned project task is completed by going through various books, committee reports regarding Indian agriculture & non-farming sector, also role of various financial institutions in this grassland. The project report entitled here is purely study project and does not include any predictions or forecast regarding the future trends in the rural sector. The project is based on various references taken from book & reports mentioned in the bibliography at the end of the assign project.

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Rural Finance In Indian Economy

1.0 Meaning of an Underdeveloped Economy: There is a big difference between underdeveloped and developed countries. The United Nations group of experts states, “We have had some difficulty in interpreting the term ‘underdeveloped countries’. We frankly consider that, per capita real income is low when compared with the per capita real incomes of the United States of America, Canada, Australia & Western europe. Briefly a poor country. The term ‘underdeveloped countries’ is relative. In practical, those countries which have real per capita incomes less than a quarter of the per capita income of the United States, are underdeveloped countries. But recently UN publication prefer to describe them as ‘Developing economies’. The term ‘developing economies’ signifies that though still underdeveloped, the process of development has been initiated in these countries. Thus, we have two economies ‘developing economies’ & ‘developed economies’.

The World Bank issued in its World Development Report (1991)

classified the various countries on the basis of Gross National Product (GNP) per capita. Developing countries are divided into: (a) Low income countries with GNP per capita of $580 and below in 1989; and Middle income countries with GNP per capita ranging between $ 580 and $ 6,000. As against them, the High-income Countries which are mostly members of the Organisation for Economic Co-operation and development (OECD) and some others have GNP per capita of more than $ 6,000. The above data given in the table noted that in 1989 low income countries comprise nearly 57 percent of the world population (2,948 million), but account for only 5 percent of total world GNP. The middle income countries, which are less developed than the highly developed than the low income countries comprise about 21 percent of world population but account for 11 percent of world GNP. Taking these two groups which are popularly described as developing economies

or

‘underdeveloped economies’, it may be stated that they comprise over three-fourths of the world population but account for about one-sixth of the world GNP.

Most

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

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Rural Finance In Indian Economy

Distribution of World Population & World GNP among various groups of Countries in 1989

1. Low Income Economies 2.

Middle

GNP

Total

(Billion

Population Capita

US $) 981 (4.7)

(million) 2,948

(US $) 330

(56.6) 1,105

2,040

Income 2,253

GNP Per

Economies 3. High Income Economies

(10.9) 15,230

(21.2) 831 (16.0)

18,330

4. Other Economies

(73,4) ___

323 (6.2)

___

World

20,736

5,206

3,980

India

(100.0) 283 (1.4)

(100) 832 (15.9)

340

India with its population of 832 million in 1989 and with its per capita income of $340 is among poorest of the economies of the world. It had a share of 15.9 per cent in world population, but a little more than 1 percent of world GNP. Three observation made here regarding the U.N. classification of developed and developing countries on the basis of per capita income. First, there is gross inequality of incomes between the rich and the poor countries. Second, the gap in per capita income (and naturally in the level of living) between the rich and poor countries is even widening over the years—the annual rate of growth of per capita income of the rich countries was higher during 1965-89 as compared with the poor countries. More recently, the growth rate among low-income countries has also shown an increase and if this is sustained, the gap may show a decline over a period. Third, all the high income countries are not necessarily developed countries. For instance, the high income oil-exporting countries have high per capita income but this is mainly due to their exports of oil; really speaking, they are not developed economies. Recently, with

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Rural Finance In Indian Economy

a decline in world oil prices, the GNP per capita has started showing a decline in this group. Definition: “A country which has good potential prospects for using more capital or more labour or more available natural resources, or all of these, to support its present population on a higher level of living or if its per capita income level is already fairly high, to support a large population on a not lower level of living.” As per this definitions the problem of development is mainly the problem of development is mainly the problem of poverty and prosperity. The basic criterion then becomes whether the country has good potential prospects of raising per capita income, or of maintaining an existing high level of per capita income for an increased population.” 1.1 Basic Characteristics Of The Indian Economy As An Underdeveloped Economy: India is an underdeveloped economy. Its is a vast country having an area of 3.3 million sq. km. It has almost 5,76,000 villages. The population of India is widely scattered over villages and towns. Nearly 75% of the population lives in rural & semi urban areas, while the rest lives in towns.

There is doubt that the bulk of its

population lives in conditions of misery. Poverty is not only acute but is also a chronic malady in India. At the same time, there exist unutilized natural resources. It is, therefore, quite important to understand the basic characteristics of the Indian economy, treating it as one of the underdeveloped but developing economies of the world. 1. Low per capita income:-

Underdeveloped economies are marked by the

existence of low per capita income. The per capita income of an India is lowest in the world. The per capita income in Switzerland in 1989 was about 88 times, in West Germany about 60 times, in U.S.A. 61 times and in Japan 70 times of the per capita income in India. It is also important that developed economies are growing at a faster rate than the Indian economy and as a consequence, the disparity in the levels of income has become wider during period 1960-89.

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Rural Finance In Indian Economy

2. Occupational pattern:- Primary producing. One of the basic characteristics of an underdeveloped economy is that it is primary producing. A very high proportion of working population is engaged in agriculture, which contributes a very large share in the national income. In India, in 1981, about 71 per cent of the working population was engaged in agriculture and its contribution to national income was 36 per cent. In Asia, Africa and Middle East countries countries from two-thirds to more than four-fifths of the population earn their livelihood from agriculture, and in most Latin American countries from twothirds to three-fourths of population engaged in agriculture in developed countries is much less than the proportion of population engaged in agriculture in underdeveloped countries. 3. Heavy Population pressure:- The main problem in India is the high level of birth rates coupled with a falling level of death rates. The rate of growth of population which was about 1.31 per cent per annum during 1941-50 has risen to 2.11 per cent during 1981-91.

The chief cause of this rapid spurt to

population growth is the steep fall in death rate from 49 per thousand during 1911-20 to 9.6 per thousand in 1990; as compared to this, the birth rate has declined from about 49 per thousand during 1911-20 to 29.9 per thousand in 1990. The fast rate of growth of population necessitates a higher rate of economic growth in order to maintain the same standard of living of the population. To maintain a rapidly growing population, the requirements of food, clothing, shelter, medicine, schooling, etc. all rise. Thus, a rising population imposes greater economic burdens and, consequently, society has to make a much greater effort to initiate the process of growth.

4. Prevalence of chronic unemployment and underemployment: In India labour is an abundant factor and, consequently, it is very difficult to provide gainful employment to the entire working population.

In developed countries,

unemployment is of a cyclical nature and occurs due to lack of effective demand. In India unemployment is structural and is the result of a deficiency of capital. The Indian economy does not find sufficient capital to expand its industries to such an capacity that the entire labour force is absorbed. 5

Rural Finance In Indian Economy

5. Low rate of capital formation: Another basic characteristic of the Indian economy is the existence of capital deficiency which is reflected in two ways — first, the amount of capital per head available is low; and secondly, the current rate of capital formation is also low. Following table reveals that gross capital formation in India is less than that of developed countries.

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

Gross Domestic

Investment

Saving

1965

1989

1965

1989

Japan

28

33

30

34

Australia Germany

26 23

26 22

23 23

23 27

U.S.A. U.K.

12 13

15 21

12 12

13 18

India

17

24

15

21

As per Colin Clark to maintain the same level of living a country requires an additional investment of 4 percent per annum if its population increases at the rate of 1 percent per annum. In a country like India where the rate of population growth is 2.11 percent (during 1981-91), about 8 percent investment is needed to offset the additional burdens imposed by a rising population. Thus, India required as high as 14 percent level of gross capital formation in order that it may cover depreciation and maintain same level of living. A still higher rate of gross capital formation alone can give a way for economic growth to improve living standard of the population.

2.0 History Of The Rural Economic Structure Of India 2.1 Indian Economy in the Pre-British period:6

Rural Finance In Indian Economy

The Indian economy in the pre-British period consisted of isolated and selfsustaining villages on the one hand, and towns, which were the seats of administration, pilgrimage, commerce and handicrafts, on the other. Means transport & communication were highly underdeveloped and so the size of the market was very small.. a. The structure and organization of villages: The village community was based on a simple division of labour. The farmers cultivated the soil and tended cattle. Similarly, there existed classes people called weavers, goldsmiths, carpenters, potters, oil pressers, washer men, cobblers, barber-surgeons, etc. All these occupations were hereditary and passed by tradition from father to son. Most of the food produced in the village was consumed by the village population itself. The raw materials produced from primary industries were the feed for the handicrafts. Thus interdependence of agriculture and hand industry provided the basis of the small village republics to function independently. The villages of India were isolated and self-sufficient units which formed an enduring organization. But this should not lead us to the conclusion that they were unaffected by wars or political decisions. They did suffer the aggressors and were forced to submit to exactions, plunder and extortion, but the absence of the means of transport and communications and a centralized government helped their survival. b. Classes of Village India: There were three distinct classes in village India: (i) the agriculturists, (ii) the village artisans and menials, and (iii) the village officials. The agriculturists could be further divided into the land-owning and the tenants. Labour and capital needed was either supplied by the producers themselves out of their supplied by the producers themselves out of their savings or by the village moneylender. These credit agencies supplied finance at exorbitant rates of interest but since the moneylender and the landlord were the only sources of credit, the peasants and even the artisans were forced to depend on them. The village artisans and menials were the servants of the village. Most of the villages had their panchayats or bodies of village elders to settle local disputes. The panchayats were the court of justice. 2.2 Industries & handicrafts in Pre-British India: 7

Rural Finance In Indian Economy

The popular belief that India had never been an industrial country, is incorrect. It was true that agriculture was the dominant occupation of its people but the products of Indian industries enjoyed a worldwide reputation. The muslim of Dacca, the calicos of Bengal, the sarees of Banaras and other cotton fabrics were known to the foreigners. The chief industry spread over the whole country was textile handicrafts. The textile handicrafts includes chintzes of Lucknow, dhotis and dopattas of Ahmedabad, silk, bordered cloth of Nagpur and Murshidabad. In addition to cotton fabrics, the shawls of Kashmir, Amritsar and Ludhiana were very famous. India was also quite well-known for her artistic industries like marble-work, stone-carving, jewellery, brass, copper and bell-metal wares, wood-carving, etc. The cast-iron pillar near Delhi is a testament to the high level of metallurgy that existed in India. In this way Indian industries, “Not only supplied all local wants but also enabled India to export its finished products to foreign countries”. Decline Of Indian Handicrafts And Progressive Ruralisation Of The Indian Economy: Before the beginning of Industrial Revolution in England, the East India Company concentrated on the export of Indian manufactured goods, textiles, spices, etc., to Europe where these articles were in great demand. But the Industrial Revolution reversed the face of Indian’s foreign trade. Tremendous expansion of productive capacity of manufactures resulted in increased demand of raw materials for British industry and the need to capture foreign markets. Following principal causes that led to the decay of handicrafts were as follows:a. Disappearance of Princely courts: The growth of industries is only possible due to patronage of nawabs, princes, rajas & emperors who ruled in India. The British rule meant the disappearance of this patronage enjoyed by the handicrafts. Cotton and silk manufactures suffered especially. b. Competition of machine-made goods: The large-scale production that grew as a result of Industrial Revolution meant a heavy reduction in costs. It also created a gigantic industrial organization and, consequently, the machine-made goods began to compete with the products of Indian industries nad handicrafts. This led to the decline of textile handicrafts. Whereas the British emphasized the free import of machine-made manufactured goods they did not allow the

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Rural Finance In Indian Economy

import of machinery as such. The decline of Indian handicrafts created a vaccum which could be filled by the import of British manufactures only. c. The development of new forms and patterns of demand as a result of foreign influence: With the spread of education, a new classs grew in India which was keen to imitate western dress, manners, fashions and customs so as to identify itself with the British officials. This led to a change in the pattern of demand. Indigenous goods went out of fashion and the demand for European commodities got a fillip. Besides, there was a loss of demand resulting from the disappearance of princely courts and nobility.

Thus, the British rule,

silently but surely, alienated the Indians not only from Indian culture but also diverted in its favour their form and pattern of demand for goods. 2.3 Indian Population an Overview:India is one of the most populated countries in the world, next only to China. Although India occupies only 2.4% of the total area of the world it supports over 15% of the world population, as revealed by statistics. India is land of diversity, spread across its cultures, landscape, languages and religion. India has been invaded from the Iranian plateau, Central Asia, Arabia, Afghanistan, and the West. The Indian people have absorbed these influences producing a remarkable racial and cultural synthesis. Religion, caste, and language are major determinants of social and political organization in India today. The government has recognized 16 languages as official; Hindi is the most widely spoken. Although Hinduism is the popular religion, comprising 83% of the population, India is also home to one of the largest population of Muslims in the world--- more than 120 million. The population also includes Christians, Sikhs, Jains, Buddhists, and Parsis. The caste system reflects Indian historical occupation and religiously defined hierarchies. Traditionally, there are four castes identified, plus a category of outcastes, earlier called "untouchables" but now commonly referred to as "dalits," the oppressed. In reality, however, there are thousands of sub-castes and it is with these sub-castes that the majority of Hindus identify. Despite economic modernization and laws countering discrimination against the lower end of the class structure, the caste system remains an important factor in Indian society. Poverty is one of the major problems facing India. An estimated 30-40 percent of the population lives in poverty. Four out

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Rural Finance In Indian Economy

of five of India's poor live in rural areas. About 70% of the people live in more than 550,000 villages, and the remainder in more than 200 towns and cities. Statistics Population: 966,783,171 (July 1997 est.) Age structure: 0-14 years: 35% (male 173,420,822; female 163,433,648) 15-64 years: 61% (male 304,048,569; female 281,625,342) 65 years and over: 4% (male 22,536,104; female 21,718,686) (July 1997est.) Population growth rate: 1.72% (1997 est.) Birth rate: 26.19 births/1,000 population (1997 est.) Death rate: 8.87 deaths/1,000 population (1997 est.) Net migration rate: -0.08 migrant(s)/1,000 population (1997 est.) Sex ratio: at birth: 1.05 male(s)/female under 15 years: 1.06 male(s)/female 15-64 years: 1.08 male(s)/female 65 years and over: 1.04 male(s)/female total population : 1.07 male(s)/female (1997 est.) Infant mortality rate: 65.5 deaths/1,000 live births (1997 est.) Life expectancy at birth: total population: 62.41 years male: 61.68 years female: 63.18 years (1997 est.) Total fertility rate: 3.29 children born/woman (1997 est.)

3.0 Natural Resources In Process Of Economic Development In Rural India:

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Rural Finance In Indian Economy

To ahieve the development in national output, it is essential to combine natural resources, human resources & capital. The existence or the absence of favourable natural resources can facilitate or retard the process of economic development. Natural resources include land, water resources, fisheries, mineral resources, forests, marine resources, climate, rainfall and topography. 1.

Land Resources: The total geographical area of India is about 329 million hectares, but statistical information regarding land classification is available for only about 305 million hectares; this information is based partly on village papers and partly on estimates. We can explain land utilization pattern from the following table:Land utilization pattern, 1986-87 (million hectares) Particulars 1. Total geographical area

Area 329

Percent --

2. Total reporting area

305

100

3. Barren land not available for cultivation

41

13

4. Area under forests

67

22

5. Permanent pastures and grazing land

12

4

6. Culturable waste lands, etc.

19

6

7. Fallow lands

26

9

8. Net area sown

140

46

9. Area sown more than once

37

12

10. Total cropped area (8+9)

177

58

2.

Forest Resources: Forest are an important natural resource of India. They have a moderating influence against floods and thus they protect the soil against erosion.

They provide raw materials to a number of important

industries, namely, furniture, matches, paper, rayon, construction, tanning, etc. 11

Rural Finance In Indian Economy

The total area under forests was 67 million hectares in 1986-87 which was about 22 percent of the total geographical area, a recent estimate has put it at 75 million hectares or 23 percent of the total geographical area. Forests in India are mostly owned by states (95%); a small portion is under the ownership of corporate bodies and private individuals. 3. Water Resources: India is one of the wettest countries in the world, with average annual rainfall of 1100 m.m.

India’s water policy, since

Independence, has mainly concentrated on highly visible large dams, reservoirs and canal systems, but has ignored minor water works such as tanks, dugwells and tubewells. 4. Fisheries: Broadly speaking, fishery resources of India are either inland or marine.

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

reservoirs comprise the inland fisheries. The rivers extend over about 17,000 miles, and other subsidiary water channels comprise 70,000 miles. The marine resources comprise the two wide arms of the Indian Ocean and a large number of gulf and bays along the coast. About 1.8 million fishermen draw their livelihood from fisheries, though they generally live on the verge of extreme poverty. Out of a total catch of 3 million tones of fish in 1988-89, over 1 million tones came from inland fisheries and nearly 2 million tones from marine sources. India is the seventh largest producer of fish in the world and is second in inland fish production, which contributes 45 per cent of total production in the country. Fish production reached the level of 5.4 million tonnes in 1997-98, comprising 3.0 million tonnes of marine fishery and 2.4 million tonnes of inland fishery and is expected to reach 5.6 million tonnes in 1998-99 with 3.0 million tonnes of marine fishery and 2.6 million tonnes of inland fishery, respectively. During 1998-99, the export of marine products came down to US$ 1,038 million from US$ 1,208 million during 1997-98

3.1 Infrastructure In Process Of Economic Development In Rural India: The prosperity of a Rural India depends directly upon the development of agriculture and industry. Agricultural production, however, requires power, credit, 12

Rural Finance In Indian Economy

transport facilities, etc.

Industrial production requires not only machinery &

equipment but also skilled man-power, management, energy, banking facilities, marketing facilities, transport services which include railways, roads, shipping, communication facilities, etc. All these facilities and services constitute collectively the infrastructure of an economy and the development and expansion of these facilities are an essential pre-condition for increasing agricultural & industrial production in a rural area. Types of Infrastructural facilities—often referred towards economic and social development of rural India: 1. Energy: The most important single factor which can act constraint on economic growth of a country is the availability of energy. There is a direct correlation between the degree of economic growth, the size of per capita income and per capita consumption of energy.

Since energy is an essential input of all

productive economic activity, the process of economic development inevitably demands increasing higher levels of energy consumption. There are broadly two sources of energy commercial energy & non-commercial energy. Following are the various commercial energy:- coal & lignite, Oil & gas, Hydro-electric resource, Uranium. & non-commercial energy are Fuelwood, Agricultural wastes, Animal dung. 2. Power: Electric power, which is one form of energy, is an essential ingredient of economic development and, it is required for commercial and noncommercial uses. Commercial uses of power refer to the use of electric power in industries, agriculture and transport. Non-commercial uses include electric power required for domestic lighting, cooking, use of mechanical gadgets like the refrigerators, air conditioners, etc. With the growth of population and with the increase in the use of modern gadgets in daily life, it is quite natural that the demand for electricity for domestic use should grow at a fast rate. 3. Transport: If agriculture and industry are regarded as the body and the bones of the economy, which help the circulation of men and materials. The transport system helps to broaden the market for goods and by doing so, it makes possible large-scale production through division of labour. It is also essential 13

Rural Finance In Indian Economy

for the movement of raw materials, fuel, machinery etc., to the places of production. The more extensive and continuous the production in any branch of activity the greater will be the need for transport facilities.

Transport

development helps to open up remote regions and resources for production. Regions may have abundant agricultural, forest and mineral resources but they cannot be developed if they continue to be remote and inaccessible. Modes of transport & communication facilities: Indian Railways: The most important form of transport system in India is the Indian railways, which is also the country’s largest single undertaking with a capital investment of around Rs. 15,000 crores. In 1950-51, railway route length was 53,600 kms but by 1990-91 it had increased to nearly 62,400 kmsan increase at the rate of 0.4 percent per annum. Roads & Road Transport: Road transport plays an important role in rural economy of country, since it is most suitable for short distances. It has also the advantage of door-to-door service, flexibility, speed and reliability. The utility of other modes of transport such as railways, internal waterways, ports, etc. increase when linked to the road transport system. Road construction and maintenance generate sizeable employment opportunities—factor of great importance in the context of growing population and growing unemployment in the country. The rural road network now connects about 70 percent of our villages. Inland water transport: Inland water transport is the cheapest mode of transport, for both long and short distances, so far as the points of origin and destination of traffic are concerned. It is cheap as energy consumption is low. India has over 14,500 kms. Of navigable inland waterways comprising a variety of river systems, canals, backwaters, creeks, etc. 4. Communications: The communication system comprises posts and telegraphs, telecommunication system, broad casting, television and information services. By providing necessary information about the markets and also supplying

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Rural Finance In Indian Economy

necessary motivation, the communication system helps to bring buyers and sellers together effectively and helps to accelerate the growth of the economy.

4.0 Microfinance In An Indian Context:-

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Rural Finance In Indian Economy

Microfinance institutions (MFIs), specialised financial institutions that serve the poor, derive from the success of some micro enterprise credit programmes performed mainly by practitioners in developing countries. microFinance (mF) is being practiced as a tool to attack poverty the world over. During the last two decades, substantial work has been done in developing and experimenting with different concepts and approaches to reach financial services to the poor, thanks mainly to the initiatives of the Non-Governmental Organisations (NGOs) and banks in various parts of the country. Despite having a wide network of rural bank branches in the country and implementation of many credit linked poverty alleviation programmes, a large number of the very poor continue to remain outside the fold of the formal banking system. Various studies suggested that the existing policies, systems and procedures and the savings and loan products often did not meet the needs of the hardcore and assetless poor. Experiences of many anti-poverty and other welfare programmes of the state as well as of international organisations have also shown that the key to success lies in the evolution and participation of community based organizations at the grassroots level. Micro-finance and Poverty Alleviation: Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend downmarket to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself. The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institutions and the economic characteristics and financing needs of low-income households. For example, commercial lending institutions require that borrowers have

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Rural Finance In Indian Economy

a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self employed households is not stable, regardless of its size. A large number of small loans are needed to serve the poor, but lenders prefer dealing with large loans in small numbers to minimize administration costs. They also look for collateral with a clear title which many low-income households do not have. In addition bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation. In other words, although microfinance offers a promising institutional structure to provide access to credit to the poor, the scale problem needs to be resolved so that it can reach the vast majority of potential customers who demand access to credit at market rates. To be successful, financial intermediaries that provide services and generate domestic resources must have the capacity to meet high performance standards. They must achieve excellent repayments and provide access to clients. And they must build toward operating and financial self-sufficiency and expanding client reach. In order to do so, microfinance institutions need to find ways to cut down on their administrative costs and also to broaden their resource base. Cost reductions can be achieved through simplified and decentralized loan application, approval and collection processes, for instance, through group loans which give borrowers responsibilities for much of the loan application process, allow the loan officers to handle many more clients and hence reduce costs. Savings facilities make large scale lending operations possible. On the other hand, studies also show that the poor operating in the informal sector do save, although not in financial assets, and hence value access to client-friendly savings service at least as much access to credit. Savings mobilization also makes financial instituttions accontable to local shareholders. Therefore, adequate savings facilities both serve the demand for financial services by the customers and fulfill an important requirement of financial sustainability to the lenders. Microfinance institutions can either provide savings services directly through deposit taking or make arrangements with other financial institutions to provide savings facilities to tap small savings in a flexible manner.

17

Rural Finance In Indian Economy

Convenience of location, positive real rate of return, liquidity, and security of savings are essential ingredients of successful savings mobilization. Once microfinance institutions are engaged in deposit taking in order to mobilize household savings, they become financial intermediaries. Consequently, prudential financial regulations become necessary to ensure the solvency and financial soundness of the institution and to protect the depositors. Governments should provide an enabling legal and regulatory framework which encourages the development of a range of institutions and allows them to operate as recognized financial intermediaries subject to simple supervisory and reporting requirements. One way of expanding the successful operation of microfinance institutions in the informal sector is through strengthened linkages with their formal sector counterparts. A mutually beneficial partnership should be based on comparative strengths of each sectors. Informal sector microfinance institutions have comparative advantage in terms of small transaction costs achieved through adaptability and flexibility of operations. They are better equipped to deal with credit assessment of the urban poor and hence to absorb the transaction costs associated with loan processing. On the other hand, formal sector institutions have access to broader resource-base and high leverage through deposit mobilization. Therefore, formal sector finance institutions could form a joint venture with informal sector institutions in which the former provide funds in the form of equity and the later extends savings and loan facilities to the urban poor. Another form of partnership can involve the formal sector institutions refinancing loans made by the informal sector lenders. Under these settings, the informal sector institutions are able to tap additional resources as well as having an incentive to exercise greater financial discipline in their management. Microfinance institutions could also serve as intermediaries between borrowers and the formal financial sector and on-lend funds backed by a public sector guarantee. Weaknesses of Existing Microfinance Models

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Rural Finance In Indian Economy

One of the most successful models discussed around the world is the Grameen type. The bank has successfully served the rural poor in Bangladesh with no physical collateral relying on group responsibility to replace the collateral requirements. The brief idea about Grameen is given in the next part of this report. This model, however, has some weaknessed. It involves too much of external subsidy which is not replicable Grameen bank has not oriented itself towards mobilising peoples' resources. The repayment system of 50 weekly equal instalments is not practical because poor do not have a stable job and have to migrate to other places for jobs. If the communities are agrarian during lean seasons it becomes impossible for them to repay the loan. Pressure for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the Grameen model is based only on credit. Micro-finance is time taking process. Haste can lead to wrong selection of activities and beneficiaries. Another model is Kerala model (Shreyas). The rules make it difficult to give adequate credit {only 40-50 percent of amount available for lending). In Nari Nidhi/Pradan system perhaps not reaching the very poor. Most of the existing microfinance institutions are facing problems regarding skilled labour which is not available for local level accounting. Drop out of trained staff is very high. One alternative is automation which is not looked at as yet. Most of the models do not lend for agriculture. Agriculture lending has not been experimented. •

Risk Management : yield risk and price risk

•

Insurance & Commodity Future Exchange could be explored

All the models lack in appropriate legal and financial structure. There is a need to have a sub-group to brainstorm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector prudential norms. A forum/ network of micro-financier (self regulating organization) is desired.

5.0 Rural Market Contribution In Total Indian Economy

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Rural Finance In Indian Economy

When you consider a rural market then the measure part of the rural buiness directly or indirectly connected with agriculture. In this condition,whenever you study about rural market you have to consider the impact of agriculture towards Indian Economy. 5.1 Profile of Rural people:-If we classify the rural people by their occupation, we find cultivators as the predominant occupation group who account 72% of rural households. Distribution of rural households by their profession or business activity Occupation Cultivators Agricultural labourers Other non-cultivators Artisans All house holds

Percentage of Households 72 15 11 2 100

However this group of cultivators contain both prosperous and well as marginal cultivators within itself. This is rural India’s picture where 20% of rural households (mostly cultivators) control about 66% of assets in rural India. In this way rural population broadly divided into 6 categories: 1.

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

2. Rich farmers who belong to dominant caste of the area. 3. Small peasants or marginal farmers owning uneconomic land holdings. 4. Tenant farmers operating on rented lands belonging to large land holders and working on small uneconomic land holdings. 5. Agricultural labourers who work on lands of landlords and rich farmers. 6. Artisans and others, which include the unemployed also.

5.2 Stastitical Profile Of The Rural Business in India

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Rural Finance In Indian Economy

TABLE: VILLAGE & SMALL INDUSTRIES (Production) Industry

Unit #

<-------------------- Production ---------------> 1973-74

1979-80

1984-85

1985-86

1990-91

1995-96!

M.Sq.Mtres

56.00

82.00

103.98

108.58

1088.8

1052.63

Value (Rs. crores)

33.00

92.00

157.62

186.30

285.95

353.49

122.00

348.00

807.06

900.38

1994.06

356216 7020

Traditional Industries: Khadi

Village

Value

Industries

(Rs. crores)

Handlooms

Mill Meters

2100.00

2900.00

3600.00

3692.00

4888

Value (Rs. crores)

840.00

1740.00

2880.00

2953.60

3633

Lakh Kgs. of raw

29.00

48.00

76.70

78.97

12836

63.00

131.00

345.69

310.14

868

1065.00

2050.00

3500.00

3800.00

11325

25200

1.50

1.85

1.49

1.83

2.11

2.63

Value (Rs. crores)

60.00

86.00

100.50

139.51

161.00

Value (Rs. crores)

21.83

4447.00

7790.87

8289.93

16272.95

25553.489

Small Scale Industries

Value (Rs. crores)

7200.00

21635.00

50520.00

61228.00

155340

219968

Powerlooms

Mill Meters

2400.00

3450.00

4930.00

5886**

10988

17201

Value (Rs. crores)

1980.00

3250.00

6423.00

7668.51

12337

Sub-total (B)

Value (Rs. crores)

9180.00

24885.00

56943.00

64768.51

167677

Total (VSI)

(Rs. crores)

Sericulture

13909

silk (value Rs.crores) Handicrafts

Value (Rs. crores)

Coir

Lakh tonnes of fibre

Sub-total (A)

Modern Industries:

219968

11353.00 29332.00 64733.87 73058.44 183949.95 245521.48

TABLE: VILLAGE & SMALL INDUSTRIES (Employment)

21

Rural Finance In Indian Economy

Industry

Unit #

<-------------- Employment (Lakh persons) --------> 1973-74

1979-80

1984-85

1985-86

1990-91

8.84

11.20

13.05

15.00

14.15

1995-96

Traditional Industries: Khadi

M.Sq.Mtres Value (Rs. crores)

Village

Value

Industries

(Rs. crores)

Handlooms

Mill Meters

N.A. 9.27

16.13

24.84

25.50

34.42

52.40

61.50

76.80

73.70

96.87

128.00

12.00

16.00

20.43

53.60

52.00

59.50

15.00

20.30

27.40

28.00

43.84

65.50

5.00

5.59

5.89

8.00

5.46

Value (Rs. crores) Sericulture

Lakh Kgs. of raw silk (value Rs.crores)

Handicrafts

Value (Rs. crores)

Coir

Lakh tonnes of fibre

N.A.

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

Value (Rs. crores)

Modern Industries: Small Scale Industries

Value (Rs. crores)

Powerlooms

Mill Meters

102.21

130.72

168.41

203.80

246.74

253.00

39.65

67.00

90.00

96.00

124.3

152.61

10.00

11.00

32.19

35.32

55.00

N.A.

Value (Rs. crores)

5.3 Agricultural Impact on National Economy: Agriculture is a backbone of the Indian Economy. It is important to note that importance is given to industrialization in last four decades, agriculture is largest industry in the country.

5.4 Agricultural Production The agricultural sector as a whole is estimated to record a real growth rate of 6.6 per cent during 1998-99. The overall growth in agricultural production during 1998-99 has been provisionally estimated at 6.8 per cent, as against a negative

22

Rural Finance In Indian Economy

growth rate of (-) 5.4 per cent during 1997-98. In spite of the damage caused to the cotton crop in Punjab by excessive rains and unexpected cyclonic storms in Andhra Pradesh in October 1998, cotton production was estimated to be higher at 13.3 million bales in 1998-99, as against 11.1 million bales produced in 1997-98. Similarly, the sugarcane output is expected to touch 282.7 million tonnes during 1998-99, compared to 276.3 million tonnes during 1997-98. The production of oilseeds is also likely to be higher at 25.3 million tonnes during 1998-99, as against 22.0 million tonnes during 1997-98. Foodgrains Production The production of kharif foodgrains estimated at 102.5 million tonnes during 1998 showed a marginal growth of 1.4 per cent over the production achieved (101.1 million tonnes) in 1997. The rabi foodgrains production for 199899 is expected to go up to 98.4 million tonnes compared to 91.3 million tonnes in 1997-98. The foodgrains production is estimated to be 200.9 million tonnes in 1998-99 compared to 192.4 million tonnes during 1997-98, recording an impressive increase by 4.4 per cent (Advance Estimates). During 199899, efforts have also been initiated by various government agencies to double the food production in the next decade. During 1998-99 rice production is estimated to increase to 84.5 million tonnes from 82.3 million tonnes produced in 1997-98, while the wheat production during 1998-99 is estimated at 70.6 million tonnes, compared to the previous year's level of 65.9 million tonnes, an increase by 7.1 per cent. Production of pulses in 1998-99 is expected to be around 15.2 million tonnes, as against 13.1 million tonnes during 199798.

Agricultural Production-Major crops (in million tonnes) Year

1995-96

1996-97

1997-98

23

1998-99

Rural Finance In Indian Economy

Crops

Achievement

Target

Achiev ement

% change over

Target

Achiev -ement

199596

% change over

Target

Production (Adv. Est.)

199697

% change over 1997-98

Rice

77.0

81.0

81.7

6.1

83.0

82.3

0.7

84.2

84.5

2.7

Wheat

62.1

65.0

69.4

11.8

68.5

65.9

(-) 5.0

70.0

70.6

7.1

Coarse Cereals

29.0

29.0

32.5

34.1

17.6

33.5

31.1

(-) 8.8

34.3

30.6

Pulses

12.3

15.0

14.2

15.4

15.0

13.1

(-) 7.7

15.5

15.2

16.0

Total Foodgrains Oilseeds

180.4

193.5

199.4

10.5

200.0

192.4

(- 3.5

204.0

200.9

4.4

22.1

23.0

24.4

10.4

25.5

22.0

(-) 9.8

27.0

25.3

15.0

Sugarca -ne

281.1

270.0

277.6

(-) 1.2

280.0

276.3

(-) 10.5

300.0

282.7

2.3

Cotton*

12.9

13.0

14.2

10.0

14.8

11.1

(-) 21.8

14.8

13.3

19.8

* Million bales of 170 kg. each.

Agricultural Exports and Imports

The share of exports of agriculture and allied products in the total exports had declined marginally, from 18.9 per cent during 1997-98 to 17.8 per cent during 1998-99. During the same period, the value of exports of agriculture and allied products amounted to US$ 5,994 million, showing a decline of 9.6 per cent from a level of US$ 6,634 million in 1997-98. Major items of agricultural exports were basmati and non-basmati rice, raw cotton, meat, oilmeals, tea, coffee, unmanufactured tobacco, cashew, spices, fresh and processed fruits and juices, vegetables and marine products, etc.

24

Rural Finance In Indian Economy

Agricultural imports related to food and other items constituted 5.8 per cent of the total imports during 1998-99, as against 4.0 per cent during corresponding period of the previous year. Important agricultural items imported during the year were vegetable oils (edible), sugar, wheat and fruits & nuts. During 1998-99, the volume of agricultural imports aggregated US$ 2,409 million, as against US$ 1,678 million during the corresponding period of the previous year, recording a growth of 43.6 per cent. Agricultural markets: There were 7,062 agricultural regulated markets operating in India, 162 agricultural commodities considered for grading standards and 3,253 cold storage with capacity of 8.73 million tonnes as on end March 1998. With the introduction of economic reforms, futures trading was permitted in coffee, cotton, castor oil and jute goods during 1997-98. Earlier futures trading were permitted in gur, potato, castor seed, pepper, turmeric, etc. Further, during 1998-99, futures trading was introduced in oilseeds, oil cakes and edible oils. A network of co-operatives at the national, state and primary level operates to help farm producers with access and further reach for sale of produce. As per the Annual Report (1998-99) of Ministry of Agriculture, Government of India, the value of agricultural produce marketed through co-operatives has registered a remarkable growth of 21.6 per cent, from Rs.9,500 crore in 1994-95 to about Rs.11,551 crore in 1995-96.

5.5 Agriculture role in Indian Economy Agriculture for Industrial Development: Indian agriculture has been the source of supply of raw materials to our leading industries. Cotton and jute, textiles, sugar, plantations— all these directly depend on 25

Rural Finance In Indian Economy

agricultural output. indirectly.

There are many industries, which depend on agriculture

Many of our small scale and cottage industries like handlooms, oil

crushing, etc depend on agriculture for their raw materials. But then, in recent years, agriculture is losing its significance to industries such as iron and steel, engineering, chemicals, etc.

However in recent years, the

importance of food processing industries is being increasing recognized both for generation of income and generation of employment. Agriculture in economic planning: Importance of agriculture in the national economy is indicated by many facts. For example, agriculture is main support for transport sector as railways and roadways secure bulk of their business from the movement of agricultural goods. Further it is seen that good crops implying large purchasing power with the farmers lead to greater demand for manufactures and therefore better prices. In other words prosperity of farmers is also the prosperity of the industries and vice-versa. Agriculture is backbone of the Indian economy and the prosperity of agriculture can also stand for the prosperity of the economy. At the same time it is true that per capita productivity in agriculture is less than in the industry. Many scholars think that so long as the Indian Economy is dominated by agricultural activity, per capita income will not rise to an extent, which is necessary and desirable.

5.4 Capital Formation in Agriculture The Gross Capital Formation in agriculture, at 1993-94 prices, increased from Rs.18,214 crore in 1994-95 to Rs.20,995 crore in 1997-98. The share of private sector investment in agriculture has been registering an increasing trend over the last four years. It increased from Rs.13,244 crore in 1994-95 to Rs.15,555 crore in 1996-97 and further to Rs.16,579 crore in 1997-98. The rising trend in the private investment in 26

Rural Finance In Indian Economy

agriculture is attributable mainly to accelerated flow of institutional credit. It is explain graphically as follows:

The public sector capital investment in agriculture which has been declining from Rs. 4,970 crore in 1994-95 to Rs.4,776 crore in 1995-96 and further to Rs.4,347 crore in 1996-97 showed an increase from Rs.4,347 crore in 1996-97 to Rs.4,416 crore (at 1993-94 prices) in 1997-98.

6.0 Changing Scenario Of Rural Credit Indian rural credit structure is regarded all over the world as quite unique and innovative. It required a careful feasibility study to understand rural structure. Evolved over a period of last eight decades, it can perhaps claim the honour of being a very important constituent of the most complex rural economy in the third world countries. In India there is different caste, religion of people living together, the

27

Rural Finance In Indian Economy

language of every state, caste is different than each other. The land, weather, water availability is different in different area, which give lots of problem in applying various policies. One of the distinguishing features has been its ability to adapt itself, without much turmoil and stress, to the socio-economic dynamics of the rural scenario. Over the years it has developed into a multi faceted structure to service almost the entire cross-section of rural population spread thoughtout the length and breadth of our country. In rural areas the indigenous moneylenders continued to be the banker in need. Since these money-lenders had virtual monopoly in supplying credit in rural areas, the poor were often subjected to exploitation. With the overriding monopoly the moneylenders often resorted to usurious practices--- levying the exobirant rate of interest, demanding gift/contribution to the temple funds out of the amount of credit, demanding advance interest, etc.

Besides, often the money-lenders resorted to

unethical practices like taking thumb impression on a blank paper for inserting some arbitrary amount, manipulation of account to inflate the balance due.

The poor

villager could not escape the clutches of these indigenous bankers as they had to keep on borrowing from them under distress since they were the only source of credit for all type of requirements--- production and consumption. The conditions of the poor peasantry were perpetually so pathetic that an adage—“they are born in debt, they live in debt & die in debt” was the usual description of their plight. To mitigate the sufferings of the poor farmers the infrastructure of co-operative credit was brought into being in the matter of agricultural finance. The Co-operatives Societies Act of 1904 provided the formation of primary agricultural co-operatives credit societies. Later in 1912, the co-operative movement was extended to formation of non-agricultural co-operative credit societies also. The commercial banks on the other hand were participating in rural banking only as an alien since they were programmed for meeting the financial requirements of trade and commerce. In a view of the huge gap in rural credit from institutional sources and in a bid to meet the growing needs of financial assistance to modernizing farming, the government adopted the multi-agency approach. This was intended to increase the farm productivity and thus raise the living standards of the poor farmers. The formation of State Bank Of India which was formed my taking over the Imperial 28

Rural Finance In Indian Economy

Bank of India by the Government was with a objective of “extension of banking facilities on a large scale more particularly in the rural and semi-urban areas and for other diverse purposes.” This was an important milestone in the banking of rural India. Momentum was gained more prominently after the concept of “Social control” over commercial banks was propagated in 1967. With the setting up of National Credit Council in 1968 to asses the demand for bank credit for various sectors of economy and to determine priorities for the grant of loans, etc. it came to be felt increasingly that banks should become instruments of economic and social development. To this effect nationalization of 14 major Indian commercial banks in July 1969 can be described as a major landmark in the history of Indian financial system and a big leap towards rural banking. With emphasis on lending to priority sector— agriculture, rural artisans and handicrafts, small scale industries, small business and retail trade and other weaker sections of the society— rural banking came to the fore. The step was initiated to utilize effectively the professional skills and acumen developed by the banking system for achieving the basic objective of balanced socioeconomic development. Both the Co-operative and Commercial banks made substantial development in providing credit to agricultural and rural economy. The total share of co-operatives in total borrowing of the rural household grew from 5,204 in july 1964 to 12,065 in Dec 1974. But still it was noticed that two-thirds of the total credit was taken from noninstitutional sources. The demand for rural credit was on the increase owing to adoption of modern agriculture, which increasingly required larger amounts of capital both short term & long term.

6.1 Structure of Rural Credit In India “In the village itself no form of credit organization will be suitable except the Cooperative Society—Co-operation has failed, but co-operation must succeed.” --All-India Rural Credit Survey

29

Rural Finance In Indian Economy

National Policy & Its’s Aim: Agricultural credit is one of the most crucial inputs in all agricultural development programmes. From olden days private money-lenders are main sources of credit towards agricultural or rural products. After independence multi-agency approach consisting of co-operatives, commercial banks and regional rural banks are adopted due to its cheaper and adequate credit to farmers. The major policy in the sphere of agricultural credit has been its progressive institutionalization for supplying agriculture and rural development programmes with adequate and timely flow of credit to assist weaker sections and less developed regions. The basic aim of this Policy are as follows:a. To ensure timely & sufficient flow of credit to the farming sector; b. To avoid money-lender chain from rural scene. c. To reduce regional imbalance through their credit facilities. d. To provide larger credit support to areas covered by special programmes. e.g. National Oilseeds Development Project.

Need of Credit for Farmers:Farmers need finance mainly for the following things—to pay current expenses of cultivation such as the purchase of seed, manures, etc.; the purchase of cattle, implements and raw materials; acquire new land; or improve land by irrigation, drainage, wedding and planting; pay up old debts to build and repair houses, to purchase food stuffs and other personal necessaries; pay land revenue to the Government; meet expenses connected with marriage and other social events in the family, but jewellery and conduct law suits. The credit need of agriculturists can, 30

Rural Finance In Indian Economy

therefore, be broadly divided into directly productive & indirectly unproductive expenses. Unfortunately fact is that underdeveloped and old countries are in need of both the types of credit.

7.0 Sources Of Rural Credit There are mainly two sources available to the farmers private agencies & institutional. Private agencies means relatives, landlords, agricultural moneylenders, professional private moneylenders, traders & commission agents, others.

Where

institutional agencies are a. commercial banks, b. the state bank, c. co-operative societies & land mortgage banks d. agricultural finance Corporation.

31

Rural Finance In Indian Economy

Private agencies giving 93% of the total credit requirements in 1951-52 and institutional sources including government giving for only 7% of the total credit needs. But in 1960-61, the share of private agencies came down to 81.3 which was as follows:- Relatives 8.8%, Landlords 0.6%, Agricultural moneylenders 36.0, Professional private moneylenders 13.2%, traders & commission agents 8.8%, other sources 13.9. that time institutionals sources were 18.7 and the break up was government 2.6%, Co-operative 15.5%, Commercial banks 0.6%. As per the All India Debt and Investment Survey (1981), estimated that the share of private agencies had further slumped to about 37% & share of institutional credit jumped to 63% break up was 30% of co-operative & 29% of commercial banks. Government & Reserve Bank of India is supporting commercial bank & co-operatives to meet the growing demand for agricultural credit. 8.0 Private Agencies Sources:  Money lenders: Though there are drawbacks, moneylenders are by far the most important source of agricultural credit in India. That we have already seen before, It is therefore, clear that the basic problem of the agricultural economy of India is the huge indebtedness of farmers and their exploitation by private moneylenders. For that government of India make provisions in act as follows a. maintenance of accounts in prescribed forms, b. furnishing of the receipts and periodical statements, c. fixing of maximum rates of interest, d. Protection of the debtors from molestations and intimidations, e. licensing of moneylenders, and f. penalties for infringement of the provisions.

The basic objectives of such

legislative enactments can be stated as: I. To bring about an improvement in the terms on which private credit was available to agriculturists and to place legal restrictions on the unreasonable exactions of moneylenders, II. To enable civil courts to do greater justice as between lenders and borrowers than was possible in the prevailing circumstances under the ordinary Code of Civil Procedure.  Traders & commission agents: Traders & commsiion agents supply funds to farmers for productive purposes much before the crops mature. They force the farmers to sell their produce at low prices and they charge a heavy commission for themselves.

32

Rural Finance In Indian Economy

 Landlords & others: Farmers, predominantly small farmers & tenants, depend upon landlords and others to meet their financial requirements.

This

source of finance has all the defects associated with moneylenders, traders and commission agents. Interests rates are exorbitant. Often the small farmers are cheated and their lands are appropriated. What is worse, this source of finance is becoming more important—from 3.3 percent in 1951-52 to 14.5 percent in 196162 but declined to 8.8 percent in 1981. 9.0 Institutional sources of credit: These are the funds made available by co-operative societies, commercial banks, & regional rural banks & state governments also. The need for institutional credit arises because of the weakness or inadequacy of private agencies to supply credit to farmers. Private credit is defective because:I. It is based on profit motive &, therefore, it is always exploitative. II. It is very expensive and is not related to the productivity of land. III. It does not flow into most desirable channels and to most needy persons. IV. It is not available for making agricultural improvements—and much of the necessary improvements are not undertaken as funds are not available for long periods at low rates of interest V. It is not properly integrated with the agriculturists other needs. Problems in Institutional sources: The government was of the view that multi-agency approach to rural credit was the real solution to the emancipation of small farmers from the clutches of the moneylenders. But withing a short period, number of problems have surfaced such as: a) There was no coordination between different agencies operating in the same area and, as a result, there was multiple financing, over-financing in some areas and under-financing in others. b)

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

different agencies often failed to formulate and develop meaningful agricultural credit programmes in given blocks and districts.

33

Rural Finance In Indian Economy

c) Despite guidelines issued by RBI, different agencies adopted different procedures and policies in the matter of providing loans and their recover. The result was unnecessary competition among the different agencies. d) There were practical problems in the recovery of loans when different agencies had lent to the same person against the same securities. Ultimatlely, there were heavy overdues. The major problem faced by lending institutions, particularly co-operatives, is the most unsatisfactory level of overdues. The ration of overdues to that of demand is around 40 to 42 percent in the case of co-operatives and 47 percent in the case of Regional rural banks.

Accordingly, health of rural credit institutions, both co-

operative and commercial banks, is in a very sad state in several parts of the country. 1.

Co-operative credit societies [9.1]

It is the cheapest and the best source of rural credit. The rate of interest is low. Since 1951, the co-operative credit movement has started helping the farmers in a big manner. During 1989-90 there were about 88,000 primary agricultural credit societies. The stranglehold of the moneylenders on the peasants is not met by the cooperatives.

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

requirements from the co-operatives. Primary Agricultural Credit Society: The co-operative movement was started in India largely with a view to providing agriculturists funds for agricultural operations at low rates of interest and protect them from the clutches of moneylenders. The organization of the co-operative credit for short period may be briefly outlined as follows: A co-operative credit society, commonly known as the primary agricultural credit society (PACS) may be started with ten or more persons, normaly belonging to a village. The value of each share is generally nominal so as to enable even the poorest farmer to become a member. The members have unlimited liability, that is each member is fully responsible for the entire loss of the society in the event of failure. This will mean that all the members should know each other intimately. The management of the society is under an elected body consisting of President, Secretary 34

Rural Finance In Indian Economy

& Treasurer. The management is honorary, the only paid member being normally. Loans are given for short periods, normally for one year, for carrying out agricultural operations, and the rate of interest is low. Profits are not distributed as dividend to shareholders but are used for the welfare of the village. In the construction of a well, or maintenance of a school, and so on. The usefulness of the primary credit societies has been rising steadily. In 1950-51, it advanced loans worth Rs.23 crores; this rose to Rs. 200 crores in 1960-61, and to Rs. 4200 crores in 1988-89. Financial Strength of PAC’s.: To make all primary agricultural societies viable and ensure adequate and timely flow of co-operative credit to the rural areas the Reverse Bank of India, in collaboration with State governments, had been taking a series of steps to strengthen weak co-operative banks and to correct regional imbalances in cooperatives development. Steps were taken to reorganize viable PACs and for amalgamation of non-viable societies with farmer’s service societies or large sized multipurpose societies. These efforts are being intensified by providing larger funds to weak societies to write off their losses, bad debts and overdues. PAC’s and Weaker Sections: The major objective of the co-operative development programmes is to ensure that the benefits of co-operative activities flow increasingly to weaker sections including scheduled castes and scheduled tribes. The government seeks to achieve this through expanding the membership of the weaker sections in the existing PACs and ensuring larger flow of funds and services to them. In the tribal areas, large sized multipurpose societies are being organized mainly for the benefit of the tribals.  Co-operative Central Banks: These are federations of primary credit societies in specified areas normally extending to the whole district meance they are sometimes called as district co-operative banks. These banks have a few private individuals as shareholders who provide both finance of management. Their main task is to lend to village primary societies, but they were expected to attract deposits from the general public. But the expectation has not been fulfilled and many of the co-operative central banks act as intermediaries between the State Co-operative Bank on the one hand and the village primary credit societies on the other.

35

Rural Finance In Indian Economy

 State Co-operative Bank: This bank forms the apex of the co-operative credit structure in each state. It finances and controls the working of the central co-operative banks in the State. It serves as a link between the Reserve Bank of India from which it borrows and the co-operative central banks and village primary societies. The State Co-operative Bank obtain its working funds from its own share capital and reserves, deposits from the general public and loans and advances from the Reserve Bank now NABARDhas formulated a scheme for the rehabilitation of weak central co-operative banks. NABARD is providing liberal assistance to the State Governments for contributing to the share capital of the weak central co-operative banks selected for the purpose. The State Co-operative bank is not only interested in helping the cooperative credit movement but also in promoting other co-operative ventures and in extending the principles of co-operation. Problem of overdues to Co-operative credit A highly distressing fact of co-operative credit is the heavy overdues of cooperative credit institutions, now estimated between Rs.9,000 crores to Rs.10,000 crores. According to the RBI study team on overdues “lack of will and discipline among cultivators to repay loans was the principal factor responsible for the prevalence of overdues of co-operatives. Defective lending policy pursued by cooperatives, the apathy of management in taking quick action against recalcitrant members and absence of favourable climate were other contributing factors.” Apart from these commonly factors normally responsible for a high level of overdues, intervention of external forces such as loan waivers, concession in various forms towards repayment of principal and interest has also affected the recovery performance of credit institutions to a significant extent. The problem is further aggravated on the account of the state governments in ability to meet the financial commitments to co-operative banks. In recent years, the farmers are getting organized and one of their chief demands of the farmer union is to cancel their debts to the co-operative societies and banks. States have meekly surrended to such demands to write off the debts in a matter of extreme concern, as it hampers the recovery of dues from the farmers. The problem of loan overdues is a matter of serious concern, as it affects the recycling of funds and

36

Rural Finance In Indian Economy

credit expansion on one hand and economic viability of the lending institutions, specially the co-operatives and RRBs, on the other. 2.

Land development banks[9.2]: The need for long-term loan is being satisfied by land development banks (formerly the were called land mortgage banks). The objective of such banks is to provide long-term credit to the cultivators against the mortgage of their lands. The loans from the land development banks are quite cheap and are spread over a long period of 15 to 20 years. It is, therefore, convenient ot borrow from these banks if previous debts have to be cancelled or if additional land is to be purchased or if improvements have to be made. Though land development banks have been making considerable progress in recent years in this country, they have not really contributed much to the financial need of the farmers. Most farmer are not even aware about this bank & 70% of the land development banks are located in the three South Indian States of Tamil Nadu, Andhra Pradesh & Karnataka. The loan sanction by this bank has been increase annually from Rs. 3 crores to Rs. 770 crores between 1950-51 and 1989-90. major drawback of this bank is they lend against the security of land, and big landlords have taken advantage of them and, by and large, small peasants have not benefited from them.  The Structure of LDBs:- The long term credit structure consists of the central land development banks (generally one for each State) and primary land development banks. In some States, there are no primary land developments banks but in their place, there are branches of central land development banks.  Problems of LDBs:- Land development banking is yet to take strong roots in India barring few States. However, LDBs have contributed in large measure to agricultural development by lending specially for minor irrigation. All their loans are for productive purposes benefiting mostly the small farm holders. Though land development banking has made considerable progress in recent years, it has not really contributed much to the improvement of the financial position of the farmers. A large number of factors are responsible for the relative ineffectiveness of LDBs.

37

Rural Finance In Indian Economy

 Overdues Problems:- mounting overdues in most of the LDBs have crippled the structure badly, in recent years. Overdues at the level of primary land development banks have been put between 42 to 44 percent. Overdues have caused innumerable financial problems besides limiting the capacity of LDBs to lend and operate as viable units. The financial discipline imposed on the banks in the matter of eligibility to undertake fresh lending based on recovery performance has been the main limiting factor quantitative growth of credit operations. To some extent, the banks themselves are to be blamed for this predicament due to faulty loaning policies, inadequate supervision, overutilisation of loans, ineffective measures for recovery etc. Which have contributed to the deterioration in recovering the loans. 3.

Commercial Banks[9.3]: The commercial banks in India have long confined their operations to urban areas, receiving deposits from the urban public and financing trade and industry in urban public and financing trade and industry in urban areas. Commercial banks are extending financial support to agriculture both directly and indirectly Direct finance is extended for agricultural operations for short and medium period. Indirect finance to farmers is made through providing advances for the distribution of fertilizers, other inputs, etc, and also through financing primary agricultural credit societies. Financing of investment in agriculture is a major aspect of the farm credit activities of banks Credit needs of service units providing services for warehousing, processing, marketing, transporting, and repairing of tractors etc.  Direct Finance by Commercial Banks:- At the time of bank nationalization, it was clearly conceded that the commercial banks did not have the necessary experience or the personnel to deal with the farmers directly. While the cooperative had been specializing in rural credit since the beginning of the century. Even then the nationalized banks were expected to go vigorously in the support of the farmers in general and the small cultivators in particular. In the initial stages, for obvious reasons the nationalized banks concentrated their attention on large cultivators and other special category farmers such as those engaged in raising high-yielding varieties of food-grains. At present short term crop loans

38

Rural Finance In Indian Economy

accounted for nearly 40 to 45% of the total loans disbursed by the commercial banks to the farmers. Term loans for varying periods for purchasing pump-sets, tractors and other agricultural machinery, for construction of wells and tube-wells, for the development of fruit and garden crops, or leveling and development of land, etc. are provided. These term loans accounted for about 35 to 37% of the total loans disbursed by commercial banks. Finally, commercial banks extend loans for such activities such as dairying, poultry farming, piggery, bee keeping, fisheries and others— these loansaccount for 15 to16%. Region wise, southern region accounts for the bulk of credit disbursed by commercial banks viz. 52% of the total credit extended.  Indirect Finance by Copmmercial Banks: Even though the scope for direct financing by commercial banks would be limited for some years to come, there is a considerable scope for indirect financing by commercial banks.

For

instance, commercial banks are financing co-operative societies to enable them to expand their production credit to the farmers.

More especially they

increasingly finance co-operatives engaged in marketing and processing of agricultural produce or in the activities ancillary to agriculture such as dairy farming, poultry farming, etc. In this connection, the Stated Bank of India and its subsidiaries are already playing an active role in financing co-operative marketing and processing. Commercial banks are providing indirect finance for the distribution of fertilizers and other inputs. Commercial banks extend credit to manufacturing or distribution firms and agencies and co-operatives engaged in the supply of pump-sets and other agricultural machinery on the hire-purchase basis. They finance the operations of the Food Corporation of India, the state governments and others in the procurement, storage and distribution of food grains. Finally, commercial banks increasingly subscribe to the debentures of the central land development banks and also extend advances to the latter. This enables land development banks to expand their medium and long-term advances to farmers for the purpose of land improvement and land development.

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Rural Finance In Indian Economy

 Commercial Banks & Small Farmers: It has been estimated that nearly 70 percent of farmers owning less than 2 hectares of land are not getting bank credit; only large landowners have been found creditworthy and suitable for banks advances. But such a situation cannot continue for long. Under the direction of the Planning Commission, Small farmers Development Agencies have been set up to identify small farmers and work out economically viable schemes of agricultural development. Commercial banks have to group them into various categories for credit support so as to enable them to become viable cultivators. For instance, in areas where the subsoil water table is high, the small cultivator has to be helped by banks to convert his dry holding into wet holding. With pump set loan, the cultivator can change the cropping pattern into double or even multiple cropping activity. As regards small cultivators near urban areas and with irrigation facilities, commercial banks can help them to go in for poultry farming and maintaining one or two vegetable cultivation or combine it with small milch cattle.  Problems of Commercial Banks in Agricultural Credit:- The credit needs of the agricultural sector in the next few years are estimated to rise to Rs.50,000 to Rs.60,000 crores. To meet the needs is an enormous task, and responsibility will have to be borne by co-operatives and commercial banks. As resources available to commercial banks in the agricultural sector will naturally be limited, it is important that every commercial bank attempts to make optimum use of its limited resources in this sector. In the field of financing of agriculture, the problem is not merely quantitative but also of coverage vis-à-vis the organization and the personnel available to the nationalized banks. The majority of the rural population consists of small farmers. Further, there are 5,50,000 villages spread throughout the country. To reach all of them with only about 47,000 banking offices is, no doubt, a stupendous task. Even with the completion of branch extension programmes of the commercial banks now in hand or those which may be undertaken during the next 5 to 10 years, commercial bank may not be in a position to cover many of the villages. Moreover in recent years, the rural branches of commercial banks in general and branches of RRB in particular, have been under severe financial strain on account of higher transaction cost involved in handling of large number of small size loan accounts and somewhat

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Rural Finance In Indian Economy

lower interest income as a result of concessional rate of interest on small size loans. The lower proportion of current deposits in total deposits of rural branches has also placed them at a disadvantage with regards to cost of resources.

Finally, the presence of overdues, particularly after the

implementation of Agricultural and Rural Credit Debt Relief Schemes, 1990 has further adversely affected the viability of rural branches of commercial banks. Under these conditions, if the development of agriculture is not to suffer for want of credit and if there has to be some improvement in the lot of innumerable small farmers, new dimensions will have to be given to schemes of financing agriculture. 4.

Regional Rural Banks [9.4]: These banks were first set up in 1975 specifically to give direct loans and advances to small and marginal farmers, agricultural labourers, rural artisans and other of small means. The loans are given for productive purposes. There were 196 RRBs which have been lending around Rs. 3600 crores annually by way of loans to rural people. Over 90 percent of the loans of RPBs are given to the weaker sections in rural areas. The regional banks, though basically scheduled commercial banks, differ from the latter in certain respects:  The area of regional rural banks is limited to a specified region comprising one or more districts of a State.  The regional rural banks grant direct loans and advances only to small and marginal farmers, rural artisans and agricultural labourers and other of small means for productive purposes.  The lending rates of the regional rural banks should not be higer than the prevailing lending rates of co-operatives societies in any particular State. The sponsoring banks and the Reserve Bank of India provide many subsidies and concessions to RRBs to enable the latter to function effectively

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 Concessions to RRBs: From the beginning, the sponsor banks have continued to provide managerial and financial assistance to RRBs and also other concessions such as lower rate of interest on the latter’s borrowing from sponsor banks. Further, the cost of staff deputed to RRBs and training expenses of RRB staff are borne by the sponsor banks. The Reserve Bank of India has been granting many concessions to RRBs.  Progress of RRBs: There are now 196 regional rural banks in 23 States with 14,500 branches. As at the end of September 1990 the regional rural banks had advanced Rs.3,560 crores by way of short-term crop loans, term loans for agricultural activities, for rural artisans, village and cottage industries, retail trade and self employed, consumption loans etc. Nearly 90 percent of the loans of RRBs, were provided to the weaker sections. State wise Uttar Pradesh found large number of offices.  Objectives of RRBs:  RRBs had followed instructions given by RBI and Government of India regarding loan policies, procedures, etc.  The basic aim of setting up RRBs viz, developing the rural economy by providing credit for the development of agriculture, trade, commerce industry and other productive activities in rural areas, was being fulfilled and  RRBs had successfully maintained their image as a small man’s bank by confining their credit facilities to the target groups viz, small marginal farmers, agricultural labourers, artisans and small enterprises for productive activities.  The recovery position on the whole was not satisfactory.

 Problems in functioning of RRBs:

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Rural Finance In Indian Economy

a. On account of the many restrictions place on the business they can undertake,

RRBs have lowearning capacity.

b. The wage and salary scales of RRBs have been rising and, in fact, with the recent award of a tribunal, their scales would approximate those of commercial banks; with the increase in salary scales, an important rationale for the setting up of RRBs has ceased to exist. c. The sponsoring banks are also running their own rural branches in the very area of operations of the RRBs; this has given rise to certain anamolies and to avoidable expenditure on controls and administration. 5.

Reserve Bank of India [9.5]: RBI had shown keen interest in agricultural credit and maintained a separate department for this purpose. RBI extended short-term seasonal credit as well as medium-term and long-term credit to agriculture through State level cooperative banks and land developments banks. RBI had also set up the Agricultural Refinance Development Corporation (ARDC) to provide refinance support to the banks to promote programmes of agricultural development, particularly those requiring term credit. With the widening of the role of bank credit from “agricultural development” to “rural development” the Government propo9sed to have a more broad-based organization at the apex level to extend support and give guidance to credit institutions in matter relating to the formulation and implementation of rural development programmes.

A National Bank for Agriculture and Rural Development

(NABARD) or National Bank was, therefore, set up to take over the agricultural credit functions of RBI on the on hand and the refinance functions of ARDC on the other.

9.5.a N A B A R D: an Overview-

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 NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas.  NABARD operates throughout the country through its Head Office at Mumbai, 25 Regional Offices and on Sub-Office, located in the capitals of all the states/union territories. It also has 4 training establishments.  It is an apex refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas.  It takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institution, training of personnel, etc.  It co-ordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India and other national level institutions concerned with policy formulation.  It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the base for annual credit plans of all rural financial institutions o It undertakes monitoring and evaluation of projects refinanced by it. o

It promotes research in the fields of rural banking, agriculture

and rural development.

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10.0 Schemes & Facilities from the various banks 10.1 NABARD:RURAL NON-FARM SECTOR FINANCE SCHEME Rural Non Farm Sector (RNFS) holds the key to faster economic development of the country. It has potential and promise for generating employment and increased income in the rural areas. Hence, NABARD has identified financing, development and promotion of RNFS as one of its thrust areas. Schemes from NABARD for non-farming sector:

1. COMPOSITE LOAN SCHEME (CLS) - under ARF Borrowers: Rural artisans, handicraftsmen, small entrepreneurs, groups of individuals, partnership firms, co-operative societies, NGOs, etc. Refinance ceiling -Maximum of Rs. 10 lakh per borrower. Repayment period -3 to 10 years with suitable need based moratorium not exceeding 18 months. Eligible activities -All manufacturing, processing, and approved service activities. 2. INTEGRATED LOAN SCHEME (ILS) - under ARF Borrowers: Individuals, artisans, groups of individuals, associations (formal and informal), proprietary/ partnership firms/ co-operative societies, registered institutions/ trusts, voluntary agencies, private and public limited companies, etc. Refinance Repayment period 3 to 10 years with suitable need based moratorium not exceeding 18 months.

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Rural Finance In Indian Economy

Eligible activities Manufacturing, processing and approved service activities in the cottage, village and tiny industry sector and modernization/ renovation/ expansion/ diversification of existing units. 3. Small Road and water Transport Operators SCHEME (SRWTO) - Under ARF Borrowers Individuals, groups of individuals, including partnership/ proprietary firms and co-operative enterprises. The borrowers should be from the rural areas and should utilise the vehicle mainly for transportation of Rural Farm and Non-Farm Products and inputs and passengers to/ from marketing centres. The borrower or his employee should possess a valid driving licence and the vehicle should be duly registered with the Regional Transport Authority as public transport vehicle. Refinance ceiling Maximum of Rs.15 lakh per borrower Repayment period 5 years with moratorium of 6 months. Eligible vehicles Transport vehicles including Light Motor vehicles, Jeeps, Autorickshaws, Water transport units (boats, launches etc.) 4. Schemes under pre - sanction procedure (i) Term Loan to SSI units (through CBs & Scheduled PCBs) Borrowers : Individuals, Proprietary / Partnership concerns, Private/ Public Limited Companies, Promotional/ Developmental Organisations, State Level Federations/ Corporations, Joint Sector Undertakings. (ii) Term Loan to Industrial Co-operatives (through SCBs) Borrowers : Industrial Co-operative Societies identified as viable/ potentially viable by the State Government. iii) Project Finance for Agro-Industries (through CBs, Scheduled PCBs and SCBs) Borrowers 46

Rural Finance In Indian Economy

1. State level corporations such as agro-industries corporations, forest/ tribal development corporations, KVIC/ KVIB, state level cooperative societies/ federations, co-operative marketing/ processing and industrial societies, joint sector undertakings, registered societies in KVIC/ KVIB fold. 2. Public/ private limited companies, partnership firms and proprietary concerns. Repayment period: 3 to 10 years with moratorium of 12 months.

5. Soft Loan Assistance Scheme for Margin Money Beneficiaries and purpose: Entrepreneurs having necessary talent/ skills, but who lack monetary resources to meet the margin requirements stipulated under the relevant schemes covering both ARF and prior sanction. Purpose To set up new units as well as for modernisation/ renovation/ expansion/ diversification of existing units even if the units were not initially refinanced by the Bank. Eligibility criteria Refinance will be available on the banks' satisfying the eligibility criteria based on recovery performance/the position of NPAs, as prescribed by NABARD from time to time. FARM SECTOR FINANCE SCHEME: A) Refinance Assistance for financing farm mechanization i) Tractors: (a) The quantum of refinance in respect of financing for acquisition of second tractor has been enhanced from existing level of 40% to 90% ( 95% in case of SCARDBs) of the loan amount as in the case of first tractor. (b) Though the minimum land holding required for financing tractors is 8 acre perennially irrigated land, necessary discretion has been given to banks to evolve their own area specific norms, if need be, and report such norms evolved by them to the concerned RO of NABARD.

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Rural Finance In Indian Economy

(c) Refinance facility for financing purchase of second hand tractors has been extended to Gujarat in addition to Punjab, Haryana and Rajasthan. ii) Power Tillers: (a) Though the minimum land holding required for financing power tillers is 6 acres of perennially irrigated land, necessary discretion has been given to banks to evolve their own area specific norms, if need be, and report such norms evolved by them to the concerned RO of NABARD. (b) Banks have also been advised to give focused attention on financing power tillers by preparing a three year banking plan for a compact area for the benefit of the small farmers. C) Swarnajayanti Gram Swarozgar Yojana (SGSY) SGSY, formed by restructuring ongoing self employment programmes, viz. IRDP, TRYSEM, DWCRA, etc., is under implementation from 01 April 1999. The programme envisages formation of SGSY Groups and their linkage with the banks. Individuals as also SGSY group members, below poverty line are assisted under the programme D) Scheme for setting up of Agriclinic and Agribusiness centers In pursuance of the announcement made by the Union Finance Minister in the budget speech for the year 2001-02, National Bank in consultation with the Ministry of Agriculture, GOI and select banks formulated a scheme for financing Agriculture Graduates for setting up Agriclinics and Agribusiness Centres The scheme aims at supplementing the existing Extension Network to accelerate the process of technology transfer to agriculture and supplement the efforts of State Agencies in providing inputs and other services to the farmers.

E) Scheme for financing farmers for purchase of land for Agricultural purposes

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Rural Finance In Indian Economy

In response to the Hon'ble Union Finance Minister's emphasis on the need to step up priority sector lending and to examine financing farmers for purchase of land for agricultural purposes, the Working Group constituted by Indian Banks Association formulated a above scheme in consultation with the Government of India, RBI and NABARD. The objective of the Scheme is to finance the farmers to purchase, develop and cultivate agricultural as well as fallow and waste lands as also consider financing purchase of land for establishing or diversifying into other allied activities. Eligibility (i) Small and marginal farmers i.e.. those who would own maximum of 5 acres of non- irrigated land or 2.5 acres of irrigated land including purchase of land under the scheme and (ii) Share croppers / Tenant farmers are eligible. F) Central Sector Capital Subsidy scheme for Investment Promotion (IPS) A Central Sector Capital Subsidy scheme (Investment Promotion Scheme) launched by the Government of India in collaboration with NABARD for development of privately owned non-forest wastelands in the country is under implementation since 1998. Of the 40 schemes covering about 1500 ha sanctioned till date, the coverage is mostly confined to the States of Tamil Nadu, Andhra Pradesh and Maharashtra, with Tamil Nadu accounting for more than 20 schemes. The scheme provides for subsidy upto 25% of bank loan with a ceiling of Rs. 25 lakh for taking up plantation and other on-farm developments in private wastelands. In view of the availability of substantial area under non-forest wasteland in all States and the need to develop them, a nationwide awareness and publicity campaign was launched by the Government of India in association with NABARD for popularizing the Investment Promotion Scheme (IPS). As a part of this effort, workshops are being organized by NABARD in different States/ regions. G) Refinance Scheme for financing Farmers Service Center (FSC) NABARD has decided to extend 100% refinance facility to banks for financing Farmers Service Centres (FSC) set up in collaboration with Mahindra Shubhlabh Services Ltd (MSSL) for providing various extension services to farmers including supply of agri-inputs. FSC is intended to benefit farmers by way of higher yields and 49

Rural Finance In Indian Economy

productivity through private sector participation in technology transfer and extension services.

Scheme for Rural Finance [10.2]: SBI Caters to the needs of agriculturists and landless agricultural labourers through a network of 6600 rural and semi-urban branches.There are 972 specialized branches which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment.These branches include 427 Agricultural Development Branches (ADBs) and 547 branches with Agricultural Banking Divisions (ADBs) and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hitech commercial agricultural projects. The Bank has achieved tremendous growth in agricultural credit.As on March 2001 ,it has covered 48 lakh farmers with loan outstanding of Rs. 14962 crores , accounting for 28% of total agricultural advances of Public Sector Banks (PSBs)

 Crop Loan SBI offers financial assistance to meet cultivation expenses for various crops as short Term Loan. With a repayment period not exceeding 18 months, the Crop Loan is extended in the form of direct finance to cultivators. Eligibility-Agriculturists, Tenant farmers and Share Croppers who actually cultivate the lands are eligible for these loans. All categories of farmers - Small/Marginal (SF/MF) and others are included.  Produce marketing loan scheme The Bank extends financial assistance to help farmers store produce on their own to avoid distress sale. The repayment period of the produce marketing loan (PML) does not exceed 6 months. Further, this facilitates immediate renewal of crop loans for next crop.

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Eligiblity-All categories of farmers - Small/Marginal (SF/MF) and others - are eligible. The Bank verifies the following aspects before granting the loan: 1) Service Area Approach. 2) Stocks at the borrowers' residence/godown. 3) Stock statement for valuation.

Loan Amount

Security to be furnished

Upto Rs.25,000

DPN, DPN take delivery letter Hypothecation of stocks.

Above Rs.25,000

Hypothecation of stocks.Mortgage of properties.

 Kisan credit card scheme The SBI offers the Kisan Credit Card for farmers under short-term credit introduced as per RBI/NABARD guidelines, providing a running account facility tofarmers to meet their production credit need and contingency needs. Eligibility-All agricultural clients having good track record for the last two years are eligible for the Kisan Credit Card. Minimum credit limit: Rs.3000/- New borrowers requiring crop loans can also avail this product. Credit limit is based on operational land holding, cropping pattern and scale of finance. Withdrawals can be made using easy and convenient withdrawal slips. The Kisan Credit Card is valid for 3 years, subject to annual review.  Agriculture term loans SBI gives agricultural term loans in the form of direct finance to cultivators to create assets facilitating crop production/income generation. Repayments span not less than 3 years and not exceeding 15 years. Activities broadly covered are land development, minor irrigation, farm mechanization, plantation and horticulture, dairying, poultry, sericulture, dry land, waste land development schemes, etc.

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Eligibility-All categories of farmers-small/medium-and agricultural labourers are eligible for agricultural term loans, provided they have necessary experience in the activity and the required land area.  Land Development Schemes The SBI gives credit solutions for land development programmes in the form of direct finance to cultivators aimed at better productivity. Loans under this head cover various activities like land clearance (removal bushes, trees, etc.), land leveling and shaping, contour/graded bunding, bench terracing for hilly areas, contour stone walls, staggered contour trenches, disposal drains, reclamation of saline/alkaline soils and fencing. Eligibility:Loans cover various activities like digging of new wells (open/bore wells), deepening of existing wells (traditional/inwell bore), energisation of wells (oil engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation system and lift irrigation system.  Minor Irrigation Schemes SBI provides credit for creating new source of irrigation by exploiting underground water, energisation of wells, conveyance of water, judicious use of available water, etc. Loans cover various activities like digging of new wells (open/bore wells), deepening of existing wells (traditional/inwell bore), energisation of wells (oil engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation system and lift irrigation system.

 Farm Mechanisation Schemes

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SBI provides credit for purchase of farm equipment and machinery for agricultural operations. This mode of finance covers activities ranging from: Purchase of tractors, trailers, cultivators, cage wheels, power tillers, combine harvesters, power sprayers, dusters, etc. Eligibility- is ascertained on the basis of minimum area requirements: Tractors - 8 acres of irrigated area Power tiller - 5 -6 acres Combine harvester - 20 acres  Financing of Combine Harvesters: o A farmer should own minimum 8 acres of irrigated land. o Non-farmer entrepreneurs capable of utilizing combine harvester for custom hiring work are also eligible. o Combine harvester should be utilised for a minimum of 1000 hours of productive work in a year. o Unit cost will include cost of combine harvester and accessories, if any.

 Kisan Gold Card Scheme: Eligibility-Farmers with excellent repayment record for at least past 5 years. New farmers are not eligible for the product. Purpose-Investment credit for which term loans are ordinarily sanctioned. The scheme also includes major family expenditures like marriages and education of children.  Land Purchase Scheme: Eligibility-Small/marginal farmers, tenants, share-croppers owning less than 5 acres of unirrigated / 2.5 acres irrigated land in their own name and landless agricultural labourers are eligible to avail loan under the scheme, provided they are our existing borrowers with record of prompt repayment of loans. Own land before and after purchase should not exceed 5 acres irrigated / 2.5 acres irrigated.

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Security-Land to be purchased with Bank finance will be mortgaged as security. No other security will be insisted upon. Repayment-Entire loan will be repayable in 10 years in half-yearly instalments. Adequate gestation period will be allowed for development of land for cultivation. Self Help Groups (SHGs) SHGs are self managed homogeneous groups of economically backward people that promote savings among themselves and pool the savings. These pooled resources are supplemented by external resources i.e. bank credit when these groups gain experience. The Self Help Groups Linkage Programme of SBI is under implementation since 1992. At the end of March 2001, the Bank has financed 25,000 self-help groups with aggregate credit limit of Rs 46 crore.

10.3 Various Finance Scheme Offered From Government: Maharashtra Rural Credit Project (MRCP) - India - Out line of the project features and Impact General: Access to credit has long been considered a major poverty alleviation strategy in India. A variety of credit-linked programmes supplemented by subsidies have been implemented. The Integrated Rural Development Programme (IRDP) operating since 1978-79 has been a major national rural poverty alleviation programme with a large credit component. Under this programme, nearly 53 million families below poverty line were assisted with bank credit of Rs.31 billion and subsidy of Rs. 10.5 billion upto 31st March 1998, but its impact had not matched the resources spent. This was due to reasons like provision of supply rather than demand-led credit, loans not tailored to meet needs of individual enterprises, lack of aftercare support, weak linkages lack of supervision over loan utilisation etc. Further, there was no effective involvement of the people at any stage of implementation of the programme. As a result, the incidence of high overdues and high transaction cost for the banks in financing the rural poor became a matter of concern for the policy-makers. 54

Rural Finance In Indian Economy

Maharashtra Rural Credit Project (MRCP) Against this backdrop the MRCP supported by IFAD was evolved as an innovative approach to poverty reduction with people’s participation. The strategy for implementation of this project has been devised in such a manner that the rural poor assume centre-stage and their participation ensured at all stages of the project viz. planning, implementation and monitoring. The experience gained shows that once the people’s participation is invoked at the planning stage itself a strong sense of ownership of the project develops among the people which stimulates them to actively involve in the subsequent phases of the project. The MRCP being implemented with an outlay of US$ 48.35 million is financed by an IFAD loan of US$ 29.2 million supplemented by a contribution of US$ 14.97 million from Government of India/Government of Maharashtra and US$ 1.65 million from participating banks. The Project which is implemented by a number of banking institutions, Government agencies and Non Governmental Organisation (NGOs) since 1994-95 was designed with the principal goal .

Credit-Cum-Subsidy Scheme for Rural Housing. Introduction:- The Credit-Cum-Subsidy Scheme for Rural Housing has been conceived for rural households having annual income upto Rs.32,000/-. Objective- To enable/facilitate construction of houses for all rural households who have some repayment capacity. Target Group- The target group under the scheme will be the rural households having an annual income of Rs. 32000/- only. However preference will be given to rural households who are below poverty line. Salient Features:•

Subsidy upto Rs.10,000/- per eligible household in plain areas and Rs.11,000/in hilly/difficult areas.

•

Loan upto Rs."2"0,000/- per household. 55

Rural Finance In Indian Economy

•

Sanitary latrine and smokeless chulha are integral part of the house.

Achievement The scheme has been launched with effect from 1 April, 1999 and is in the process of implementation. Funding Pattern Funds are shared by the Centre and State in the ratio of 75:25. Implementing Agency The Implementing Agency for the Credit Cum Subsidy Scheme for Rural Housing may be the State Housing Board,State Housing Corporation, specified Scheduled Commercial Bank, Housing Finance Institution or the DRDA/ZP.

Council for Advancement of People’s Action & Rural Technology (CAPART) Recognising the need for an organisation that would coordinate and catalyse the development work of voluntary agencies in the country, particularly to ensure smooth flow of benefits to the underprivileged and socio-economically weaker sections of society, Government of India, in September, 1986 set up the Council for Advancement of People’s Action and Rural Technology (CAPART), a registered society under the aegis of the Department of Rural Development, by merging two autonomous bodies, namely, People’s Action for Development of India (PADI) and Council for Advancement of Rural Technology (CAPART). The main objectives of the CAPART are :•

To encourage, promote and assist voluntary action for the implementation of projects intending enhancement of rural prosperity.

•

To Strengthen and promote voluntary efforts in rural development with focus on injecting new technological inputs;

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Rural Finance In Indian Economy

•

To act as a catalyst for the development of technology appropriate for rural areas.

•

To promote, plan, undertake, develop, maintain and support projects/schemes aimed at all-round development, creation of employment opportunities, promotion of self-reliance, generation of awareness, organisation and improvement in the quality of life of the people in rural areas through voluntary action.

Agriculture and its associated activities are found constituting the economic base and the main source of livelihood and employment for the people in the state. However, unprecedented growth of population on one hand and decreasing rate of

57

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available agriculture land along with degradation of supporting natural resources as required for sustaining crop productivity on the other have been seriously forcing the problems of sustaining livelihood for farming communities. It is becoming difficult to do the farming activity without external or internal sources.

In this context the

significance of extending non-farm sector becomes only alternative but it also required finance assistance for its development. Means a lot of hard work & government awareness is required to flow the finance assistance in Rural Economy. But various scheme which are provided by the various banks & government should be specific in its eligibility criteria to stop the misuse of these funds by large farmers and to ensure that the credit reaches the farmers who is in need of finance.

As per the above evaluation of the major problems and issues relating to the rural financial system I can submit the following observations & recommendations:  Interest rates: Interest rates must be different for different categories. First it should be concessional rate exclusively for small and marginal farmers at 1.5%

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to 11.5% & Secondly, there should be a higher rate of interest applicable to the rest of the agricultural borrowers upper limit for it is15.5%  Infrastructure Development: tempo of agricultural lending has been low in the eastern regional states like Bihar, Orissa and West Bengal & in the North Eastern States. So Agricultural and Rural Infrastructure Development Corporation should be setup in these area which will concentrate on building up necessary backward and forward linkages and supporting services as well as formulate location specific schemes for accelerating the transformation of agriculture and to arrange for funding of the schemes.  Insurance scheme: Crop insurance scheme which was introduced in India from Kharif 1985 covering major cereal crops, oilseeds and pulses.

The sum

insured was limited to Rs.10,000 per farmer irrespective of quantum of crop loan and the total sum insured would be limited to 100 percent of the crop loan disbursed. Proper research should be done by statutory crop insurance corporation.  Recovery of dues: Recovery is important for survival of the banks, it is important that a common legal framework covering cooperatives and commercial banks for recovery of dues for the country as a whole should be formulated. & The government should setup State level tribunals for adjudication.  Rationalisation: In present scenario each village is allotted to a commercial bank branch under the Service Area approach. As per the analysis each block should be allotted to a bank which has the largest presence in the block through its branches. Which will reduce the cost of supervision, improve quality of monitoring and be beneficial to the customers.

Bibliography Sr.No. 1.

Name

Author

Indian Economy

Ruddar Datt. K.P.M. Sundharam.

2. 3.

State Bank of India journals Agricultural Financing In S.N.Ghosal

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4.

India Economic Survey, 1998-99.

Monthly

Review

of

the

Indian

Economy, CMIE, March-April 1999 5.

Romeo S. Mascarenhas

Rural Marketing

Webliography www.nabard.org www.rbi.gov www.sbi.co.in

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