Agriculture Credit Derivative System

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AGRICULTURAL CREDIT DELIVERY MECHANISM

Project Report

On

Agricultural Credit Delivery System

Submitted To:

PROF. S. MITRA

Submitted By:Batch Spring-Summer

Year 2009-11/PGP

KIRAN JENA

KALIPRASAD MISHRA

PARTHA PATTANAIK

SAMBIT NANDA

SUBHRAMANYU JENA


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CONTENT

Page

1. Introduction. 1

2. Structure of rural credit/multi agency approach.. 3

y Co-operative societies 4

y Regional rural banks 6

y Commercial bank 7

3. Assessment of process in agricultural credit 10

4. Problems of the multi agency Approach. 11

5. Reform process. 14

6. Role of NABARD 15

7. Credit Disbursement. 17

y Irrigation 17

yCropping pattern 18

y Crop production 19

y Allied agricultural activity 19

y National agricultural insurance scheme 20

y Financial inclusion 21

y Micro finance 24

8. Agriculture, as an investment friendly destination.. 24

9. Efficient rural credit delivery system. 26

10.Conclusion .. 27


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OBJECTIVE

The keen objective of this project is

To assess the efficiency of credit flow in Agricultural and its allied sector.

Find out the scope of credit delivery mechanism.

To evaluate the effect of credit flow in terms of crop productivity

To measure the sector as an Investment friendly zone


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ACKNOWLEDGEMENT

Time and money well spent earns you degree, well, quality time spent with superlative

environs enhances the essence of degree EARNED.

Preparing this thematic report, we would like to take up this auspicious opportunity to

express our heartfelt gratitude to the whole atmosphere whose aura and charisma we soaked in to

create the final draft.

Words would surely belie the fact of acknowledging the constant and unparalleled

support, yet sometimes simple words helps you express the eminence, so ,

Thank You Prof. S. Mitra.


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ABSTRACT

The agricultural sector has always been an important contributor to the Indian GDP. This

is due to the fact that the country is mainly based on the agriculture sector and now employs

around 60% of the total workforce in India. The agricultural sector and its allied sector now

contribute around 15.7% to India GDP in 2008-09; down from 60% in 1960s.

Agriculture Growth Rate in India GDP in spite of its decline in the share of the country's GDP

plays a very important role in the all round economic growth and social development of the

country.

Currently the biggest challenge for the entire credit delivery system mechanism of India is the

financial non-inclusion of small and marginal farmers. There are some fundamental problems forthis and the root of these fundament problems are the land holding pattern of the Indian farmers.

Majority of farmers are marginal farmers and they cultivate the land on share basis. So basically

they dont have the land on their name. So they dont go for borrowing from the institutional

lenders rather preferring non-institutional money lenders.

An efficient Agricultural Credit Policy essentially focuses on strengthening the credit flow at the

ground level through credit planning, adoption of region specific strategies, rationalization of

lending policies and procedures, and bringing down the cost of borrowing.


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I. INTRODUCTION

The agricultural sector has always been an important contributor to the India GDP. This

is due to the fact that the country is mainly based on the agriculture sector and employs around

60% of the total workforce in India. The agricultural sector and its allied sector contributed

around 15.7% to India GDP in 2008-09.

Agriculture Growth Rate in India GDP in spite of its decline in the share of the country's GDP

plays a very important role in the all round economic and social development of the country. The

Growth Rate of the Agriculture Sector in India GDP grew after independence for the government

of India placed special emphasis on the sector in its five-year plans.

Since independence Indian agricultural sector has come through many ups and downs, it has seen

the terrible face of droughts and floods The agricultural sector has had low production due to a

number of factors such as illiteracy, insufficient finance, and inadequate marketing of

agricultural products.

Agriculture Growth Rate in India GDP has also decreased due to the fact that the sector has

insufficient irrigation facilities. As a result of this the farmers are dependent on rainfall, which is

however very unpredictable.

Finance in agriculture is as important as development of technologies. Technical inputs can be

purchased and used by farmer only if he has money (funds). But his own money is always

inadequate and he needs outside finance or credit.

Currently the biggest challenge for the entire credit delivery system mechanism of India is the

financial non-inclusion of small and marginal farmers. There are some fundamental problems for

this and the root of these fundament problems are the land holding pattern of the Indian farmers.

Majority of farmers are marginal farmers and they cultivate in the land on share basis. Sobasically they dont have the land on their name. Due to this fact they hesitate to approach the co

operative societies or banks. They prefer to take loan from the local money lenders. They use to

charge unduly high rates of interest and follow serious practices while giving loans and

recovering them. As a result, farmers were heavily burdened with debts and many of them

perpetuated debts.


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With the passing of Reserve Bank of India Act 1934, District Central Co-op. Banks Act and

Land Development Banks Act, agricultural credit received impetus and there were improvements

in agricultural credit.

Till 14 major commercial banks were nationalized in 1969, co-operative banks were the

main institutional agencies providing finance to agriculture. After nationalization, it was made

mandatory for these banks to provide finance to agriculture as a priority sector. These banks

undertook special programs of branch expansion and created a network of banking services

throughout the country and started financing agriculture on large scale. Thus agriculture credit

acquired multi-agency dimension. Development and adoption of new technologies and

availability of finance go hand in hand. In bringing "Green Revolution", "White Revolution" and

now "Yellow Revolution" finance has played a crucial role.

So finally we can say the fact is that now it has achieved the development in terms of increase in

crop production and productivity, technological developments, and crop diversification. The

reason behind this developments are the improved irrigation system, accurate weather

forecasting techniques with the help of sophisticated technology, effective government policy on

agriculture, dedicated universities and institutions for agricultural research and last but not the

least the ever improving agricultural credit delivery system which comprise of extensive networkof Co-operative societies, Regional Rural Banks (RRBs), Commercial banks, NGOs. etc.


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II.STRUCTURE OF RURAL CREDIT/MULTI AGENCY APPROACHThe credit facilities are available to rural agriculturists through financial and non financial

institutions which are:

Non Institutional

- Professional money lenders

- Agricultural money lenders

- Relatives and friends

- Traders and commission agents

- Land lords and

- Others

Institutional

- Government- Cooperative Banks and

- Commercial banks

The non institutional credit sources are considered as exploitative and high cost system.

However, they are very much accessible and easily negotiable with the lenders. It is observed

that non institutional source of credit is continued to be an important source in rural areas.

Institutional lending or credit or loans refers to loans provided by financial institutions.

Agricultural Credit Policy essentially focuses on strengthening the credit flow at the

ground level through credit planning, adoption of region specific strategies, rationalization of

lending policies and procedures, and bringing down the cost of borrowing. Bank credit is

available to the farmers in short term basis for financing the crop production process and in

medium/long term basis for various purposes like purchase of land, irrigation, farm

mechanization, plantation, poultry, etc.

Agricultural credit is disbursed through a multi agency network consisting of Commercial Banks

(CBs), Regional Rural Banks (RRBs) and Cooperatives. There are approximately 100,000

village-level Primary Agricultural Credit Societies (PACS), 368 District Central Cooperative

Banks (DCCBs) with 12,858 branches and 30 State Cooperative Banks (SCBs) with 953


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branches providing primarily short- and medium-term agricultural credit in India. The long-term

cooperative structure consists of 19 State Cooperative Agricultural and Rural Development

Banks (SCARDBs), with 2609 operational units as on 31 March 2005 comprising 788 branches

and 772 Primary Agricultural and Rural Development Banks (PA&RDBs) with 1049 branches.

II.1. Co-Operative Societies

Remarkable progress is made as far as Indian cooperatives are concerned after 1950s in various

sectors like credit, banking, production, processing, distribution/marketing, housing,

warehousing, irrigation, transport, textiles and even industries. In fact, dairy and sugar

cooperatives have made India a major nation in the world with regard to milk and sugar

production. Today, India can claim to have the largest network of cooperatives in the world

numbering more than half a million, with a membership of more than 200 million. The following

are the unique features of Indian cooperative movement:

Agricultural Cooperatives are given priorities by the government and the policy makers

hence are more developed than others. They have tasted success in some areas like diary,

urban banking, etc up to certain extent but larger areas have remained untouched.

Government has a say in the Indian cooperative movement. Its contribution is 7.5 percentof the total share capital of the primary agricultural cooperatives.

ORGANIZATIONAL STRUCTURE OF COOPERATIVE CREDIT SOCIETIES:

The rural credit cooperatives have two parts and it is a three-tier structure \,one is short-term

credit cooperatives and another is long-term credit cooperatives. For the short-term credit

cooperatives around 92,000 Primary Agricultural Credit Societies (PACS) directly dealing with

the individual borrower at the bottom level. At the district level, District Central CooperativeBanks (DCCB) acts as a link between primary societies and State Cooperative Apex Banks

(SCB). The federal cooperatives like DCCB and SCB, whose objective is to serve the member

cooperatives. The long-term cooperative credit structure has two tiers structure i.e. Primary

Cooperative Agriculture and Rural Development Banks (PCARDB) at the primary level and

State Cooperative Agriculture and Rural Development Bank at the state level.


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CO-OPERATIVE SOCIETIES

Primary Agricultural

Credit Societies(92,000)

Primary operative

Agriculture and RuralDevelopment Banks

District Central Co-

Operative Banks

(367)

State Co-operative

Agriculture and RuralDevelopment Banks

State Co-operative

Banks (29)

Long-term

StructureShort-term

Structure


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II.2. Regional Rural Bank

On 26th September 1975, Regional Rural Banks have been opened by Government of India

which was later replaced by the Regional Rural Bank Act 1976. 183 Regional Rural Banks with

a network of 10,245 branches have been opened in India up to June 1985. The total number of

Regional Rural banks functioning in the country as at the end of June 1999 was 196 covering

451 districts spread over 23 states with the network of 14,467 branches.

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

Banks (27 scheduled commercial banks and one State Cooperative Bank); the issued capital of a

RRB is shared by the owners in the proportion of 50%, 15% and 35% respectively.

Regional Rural Banks were established with the following objectives in mind:

i.) Reaching the banking service at every corner of the state, district and village i.e. to

unbanked areas

ii.) Credit availabity to every weaker section of the society who has not been access to

loan or depending on the private money lenders.

iii.) Mobilizes rural savings and channelize them for supporting productive activities in

rural areas.

iv.) To create a supplementary channel for the flow the money to the rural areas through

refinance

v.) Generating employment opportunities in rural areas and providing credit with very

cheaper rate of interest.

II.2.1 District Coverage

RRBs covered 525 out of 605 districts as on 31 March 2006. After amalgamation, RRBs have become quite large covering most parts of the State like, Assam Gramin Vikas Bank, an

amalgamated RRB, covers 25 districts, the highest in the country, while five other amalgamated

RRBs cover 10 or more districts each. However, 40 RRBs covered two districts and 16 RRBs

covered a single district each in 2005-06. Increased coverage of districts by RRBs makes them

an important segment of the Rural Financial Institutions (RFI) for financial inclusion.


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II.2.2. Branch Network

The number of branches of RRBs increased to 14,494 as on 31 March 2006 from 13,920

branches as on 31 March 1989. The network of the 45 amalgamated RRBs (as on April 2007)

was quite large and diverse varying from 85 to 680 branches. The Uttar Bihar KGB, an

amalgamated RRB, has 680 branches, followed by Baroda Eastern UPGB with 539 branches.

The branch network of stand-alone RRBs varied between 8 and 242 as on 31 March 2006.

II.3.Commercial Bank

In 1954 All-India Rural Credit Survey (AIRCS) had given an impetus to build up an effective

credit in agriculture. It was found that the credit given by commercial banks was less than 1% in

1951-52.For which agricultural credit fell short of the right quantity, was not of the right type,

and did not fit the right purpose and often failed to go to the right people. So to overcome those

loopholes, Imperial Bank of India had been nationalized and named as State Bank of India (SBI).

The agricultural advances of the commercial banking system aggregated Rs. 16,687 crore

and constituted 14% of total advances in March 1991. The rural and semi-urban branches of

commercial banks covered 17.6 crore deposit accounts while the number of loan accounts

serviced aggregated 3.7 crore.

Since 1991-92, it has been seen a vigorous growth in agricultural credit. The statistics said that in

2003-04, the total flow of credit both by commercial banks and RRBs increased to Rs. 60,022

crore, i.e a compound annual growth rate of 22.2%.At this time credit flow from cooperative

sector was much slower in this period. The compounded annual growth rate of credit for

agriculture from cooperative institutions was only 13.7%.


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Bank credit disbursed during 1970-71 as a percentage to the Agriculture GDP was

0.57,the same increased to 12.13 during 2000-01 and to an all-time high of 49.5% points during

2005-06.However 2.04 times increment in the credit disbursement in Indian Agriculture could

lead to an increase in 1.11 times of the Agri-GDP during 1970-71 and 1975-76,the growth in

credit disbursement and Agri-GDP between the years 2000-01 and 2005-06 shows that same

were 4.73 times and only 1.16 times respectively.

Special Agricultural Credit Plan (SACP) was introduced by RBI for Public Sector

Commercial Banks in 1994-95. Credit growth for agriculture and allied sectors under this caption

reflected a CAGR of 36.45% during 2001-02 to 2005-06.SACP has since been extended to

Private Sector Commercial Banks from 2005-06.

An enormous increased in the flow of agricultural credit through commercial bank, from

Rs. 52,441 crore in 2003-04 to Rs. 1,16,447 crore in 2005-06, reaching an annual growth of 43%

each year.Doubling of credit, a strategy followed by Government Of India where 95 lakh new

farmers have been brought under the institutional fold and 1,383 agri-clinics opened.

Commercial banks have also played a major role in the promotion of the SHG bank linkage

movement with more than 11.88 lakh groups being linked to banks for provision of credit. Many

reforms has also been taken place like elimination of Service Area Approach, reducing margins,

redefining overdue to coincide with crop cycles, new debt restructuring policies, one time

settlement and relief measures for farmers indebted to non-institutional sources

0

10

20

30

40

50

60

Credit Disbursed as a % ofAgri-GDP

Credit Disbursed as a % of

Agri-GDP


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AGRICULTURAL CREDIT

Year Agricultural

credit

Disbursed(in

Cr)

Agri-GDF(

in Cr)

Credit

Disbursed

as a % of

Agri-GDP

Total GDP

(in Cr)

Agri-

Credit as a

% of Total

GDP

Total Bank

Credit

Disbursed

By CBs (in

Cr)

Agri-

Credit as a

% of Total

CBs Credit

1970-71 818 142581 0.57 296278 0.28 4684 17.5

1975-76 1675 159337 1.05 343924 0.49 10877 15.4

1980-81 3436 167770 2.05 401128 0.86 25371 13.5

1985-86 7159 198353 3.61 513990 1.39 56067 12.8

1990-91 10188 2422012 4.21 692871 1.47 116301 8.8

1995-96 23692 275153 8.61 899563 2.63 254015 9.3

2000-01 38127 314252 12.13 1203079 3.17 511434 7.5

2005-06 180486 364576 49.51 1680343 10.74 1507077 12.0

Source: Handbook of statistics on the Indian Economy (RBI), 2005-06, Economic Survey (GoI), 2006-07

Currently, there are 33,478 commercial bank branches in rural and semi-urban centres in

the country. Out of these, there are about 12,340 branches in the rural and semi urban areas of

the Central, Eastern and North-Eastern Regions, where the majority of the financially excluded

population live. It is understood that each branch of Grameen Bank in Bangladesh services at

least 4,000-5,000 borrowers, with 6-7 field officers per branch. Given the existing staff strength,

it should be possible for commercial banks (including RRBs) to provide access to credit to at

least 250 hitherto excluded households per annum at each of their existing rural and semi-urban

branches. For this, banks will have to strengthen their staff and use a variety of delivery

mechanisms.


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III.ASSESSMENT OF PROGRESS IN AGRICULTURAL CREDIT

The existing agricultural credit system is geared to the needs of foodgrains production:

with the share of food grains production falling as a proportion of total agricultural production, it

is all the more creditable that agriculture credit has not fallen as a proportion of agricultural

GDP. With the share of agriculture in GDP falling continuously, from 36 per cent in 1981 to 29

percent in 1991 and 22 per cent in 2001, it is to be expected that the share of agricultural credit

would also fall as a proportion of total credit, unless this trend is corrected by increasing

commercialisation of agriculture.

The age old problem of rural credit has been the excessive reliance of borrowers on

money lenders and other informal sources that have entailed usurious interest rates and

exploitation. It is quite remarkable how long it has taken to really substitute institutional credit

for informal money lending channels and how tortuous the process of change has been: change

of any significance took over 50 years from the beginning of serious attention in the 1930s to the

1980s.

(Relative Share ofBorrowing of Cultivator Households from Different Sources)

Sources of Credit 1951 1961 1971 1981 1991

Non Institutional

of which

Money Lenders

Institutionalof which

Cooperative Societies /Banks

Commercial Banks

Unspecified

Total

92. 3

69.7

7.3

3.3

0.9

-

100.0

81.3

49.2

18.7

2.6

0.6

-

100.0

68.3

36.1

31.7

22.0

2.4

-

100.0

36.8

16.1

63.2

29.8

28.8

-

100.0

30.6

17.5

66.3

35.2

35.2

3.1

100.0

Source: All India Debt and Investment Survey and RBI Bulletin, February 2000.It was the nationalisation of banks in 1969 and subsequent spread of rural bank branches

that has really made a difference in reducing, finally the share of money lenders in agricultural

credit.


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The remarkable feature of agricultural credit extension in India is the widespread network

of Rural Financial Institutions (RFIs). Following the first phase of nationalization of commercial

banks in 1969, large scale branch expansion was undertaken with a view to creating a strong

institutional base in rural areas. At the time of nationalization in June 1969, the total number

of rural offices of scheduled commercial banks (SCBs) were 1,833, which then increased

significantly to 32,406 by March 2003. The number of co-operative institutions catering to

agriculture went up from 95,871 in end-June 1980 to over 1, 10,000 by 2004. The share of

the rural branches of scheduled commercial banks (including RRBs) in total increased sharply

from 22 per cent in June 1969 to 47 per cent by March 2003.The main story in the expansion of

rural credit in the 1980s and 1990s has been the ascendancy of commercial banks, along with

RRBs, with a corresponding fall in the share of cooperatives.

(Average Share of Institutions in Direct Agricultural Credit (Disbursements))(Per cent)

Co-operatives RRBs CommercialBanks

1970s

1980s

1990s

2001-02

79.5

55.9

51.5

44.0

2.3

5.3

6.2

11.0

21.0

38.9

42.3

45.0

Source: Handbook of Statistics on Indian Economy: 2002-03.This is reflected in the increasing concern in recent years over the effectiveness,

governance and financial health of rural cooperative banks. Just under half of rural credit

continues to be extended by them and hence it is essential that they be revitalized and put on a

sound business footing.

IV.PROBLEMS OF THEMULTI AGENCY APPROACH

Theadaptation of multi agency approach in Agri financing has created many problems in

efficient credit disbursal. In order to examine the problems RBI constituted a working group in

August 1976, under the chairmanship of C.E Kamath.

The following problems were


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1) Due to the uncoordinated manner of credit disbursal and the existence of number of

agencies retailing credit in a common area resulted in over financing, under financing,

multiple financing, financial indiscipline.

2) The inability of credit agencies to formulate and develop meaningful agricultural credit

programmes on an area approach basis. It has created a competition among the

commercial banks themselves and among the commercial banks and cooperatives which

result in a waste of expenditure.

3) When more than one credit agency making claim on the same income at the time of

recovery of loan becomes difficult because in a situation like this the borrower will try

to play one agency against other.

4) Besides the problems associated with the multi agency approach, the successive reviews

of the working of institutional credit system have revealed lacunae in the procedure and

organization of the system in the country. Over the large parts of the country, small

farmers have been handicapped for want of access to cooperative credit. An important

feature of cooperative credit has been its tendency to flow mainly to large cultivators

because

i. Land ownership was a dominant criterion for admission of new members

and extending credit

ii. Cooperative leadership and management were mainly in hands of bigger

farmers

iii. Lack of technical expertise and operational efficiency inhibited the

application of the principle of lending related to possible increase in

income to a large coverage of small farmers.

Also the measure factors which inhibits the public sector banks effort to cover small and

marginal farmers extensively were

a) Weakness in their organizational structure and

b) The conventional land based norm of security

Today also some loopholes present in the banking system due to which the credit disbursal rate is

not in a remarkable growth. The measure problems are


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a. Sometimes the credit availability by the bank processes at very slow rate. So, at the time

of money required if it is not available then borrower will approach to local

moneylenders.

b. In that case even if money lenders take high rate of interest but to process the work at the

right time rural people heavily depend on them.

c. Repayment period of loans fixed by banks are shorter than required for the type of

activity financed.

d. At time of fixing the due dates gestation period is not considered.

e. According to income generation due dates of repayment of loan installments were not

fixed

f. Also banks generally do not give loans for consumption. In cases where day-to-day living

itself is at question, banks, their strict conditions on the use of money borrowed and the

numerous delays are avoided.

Typically for RRBs some factors which inhibits advances are

y Availability of staff, access roads to villages, police protection, infrastructure

facilities, like pucca houses to locate branches these are the major hurdles in front of

RRB to make progress.

y Natural calamities in successive years are another major hurdle.

y Frequent fluctuations of Price for farm inputs.

y Very less support from the Government to take care. As 50% of share in RRB, 3

Directors has to nominate on the Board. So how quickly they will work on the

problem and what steps they will be taking to resolve those issues is the main point of

discussion.


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V.REFORM PROCESS

The significant increase in the credit flow from institutional sources brought forth a

strong sense of expectation from the public sector banks. However, this expectation could not be

sustained as the emphasis throughout was on achieving certain quantitative targets. As a

consequence, inadequate attention was paid to the qualitative aspects of lending resulting in loan

defaults and erosion of repayment ethics, to a greater or lesser extent, by all categories of

borrowers. The end result was a disturbing growth in overdue, which not only hampered the

recycling of scarce resources of banks, but also affected profitability and viability of financial

institutions. Ultimately, financial deepening occurred but the development impact of rural

finance was blunted. In 1991, which is on the eve of reforms, the rural credit delivery system was

in poor shape.

The basic aim of the financial sector reforms was to improve the soundness, efficiency

and productivity of all credit institutions, including rural credit institutions whose financial

health was far from satisfactory. The reforms sought to enhance the areas of commercial

freedom, increase their outreach to the poor and stimulate additional flows to the sector. The

reform programme also included far reaching changes in the incentive regime through

liberalizing interest rates for cooperatives and RRBs, relaxing controls on where, for what

purpose and whom rural financial institutions [RFIs] could lend, introducing prudential norms

and restructuring and recapitalizing of RRBs.

As a result of the reform process, the financial health of commercial banks has improved

in terms of parameters such as capital adequacy, Non Performing Loans and return on assets

consistent with international standards for classification of advances and prudential norms being

applied in almost all areas. However, commercial banks being more focused on profitability tend

to cherry pick and give comparatively less priority to marginal and sub-marginal farmers.


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VI.ROLE OF NABARD

A committee appointed by Government of India had reviewed the entire arrangement for

credit disbursal in agriculture and rural development and suggested there should be an

undivided attention authority for development of rural credit system. In 1982 based on

recommendations NABARD was set up by integrating the rural credit functions of other

agencies and Agricultural Credit Department of RBI to provide credit for the promotion of

agriculture, cottage and village industries, handicrafts, other rural crafts and other allied

economic activities in rural areas in order to secure integrated rural development. Since its

inception, NABARD is discharging its mandate through activities relating to credit planning,

financial assistance, institutional development and promotional efforts.

The equity of NABARD is equally held by RBI and Government of India.

NABARD raises its resources through

a. Re-deployment of surplus

b. Borrowing from bilateral and multilateral institutions

c. Borrowing from market

d. Institutional deposits

e. RBI borrowing

Its main role is to develop .implement, monitor and evaluate strategies for rural lending in

support of Government of India policies.

Its main function is to provide financial support to Rural Financing Institution (RFIs), strengthen

institutional capacity of RFIs, monitor and evaluate the programmes and institutions, advise

Government of India and RBI on rural credit, direct the function of RFIs.

Generally NABARD plays following activities:

Appraisal of projects / programme

Disbursal of finance / refinance

Monitoring lending / programs

Resources planning


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Credit planning

Innovation in credit

Integrating new paradigms in policies

Rebuilding

Restructuring

Training

Coordination and liaison

Inspection

Reviews

Operation

y NABARD is responsible for refinance disbursement to commercial banks, State

cooperative banks, State cooperatives, rural development banks, Regional Rural Banks

(RRBs) and other eligible financial institutions. It also sanctions money through its Rural

InfrastructureDevelopment Fund (RIDF) for projects covering irrigation, rural roads

and bridges, health and education, soil conservation and drinking water schemes.

NABARD also offers a Kisan Credit Card Scheme and crop loans under the Rashtriya

Krishi Bima Yojana.

y Also a plan has been developed by NABARD for agricultural and credit and other

financial process, it had to bring Non Government organization (NGOs) and Self Help

Group (SHGs) into the picture. For reducing the transaction cost, a linkage has also been

formed between RFIs and NGOs / SHGs through which NGOs / SHGs can access to

better technology and a large amount of funds. Vikas Volunteer Vahini programme has

also been proposed by NABARD with the help of RFIs to running the credit development

process.


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VII.CREDIT DISBURSEMENT

Banking system disbursed loans of Rs.7, 58,353 crore to agricultural sector as against

targets of Rs 6, 45,500 crore during 2004-05 to 2007-08 showing 117% achievements.

Commercial banks achievements were the highest at 128% [Rs.5, 28,296 crore] as against target

of Rs. 4, 13,200 crore.

Doubling of Agricultural Credit within Three Years

The 'Farm Credit Package' announced by the Government of India in June 2004 stipulated

doubling the flow of institutional credit for agriculture in ensuing three years. For the year 2007-

08, agricultural credit target was fixed for Rs. 2, 25,000 crore disbursement my banks, adding 5

million farmers to their portfolio. As against this all banks (including cooperative banks, RRBs)

disbursed Rs. 2, 54,657 crore forming 113% of the target. During 2007-08, 75.36 lakh new

farmers were financed by commercial banks and RRBs.As per the budget target of Rs.2,80,000

crore during the year 2008-09,the amount disbursed by all banks (including cooperative

banks,RRBs ) is placed at Rs.2,64,455 crore.

Crop loans disbursed increased progressively from Rs. 54.977 crore in 2003-04 to Rs. 1,

38,455 crore in 2006-07, recording a growth of 151%. Investment credit [irrigation, land

development, farm mechanization] rose from Rs.32, 004 crore to Rs.90, 945 crore, recording a

growth of 184%.

VII.1. Irrigation

Uncertainties of rainfall and relatively short duration of rain makes irrigation the most

important tool for agricultural development in India. About 32% of operational holding were

irrigated in 2000-01.Among different sources of irrigation, canals covered 28% of total area

irrigated, tube wells irrigated nearly 40% and wells irrigated another 18%.

Net irrigated area increased from 21 mn ha in 1950-51 to 60 mn ha in 200-01;as a % tonet shown area, the increase was from 18% in 1950-51 to 42% in 2000-01.

The Government of India has taken up irrigation potential creation through public

funding and is assisting farmers to create potential on their own farms.Substancial irrigation has


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been created through major and medium irrigation schemes. The total irrigation potential in the

country has increased from 81.1 mn ha in 1991-92 to 102.77 mn ha March 2007.

VII.2.cropping pattern

In India, a large variety of crops are grown. Over the years, some changes had taken place in the

crop pattern. Area under broad group of crops showed that food grains covered 63% of total

cropped area in 2005-06,coming down from 77% in 1950-51 and 69% in 1990-91.Area under

Fiber crops also declined. Share of all other crops like oil seeds, fruits, vegetables, condiments

and spices and sugarcane rose over the same periods, indicating diversification in crop pattern

over time.

Crop

groups

(crop-wise distribution of gross cropped area)

% share of area to gross cropped area

1950-51 1990-91 2005-06

Food grains 76.7 69 63.31

Oilseeds

8.3 13.5 16

Fruits 0.6 1.4 2.02

Vegetables 1.2 2.1 2.81

Condiments 0.9 1.3 1.46

Sugarcane

1.3 2.1 2.41

Fiber 5.1 4.6 4.97

Other crops 5.9 6 7.01


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VII.3.crop production

For the consecutive years (2005-06 to 2007-08), food grains production recorded an

average annual increase of over 10 millions tonnes.The total food grains production in 2008-09

was estimated at 233.88 million tonnes as against 230.78 million tonnes in 2007-08.However,

the production of major commercial crops (oilseeds, sugarcane, cotton, jute) declined in 2008-09

compared to 2007-08 levels which has shown in the below table.

(Million tonnes)

Crop 2007-08 2008-09

Target Achievement Target Achievement

Rice 93.00 96.69 97.00 99.18

Wheat 75.50 78.57 78.50 80.68

CoarseCereals 37.50 40.76 42.00 40.03

Pulses 15.50 14.76 15.50 14.57

Food grains 221.50 230.78 233.00 234.47

Oilseeds 30.00 29.76 31.75 27.72

Sugarcane 310.00 348.19 340.00 285.03

Cotton 22.00 25.88 26.00 22.28

Jute &Mesta 11.00 11.21 11.00 10.37

Source: Department of Agriculture & Cooperation

VII.4.Allied Agricultural ActivityBroadly agriculture sector includes allied activity like livestock, forestry and fishery. The

livestock sector contributed over 5.26% to the total GDP during 2006-07 and contributes about

31.7% GDP from total agriculture and allied activities. The 11th five year plan envisages an

overall growth of 6-7% per annum for the sector. In 2007-08, this sector contributed 104.8

million tonnes of milk, 53.5 billion eggs, 44 million kg wool and 2.6 million tonnes of meat.


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Dairy: India ranks first in the world in milk production, which increased from 17 million

tonnes (MT) in 1950-51 to about 104.84 MT by 2007-08.The per capita availability of milk has

also increased from 112 grams per day in 1968-69 to 252 grams during 2007-08,but it is still low

compared to the world average of 265 grams/day. About 80% of milk produced in the country is

handled by in the unorganized sector and remaining 20% is shared equally by cooperative and

private dairies. Over 1.28 lakh village-level dairy cooperative societies, spread over 346 districts

in the country, collect about 22.8 million litres of milk per day and market about 18.9 million

litres. The efforts of the Government in the dairy sector are concentrated on promotion of dairy

activities in non-operation flood area with emphasis on building up cooperative infrastructure,

revitalization of sick dairy cooperatives and federations and creation of infrastructure in the state

for production of quality milk and milk products.

Livestock sector contributes about 27% of the G.D.P. from agriculture and allied

activities. This sector has excellent forward and backward linkages, which p-promote many

industries and increase the incomes of vulnerable groups of the society such as agricultural

labourers and small and marginal farmers. India possesses the second largest livestock

population in the world. Production and export of poultry products have shown considerable

growth in the recent decades. Export of such products to countries including Bangladesh,

Srilanka, Middle East, Japan, Denmark, USA, and Angola augers well for this industry. As per

estimated provided by the Food and Agriculture Organization (FAO) for 2007,the annual

chicken meat production in India is around 2.2 million tonnes.The value of exports was around

Rs.441 crore during 2007-08.Fish production increased from 6.8 million tonnes in 2006-07 to 7.3

million tonnes in 2007-08.

Fishing, aquaculture and allied activities are reported to have provided livelihood to

over 14 million people in 2006-07 apart from being a major foreign exchange earner. India is the

7th largest producer of fish in the world and is 2nd in inland fish production. Fish production

increased from 6.8 million tonnes in 2006-07 to 7.3 million tonnes in 2007-08.

VII.5. National Agricultural Insurance Scheme (NAIS)This scheme, with increased coverage of farmers, crops and risk commitment, was

introduced in India from Rabi 1999-2000, replacing the erstwhile Comprehensive Crop

Insurance Scheme (CCIS). The main objective of the scheme is to protect farmers against crop


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losses suffered on account of natural calamities, such as drought, flood, hailstorm, cyclone, pests

and diseases. The scheme is being implemented by the Agriculture Insurance Company of India

Ltd (AICL).

The scheme is available to all farmers both loanee and non-loanee irrespective of

their size of holding. It envisages coverage of all food crops (cereals, millets and pulses),

oilseeds and annual commercial/horticultural crops, in respect of which past yield data is

available for an adequate number of years.

VII.6. Financial Inclusion

It is the financial service (i.e. adequate credit) given to the weaker and lower income

groups in timely manner. The range includes a basic banking account for making and receiving

payments, a savings product suited to the pattern of transactions of a poor household, money

transfer facilities, small loans and overdrafts for productive, personal and other purposes

,insurance(life and non-life), etc.

The main strategies which are playing a major role to build up a financial inclusion are:

y Suggesting measures for improving credit absorption capacity especially amongst

marginal and sub marginal farmers and poor non-cultivator households

y Generate new models for effective domain

y Influencing on technological solutions

A National Rural Financial Inclusion Plan (NRFIP) has also been recommended by the

committee for the provision of comprehensive financial services within a schedule time. The

Bank has taken several measures for promoting financial inclusion such as advising banks to

open no frills accounts, introduction ofBusiness Correspondent (BC)/Business Facilitator

(BF) model, promotion of financial literacy, and adoption of Information and Communication

Technology solutions for achieving greater outreach.


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Business Facilitator Model

Under this model, the banks may use intermediaries such as the NGOs/Farmers Clubs,

Co-operatives, Community-based Organisations, IT enabled rural outlets of corporate entities,

Post Offices, Insurance Agents, Well functioning Panchayats, Village Knowledge Centres, Agri

Clinic / Agri Business Centres, Krishi Vigyan Kendras and KVIC/KVIB Units, depending on the

comfort level of the banks, for providing facilitation services.

Such services may include

(i) identification of the borrowers and activities;

(ii) collection and preliminary processing of the loan applications including verification of

primary information/data;

(iii) Providing knowledge about savings and other products and educating them on

management of money;

(iv) processing and submission of applications to the banks;

(v) promotion and fostering of the Self Help Groups;

(vi) post-sanction monitoring;

(vii) Monitoring and handholding of the Self Help Groups and others and follow-up for

recovery.


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Business Correspondent Model

Under this model, the NGOs/MFIs, set up under the Societies/Trust Acts, Societies

registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of

the States, Section 25 Companies, registered NBFCs not accepting public deposits and Post

Offices may act as Business Correspondents.

The banks may conduct thorough due assiduousness on such entities, keeping in view the

indicative parameters to examine the issues relating to Rural Credit & Micro-Finance. In

engaging such intermediaries as Business Correspondents, the banks should ensure that they are

well established, enjoying good reputation and having the confidence of the local people. The

banks may give wide publicity in the locality about the intermediaries engaged by them as

Business Correspondent and take measures to avoid being misrepresented.

The scope of the activities, to be undertaken by the Business Correspondents will include

(i) disbursal of small value credit,

(ii) recovery of principal / collection of interest,

(iii) collection of small value deposits,

(iv) Sale of micro insurance/mutual fund products/pension products/other third party

products and receipt and delivery of small value remittances/other payment

instruments.


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VII.7.Micro Finance

Micro finance scheme has been introduced by National Bank for Agriculture and Rural

Development (NABARD), the apex bank for agriculture and rural development in India, to

improve the access of the rural poor to formal institutional credit and other financial products. Inall 547 banks, which include 47 commercial banks, 158 RRBs, 342 cooperative banks are now

actively involved in the operation of Self Help Group (SHG)-Bank Linkage Programme to

spread the facility of micro finance to the needy small and marginal farmers and tiny

entrepreneurs. The programme has enabled nearly 329 lakh poor families in the country to gain

access to micro finance facilities from the formal banking system.

VIII.AGRICULTURE, AS AN INVESTMENT FRIENDLY DESTINATION

Agricultural Commodities Exchanges: To introduce future trading in agricultural commodities

in India, two commodity exchanges have been introduced in 2003 for future trading. They are,

National Commodity & Derivatives Exchange Limited (NCDEX) and Multi Commodity

Exchange of India Limited (MCX). These exchanges are majorly dealing in agricultural

commodities. They are involved in forward trading to mitigate price risks of the farmers.

Agricultural Export: India's total exports of agricultural and allied products at $10.5 billion

in 2005-06 constitute 10.2% of its export share. Developed country markets account for

nearly 35% of India's agri-exports. In agricultural exports there are varied performances

across commodities. Contribution of various agricultural commodities in world exports has

been listed below.

Product Percentage share in World Export

Lac, gums, resins, vegetable products 10

Vegetable planting materials, vegetableproducts

4.9

Coffee, tea, mate & spices 3.7

Marine products 2.3

Residues, waste of food industry, animalfodder

2.1

Cereals 1.3

Fruits & nuts 1.1Source: NCTI based on UN-ITC Trade Map Data


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Export of Marine products, which after a decline in 2003-04 had picked up in subsequent

years, grew by 6.3% in April- October-2006.In terms of export earnings, among marine products,

frozen shrimp contributed to be the largest export item, followed by frozen fish, cuttlefish, squid,

and dried items. European Union accounted for the largest share of India's export of marine

products, followed by US and Japan. This sector, however, faced a number of hurdles in the

major export destinations. Indian shrimp imports to USA have been subject to anti dumping duty

of 10.17% from August 2004. In European markets, India's marine products have been facing

problem due to multiplicity of standards-in addition to the EU's own standards, the standards of

each of the own member states.

Agri Export Zones: In the Export Import (EXIM) Policy 2001-02, the Government of India

announced the proposal to set up Agri-Export Zones for the purpose of developing and sourcing

raw materials and their processing/packaging leading to final exports. The concept essentially

embodies a cluster approach of identifying the potential products and the geographical region in

which such products are grown and adoption of an end to end approach of integration of the

entire process, right from the stage of production to consumption.

Under the Scheme, the State Government identifies products with export potential, which

have comparative advantage in local production. Agricultural and Processed Food Products

Development Authority (APEDA) is the nodal agency of the Central Government to promote

setting up of Agri Export Zones. Till December 2005, 60 Agri Export Zones of different

products had been set up in different parts of the country.

Research and Extension: Government of India has created a widespread network of agricultural

universities and institutes all over India to facilitate research and extension works in Indian

agriculture. The Indian Council of Agricultural research (ICAR) is an apex body in India at the

national level, which promotes science and technology programmes in the area of agricultural

research, education, and extension education.


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IX. EFFICIENT RURAL CREDIT DELIVERY SYSTEM

With a view to strengthen the rural credit delivery system for facilitating smooth credit

flow to the rural sector in general and to agriculture in particular, 3 steps were taken by RBI and

GOI.

Special Agricultural Credit Plan

The Public sector banks have been formulating Special Agricultural Credit Plans (SACP)

since 1994-95 with a view to achieving distinct and marked improvement in the flow of credit to

agriculture. Under SACP, the banks are required to fix self targets for achievement during the

financial year. The targets fixed by show an increase of about 20 to 25 % over the disbursement

made in the previous year. During 2007-08, against the target of Rs.1, 52,113 crore,

disbursement to agricultural by Public sector banks under the plan aggregated at Rs.1, 33,226

crore were 87.6% of the target.

The SACP mechanism were also made applicable to private sector banks from the year

2005-06.The disbursement to agriculture by private sector banks under the plan aggregated Rs.

47,862 crore against the projection of Rs.41,427 crore during 2007-08, thus constituting

115.53% of the target.

Outstanding Credit

Outstanding Credit of Public sector banks to agriculture sharply shot up from Rs. 58,142

crore in 2002 to Rs.2, 48,685 crore in 2008 exhibiting 14.8% and 17.4% of net bank credit,

whereas that of private sector banks increased from Rs.6, 581 crore to Rs.57, 702 crore

indicating 8.5% and 15.4% of net bank credit during the period, which was less than the

mandated 18% requirement.

Recovery

Recovery of direct agricultural advances as % of collection to demand increased from

74.5% in 2004 to 78.6, 80.1 and 79.7 in the following three years. Amount recovered during the

period was Rs.25,002 crore,Rs.35,733 crore,Rs.37,298 crore and Rs.58,840 crore as against


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demand of Rs.33,544 crore,Rs.45,454 crore,Rs.46,567 crore and Rs.73,802 crore respectively

showing significant improvement in containing overdue.

X.CONCLUSION

Agricultural credit has played a vital role in supporting agricultural production in India.

The Green Revolution characterized by a greater use of inputs like fertilizers, seeds and other

inputs, increased credit requirements which were provided by the agricultural financial

institutions. Though the outreach and the amount of agricultural credit have increased over the

years, several weaknesses have crept in which have affected the viability and sustainability of

these institutions.

Though the overall flow of institutional credit has increased over the years, there are

several gaps in the system like inadequate provision of credit to small and marginal farmers,

paucity of medium and long-term lending and limited deposit mobilisation and heavy

dependence on borrowed funds by major agricultural credit purveyors.

Following the changes in the consumption and the dietary patterns from cereals to non-

cereal products, a silent transformation is taking place in the rural areas calling for diversification

in agricultural production and value addition processes in order to protect employment

and incomes of the rural population. In the changed scenario, strong and viable agricultural

financial institutions are needed to cater to the requirements of finance for building the necessary

institutional and marketing infrastructure.


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BIBLIOGRAPHY

NABARD Data Bank

SBI Hand Book 2004

RANGARAJAN Report On Financial Inclusion

Cooperative Banking and Financial Sector Reforms in India By Dr.

K. RAMESHA

SHRI Y.S.P. THORAT Report on Rural Credit in India

Banking and finance journal

Agricultural Credit in India by RAKESH MOHAN

Handbook of Statistics on Indian Economy: 2002-03,2005-06

Economic Survey (GoI), 2006-07

All India Debt and Investment Survey and RBI Bulletin,

February 2000

Book--Rural Banking

Agriculture Credit Derivative System

Documents

Transcript of Agriculture Credit Derivative System