Rural Finance in an Indian Economy1-266)

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Rural Finance In Indian Economy

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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.

1.0 Meaning of an Underdeveloped Economy:

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

them.

Distribution of World Population & World GNP among various groups of

Countries in 1989

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GNP

(Billion

US $)

Total

Population

(million)

GNP Per

Capita

(US $)1. Low Income Economies 981 (4.7) 2,948

(56.6)

330

2. Middle Income

Economies

2,253

(10.9)

1,105

(21.2)

2,040

3. High Income Economies 15,230

(73,4)

831 (16.0) 18,330

4. Other Economies ___ 323 (6.2) ___

World 20,736

(100.0)

5,206

(100)

3,980

India 283 (1.4) 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 developedand 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 yearsthe 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

a decline in world oil prices, the GNP per capita has started showing a decline in this

group.

Definition:

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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 aconsequence, the disparity in the levels of income has become wider during

period 1960-89.

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 centof the working population was engaged in agriculture and its contribution to

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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 two-

thirds 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 effectivedemand. 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. 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

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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)

As per Colin Clark to maintain the same level of living a country requires anadditional 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:-

The Indian economy in the pre-British period consisted of isolated and self-

sustaining villages on the one hand, and towns, which were the seats of administration,

pilgrimage, commerce and handicrafts, on the other. Means transport &

Gross Domestic Gross Domestic

Investment Saving

1965 1989 1965 1989

Japan 28 33 30 34

Australia 26 26 23 23

Germany 23 22 23 27

U.S.A. 12 15 12 13U.K. 13 21 12 18

India 17 24 15 21

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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 todepend 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:

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

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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 Indians 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 createda 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

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 foreigninfluence: With the spread of education, a new classs grew in India which was

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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 lawscountering 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

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.

StatisticsPopulation: 966,783,171 (July 1997 est.)

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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:

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.

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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 Area Percent1. Total geographical area 329 --

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. Theyhave 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.

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 ownershipof corporate bodies and private individuals.

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are an essential pre-condition for increasing agricultural & industrial production in a

rural area.

Types of Infrastructural facilitiesoften 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 non-

commercial 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

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.

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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 countrys 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 kms-

an 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 opportunitiesfactor 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

necessary motivation, the communication system helps to bring buyers and

sellers together effectively and helps to accelerate the growth of the economy.

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4.0 Microfinance In An Indian Context:-

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

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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 down-

market 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 financialinstitutions and the economic characteristics and financing needs of low-income

households. For example, commercial lending institutions require that borrowers have

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

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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.

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.

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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

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

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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

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

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Occupation Percentage of HouseholdsCultivators 72Agricultural labourers 15Other non-cultivators 11Artisans 2All house holds 100

However this group of cultivators contain both prosperous and well as marginal

cultivators within itself. This is rural Indias 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 andworking 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

TABLE: VILLAGE & SMALL INDUSTRIES (Production)Industry Unit #

1973-74 1979-80 1984-85 1985-86 1990-91 1995-96!

TraditionalIndustries:

Khadi 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

Village Value 122.00 348.00 807.06 900.38 1994.06 356216

Industries (Rs. crores)

Handlooms Mill Meters 2100.00 2900.00 3600.00 3692.00 4888 7020

Value

(Rs. crores)840.00 1740.00 2880.00 2953.60 3633

Sericulture Lakh Kgs. of 29.00 48.00 76.70 78.97 12836 13909

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raw

silk

(valueRs.crores) 63.00 131.00 345.69 310.14 868

Handicrafts Value 1065.00 2050.00 3500.00 3800.00 11325 25200

(Rs. crores)

Coir Lakh tonnesof 1.50 1.85 1.49 1.83 2.11 2.63

fibre

Value(Rs. crores) 60.00 86.00 100.50 139.51 161.00

Sub-total (A) Value(Rs. crores) 21.83 4447.00 7790.87 8289.93 16272.95 25553.489

ModernIndustries:

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 219968

Total (VSI) (Rs.crores) 11353.00 29332.00 64733.87 73058.44 183949.95 245521.48

TABLE: VILLAGE & SMALL INDUSTRIES (Employment)

Industry Unit # 1973-74 1979-80 1984-85 1985-86 1990-91 1995-96

TraditionalIndustries:

Khadi M.Sq.Mtres 8.84 11.20 13.05 15.00 14.15

Value(Rs. crores) N.A.

Village Value 9.27 16.13 24.84 25.50 34.42

Industries (Rs. crores)

Handlooms Mill Meters 52.40 61.50 76.80 73.70 96.87 128.00

Value(Rs. crores)

Sericulture Lakh Kgs. of raw 12.00 16.00 20.43 53.60 52.00 59.50

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silk

(valueRs.crores)

Handicrafts Value 15.00 20.30 27.40 28.00 43.84 65.50

(Rs. crores)

Coir Lakh tonnes of 5.00 5.59 5.89 8.00 5.46

fibre N.A.

Value(Rs. crores)

Sub-total (A) Value(Rs. crores) 102.21 130.72 168.41 203.80 246.74 253.00

Modern Industries: 39.65 67.00 90.00 96.00 124.3 152.61

Small ScaleIndustries

Value(Rs. crores)

Powerlooms Mill Meters 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

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.

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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 milliontonnes) in 1997. The rabi foodgrains production for 1998-

99 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 1998-

99, 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 1997-

98.

Agricultural Production-Major crops (in million tonnes)

Year 1995-96 1996-97 1997-98 1998-99Crops Achiev-

ementTarget Achiev

ement%changeover

1995-

96

Target Achiev-ement

%changeover

1996-

97

Target Produ-ction

(Adv.Est.)

%changeover

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

CoarseCereals

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

TotalFoodgr-

180.4 193.5 199.4 10.5 200.0 192.4 (- 3.5 204.0 200.9 4.4

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ainsOilseeds 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.

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:

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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

agricultural output. There are many industries, which depend on agricultureindirectly. 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:

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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

agriculture is attributable mainly to accelerated flow of institutional credit. It is explain

graphically as follows:

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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

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

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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 money-

lenders 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 adagethey 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 institutionalsources 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

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

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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 socio-economic 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 non-

institutional 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 Co-

operative SocietyCo-operation has failed, but co-operation must succeed.

--All-India Rural Credit Survey

National Policy & Itss Aim:

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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 thingsto 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,

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.

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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.

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

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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.

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

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becoming more importantfrom 3.3 percent in 1951-52 to 14.5 percent in 1961-

62 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 improvementsand 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 money-

lenders. 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.

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.

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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 co-operatives. 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

& 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

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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 PACs.: 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 co-

operatives development. Steps were taken to reorganize viable PACs and for

amalgamation of non-viable societies with farmers 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.

PACs 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.

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

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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 co-

operative 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 co-

operative 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 disciplineamong cultivators to repay loans was the principal factor responsible for the

prevalence of overdues of co-operatives. Defective lending policy pursued by co-

operatives, 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

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

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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, over-

utilisation 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 co-

operative 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

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 loansdisbursed by commercial banks. Finally, commercial banks extend loans for

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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.

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 viableschemes of agricultural development. Commercial banks have to group them

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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--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 spreadthroughout 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 costinvolved in handling of large number of small size loan accounts and somewhat

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

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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

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 latters 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.

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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 mans 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:

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.

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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 co-

operative 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 agriculturaldevelopment, 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-

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.

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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 absorptivecapacity 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.

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

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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 : Ru

Rural Finance in an Indian Economy1-266)

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