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ContentsCERTIFICATE
DECLARATIONPREFACE
ACKNOWLEDGEMENT
RESEARCH METHODOLOGYContents .................................................................................................................... 1
INTRODUCTION TO CREDIT ........................................................................................ 2
INTROUCTION TO RURAL ECONOMY .......................................................................... 4
2.1 INDUSTRIES ................................................................................................... 8
2.2 ORGANIC FARMING ........................................................................................... 9
INTRODUCTION TO RURAL CREDIT .......................................................................... 11
3.1 ISSUES AND CONCERNS .................................................................................. 12
Organization of Rural Credit in India ........................................................................ 13
4.1 SOURCES OF CREDIT FOR INDIAN FARMERS .................................................. 13
SOURCES OF RURAL CREDIT .................................................................................... 14
5.1 NON-INSTITUTIONAL SOURCES ....................................................................... 14
5.2 Need for Institutional Finance:- ....................................................................... 16
5.3 National Policy and Objectives ........................................................................ 175.4 Rural Co-operative Credit Societies .............................................................. 17
5.5 Long term Rural Credit .................................................................................. 18
5.6 Small-scale credit and rural banks ................................................................ 18
5.7 Magnitude of rural credit .............................................................................. 19
PROBLEMS OF RURAL CREDIT .................................................................................. 20
CHALLENGES IN RURAL CREDIT ............................................................................... 22
DEREGULATING RURAL CREDIT ................................................................................ 25
8.1 DEMAND FOR RURAL CREDIT ........................................................................ 26
8.2 SUPPLY OF RURAL CREDIT: .......................................................................... 27
STRUCTURE OF THE CREDIT SYSTEM IN INDIA ......................................................... 27
THE RESERVE BANK OF INDIA .................................................................................. 28
NABARD AND ITS ROLE ............................................................................................ 34
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11.1 NABARD TODAY ......................................................................................... 36
11.2 THE CO-OPERATIVE STRUCTURE ................................................................ 37
COMMERCIAL BANKS ................................................................................................ 38
12.2 REGIONAL RURAL BANKS (RRBs): ................................................................ 40
MICRO FINANCE ....................................................................................................... 41
13.1 The Terms & Conditions for Accessing Micro Credit. ..................................... 42
13.2 Self Help Group (SHG) ................................................................................. 43
13.3 Role Played by Non-Governmental organizations (NGO ) in Provision of Micro
Credit.................................................................................................................... 43
13.4 LATEST MICRO CREDIT DISBURSEMENT INDICATORs.................................... 44
13.5 FOREIGN INVESTMENT IN MICRO CREDIT PROJECTS .................................... 45
13.6 MICRO FINANCE INSTITUTIONS (MFIS) .......................................................... 46
SMALL SCALE INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) .......................... 50
14.1 Various innovative Schemes / Card products were introduced: .................... 51
14.2 KISAN CREDIT CARD ..................................................................................... 52
CASE STUDY ............................................................................................................. 53
15.1 TWO POSITIVES ........................................................................................... 59
15.2 CENTRE FINALISES Rs. 4000 CRORE PACKAGES FOR VIDHARBHA FARMERS.
............................................................................................................................. 60
CURRENT POSITION OF FARMERS ............................................................................ 62
BIBLIOGRAPHY .................................................................................................... 66
ANNEXURE ............................................................................................................... 67
INTRODUCTION TO CREDIT
Credit is a crucial input helping the poor in raising their incomes. As most farmers
are small they tend to borrow substantial finance from different sources to improve
their agricultural output. The problem of Indebtness makes it worse when loans are
not put to productive uses. Providing adequate credit to rural poor has become a
problem because of the complex nature of the rural society. Moreover, it is not the
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borrowing that affects productivity but indebt ness which lowers productivity by
eliminating the will to change and by creating a despondent outlook.
Credit is a `pure service' transaction between two points of time rather than a spot
market transaction in `pure goods'. Because of the time gap involved between
sanction and realization of credit, the players in the market confront several kinds
of risks, many of which are not independent of the socio-economic environment.
Against the backdrop of the institutional changes in the form of establishment and
strengthening of the Panchayats in rural West Bengal over the last two decades,
the present study is an attempt to capture the attendant changes in rural credit
market between mid-1980s and mid-1990s from the experiences of two villages in
the district of Birbhum. In doing so, it compared the profile and mode of operation
of prevailing moneylenders and lending institutions with those documented in an
earlier study carried out in the same two villages and made an endeavor to find out
as to whether the changes in the functioning of both formal and informal rural
credit have led to greater accessibility to credit of the rural masses, a larger base
for agricultural production through productive use of assets and ensuring betterprices for farmers.
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INTROUCTION TO RURAL ECONOMY
The Rural Economy in India is wholly agriculture based and it is of tremendous
importance because it has vital supply and demand links with the other Indian
industries. Agriculture is the main stay of the Indian economy, as it constitutes the
backbone of rural India which inhabitants more than 70% of total Indian
population. The fertility of the soil has augmented the success of agriculture in
India. Further, Rural economy in India has been playing an important role towards
the overall economic growth and social growth of India. India has beenpredominantly an agriculture- based country and it was the only source of
livelihood in ancient time. During pre historic time when there was no currency
system the Indian economy system followed barter system for trading i.e. the
excess of agricultural produce was exchanged against other items. The agriculture
produce and system in India are varied and thus offers a wide agricultural product
portfolio.
Today the rural economy in India and its subsequent productivity growth is
predicated to a large extent upon the development of its 700 million strong rural
populations. The agricultural economy of India is drafted according to the needs of
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rural India since majority of the population lives in about 600,000 small villages.
In India, agriculture accounts for almost 19 % of Indian gross domestic product.
(GDP). The rural section of Indian population is primarily engaged with
agriculture, directly or indirectly. The Ministry Of Agriculture, the Ministry of
Rural Infrastructure, and the planning commission of India are the main governing
bodies that formulate and implements the policy related to rural economy in India
and its subsequent development for the overall growth of the rural economy.
The main agricultural products that control the fate of the rural economy in India
are as follows:
Food Grains
Fruits and nuts
Vegetables
Seeds, Buds & Plantation
Spices
Tea and Coffee
Tobacco and Tobacco products
The development of the Indian rural economy can be credited to the liberal
policy of the Ministry of Rural development, Government of India and the
Planning commission of India. India is still an agrarian economy and the sector
contributes substantially to the GDP of India.
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GLIMPSES OF THE RURAL ECONOMY OF INDIA
A TARGET OF Rs. 225,000 crores for farm credit has been set for
the financial year 2007-08
50 Lac new farmers have been brought under the banking system.
Agricultural Insurance to facilitate agricultural loans to the farmers.
Allocation for the Rural Infrastructure Development Fund to be
increased substantially.
In the financial year 2006-07, 35 projects were successfully
completed.
Additional irrigation of 900,000 hectares has been targeted in the
financial year 07-08
For better farm yields modern farming techniques has been set up.
Direct disbursement of subsidy to rural Indian farmers has been
arranged through pilot program.
Various activities or occupations allied to agriculture or the farm sector assumes
great importance in the rural economy of India. These factors assume great
importance because of increasing pressure of population on land and need for
removing a substantial percentage of working population from agricultural proper.
The allied activities or occupations provide almost unlimited scope for rural
people from the point of view of employment opportunities and earning income.
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The significance of allied activities can be explained as:
The allied activities or occupations like Animal husbandry, poultry, fishery
and forestry will help you diversify rural economy which for long has cometo depend only on agriculture proper with all its precarious nature.
Many of the above, mentioned activities have either a small land- based or
use lands such as fallow lands, marshy places, etc. , which are not under
regular cultivations.
This means that most of the allied activities will not be at the cost of the
agricultural land and agricultural production but would be supplementary to
regular and agricultural activities.
The allied activities would thus be an important source or main or
supplementary for all types of rural people- those with substantial lands and
those with small or no lands at all as also to the members of rural families
with little or even no technical skills.
One estimate is that in case of the Indian agricultural, there is a disguised
unemployment to the extent of nearly 20- 30 % of the rural work force. The
allied activities will be in position to provide employment opportunities and
income for them practically in their own places or even homes.
Further, I would like to focus on some of the rural allied economic activities:
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2.1 INDUSTRIES
Handicraft Industries:
The role of Handicraft Industries in rural India Economy is very important. The
Ministry of Rural Development and the Ministry of Rural Economy, under govt. of
India are the two main governing authorities, which drafts and implements policies
for the handicraft industries in the rural India eco. The Handicraft Industry of India
comes under the unorganized sector of village economy of India.
The main products that are manufactured by Rural Handicrafts industry are as
follows:
Art metal wares.
Wood wares
Hand printed and textiles and scarves
Embroidered and crotched goods.
Shawls as art wares
Zari and zari goods
Imitation jewellery
Miscellaneous handicrafts.
Presently, the global market of handicraft is valued at US $ 400 billion and Indians
share in the global market stands at 2%. However, the Handicrafts industries inrural India economy registered an annual growth rate of 15 % consistently over the
last decade and it is estimated to grow at the rate of 42% over the next 5 years
annually industries in rural India economy registered an annual growth rate of 15
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% consistently over the last decade and it is estimated to grow at the rate of 42%
over the next 5 years annually industries in rural India economy registered an
annual growth rate of 15 % consistently over the last decade and it is estimated to
grow at the rate of 42% over the next 5 years annually.
2.2 ORGANIC FARMING
The role ofOrganic farming in India Rural Economy can be leveraged to mitigate
the ever increasing problem of food security in India. With rapid industrialization
of rural areas of India, there has been a crunch for farm lands, further, with the
exponential growth of India; the need for food sufficiency has become the need ofthe hour.
The proposition of Organic farming in India rural economy holds good, as an
alternative to arrest this problem. The interaction of the process of organic farming
in Indian Rural Economy is a very new concept.
The main advantages of Organic farming:
Organic fertilizers are completely safe and doesnt produces harmful
compounds
The consumption of chemical fertilizers in comparison is always more,
especially in unused cultivable lands
India has around 1426 certified organic farms
India produces approx. 14000 tones of output annually
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Rural industries in Indian Economy-
The Ministry of Agro and rural industries in India was established in
September, 2001 with the aim to develop the rural industries in the IndianEconomy. The main objectives of this initiative were to ameliorate the
supply chain management, upgrade skills, introduce innovative technologies
and expand markets of the entrepreneurs and artisans. Also, the Govt. of
India has also ensured employment generation programmes in the rural
regions under Rural Employment generation program and the Prime
ministers Rozgar Yojana (PMRY) in association with RBI and other banks.
Some of the major sectors in rural economy of India have been listed below:
Rubber Business in India
Fisheries in Rural India
Poultry business in India
Tobacco business in India
Jute business in India
Horticulture business in India
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INTRODUCTION TO RURAL CREDIT
Describing India, the AIRSC had said, India is essentially Rural India and Rural
India is virtually the cultivator, the village craftsman and the agricultural laborer.
Rural India, where 70% of all Indians live, still depends heavily on agriculture. ,
However it is increasingly becoming diversified market with a strong demand for
credit for agriculture and non- agricultural purposes, savings, insurance and money
transfers. Given an understanding of the seasonal credit requirements of farm
operations, institutional credit was perceived fairly early in the development
process as a powerful tool for enhancing the production and productivity and for
poverty alleviation. The debates surrounding these issues, as also the suggested
policy directions were clearly spelt out in the report of the All India Credit Survey
Committee 1952.
To achieve the objectives of production and productivity, the stance of
policy towards rural credit was to ensure provision of sufficient and timely credit
at reasonable rates of interest as to a large extent a segment of the rural population
as possible. The chosen institutional vehicles for the task were Co-operatives,
Commercial banks and Regional Rural Banks (RRBs). Between1950-69, the
emphasis was on the promotion of co-operatives, followed by a concerted push by
commercial banks during the post nationalization period to establish branches in
the rural areas and the creation of new institutional structures- RRBs in 1970s.
NABARD in 1980s and Local Area Banks in late 1990s.
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The Central Banks policy response consisted of social control and nationalization,
expansion of branch network into unbanked and under banked areas, evolution of
Lead Bank Scheme and area approach, enunciation of concept of targets for
priority sectors and weaker sections lending and special credit cum subsidy
programmes for the poorer sections of rural and urban areas.
Reaching credit at concessional rates was one of the most important elements of
the strategy for the deployment of rural credit. The justification for offering credit
at low rates to certain categories of borrowers was based on the argument that farm
based investment activity in the short run does not always yield a return which
enables regular servicing of loans and at the same time meet the minimum
consumption requirements. Since concessional lending impacted the profitability
of rural financial institutions (RFIs), a policy of cross subsidization and refinance
from the RBI and later NABARD was put in place simultaneously.
3.1 ISSUES AND CONCERNS
Overall concerns in relation to rural credit- other than those relating to structural
issues- are generally expressed in terms of-
Inadequacy of credit
Constraints on timely availability of credit
High interest rates
Neglect of small and marginal farmers
Low credit deposit rates in several states
Continued presence of informal markets
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Organization of Rural Credit in India
In the village itself no form of credit organization will be suitable except the Co-
operative Society Co-operation has failed, but co-operation must succeed.
4.1 SOURCES OF CREDIT FOR INDIAN FARMERS
The financial requirement of the Indian farmers can be classified into three types
depending upon the period and the purpose for which they are required:
a) Farmers need funds for short periods of less than 15 months for the purpose of
cultivation or for meeting domestic expenses. For example, they want to buyseeds, fertilizers; fodder for cattle, etc.
b) The farmers require finance for medium period ranging between 15 months and
5 years for the purpose of making some improvement on land, buying cattle,
agricultural implements, etc.
c) The farmers need finance for the purpose of buying additional land, to make
permanent on land, to pay of old debts and to purchase costly on agricultural
machinery. These loans are for long periods of more than 5 years.
We can further classify the credit requirements of farmers into two types
productive and unproductive loans. The former include loans to buy seeds,
fertilizers, implements, etc. to pay taxes to the government and to make permanent
improvement on land, such as digging and deepening of wells, fencing of land, etc.
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SOURCES OF RURAL CREDITBroadly, there are two sources of credit available to the customers- institutional
and private. Non-institutional or private sources include money-lenders, traders,
and commission agents, relatives and landlords; institutional sources consist of the
Government and co-operatives, commercial banks including the Regional Rural
Banks (RRBs).
Non-institutional sources- money lenders, landlords, traders etc. accounted for
93% of the total credit requirements in 1951-52 and institutional sources including
the Government accounted for only 7% of the total credit needs in that year. The
All India Debt and Investment Survey (1981), estimated that the share of non-
institutional sources had slumped to about 37% in 1981, money lenders accounting
for barely 16% ; the share of institutional credit, however, had jumped to 63% co-
operatives contributing 30% and commercial banks about 29%
5.1 NON-INSTITUTIONAL SOURCES
A) Money Lenders:
There are two types of money lenders in the rural areas. There are rich farmers or
landlords who combine farming with money-lending. There are also professional
money-lenders whose only occupation or profession is money lending.. The
Government and the Reserve Bank of India have been propagating that the
importance of the money lenders as suppliers of loans to the farmers has been
declining rapidly.
However, there are many reasons for the preponderance of the village money
lenders in the rural areas even now.
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a) The money lender freely supplies credit for productive and non productive
purposes, and also for short-term and long-term requirements of the farmers.
b) He is easily accessible and maintains a close and personal contact with the
borrower, often having relations with family extending over generations.
c) He has local knowledge and experience and, therefore, can lend against land as
well as against promissory notes. He knows how to protect himself against default.
Malpractices of the Money-lenders
There are various malpractices which are associated with the village money
lenders. They obtain bonds and promissory notes from their debtor on false
pretences, and enter in them sums larger than actually lent. They deduct exorbitant
premium. They give no receipts for repayment and often they deny such
repayments. They charge high rate of interest often 36%, 3%, per month and over.
They commit many other rogueries which are so well know. Unless their activities
are controlled and alternative sources of credit provided to the farmers, it would be
difficult to improve the condition of the peasants and prevent extensive suicides of
small and marginal farmers.
B) Landlords and others:-
Traders and commission agents supply funds to farmers for productive
purpose much before the crops mature. They force the farmers to sell their produce
at a low price and they charge a heavy commission for themselves.
This source of finance is particularly important in the case of cash crop like cotton,
groundnut, tobacco, etc. and in the case of fruit orchards like mangoes. Traders
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and commission agents may be bracketed with money lenders, as their lending to
farmers is also exorbitant rates and has other undesirable effect too.
Farmers often borrow from their own relatives in cash or kind in order to
tide over temporary difficulties. These loans are generally contracted in an
informal manner; they carry low or no interest and they are returned soon after the
harvest. Farmers, particularly small farmers and tenants, depend upon landlords
and other to meet their financial requirements. This source of finance has all the
defects associated with money-lenders, traders and commission agents. Interest
rates are exorbitant. Often the small farmers are cheated and their lands are
appropriated. The landless laborers are forced to become bonded slaves.
5.2 Need for Institutional Finance:-
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:-
1) It is based on profit motive and, therefore, it is always exploitative.
2) It is very expensive and is not related to the productivity of land.
3) It does not flow into most desirable channel and to the neediest persons;
4) It is not available for making agricultural improvements and much of the
necessary improvements are not undertaken as funds are not available for long
periods at low rates of interest; and
Institutional credit is not exploitative and the basic motive is always to help the
farmer to raise his productivity and maximize his income. The rate of interest is
not only relatively low but can be different for different group of farmers and for
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different purpose. Agricultural credit and agricultural improvement should be
taught improved farming methods and also be provided adequate and cheap credit.
5.3 National Policy and Objectives
Since independence, a multi- agency approach consisting of co-operatives,
commercial banks and regional rural banks known as institutional credit has
been adopted to provide cheaper and adequate credit to farmers. The major policy
in the sphere of agricultural credit has been its progressive institutionalization for
supplying agricultural and rural development programmes with adequate and
timely flow of credit to assist weaker sections and less developed regions.
The basic objectives of this policy are:-
a) To ensure timely and increased flow of credit to the farming sector;
b) To reduce and gradually eliminate the money lender from the rural scene;
c) To make available credit facilities to all the regions of the country, i.e. reduce
regional imbalances; and
d) To provide larger credit support to areas covered by special programmes like
Pulses Development Programmes, Special Rice Production Programme and the
National Oilseeds Development Project.
Institutional credit, as mentioned earlier, refers to the funds made available by co-
operative societies, commercial banks, and Regional Rural Banks.
5.4 Rural Co-operative Credit Societies
Indian planners considered co-operation as an instrument of economic
development of the disadvantaged particularly the rural areas. They saw in village
panchayats, a village cooperative and a village school as trinity of institutions on
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which a self reliant and just economic and social order was to be built. The co-
operative movement was started in India largely with a view to providing
agriculture funds for agriculture operations at low rates of interests and protects
them from clutches of money lenders.
5.5 Long term Rural Credit
The Long term requirements of the farmers were traditionally met by the
moneylenders but later by other agencies also such as State Governments and the
co-operative credit banks. But these banks were found defective for one reason or
another. Taking this guard in consideration the banks named as Land
developmental banks was established with purpose of providing long term credit
to farmers.
In recent times these banks are known as CO-OPERATIVE AGRICULTURAL
AND RURAL DEVELOPMENT BANKS. (CARDBs)
5.6 Small-scale credit and rural banks
While small-scale, short-term loans or micro credit constitute only one among
the many services that the public authority should provide, schemes that provide
such loans to rural working households do nevertheless serve as a kind of
palliative reform in the countryside. For all the weaknesses in its implementation,
IRDP played an important role in the 1980s in that it gave new access to millions
of rural households to the formal banking system and increased levels of
purchasing power in rural India significantly. Small-scale credit schemes have also
been the basis for useful and socially progressive experiments in social
mobilization.
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5.7 Magnitude of rural credit
The All-India Rural Credit Survey (1951-1952) collected data on the socio-
economic conditions of farmers so that it would be of help to the Reserve Bank of
India, the government of India and the state Government on the formulation of an
integrated scheme of rural credit. Another survey, the All-India Rural Debt and
Investment Survey
(1962-62) was conducted to arrive at statistically valid and reliable estimate of
debts, investment and other related features of rural households both at national
and state levels. After the nationalized of 14 major commercial banks in 1969,
commercial banks started increasingly their levels of interest on financing of
priority sectors. Therefore, it was thought that a fresh look at financial conditions
of farmers was needed .During 1971-72, the All-India Debt and investment Survey
was conducted, covering the rural and urban household sectors of the economy.
The results of the survey relating to rural households were released in April 1975.
The 1971_72 survey has thrown useful light on the extent of concentration of
economic power and rural indebtness. Out of the total assets of rs.88, 409 Cr,
cultivator households, which constituted 72.3 per cent of the rural household,
claimed 93.6 percent, with an average of rs.14, 694 per household. The proportion
of agriculture laborers household to the rural households may be taken as an index
of inequality and poverty in rural areas.
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PROBLEMS OF RURAL CREDIT
The burden of indebtedness in rural India is great, and falls mainly on the
households of rural working people. The exploitation of this group in the credit
market is one of the most pervasive and persistent features of rural life in India,
and despite major structural changes in credit institutions and forms of rural credit
in the post-Independence period, Darlings statement (1925) that the Indian
peasant is born in debt, lives in debt and dies in debt, still remains true for the
great majority of working households in the countryside. Rural households need
credit for a variety of reasons. They need it to meet short-term requirements for
working capital and for long-term investment in agriculture and other income-
bearing activities. Agricultural and non-agricultural activities in rural areas are
typically seasonal, and households need credit to smooth out seasonal fluctuations
in earnings and expenditure. Rural households, particularly those vulnerable to
what appear to others to be minor shocks with respect to income and expenditure,need credit as an insurance against risk. In a society that has no free, compulsory
and universal education or health care, and very few general social security
programmes; rural households need credit for different types of consumption.
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These include expenditure on food, housing, health and education. In the Indian
context, another important purpose of borrowing is to meet expenses for a variety
of social obligations and rituals.
If these credit needs of the poor are to be met, rural households need access to
credit institutions that provide them a range of financial services, provide credit at
reasonable rates of interest and provide loans that are unencumbered by extra-
economic provisions.
Historically, there have been four major problems with respect to providing credit
to the Indian countryside. First, the supply of formal sector credit to the
countryside as a whole has been inadequate. Secondly, rural credit markets in
India themselves have been very imperfect and fragmented. Thirdly, as the
foregoing suggests, the distribution of formal sector credit has been unequal,
particularly with respect to region and class, caste and gender. Fourthly, the major
source of credit to rural households, particularly income- poor working
households, has been informal sector loans which are usually advanced at very
high rates of interest. Further, the terms and conditions attached to these loans
have
The institutions in this sector include commercial banks, cooperative banks and
credit societies, and other registered financial institutions. The informal sector of
credit is not regulated by public authorities, and the terms and conditions attached
to each loan are personalized, and therefore vary according to the bargaining
power of borrowers and lenders in each case.
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CHALLENGES IN RURAL CREDIT
The economy recorded 3.7 per cent growth in 2002-03 (5.6 per cent) against the
previous year. The deceleration in the performance was largely attributed to the
negative growth of 4.4 per cent in the agriculture sector. This steep downfall of
GDP brought to the surface the vulnerability of the economy to agricultural sector
growth despite its strengths on other macro-economic indicators/sectors. When the
economy achieved 5.6 per cent GDP growth in 2001-2002, the contribution of
agriculture and allied sectors was 5.7 per cent vis--vis 2.6 per cent of the
industrial sector. At the same time, the Tenth Plan (2002-2007) has set an
ambitious average GDP growth rate of 8 per cent per annum. To achieve this, all
the energies of the country need to be focused for the total revitalization and
revamping of the farm sector and the rural financial institutions to ensure average
7 per cent sustainable growth per annum from this sector in the next five years.
Otherwise, the target of 8 per cent GDP growth for the economy would remain a
dream.
The farm sector, to a large extent, was excluded from general economic reforms
initiated in 1991. However, the reforms introduced in industry, finance, banking
and other sectors over the last decade have had a considerable impact on the farm
sector. The financial sector reforms have created a level-playing field between
rural financial institutions (RRBs and cooperatives) and other scheduled
commercial banks in treatment and in compliance of regulatory norms, but without
any concomitant reforms in agricultural sector which is more than three times (320
per cent) the credit flow (Rs 2,29,853 crore) during the Ninth Plan (1997-2002).
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The Rural Non-Farm Sector (RNFS) has emerged an area of focus for creating
employment in the rural sector and to enable migration from the over-stretched
farm sector. The future strategy of rural credit institutions would have to include
strengthening the credit delivery system for increasing RNFS employment.
Development of entrepreneurs' skills, enhanced credit flow to women and other
weaker sections, supporting tiny, cottage and village industries, and coverage of
wide variety of service sector activities would require larger and wider role of
rural financial institutions in RNFS sector. The growing role of microfinance
through self-help groups (SHGs), especially of women, in the unique process of
socio-economic engineering has assumed a critical challenge. The SHG movementhas so far been mostly South-centric (constituting 64 per cent share) but is yet to
take off in other regions. Nabard's goal of reaching microfinance services to one-
third of the rural poor about 100 million through one million SHGs by 2006-
2007 poses many challenges for rural financial institutions. The socio-economic
condition of a majority of the rural population continues to be the cause of concern
for policy-makers in this era of reforms and the WTO. There are still more than
200 million people in rural areas who live below the poverty line and for whom
banking access is still not a reality and, despite a large bank network, the critical
gap in rural credit still exists. Therefore, the requirement for strong and flexible
structure of rural financial institutions in rural and semi-urban segment need not be
overemphasized.
The financial sector reforms without social and rural sensitivity would only
aggravate the complexities of agrarian sector reforms, which are yet to take shape.
Therefore, it is hoped that the Advisory Committee, being constituted by the RBI,
will be a High-Powered one (on the lines of the All India Rural Credit Survey
Committee of 1954) and take a comprehensive review of the current rural credit
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structure and suggest innovative measures with a definite roadmap to meet the
emerging needs/challenges in rural credit.
Some major problems facing the rural credit system are:
(a) It has not produced the desired results in terms of the direction, quantum and
quantity of flow of credit;
(b) It is afflicted by alarmingly high over dues, bad debts, loan defaults, low
profitability, over-burdening of staff, declining control and deteriorating customer
services;
(c) Information imperfections have contributed to inefficiencies like high
transactions costs and low recycling of credit;
(d)Motivation to perform has not been given due importance;
(e) Directed credit programmes and subsidized lending have badly affected viable
functioning of credit disbursing units.
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DEREGULATING RURAL CREDIT
MONEYLENDERS in India are as old as its villages, agricultural credit
cooperatives go back a century, commercial banks have been involved in
agricultural loans for nearly 50 years, the regional rural bank network is over 25
years old, and reforms in the banking system were triggered a decade back. Yet,
credit flow to small farmers has remained far below needs, both for crop
cultivation and for long term requirements such as land development, irrigation
and farm equipment as compared to the potential demand. The widespread
discontent among farmers has manifested itself in the form of mass voting against
incumbent governments as also individual acts of despair such as farmers
committing suicide, particularly in Andhra Pradesh.
Partly in response to this situation, the finance minister announced certain
measures required to be implemented by all scheduled commercial banks in July
2004 for improving the flow of credit to agriculture. Accordingly, banks have been
advised to reschedule the debts of farmers who have suffered losses on account of
drought, flood or other calamities. The principal and interest outstanding in the
accounts of such crop loan and agriculture term loan borrowers up to 31 March
2004 would now be repayable over a period of five years at current interest rates,
including an initial moratorium of two years. On restructuring their existing loans,
the farmers would become eligible for fresh loans. Banks have also been advised
to formulate guidelines on one-time settlement (OTS) for small and marginal
farmers declared as defaulters as on 24 June 2004 and thus ineligible for fresh
credit. Banks should complete the exercise of notifying defaulters.
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Banks have been told that all applications for OTS received from defaulters should
be processed within one month of their receipt. Further, in order to mitigate the
acute distress that farmers might be facing due to debt from non-institutional
lenders (e.g. moneylenders) and to provide them relief from such indebtedness,
banks have been asked to advance loans to such farmers against appropriate
collateral or group security.
In an effort to ameliorate the suffering of debt-ridden farmers, the Andhra Pradesh
Legislative Assembly passed the A.P. Farmers Agricultural Debts (Moratorium)
Act 2004 on 21 June 2004, which provides for declaring a six-month moratorium
on repayment of loans from private moneylenders. The move comes in the
backdrop of a continued spate of suicides by farmers even after the new Congress
government unveiled a series of steps, including free power, to the agriculture
sector and a comprehensive package for farmers
8.1 DEMAND FOR RURAL CREDIT
In a study carried out for the World Bank between 1994 and 1995, Mahajan and
Ramola1 (1996) estimated the average annual credit usage by rural households in
the survey area based on their credit usage for the previous three years.
Accordingly, the annual average credit usage per household from all sources
worked out to Rs 14,549. Of this, 65% was for productive purposes. Long term
productive purpose, viz. purchase of livestock, farm machinery, etc. accounted for
16% of the total usage while the remaining 49% was for short term purposes like
agricultural crop loan. Of the total usage, 35% was for consumption purposes
15% being on account of long term purposes like house building, marriage, etc.
and 20% was for short term purposes like household expenses, clothes, consumer
durables, and so on.
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We can try to estimate the annualized credit usage in rural India from the above
data. The above-cited study was carried out in Raichur district of Karnataka, which
though a dry land region, has a higher credit usage compared to the poverty belt in
Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh, Orissa, and the North East. In
view of the above, if we assume the average annual credit usage in 2004 to be only
Rs 9000 per house-hold per annum, the total usage comes to Rs 117,000 crore by
rural households. This is an extremely conservative estimate.
It should be noted that the demand for credit is not the same as credit usage, since
the latter is constrained by supply. The Xth Five Year Plan Working Group on
Agricultural Credit estimated the requirement of credit at Rs 720,000 crore in five
years ending 2007, or Rs 144,000 crore per annum on an average. This has to be
compared with Rs 60,000 crore that was actually disbursed in 2001, the terminal
year of the IX th Plan.
8.2 SUPPLY OF RURAL CREDIT:
The present structure of the rural credit system has emerged after a series of
interventions by the government and Reserve Bank of India. In the formal sector, a
multi-agency approach has been followed to provide the necessary financial
services in the rural areas. The various institutions are the commercial banks,
regional rural banks and the cooperative credit structure (CCS).
STRUCTURE OF THE CREDIT SYSTEM IN INDIA
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GOVERNMENT OF INDIA
RESERVE BANK OF INDIA
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THE RESERVE BANK OF INDIA
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DEPOSITORS AND BORROWERS
NABARD
COMMERCIAL
BANKSREGI
ONA
LRUR
AL
BAN
KS
RURAL CO-OPERATIVES CREDIT STRUCTURE
LONG TERM CREDIT
STRUCTURE
SHORT TERM
CREDIT STRUCTURE
STATE CO-OPERATIVE
AGRI & RURAL DEVPTBANKS
STATE CO-
OPERATIVES BANKS
PRIMARY CO-
OPERATIVE AGRI &
RURAL DEVPT BANKS
PRIMARY AGRI CREDIT
SOCIETIES (PACS)
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THE Reserve Bank of India is perhaps the first central bank that has the statutory
provisions to maintain a team of experts to advise and impart guidance on rural
credit. Since Independence, the RBI has initiated a number of measures to
augment the flow of rural credit. It has a unique system of extending General Line
of Credit-I for seasonal agricultural operations and General Line of Credit-II for
the handloom sector, out of the created money.
In the realm of micro finance, the RBI is again the pioneer to take up the measures
for up scaling and mainstreaming micro credit. The RBI has contributed
significantly to the Micro Credit Development Fund for developing micro finance
sector. Another noteworthy feature of the RBI initiatives is the introduction of
Kisan Credit Card Scheme to provide hassle-free credit to farmers.
Despite proactive and impressive track record of the RBI in policy interventions,
the flow of rural credit is not very satisfactory. As rural credit deals with millions
of small borrowers, it requires the constant attention of the policy-makers of Mint
Street. There are a number of irritants to the free flow of the rural credit.
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At times, these become the major cause for the failure of appropriate policy
intervention and need to be addressed immediately. With mid-term Monitory
Policy for 2003-04 round the comer, it is time to identify these irritants. What
really plagues the rural credit system is partial de-regulation of interest rates.
While interest rates of scheduled banks for advances over Rs 2 lakh have been
completely deregulated, loans up to Rs 2 lakh are subject to maximum of prime
lending rate (PLR).
As a result of partial de-regulation, banks generally charge high rate of interest on
loans over Rs 2 lakh to make good the opportunity lost on financing of the small
advances up to Rs 2 lakh. An analysis of the sector-wise weighted interest rates of
de-regulated advances reveals that in 2001-2002 the weighted interest rate for
regulated direct agricultural advances was 14.6 per cent compared to 13.8 per cent
for the non-agricultural advances and 13.6 per cent for indirect agricultural
advances.
Incidentally, the share of the de-regulated advances was as low as 23 per cent in
the case of direct agricultural advances, 85.7 per cent for non-agricultural
advances and 93.8 per cent for indirect agricultural advances.
This indicates that higher the proportion of the deregulated advances, lower the
weighted interest, suggesting that banks try to cross-subsidies the small loans by
charging higher rates on larger advances. There is a clear-cut case for complete
deregulation of interest rates to allow banks to prescribe interest rate as per the riskperception. However, when it is not possible to deregulate interest rates at one go,
it is imperative to downsize the existing threshold limit of Rs 2 lakh in a phased
manner.
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A person borrowing loan, aggregating Rs 2 lakh, is by no means poor and deserves
to be financed at a prime-lending rate, (rate for risk free lending). Recently, the
Government has advised banks to extend crop loans up to Rs 50,000 at 9 per cent
interest. The RBI may perhaps like to follow this benchmark and regulate interest
rate only up to Rs 50,000. This will go a long way in reducing the interest burden
of the large borrowers who will then get loans at slightly lower rate of interest.
Another major reason for higher interest rate on rural advances is the present
system of service area approach. This restricts the choice of the rural borrowers to
select a bank of their choice, whereas urban borrowers have a wide range of banks
to borrow from.
Seemingly, the competition among the banks in the urban areas is an important
factor for lower rate of interest on housing and personal loans.
Precisely due to the service area approach, a rural borrower for tractor loan pays
higher interest compared to his counterpart in urban area borrowing for a car loan.
It is not implausible to say that service area approach is a relic of past and has
outlived its utility. It is time the service area approach was scraped for at least non-
Swamajayanti Gram Swarozgar Yojana (SGSY) borrowers. They are the poor and
there is hardly any competition among the banks for financing them; it would be
better to fix responsibility on the service area branch as a lender of last resort for
financing poverty alleviation programme.
Nonetheless, SGSY borrowers should also have the freedom to borrow from any
other branch if they are able to manage. Though the RBI has already relaxed
service area approach to a great extent, there are some irritants and a formal
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scrapping of the approach is necessary to induce competition in rural banking.
Second, under the present dispensation, banks are required to deposit with the
Rural Infrastructure Development Fund (RIDF) amount equivalent to shortfall in
stipulated sub target of 13.5 per cent for direct agricultural lending at a fixed
interest rate. As the annual corpus of the RIDF depends on the requirements of
funds, its size is mostly lower than the shortfalls. The share of each bank in the
RIDF corpus is, therefore, determined in proportion to the deposits mobilized by
them. Quite often, deposits with the RIDF do not cover total shortfall. Toaccommodate total shortfalls and to give banks an alternative to RIDF at market-
determined interest rates, it is imperative to develop market for priority sector
inter-bank participatory certificates (IBPC), whereby banks exceeding their target
in priority sector may be allowed to sell excess lending at market-determined
interest rates to other banks having shortfalls.
Thirdly, Automated Teller Machines (ATMs) have the potential to rationalize the
cash delivery system in a cost-effective manner. As a result, banks are increasingly
using non branch/standalone ATMs to provide a range of cost-effective and timely
services to their customers. However, the benefits of ATMs have not reached the
rural areas mainly because the customers are not in a position to handle ATM
operations independently and more often than not need to be assisted by a
facilitator. As of now, only a security guard is posted at stand-alone ATM.Needless to say, ATMs in the rural areas would be more suitable for providing
basic services of deposits and withdrawal in a cost-effective manner as setting up
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of ATMs is far cheaper than a bank branch. (Incidentally, in South Africa, ATM
centers in the rural areas provide the services of a facilitator to its customers.)
Further, they will help the farmers in making full use of the Kisan Credit Card
facility. Also, there is a need to broaden the definition of the priority sector to
accommodate the emerging items of importance such as:
Lending for dairy development should include activities such as
chilling/processing plants, milk van and other collection and transport equipment;
Financing of godowns for storing the produce of others may also qualify for
priority sector category; Similarly, the financing construction of educationinstitutions and hospitals should also be considered as priority sector lending; the
quantum of consumption credit should be enhanced to Rs 10,000 to take care of
genuine consumption needs; and there is a need to change the present criteria of
classification of direct and indirect agricultural advances.
The funds ultimately reaching the farmer should be treated as direct agriculture
advance. Loans provided by non-bank finance companies, commission agents, and
other agencies such as Scheduled Castes and Scheduled Tribes Development
Corporation(s), etc., or on-lending to farmers are treated as indirect finance.
As these loans ultimately reach the farmers, they should be treated as direct
agricultural advances. There is no strong and regular institutional framework in
place for appraising and providing feedback on policy interventions.
The complete deregulation of interest rates, scrapping of service area approach,
development of priority sector inter-bank participatory certificates, posting of
facilitator-cum-security guard at rural ATM centers and broadening of the
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definitions of priority sector advances will go a long way in augmenting the flow
of credit in rural areas. In 1969 the fourteen largest Indian commercial banks were
nationalized, at which point they came under the direct control of the Indian
central bank A central aim was to reduce and equalize the average population per
bank branch across Indian states. The Indian central bank, however, still needed to
coerce commercial banks to expand into unbanked, rural locations. Much more
debated, is the question of whether commercial banks in rural India affected the
extent and type of economic activity in rural areas, and whether they affected
poverty and inequality. The extent to which credit disbursements by the banking
sector were based on need rather than political power is also debated. Default rateswere very similar across types of borrower a finding consistent with poor
monitoring of borrowers at all levels, and the fact that large scale loan defaults
were very often politically condoned. The share of rural banks in total banks has
fallen from 58 percent in 1990 to under 50 percent by 2000 and the share of total
bank credit that went to rural areas declined, from 15.3 per cent in 1988 to 10.6 per
cent in 2000. The policy recommendation is that this reduction in formal sector
lending be filled by micro-credit institutions. Despite impressive advances by the
Indian micro-credit sector it is still unclear whether they will be able to achieve a
mobilization of rural savings and a credit outreach which equaled the
achievements of the Indian social banking experiment in the 1970s and 1980s.
NABARD AND ITS ROLE
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NABARD is set up by the Government of India as a development bank with the
mandate of facilitating credit flow for promotion and development of agriculture
and integrated rural development. With a capital base of Rs. 2,000 crore provided
by the Government of India and Reserve bank of India, it operates through its head
office at Mumbai, 28 regional offices situated in state capitals and 391 district
offices at districts.
The National Bank for agricultural And Rural Development (NABARD) was set
up on July 12, 1982, as a development bank under an act of parliament. The bank
began its journey by taking over the agriculture credit functions of the Reserve
Bank of India and the refinance functions of the then agricultural refinance anddevelopment corp. (ARDC).
NABARDs mission is to promote sustainable and equitable prosperity in rural
India through effective credit support, related services, institution development
and other innovative initiatives. Its prime function continues to be that of
refinancing, supplementing the resources of co-operative banks, regional rural
banks (RRBs) and commercial banks against the amounts lent at the grassroots
level for agriculture and rural development.
Apart from its developmental role, NABARD has also been entrusted with certain
supervisory functions in respect of co-operative banks and RRBs under the
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Banking Regulation act, 1949. It may be noted that co-operative banks and RRBs
have been in existence much before NABARD.
In the 1990s gross capital formation (GCF) in agriculture witnessed a declining
trend. This apart, commercial banks, which were assigned the task of channeling at
least 18 % of their total lending to agriculture, were not able to fulfill their
commitment. It was therefore, considered desirable to create the Rural
Infrastructure Development fund (RIDF) out of the shortfall in commercial banks
lending to agriculture to be managed and operated by NABARD.
The fund was set up in 1995-96 with an initial corpus of Rs, 2000 crore forproviding loans to state governments and state- owned corporations for projects
relating to minor and medium irrigation , soil conservation, watershed
management and rural infrastructure ( such as roads, bridges and market yards.)
Investment projects under social infrastructure, such as construction of primary
health centers/ schools, providing drinking water, and so on, were also supported
under the RIDF financial scorecard.
Through its main refinance portfolio to rural financial institutions (RFIs) and
mobilization and disbursements under the (RIDF) NABARD has over the past two
decades built up a strong financial base.
11.1 NABARD TODAY
It Initiates measures towards institution building for improving absorptive capacity
of the credit delivery system, including monitoring, formulation of rehabilitation
schemes, restructuring of credit institutions, training of personnel etc.
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Coordinates the rural financing activities of all the institutions engaged in
developmental work at the field level and maintains liaison with the government of
India, state governments, the Reserve Bank of India and other national level
institutions concerned with policy formulation.
It prepares, on annual basis, rural credit plans for all the districts in the country.
These plans form the base for annual credit plans of all rural financial institutions.
It undertakes monitoring and evaluation of projects refinanced by it.
It promotes research in the field of rural banking, agriculture and rural
development.
It functions as a regulatory authority, supervising, monitoring and guiding co-
operative banks and Regional Rural banks.
11.2 THE CO-OPERATIVE STRUCTURE
It caters to both the short term and long term credit need of the rural consumers.
The short term credit need of the rural consumers is fulfilled by three institutions,
namely, the State Cooperative Banks (SCBs), District Central Cooperative Banks
(DCCBs) and the large network of the Primary Agricultural Credit Societies
(PACS) in the villages. On the other hand, the State Cooperative Agriculture and
Rural Development Banks (SCARDBs) provide long term credit in the rural
economy through Primary Land Development Banks, now renamed Primary
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Cooperative Agriculture and Rural Development Banks (PCARDBs). In Andhra
Pradesh and Jharkhand the long term structure has been merged with the short
term structure.
The CCS is refinanced by the National Bank of Agricultural and Rural
Development (NABARD). These institutions are, however, beset with problems
like low recovery percentage (40-60%), inefficient management systems and
politicization of the cooperatives due to inadequate laws prevalent in the system.
In 2001-02, there were over 98,000 primary agricultural cooperatives and the loan
outstanding was Rs 32712 crore. In addition, the cooperative sector also had Rs
14,172 crore of long term loans given for land and water development, tractors,
etc.
COMMERCIAL BANKS
The involvement of commercial banks in credit to agriculture began after the
Gorawala Committee Report in 1954. The State Bank of India was asked to open
400 branches in semi-urban areas and start agricultural lending. The issue became
urgent with the onset of the Green Revolution, as the package of high yielding
variety seeds and fertilizers required access to credit. The government responded
by first directing banks to lend to agriculture, then imposing social control and
eventually nationalizing the major banks in 1971. This was followed by a majorexpansion in rural branches and introduction of the Lead Bank scheme and district
credit plans. Within the overall quota of 40% priority sector lending, banks were
asked to lend 18% of their total advances to agriculture. The number of
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commercial bank branches as also the share of commercial banks in agricultural
credit kept rising, particularly as cooperative credit structure in many states was
not working well. This trend remained till the late 1980s, when the Agriculture and
Rural Debt Relief Scheme, 1989 was announced by the then government resulting
in a waiving of all loans below Rs 10,000. This created repayment problems for
banks and generally discouraged them from further lending.
The circle turned completely with the Narasimhan Committee report in 1993
recommending that banks should focus on profitability and adopt prudential
norms. This meant much more stringent provisioning for non-performing loans
than earlier and de-recognition of interest on overdue loans. Expectedly, banks
became even more averse to lending to smaller, rural and agricultural borrowers.
The proportion of bank credit to small borrowers (below Rs 25,000) came down
steadily from 18.3% of total commercial scheduled bank credit in 1994 to 5.3% by
March 2002. The declining trend by commercial banks is continuing. The new
generation private sector banks hardly have any branches in district towns, leave
alone rural areas and are generally averse to agricultural lending, even though they
have an obligation that 18% of their total lending will be to agriculture. Some of
them are trying to meet this by offering bulk credit to corporate in agriculture such
as sugar mills and plantations, while most others simply deposit the shortfall with
NABARD at low interest rates, from where it goes into the Rural Infrastructure
Development Fund. To incentivize banks to lend to small farmers, interest rates
must be deregulated and use of traditional (such as arhatiyas or commission agents
in market yards) and innovative channels (such as e-kiosks) must be permitted,
indeed encouraged.
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12.2 REGIONAL RURAL BANKS (RRBs):
These were set up in 1975 under an act of parliament to exclusively cater to the
credit needs of the rural population, especially small and marginal farmers. The
ownership structure of RRBs is the central government (50%), the state
government concerned (15%) and the sponsor commercial bank (35%). The
sponsor bank manages the RRB concerned. There are 196 RRBs spread over 516
districts with a branch network of 14433. In 1972, the Banking Commission
observed that despite massive expansion of the network of commercial banks
consequent to nationalization, there was still a need for having a specialized
network of bank branches to cater to the needs of the rural poor. With this premise,
RRBs were established in India under the RRB Act, 1976. The thinking was to set
up RRBs as rural-oriented commercial banks with the low cost profile ofcooperatives but the professional discipline and modern outlook of commercial
banks. In the very first decade of the setting up of RRBs, 152 out of 188 RRBs had
accumulated losses of Rs 340 crore. This demands policy autonomy and strategic
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attention, not micro-management by a plethora of actors. They must also be
allowed to charge higher interest rates to small farmers in turn for timely credit.
MICRO FINANCE
Micro finance clients are typically self- employed micro entrepreneurs. In rural
areas they are usually small farmers and people who are engaged in small income
generating activities such as food processing and petty trade. In urban areas clientsof microfinance may be shopkeepers, service providers, artisans and street
vendors.
A Self- Help Group (SHG) is a small voluntary association of poor people of
comparable socio- economic background. It promotes small savings among its
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members. The savings are kept with a bank. This common fund is in the name of
the SHG. Usually, the number of members in one SHG does not exceed twenty
and are usually very poor people who are not creditworthy enough to access credit
from formal credit institutions. SHGs can open a Savings Bank account with the
nearest Commercial or Regional Rural Bank or a Co-operative Bank. This isessential to keep the thrift and other money of SHG safely and also to improve the
transparency levels of SHGs transactions. Opening of an SB account, in fact, is
the beginning of relationship between the bank and the SHG. The reserve bank of
India has issued instructions to all banks permitting them to open SB accounts in
the name of registered or unregistered SHGs.
Micro credit is defined as provision of thrift, credit and other financial services and
products of very small amount to the poor in rural, semi urban and urban areas for
enabling them to raise their income levels and improve living standards. Micro
Credit Institutions are those which provide these facilities.
Applicable Interest Rates
The reform of the interest rate regime as constituted an integral part of the
financial sector reform initiated in our country in 1991. In consonance with this
reform process, interest rate applicable to loans given by banks to micro credit
organizations or by the micro credit organizations to Self Help Groups/members-
beneficiaries has been left to their discretion. The interest rate ceiling applicable to
direct small loans given by banks to individual borrowers, however, continues to
remain in force.
13.1 The Terms & Conditions for Accessing Micro
Credit.
Banks have been given freedom to formulate their own lending norms keeping in
view ground realities. They have been asked to devise appropriate loan and saving
products and the related terms and conditions including size of the loan, unit cost,unit size, maturity period, grace period, margins etc. Such credit covers not only
consumption and production loans for various farm and non-farm activities of the
poor but also include their credit needs such as housing and shelter improvements.
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13.2 Self Help Group (SHG)
A self help group (SHG) is a registered or unregistered group of microentrepreneurs having homogenous social and economic background voluntarily
coming together to save money regularly, to mutually agree to a common fund and
to meet their emergency needs on mutual help basis. The group members use
collective wisdom and peer pressure to ensure proper end use of credit and timely
repayment thereof. In fact, peer pressure has been recognized as an effective
substitute for collaterals.
THE Advantages of financing through SHGS
Economically poor individual gains strength as part of a group. Besides, financing
through SHGs reduces transaction costs for both lenders and borrowers. While
lenders have to handle on a single SHG account instead of a large number of small
sized individual accounts, borrowers as part of a SHG cut down expenses on travel
(to & from the branch and other places) for completing paper work and on the loss
of workdays in canvassing for loans.
13.3 Role Played by Non-Governmental
organizations (NGO ) in Provision of MicroCredit.
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A Non Governmental Organization (NGO) is a voluntary organization established
to undertake social intermediation like organizing SHGs of micro entrepreneurs
and entrusting them to banks for credit linkage or financial intermediation like
borrowing bulk funds from banks for on lending to SHGs.
13.4 LATEST MICRO CREDIT DISBURSEMENT
INDICATORs.
With a view to facilitating smoother and more meaningful banking with the poor, a
Pilot Project for purveying micro credit by linking Self- Help groups with banks
was launched by NABARD in 1991-92 with a view to facilitating smoother and
more meaningful banking with the poor. RBI had then advised commercial banks
to actively participate in this linkage programme. The scheme has since been
extended to RRBs and co-operative banks. The number of SHGs linked to banks
aggregated 461478 as on March 31, 2002. This translates into an estimated 7.87
million very poor families brought within the fold of formal banking services as on
March 31, 2002. More than 90% of the groups linked with banks are exclusive
women groups. Cumulative disbursement of bank loans to these SHGs stood at Rs.
1026.34 crores as on March 31, 02 with an average loan of Rs. 22240 per SHG
and Rs. 1316 per family. As regards model wise linkage , while Model 1 , viz.directly to SHGS without intervention of any NGO now accounts for 16% , Model
2, viz. directly to SHGs with facilitation by NGOs and other formal agencies
amounts to 75% and Model 3, viz. through NGO as facilitator and financing
agency represents 9 % of the total linkage. While 488 districts in all the states have
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been covered under this programme, 444 banks including 44 commercial banks ,
17 in the pvt sector, 191 RRBs and 209 co-operative banks along with 2155 NGOs
are now associated with the SHG bank linkage programme. While the SHG bank
linkage programme has surely emerged as the dominant micro finance
dispensation model in India, other models have evolved as significant microfinance purveying channels.
The other successful models that have emerged are as follows:
(a) An Intermediate Model that works on banking principles with focus on both
savings and credit activities and where banking services are provided to the
clients either directly or through SHGs.
(b) There is also a Wholesale Banking model where the clients comprise
NGOS, MFIs and SHG federations. This Model involves a unique package
of providing both loans and capacity building support to its partners.
(c) Further, there is an Individual Banking model that has its clients as
individuals or joint liability groups. While programme management and
client appraisal in this model may be an challenge, it is best suited to
lending to enterprises.
Keeping these models for delivery of credit to the poor and the unorganized sector
in view RBI is moving towards a systems perspective for providing effective
policy support not only because a no. of different institutions are involved but also
because these institutions have very different institutional goals. With this in view,
a series of initiatives is being planned in the coming months for putting in place a
more vibrant micro finance dispensation and competitive models of micro finance
delivery would be encouraged to co-exist.
13.5 FOREIGN INVESTMENT IN MICRO CREDITPROJECTS
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Government of India with their notification dated August 29, 2000 have included
Micro Credit/ Rural credit in the list of permitted non banking financial company
(NBFC) Activities for being considered for foreign direct investments (FDB) /
Overseas co-operate bodies(OCB) / Non- Resident Indians (NRI) Investment to
encourage foreign participation in micro- Credit Projects. This covers creditfacility at micro level for providing to small producers and small micro enterprises
in rural and urban areas.
13.6 MICRO FINANCE INSTITUTIONS (MFIS)
Even as banks are physically present in rural areas and offer concessional interest
rates, small farmers are unable to access them because of borrower-unfriendly
products and procedures, inflexibility and delay, and high transaction costs, both
legitimate and illegal. It was in this context that NGOs began to examine
alternative ways to enhance access to credit by the poor since the mid-1970s. After
pioneering efforts by organizations like SEWA, MYRADA, PRADAN and CDF,
in 1992 the RBI and NABARD encouraged commercial banks to link up with
NGOs to establish and finance self-help groups of the poor.
Despite this impressive growth, there are still a number of problems with micro-
credit. For a start, the average loan size through SHGs is only about Rs 1600. This
is too little to even alleviate poverty, leave alone lift a family out of poverty.
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Second, the distribution of the SHG loans is highly skewed regionally, with nearly
75% coming to the four southern states, while less than 0.6% went to all the eight
northeastern states. The geographical distribution of MFIs is not much better.
There are also problems of banks and MFIs being forced by vote-seeking political
leaders to lend at unrealistically low interest rates, which does not cover costs, and
thus eventually makes the whole effort financially unsustainable.
INFORMAL SOURCES:
RBI data reveals that informal sources provide a significant part of the total credit
needs of the rural population. The magnitude of the dependence of the rural poor
on informal sources of credit can be seen from the findings of the successive All
India Debt and Investment Surveys (AIDIS). These show that the share of non-
institutional agencies (informal sector) in the outstanding cash dues of rural
households has reduced from 83.7% in 1961 to 36% in 1991. As per the latest
AIDIS, 1992, formal institutional sources, banks and cooperatives provided credit
support to almost 64% of the rural households, while professional and agriculturalmoneylenders extend credit to about one sixth of the rural households. From the
point of view of a small farmer, the important informal sources of credit are large
farmers, input suppliers (seed, fertilizer and pesticide dealers), commission agents
or arhatiyas who arrange the sale of a farmers produce in a mandi or market yard,
and occasionally professional moneylenders. The interest rates from these sources
vary from 3% per month in the southern states to over 10% per month in the
eastern states. Moreover, such credit is often tied such as the obligation to work
in the large farmers land as needed, and selling their produce through the same
arhatiyas who advanced a loan for the sowing season. The relationship varies from
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being mildly unfavorable to the farmer to being highly exploitative, depending on
the place.
To increase access to credit for small farmers, use must be made of the informal
sector players and the best way is to make them compete with each other. Thus in
locations where there are only few input dealers or arhatiyas, an effort should be
made to help set up others in the same business. Bank loans, for instance, should
be provided to set up seed/fertiliser shops and licenses given to more arahtiyas in
regulated market yards. Once they are forced to compete, they will end up serving
the small farmer better and on more reasonable terms.
INTEREST RATES:
One of the abiding questions related to extension of credit to small farmers
revolves around interest rates. Both emotive as well as intellectual arguments tend
to suggest that smaller borrowers, including farmers, should be charged a lower
rate of interest than larger borrowers. Policies and directives based on this thinking
have been dominant in India since over a hundred years. This was partly justified
on the grounds of the usurious practices of traditional moneylenders, often aimed
at dispossessing borrowers of their main collateral security land. This led to the
enactment of anti-usury laws, known in most states as the Moneylenders Acts.
However, the result has been perverse, reducing the supply of credit and increasing
the interest rate of the little that is given. The discomforting fact is that interest
rates of informal lenders are difficult to control, whereas formal institutions which
are under public scrutiny have to keep their interest rates low. Thus formal
institutions tend to ration credit to small farmers since they are not able to meet
their full costs. Transaction costs on small loans are necessarily higher than for
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large loans, when expressed as a percentage of the loan amount. The pricing
should cover the cost of funds, the transaction costs and the risk costs (likelihood
of bad debts). Most arguments in favor of lower interest rates for small farmers do
not take this into account. As a result, banks find it unprofitable to lend to small
farmers and effectively cut their losses by lending as little as they can get by
without incurring regulatory wrath.
In India, though interest rates on small loans by RRBs and cooperative banks were
deregulated in 1996, the amount of credit by these banks has not gone up
significantly. This is because the regulatory cap was never removed for the largest
channel of rural credit, the commercial banks, thus ensuring that RRBs and
cooperatives could never significantly increase their interest rates. More recently,
the government has been asking (though it has refrained from getting the RBI to
direct) banks to reduce interest rates to farmers to 9%, on the grounds that interest
rates on housing loans to the urban middle class were down to 7-8%. Though it is
acceptable to compare these rates, what is not discussed is that the transaction cost
of an urban housing loan is much lower because of high volumes per branch and
much lower risk levels. Bad debts for housing loans are a fraction of one percent
while those for agricultural loans are anywhere from 3-5%, even without the risk
of politic