LESSON 5 "AGRICULTURE CREDIT IN INDIA"
Studying this chapter should enable you to understand:
• Sources and pattern of agriculture credit in India.
• Institutional framework of Indian agriculture credit.
• Trends and Appraisal of Institutional agriculture credit.
• Suggested measures to improve agriculture credit.
• Recent Government’s Initiatives:-
Introduction Agriculture credit is an important prerequisite for agricultural growth. Agricultural policies have been reviewed from time to time to provide adequate and timely availability of finance to this sector. Rural credit system assumes importance because for most of the Indian rural families, savings are inadequate to finance farming and other economic activities. This coupled with the lack of simultaneity between income realization and expenditure and lumpiness of agricultural capital investments. The institutional credit system is critical for agricultural development and its role has further increased in the liberalized economic environment. In India a multi-agency approach comprising co-operative banks, scheduled commercial banks and regional rural banks (RRBs) has been followed to allow credit to agricultural sector.
* Types of Agriculture Credit:-
The agriculture credit can be classified on the basis of:-
(1) According to Tenure of Agricultural Credit i.e. the credit requirement based on the timeperiod of loans:-
* It can of three types:-
(a) Short-Term:- It refers to the loans required for meeting the short-term requirements of the cultivators. These loans are generally for a period not exceeding and repaid after the harvest. For example loans required for the purchase of fertilizers, HYV seed, for meeting expense on religious or social ceremonies etc.
(b) Medium-Term:- These loans are for a period up to 5 years. These are the financial requirements to make improvements on land, buying cattle or agricultural equipments, digging up of canals etc.
(c) Long-Term:- These loans are for a period of more than 5 years and are generally required to buy additional land or tractor or making permanent improvements on land.
(2) According to Purpose of Agriculture Credit: -The agriculture credit on the basis of purpose for which the credit is used can be of two types:-
a) Productive: Productive loans are the loans that are related to agricultural production and economically justified. For example purchase of tractor, land, seeds etc.
b) Unproductive:- Unproductive credit are used for personal consumption and unrelated to productive activity for example loans for expenditure on marriages, religious ceremonies etc.
* Source of Agricultural Credit in India:
There are two broad sources of agricultural credit in India:-
(1) Non-Institutional Sources
(2) Institutional Sources
(1) Non-Institutional Sources:- The non-institutional finance forms an important source of rural credit in India, constituting around 40 percent of total credit in India. The interest charged by the non-institutional lenders is usually very high. The land or other assets are kept as collateral.
The important sources of non-institutional credit are as follows:-
(i) Money-Lenders: - Money-lending has been the widely prevalent profession in the rural areas. The money-lenders charge huge rate of interest and mortgage the property of the cultivators and in some cases even the peasants and members of his family are kept as collateral.
(ii) Other Private Sources:-
(a) Traders, landlords and commission agents:- The agents give credit on the hypothecation of crops which when harvested is used to repay loans.
(b) Credit from relatives:-
These credits are generally used for meeting personal expenditure.
(2) Institutional Sources:-
The general policy on agricultural credit has been one of progressive institutionalization aimed at providing timely and adequate credit to farmers for increasing agricultural production and productivity. Providing better access to institutional credit for the small and marginal farmers and other weaker sections to enable them to adopt modern technology and improved agricultural practices has been a major thrust of the policy.
* National Bank for Agriculture and Rural Development (NABARD) is an apex institution established in 1982 for rural credit in India. It doesn’t directly finance farmers and other rural people. It grants assistance to them through the institutions described as follows:-
1. Rural Co-Operative Credit Institutions:-
Rural Credit cooperatives are the oldest and most extensive form of rural institutional financing in India. The major thrust of these cooperatives in the area of agricultural credit is the prevention of exploitation of the peasants by moneylenders. The rural credit cooperatives may be further divided into short-term credit cooperatives and long-term credit cooperatives.
The short-term credit cooperatives provide short-term rural credit and are based on a three-tier structure as follows:-
a) Primary Agricultural Credit Societies (PACs):-
These are organized at the village level. These societies generally advance loans only for productive purposes. The main objective of a PACS is to raise capital for the purpose of giving loans and supporting the essential activities of the members such as supply of agricultural inputs at cheap price, improving irrigation on land owned by members, encourage various income-augmenting activities such as horticulture, animal husbandry, poultry etc. In India, around 99.5 percent of villages are covered by PACs.
(b) District Central Cooperative Banks:- These cooperatives are organized at the district level.
The PACS are affiliated to the District Central Co-operative Banks (DCCBs). DCCBs coordinate the activities of district central financing agencies, organize credit for PACs and carry out banking business.
(c) State Co-Operative Banks:-
The DCCBs are affiliated to State Co-operative Banks (SCBs), which coordinate the activities of DCCBs, organize provision of finance for credit worthy farmers, carry out banking business and act as leader of the Co-operatives in the States.
Long-term credit Cooperatives: These cooperatives meet long-term credit of the
farmers and are organized at two levels:
(i) Primary Co-Operative Agriculture and Rural Development Banks:-
These banks operate at the village level as an independent unit.
(ii) State Co-Operative Agriculture and Rural Development Banks:-
These banks operate at state level through their branches in different villages.
2. Commercial Banks:-
Commercial Banks(CBs) provide rural credit by establishing their branches in the rural areas. The share of commercial banks in rural credit was very meager till 1969. The All India Rural Credit Review Committee (1969) recommended multi agency approach to the rural and especially agricultural credit. It suggested the increasing role of the CBs in providing agricultural credit. Further, under the Social Control Policy introduced in 1967 and subsequently the nationalization of 14 major CBs in 1969 (followed by another six banks in 1980), CBs have been given a special responsibility to set up their advances for agricultural and allied activities in the country. The major expansion of rural branches took place and CBs introduced Lead Bank scheme and district credit plans for rural areas. Banks were asked to lend 18 percent of their total advances to agriculture within the quota of 40 percent of priority sector lending. This expansion of rural credit remained till the late 1980s. However, during late 80’s, CBs suffered huge losses due to waiving of agricultural loans by the government. The financial liberalization process with the adoption of "Narasimham Committee report in 1993" has necessitated the banks to focus on profitability and adopt prudential norms. The proportion of bank credit to rural areas especially small borrowers has come down steadily.
3. Regional Rural Banks (RRBs):-
RRBs are the specialised banks established under RRB Act, 1976 to cater to the needs of
the rural poor. RRBs are set-up as rural-oriented commercial banks with the low cost profile of cooperatives but with the professional discipline and modern outlook of commercial banks.
Between 1975 and 1987, 196 RRBs were established with over 14,000 branches. As a result of the amalgamation, the number of RRBs was reduced from 196 to 133 as on 31 March, 2006 and to 96 as on 30 April 2007. RRBs covered 525 out of 605 districts as on 31 March 2006. After amalgamation, RRBs have become quite large covering most parts of the State. Increased coverage of districts by RRBs makes them an important segment of the Rural Financial Institutions (RFI). The branch network of RRBs in the rural area form around 43 per cent of the total rural branches of commercial banks. A large number of branches of RRBs were opened in the un-banked or under-banked areas providing services to the interior and far-flung areas of the country. RRBs primarily cover small and marginal farmers, landless laborers, rural artisans, small traders and other weaker sections of the rural community. However, even after so many years, the market share of RRBs in rural credit remained low and have suffered huge losses. In recent years Government has initiated reform process to improve the functioning of RRBs. Efforts are made to increase the capital base and investible fund of these banks. The financial support is provided to improve training, technology development including computerization in these banks. The structural consolidation process has been initiated by amalgamating these banks. This has resulted into pooling of resources including experienced work force, common marketing efforts and thus better customer services. Further, RRBs have been able to derive the benefits of increased area of operations and enhanced credit exposure.
These measures have provided remarkable improvements in the financial performance of RRBs. The number of RRBs incurring losses and the levels of non- performing assets has reduced dramatically.
4. Micro Finance Institutions (MFIs):-
Banks offer concessional interest rates for the rural credit. However; 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. Thus, Non-Government Organisations (NGOs) are providing alternative means to enhance access to credit by the poor since mid-70’s. 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 (SHGs) of the poor. The RBI has included financing of SHGs under priority sector lending. At present, there are three groups of SHGs viz. SHGs formed and financed by the banks (20 percent); SHGs formed by other formal agencies but financed by banks; SHGs financed by banks using NGOs and other agencies (8 percent).These institutions provide small loans to the poor at low interest rates without collateral.
The experience of micro-finance scheme in India suggests that:-
i) It is the cost effective way of financing the rural poor;
ii) The repayment rate of SHGs is more than 95 percent due to peer pressure.
iii) It reduces transaction costs of borrowers as well as lenders;
iv) It inculcates the habit of thrift among members and provide timely credit.
*Concept-Check Questions:-
Q. Explain the reasons that necessitate agriculture credit?
Q. What are the various kinds of agriculture credit?
Q. Give the distinction between institutional and non-institutional source of agriculture finance.
Q. What are the major sources of institutional agriculture credit in India?
Trends in Agricultural Credit :-
Over time, spectacular progress has been achieved in terms of the scale and outreach of institutional framework for agricultural credit. Some of the major discernible trends are as follows:
1. Increasing Dependence on Institutional Credit :-
One of the major achievements in the post-independent India has been the widening of the spread of institutional machinery for credit and decline in the role of non-institutional sources. The share of institutional credit, which was little over 7 per cent in 1951, increased manifold to over 66 per cent in 1991, reflecting a remarkable decline in the share of non institutional credit from around 93 per cent to about 31 per cent during the same period.
2. Trends of Overall Institutional Credit Flow :-
Over time, the flow of credit to agriculture and rural sector has expanded impressively. The ground level credit flow had registered an increase from Rs. 1675 crore in 1975-96 to Rs.86891 crore in 2003-04 and further to Rs.203297 crore in 2005-06. This rate of growth was even higher than the growth rate of Gross Domestic Product (GDP) originating in agriculture.
Despite this growth, the credit needs of agriculture have not been met fully and
overwhelming numbers of farm households have not been able to borrow from institutional sources.
3. Agency-wise Credit Flow :-
The analysis of agency wise credit flow indicates that the cooperative banks were the major source of agriculture credit in 1975-76 constituting around 71 percent of the total ground level credit flow followed by commercial banks at 24.2 percent and regional rural banks at 4.9 percent .
Though cooperative banks had dominated agriculture credit supply till the early reform period, commercial banks and RRBs recorded impressive growth rates. As a result, in 2006-07, the share of cooperative banks in the total institutional credit flow receded to 20.1 percent and that of commercial banks advanced to 69.1 percent. Although the quantum of disbursement from cooperative banks increased, it could not keep pace with commercial banks in enhancing credit flow due to several reasons including its poor financial health, dual control, lack of internal controls and corporate governance norms and excessive dependence on other financial institutions.
4. Size-wise Credit Flow:-
Despite impressive growth in direct credit to farmers from the scheduled commercial
banks between 1991-92 and 2003-04, contrary to expectation, credit disbursement to small and marginal farmers has not been encouraging. Though the number of accounts increased for small farmers yet the credit flow favoured the richer farmers.
5. Region-wise Credit Flow :-
While analyzing the pattern of credit flow, it is observed that the proportions of bank
deposits and credit shares have moved in favour of the South, West and North regions. While the share of loans in the total disbursement of credit for agriculture and allied activities were the maximum for the South region, it was the minimum for North-east region.
Recent Initiatives taken by Govt. Of India:-
Government of India & Reserve Bank of India: In order to increase credit flow to the agriculture sector, the policy of doubling of agricultural credit in three years was introduced in 2004-05. In order to expand the outreach of the banking services, banks made available basic banking ‘no-frills’ account with low or nil minimum balances as well as low or no charges in 2005. The regional rural banks were also specifically advised to allow limited overdraft facilities in ‘no-frills’ accounts without any collateral or linkage to any purpose.
National Agricultural Insurance Scheme (NAIS):- NAIS is implemented since Rabi 1999-2000 season with the objectives to provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crops as a result of natural calamities, pests and diseases and to encourage the farmers to adopt progressive farming practices, high value in-puts and higher technology in agriculture and to help stabilize farm incomes particularly in disaster
years.
* Government of India & NABARD :-
i. Rural Infrastructure Development Fund:- RIDF was established in 1995-96 with a corpus of Rs. 2,000crores with the major objective of providing funds to state governments and state owned corporations to develop rural infrastructure such as rural roads, rural bridges, irrigation works, soil conservation, flood protection, drinking water, infrastructure for rural education etc.
The total corpus of RIDF till 2007-08 (RIDF-I to RIDF-XIII) amounted to Rs.72, 000 crores
with 2008-09 budget further adding the amount of RIDF XIV of Rs. 14,000 crores to this corpus. The total sanctions and disbursements as on 30 June 2007 aggregated Rs. 61312.27 crores and Rs.38581.82 crores respectively.
ii. Micro Finance Innovations: -The credit accessibility for the poor from conventional banking is limited due to lack of collaterals and information. Micro finance has emerged as an alternative financial vehicle that provides micro credit or small loans granted to the poor without any collateral. These loans are provided through micro finance institutions (MFIs). NABARD plays a key role in developing the MFIs by providing them refinance facility at low interest rates.
iii. Kisan Credit Card Schemes: -The kisan credit cards (KCC) scheme was introduced in 1998-99 to facilitate short-term credit to farmers. Each farmer is given with a kisan credit card and a pass book for providing revolving cash credit facilities. NABARD provide refinance facility to commercial banks and cooperatives to provide credit under this scheme.
iv. Refinance under Swarnajayanti Gram Swarozgar Yojna (SGSY):- NABARD provides refinance facility to institutions that support SGSY.
v. Co-operative Development Fund: -NABARD has set up the cooperative development fund in 1993 with objective of strengthening the co-operative credit institutions in the areas of resource mobilization, recovery position etc. the assistance is provided to cooperatives by way of soft loans or grants.
"Weaknesses in Rural Credit Structure" :-
1. Overemphasis of Monetary Credit: -The rural credit institutions have given overemphasis on the financial assistance to the cultivators. While the finance is very important factor but it should be complemented with the extension of services in form of guidance, expertise and counseling on agricultural issues.
2. Multiplicity of Institutions:- The rural credit structure is based on multi agency credit system whereby there exist numerous organizations providing similar kind of financial services. There is a lack of coordination in the system and the commercial viability is adversely affected in this scenario.
3. Lack of Motivation: - In order to fill the gap that occurred due to the failure of rural cooperative societies Government gave increasing role to the commercial banks. However, commercial banks lack the desired skills and expertise in the agro-credit. The banks have enough financial resources but the service consultancy is not available. Thus, there is a failure to provide complete package of assistance to the farmers. Further, financial sector reforms have put pressure on banks to improve their financial position and so these banks are now concentrating on selected clientele of large borrowers
4. Financial Exclusion: - Despite of a large network of the institutional credit system, it has not been able to adequately penetrate the informal rural financial markets and the non-institutional sources continue to play a dominant role in purveying the credit needs of the people residing in rural areas. The results of the All-India Debt and Investment Survey (AIDIS, 2002) also indicate that the share of the non-institutional sources, in the total credit of the cultivator households, hadincreased from 30.6 percent in 1991 to 38.9 percent in 2002.
5. High Interest Rates:- The rate of interest charged by rural financial institutions (RFIs) from farmers continues to be considerably higher than those charged by financial institutions from urban consumers. The owners of small or marginal farms, which are non-viable or viable at the margin, and self-employed in the informal sector, cannot afford to bear the level of interest charged by RFIs.
6. Procedural Delays:- There is a problem of considerable delays in processing of loan
applications and collaterals. Thus farmers shy away from institutional financing and increase their dependency upon non-institutional sources.
7. Poor Recoveries: - Banks are shying away from rural financing mainly because of poor recoveries which is inflicting the system. It is ironical that the recoveries position is adverse amongst rich farmers than amongst the small farmers. The political decisions of waiving off loans are further putting pressures on the financial system.
* Suggestions for Improving Institutional Rural Credit System:-
1. Financial Discipline to Improve Recovery:- A national consensus among political parties should be evolved for not politicizing the RFIs and resist from announcement of loan or interest waiver schemes and giving calls for not repaying the institutional loans. However, given the risk involved in the agriculture credit the recovery system should be flexible and humane.
2. Revamping ( To make something more attractive) the Cooperative Credit Structure:- The Cooperative Credit Structure should be strengthened to make use of its wider reach. These have to be recapitalised so as to provide funds for improving their financial positions. There is a need of capacity building, human resource development, institutional restructuring to ensure democratic functioning, and improving the regulatory regime to empower the Reserve Bank of India (RBI) to enforce prudent financial management.
3. Better Physical, Social and Economic Infrastructure: - The long term policy framework needs to be designed to improve infrastructure facilities so as to boost rural economic growth.
This requires increased public expenditure on social infrastructure (like education, availability of drinking water, health facilities), physical infrastructure (like roads, power) and economic infrastructure like (irrigation, modern agricultural techniques). These measures would help to improve the debt paying capacity of rural poor and provide greater opportunities to RFIs.
4. Financial cum Consultancy Approach: -RFIs needs to provide extension services like consultancy about seeds, availability and use of modern inputs, marketing strategies etc to the cultivators so that a holistic package of assistance can be provided to them.
5. Group Approach to Lending: - The lending to homogenous farmer’s groups needs to be organized to improve credit delivery. This would help to improve recovery because of peer pressure. Further, group lending tends to be cost-effective. Involving NGOs or rural educated youths in organizing farmers or rural families in groups, scrutinizing applications, disbursement of loan and effecting recoveries would help RFIs in reducing lending costs.
6. Autonomy to RRBs: - RRBs should be given more autonomy and flexibility in planning and lending policies, so that their comparative advantage in rural lending is restored.
7. Greater involvement of Micro Finance Organizations: - The banks need to involve microfinance agencies like SHGs, NGOs etc. and other grass root level financial intermediaries who have better understanding of the credit needs and recovery situations.
8. Technological Up Gradation: -Technological improvements like computerization can be critical in building up a reliable credit information system and database on customers, reducing transaction costs and facilitating better pricing of risk, improving the efficiency of the financial system, and thereby increasing the access of un-banked rural people in an efficient manner.
9. Information Dissemination to Rural Poor:- Credit counseling, awareness and financial education regarding the benefits of institutional financing are important for effective expansion of financial services in rural areas. To do this, banks may utilize the services of nongovernmental organisations, village youth clubs, village panchayats, farmer clubs and self-help groups into confidence.
"Notes on National Bank for Agriculture and Rural Development (NABARD)":-
NABARD was established in July 1992 as an apex institution to coordinate the
activities of organizations engaged in the area of rural credit. It took over from RBI all the functions that the latter performed in the field of rural credit. It is designed specifically to provide undivided attention and focus to the credit problems of rural sector. As an apex bank it is involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes. The functions of NABARD can be divided into three categories:
(1) Credit Functions:
NABARD's credit functions cover planning, dispensation and monitoring of credit.
This activity involves framing policy and guidelines for rural financial institutions, providing credit facilities to issuing organizations such as commercial banks, cooperatives etc. and monitoring the flow of ground level rural credit. As stated earlier, NABARD doesn’t directly deal with farmers and other rural people. It provides refinance facilities in terms of shortterm loans for crops, marketing and other working capital requirements, medium-term and long-term credit to cooperatives for investment purposes including rural infrastructure. The loans are also provided to the state government for investment in cooperatives.
(2) Developmental and Promotional Measures: -
In order make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as to provide help to cooperative banks and Regional Rural Banks to prepare development actions plans for themselves, enter into MoU with state governments, cooperative banks and RRBs to improve the affairs of banks, provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells .
(3) Supervisory Functions:
NABARD has been sharing with the Reserve Bank of India certain supervisory
functions in respect of cooperative banks and Regional Rural Banks (RRBs). NABARD
has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on a voluntary basis.
The objectives of periodic inspections is to protect the interest of the depositors, to ensure banks work according to the rules and regulation issued by Government and to examine the financial soundness of the banks.
Conclusion :-
The rural credit systems have under gone several changes during the last decade. There has been an increasing trend towards institutional rural financing. The financial institutions are under stress, particularly since the financial sector reforms of 1992-93. The credit policy should continue to emphasize small borrowers. The commercial banks have started feeling shy of lending to agricultural sector and rural poor. The provisions of mandatory lending for priority sector and the agricultural activities should continue. The banks should take the help of NGOs and local formal institutions in their lending programmes to reduce the transaction costs and improve recoveries. The financial cum consultancy approach needs to be followed. For meeting the credit needs of the poor, the programmes like linking of self-help groups (SHGs) with lending agencies are to be further strengthened.
Concept-Check Questions
Q.1 “There is an increasing trend towards institutionalization of agriculture credit in
India”. Do you agree with the statement?
Q.2 Which institutional source accounts for major proportion of agriculture credit in India?
Q.3 What are the credit and supervisory functions of NABARD?
Q.4 What do you mean by financial cum consultancy approach agriculture credit?
Q.5 What do you understand by Micro-financial institutions?
Q.6 Which one dominate the agriculture credit – Short-term or Long-term?
Studying this chapter should enable you to understand:
• Sources and pattern of agriculture credit in India.
• Institutional framework of Indian agriculture credit.
• Trends and Appraisal of Institutional agriculture credit.
• Suggested measures to improve agriculture credit.
• Recent Government’s Initiatives:-
Introduction Agriculture credit is an important prerequisite for agricultural growth. Agricultural policies have been reviewed from time to time to provide adequate and timely availability of finance to this sector. Rural credit system assumes importance because for most of the Indian rural families, savings are inadequate to finance farming and other economic activities. This coupled with the lack of simultaneity between income realization and expenditure and lumpiness of agricultural capital investments. The institutional credit system is critical for agricultural development and its role has further increased in the liberalized economic environment. In India a multi-agency approach comprising co-operative banks, scheduled commercial banks and regional rural banks (RRBs) has been followed to allow credit to agricultural sector.
* Types of Agriculture Credit:-
The agriculture credit can be classified on the basis of:-
(1) According to Tenure of Agricultural Credit i.e. the credit requirement based on the timeperiod of loans:-
* It can of three types:-
(a) Short-Term:- It refers to the loans required for meeting the short-term requirements of the cultivators. These loans are generally for a period not exceeding and repaid after the harvest. For example loans required for the purchase of fertilizers, HYV seed, for meeting expense on religious or social ceremonies etc.
(b) Medium-Term:- These loans are for a period up to 5 years. These are the financial requirements to make improvements on land, buying cattle or agricultural equipments, digging up of canals etc.
(c) Long-Term:- These loans are for a period of more than 5 years and are generally required to buy additional land or tractor or making permanent improvements on land.
(2) According to Purpose of Agriculture Credit: -The agriculture credit on the basis of purpose for which the credit is used can be of two types:-
a) Productive: Productive loans are the loans that are related to agricultural production and economically justified. For example purchase of tractor, land, seeds etc.
b) Unproductive:- Unproductive credit are used for personal consumption and unrelated to productive activity for example loans for expenditure on marriages, religious ceremonies etc.
* Source of Agricultural Credit in India:
There are two broad sources of agricultural credit in India:-
(1) Non-Institutional Sources
(2) Institutional Sources
(1) Non-Institutional Sources:- The non-institutional finance forms an important source of rural credit in India, constituting around 40 percent of total credit in India. The interest charged by the non-institutional lenders is usually very high. The land or other assets are kept as collateral.
The important sources of non-institutional credit are as follows:-
(i) Money-Lenders: - Money-lending has been the widely prevalent profession in the rural areas. The money-lenders charge huge rate of interest and mortgage the property of the cultivators and in some cases even the peasants and members of his family are kept as collateral.
(ii) Other Private Sources:-
(a) Traders, landlords and commission agents:- The agents give credit on the hypothecation of crops which when harvested is used to repay loans.
(b) Credit from relatives:-
These credits are generally used for meeting personal expenditure.
(2) Institutional Sources:-
The general policy on agricultural credit has been one of progressive institutionalization aimed at providing timely and adequate credit to farmers for increasing agricultural production and productivity. Providing better access to institutional credit for the small and marginal farmers and other weaker sections to enable them to adopt modern technology and improved agricultural practices has been a major thrust of the policy.
* National Bank for Agriculture and Rural Development (NABARD) is an apex institution established in 1982 for rural credit in India. It doesn’t directly finance farmers and other rural people. It grants assistance to them through the institutions described as follows:-
1. Rural Co-Operative Credit Institutions:-
Rural Credit cooperatives are the oldest and most extensive form of rural institutional financing in India. The major thrust of these cooperatives in the area of agricultural credit is the prevention of exploitation of the peasants by moneylenders. The rural credit cooperatives may be further divided into short-term credit cooperatives and long-term credit cooperatives.
The short-term credit cooperatives provide short-term rural credit and are based on a three-tier structure as follows:-
a) Primary Agricultural Credit Societies (PACs):-
These are organized at the village level. These societies generally advance loans only for productive purposes. The main objective of a PACS is to raise capital for the purpose of giving loans and supporting the essential activities of the members such as supply of agricultural inputs at cheap price, improving irrigation on land owned by members, encourage various income-augmenting activities such as horticulture, animal husbandry, poultry etc. In India, around 99.5 percent of villages are covered by PACs.
(b) District Central Cooperative Banks:- These cooperatives are organized at the district level.
The PACS are affiliated to the District Central Co-operative Banks (DCCBs). DCCBs coordinate the activities of district central financing agencies, organize credit for PACs and carry out banking business.
(c) State Co-Operative Banks:-
The DCCBs are affiliated to State Co-operative Banks (SCBs), which coordinate the activities of DCCBs, organize provision of finance for credit worthy farmers, carry out banking business and act as leader of the Co-operatives in the States.
Long-term credit Cooperatives: These cooperatives meet long-term credit of the
farmers and are organized at two levels:
(i) Primary Co-Operative Agriculture and Rural Development Banks:-
These banks operate at the village level as an independent unit.
(ii) State Co-Operative Agriculture and Rural Development Banks:-
These banks operate at state level through their branches in different villages.
2. Commercial Banks:-
Commercial Banks(CBs) provide rural credit by establishing their branches in the rural areas. The share of commercial banks in rural credit was very meager till 1969. The All India Rural Credit Review Committee (1969) recommended multi agency approach to the rural and especially agricultural credit. It suggested the increasing role of the CBs in providing agricultural credit. Further, under the Social Control Policy introduced in 1967 and subsequently the nationalization of 14 major CBs in 1969 (followed by another six banks in 1980), CBs have been given a special responsibility to set up their advances for agricultural and allied activities in the country. The major expansion of rural branches took place and CBs introduced Lead Bank scheme and district credit plans for rural areas. Banks were asked to lend 18 percent of their total advances to agriculture within the quota of 40 percent of priority sector lending. This expansion of rural credit remained till the late 1980s. However, during late 80’s, CBs suffered huge losses due to waiving of agricultural loans by the government. The financial liberalization process with the adoption of "Narasimham Committee report in 1993" has necessitated the banks to focus on profitability and adopt prudential norms. The proportion of bank credit to rural areas especially small borrowers has come down steadily.
3. Regional Rural Banks (RRBs):-
RRBs are the specialised banks established under RRB Act, 1976 to cater to the needs of
the rural poor. RRBs are set-up as rural-oriented commercial banks with the low cost profile of cooperatives but with the professional discipline and modern outlook of commercial banks.
Between 1975 and 1987, 196 RRBs were established with over 14,000 branches. As a result of the amalgamation, the number of RRBs was reduced from 196 to 133 as on 31 March, 2006 and to 96 as on 30 April 2007. RRBs covered 525 out of 605 districts as on 31 March 2006. After amalgamation, RRBs have become quite large covering most parts of the State. Increased coverage of districts by RRBs makes them an important segment of the Rural Financial Institutions (RFI). The branch network of RRBs in the rural area form around 43 per cent of the total rural branches of commercial banks. A large number of branches of RRBs were opened in the un-banked or under-banked areas providing services to the interior and far-flung areas of the country. RRBs primarily cover small and marginal farmers, landless laborers, rural artisans, small traders and other weaker sections of the rural community. However, even after so many years, the market share of RRBs in rural credit remained low and have suffered huge losses. In recent years Government has initiated reform process to improve the functioning of RRBs. Efforts are made to increase the capital base and investible fund of these banks. The financial support is provided to improve training, technology development including computerization in these banks. The structural consolidation process has been initiated by amalgamating these banks. This has resulted into pooling of resources including experienced work force, common marketing efforts and thus better customer services. Further, RRBs have been able to derive the benefits of increased area of operations and enhanced credit exposure.
These measures have provided remarkable improvements in the financial performance of RRBs. The number of RRBs incurring losses and the levels of non- performing assets has reduced dramatically.
4. Micro Finance Institutions (MFIs):-
Banks offer concessional interest rates for the rural credit. However; 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. Thus, Non-Government Organisations (NGOs) are providing alternative means to enhance access to credit by the poor since mid-70’s. 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 (SHGs) of the poor. The RBI has included financing of SHGs under priority sector lending. At present, there are three groups of SHGs viz. SHGs formed and financed by the banks (20 percent); SHGs formed by other formal agencies but financed by banks; SHGs financed by banks using NGOs and other agencies (8 percent).These institutions provide small loans to the poor at low interest rates without collateral.
The experience of micro-finance scheme in India suggests that:-
i) It is the cost effective way of financing the rural poor;
ii) The repayment rate of SHGs is more than 95 percent due to peer pressure.
iii) It reduces transaction costs of borrowers as well as lenders;
iv) It inculcates the habit of thrift among members and provide timely credit.
*Concept-Check Questions:-
Q. Explain the reasons that necessitate agriculture credit?
Q. What are the various kinds of agriculture credit?
Q. Give the distinction between institutional and non-institutional source of agriculture finance.
Q. What are the major sources of institutional agriculture credit in India?
Trends in Agricultural Credit :-
Over time, spectacular progress has been achieved in terms of the scale and outreach of institutional framework for agricultural credit. Some of the major discernible trends are as follows:
1. Increasing Dependence on Institutional Credit :-
One of the major achievements in the post-independent India has been the widening of the spread of institutional machinery for credit and decline in the role of non-institutional sources. The share of institutional credit, which was little over 7 per cent in 1951, increased manifold to over 66 per cent in 1991, reflecting a remarkable decline in the share of non institutional credit from around 93 per cent to about 31 per cent during the same period.
2. Trends of Overall Institutional Credit Flow :-
Over time, the flow of credit to agriculture and rural sector has expanded impressively. The ground level credit flow had registered an increase from Rs. 1675 crore in 1975-96 to Rs.86891 crore in 2003-04 and further to Rs.203297 crore in 2005-06. This rate of growth was even higher than the growth rate of Gross Domestic Product (GDP) originating in agriculture.
Despite this growth, the credit needs of agriculture have not been met fully and
overwhelming numbers of farm households have not been able to borrow from institutional sources.
3. Agency-wise Credit Flow :-
The analysis of agency wise credit flow indicates that the cooperative banks were the major source of agriculture credit in 1975-76 constituting around 71 percent of the total ground level credit flow followed by commercial banks at 24.2 percent and regional rural banks at 4.9 percent .
Though cooperative banks had dominated agriculture credit supply till the early reform period, commercial banks and RRBs recorded impressive growth rates. As a result, in 2006-07, the share of cooperative banks in the total institutional credit flow receded to 20.1 percent and that of commercial banks advanced to 69.1 percent. Although the quantum of disbursement from cooperative banks increased, it could not keep pace with commercial banks in enhancing credit flow due to several reasons including its poor financial health, dual control, lack of internal controls and corporate governance norms and excessive dependence on other financial institutions.
4. Size-wise Credit Flow:-
Despite impressive growth in direct credit to farmers from the scheduled commercial
banks between 1991-92 and 2003-04, contrary to expectation, credit disbursement to small and marginal farmers has not been encouraging. Though the number of accounts increased for small farmers yet the credit flow favoured the richer farmers.
5. Region-wise Credit Flow :-
While analyzing the pattern of credit flow, it is observed that the proportions of bank
deposits and credit shares have moved in favour of the South, West and North regions. While the share of loans in the total disbursement of credit for agriculture and allied activities were the maximum for the South region, it was the minimum for North-east region.
Recent Initiatives taken by Govt. Of India:-
Government of India & Reserve Bank of India: In order to increase credit flow to the agriculture sector, the policy of doubling of agricultural credit in three years was introduced in 2004-05. In order to expand the outreach of the banking services, banks made available basic banking ‘no-frills’ account with low or nil minimum balances as well as low or no charges in 2005. The regional rural banks were also specifically advised to allow limited overdraft facilities in ‘no-frills’ accounts without any collateral or linkage to any purpose.
National Agricultural Insurance Scheme (NAIS):- NAIS is implemented since Rabi 1999-2000 season with the objectives to provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crops as a result of natural calamities, pests and diseases and to encourage the farmers to adopt progressive farming practices, high value in-puts and higher technology in agriculture and to help stabilize farm incomes particularly in disaster
years.
* Government of India & NABARD :-
i. Rural Infrastructure Development Fund:- RIDF was established in 1995-96 with a corpus of Rs. 2,000crores with the major objective of providing funds to state governments and state owned corporations to develop rural infrastructure such as rural roads, rural bridges, irrigation works, soil conservation, flood protection, drinking water, infrastructure for rural education etc.
The total corpus of RIDF till 2007-08 (RIDF-I to RIDF-XIII) amounted to Rs.72, 000 crores
with 2008-09 budget further adding the amount of RIDF XIV of Rs. 14,000 crores to this corpus. The total sanctions and disbursements as on 30 June 2007 aggregated Rs. 61312.27 crores and Rs.38581.82 crores respectively.
ii. Micro Finance Innovations: -The credit accessibility for the poor from conventional banking is limited due to lack of collaterals and information. Micro finance has emerged as an alternative financial vehicle that provides micro credit or small loans granted to the poor without any collateral. These loans are provided through micro finance institutions (MFIs). NABARD plays a key role in developing the MFIs by providing them refinance facility at low interest rates.
iii. Kisan Credit Card Schemes: -The kisan credit cards (KCC) scheme was introduced in 1998-99 to facilitate short-term credit to farmers. Each farmer is given with a kisan credit card and a pass book for providing revolving cash credit facilities. NABARD provide refinance facility to commercial banks and cooperatives to provide credit under this scheme.
iv. Refinance under Swarnajayanti Gram Swarozgar Yojna (SGSY):- NABARD provides refinance facility to institutions that support SGSY.
v. Co-operative Development Fund: -NABARD has set up the cooperative development fund in 1993 with objective of strengthening the co-operative credit institutions in the areas of resource mobilization, recovery position etc. the assistance is provided to cooperatives by way of soft loans or grants.
"Weaknesses in Rural Credit Structure" :-
1. Overemphasis of Monetary Credit: -The rural credit institutions have given overemphasis on the financial assistance to the cultivators. While the finance is very important factor but it should be complemented with the extension of services in form of guidance, expertise and counseling on agricultural issues.
2. Multiplicity of Institutions:- The rural credit structure is based on multi agency credit system whereby there exist numerous organizations providing similar kind of financial services. There is a lack of coordination in the system and the commercial viability is adversely affected in this scenario.
3. Lack of Motivation: - In order to fill the gap that occurred due to the failure of rural cooperative societies Government gave increasing role to the commercial banks. However, commercial banks lack the desired skills and expertise in the agro-credit. The banks have enough financial resources but the service consultancy is not available. Thus, there is a failure to provide complete package of assistance to the farmers. Further, financial sector reforms have put pressure on banks to improve their financial position and so these banks are now concentrating on selected clientele of large borrowers
4. Financial Exclusion: - Despite of a large network of the institutional credit system, it has not been able to adequately penetrate the informal rural financial markets and the non-institutional sources continue to play a dominant role in purveying the credit needs of the people residing in rural areas. The results of the All-India Debt and Investment Survey (AIDIS, 2002) also indicate that the share of the non-institutional sources, in the total credit of the cultivator households, hadincreased from 30.6 percent in 1991 to 38.9 percent in 2002.
5. High Interest Rates:- The rate of interest charged by rural financial institutions (RFIs) from farmers continues to be considerably higher than those charged by financial institutions from urban consumers. The owners of small or marginal farms, which are non-viable or viable at the margin, and self-employed in the informal sector, cannot afford to bear the level of interest charged by RFIs.
6. Procedural Delays:- There is a problem of considerable delays in processing of loan
applications and collaterals. Thus farmers shy away from institutional financing and increase their dependency upon non-institutional sources.
7. Poor Recoveries: - Banks are shying away from rural financing mainly because of poor recoveries which is inflicting the system. It is ironical that the recoveries position is adverse amongst rich farmers than amongst the small farmers. The political decisions of waiving off loans are further putting pressures on the financial system.
* Suggestions for Improving Institutional Rural Credit System:-
1. Financial Discipline to Improve Recovery:- A national consensus among political parties should be evolved for not politicizing the RFIs and resist from announcement of loan or interest waiver schemes and giving calls for not repaying the institutional loans. However, given the risk involved in the agriculture credit the recovery system should be flexible and humane.
2. Revamping ( To make something more attractive) the Cooperative Credit Structure:- The Cooperative Credit Structure should be strengthened to make use of its wider reach. These have to be recapitalised so as to provide funds for improving their financial positions. There is a need of capacity building, human resource development, institutional restructuring to ensure democratic functioning, and improving the regulatory regime to empower the Reserve Bank of India (RBI) to enforce prudent financial management.
3. Better Physical, Social and Economic Infrastructure: - The long term policy framework needs to be designed to improve infrastructure facilities so as to boost rural economic growth.
This requires increased public expenditure on social infrastructure (like education, availability of drinking water, health facilities), physical infrastructure (like roads, power) and economic infrastructure like (irrigation, modern agricultural techniques). These measures would help to improve the debt paying capacity of rural poor and provide greater opportunities to RFIs.
4. Financial cum Consultancy Approach: -RFIs needs to provide extension services like consultancy about seeds, availability and use of modern inputs, marketing strategies etc to the cultivators so that a holistic package of assistance can be provided to them.
5. Group Approach to Lending: - The lending to homogenous farmer’s groups needs to be organized to improve credit delivery. This would help to improve recovery because of peer pressure. Further, group lending tends to be cost-effective. Involving NGOs or rural educated youths in organizing farmers or rural families in groups, scrutinizing applications, disbursement of loan and effecting recoveries would help RFIs in reducing lending costs.
6. Autonomy to RRBs: - RRBs should be given more autonomy and flexibility in planning and lending policies, so that their comparative advantage in rural lending is restored.
7. Greater involvement of Micro Finance Organizations: - The banks need to involve microfinance agencies like SHGs, NGOs etc. and other grass root level financial intermediaries who have better understanding of the credit needs and recovery situations.
8. Technological Up Gradation: -Technological improvements like computerization can be critical in building up a reliable credit information system and database on customers, reducing transaction costs and facilitating better pricing of risk, improving the efficiency of the financial system, and thereby increasing the access of un-banked rural people in an efficient manner.
9. Information Dissemination to Rural Poor:- Credit counseling, awareness and financial education regarding the benefits of institutional financing are important for effective expansion of financial services in rural areas. To do this, banks may utilize the services of nongovernmental organisations, village youth clubs, village panchayats, farmer clubs and self-help groups into confidence.
"Notes on National Bank for Agriculture and Rural Development (NABARD)":-
NABARD was established in July 1992 as an apex institution to coordinate the
activities of organizations engaged in the area of rural credit. It took over from RBI all the functions that the latter performed in the field of rural credit. It is designed specifically to provide undivided attention and focus to the credit problems of rural sector. As an apex bank it is involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes. The functions of NABARD can be divided into three categories:
(1) Credit Functions:
NABARD's credit functions cover planning, dispensation and monitoring of credit.
This activity involves framing policy and guidelines for rural financial institutions, providing credit facilities to issuing organizations such as commercial banks, cooperatives etc. and monitoring the flow of ground level rural credit. As stated earlier, NABARD doesn’t directly deal with farmers and other rural people. It provides refinance facilities in terms of shortterm loans for crops, marketing and other working capital requirements, medium-term and long-term credit to cooperatives for investment purposes including rural infrastructure. The loans are also provided to the state government for investment in cooperatives.
(2) Developmental and Promotional Measures: -
In order make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as to provide help to cooperative banks and Regional Rural Banks to prepare development actions plans for themselves, enter into MoU with state governments, cooperative banks and RRBs to improve the affairs of banks, provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells .
(3) Supervisory Functions:
NABARD has been sharing with the Reserve Bank of India certain supervisory
functions in respect of cooperative banks and Regional Rural Banks (RRBs). NABARD
has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on a voluntary basis.
The objectives of periodic inspections is to protect the interest of the depositors, to ensure banks work according to the rules and regulation issued by Government and to examine the financial soundness of the banks.
Conclusion :-
The rural credit systems have under gone several changes during the last decade. There has been an increasing trend towards institutional rural financing. The financial institutions are under stress, particularly since the financial sector reforms of 1992-93. The credit policy should continue to emphasize small borrowers. The commercial banks have started feeling shy of lending to agricultural sector and rural poor. The provisions of mandatory lending for priority sector and the agricultural activities should continue. The banks should take the help of NGOs and local formal institutions in their lending programmes to reduce the transaction costs and improve recoveries. The financial cum consultancy approach needs to be followed. For meeting the credit needs of the poor, the programmes like linking of self-help groups (SHGs) with lending agencies are to be further strengthened.
Concept-Check Questions
Q.1 “There is an increasing trend towards institutionalization of agriculture credit in
India”. Do you agree with the statement?
Q.2 Which institutional source accounts for major proportion of agriculture credit in India?
Q.3 What are the credit and supervisory functions of NABARD?
Q.4 What do you mean by financial cum consultancy approach agriculture credit?
Q.5 What do you understand by Micro-financial institutions?
Q.6 Which one dominate the agriculture credit – Short-term or Long-term?
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