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Role of Banks In Agriculture &

Rural Development

n the last few years, the In- reflected in the growth in ag- more or less confined to ensur-
dian economy has emerged gregate deposits and advances ing a bare minimum access to a
as one of the fastest grow- for scheduled commercial savings bank account without
ing economies in the world. banks, which stood at 15.4 frills to all. Having a current
However, the vulnerability of per cent and 27.9 per cent account/savings account on its
the Indian economy with re- during 2004-2005. However, own, cannot be regarded as an
spect to the performance of the access of banking services accurate indicator of financial
the agricultural sector despite to the rural, agriculture and inclusion.
other macroeconomic indi- the common man in general
cators and sectors gaining in is not as promising. Need For Banking in Rural
strength is well known. For As Mr. V. Leeladhar (Dep- and Agricultural Areas
example, the Indian economy uty Governor, RBI, on the oc- The rural population in In-
grew at an estimated 3.7 per casion of the Commemorative dia suffers from a great deal of
cent in 2002-03 against 5.6 lecture at the Fedbank Hor- indebtedness and is subject to
per cent during 2001-02. This mis Memorial Foundation, exploitation in the credit mar-
was largely because of the neg- Ernakulam) said “Despite ket due to high interest rates
and the lack of convenient
The banking sector has witnessed a huge growth in the access to credit. Rural house-
recent years. However, despite such a growth, the credit flow holds need credit for investing
by banks to the rural and agricultural sectors remains dismal, in agriculture and smoothen-
which, more or less, has resulted in financial exclusion of the ing out seasonal fluctuations
rural masses. The rural and agricultural sectors have to play in earnings. Since cash flows
a very important role if a target of 8% GDP growth per an- and savings in rural areas for
Dr. Gourav Vallabh* num as envisioned in the tenth plan is to be achieved. And the majority of households
the banks and the Chartered Accountants have a huge role are small, rural households
to play in boosting the rural and agriculture sector through typically tend to rely on credit
product innovation, broadening the reach, promotion of for other consumption needs
SHGs/Micro enterprises and providing know-how. This ar- like education, food, hous-
ticle provides an overview of the concept. ing, household functions, etc.
Rural households need access
to financial institutions that
Suraj Chatrath** ative growth of 4.4 per cent in making significant improve- can provide them with credit
* The author is Profes- the agriculture sector. Many ments in all the areas relating at lower rates and at reason-
sor (Finance), XLRI
Jamshedpur. **The economists and policy-makers to financial viability, profit- able terms than the traditional
author is a student of
Business Management
increasingly believe that the ability and competitiveness, money-lender and thereby
at XLRI Jamshedpur. future growth of the domestic there are concerns that banks help them avoid debt-traps
They can be reached at and
economy, to a large extent, will have not been able to include that are common in rural
suraj_chatrath@yahoo. depend on the robust perfor- a vast segment of the popula- India.
com respectively.
mance of the agricultural and tion, especially the underprivi-
rural sector. The manufactur- leged sections of the society, Current Trends: A Pointer
ing and service sectors cannot into the fold of basic banking To Financial Exclusion
sustain the economy’s growth services.” Rural Credit: The 2001
if the rural sector underper- The focus of Indian banks census reveals the low level of
forms. on financial inclusion i.e. de- banking usage among Indian
The contribution of the livery of banking services at an households in general (35.5%)
banking and financial sec- affordable cost of the low-in- and rural households in par-
tor to the current economic come groups has been dismal. ticular (30.1%). This reflects
growth of the Indian econo- In India, the focus of the fi- on the latent demand for gen-
my is very significant. This is nancial inclusion at present is

1122 The Chartered Accountant February 2006

Usage of banking services by Indian households (HHs)
Source: Census of India 2001
Total % of Rural % of Total Urban % of Total
No. HHs HHs HHs
Total No. of HHs 19.19 100 13.83 72.0 5.36 28.0
No. of HHs which use banking services 6.8 35.5 4.16 30.1 2.65 49.5
eral banking needs in rural as 70,810 crore in 2002-03 and Debt profile of rural households (in %)
well as urban segments. Rs. 86,981 crore in 2003-04, Source:Ministry of Labour, Ru ral Labour Enquiry Report
The debt profile of rural much below the levels en- SOURCE OF DEBT 1993.94 1999-2000
households indicates that the visaged in the Tenth Plan.
Government 8.3 5.4
major source of credit to rural Agriculture’s share in sched-
households, particularly poor uled commercial banks’ total Co-operative Societies 7.9 13.1
income working households, outstanding credit as on 31st Employees 11.4 6.9
has been informal sector loans March 2005 was only Rs. Money Lenders 27.6 31.7
like money-lenders, which are 1,12,475 crore. The total agri-
usually at very high rates of cultural lending by commercial Shopkeepers 7.3 7.1
interest. The terms and condi- banks is lower than credit in Relatives & Friends 12.4 15.1
tions attached to these loans “personal loans” which stood Others 6.2 3.5
impact the poor adversely. at Rs. 2,66,988 crore, compris-
Banks 18.9 17.2
This reflects the inadequate ing advances for housing and
institutional credit flow to ru- consumer durables. of the banks towards short-
ral areas. As on 31-3-2003, In recent years, retail ad- term production loans rather
rural and semi-urban centres vances have increased by 41.2 than for term loans.
had a Credit/Deposit (CD) per cent in 2004-05 as com- Post reforms, the bank-
ratio of 42% and 35% respec- pared to the growth of 27.9 ing system has mobilised more
tively as compared to a CD ra- per cent in the overall loans deposits from farmers and ex-
tio of 69.5% and 59.3% for ur- and advances of Scheduled tended less credit to a declin-
ban centres and national level. Commercial Banks. As a re- ing number of farmers. These
These trends broadly indicate sult, their share in total loans are reflected in the figures for
that despite the widespread and advances increased signif- farmer borrowings and deposits
banking network in place, icantly during the year ended in the last decade as in Table A.
there is a continued migration March 2005. However, ac-
of rural/semi-urban savings to cording to a recent study, only TABLE A
urban/metro centres, thereby 15 out of 85 banks registered Changes in farmers reliance on the banking system
causing a banking divide be- an increase in return on assets Source: Statistical tables relating to banks in India
tween rural and urban areas. as at the end of 2004-05 over (RBI)
Agricultural Credit: An 2003-04. Hence, the argu- Year Farmer Farmer Total
equally important concern ment that rural credit drives Deposits Borrowings (Rs.
that needs attention is the down the banks profits and (Rs Crore) (Rs Crore) crore)
flow of institutional credit to increases NPA is not justified.
agriculture. The progress of NPA in rural credit are far less 1992 26211 17835 273
agricultural credit in India has and the rate of retrieval of ru- 1993 29825 19493 257
depended crucially on govern- ral credit NPAs is faster than
1994 36583 19669 251
ment intervention over the other advances. The annual
years i.e. package of incentives growth rate of farm credit is 1995 43341 21334 198
and policy measures, which the around 15% and this growth 1996 47433 23813 194
RBI and the Centre formulate in rural advances essentially
and implement. The growth of comes from advances like gold 1997 53611 27448 188
commercial banks’ lending to loans for agriculture and Kisan 1998 57442 29442 173
agriculture and allied activities Cards. About 70% of the pres-
1999 78881 33094 169
witnessed a substantial decline ent rural credit stock of over
in the 1990s as compared to Rs. 115243 crore is Kisan 2000 91009 36466 162
the 1980s. Credit flow to the Credit Cards spread over 4.8 2001 99812 43420 195
agriculture sector from all for- crore of such card holders.
mal sources amounted to Rs. This shows the narrow focus 2002 108233 47430 197

February 2006 The Chartered Accountant 1123

Many scheduled commer- TABLE B
cial banks are shying away from
agriculture and priority sector Deposits received under RIDF as on 31st March 2003
lending even though the com- Source: NABARD Report 2002-03
mercial banks have an excess Year Total (Crore)
investments portfolio beyond
the required limits of 25 per 1995-96 350
cent. Furthermore, scheduled 1996-97 1042.30
commercial banks are resort- 1997-98 1007.04
ing to the soft window option
of investing in the Rural Infra- 1998-99 1337.95
structure Development Fund 1999-2000 2306.63
(RIDF) of NABARD. Table B
illustrates the growing contri- 2000-01 2653.64
butions to the corpus of RIDF 2001-02 3590.72
received by NABARD by way 2002-03 3857.09
of deposits from Scheduled
Commercial Banks against Total 16145.37
Since inde- for over 70 per cent of the mercial banks to lend 40% of
their shortfall in priority sec-
pendence, total. Agriculture alone took their advances to the ‘priority
tor/agricultural lending during
the RBI up 46 per cent of the priority sector’. The Service Area Ap-
the preceding year.
has taken sector advances. RRBs have proach was introduced by the
Policy Initiatives by a number also taken a lead role in the fi- Government in 1989, which
Government/RBI of mea- nancing of Self Help Groups imparted development orien-
To meet the gap that ex- sures to (SHG’s) mostly comprising tation to agricultural lending.
isted in meeting the credit augment women leading to their eco- Other major innovations in
needs of the rural poor, the the flow nomic and social empower- the field of rural credit de-
Government appointed a of rural ment. Cooperative banks were livery in the 1990s were the
working group on rural credit, credit. formed to promote the rural successful introduction and
the Narasimhan Commit- credit. Cooperative banks and implementation of Kisan
tee in July 1975. Based on its RRBs differ in their ownership Credit Cards (KCCs) and the
recommendations, Regional and management. Cooperative extension of micro-finance
Rural Banks (RRB) emerged banks are state-government in the form of Self-Help
in 1975. These banks were run banks while RRBs are Group (SHG).
meant to take banking to the managed by the sponsor bank
rural masses, particularly in ar- with an equity stake of 35%. Challenges For Rural and
eas without banking facilities, The Central Government and Agricultural Credit
make available cheaper insti- State Government hold 50% Agriculture is a matter of
tutional credit to the weaker & 15% equity stake in RRBs. livelihood and food security,
sections of society, mobilise Since independence, the with nearly 60 per cent of the
rural savings and channelise RBI has taken a number of population depending on it.
them for other productive measures to augment the flow At the same time, to with-
activities in rural areas and of rural credit. It has a unique stand the global competition,
bring down the cost of provid- system of extending General enhanced productivity and
ing credit in rural areas. The Line of Credit-I for seasonal sustainability of the agriculture
number of RRBs increased agricultural operations and sector has become imperative.
dramatically over a period of General Line of Credit-II In addition, the majority of
time. At the end of the fiscal for the handloom sector out the country’s population, more
year of 2002-03, there were of the created money. The so marginal and disadvantaged
196 RRBs spread with a net- RBI has also been issuing di- sections of society, stay in vil-
work of 14,350 branches, ac- rectives for a long time now lages. Hence, the role of banks
counting for 44.5 per cent of regarding ‘social and devel- in the enhancement of agricul-
the total rural network of all opment banking’ like impos- ture productivity, expansion of
scheduled commercial banks ing a cap on the interest rates rural credit and poverty eradi-
(including RRBs). and sectoral allocation of cation assumes high priority.
The bulk of the loans from credit and expansion of rural Despite decades of ef-
RRBs have been given to pri- branches. The RBI has also forts and experimentation
ority sectors, which accounted made it mandatory for com- in banking, the organised fi-

1124 The Chartered Accountant February 2006

nancial sector is still not able mum of prime lending rate towards agriculture lending,
to meet the credit gap in the (PLR). In the process of re- from ‘directed’ credit to the
rural sector. The lower levels covering the opportunity lost one that is business opportu-
of per capita income, lack of on income, the banks used to nity-led. A substantial jump in
infrastructure in the rural ar- charge a high rate of interest the credit flow to agriculture
eas, focus in the urban sector for loans above 2 lakhs. This is envisaged in the Tenth Plan
and lack of proper connectiv- led to acceleration in the pro- at Rs.7,36,570 crore, which is
ity were the main hindrances cess of willful defaulting. This more than three times of what
for banks to venture into rural has really damaged the credit was achieved during the Ninth
areas. Directed lending, cum- culture and structure in the ru- Plan. The contribution by
bersome procedures, delay in ral sector resulting in shutting commercial banks is projected
sanctioning loans and lack of down of non-viable outlets of at Rs.3,81,652 crore. In order
statutory backing for recover- rural branches of commercial to achieve this target, the Gov-
ies were other major impedi- banks, co-operative banks and ernment has directed banks to
ments to the growth of bank- RRBs in last few years. double the flow of farm credit
ing in the rural sector. from the level achieved as on
The focus in the past has Role of Government/RBI in 31.03.2004 in the next three
always been to make avail- Meeting the Challenges years. In this context, the Gov-
able cheaper credit. When The number of reports on ernment/RBI needs to take a
banks are forced to lend cheap, the rural credit delivery sys- number of initiatives:
there has been a tendency for tem matches the population Revitalising RRBs: Al-
a scramble for credit by the of co-operative credit institu- though, RRBs have estab-
non-target group of benefi- tions, is a common saying in lished themselves as a strong
ciaries. While interest rates of banking circles. As the agri- alternative mechanism for ru-
scheduled banks for advances culture sector becomes more ral credit delivery, their poten-
over Rs. 2 lakh is completely commercial, there would be a tial and relevance is rather ne-
deregulated, loans up to Rs. greater need for credit. Banks glected in the current scenario.
2 lakh are subject to maxi- need to change their strategy The issue of capital infusion of

Lamiya Lokhandwala

February 2006 The Chartered Accountant 1125

RRBs assumes critical impor- reach of PSBs in rural areas. would help in making avail-
tance to enlarge the scope of With the merger of RRBs able more resources for rural
RRB operations. RRBs need with sponsor banks, the latter credit deployment. The rate of
to be provided with adequate will get a wide branch network interest paid on CRR balances
capital support to enable them in rural areas. held by these rural institu-
to have a net capital adequacy In the long term, however, tions might also be marginally
ratio (CAR) of 5 per cent. The a single independent owner of (100 basis points) above what
share of sponsoring institu- all RRBs with exclusive fo- is paid to commercial banks.
tions in the capital structure cus on rural and micro-credit, Similarly, the Central Gov-
of RRBs also needs to be en- would be a great step towards ernment and all State govern-
larged to make them majority channelising resources for the ments need to park their rural
shareholders. By acquiring the purpose for which RRBs were developmental funds with
majority shareholding in RRB, established. RRB to ensure cheaper flow
the sponsor banks/institutions Increasing the scope of NAB- of demand deposits. Regula-
can convert them into vibrant ARD: NABARD has evolved tion with respect to banking
and professional subsidiaries over the past two decades has been designed for delivery
and area-specific special busi- into a strong and rural-sensi- in urban India and distribu-
ness units (SBU). In the long tive developmental institution tion required more manpower
run, they may merge all their with a complete understand- to be deployed in rural areas.
agricultural and rural activities ing of the complexities of the All rural financial institutions
under the umbrella of these agricultural and rural sectors. need special dispensation suit-
SBU. The government should NABARD should thus be- ed to their local potential and
further amalgamate regional come an apex development challenges.
rural banks (RRBs) with the bank in the rural and agricul- Commodity Markets: The
sponsor banks to increase the tural sectors with direct equity focus of the commodity ex-
participation in RRBs along changes has been confined to
with sponsoring institutions. traditional future/derivative
With presence on the boards trading centres, and the farm-
of all RRBs and co-operatives, ers and actual commodity us-
NABARD is fully equipped to ers are still not participating.
emerge as a strong player in Only traders and speculators
the rural credit system. NAB- are participating in it. Banks
ARD’s promotion of self-help should be permitted to of-
group (SHGs) movements re- fer futures-based products
flects its immense capability in to farmers in order to enable
capacity building and nurtur- them to hedge against price
ing the rural credit delivery or weather risk, etc. To miti-
system. gate the risk in the financing
Minimum CD Ratio: In or- of agriculture, the Govern-
der to obviate the regional or ment should allow banks to
urban/rural imbalances, the operate on behalf of farmers
minimum benchmark CD and participate in commodity
ratio provided (for example futures.
55%) should be envisaged in Allowing banks entry into
all districts of the country. commodity futures trading will
That will assist broad-based not only boost liquidity and
and equitable credit expan- turnover volumes but will also
sion thereby contributing en- provide them with a protec-
hanced economic activity. The tive cover against default on
reason urban India is reflect- agricultural loans. In the new
ing enhanced economic activ- arrangement, banks can lend to
ity post-reforms is the avail- farmers or cooperatives and si-
ability and expansion of credit multaneously encourage them
for housing and consumption to sell into futures contracts.
purposes. This can help reduce the risk
Reducing cost of rural of farmers defaulting on their
credit: A different dispensa- loans in the event of a fall in
tion under CRR and SLR spot commodity prices or un-

1126 The Chartered Accountant February 2006

expected weather conditions. Bangladesh Grameen Bank
Crop Insurance: The Agri- model and micro-finance expe-
culture Insurance Company rience of Philippines are quite
of India (AIC) should further well-known. Banking Corre-
spread crop insurance aware- spondents in Brazil is another
ness level among the Indian successful model where banks
farming community, which is can create a network of “bank-
abysmally low. The Union and ing correspondents”. These
State Governments should banking correspondents are
give time-bound subsidy on small outlets, which provide
premiums of crop insurance basic banking services, exam-
to increase the coverage of ple drug stores, petrol pump,
the AIC. small stores in the neighbour-
Promoting Micro-finance/ hood, etc. The widely spread
Micro enterprise: Micro-fi- post-offices network in the
nance refers to the provision country can also be used to de-
of small-scale savings, credit, liver banking services. Banks
insurance, and any other finan- and regulators need to look at
cial services to those who can- these models and their feasi-
not access them from formal bility in the Indian scenario to
financial institutions. Due to bridge the banking divide.
issues of risk and cost associ-
ated with servicing the larger Role of Chartered ture/rural sector: Chartered
numbers of small low capital Accountants in Meeting Accountants should focus
input businesses, the formal the Challenges on developing new products
sector lending to micro en- Widening the reach: Of the suited to agricultural and ru-
terprises is low. Banks offer a 110 million farm households ral requirements for better
variety of potential advantages merely 36% have been covered fund mobilisation and credit
for financing micro-enterpris- by institutional credit, leaving disbursement. They should
es like commercial outlook and a majority of them out of the look at more non-food crops
relatively sophisticated skills. scope of farm credit. Banks and also offer more flexibility
Apart from acting as a credit need to broaden their coverage in repayment schedules in or-
provider, the banks should act so that the rural households der to bring rural credit to the
as agents of change by helping can also reap the benefits mainstream. Owing to their
people in acquiring the basic of institutional credit. The reach, banks are in a better po-
knowledge of business, policy Chartered Accountants can sition to cross-sell other prod-
environment, etc. assist the banks and institutions ucts like crop insurance in the
Well-defined investment in devising strategies to increase rural sector too. This will help
policy: RBI/NABARD should the reach of credit. alleviate the farmers in times
also provide a well-defined in- of distress. A wider network
vestment policy for the above- Risk-based pricing: Risk of specialised ATMs suited
mentioned institutions. This based pricing for rural and to rural needs may make the
will help these institutions in agricultural credits can expose spread of rural banking easier.
better deployment of surplus minorities, low-income For example, as part of its ru-
funds. In comparison to PSB’s families and first-time creditors ral initiative, some banks are
and Private Sector banks these to higher interest costs and developing a low cost ATM
institutions can’t afford to have hence further keeping them to cater to the needs of villages
statistically sophisticated mod- economically vulnerable. in India. Products like Kisan
els for investment and treasury Hence, there is a scope for Credit Cards (KCC), which
management. In that regard Chartered Accountants address the needs of farmers
they seek the guidance and as- who can assist Rural and and cultivators, have been very
sistance from the supervisor in Agro-Financing institutions successful. Similar products
this area. in balancing principles of should be designed to provide
Learning from other coun- social justice and profit while banking services to artisans,
tries/Adopting new models: assessing comprehensive risks agricultural labour, and house-
Banks also need to look at the of the borrower. hold entrepreneurs. Chartered
models followed by banks in New product innovation & Accountants should not limit
other countries. For example, development for the agricul- their thinking only to design-

1128 The Chartered Accountant February 2006

ing of products can also help role both in the formation, co-
banks to reduce the cost. For ordination, management and
example, the cost to serve a support of MFIs.
customer who takes a loan is
as high as 25 per cent. Char- Conclusion
tered Accountants can assist To achieve the ambitious
the banks in selling health average GDP growth of 8 per
insurance, weather insurance cent per annum target set in
and other financial products to the Tenth Plan, it is important
the same customer, which will to revitalise and revamp not
substantially reduce the cost only the agricultural sector but
to serve the customer to 7-8 also rural financial institutions.
per cent. The directed lending norms
Know your customer norms: that require commercial banks
If banks can offer housing and to allocate 40 per cent of their
car loans through simple pro- lending to the `priority sector’
cedures in urban markets, it is have not generated the intend-
unreasonable to have compli- ed results, since most of the
cated procedures in the rural banks get around this require-
ing the products for micro- sector. Simplification of loan ment by subscribing to other
credit. A lot of innovation procedures and credit acces- eligible instruments. Large
needs to be done for designing sibility will attract quality and farmers and agri-businesses
micro-savings products also. high net worth borrowers. seem to be able to obtain fi-
Target SME: Small and Me- Chartered Accountants can nancial services from modern
dium Enterprises (SMEs) assist both the borrowers and financial institutions but small
have an important role to play, lenders in fulfilling the desired and marginal farmers continue
which is evident from their Chartered Know Your Customer norms. to depend, largely, on indig-
contribution to GDP, employ- Accoun- Training requirements: Char- enous money-lenders.
ment generation and export tants can tered Accountants can assist the Banks, Government and
earnings, etc. The Third Cen- play a banks in improving the skills Chartered Accountants need
sus of SSI Sector conducted by crucial role of the farm-lending managers to re-evaluate their pre-con-
the Government of India re- both in the for better assessment and dis- ceived notions about the com-
veals that the SSI sector (reg- formation, bursement of credit. They can mercial opportunities in serv-
istered and unregistered units) coordi- also help in sensitising people ing the rural and agricultural
comprised 1,05,21,190 units in nation, engaged in agriculture and al- sector. Banks can achieve com-
2001-02. About 55.0 per cent manage- lied activities, regarding usage mercial success and helps in
of these units were located in ment and of credit. societal improvement if it con-
rural India. So, a strong focus support of Micro-finance institutions: ceives the products and ser-
of the banks on rural credit MFIs. Commercial banks are now vices keeping these segments
will have a positive impact in allowed to appoint MFIs as in mind. Banks must also
strengthening the SME sec- “banking correspondents”. strengthen their credit delivery
tor. Chartered Accountants Banks can now delegate some systems for Rural India. Today,
can play a crucial role both in of their routine banking func- finance and banking systems
the development, management tions to the MFIs. This can are very strong. It is time to
and formation of SME’s. help them extend their cov- focus on people at the bottom
Reduce cost: The overhead erage at far lower costs than of the pyramid and align all
cost of operations for banks would be possible with their sections with the systems that
in Rural India will be more own networks. The MFIs too have been put in place. We can
because of low business per will gain as they will get to also conclude that there are a
employee and the large num- handle a variety of sophisticat- lot of untouched and unex-
ber of small clients. However, ed financial products and earn plored areas for fulfilling so-
mechanisation and centralisa- a fee income. The Self Help cial and professional commit-
tion of accounting, cheaper Groups-bank linkage has sev- ments. There are tremendous
office premises, engagement eral benefits like lower transac- opportunities for Chartered
of external agents for recov- tion costs, negligible NPAs and Accountants to excel in the ag-
ery of loans and marketing of generation of goodwill among riculture and rural sectors and
products will make up for the the rural populace. Chartered it all depends on how best one
other drawbacks. Cross-sell- Accountants can play a crucial capitalises these. r

1130 The Chartered Accountant February 2006