PROJECT REPORT ON:

AGRICULTURE BANKING
SUBMITTED BY:
DEEPINDER SIDHU
T.Y. BANKING & INSURANCE (SEMESTER V)
SUBMITTED TO:

UNIVERSITY OF MUMBAI
PROJECT GUIDE:
DR NISHIKANT JHA
ACADEMIC YEAR:
2015-2016

CERTIFICATE

This is to certify that the project entitled is successfully done by DEEPINDER SIDHU during
Third Year FIFTH SEMSETER of B.COM (BANKING & INSURANCE) under the University
of Mumbai through the Thakur College of Science and Commerce, Kandivali (E) Mumbai400101.

Co-ordinator

Project Guide

Principal

Date:
Place:

Internal Examiner

External Examiner

DECLARATIONS

I DEEPINDER SIDHU from THAKUR COLLEGE OF SCIENCE & COMMERCE, student of

T.Y. BANKING & INSURANCE (SEMESTER V), hereby submit my project report on
AGRICULTURE BANKING.
I also declare that this project, which is the partial fulfilment of the requirement for the degree of
T.Y.B.Com (Banking & Insurance) of the MUMBAI UNIVERSITY, is the result of my own
efforts with the help of experts.

DEEPINDER SIDHU

ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project of AGRICULTURE BANKING.

Firstly, I take the opportunity in thanking our very dear principal DR. C.T. CHAKRABORTY. I
would also like to thank The Almighty and my parents without whose continuous blessings; I
would not have been able to complete this project.
I would like to thank my project guide DR Nishikant jha and Course coordinator Prof. Nirav
R. Goda for their valuable help, opinions, advice and support, giving me encouragement and for
providing me with the material and knowledge to make this project a success. I convey my deep
appreciation to them for sparing their valuable time and efforts, so has to make me capable of
presenting this project.
I am thankful to our college for all the possible assistance and support, especially our library by
making available the required books and the internet room which have been useful to me in
successful completion of my project.
I hope that I have succeeded in presenting this project to the best of my abilities.

INDEX
Sr. No.

Particulars

Page No

INTODUCTION

7-12

REVIEW OF LITERATURE

13-15

3.

OBJECTIVES & HYPOTHESES

16

4.

RESEARCH METHODOLOGY

17

IMPORTANCE OF AGRICULTURE IN GROWTH OF INDIA

18-22

PROBLEMS IN THE AGRICULTURE SECTOR

23-25

FINANCING THE AGRICULTURE SECTOR

26-32

URBAN COOPERATIVE BANKS

REGIONAL RURAL BANKS

GOVERNMENT/POLICY SUPPORT TOWARDS AGRICUTURE 34-38

SECTOR

NATIONALISTION OF BANKS

KISAN CREDIT CARD

PRIORTY SECTOR LENDING

IMPACT OF GLOBALISATION IN AGRICULTURE SECTOR

39-40

10

ANALYSIS OF SECONDARY DATA

41-45

11

ROLE OF INSISTUTIONS

46-50

ROLE OF NABARD

ROLE OF COMMERICIAL BANKS

ROLE OF PUBLIC SECTOR BANKS

ROLE OF RBI

ROLE OF SELF HELP GROUP

51

CONCLUSION

ABSTRACT
Regional rural Banks plays a vital role in the agriculture and rural development of India. The
RRBS have more reached to the rural area of India, through their huge network. The success of
rural credit in India is largely depends on their financial strength. RRBs are key financing
institution at the rural level which shoulders responsibility of meeting credit needs of different
types of agriculture credit in rural areas. At present, most of the regional rural banks are facing
the problems of overdue, recovery, nonperforming assets and other problems. Therefore, it is
necessary to study financial performance of RRBs in India. This paper attempts to analyze the
current status with financial performance of RRBs in India as on 31st March 2011. The study is
based on secondary data collected form annual reports of NABARD and RBI. An analytical
research design of Key Performance Indicators Analysis such as number of banks and branches,
deposits, loans, loans, investments and growth rate index is followed in the present study. The
study is diagnostic and exploratory in nature and makes use of secondary data. The study finds
and concludes that performance of RRBs has significantly improved.

INTRODUCTION
In developing countries like India, the agriculture sector assumes significance for a variety of
reasons. It is still a source of livelihood for a majority of people in rural areas and there is a need
for ensuring sustainability in these livelihoods. Recent Population Census (2011) reveals that
there are 18.20 crore cultivators and agricultural workers. It is noteworthy that the agriculture/
rural sector provide demand for industrial goods and in India whenever agriculture sector has
grown at the annual rate of 3-4 percent; other sectors have shown healthy growth. In fact, the
required growth of productivity in agriculture means that more capital must be invested in it.
Farmers need much more capital than they can afford to save and small and marginal farmers
with meagre savings require a higher input of capital. Credit is a condition that enables a person
to extend his control over his ownership of resources. Indian agriculturist is not only capital
starved, but faces vagaries of nature too; irrigated agriculture is roughly 33 percent of total
cropped area. Agriculture, thus is, a high- risk area. It is also observed that Indian agricultures
investments requirements fluctuate as incremental output ratios have varied significantly. In fact,
it is not only the availability of credit but also the access to adequate institutional credit that
matters, since most of those who are engaged in agriculture belong to the marginal and small
farmer categories.
Agriculture sector credit flow has been influenced by fallout of implementation of various
accounting and statutory norms without taking into account the ground level realities, which led
to irreparable damage to the rural financial architecture in the post liberalization era. The
agriculture finance is being viewed as a risky proposition now. This has led to piquant situation
where the share of small and marginal farmers in total credit flow has declined when share of this
group of farmers in operational holdings over the period has increased. Besides, dalit and tribal
farmers are largely observing declining share in credit flow. We encounter a situation when these
farms have increased their contribution in agricultural production thereby immensely
contributing to food security and attaining food self-sufficiency, the share in total credit has
declined.

The main challenge faced by agricultural credit involves not only ensuring flow of credit to small
and marginal farmers and dalit and tribal farmers, but designing policies and credit delivery
systems that have relevance in the present context in terms of production and demand for
agricultural products. Such policies have to consider the need for agricultural credit due to crop
diversification. The present multi-agency approach is inadequate to tackle the pressing need for
finance of agricultural extension services too. We need to tackle the issue of how to channel the
resources of commercial banks in sustainable and viable manner in order to fund the
development of a wide range of allied activities. It is also felt that tenancy laws also hinder flow
of credit to tenant and sharecroppers despite guidelines issued by Reserve Bank of India. The
specific needs of the agricultural sector to financial services demand a broader systemic
approach. Need is to understand the extent of availability and distribution of productive
resources, along with their distribution, legal and social structures governing their use, cropping
patterns, current and emerging technologies and dynamics of rural markets and so on to gauge
the credit requirements. This would improve the flow of credit to agriculture, especially small
farmers. A critical determinant for agricultural credit is the commercialization of subsistence
farmers. Development of efficient marketing system would result in the commercialization of
subsistence farmers by providing outlets and incentives for increased production.
Critical issues of rural agricultural infrastructure and institutions need to be addressed as credit
can only be the facilitator. Investments are required in irrigation, rural roads and other
infrastructure. One argument is that farmers need to be provided incentives to adopt market
based solutions for input procurement and marketing of output through autonomous cooperatives
and other forms of organization. Does integration of crop and investment credit and scales of
finance used reviewed and readjusted in line with the requirements of modern, market-oriented
capital intensive agriculture using newer technologies and superior inputs? Is rising cost of
production is factored in? The new technologies and production cycles are high cost and risky
proposition for such farmers and market volatility harms them the most and policies and state
role need to take cognizance of these factors. Such farmers have no protection against natural
calamities and are most vulnerable. These farmers have limited ability to manage interest rate
risk. Most of these farmers lack the absorptive capacity both in terms of cost and the size of
loans and advances, which are of cost effective size to be handled by the banks. It has to be
9

recognized that business of farming is not just an issue of individual livelihood but is also
critically related to national food security.
Therefore farmers must have access to credit .In Indian agriculture, even small and marginal
farmers and dalit and tribal farmers whether owning land or not, are risk taking entrepreneurs
contributing to economic growth. Farmer is an important player in the financial, labor, inputs and
commodity markets, who because of the size of transactions in the market place does get
marginalized. Livelihood diversification can help in greater credit absorption at lower end of
farming community. Besides, increased public investment in agricultural infrastructure, research
and extension services is required. Need is also felt for developing post-harvest technologies and
marketing facilities that can reduce frequent risk and losses faced by farmers.
Banks play an important role in mobilization and allocation of resources in any country. Rural
people in India are facing problems in the inadequate supply of credit. The major source of credit
to rural households, particularly-low income working households, has been the informal sector.
Informal sector advances loans at very high rates of interest; the terms and conditions attached to
such loans have given rise to an elaborate structure of intimidation of both economic and noneconomic conditions in rural population in India.
Agriculture continues to be an important sector of the economy with 18 per cent share in the
Gross Domestic Product (GDP), provides employment to nearly 2/3rd of the work force in the
country. Agriculture at present has undergone a significant shift from the subsistence level of
production to market oriented production. The much needed food security is reflected in the
abundant buffer stocks of grains build up out of the surplus production. Diversification and
commercialization in agriculture have resulted in shifting of cropping pattern from traditional
crops to high-value crops and new markets.
Institutional credit, which played a very important role in the development of agricultural sector
was instrumental in development of Indian agriculture. It showed all signs of resilience to natural
shocks like droughts and famines. In fact, credit acted as a means to provide control over
resources to enable the farmers to acquire the required capital for increasing agricultural
10

production. It enabled the farmer to go for short-term credit for purchase of inputs and other
services and the long-term credit for investment purposes. Thus, credit played an important role
by facilitating technological up-gradation and commercialization of agriculture. The success of
Green Revolution

in Indian agriculture to a large extent laid on

institutional credit support to agricultural sector in terms of expansion in inputs like fertilizers,
irrigation, private capital formation, etc.
Institutional credit dispensation system for agriculture in India has only a brief history starting
with the setting up of cooperative credit societies in 1904. However, coverage of these societies
to meet the credit requirement was so limited in certain pockets and negligible that almost entire
credit requirement of the farming community was met by informal money lending sources till
1950s. The recommendations of All India Rural Credit Survey Committee (1951-54) has laid the
foundation of the institutional framework for establishing a sound credit delivery system for
financing agriculture and allied activities.
A major shift in the short-term credit product was the introduction of crop loan system. An action
programed in 1963 was laid down by the Central Government for implementation by the State
Government. Till the end of the 1960s, to be more specific, up to the social control introduced on
the commercial banks, cooperative structure was assumed the sole responsibility of providing
production credit to the farmers. The entry of commercial banks with bank nationalization in
1969 and the emergence of Regional Rural Banks (RRBs) in 1975 gave wider reach to the shortterm credit delivery system in the country. The entry of commercial banks and RRBs, brought in
a sea change in the financing pattern of the farm sector as the credit of the Indian farmers were
increasingly met by the institutional sources. However, such a quantitative improvement in the
coverage could not be achieved in the case of quality of credit products provided by the banks
especially to the priority sector.
Though several suggestions for provision of credit through single source, including by The
National Commission for Agriculture, the basic characteristic of the credit dispensation system in
India remained as multi product and multi-agency approach especially in 1970 and 1980s. The
credit product was targeted to cater to the stipulated and specific production investment needs
11

within that specific sector activity, presuming that the economic function of that activity is
independent of other economic activity of the same farm enterprises.
Under the system each farmer had the flexibility to approach an agency of his choice for an
investment as per the standard stipulations laid down by the agency. Again, component of
investment credit or production credit would exclude the maintenance cost as it presumed that
maintenance is a recurring cost which the farm enterprises can meet out of its operational
surplus. It was also presumed that the credit need (investment/production) of the firm and that of
the investor (consumption) are independent and mixing up of the same will adversely affect the
economics of the firm; hence, no effort was made to cover the later by the institutional credit
along with the former. Another set of explanation is that whether surplus income generated from
the investment within the economic life of the investment is sufficient to repay the debt burden
of that particular investment.
The functioning of multi credit product approach has a number of intrinsic and structural
rigidities, making most of the products inefficient and reducing its utility to sub-optimal level.
Very often the line of credit was made supplier friendly so as to make its operation to the
minimum. Production credit, for example, as stipulated by Date Committee and further modified
by Kaila Committee was available on crop season basis. Major economic impact of the system
was high procedural formalities in the system and the lack of timeliness in loan sanction and
disbursement and inadequacy of the loan amount. Quite often, farmer has to approach various
agencies; with different package of credit, with different interest rate and with differing and
cumbersome sanction procedures and norms to meet is entire credit needs and economic cost of
his time spend on this account was neglected. The complicated credit environment created by the
multiple credit delivery systems in rural areas duplicated workload increasing the social cost
associated with it. Absence of maintenance package in the individual credit product often made
farm investment infructuous for the remaining economic life for want of smell repairs, creating
conditions for perpetual indebtedness for them.
The structure of the Agricultural Credit Delivery System (ACDS) in the country, evolved over
the years, comprises of institutions in the formal and informal sectors. In the formal sector, a
multi-agency approach has been adopted and includes Co-operatives, Commercial Banks (public
12

and private sectors) and the Regional Rural Banks. The informal sector operates through noninstitutional sources like the moneylenders, traders, merchants, commission agents, friends and
relatives, etc.

13

REVIEW OF LITERATURE
A number of studies have been conducted to see the functioning and performance of regional
rural bank in the country. The literature available in the working and performance of RRBs in
India is a little limited. The literature obtained by investigators in the form of reports of various
committees, commissions and working groups established by the Union Government, NABARD
and Reserve Bank of India, the research studies, articles of researchers, bank officials,
economists and the comments of economic analysts and news is briefly reviewed in this part.
Some of the related literatures of reviews are as follows. NABARD (1986) published A study
on RRBs viability, which was conducted by Agriculture Finance Corporation in 1986 on behalf
of NABARD. The study revealed that viability of RRBs was essentially dependent upon the fund
management strategy, margin between resources mobility and their deployment and on the
control exercised on current and future costs with advances. The proportion of the establishment
costs to total cost and expansion of branches were the critical factors, which affected their
viability. The study further concluded that RRBs incurred losses due to defects in their systems
as such, there was need to rectify these and make them viable. The main suggestions of the study
included improvement in the infrastructure facilities and opening of branches by commercial
banks in such areas where RRBs were already in function.
In the year 1989 for the first time, the conceptualization of the entire structure of Regional Rural
Banks was challenged by the Agricultural Credit Review Committee (Khusro Committee), which
argued that these banks have no justifiable cause for continuance and recommended their
mergers with sponsor banks. The Committee was of the view that the weaknesses of RRBs are
endemic to the system and non-viability is built into it, and the only option was to merge the
RRBs with the sponsor banks. The objective of serving the weaker sections effectively could be
achieved only by self-sustaining credit institutions.

The Committee on Financial Systems,

1991 (Narasimham Committee) stressed the poor financial health of the RRBs to the exclusion of
every other performance indicator. 172 of the 196 RRBs were recorded unprofitable with an
aggregate loan recovery performance of 40.8 percent. (June 1993). The low equity base of these
banks (paid up capital of Rs. 25 lakhs) didn't cover for the loan losses of most RRBs. In the case
14

of a few RRBs, there had also been an erosion of public deposits, besides capital. In order to
impart viability to the operations of RRBs, the Narasimham Committee suggested that the RRBs
should be permitted to engage in all types of banking business and should not be forced to
restrict their operations to the target groups, a proposal which was readily accepted. This
recommendation marked a major turning point in the functioning of RRBs.
The contemporary literature on banking efficiency spells out two distinct approaches to measure
efficiency (1) accounting measure (2) economic measure. Accounting measure refers to the use
of various financial ratios that focus on one or more outputs and their relevant inputs to measure
the performance of a banking unit. The financial ratio approach has been widely used by the
researchers and working groups/committees to analyze the performance of RRBs. Most of the
studies on the performance evaluation of RRBs concentrated on the banks in particular
state/region. Some of the studies are: Singh (1992) analyzed the performance of RRBs banks in
Punjab. Prasad (2003) evaluated the performance of RRBs in India. Moreover, Pati (2005)
developed the performance of RRBs in the north-east region. The study of Bagchi and Hadi
(2006) concentrated on the performance of regional rural banks in West Bengal. Few studies also
exist in the literature which concentrated on the efficiency of a single regional rural bank. Some
of the studies conducted so far are: Sudhaker et al., (1984) evaluated the performance of Cauvery
Grameen Bank in Mysore district; Parmar (1986) assessed the performance of Banaskantha
Mehsane Grameen Bank in Gujarat; Sangwan (1988) analyzed the performance of Chattanja
Grameen Bank in Andhra Pradesh; Jagadeesha et al., (1990) evaluated the performance of
Tungabhadra Garmeen Bank in Karnataka. Further, Hosamani (2002) explored the performance
of Malaprabha Garmeen Bank in Karnataka and Yadappanvar and Nath (2003) assessed the
performance of Aurangabad and Jalna Grameen Bank in Maharashtra.
Though financial accounting ratios are simple to use and relatively easy to understand, but their
use to measure bank performance is plagued by various problems. As a precautionary measure,
regulatory frame works (such as CAMEL rating) based on these ratios has been put in place in
most of the supervisory systems across the globe. Further, Sherman and Gold (1985) noted that
financial ratios do not capture the long-term performance. This measure also helps in the analysis
of banks performance in terms of individual parameters determining the overall efficiency level
15

as it is difficult to precisely measure the efficiency of banks. Therefore, in recent years, there is a
trend towards measuring bank performance using economic measure. This measure provides
accurate, composite and precise estimate of efficiency of banks comparing each bank against the
top performers in the banking industry.
A scan of the existing literature on the efficiency of Indian banks provides that there exists
various studies that analyzed the efficiency of Indian commercial banks using most popularly
used parametric technique of Stochastic Frontier Analysis (SFA) and non- parametric technique
of Data Envelopment Analysis. The notable studies belonging to this group are: Noulas and
Ketkar (1996), Bhattacharyya et al., (1997), Das (1997), Saha and Ravisankar (2000), Mukherjee
et al., (2002), Kumar and Verma (2003), De Kumar (2004), Chakrabarti and Chawla (2005), etc.
To the authors knowledge, there is virtually no study except Reddy (2005), Khankhoje (2008),
Sathye (2008) and Mahindra (2011) which analyzed the performance of RRBs by using Frontier
and Data Envelopment Analysis approach respectively.

16

OBJECTIVES
The objective of this project is to measure the productive efficiency of banks in a developing
country that is India. Some of the objective are as follows:
1. To know the lending practices of cooperative banks in India.
2. To know the satisfaction level of the customer from bank lending policies.
3. To know different type of loans preferred by different sets of customer.
4. To measure and compare the efficiency of regional rural banks.
5. To make important suggestion to improve the working of RRBs.

17

HYPOTHESES
H1

It is assumed that Cooperative banks provide better loan facilities.

H0

It is assumed that cooperative banks doesnt provide better loan facilities.

H1

Loan is provided at lower rate of interest.

H0

Loan is provided at higher rate of interest.

18

RESEARCH METHODOLOGY
Descriptive research is used in this study in order to identify the lending practices of Regional
Rural Banks. The study is done by primary data &secondary data. The secondary data have been
collected from journals like the banker and the journal of Indian Institute of bankers have also
been referred, books, articles and research papers, internet, manual of instructions on loans and
advances. The method which is used in collecting primary data are:
Observation method

19

IMPORTANCE OF AGRICULTURE IN GROWTH OF INDIA

There have prevailed various inter-state differences in the access to institutional credit

as the

loan amount obtained by farm households even for the same size class of land holding. Owing to
which, an analysis of status and performance of agricultural credit has been the major concern of
the available literature on agricultural finance. Such literature facilitated policy makers in taking
review of progress already made and thereby it helped them in taking the appropriate corrective
action.
There appeared a large number of studies that have examined this aspect. Sahu (2008), for
example, analyses the trends in the supply of agricultural credit by institutional agencies in
fourteen major Indian states. It observes that the growth rate of agricultural credit was higher
during per-reform period compared to the reform period in most of the states. It also observes
that the growth rate of agricultural credit was higher during pre-reform period compared to the
reform period in most of the states. It notes the unevenness in the growth rate of agricultural
credit during the sub periods as well as across the states. Similarly, Mohan (2006) examining the
performance of the flow of institutional credit finds that despite the increase in the overall flow
of institutional credit over the years, there has taken place several gaps in the system like
inadequate provision of credit to small and marginal farmers, paucity of medium and long-term
lending and limited deposit mobilisation and heavy dependence on borrowed funds by major
agricultural credit purveyors. All these have major implications for agricultural development and
the well-being of the farming community. It urges for taking serious efforts to address and rectify
these issues.

In the 1960s, the Green Revolution allowed less developed countries, such as India, to overcome
chronic food deficits. Basically, the Green Revolution stands for producing more food and other
agricultural products from less land. Modernization is one of the main concepts in the Green
Revolution. The practices were made up of using high-yielding varieties of seeds, modifying
farm equipment, and substantially increasing chemical fertilizers. This allowed growth and
sustainability. At the beginning of the Green Revolution, there was a large growth in Indian
20

agriculture however, instability arose and the Green Revolution was on a rapid decline. In the
end, it caused a shortage of water. When water is the primary source of survival, life seems
difficult when there is a large shortage of the one thing that can make assurance of life. Before
the Green Revolution was introduced prior to the 1960s, farmers main goal was to produce
wheat and rice. These varieties had a low yield per hectare, which means that these crops took
one year to produce and in order for farmers to increase production, there would have to be a
change. The change would have to consist of irrigation facilities, fertilizers, and pesticides. In
order for these changes to work properly, there would have to be a sufficient quantity of water
and fertilizers. At the beginning, many farmers thought if they could double their production of
crops in one season that they would do whatever they could do increase crop production.
Improving high yielding varieties of wheat was a major factor, which finally led to the Green
Revolution.
The introduction of high-yielding varieties of seeds and the increased use of chemical fertilizers
provided the agriculture industry in India an increase in production. The Green Revolution was
thought to pave the way for rapid industrial growth, but in the end it did exactly the opposite. It
created a shortage. At the time, when the Green Revolution first began, it was considered one of
the most significant technological achievements in the agricultural industry. The Green
Revolution dramatically increased global food production over the next two decades, particularly
in India. Green Revolution Leader Mankombu Sambasivan Swaminathan is an Indian genetics
and international administrator who took the leading role in Indias Green Revolution. His main
goal was to eliminate world hunger and poverty, especially in India by using environmentally
sustainable agriculture, sustainable food security and the preservation of biodiversity. He called
the preservation of biodiversity the evergreen revolution. Swaminathan was a part of the Indian
Council of Agricultural Research and he was the administrator of Agriculture from 1979- 1980,
which is when his early work was started in the involvement of the Green Revolution. M.S.
Swaminathan was hailed as the father of the Green Revolution in India. Impacts the increase
production of wheat fueled a self sufficiency of food for India. The high yielding seeds and
irrigation facilities, brought enthusiasm too many farmers in India. By seeing better profits from
the Green Revolution, the farmers began to enjoy life more with better earnings, knowing that

21

they had the ability to provide for their family. Unfortunately, with the rise in use of chemical
pesticides and fertilizers, there were many negative effects on the soil and land.
Double cropping was a primary feature of the Green Revolution. The idea was for farmers to
have two crop seasons within one year. This meant that the crop production would double within
one year. This was based primarily on the natural one monsoon per calendar year. For farmers to
have to double the crops per season there would have to be one artificial monsoon. These were
created from a large irrigation facility. Dams were built in rural areas to collect large volumes of
monsoon rainwater. Before the Green Revolution, this water was wasted. This was a simple
irrigation technique that rural farmers adopted. However, in a year without monsoon, this led to
failure. Consequences, Damage and Results The consequences of the Green Revolution to the
rural farming areas, dating significantly from the year of the drought. There were flaws in the
technological achievements, which created this drought in India. The new technologies relied on
the monsoon seasons every year for the water supply in reassuring to keep up with increased land
use and production. When the monsoon failed in 1972-73, the year of drought occurred; this
had a major effect on the Green Revolution. There was much damage caused by the Green
Revolution. There was an excessive amount of fertilizers and pesticides used which polluted
waterways and poisoned agricultural workers. The beneficial wildlife and insects that lived in the
farming areas were also killed which made the land not as healthy for farmers to work with.
There are four main economic results of the Green Revolution. The crops were under high-yield
varieties and needed more water, fertilizers, pesticides, and other chemicals. This stimulated
growth of the local manufacturing sector. For example, the industrial growth created new jobs
and contributed to the countrys GCP. There was an increase in irrigation, which created a need
for new dams to collect the monsoon water. The water was stored and used to create hydroelectrical power. This boosted the industrial growth, created new jobs, and improved the quality
of life within the people living in the villages. India paid back all of their loans from the World
Bank to create the dams in rural areas. By an outside view, this looks good on behalf of India for
paying back such a large loan and it looks good in the eyes of other lending agencies.

22

The irrigation and growth of wheat and rice are very important to the economy and production of
livelihood in India. These are the main products that most families can afford and live off on a
daily basis. Both wheat and rice varieties require carefully controlled irrigation. About 75% of
cropped land is devoted to food grains such as rice, wheat, maize, and barley. Rice and wheat
contribute to approximately 70%-90% of the food requirements for the people of India. Because
of the high yielding varieties, the soils are too dry when the monsoon season fails when the
agricultural industry needs an adequate amount of water for the rice and wheat to grow properly,
but that water is not available, it poses a great problem to the success of the Green Revolution.
Countries involved in the Green Revolution have subsidies in part with the prices of the
fertilizers, pesticides and the production of wheat and rice.
In the last five decades, the Governments objectives in agricultural policy and the instruments
used to realize the objectives have changed from time to time, depending on both internal and
external factors. Agricultural policies at the sectorial level can be further divided into supply side
and demand side policies. The former include those relating to land reform and land use,
development and diffusion of new technologies, public investment in irrigation and rural
infrastructure and agricultural price supports. The demand side policies on the other hand,
include state interventions in agricultural markets as well as operation of public distribution
systems. Such policies also have macro effects in terms of their impact on government budgets.
Macro level policies include policies to strengthen agricultural and non-agricultural sector
linkages and industrial policies that affect input supplies to agriculture and the supply of
agricultural materials.
During the pre-green revolution period, from independence to 1964-1965, the agricultural sector
grew at annual average of 2.7 per cent. This period saw a major policy thrust towards land
reform and the development of irrigation. With the green revolution period from the mid-1960s
to 1991, the agricultural sector grew at 3.2 per cent during 1965-1966 to 1975-1976, and at 3.1
per cent during 1976-1977 to 1991-1992. Acharya (1998) explains that the policy package for
this period was substantial and consisted of: a) introduction of high-yielding varieties of wheat
and rice by strengthening agricultural research and extension services, b) measures to increase
the supply of agricultural inputs such as chemical fertilizers and pesticides, c) expansion of
23

major and minor irrigation facilities, d) announcement of minimum support prices for major
crops, government procurement of cereals for building buffer stocks and to meet public
distribution needs, and e) the provision of agricultural credit on a priority basis. This period also
witnessed a number of market intervention measures by the central and state Governments. The
promotional measures relate to the development and regulation of primary markets in the nature
of physical and institutional infrastructure at the first contact point for farmers to sell their
surplus products. Acharya (1998) also notes that the rate of growth of productivity per hectare of
all crops taken together increased from 2.07 per cent in the decade ending 1985-1986 to 2.51 per
cent per annum during the decade ending 1994-1995. Similar evidence of an increase in yields, a
partial measure of productivity gains given by output per unit of land area is seen below for
various crops.

24

PROBLEMS IN THE AGRICULTURE SECTOR

Despite the early benefits, it became apparent that there were many negative impacts from the
green revolution. After the Green Revolution began in India, there was a change in the land use
patterns, known as the degradation of land. Whereas primarily there were only one crop planted
per year, before the Green Revolution. There were two to three crop rotations every year, the
land quality diminished and the land quality had suffered. Due to the impute of heavy chemical
fertilizers, a strain on the carbon material within the soils were created. There also has been a
loss in bio diversity in farm lands because since there has been an increase in chemical pesticides
and fertilizers, many insects have been killed and the birds that create homes in rural areas have
found new areas to live because of the negative side effects that the pesticides give off to the
environment. As a result of chemical use in the land, contamination of ground water affected the
health of the people who are consuming the agricultural goods that now contained pesticides and
chemicals. This directly affected the health of Indians, who were not used to putting such
chemicals in their bodies.
It was not only the environmental and health problems that arose; there were also many social
problems that occurred in the late 20th century because of the green revolution. Since the
farming industry was booming and farmers had higher incomes, there was an increase demand
for more land which created more demand for farm families who took on more farming land that
they could manage. Critics believe that the Green Revolution resulted in environmental
degradation, increased income inequality, inequitable asset distribution, and worsened poverty
levels in India. The majority of the large farmers were able to adapt to the new technologies
because they had better irrigation, fertilizers, and seeds.
However, the Green Revolution affected just as many of the smaller farmers during the Green
Revolution. It is believed that the Green Revolution encouraged mechanization, which pushed
down rural wages and employment, and increasingly impoverished small farmers. When the
Green Revolution occurred, there was a spread only in irrigated and high-potential rained areas,
which created many villages without sufficient water. Even though there were more employment
opportunities and cheaper food, not having a sufficient amount of water in a village is crucial for
25

survival. There was some retreating of water from natural watersheds; this was replenishing
water, which was pumped from areas that can be quickly replenished by the rainwater, however,
there was not a sufficient amount of water for survival.
At the beginning, there were no problems with the Green Revolution until the farmers and
government started to see problems arising. The sudden change in agricultural techniques
developed caused a rapid change creating economic imbalance among farmers, which
contributed to large interregional agricultural disparities. It has been brought to the attention of
many farmers that crop productivity needs to increase in order to keep up with the competitive
agricultural market. In order to survive the market, may need to increase productivity in order to
keep an income coming in for a family. This requires new technology being brought into their
farms to succeed in the agricultural industry in India, and yet not all farms can afford this new
technology. There has been an ongoing debate in India surrounding the survival of farmers:
whether to increase agricultural productivity or improve food quality. Ever since the Agreement
on Agriculture was created in 1999 from the World Trade Organization this has been a topic
surrounding not only farmers but this problem affects mostly everyone living in India. This idea
was created to replace agriculture price support with direct payments to farmers from production
dates.
One would think that protests to get peoples attention about the growing problem from the green
revolution would not be wasting food, however, that is not the case. In the district in Andhra
Pradesh, farmers had dumped cartloads of tomatoes on the streets to express their struggles as
farmers. With the price of tomatoes increasing for a normal family, it was almost impossible for
farmers to keep producing these goods and selling them at a reasonable price. In another instance
near Punjab, potato farmers demonstrated their negative views towards the Green Revolution by
throwing potatoes onto highways to get people in the community to start talking about the
agricultural problem arising. It is believed that the productivity will bring more income to
farmers, which will no doubly be true, however, the factors of the environmental issues because
of the over productivity does not come into place.

26

Suicide has become common in rural farms on the outskirts of major Indian cities. The pressure
farmers have to produce a certain amount of crops yearly puts many stresses on top of their busy
lives. Farmers who cannot produce a certain amount of crops, they believe that the stress about
not being able to provide for their families, which they believe life not worth living any longer.
In 2002, there were over 1000 suicides reported from 12 districts of Maharashtra, India. The
rising amount of debt that farmers collect from having to purchase fertilizers and pesticides puts
a large strain on themselves. Within the process of producing the second round of crops within
one year, when the second round does not produce as quickly or they do not have the same
quality, farmers get very distressed that they will not be able to sell these crops. The government
in India has been in denial about the number of suicides that have occurred since 1987, which
has arisen to over 10,000 suicides committed by farmers. This is within the same time that the
Green Revolution began to tumble and not be as successful. Food Security At this time in India,
during the food crisis, farmers cannot pay the wages. There is a shortage of farm laborers
because of the higher prices that the farmers need to pay the laborers. The increasing price from
seeds, fertilizers and water, cause the wages to increase and it will make growing food more
expensive. Small farmers cannot afford this especially since they need to provide for their family.

27

FINANCING THE AGRICULTURE SECTOR

Agricultural finance is a sectorial concept which comprises financial services for agricultural
production, processing and marketing, such as short, medium and long-term loans, leasing, and
crop and livestock insurance. Recently, the concept of agricultural value chain finance was
introduced to emphasis the vertical dimension of agricultural finance to and between different
segments of agricultural value chains. Although agricultural finance can largely be regarded as a
subset of rural finance, some larger companies operating on both ends of agricultural value
chains are also located in bigger towns and cities recent growth of Indian economy has been
primarily service-led. The service sector has completely replaced agriculture, which has been
traditionally the largest contributor to Indias GDP.
However, the fact that agriculture has a small share of 14 percent in GDP today comparing to a
share of more than 50 percent in total GDP, does not belittle its importance for the Indian
economy. This is because first, agriculture remains the largest employer having a share of around
60 percent; second, it holds the key to creation of demand in other sectors and remains by far an
important indirect contributor to Indias GDP growth. Commercial banks have played an
important role in financing the needs of agricultural sector. With the aim of facilitating timely
and adequate credit flow to agriculture, the sector has been targeted as a part of the priority
sector lending programed introduced after nationalization of banks in 1969. Since then, banks
have become gradually an important source of agricultural credit, although the growth in their
share has not been monotonic during 1980s.
In the first half of 2000s, there has been a steep rise in the share of commercial banks in total
agricultural credit. Starting 1990s, the share of short-term agricultural credit in total agricultural
credit has been going up. Newer credit delivery systems in the form of Kisan Credit Card (KCC)
were introduced to provide easy access to credit. Banks like NABARD has grown and evolved
over the last three decades from a uni-dimensional apex financing agency into a multidimensional institution for shaping and implementing the countrys overall rural credit policy. In
the first two decades after independence, the conduit for institutional credit to agriculture was the

28

cooperative sector. Although sound in concept, the cooperative sector failed to live up to
expectations.
With the nationalization of commercial banks, the decade of 1970 marked the entry of
commercial banks into agricultural credit. Over the last 40 years, there has been a striking
increase in the credit intensity of agriculture as measured by the ratio of agricultural credit to
agricultural GDP. The credit intensity increased from 12 percent in the early 1970s to 67 percent
by 2010-11 (Subbarao, 2012).
Capital formation in agriculture has been another aspect that has attracted the attention of
researchers. A study by Karmakar (1998) has examined the growth trends in capital formation in
agriculture in both public and private sectors. It finds the declining trend in both the public and
private sources of capital formation. In fact, as per his study, the share of gross capital formation
had declined from 15 percent in 1980-81 8 percent in 1990-91. It finds that the real gross capital
formation in agriculture sector showed negative growth rates of 2 percent per annum during the
sixth plan and 1.4 percent per annum during the seventh Plan. Correspondingly, the share of
agriculture sector as percentage of total investment in economy had also declined from 18.2
percent in fifth plan to 15.1 percent in the sixth plan and further to 11.9 percent during the
seventh Plan.
The impact of agricultural credit policy and credit disbursements on crop productivity is also
examined by numerous studies. Kannan (2011), for example, by focusing on the state of
Karnataka finds that the disbursement of credit through institutional sources had a large impact
on improving agricultural productivity. However, it points at its inadequacy and thereby urges for
widening its coverage both in terms of the amount of credit and the coverage of more number of
marginal and small farmers. Similarly, Das et al. (2009) examine the role of direct and indirect
agricultural credit on agricultural production by taking care of regional disparities in agriculture,
credit disbursement and agricultural production in an economic framework using Dynamic Panel
Data Analysis. It finds that the direct agriculture credit has a positive and statistically significant
impact on agricultural output and its effect is immediate.

29

India has long experience of using development banks and cooperative institutions to deliver
agriculture credit to farmers. Cooperative credit for crop production is being administered
through primary cooperative societies, which have farmers as members. Credit, as one of the
critical non-land inputs, has two dimensions in the context of its contribution to the augmentation
of agricultural growth. These are availability of credit (quantum) and the distribution of credit. In
this section, we look at sources of agriculture credit. There have prevailed various inter-state
differences in the access to institutional credit as well as the loan amount obtained by farm
households even for the same size class of landholding. Owing to which, an analysis of status
and performance of agricultural credit has been the major concern of the available literature on
agricultural finance. Such literature facilitated policy makers in taking review of progress already
made and thereby it helped them in taking the appropriate corrective action. There appeared a
large number of studies that have examined this aspect. Sahu (2008), for example, analyses the
trends in the supply of agricultural credit by institutional agencies in fourteen major Indian
states. It observes that the growth rate of agricultural credit was higher during per-reform period
compared to the reform period in most of the states. It also observes that the growth rate of
agricultural credit was higher during pre-reform period compared to the reform period in most of
the states. It notes the unevenness in the growth rate of agricultural credit during the sub periods
as well as across the states.

Similarly, Mohan (2006) examining the performance of the flow of

institutional credit finds that despite the increase in the overall flow of institutional credit over
the years, there has taken place several gaps in the system like inadequate provision of credit to
small and marginal farmers, paucity of medium and long-term lending and limited deposit
mobilisation and heavy dependence on borrowed funds by major agricultural credit purveyors.
All these have major implications for agricultural development and the well-being of the farming
community.
Urban Cooperative Banks
Co-operative banks are small-sized units organized in the co-operative sector which operate both
in urban and non-urban regions. These banks are traditionally centered on communities,
localities and work place groups and they essentially lend to small borrowers and businesses. The
term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary
cooperative banks located in urban and semi-urban areas. These banks, until 1996, could only
30

lend for non-agricultural purposes. As at end-March 2011, there were 1,645 UCBs operating in
the country, of which majority were non-scheduled UCBs. Moreover, while majority of the
UCBs were operating within a single State, there were 42 UCBs having operations in more than
one State. However, today this limitation is no longer prevalent. While the co-operative banks in
rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery,
personal finance, etc. along with some small scale industries and self-employment driven
activities, the co-operative banks in urban areas mainly finance various categories of people for
self-employment, industries, small scale units and home finance.
These banks provide most services such as savings and current accounts, safe deposit lockers,
loan or mortgages to private and business customers. For middle class users, for whom a bank is
where they can save their money, facilities like Internet banking or phone banking is not very
important. Although they are not better than private banks in terms of facilities provided, their
interest rates are definitely competitive. However, unlike private banks, the documentation
process is lengthy if not stringent and getting a loan approved quickly is rather difficult. The
criteria for getting a loan from a UCB are less stringent than for a loan from a commercial bank.
In India rural people such as small and marginal farmers, landless agricultural laborers, artisans
and socially and economically backward castes and classes they have been exploited in the name
of credit facility by informal sector. The rural credit market consists of both formal and informal
financial institutions and agencies that meet the credit needs of the rural masses in India. The
supply of total formal credit is inadequate and rural credit markets are imperfect and fragmented.
Moreover, the distribution of formal sector credit has been unequal, particularly with respect to
region and class, cast and gender in the country side.
Regional Rural Banks
Regional Rural Banks have been in existence for around 36 years in the Indian financial scene.
The institution of Regional Rural Banks (RRBs) was created to meet the excess demand for
institutional credit in the rural areas, particularly among the economically and socially
marginalized sections. The Banking Commission (1972) recommended establish an alternative
institution for rural credit and ultimately Government of India established Regional Rural Banks
31

as a separate institution basically for rural credit on the basis of the recommendations of the
Working Group under the Chairmanship of Shri M. Narashimham. In order to provide access to
low-cost banking facilities to the poor, the Narashimham Working Group (1975) proposed the
establishment of a new set of banks, as institutions which combine the local feel and the
familiarity with rural problems which the cooperatives possess and the degree of business
organization, ability to mobilize deposits, access to central money markets and modernized
outlook which the commercial banks have. Subsequently, the Regional Rural Banks were setup
through the promulgation of RRB Act of 1976. The RRBs Act, 1976 succinctly sums up this
overall vision to sub-serve both the developmental and the redistributive objectives. The RRBs
were established with a view to developing the rural economy by providing, for the purpose of
development of agriculture, trade, commerce, industry and other productive activities in the rural
areas, credit and other facilities, particularly to small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental
thereto.
Regional Rural Banks were established under the provisions of an Ordinance promulgated on the
26th September 1975 and the RRB Act, 1975 with an objective to ensure sufficient institutional
credit for agriculture and other rural sectors. The RRBs mobilize financial resources from
rural/semi-urban areas and grant loans and advances mostly to small and marginal farmers,
agricultural laborers and rural artisans. For the purpose of classification of bank branches, the
Reserve bank of India defines rural area as a place with a population of less than10, 000. RRBs
are jointly owned by Government of India, the concerned State Government and Sponsor Banks;
the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35%
respectively.
The financial viability of RRBs has engaged the attention of the policy makers from time to time.
In fact, as early as 1981, the Committee to Review Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD) addressed the issue of financial viability of
the RRBs. The CRAFICARD recommended that the loss incurred by a RRB should be made
good annually by the shareholders in the same proportion of their shareholdings. Though this
recommendation was not accepted, under a scheme of recapitalization, financial support was
32

provided by the shareholders in the proportion of their shareholdings. Subsequently, a number of

committees have come out with different suggestions to address the financial non-viability of
RRBs. For instance, the Working Group on RRBs (Kelkar Committee) in 1984 recommended
that small and uneconomic RRBs should be merged in the interest of economic viability. Five
years down the line, in a similar vein, the Agricultural Credit Review Committee (Khusro
Committee), 1989 pointed out that the weaknesses of RRBs are endemic to the system and nonviability is built into it, and the only option was to merge the RRBs with the sponsor banks. The
objective of serving the weaker sections effectively could be achieved only by self-sustaining
credit institutions. The Committee on Restructuring of RRBs, 1994 (Bhandari Committee)
identified 49 RRBs for comprehensive restructuring. It recommended greater devolution of
decision-making powers to the Boards of RRBs in the matters of business development and staff
matters. The option of liquidation again was mooted by the Committee on Revamping of RRBs,
1996 (Basu Committee).
The Expert Group on RRBs in 1997 (Thingalaya Committee) held that very weak RRBs should
be viewed separately and possibility of their liquidation be recognised. They might be merged
with neighboring RRBs. The Expert Committee on Rural Credit, 2001 (Vyas Committee I) was
of the view that the sponsor bank should ensure necessary autonomy for RRBs in their credit and
other portfolio management system. Subsequently, another committee under the Chairmanship of
Chalapathy Rao in 2003 (Chalapathy Rao Committee) recommended that the entire system of
RRBs may be consolidated while retaining the advantages of regional character of these
institutions. As part of the process, some sponsor banks may be eased out. The sponsoring
institutions may include other approved financial institutions as well, in addition to commercial
banks. The Group of CMDs of Select Public Sector Banks, 2004 (Purwar Committee)
recommended the amalgamation of RRBs on regional basis into six commercial banks - one each
for the Northern, Southern, Eastern, Western, Central and North-Eastern Regions. Thus one finds
that a host of options have been suggested starting with vertical merger (with sponsor banks),
horizontal merger (amongst RRBs operating in a particular region) to liquidation by different
committees that have gone into the issue of financial viability and restructuring strategies for the
RRBs.

33

More recently, a committee under the Chairmanship of A.V Sardesai revisited the issue of
restructuring the RRBs (Sardesai Committee, 2005). The Sardesai committee held that to
improve the operational viability of RRBs and take advantage of the economies of scale, the
route of merger/amalgamation of RRBs may be considered taking into account the views of the
various stakeholders. Merger of RRBs with the sponsor bank is not provided in the RRB Act
1976. Mergers, even if allowed, would not be a desirable way of restructuring. The Committee
was of the view that merging a RRB with its sponsor bank would go against the very spirit of
setting up of RRBs as local entities and for providing credit primarily to weaker sections. Having
discussed various options for restructuring, the Committee was of the view that a change in
sponsor banks may, in some cases help in improving the performance of RRBs. A change in
sponsorship may, inter alia; improve the competitiveness, work culture, management and
efficiency of the concerned RRBs. Against this backdrop, a number of issues need empirical
probing. Such as, which are the RRBs that need focus and whether for them the sponsor bank has
really to be made accountable. All these issues fall under the broader questions of what factors
drive the performance of RRBs? And do the sponsor banks have a role to play?

34

GOVERNMENT/POLICY SUPPORT TO AGRICULTURAL SECTOR

Indian Banking history can be traced to 19th century. During the colonial era many Indian banks
were founded either by the Presley States or by wealthy individuals. The primary aim of most of
the banks was to cater financial needs of trade and industry in that locality. During this period the
banking services became the privilege of big business firms and wealthy individuals. Masses
were denied easy credit and banking services. Agriculture and rural small scale industries did not
have access to credit facilities and banking services. They depended on village money lenders
and other private financiers to fund their activities. These local financial prodders exploited the
rural population by charging enormous interest rates and harsh repayment conditions.
Nationalization of banks in India by then Indian Prime Minister Indira Gandhi wrote a new
chapter in Indian Banking history. The nationalized banks in India were compelled to focus on
rural and agricultural sectors as a part of their social responsibility. Their resources were utilized
to empower farmers and agricultural laborers in order to free them from the clutches of money
lenders.
NATIONALISATION OF BANKS
Nationalization of banks in India was done in two phases. The first phase of nationalization
started in 1955 when the erstwhile Imperial Bank of India became State Bank of India with an
Act of parliament. During 1959, seven subsidiaries were nationalized and associated with State
Bank of India one by one. This heralded a new beginning in Indian banking system. The State
Bank group became the largest bank in India serving 90 million customers with a network of
over 9000 branches in nook and corners of the country. The second phase of nationalization
started in 1969 with the nationalization of 14 major commercial banks in India. In 1980, 6 more
commercial banks were nationalized and became public sector banks. After this period the Public
Sector Undertaking banks expanded their reach and grew in leaps and bounds. The nationalized
banks in India expanded their branches and spread their activities across the country. The PSU
banks introduced new schemes and programs to cater all sections of the society. Thus the
nationalization of Banks in India helped the masses to avail banking services at affordable cost.
KISAN CREDIT CARD
35

Honourable Union Finance Minister announced in his budget speech for 1998-99 that NABARD would
formulate a Model scheme for issue of Kisan Credit Cards to farmers, on the basis of their land holdings, for
uniform adoption by banks, so that the farmers may use them to readily purchase agricultural inputs such as
seeds, fertilisers, pesticides, etc. and also draw cash for their production needs. NABARD formulated a Model
Kisan Credit Card Scheme in consultation with major banks. Model Scheme circulated by RBI to commercial
banks and by NABARD to Cooperative. Banks and RRBs in August 1998, with instructions to introduce the
same in their respective area of operation.
OBJECTIVES
As a pioneering credit delivery innovation, Kisan Credit Card Scheme aims at provision of adequate and timely
support from the banking system to the farmers for their cultivation needs including purchase of inputs in a
flexible and cost effective manner.
CONTENTS OF CREDIT CARD
Beneficiaries covered under the Scheme are issued with a credit card and a pass book or a credit card cum pass
book incorporating the name, address, particulars of land holding, borrowing limit, validity period, a passport size
photograph of holder etc., which may serve both as an identity card and facilitate recording of transactions on an
ongoing basis. Borrower is required to produce the card cum pass book whenever he/she operates the account.
SALIENT FEATURES OF THE KISAN CREDIT CARD (KCC) SCHEME

Eligible farmers to be provided with a Kisan Credit Card and a pass book or card-cum-pass book.
Revolving cash credit facility involving any number of drawls and repayments within the limit.
Limit to be fixed on the basis of operational land holding, cropping pattern and scale of finance.
Entire production credit needs for full year plus ancillary activities related to crop production to be

considered while fixing limit.

Sub-limits may be fixed at the discretion of banks.
Card valid for 3 years subject to annual review. As incentive for good performance, credit limits could

be enhanced to take care of increase in costs, change in cropping pattern, etc.

Each drawl to be repaid within a maximum period of 12 months.
Conversion/reschedulement of loans also permissible in case of damage to crops due to natural

calamities.
Security, margin, rate of interest, etc. as per RBI norms.

36

Operations may be through issuing branch (and also PACS in the case of Cooperative Banks) through
other designated branches at the discretion of bank.

Withdrawals through slips/cheques accompanied by card and passbook.

ADVANTAGES & BENEFITS OF THE KISAN CREDIT CARD SCHEME

1.

Advantages:-

Advantages to farmers

Access to adequate and timely credit to farmers

Full year's credit requirement of the borrower taken care of.

Minimum paper work and simplification of documentation for drawl of funds from the
bank.

Flexibility to draw cash and buy inputs.

Assured availability of credit at any time enabling reduced interest burden for the farmer.

Sanction of the facility for 3 years subject to annual review and satisfactory operations and
provision for enhancement.

Flexibility of drawls from a branch other than the issuing branch at the discretion of the
bank.

2.

Benefits:-

Reduction in work load for branch staff by avoidance of repeat appraisal and processing of
loan papers under Kisan Credit Card Scheme.

Minimum paper work and simplification of documentation for drawl of funds from the
bank.

Improvement in recycling of funds and better recovery of loans.

Reduction in transaction cost to the banks.

Better Banker - Client relationships.

COVERAGE OF CROP LOANS DISBURSED UNDER KCC
Under the Rashtriya Krishi Bima Yojna (RKBY)GIC has agreed that the crop loans disbursed for eligible
crops under the Crop Insurance Scheme will be covered under the CCIS, now under Rashtriya Krishi Bima
37

Yojna. However, the banks are expected to maintain all back up records relating to compliance with "RKBY"
and its seasonality discipline, cut-off date for submitting declarations and end use, etc. as in the case of
normal crop loans.
Objectives of the Scheme:

To provide insurance coverage and financial support to the farmers in the event of failure of
crops as a result of natural calamities, pests and diseases.

To encourage farmers to adopt progressive farming practices, high value inputs and higher
technology in agriculture.

To help stabilise farm incomes, particularly in disaster years.

To support and stimulate primarily production of food crops and oilseeds.

Farmers to be covered: All farmers (both loanee and non-loanee irrespective of their size of
holdings) including sharecroppers, tenant farmers growing insurable crops covered.

Sum insured: The sum insured extends up to the value of threshold yield of the crop, with an
option to cover up to 150% of average yield of the crop on payment of extra premium.

Premium subsidy: 50% subsidy in premium allowed to Small and Marginal Farmers, to be
shared equally by the Government of India and State Government/Union Territory. Premium subsidy to be
phased out over a period of 5 years.
MAJOR STEPS TAKEN BY NABARD

A Brochure on KCC Scheme highlighting the salient features, advantages and other relevant
information about the Scheme was brought out by Head Office and ROs were asked to circulate the brochure
to State govt. departments, Commercial Banks, Cooperative Banks, RRBs and other concerned
agencies/officers so as to generate wider awareness about the Scheme.

Floor limit of Rs.5000/- for issue of KC Cards stands withdrawn.

Studies on KCC Scheme have been entrusted to BIRD and NABARD Staff College to facilitate
feedback on the ground level issues/problems so that changes, where necessary, could be considered.

Studies on the implementation of the Scheme undertaken by NABARD periodically.

On the lines of instructions of RBI to Commercial Banks, Cooperative Banks and RRBs have
been advised that they may, at their discretion, pay interest at a rate based on their perception and other
relevant factors on the minimum credit balances in the cash credit accounts under the Kisan Credit Cards of
farmers during the period from 10th to the last day of each calendar month.
38

Regional Rural Banks (RRBs) were advised to initiate innovative publicity campaign in each
area of operation in order to cater all eligible farmers under KCC.
Progress in implementation of the Scheme:-

Since launching in August 1998, around 2.38 crore Kisan Credit Cards issued up to 31 March
2002 by Cooperative Banks, Regional Rural Banks and Commercial Banks put together.

Scheme implemented in all States and Union Territories (except Chandigarh, Daman & Diu and
Dadra & Nagar Haveli) with all Cooperative Banks, RRBs and Commercial Banks participating.

Agency-wise/State-wise progress in issue of cards by all banks during 2001-02 and since
inception of Scheme.
IMPORTANT INITIATIVES BY NABARD
1) Institutional Strengthening Initiatives:Preparing Institution Specific Development Action Plans (DAPs) and entering into MoUs with
Cooperative Banks and RRBs Facilitating State-specific reform packages for Cooperative Banks ODI
Intervention and Training and capacity building in RFIs Support for improvement of business, system, HRD,
etc. of cooperatives Social Re-engineering through Vikas Volunteer Vahini (VVV) Institution of Awards for
good performing Cooperative Banks Assistance for Business Development Cells (BDC) in Co-operative and
RRBs
2) Micro Finance Innovations and Strategies:Grant support to Self Help Promoting Institutions (SHPIs) to improve access to credit for rural poor
Capacity Building of partner institutions in micro Finance Supporting and upscaling of SHG-bank linkage
programme
3) Research and Development Initiatives:Support to Research activities in areas of agriculture and rural development Support for seminars,
conferences & workshops Conducting institution/area/sector/project-specific studies Dissemination of
findings of studies and research and innovative models and practices
4) Supervision:On-site inspection and off-site surveillance of RFIs Issue of warning signals to banks showing deterioration
in financial position and adverse features taking preventive and revival measures for weak banks
5) Institution of purpose-specific funds in NABARD:1) Watershed Development Funds (WDF)
39

2) Co-operative Development Funds (CDF)

3) Rural Promotion Corpus Fund (RPCF)
4) Credit and Financial Services Fund (CFSF)
5) Micro-Finance Development Fund
6) Soft Loan Assistance for Margin Money Fund
7) National Rural Credit Operation Fund
8) National Rural Credit Stabilisation Fund
9) Agriculture and Rural Enterprises Incubation Fund

The KCC came into existence in 1998-99 as a credit product that allowed farmers the required
financial liquidity and avail credit when it was absolutely needed, providing in the process
flexibility, timeliness, cost effectiveness and hassle free services to the farmers. Since almost one
decade has been passed since the implementation of KCC scheme in 1999, it was felt by the
NABARD to (i) critically examine the difficulties and operational problems / bottlenecks
encountered by the farmers as well as the implementing agencies, (ii) critically review the
progress of the scheme, particularly from the angle of its geographical spread, bank-wise
progress and coverage of different categories of farmers. Recognizing the limitations of multicredit product and multiagency approach, a stronger view emerged among policy makers,
particularly since the early nineties, on the need for an integrated credit product for accelerating
sector/area/activity specific development process.
The introduction of a new credit product called Kisan Credit Card (KCC) in 1998-99 with three
different sub-limits viz. production, assets maintenance and consumption needs is a step in this
direction. This brings integration into the multi-credit product system by offering farm
entrepreneurs a single line of credit through a single window for multiple purposes. These
include acquisition of farm assets, maintenance thereof and meeting families intervening
consumption needs. The Kisan Credit Card Scheme was a step towards facilitating the access to
short-term credit for the borrowers from the formal financial institutions. The scheme was
conceived as a uniform credit delivery mechanism, which aimed at provision of adequate and
timely supply of short-term credit to the farmers to meet their crop production requirements. The
40

KCC instrument would allow farmers to purchase agriculture inputs such as seeds, fertilizers,
pesticides and also allow them to withdraw some cash for meeting their other crop production
related requirements. Under the old system short-term credit was disbursed either through a
demand loan or through a system of loans known as crop cash credit mechanism9. In the
demand-based system, loans were granted on crop specific basis against execution of fresh
documents each season. The sub limit was fully used up only credits were permitted, but
withdrawals were not allowed. Withdrawals under these limits were permitted either in cash
through debit slips or through bankers cheques for the kind component. As a result the
withdrawals were usually bunched at the beginning of crop season and repayments at the end of
the season when farmers were able to generate cash after harvesting and marketing their produce.
Since then, the scheme of KCC is under implementation by State Cooperative Banks (SCBs)
through DCCBs and PACS as also the Regional Rural Banks (RRBs) and Commercial Banks
(CBs) under the aegis of NABARD. As on 31 March 2009, 828.7 lakh farmers were issued
KCCs by various banks. Co-operative banks have the largest share (62%), followed by
commercial banks (30%) and RRBs (8%). The performance in the implementation of the KCC
scheme has been impressive10 in the states of Andhra Pradesh, Gujarat, Haryana, Karnataka,
Maharashtra, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttaranchal. A personal accident
insurance scheme has also been introduced from the year 2001-02 for all KCC holders against
accidental death/ permanent disability. The scheme has become popular both amongst farmers
and bankers.
PRIORITY SECTOR LENDING
The financial sector reforms have observed changes in priority sector lending across states. Over
the years the stipulation for lending to the priority sector has been retained though its scope and
definition has been fine-tuned by including new items. Based on the recommendations of the
Working Group set up by the RBI2, the priority sector norms were revised in April 2007. As per
the revised norms, the sectors of the society/ economy that impact large segments of the
population, the weaker sections and the sectors which are employment-intensive such as
agriculture and micro and small enterprises, have been retained as priority sector in the revised
guidelines, which came into effect from April 30, 2007. Agriculture, small enterprise, micro
41

credit, retail trade, education loans and housing loan up to Rs.20 lakh are the broad categories
included in the priority sector.3 However, under the revised norms effective since April 30, 2007,
priority sector lending proportion is calculated as a percentage of adjusted net bank credit
(ANBC) or credit equivalent amount of off-balance sheet exposure (OBE), whichever is higher,
instead of net bank credit (NBC). ANBC includes NBC plus investments made by banks in nonSLR bonds held in HTM category.
Narasimham committee had recommended a reduction in priority sector lending, but political
compulsions did not allow the government to reduce the lending from existing 40 percent and
that of agriculture of 18 percent. Under the priority sector lending, direct institutional credit to
agriculture sector includes loans sanctioned for small and marginal farmers for purchase of land
for agricultural purposes. Distressed farmers indebted to non-institutional lenders can obtain
loans against appropriate collateral and group security. As per the new guidelines, individual
farmer can avail of loans up to Rs.10 lakh against pledge/hypothecation of agricultural produce
(including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the
farmers were given crop loans for raising the produce or not. This policy is exclusionary as small
and marginal farmers get excluded. They are not in a position to pledge produce.
For instance in 1996-97, share of agriculture was 12.14 percent that fell to 10.98 percent in 200203 (table 2.7). It recovered in next year, a year before the base year of doubling of credit flow to
agriculture and has continuously risen since then, but never touched 18.0 percent. This is despite
the fact that policies reflect pro-agriculture shift in the recent times, the focus in the 11th fiveyear plan is to achieve 4 percent growth in agriculture. Reforms have had a varied impact on
formal sector finances across states in India. However, it may be mentioned here that in quantum
terms the credit flow across the sectors and states has gone up significantly since the reforms.
The gross bank credit during 1996-97 and 2008-09 grew at the rate of 22.25 percent, which is
marginally lower than the growth of priority sector lending. However, agricultural credit grew at
slightly higher rate of 23.13 percent. Low interest rates may have primarily influenced this
positive trend.

42

The non-fulfilment of priority sector lending is the result of cautious approach adopted by
bankers to avoid bad loans, which may affect their non-performing assets. The scope of priority
sector lending has also been widened over the years. The interest deregulation has imparted more
flexibility to priority sector lending and the bankers have really used it to direct credit to sectors
that reduce their cost of delivery rather than follow the dictum of timely credit delivery. The new
guidelines are supposed to aim at overcoming the crowding out effect against small loans,
particularly to agriculture, only one-third of amount of the big-ticket loans/ advances can be
classified as direct agriculture.

43

IMPACT OF GLOBALISATION ON AGRICULTURE

Globalization in the context of agriculture can be best discussed in the context of three
components improvement of productive efficiency by ensuring the convergence of potential
and realized output, increase in agricultural exports and value added activities using agricultural
produce, and finally, improved access to domestic and international markets that are either
tightly regulated or are overly protected. These components are linked in various ways. For
example, productive efficiency would enhance value added activities in agriculture through agroprocessing and exports of agricultural and agro-based products. These activities in turn would
increase income and employment in the industrial processing sector. Thus globalizing agriculture
has the potential to transform subsistence agriculture to commercialized agriculture and to
improve the living conditions of the rural community. However, economic reforms within India
are necessary to pave the path to successful globalization.
The stated objective of the new economic policy is to raise the economys growth rate from the
current 5.5 per cent achieved over 15 years to about 7 or 8 per cent per year. Ahluwalia (1996)
explains that this indirectly requires an improvement in agricultural growth from between 2 and
3 per cent in the past to about 4 per cent per year. Although initially, with respect to agriculture,
there was no major policy reform package in the 1990s, it was however anticipated that the
opening up of the agricultural sector to foreign trade, the move to a market determined exchange
rate and reduction of protection for industry would, over time, benefit the agricultural sector.
Manmohan Singh (1995), the then Finance Minister, in his inaugural address at the 54th Annual
Conference of the Indian Society of Agricultural Economics, brought to notice that a policy of
heavy protection of the industrial sector operated to the disadvantage of the agricultural sector
when industrial prices were raised relative to world prices and thus the profitability of investing
in industry was raised relative to agriculture. This would lead to a shift of resources from
agriculture to industry.
A policy of heavy industrial protection also led to an appreciation of the exchange rate.
Ahluwalia (1996) noted that over-valuation of the exchange rate (before the Indian rupee was
devalued by 18 per cent in two phases starting in July 1991) discouraged agricultural exports
44

more than industrial exports because Indian industrial policy had sought to offset the constraints
faced by industries via a system of export incentives for market support. Agricultural exports on
the other hand were denied any such incentives as they did not use imported inputs. Ahluwalia
(1996) argued that in the past, the agricultural sector was negatively protected because of the
above two reasons and the fact that farmers were denied access to the world markets due to trade
barriers.
Exports of plantation crops and a few commercial crops were free from export restriction but
exports of essential commodities, particularly food products, were subject to bans, quotas and
other restrictions. Interestingly, Kruger and others (1991) showed that while many developed
countries continue to protect agriculture, developing countries do not do so. However, no formal
attempt or theoretical framework has yet been used to assess the extent of negative protection in
Indian agriculture. The implementation of economic reform in the Indian agricultural sector has
been a gradual process. These include an 87 per cent cut in tariff on agricultural products,
sustenance of high-yield crop varieties, removal of minimum export price on selected
agricultural products, a lift on quantity restrictions on the export of some crops and various land
reforms related to tenancy rights and land ceilings.

45

ANALYSIS OF SECONDARY DATA

Regional rural banks

Balance sheet operations
Regional rural banks (RRBs) maintained stable growth in assets around 16 per cent during 201314. Major sources of growth were borrowings and capital infusion by NABARD and sponsor
banks on the liabilities side and loans and advances on the assets side.
Profitability
As per the provisional results, all the 57 RRBs reported profits in 2013-14 with their net profit is
going up by 18.5 per cent during the year. Net margin (net interest income as per cent of average
total assets) also recovered from previous year.
Trend in profitability of RRBs

Return on asset and net interest margin of LABs

46

Local area banks

Balance sheet operations and profitability
Four local area banks (LABs) are currently operational. During 2013-14, they witnessed an asset
growth of 20 per cent. The decline in net profits by over 21 per cent, can be attributed to growth
in interest expenses outpacing the increase in their income.

Urban co-operative banks

Balance sheet operations
The balance sheets of urban co-operative banks (UCBs) showed stable growth in 2013-14.
Growth in liabilities was driven by an increase in their other liabilities and deposits.
Following consolidation, the number of UCBs came down marginally to 1,589 in 2013-14 from
over 1,600 a year ago. In 2013-14 UCBs C-D ratio declined by about 2 percentage points and
the investment-deposit ratio also showed a small contraction.
47

Number of UCBs and their asset growth

Long-

term

rural

credit

cooperatives
State

co-

operative

agriculture and rural development banks

Balance sheet operations
There was continued deceleration in balance sheet growth of state co-operative agriculture and
rural development banks (SCARDBs) in 2012-13; this was contributed to by all major
components on the liabilities and assets sides.

Trends in balance sheet indicators of SCARDBs

48

Profitability
Apart from the continued decline in their asset sizes, SCARDBs also incurred losses to the tune
of Rs.1.0 billion in 2012-13. These losses were primarily on account of large provisioning
towards loan losses.
Asset quality
There was a decline in the asset quality of SCARDBs in 2012-13 taking their GNPA ratio to a
high of 36 per cent.

Primary co-operative agriculture and rural development banks

Balance sheet operations
The asset growth of primary co-operative agriculture and rural development banks (PCARDBs)
further declined to 1.7 per cent in 2012-13 from 5.5 per cent during the previous year. These
institutions also showed weak growth in owned funds (including capital and reserves) as well as
negative growth in credit outstanding during the year.

49

Profitability
The number of loss making PCARDBs marginally increased to 318 during 2012-13. On
aggregate basis, PCARDBs reported losses in 2012-13.
Profitability indicators of PCARDBs

Asset

quality

The asset

quality of

PCARDBs continued to be fragile with their GNPA ratio increased to 37 per cent in 2012-13.

50

ROLE OF INSTITUTIONS
ROLE OF NABARD
The National Bank for Agriculture and Rural Development (NABARD) is the apex organization
with respect to all matters relating to policy, planning and operational aspects in the field of
credit for the promotion of, agriculture and allied activities in rural areas. The bank provides
refinance to various banks for their term lending operations for the purposes of agriculture and
rural development. The National Bank of Agriculture and Rural Development (NABARD) has
emerged as an apex refinancing institution for agricultural and rural credit in the country since
July, 1982. It has taken over the refinancing functions from the Reserve Bank of India with
respect of State Cooperative Banks and Regional Rural Banks. It has also taken over the ARDC
(Agricultural Refinance and Development Corporation), developing a strong and efficient credit
delivery system which is capable of taking care of the expanding and diverse credit needs for
agriculture and rural development was a task that received the attention of NABARD.
NABARD, is involved in the implementation of projects assisted by World Bank and its affiliate,
the International Development Association (IDA). There are some other International Aid
Agencies which provide assistance to NABARD in respect of various projects. NABARD has
been associated with the implementation of 42 projects with external credit out of which 38
projects are assisted by World Bank and its affiliate, i.e. IDA and International Bank for
Reconstruction and Development (IBRD).
Agricultural credit is considered as one of the most basic input for conducting all agricultural
development programmes. In India there is an immense need for proper agricultural credit as the
economic condition of Indian farmers are very poor. From the very beginning the prime source
of agricultural credit in India was money lenders. After independence the Govt. adopted the
institutional credit approach through various agencies like co-operatives, commercial banks,
regional rural banks etc. to provide adequate credit to farmers, at a cheaper rate of interest.
Moreover with growing modernization of agriculture during post-green revolution period the
requirement of agricultural credit has increased further in recent years.

51

Now a days the long term and short term credit needs of these institutions are also being met by
National Bank for Agricultural and Rural Development (NABARD). It is the evolution of
agricultural finance. It was established in the year 1982, with head office at Mumbai and 16
regional offices throughout the country. It has the objective of promoting the health and the
strength of the credit institutions which are in the forefront of the delivery system namely,
cooperatives, commercial banks and regional rural bank. It is, in brief, an institution for the
purpose of refinance; with the complementary work of directing, inspecting and supervising the
credit- flows for agricultural and rural development. The scope of the operations of NABARD is
large indeed. Besides providing finance to credit institutions, it is providing innovations in regard
to formulation of schemes, monitoring of implementation, evaluation of results and evolution of
suitable supporting structures of all kinds of agricultural activities. It is performing the various
functions assumed by it smoothly and efficiently. A rural infrastructural development fund
(RIDF) was established under NABARD in 1995-96. Every year the resources of RIDE have
been augmented to finance rural infrastructure development project by States. The outstanding
refinance from NABARD by State Co-operative Banks, RRBs and State Governments was Rs.
7,075 crore as at end June 2002, which was a little higher than Rs. 6,857 crore as at end June
2001. Farm mechanisation got the highest amount of assistance and the second place went to
minor irrigation. The rest of the amount was distributed for forestation/Plantations, Land
Development, sheep-rearing, poultry farming, dairy farming etc. The National Bank has
vigorously continued its efforts for promoting investments in the agricultural sector in the less
developed/under banked states. U.P., Bihar, M.P., Rajasthan and Orissa in that order, have been
the biggest beneficiaries. Thus NABARD is taking the necessary steps to revitalise and
rejuvenate the rural economy of India by developing agriculture, small scale and cottage
industries and trading activities in all possible ways.
In earlier years, sums aggregating Rs. 1500 crore was received from RBI and Government of
India as advance towards capital. But in 2001-02 by a notification of GOI, these amounts were
credited to capital account of NABARD. It was proposed to increase it further to Rs. 2000 crore
in future. It performs the various functions. i. It provides refinance facilities for agriculture, small
scale industries, artisans; cottage and village industries, handicrafts and other allied economic
activities so that production may be increased. ii. It can borrow from RBI and the Government of
52

India. It can arrange funds from the World Bank and other multilateral and bilateral financial
agencies. iii. It can advance loans up to a period of 20 years to State Governments so that they
may participate in the share capital of cooperative credit societies. It can provide credit facilities
for the short, medium and long term to State Co-operative Banks, Commercial Banks, Regional
Rural Banks and other financial institutions. iv. It coordinates the work of the Government of
India, Planning Commission and State Governments for Village and small scale industries. v. It
finances research on agriculture and rural development. vi. It supervisor the work of Regional
Rural Banks, Commercial Banks and other Cooperative Bank. In this way NABARD acts as an
apex body for the development of agriculture and other activities related to agriculture sector.
ROLE OF COMMERCIAL BANKS
Commercial banking system is expected to play an important role in forecasting the future
framework of institutional finance in agriculture. Before nationalization in 1969, the commercial
banks in India had confined their banking operations mainly in urban areas by receiving deposits
and financing trade and industry. One of the long standing complaints against commercial banks
was their failure in financing agriculture. Before their nationalization in 1969, they were hesitant
to provide short term, medium and long term credit for agricultural purposes. The uncertain
character of Indian agriculture, small amounts of individual loans, inadequate security for loans,
difficulty in recovery of loans' from farmers and lack of business experience of working with
rural sector, were some of the factors which discouraged the commercial banks from taking
interest in agricultural finance. Farmers needs for funds were mainly met by the private money
lender and co-operative credit institutions. The co-operative credit societies, Land Mortgage
Banks, Land Development Banks and the Government Taccavi loans were the main sources of
institutional credit available to the farmers. These agencies, however, did not have enough
resources to meet all the requirements of the farmers which had increased with introduction of
new farm technology. Recognizing that capital was one of the most limiting-factors hindering the
adoption of new farm technology, fourteen commercial banks in India were nationalized in July,
1969. These banks included, Bank of India, Central Bank of India, Bank of Baroda, Punjab
National 'Bank, United Bank of India, Canara Bank, United Commercial Bank, Union Bank of
India, Indian Overseas Bank, Indian Bank, Dena Bank, Bank of Maharashtra, Syndicate Bank
and Allahabad Bank. Six more commercial banks viz. Punjab and Sind Bank; New Bank of
53

Commerce, Andhra Bank, Corporation Bank, Vijaya Bank, Oriental Bank of Commerce were
nationalised in 1980.
The role of Commercial Banks in financing the agricultural sector has been very small. Of the
total agricultural credit their share was as low as 0.9% in 1951-52 and 28% in 1981-82. Since the
nationalisation of Banks, this share has been increasing. There has also seen a phenomenal
increase in the number of branches of commercial banks in rural areas. The proportion of new
rural branches to the total number of new bank offices has increased. The percentage of rural
branches on 30th June, 2003 was 49% of the total branches of all commercial banks in the
country.
ROLE OF PUBLIC SECTOR BANKS
The public sector banks have increased their lending under priority sector advances since June
1969. The amount outstanding under this head has increased from Rs. 441 crore at the end of
June 1969 to Rs. 2, 57,916 crore at the end of March 2002. The share of priority sector lending in
total banks credit was 34.6% as an end March 2002.
ROLE OF RBI
The Reserve Bank of India being the Central Bank of the country does not provide finance
directly to the farmer, but it provides the facility of agricultural credit through State Cooperative
Banks. The Reserve Bank of India provides two types of short-term financial assistance to the
State Cooperative banks: - a. Short-Term credit, and b. Rediscounting Facilities. Both these
facilities are provided at a concessional rate of two per cent below the bank rate. Loans are made
against specified Government Securities, approved debentures of recognised Rural Development
Banks, (formerly Land Development Banks) promissory notes of Approved Cooperative
Marketing Societies endorsed by the State Cooperative Banks, etc. Short-term loans are granted
by the Reserve bank of India to the State Cooperative banks for seasonal agricultural operations
and marketing of crops.
Besides this, Reserve bank of India also gives medium-term loans to the State Cooperative
Banks for being advanced to the farmers for such purposes as construction of wells, minor
54

irrigation schemes, purchase of machinery and agricultural tools. The Reserve Bank of India has
also started undertaking long-term financing for agricultural purposes, though indirectly, by
subscribing to debentures of the Rural Development Banks, which are guaranteed by the State
Governments. The Reserve bank of India also undertakes research investigations and surveys
relating to rural finance. The bank has been giving very valuable advice to the Central and State
Governments and to the State Cooperative Banks on matters relating to rural finance. With this
aim in view, the Reserve Bank of India has set up a separate Agricultural Credit Department
whose functions are as follows:
1. To maintain the expert staff for studying all the problems of agricultural credit and to provide
expert advice to the Central and State Governments, State Cooperative Banks and other banking
organizations.
2. To finance the movement of agricultural crops and other agricultural operations through the
medium of State Cooperative Banks and other agencies of rural credit. In addition to financial
assistance, the RBI has also played an important role in conducting research on rural credit
problems. Thus, we may conclude that the Reserve Bank of India has been playing an important
role in meeting the country's need in respect of rural credit and in making the position of State
Cooperative Banks and Rural Development Banks strong. In order to benefit fully from the
services of the Reserve Bank of India, the government must have a properly organized rural
banking system. The State Governments have assigned due place to these institutions in the
planning process. IN the early years of their evolution Central Ranks all over the world evinced
little interest in rural finance. The smallness of individual loans, the poor value of the securities
offered, the difficulties involved in the marketing of the collaterals and, consequently, the greater
risk involved in agricultural loans accounted for the reluctance of Commercial as well as central
banks to take an active part in the provision of rural finance. As agricultural loans do not
conform strictly to the canon of 'shift ability without loss' it is understandable that: commercial
batiks are not interested in agricultural finance, especially in countries where the agriculture is
backward. But for this reason Central Hanks cannot keep away from the field of rural finance.
In India the need for the Central Bank to participate in rural finance was felt as early as in 1930
when the Central Ranking Enquiry Committee expressed the hope that the proposed Reserve
Bank "would tend to increase the volume of credit available for trade, industry and agriculture
and to mitigate the evils of fluctuating and high charges for the use of such credit''. Five years
55

later, the Agricultural Credit Department of the Reserve Rank was inaugurated. Among its
functions were: maintaining an expert staff to study all questions of agricultural credit, making
itself available for consultation by the Government and other interested organisations, and
coordinating the Ranks operations with those of Stale cooperative hanks and other agencies
engaged in agricultural credit.
During the next two years, the Rank submitted two reports in compliance with Section 55 (1) of
the Reserve Bank of India Act (1934). The first Report set out, in the words of Sir James Taylor,
"the problems in their proper perspective with a view to eliciting practical and constructive
suggestions". The second report, commonly known as the statutory report, was submitted in
December 1937. After drawing attention to the predominance of moneylenders and the
exorbitant interest rates charged by them un funds supplied to agriculturists, the report suggested
legislation for the regulation of moneylending and emphasized that "the cooperative movement
must be reconstructed and revitalized". An idea of the rigid attitude of the Reserve Rank to rural
finance that prevailed then can be had from the report which stated that "it is obviously
impossible for the Reserve Rank to lend to agriculturists direct or to advance large sums to
cooperative banks or indigenous bankers for being lent out to cultivators as a matter of course.
The Reserve Rank can come into picture only when the ordinary pool of commercial credit
appears inadequate to meet the reasonable requirements of the country . . . . All that the Reserve
Bank can do is to help the provincial cooperative banks to tide over a temporary shortage of
funds and as the funds advanced must be repaid within the time limit allowed by the Act, the
cooperative banks cannot make use of them for the purpose of continuing finance.... These
conditions may seem stringent but.... the Reserve Bank has to work within the limitations
imposed on. It by the essential conditions of sound central banking and expressed in its
constitution"'.
Rediscount Facilities On the basis of the report, the Reserve Rank devised a scheme in January
1938 by which it offered to rediscount at concessional rates, through scheduled banks, the bills of
approved money lenders drawn for making advances to agriculturists against the security of
agricultural produce on the condition that the benefit of the low rate was passed on to the
agriculturists. The scheduled banks, however, did not take advantage of the scheme for a number
of reasons. The Reserve Rank soon after issued a circular to the cooperative banks asking them
to make use of the financial facilities provided by the Reserve Bank by maintaining adequate
56

reserves, separating short-term from long-term loans, showing clearly the proportion of overdues
and bad debts to total loans, effecting a business-like distribution of their assets, keeping 1 per
cent and 2.1 per cent of their time and demand Liabilities respectively with the Reserve Bank,
preparing their balance sheets in proper form, submitting audit notes and permitting inspection
by the Rank's officers. This too proved futile as the majority of the State co-operative banks
regarded the Reserve Rank's conditions as being too stringent.
ROLE OF SELF HELP GROUP
A self-help group (SHG) is a village-based financial intermediary usually composed of between 10-20 local
women. Most self-help groups are located in India, though SHGs can also be found in other countries,
especially in South Asia and Southeast Asia. Members make small regular savings contributions over a few
months until there is enough capital in the group to begin lending. Funds may then be lent back to the
members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery
of microcredit. SHGs are member-based microfinance intermediaries inspired by external technical support
that lie between informal financial market actors like moneylenders, collectors, and ROSCAs on the one
hand, and formal actors like microfinance institutions and banks on the other. Other organizations in this
transitional zone in financial market development include CVECAs and ASCAs.
A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous
social and economic backgrounds, voluntarily coming together to save regular small sums of money,
mutually agreeing to contribute to a common fund and to meet their emergency needs on the basis of mutual
help. Also it is a group of people who pool in their resources to become financially stable by taking loans
from the money collected by that group and by making everybody of that group self-employed. The group
members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment.
This system eliminates the need for collateral and is closely related to that of solidarity lending, widely used
by microfinance institutions. To make the book-keeping simple enough to be handled by the members, flat
interest rates are used for most loan calculations.
GOALS
Self-help groups are started by non-profit organizations (NGOs) that generally have broad anti-poverty
agendas. Self-help groups are seen as instruments for a variety of goals including empowering women,
developing leadership abilities among poor people, increasing school enrolments, and improving nutrition and
the use of birth control. Financial intermediation is generally seen more as an entry point to these other goals,
rather than as a primary objective. This can hinder their development as sources of village capital, as well as
57

their efforts to aggregate locally controlled pools of capital through federation, as was historically
accomplished by credit unions.
NABARD's 'SHG Bank Linkage' program
Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program, borrow from
banks once they have accumulated a base of their own capital and have established a track record of regular
repayments. This model has attracted attention as a possible way of delivery microfinance services to poor
populations that have been difficult to reach directly through banks or other institutions. "By aggregating their
individual savings into a single deposit, self-help groups minimize the bank's transaction costs and generate
an attractive volume of deposits. Through self-help groups the bank can serve small rural depositors while
paying them a market rate of interest. NABARD estimates that there are 2.2 million SHGs in India,
representing 33 million members that have taken loans from banks under its linkage program to date. This
does not include SHGs that have not borrowed. "The SHG Banking Linkage Programme since its beginning
has been predominant in certain states, showing spatial preferences especially for the southern region
Andhra Pradesh, Tamil Nadu, Kerala and Karnataka. These states accounted for 57 % of the SHG credits
linked during the financial year 2005-2006."
Advantages of financing through SHGs
An 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 only a single SHG account
instead of a large number of small-sized individual accounts, borrowers as part of an 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
DESIGN FEATURES OF THE PRODUCT
The product design features combine the collective wisdom of the poor, the organizational capabilities of the
social intermediary and the financial strength of the Banks. Its features are
1.

Small and fixed savings at frequent intervals:

Small and fixed savings made at regular intervals coupled with conditions like compulsory attendance, penal
provisions to ensure timely attendance, saving, repayment etc. forms a deterrent for the rich to join the SHG

system- thereby enables exclusion of the rich

2.
Self-selection:
The members select their own members to form groups. The members residing in the same neighbourhood
ensure better character screening and tend to exclude deviant behaved ones.
58

3.

Focus on women:
As regular meetings and savings are compulsory ingredients in the product design, it becomes more
suitable for the women clients- as group formation and participatory meetings is a natural ally for the women

to follow.
4.
Savings first and credit later:
The saving first concept enables the poor to gradually understand the importance of saving, appreciate the
nuances of credit concept using their own money before seeking external support (credit) for fulfilling future
needs. The poor tend to understand and respect the terms of credit better.
5.
Market rates of interest:
Self-determined interest rates are normally market related. Sub-market interest rates could spell doom;
distort the use and direction of credit.
6.

Intra group appraisal systems and prioritization:

Essentials of good credit management like (peer) appraisal for credit needs (checking the antecedents and
needs before sanction), (peer) monitoring- end use of credit; (peer sympathy) reschedulement in case of crisis
and (peer pressure) collateral in case of wilful non-payment etc. all seems to coexist in the system making its

one of the best approaches for providing financial services to the poor.
7.
Credit rationing:
The approach of prioritization i.e.: meeting critical needs first serves as a useful tool for intra group lending.
This ensures the potential credit takers/users to meticulously follow up credit already dispensed, as future
credit disbursals rely on repayments by the existing credit users.
8.

Shorter repayment terms:

Smaller and shorter repayment schedule ensures faster recycling of funds, greater fiscal prudence in the poor

and drives away the slackness and complacency that tends to set-in, in long duration credit cycles.
9.
Progressive lending:
The practice of repeat loans and often-higher doses - is followed by SHGs in their intra-group loaning,
thereby enticing prompt repayments.
10.
A multiple-eyed operation:
The operations of the SHG are transacted in group meetings thus enabling high trust levels and openness in
the SHG system. SHG members facilitating openness and freedom from unfair practices also generally
conduct the banking transactions.

59

60

CONCLUSION
To conclude, the rapid expansion of RRB has helped in reducing substantially the regional
disparities in respect of banking facilities in India. The efforts made by RRB in branch
expansion, deposit mobilization, rural development and credit deployment in weaker section of
rural areas are appreciable. RRB successfully achieve its objectives like to take banking to door
steps of rural households particularly in banking deprived rural area, to avail easy and cheaper
credit to weaker rural section who are dependent on private lenders, to encourage rural savings
for productive activities, to generate employment in rural areas and to bring down the cost of
purveying credit in rural areas. Thus RRB is providing the strongest banking network.
Government should take some effective remedial steps to make Rural Banks viable.
Regional Rural Banks plays a key role as an important vehicle of credit delivery in rural areas
with the objective of credit dispersal to small, marginal farmers & socio economically weaker
section of population for the development of agriculture, trade and industry .But still its
commercial viability has been questioned due to its limited business flexibility, smaller size of
loan & high risk in loan & advances. Rural banks need to remove lack of transparency in their
operation which leads to unequal relationship between banker and customer. Banking staff
should interact more with their customers to overcome this problem.
Banks should open their branches in areas where customers are not able to avail banking
facilities. In this competitive era, RRBs have to concentrate on speedy, qualitative and secure
banking services to retain existing customers and attract potential customers.

61