FINANCING AGRICULTURE

The financial needs of a farmer may be classified into three categories: i. Short-term finance, which is required for purchase of seeds, fertilizers, manures, repairs of farm machinery and implements, hiring labour etc. This is repayable within 6 to 12 months. ii. Medium-term finance for construction of wells, purchase of carts, bullocks and small machinery, development of land. This is repayable within 3 to 5 years iii. Long-term finance for effecting permanent improvements on land or purchase of land or heavy machinery. This is repayable in instalments in 5 to 10 years or more.

The financial assistance given to meet the short-term requirements is termed as a Crop Loan while the finance given to meet the medium-term or long-term financial requirements is termed as a form Loan. Direct Finance to farmers for Agricultural Purposes
1. Short-term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 6 lakhs to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank. 2. Medium and long-term loans (provided directly to farmers for financing production and development needs)

a)

Purchase of agricultural implements and machinery

b)
c) d) e) f) g) h)

Development of irrigation potential through

Reclamation and Land Development Schemes Construction of farm buildings and structures, etc. Construction and running of storage facilities Payment of irrigation charges, etc. Production and processing of hybrid seeds for crops Other types of direct finance to farmers

Indirect Finance to Agriculture 1. Credit for financing pesticides, seeds, etc. the distribution of fertilizers,

2. Loans up to Rs.40 lakh granted for financing distribution of inputs for the allied activities such as, cattle feed, poultry feed, etc.

3. Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energizing their wells. 4. Loans to farmers through PACS, FSS and LAMPS
5. Deposits held by the banks in Rural Infrastructure Development Fund maintained with NABARD 6. Subscription to bonds issued by Rural Electrification Corporation exclusively for financing pump set energisation programme in rural and semi-urban areas and also for financing system improvement programme

7.

Loans to co-operative banks of producers (e.g. Aarey Milk Colony Co-operative Bank, consisting of licensed cattle owners).

i.

Financing the farmers indirectly through the cooperative system, provided a certificate from the State Co. operative bank in favour of such loans is produced Advances to State sponsored Corporations for onward lending to weaker sections

ii.

iii. Loans to farmers for purchase of shares in Cooperative Sugar Mills and Sugar Mills set up as Joint Stock Companies and other agro-based processing units. iv. Lending to Non Banking Financial Companies for on lending to agriculture. v. Investment by banks in securitized assets, which represent indirect advances to agriculture.

The functions of NABARD can be summarized as follows: 1. It serves as an apex refinancing agency for the institutions providing investment and production credit for promoting the various development activities, in the rural areas; 2. It takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel etc. 3. It co-ordinate the rural financing activities of all the institutions engaged in the development work at the field level and maintain liaison with Government of India, State Governments, RBI and other national level institutions concerned with policy formulation; and 4. It undertakes monitoring and evaluation of projects refinanced by it.

Crop Loans i. There are mainly two crop seasons: (a) Rabi (extends roughly from October to April) (b) Kharif (extends roughly from May to September) ii. The bank should make these advances only to agriculturists preferably owning land after satisfying itself regarding their character, capacity and capital. iii. The loans should be granted in the form of a fixed amount rather than sanctioning cash credit or overdraft limits iv. In order to avoid misutilisation of funds by the borrower, the total amount sanctioned to farmers should be disbursed in accordance with their needs for various agricultural operations.

v. The credit should be disbursed by the banks by making direct payments to the suppliers or inputs. The bank may introduce the scheme of agri cards which entitles the farmers to buy seeds. vi. The bank should get standing crops hypothecated in its favour. If possible it may also obtain equitable mortgage of land .
vii. The borrower should be asked to get the produce sold through approved marketing societies from where direct payment may be received by the bank. viii. The bank may give the borrower a notice preferably one week before harvesting reminding him of the repayment of the loan. ix. The banks should obtain appropriate insurance cover for the crop loan as provided by the General Insurance Corporation of India.

Term Loans i. The usual study of three Cs, character , capacity and capital of the borrower, should be undertaken. ii. Economic feasibility of the project should be enquired into. The project should generate necessary cash to pay interest and repay the banks loan over a reasonable period. iii. The borrower should not have obtained credit for the same purpose from some other institution. A declaration to that effect should be obtained from the borrower. iv. The bank should ask for the invoice or other document certifying the value of the asset to be purchased by the borrower. v. The bank should not generally advance more than 75% of the value of the asset. The balance should be arranged by the borrower himself.

vi. The bank should make direct payment to the seller or supplier of the asset. It should obtain the authority of the buyer for that purpose and keep with it the receipt given by the seller or supplier. vii. In case of machinery, it should be checked that it is a new one and the machine and its supplier are reliable. In case of land etc. , it should be checked that it is a new one and the machine and its supplier are reliable. viii. The bank should get the asset hypothecated or mortgaged in its favour ix. The repayment should be so arranged that money is recovered over the life-span of the asset.

x. The bank should obtain the following documents from the borrower:
a) A demand promissory note for the amount lent

b)
c)

A hypothecation or a mortgage deed regarding the asset purchased

The documents of title regarding land etc. of the borrower as security for the loan taken by him A declaration from the borrower that he has not borrowed from any other institution and will not borrow till he repays the banks loan

d)

COMPREHENSIVE CROP INSURANCE SCHEME

Crop insurance (CCIS) covers major crops viz. rice, wheat, millets, oilseeds and pulses. ADVISORY COMMITTEE ON FLOW OF CREDIT AGRICULTURE AND RELATED ACTIVITIES (2004) Banks TO

may waive margin/security, requirements for agricultural loans up to Rs.50,000 and in the case of agri-business and agri-clinics for loans up to Rs.5 lakh.

2.

Investment by banks in securitized assets representing direct (indirect) lending to agriculture may be treated as their direct (indirect) lending to agriculture under the priority sector Loans to storage units, including cold storage units, which are designed to store agricultural produce/ products, irrespective of their location, would be treated as indirect agricultural finance under the priority sector.

3.

4.

Non-performing asset (NPA) norms for all direct agricultural advances, including direct agricultural term loans, may be modified with a view to aligning the repayment dates with the harvesting crops.
Micro-finance institutions (MFIs) would not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank.

5.

6.

The controlling authorities of banks may review the lapses, if any, in implementing the recommendations of the R.V Gupta Committee relating to simplification of documentation, delegation of more powers to the branch managers, etc., and take steps to rectify the situation. Banks may provide a separate flexible revolving credit limit to small borrowers of production and investment loans for meeting temporary shortfalls in family cash flows and also to evolve suitable credit products/packages. Banks may consider using low cost ATMs running on diesel generator sets for cash dispensation in rural areas. The restrictive provisions of Service Area Approach may be dispensed with for lendings outside Government sponsored schemes.

7.

8.

9.

Financial Small Scale Industries

Small Scale and Ancillary Units

Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery does not exceed Rs.5 crore. Tiny Enterprises
The status of Tiny Enterprises may be given to all small scale units whose investment in plant and machinery is up to Rs.25 lakh, irrespective of the location of the unit.

Small scale Service and Business Enterprises

Industry related service and business enterprises with investment up to Rs.10 lakh in fixed assets, excluding land and building will be given benefits of small scale sector. Credit needs of small-scale industrial units
i. Fixed capital needs. These include credit needs for meeting the expenses incurred on account of installation of plant and machinery, acquisition of land and buildings, proper maintenance of machinery against depreciation and obsolescence and also renovation, modernization and expansion of units concerned.

ii. Working capital needs. These include credit needs for purchasing and stocking of raw materials, inventories of goods, and goods in process

District Industries Centres In order to provide all sorts of services and facilities to small entrepreneurs at one place, the Government have set up District Industries Centres at district levels. i. Identification of suitable schemes ii. Preparation of feasibility reports iii. Arrangements for supply of machinery and equipments iv. Provision of raw materials, credit facilities and inputs

v. Marketing of the products

Each District Industries Centre is headed by a General Manager. He is assisted by a team of specialists in the following areas:
i. Economic Investigation ii. Machinery and Equipment iii. Research Extension and Training

iv. Raw Materials

v. Credit Facilities vi. Marketing vii.Cottage Industries

Working group on flow of credit to small scale industries sector (2004) A full-service approach to cater to the diverse needs of the SME sector may be achieved through extending banking services to recognized SME clusters by adopting a 4-C approach Viz., Customer focus, Cost control, Cross sell and Contain risk. A cluster based approach to lending may be more beneficial for (i) dealing with well-defined and recognized groups (ii) availability of appropriate information for risk assessment and (iii) monitoring by the lending institutions.

2. Corporate-linked SME cluster models need to be actively promoted by banks and FIs Bnks linked to large corporate houses can play a catalytic role in promoting this model. Financing of SMEs linked to large corporates, covering suppliers, ancillary units, dealers, etc. would also enhance competitiveness of the corporates as well as the SME participants.

3. Successful micro credit management models should be made use of by SIDBI and Lead Banks with a view to encourage the adoption of their work practices in other States.
4. New instruments need to be explored for promoting rural industry and improve the flow of credit to rural artisans, industries and rural entrepreneurs.

5. Higher working capital limits need to be taken into account while extending credit to such units located in hilly terrain and frequent flood areas with poor transportation system. 6. SIDBI may promote a NBFC exclusively for undertaking venture and other development financing activities for SMEs.
7. A uniform target in priority sector lending at 40 per cent of net bank credit for all domestic and foreign banks has been recommended with a view to providing a level playing field for all banks.

Agricultural Finance Schemes.

Activity/Scheme 1.Composite Crop Cash Credit Scheme Eligible Borrowers Individual farmers/registere d tenants/share croppers with recorded right/firms/comp any/coop.societies. Quantum of Loan Scale of finance. For consumption25% of gross income of farmer. Finance against storage receipts -50% of price of produce Max. Rs.5 lakh. Repayment Revolving limit. Seasoning sub limits to ebe adjusted after harvesting/mark eting. If loan against storage receiptsseasonal sublimit to be adjusted.

Activity/ Scheme 2.Kisan Credit Card

Eligible Borrowers Individual farmers/register ed tenants/share croppers with recorded right/firms/com pany/co-op. societies.

Quantum of Loan Requirement for entire production to be assessed on the basis of scale of finance for crops and working capital required for allied activites less margin as per norms

Repayment The sale proceeds should be routed through the cash credit account.

3.Land Farmers owning As per cost of the scheme Develop land or NABARDs unit cost may be ment cultivating taken as guiding factor. registered leased lands.

Within 9-15 years in half yearly/ annual installments. Suitable moratorium to be

Activity/Sc Eligible Borrowers heme

Quantum of Loan

Repayment

4.Minor irrigation

Individual farmers, group of farmers, co-operative societies, State irrigation Corporations/Bodies offering guarantee of State Govt.

As per cost of the scheme NABARDs unit cost may be taken as guiding factor.

Dug wells 11-15 years. Deepening of well 5 years. Pump sets 9 years. Bore well 11-15 years. Sprinkler/ Drip Irrigation 10-15 years.

5.Farm Farmer with own Mechanisa land or registered tion leased land (a) 8 acres of perennially irrigated land for purchase of transaction/purchas e of power tillers respectively. ZM can reduce it to 5 & 3 acres respectively,

As per cost of the tractor/power tiller. Margin for new 15-25%. Second hand tractor unit33.33% Repairs/renovat ion of tractor unit, transport

New tractor-9 yrs, new power tiller-7 yrs, second hand tractor -4 yrs, other machinery-35 yrs, repairs-3.5 yrs.

Activity/ Scheme 6. Dairy Development

Eligible Borrowers Farmers/agriculture labour/individuals/fir ms/companies dairy co-op. society/state corporation etc. ---Do---

Quantum of Loan Unit Cost/Project Cost

Repayment 5-6 yrs in monthly instalments.

7.Poultry Development

----Do------Do--NABARDs unit cost/project cost margin

----Do--5 years 4-5 years

8.Sheep/Goat Individual Rearing farmers/labourers 9.Piggery Farmers/tribals/Ag. Labourers/ firms/Cos./Co-op societies.

10.Sericulture Farmers/Tribals/Land Project cost less labourers margin

Term loan 5-7 years with 15-18 months moratorium cash

Activity/Scheme 11.Fishery (Pisiculture) 12. Draught animal & cart

Eligible Borrowers

Quantum of Loan

Repayment 3-5 years-max. 7years 4-5 years

Individuals/firm/Co Project cost -op. margin Farmers Unit cost of NABARD

13.Against Farmers, Co-op. Storage Receipt society approved by Bank

14. Cold Storage 15. Cold Loan Scheme Individuals/firms /Cos./ Co-op. societies

50% of price of the produce Max Rs.5 lakh

Project Cost Margin

6-12 months

4-7 years

Individuals/farmers Card limits/artisans margin. For consumption max. Rs.1000/-

Within reasonable time depending on purpose.

Farm Mechanisation:

i) The proponent should be a farmer having owned opr registered leased land
ii) For a tractor loan, the farmer should have a minimum 8 acres perennially irrigated land. iii) For purchasing power tiller the farmer should have a minimum of 5 acres of perennial irrigated land.

iv) For purchase of tractor with more than 25 hp, the land holding should be more at the rate of one acre perennially irrigated land for every 2.0 to 2.5 hp.
Selection of Optimum size of Tractor Estimated yearly usage.

(1+I) AT = -------A A R

C ---K +

(1000-Ar(1+I) --------------a

= Size of the farm (acres) = use of tractors per acre

= extent of irrigation

-a = 1 for short duration crops -1.5 for long duration crops -c = 0.70 -1 + 0.005 d -d = density of tractors (No. per 1000 acre.)

Break-even hours:
O & M Costs Variable Fuel Lubrication Repairs Replacement Fixed Salaries Taxes and Insurance Depreciation Interest Garage Rent

BEH

= O & M Costs/ Custom Rate

Quantum of Finance /Margin For purchase of new tractor unit or transport vehicle

Up to Rs. 50,000/- Nil Margin

Above Rs. 50,000/- 15% to 25% Margin Purchase of second hand tractor unit/ transport vehicles Margin 33% Finance for repair /renovation of tractor unit, transport vehicle Margin 25% (short-term advance).

Repayment: New tractor New power tiller Second hand tractor Other machinery Repairs/renovation KISAN CREDIT CARD. Purpose: Short-term credit for crop production, allied activities and other non-farm activities to farmers. Issue of Cards: The farmers under the scheme will be issued a credit card-cum passbook incorporating the name, address, particulars of land holding, borrowing limit/sub-limits, validity period, etc. to facilitate recording of the transactions on an on-going basis. Maximum Maximum Maximum Maximum Maximum 9 7 4 3 3 years years years to 5 years to 5 years.

Type of Facility:

i) Revolving Cash Credit-Annual Review. The farmer should be allowed for any number of drawals and repayment within the limit.
ii) The aggregate of credits into the account during the 12 months period should atleast be equal to the maximum outstanding in the account. iii) No drawal in the account should remain outstanding for more than 12 months in case of normal crops and 18 months in case of sugarcane and banana crops. Margin and Security:

Creation of mortgage of land has been waived in respect of Kisan Credit Card Holders with satisfactory repayment for atleast one year and with aggregate short-term loan (for crop production, allied activities and other non-farm activities) limit up to and inclusive of Rs. 50,000

Disbursement:

a) At the time of withdrawal and deposit, the beneficiary should present the passbook for recording the transactions.
b) Though drawals in the account are expected as per seasonality of the crops/sub-limits, yet, some flexibility may be allowed to enable the farmer to purchase inputs at convenient time when availability/prices are favourable. Insurance: a) Crop insurance for the notified crops in the notified areas. b) Personal accident insurance to cardholders. The risk coverage /sum assured under the scheme is as under: Death/ Permanent disability Partial disability : Rs. 50,000/: Rs.25,000/-

Annual premium of Rs 15/-per KCC holder is to paid by the bank to the designated insurance company. Supervision and follow-up a) Pre-sanction inspections should be carried out in all cases.

b) Similarly, post-disbursement inspection should also be carried out to ascertain end use of funds.