Half Monk-Half Warrior

RURAL NIRMAAN IIMK BACKWATERS , 2011

Preethi R S Priyankar Biswas Raina Burbure preethirs14@iimk.ac.in priyankarb14@iimk.ac.in rainab14@iimk.ac.in

IIM-Kozhikode

Agenda
Issues in credit disbursement Regulatory policies introduced in the sector and the impact Effectiveness of the recent innovations Reach and impact of the Non-banking Financial Corporations

Issues in credit disbursement

Growth in agriculture credit and number of accounts is on decline Differences among the large, small and marginal farmers Small and marginal constitute 27% each and is constant from long time Since bankers doubt the loan repayment from the small and marginal farmers
90 80 70 60 50 40 30 20 10 0

Inadequate investment capital in farming operations Most of the credit taken to maintain agricultural operations SHGs is skewed across the States.

Average rate of Growth of Agriculture Credit and Accounts

1990 1994 1995

2005
2006 2008 2009 2010

Share of land Size Classes in total Agriculture Credit

share of total agricultural credit supplied: Rural branches :declined from 55.5% in 1990 to 38.5% in 2010 Urban & Metropolitan: increased from 14.9 % to 33.7 %

Issues in credit delivery

45000 40000 35000

Co-operative Systems

High transaction costs

30000 25000

Structural deficiencies in the rural credit delivery system Ineffective Multi-Agency Approach Inefficient Co-operative System facing continuous losses The RRBs were backtracked This led to high cost and culture of commercial banks Lack of collaterals in view of low asset base of farmers Low volume of loans with associated higher risks

20000 15000 10000 5000 0 SCBs

No. of units

DCCBs

PACS

State Coops Primary Coops

No. of units lossmaking losses

Accumulated losses units (in crore Rs)

Non-Availability of relevant MIS Confusion related to credit disbursed and credit outstanding Inadequate segmentation of data among the banks

Regulatory policies introduced in the sector and the impact

Programme of doubling of agricultural credit in three years (announced in 2004), Feature
Envisaged accelerated expansion of Kisan Credit Cards (KCC), financing of new investments, rescheduling and restructuring of loans in areas affected by natural calamities, one time settlement (OTS) for farmers in distress and redemption of loans from informal sources.

Impact on credit quality

Doubling happened in the form of indirect advances Credit to institutions and organisations serving the interest of farmers and the rural population directly or indirectly; growth happened in an erratic fashion

Impact on Loan size

Increased favour for large-size loans, .
Loan size <25,000 >2lakh 1997 54% 16.7 %( Rs 4,556cr) 1131cr 2005 23% 33.3 % (Rs 31,550c r) 7104cr

Opportunities
With rising incomes, there will be diversification of crops, investment needs for the production of high income, elastic agricultural products such as dairying and livestock, horticulture, agro-processing

Problem
Excessive focus on quantitative targets insensitive to the distributive aspects of farm credit. silent on issues such as regional disparities and access to credit by small and marginal farmers.

>1crore Value)

Institutional Reform Packages for Cooperatives & RRBs Under Vaidyanathan Committees (STCCS) Feature for STCCs
1. Introduces legal and institutional reforms necessary for the democratic, self reliant and efficient functioning Measures to improve the quality of governance and management Provides financial assistance to bring the system to an acceptable level of financial health. Recapitalise weak RRBs

Results

Share issue
The share of co-operatives in agricultural lending has decreased tremendously

2.

3.

4.

An assessment in 4 states commented positively on the implementation of the reform package in terms of 1. Amendments to the Acts, 2. Elections to three tiers, 3. Toning to the accounting systems 4. A massive training effort. In terms of credit growth 3 states have witnessed 120% growth in cooperative credit

Bank type Commer cial Cooperat ives

83-84 36 56

2005 74 16

Problem RRBs have the potential to achieve a 25 %of the ground level credit to agriculture as against the 10 %.Reasons: stunted growth of RRBs

Interest subvention

Policy Features (2006-07) To enable farmer to get cheaper finance ,the scheme provides short term credit upto Rs 3 lakhs to farmers at 7% interest rate Targeted mainly at particularly small and marginal farmers To promote the scheme ,the GoI announced the methodology of subvention to banks low refinance rates from NABARD to cooperatives RRBs and subvention to NABARD to enable it to provide such concessional refinance rates

Debt waiver and debt relief (2008)

Policy Features . The scheme aimed at providing relief to small and marginal farmers indebted to formal agencies by writing off their farm loans taken between 1997 and 2007, which were overdue by end 2007. The scheme also offered a one time settlement (OTS) of the debt of other farmers with similar overdue loans through a 25% relief if the farmer repaid the balance of 75% Benefits The scheme covering both the waiver and relief components, benefited an estimated 3.68 crore farmers amounting to over Rs 65, 000 crore. Problem Element of negative incentives and the issue of moral hazard is inherent in the schemes At no level these can be construed as an innovative policy response from the state.

Effectiveness of the recent innovations

Kisan Credit Card
Introduced by NABARD in 1998-99 to provide farmers adequate and timely credit support from banking system in a flexible and cost effective manner The scope of the scheme was enhanced in 2004-05 to include investment credit and some consumption requirement

But 100% coverage not yet achieved and most of the borrowing farmers were resourceful farmers
Intermediaries were involved in getting a card especially for small and marginal farmers Very few of the farmers were aware of the multipurpose use of KCC for availing all types of credit and flexibility in operations as envisaged number of KCCs to 47.27 million, which constituted 50.63 percent of the operational holdings (NABARD, March 2011) Consistently achieved targets for financing

Some recent innovations being thought of are (GOI, 2010) KCC limits may be fixed for five years, based on the bankers assessment of credit needs of the farmers for a full year, limits be operated by the borrower as and when needed with no sub limits for kharif or rabi or for stages of cultivation. There should be an automatic renewal of and annual increase in credit limit linked to inflation

National Agricultural Insurance Scheme (NAIS)

The scheme is available to all the farmers loanee and nonloanee- irrespective of their size of holding. Loanee farmers are covered on compulsory basis in a notified area for notified crops non-loanee farmers scheme is voluntary. The scheme is operational in 25 states and 2 UTs During the last nineteen crop seasons (i.e. from Rabi 1999-2000 to Rabi 2008-09), 1347 lakh farmers have been covered over an area of 2109 lakh hectares insuring a sum amounting to Rs. 148250 crore. Claims to the tune of about Rs. 15230 crore payable against the premium income of Rs. 4427 crore benefiting 361 lakh farmers The scheme has always exceeded its allocated outlay

Other Innovations

Self-Help Group- Bank Linkage Programme 6.53 million groups have been linked to the banking sector, nearly 95 million households have been linked to the banks as on 31.3.2011 JLGs linked to bank branches has risen to 1.41 lakh as on 31 March 2011 Joint Liability Group Allowed small and marginal farmers to borrow (80% of all cultivators 87% had no loan accounts) Wherever they had the support of JLG promoting institutions like NGOs, farmers club, village councils their performance was better than those without such support Farmers' Club programme, philosophy of 'Development through Credit 5 principles, viz., proper credit usage, enforcing strict credit discipline, adoption of proper production technologies, proper savings and prompt repayment As at the end of March 2011, Farmers' Clubs reached 76,000. NABARD expects to reach 100,000 clubs by the end of March 2012 For non-routine activities a Farmers' Technology Transfer Fund with a corpus of Rs 50 crore set up The new policy focus for Farmers Club are: link them with technology transfer and market access; ensure sustainability of the clubs over a period of 3 to 5 years and convert them into Producers' Groups/ Companies / Federation of Farmers' Clubs. Other innovations include inventory financing transforming of poor and low- income farming households from noncreditworthy to creditworthy ones Many banks in India have introduced the Scheme for financing against warehouse receipts

Reach and impact of the Non-banking Financial Corporations

Successful pilot run of SHG Bank Linkage programme Starting with 500 groups in 92 has achieved 95 million as on 31.3.2011 Success of Joint Liability Group (JLG) approach which is running as mainstream banking process since 2008-09 offers opportunities to the unbanked and landless farmers encourages and includes like-minded entrepreneurs offers a level of sustainability through economies of scale

Performance of NBFCs
120000 100000 80000 60000 40000

Flow of institutional credit

1997-98 1999-00 2002-2003 2003-04 2004-05

20000
0

Co-opearitive Banks

RRBs

Commercial Banks

TOTAL

Indian Microfinance Industry Competition Analysis by Category

Parameters Interest rate Local rural banks/corporate bank 20% (for income generating loans) 8% (housing loans) 5% students education loan *all simple interest Have a strong reach in rural India with main offices at district level Offer small loans but have tie up with factories for repayment Regional rural banks 14% to 17 % for durable loans MFI EIR : 25% to 30%. Rate of interest goes on increasing significantly as No. of loans taken increases.

Reach

Reach in Eastern, North Eastern and central part of India. Products mainly focus on deposits and limited products from loans perspective

Reach was good across the country. Continuation in AP is in question Income generation loan (50 Week), Mid Term Loan (50 Week), Emergency Loan (20 Week), Individual loan( 1-2 years) Small volume loans

Products

Volume

Very small volume loans

Small to medium volume loans

Inference: MFIs are the most successful category though the business model sustainability is at times dubious. The Success is owed to the better services, reach , faster loan processing and a wide portfolio of products.

Impact of NBFC Increase in Cooperative Credit Institutions Integration of Long- and Shortterm Structures

Growing Reach and impact of the Non-banking Financial Corporations g Borrowers market

Revitalization of Co-operatives

Increase in tiers in Co-operative Credit System

Effective Cooperative Governance

Greater Involvement in Rural Lending

MFIs Dominance over SHGs/PSBs

Increased Credit flow to disadvantaged sections and areas

MFIs have been able to reach a dominating position over public sector banks as well as SHG-Bank Linkages but the sustainability of the model remains to be seen especially after incidents in Andhra Pradesh.
However growth rates of MFIs has been far in excess of other models and seems to have delivered as far as rural credit is concerned

Comparison of SHG-Bank Linkage Model & MFIs Model

Half Monk-Half Warrior

Thank You

IIM-Kozhikode