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Objectives and Role of Institutional Financefor Agricultural and Rural Development

B M Desai

In India, rural institutional finance isextended not only to the agricultural

production sub-system but for selectivepurposes also to the agricultural inputssub-system and the agricultural producemarketing and processing sub-system.While this innovative policy has earnedsome dividends, there are some lacunaein it as well as in the intermediation in-struments of rural financial institutions.

Desai identifies these lacunae anddiscusses how they may be overcome to

achieve the objectives of high ruralgrowth, better equity, and viability of in-stitutional finance.

B M Desai is Professor at the Centre forManagement in Agriculture at the IndianInstitute of Management, Ahmedabad.

The three main objectives of institutional finance forthe agricultural and rural sector are (a) promotinggrowth, (b) ensuring better equity, and (c) makingfinancial operations viable. This paper discusses therationale for institutional finance, its role and func-tions, and the policy support required for undertak-ing its multi-functional role effectively.

Rationale for Institutional Finance

In the pre-independence period, institutional

finance for the agricultural and rural sector wasnecessary to overcome the sector's problems result-ing from weather instability and low incomes (Singhand Asokan, 1988). While these are importantreasons, there are several others common to early aswell as later stages of agricultural development(Mellor, 1966), such as:

lack of simultaneity between the realization of income and the act of expenditure

weaknesses of informal lenders such astheir resources being limited and ill-suitedto modernize the rural sector, and perhapsthe lenders' exploitative nature

increasing extent of monetization.

While the last two reasons are obvious, the firstneeds some elaboration. There is relatively a longeroperating cycle for a farm enterprise because of: (a)lag in the production cycle though the consumptioncycle is more or less continuous, and (b) in-divisibility of fixed capital which cannot be pur-chased in bits and pieces though expenditure on itmust be incurred at the time of purchase (wells,pumpsets, farm implements, bullocks, soil andmoisture improvement works, tractors, etc.) (Mellor,1966). To illustrate: a field-crop farmer harvests hiscrop once or twice a year while his consumption iscontinuous. For a dairy-farmer, the interval betweenthe realization of his income and the act of expendi-ture is shorter; his income is more or less continuous(provided he has two milch animals and access tomarketing facilities). For a tree-crop farmer, there isa vast gap between the time of expenditure and

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income generation.

Thus, there are periods of deficits andsurpluses for most enterprises. Differences on thispoint among farm enterprises, cottage industries,and other industries are of degree rather than kind.This difference is rather unfavourable to all cate-gories of fanners except the rich and other rural

people. The need for institutional finance for moder-nizing their productive assets isgreateras it may bethe only way to improve productivity of their landand/or labour. Modern financial institutions can,therefore, identify opportunities to lend, recoverloans, and mobilize deposits even in the case of suchentrepreneurial farmers, besides others. These in-stitutions can thus facilitate integration of financialmarkets across seasons, agri-entrepreneurs, and re-gions, and thereby achieve their three earlier men-tioned goals.

Role of Institutional FinanceWhile the above-mentioned functions of financialinstitutions are conventionally accepted, agricul-tural and rural development would require perform-ing certain new functions like better access to exten-sion, inputs, and marketing services as a result oftechnological changes in this sector. These newfunctions are widely recognized to institutionalizerural credit. However, commercial banks, regionalrural banks (RRBs), and to some extent cooperativebanks are not sure as to 'how' and 'by whom' canthese functions be performed. These doubts are

somewhat unwarranted. It may be stated here thatrural financial institutions (RFIs) can promote ac-cess to inputs, marketing, and processing servicesby serving the agricultural inputs sub-system (AIS)and the agricultural produce marketing and process-ing sub-system (AMPS) besides the agriculturalproduction sub-system (APS)*. Such an access isindeed the rationale behind direct and indirectrural credit policies. **

* Separate credit, instead of APS credit linked through AISand AMPS, is needed because periods of deficits andsurpluses and the quantity of stocks held in each sub-sys

tem differ, besides the fact that each sub-system has itsown comparative advantage in its economic activities. Itis precisely on this last factor that Mellor seems to haveconsidered coordination rather than integration as amore important issue in institutional rural credit (Mellor,1966).

* * Direct rural credit is extended to APS, while a large partof indirect rural credit is extended to AIS and AMPS.

Backward and Forward Linkages

Institutional finance for APS generates demand forinputs, farm assets, and services and thereby in-fluences backward linkage of APS with AIS. Thislinkage is facilitated through institutional financefor AIS; this sub-system is encouraged to stock andsupply inputs and therefore can forge its forward

linkage with APS. Institutional finance for APS alsocreates demand for services from AMPS and resultsin forward linkage of APS with AMPS. Similarly, in-stitutional finance for AMPS forges its backwardlinkage with APS. These linkages are shown below:

Backward Linkage

Backward Linkage

These linkages are critical for increasing agri-cultural productivity, production, and value added.The resultant agricultural progress would, in turn,improve the viability of rural financial institutionsthrough:

larger scale economies

loan and deposit portfolios with "high" and"low" interest rates

higher loan recoveries and consequenthigher recycling of funds.

Unfortunately, there is a dearth of valid data tosupport these propositions. This is because theabove conceptualization of role of institutionalfinance is new. Nonetheless, three types of evidencefrom recent literature are discussed: a cross-section-al study of ten states in India (Desai, Gupta, andSingh, 1988), a study of one selected primaryagricultural cooperative society (PACS) in a back-ward taluka in Gujarat (Desai, Gupta, and Tripathi,1989), and a review of literature on rural institution-al finance systems in various countries (Desai andMellor, 1989).

Cross-Sectional Study

The study of institutional credit for ten differentgreen revolution areas under semi-arid tropics inIndia has shown that the degree of agriculturalprogress is positively associated with the share of:

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Forward Linkage

AIS APS AMPSForward Linkage

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agricultural inputs marketing sub-system(AIS) credit in total institutional credit

agricultural production sub-system (APS)credit for current production growth andstability (CPGS)* in total cooperativecredit

the 'kind* component of crop loans in this

type of APS credit.The study, moreover, shows that the degree of

agricultural progress is negatively associated withthe share of:

current production diversification andgrowth (CPDG) loans (for supplementaryactivities like dairy, poultry, sheep farming, and biogas) in APS credit

agricultural produce marketing andprocessing sub-system (AMPS) credit intotal institutional credit.

The result related to CPDG credit arises be-cause these loans may have been made in areaswhere marketing facilities for milk, eggs, etc. are notwell developed. The finding related to AMPS creditarises because the crops ( e.g. sugarcane) for whichthis credit is extended did not act as a spearhead forgrowth in the production of other crops. The studyalso has shown that the delinquency rate of APSloans from cooperative institutions is negatively as-sociated with the share of:

AIS credit in total for AIS and AMPS credit

CPGS credit in APS credit

'kind* credit in CPGS loans for APS.These findings may be interpreted to suggest

that loan delinquency could be reduced by promot-ing institutional credit to achieve linkages betweenAPS and AIS.

Study of a Selected PACS

A study of the Aniyorkampa Group Service Coopera-tive Society in Malpur taluka of Gujarat has shownthat the loan term structure for APS is in favour ofterm loans which facilitate capital formation by andhigher returns to farmer-members. Moreover, term

loans provide a higher earning opportunity for this

This is defined to include short-term loans in cash aswell as 'kind' loans for purchase of plough, animalsand/or carts, for undertaking soil and moisture improve-ment works, to dig wells and tanks, to purchase lift irriga-tion devices, to purchase farm implements andmachineries, and to obtain land ownership rights.

PACS because of their higher interest rate. Theshare of 'kind' crop loans in total APS loans is alsohigher and has facilitated in forging a link betweenAPS loans and inputs supplies (i.e. AIS). In three outof four years of the Society's operations, APS loanoperations received the maximum share, followedby agricultural inputs marketing and lastly con-

sumer goods sales. In the remaining year, agricul-tural produce marketing was most important, fol-lowed by APS loan operations, input marketing, andfinally consumer goods sales. Such a pattern ofoperations may be interpreted to suggest better back-ward and forward linkages for APS of the Society'sfarmer-members. This, in turn, has facilitated adop-tion of new agricultural technologies and more op-timal use of resources by these members, as isevidenced from the farm level data.

Finally, this PACS had fully recovered APSloans and reduced its costs by enlarging scale and

scope economies to reap large profits from its opera-tions. All these was possible because this PACS bor-rowed funds from-its apex level cooperative banknot only to extend APS loans, but also to extend the'kind' component of crop loan and to undertake in-puts distribution business (i.e. AIS). Moreover, thisPACS had a leadership which was not only en-lightened in conventional terms but also had thebusiness acumen.

Before the third evidence is presented, it maybe noted that this PACS undertook agriculturalproduce marketing operations in an innovativemanner that did not entail any requirement of work-

ing capital and storage facilities. Instead of directlypurchasing the produce from its members, thisPACS acted as a negotiator between the farmer-members and the prospective buyers of theirproduce, and for this service it did not charge anycommission.

Comparison of Cross-NationalFinance Systems

The third evidence comes from a literature reviewon cross-national comparison of rural institutionalfinance systems in various low, middle, and high in-

come countries. One of the issues covered in thisreview relates to the coverage of the entire agricul-tural system by RFIs. Agricultural progress isgenerally better in countries like Japan, South Korea,and Taiwan where RFIs serve the three sub-systems.Loan delinquency rate of APS credit and/or unittransaction costs of RFIs are much lower in thesecountries as well as in China, Egypt, Syria, and the


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US where again RFIs serve all three sub-systems. InJapan, South Korea, Taiwan, and the US, RFIs havepromoted backward and forward linkages among thethree sub-systems. But in China, Egypt, and Syria,RFIs themselves have undertaken these functionsin coordination with the state-sponsored AIS andAMPS agencies.*

Operations for RFIs

From the preceding discussion; it follows that RFIsshould perform the following operations to fulfiltheir multi-functional role:

promoting and recovering APS short-termloans

facilitating coordinated supply of inputsagainst the 'kind' component of short-termcrop loans (APS and AIS linked credit) andorganizational arrangements

extending and recovering inputs distribution credit for farmers not borrowing croploans and for those farmer-borrowerswhose demand for inputs exceeds the oneshown under the 'kind' component, i. e.AIS credit

promoting and recovering agriculturalterm loans, i. e. APS term credit

facilitating supply of assets against APSterm credit

extending and recovering credit for supplyof productive agricultural and other assets(AIS credit for assets like agricultural implements, equipment and machineries,electrification, dairy animals, etc.)

arranging agricultural produce marketingand/or processing for farmer-borrowers

promoting and recovering credit foragricultural commodity-based cooperatives and other agencies or units, i. e.AMPS credit

promoting extension services in coordination with government agencies and input

industries"These findings may not be interpreted to suggest thatthere is one-to-one correspondence between rural institu-tional credit and the degree of agricultural progress. Whatthis credit does is to facilitate realizing full potential oftechnological change. Hence appropriate RFIs are an im-

portant component of policies' related to institutionalchange for agricultural and rural development.

extending and recovering working capitalloans for dairy farming in coordinationwith Milk Primary Cooperative Societies

arranging consumer goods sales

mobilizing deposits and/or share capitalcollection including credit-linked deposits.

It may not be possible for each RFI to under-take all these functions. Instead, different types ofRFIs (three-tier cooperatives, cooperative landdevelopment banks, commercial banks, and RRBs)could concentrate on those functions for which theypossess competence and comparative advantagesuch that their mutually reinforcing and coor-dinated operations result in a multi-functional roleof the RFI system (Desai, Gupta, and Tripathi, 1989).However, as is shown by this study, it is importantto develop and strengthen the concept of linkagesas described earlier.

Promoting Multi-Functional Role

It would be wrong to say that RFIs are not multi-product and multi-market in nature. What, then, isnew or different in what we have argued earlier? Ourconceptualization is based on answers to: (a) forwhom, (b) what, and (c) how these functions are un-dertaken. The three questions correspond to officialdefinition of rural credit, instruments of intermedia-tion, and internal management structures adoptedby RFIs.

Direct and Indirect Rural Credit

Before we discuss the deficiencies in the existingpolicies and practices of institutional credit, itwould be useful to mention what constitutes directand indirect rural credit. Direct rural credit is ex-tended to rural households for their working capitaland investment capital requirements [i.e. for APS).Indirect rural credit is given for such purposes asfarm inputs distribution business, rural electrifica-tion, custom-service centres (i. e. for AIS), villagecooperatives and state-sponsored development cor-porations to onlend to rural households (i. e. for

APS), regulated market yards, and cooperativeagricultural marketing and processing (i. e. forAMPS).

Suggestions for Direct Credit Policies

Direct rural credit for working capital purposes in-cludes only loans for crops, but not for dairy

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animals, sheep-farming, cottage industries, etc.Many of these economic activities are promotedunder the Integrated Rural Development Programme(IRDP) for the rural poor who get term loans from thesame RFIs to acquire assets but have no access toworking capital loans. While the regular crop loansystem exists, loans for soil and moisture improve-

ment works, land reclamation and levelling, andsimple soil turning operations which farmers perio-dically undertake even in a drought year are rarelyplanned for. Therefore, the need to combine termand working capital loans and credit for all thesepurposes on a farming system basis, besides for es-tablished purposes like well irrigation, purchase ofbullocks, farm implements, power tillers, tractors,etc., is too obvious to elaborate. Thus, RFIs shouldadopt a more flexible approach to direct rural creditrather than confine to the "avowed" purposes for ex-tending such credit.

Another lacuna in direct rural credit is thatloans are extended only for production and not formarketing activities. The existing policy of the RBIand/or NABARD for granting credit for marketing ofcrops like sugarcane, paddy, cotton, etc. is inap-propriate and even unfavourable to farmers. This isbecause, under this policy, RFIs arrange to purchasethese crops on credit from the farmer-borrowers andyet this is treated as credit owed by the farmer-bor-rowers to the RFIs. Further, farmers are extendedmarketing loans only to the extent of certain valueof crop produce marketed. A part of this loan is ad-justed towards repayment of production loanswhich carries a lower interest rate than marketingloans (Ranade, Singh, and Rao, 1982; Singh andSeetharaman, 1987). This indeed is not a marketingloan to farmers by any stretch of imagination. More-over, it is regressive to the farmers as it increasestheir debt service burden. It is, therefore, not surpris-ing that such loans are not popular among farmersnor is the recovery of production loans throughmarketing high.

The existing policy needs to be revised in thelight of the arguments discussed above. The mar-ginal and small farmers should be extended genuinemarketing loans in order to reduce their distress

sales. This would not only improve their repaymentperformance for production as well as marketingloans, but would also improve and stabilize their in-comes.

*The author is grateful to his student A Gandhi whobrought this point out in the classroom.

Suggestions for Indirect Credit Policies

In the case of indirect rural credit, loans are givenonly for the marketing part of the farm inputs dis-tribution business (AIS). In this context, what is re-quired is to extend loans for production operationsas well. But indirect credit (i.e. AMPS) is extendedfor both production and marketing functions to the

cooperatives alone. What is needed is to extendcredit to other organizations too.

Agricultural inputs industries like seeds, fer-tilizers, tractors, and to some extent pumpsets areperhaps well served by RFIs. But the agricultural im-plements and machinery industry which produceshand-drawn, animal-drawn, and to some extentpower-operated smaller but scientific implementsmay be allowed banking credit for both productionand marketing functions. This industry is mostneglected and is unevenly spread, besides being in-adequate in its product range (see ISAE, 1970,1977-

79; RBI, 1985; Parikh, 1978, 1983; CIAE, 1979;Sharan and Kayasth, 1987). Successful fertilizer in-dustries could be encouraged to diversify intomanufacturing of hand and bullock-drawn seed-cum-fertilizer drills. Similarly, successful pump-sets, tractors, and other farm implements industriesmay be encouraged to diversify into manufacturingof animal-drawn four-wheel tool carriers and crop-harvesters, besides other smaller but scientific im-plements. These industries can market their pro-ducts through their own marketing channels. More-over, they, in turn, will contribute to improving ef-ficiency of labour and other farm inputs without

reducing labour use in agriculture.

Instruments of Intermediation for Direct Credit

Since the late 1960s the instruments of intermedia-tion between RFIs and their farmer clients have un-dergone remarkable changes. These include the na-ture of documents required, eligibility criteria forcredit, margin money, determination of credit limit,security, duration of loan, interest rate and othercharges, provision for technical services, physicalinputs and marketing services, and loan recoverypolicies.

Despite some improvements on these aspects,important limitations prevail which are discussednext. If RFI's loan applications are not printed andnegotiated in the local language they fail to en-courage the prospective rural clients to return tothem again. Their policy of screening applicants forterm loan is based more on the ownership of an ade-quate and eligible collateral instead of the incremen-


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tal income and repayment capacity criteria. This hasthe effect of excluding farmers with unclear landtitles, tenants, and other rural poor. Similarly, RFI'smargin requirements which are fairly large for a termloan discourage poor rural households to borrowfrom them. Their insistence upon third partyguarantee has a similar effect. Yet another deterrent

is providing technical advice only at the beginningof the loaning period. This has the effect of not con-sidering subsequent changes in the productionprocesses and thereby eliminating utilization of fullpotential of new technologies. At present, there is amismatch between the time fixed for recoveringloans and the time at which farmers can repay loans(Shukla, 1985). This results in loan delinquency andlower recycling of funds. The current policy ofrecovering term loan from gross instead of netreturns (as for dairy animal loans) is faulty.

Further, when interest rate on credit is higherthan the rate of return on capital invested in

economic activities, it has the effect of excludingespecially smaller entrepreneurs from the nexus ofmodern financial services. When the 'kind' com-ponent of crop loans is promoted without ensuringsupply of inputs against it, farmers are discouragedfrom taking institutional loans and their capacity torepay 'cash' loans is endangered on account of lowerreturns.

At present, RBI has stipulated that RFIs shouldtransfer the funds sanctioned against the 'kind*component of crop loans directly to inputs dealers(RBI, 1976). But, in reality, different RFIs follow dif-

ferent practices. For example, PACS provide inputsagainst 'kind' loans by borrowing marketing creditformally and/or informally for inputs (Desai, Gupta,and Tripathi, 1989; GOG, 1983; Hynniewala andTripathi, 1985). This implies that PACS borrow morethan once for the same purpose. Some commercialbanks require their farmer-borrowers to submit pur-chase vouchers for inputs to obtain money sanc-tioned against the 'kind' component. This impliesavailability of cash with farmers to purchase inputsbefore they get money from banks. This is unlikelyto be the case especially with smaller farmers, be-sides defeating the very rationale for credit. Some

other commercial banks issue drafts to their farmer-borrowers in the name of inputs dealers from whomfarmers obtain inputs. This arrangement is satisfac-tory only if dealers are approved in advance. RFIsmay, therefore, adopt the following financial in-novations (Desai, Gupta, and Tripathi, 1989).

In the case of PACS, the District Central

Cooperative Banks (DCCBs) could issue a credit cardto the concerned PACS on behalf of the farmer-bor-rowers against the 'kind' component already sanc-tioned to them. Based on this card, the PACS can in-dent inputs required by its farmer-borrowers. Afterindenting, PACS can send a copy of this card to thesupplier of inputs who, in turn, will approach theconcerned DCCB to obtain funds equivalent to thevalue of inputs supplied to the PACS. The DCCBwould make payment to the concerned supplier anddebit this amount to the account of the PACS which,in turn, would debit the said amount to the accountof the concerned individual farmer.

In the case of commercial banks and RRBs, thebranch may issue a credit card to its borrowers aswell as approved dealers against the same funds ear-marked for the kind component already sanctionedto the farmer-borrowers. This branch can make pay-ments to the approved dealers as and when theseborrowers obtain inputs against their 'kind' com-

ponent. The dealers, in turn, can make payment totheir suppliers for inputs they stock by utilizing thecredit card sanctioned to them.

Cost Reductions in Financing

This type of financing would be cost reducing inmore ways than one. It would:

save the interest and/or commission charges for input dealers including PACS, asthey would not require to borrow morethan once for the same purpose which in

turn would improve their viability and enhance their borrowing capacity for otherbusiness

reduce money in circulation without adversely affecting the supply of real goodslike farm inputs

lead to larger output with smaller amountof credit.

As regards intermediation practices related toagricultural produce marketing services by thePACS, often the PACS does not have either godownfacilities or agency on behalf of wholesaler's/re-

tailers or working capital credit or all of these. Underthis condition, its attempt to provide marketing ser-vices may lead to their premature discontinuation.Though a PACS could take up agricultural inputsand consumer goods marketing business besidesAPS credit operations, it may not be a suitable or-ganization for directly providing produce marketing

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services. This is because of its limited and simpleorganizational and personnel capability. But it canprovide market information services to its memberslike the Aniyorkampa PACS. Such innovation forproduce marketing services by cooperatives wouldbe cost reducing. This is because it would:

reduce farmers' debt service burden of the

type discussed earlier improve RFIs APS loan recoveries, besides

reducing their costs of undertaking marketing operations directly.

Even commercial banks and RRBs can providemarket information services to their clients, besidespromoting AIS, APS, and AMPS credit.

Instruments of Intermediation for Indirect Credit

At the outset, indirect credit extended by commer-cial banks to village level cooperatives to onlend tofarmers (i.e. APS) suffers from the same limitationsthat are discussed in the preceding section. Al-though systematic data to validate this empiricallyare not available, most studies on this type of ruralcredit have not visualized the village organizationsin the manner in which they are visualized here (see,for example, Gaikwad and Parma*, 1983; Padki andGajarajan, 1978). Thus, most of the changes in creditpolicies and innovations suggested above would berelevant for these organizations too. As regards theother purposes for which indirect rural credit is ex-tended, the problems of instruments of intermedia-tion seem to be much more for farm inputs distribu-

tion business, custom-service centres, and coopera-tive agricultural marketing and processing business.

Many a time RFIs give credit on the basis of col-lateral instead of incremental income/return on in-vestment and repayment capacity, besides other in-direct contributions of these businesses to promot-ing backward and forward linkages. This would dis-courage smaller entrepreneurs from taking full ad-vantage of banking services. Similarly, they wouldbe discouraged by the stringent custody facilitiesdemanded for their stocks by banks (GOG, 1983; Sik-dar, 1977; FAI, 1968). Yet another example is that ofdetermining lower credit limit because of lower in-

ventory in the busy season of the business, thoughthe credit needs at such times would be higher. Thisshows that the time at which credit limit is assessedis extremely importantlow inventory in busyseasons does not necessarily mean low credit needto procure inputs.

Cooperatives in AMPS have faced problems in

getting bank credit on account of inappropriateselective credit controls. For example, in the case ofgroundnut, selective credit controls are more strin-gent for the trading activity even though the stock-ing function is largely performed by processors andprocessors-cum-traders (Srivastava, 1988). Finally,of late, clients in the AIS and AMPS* are dis-couraged by high interest rates on bank loans.

Rural Deposits Mobilization

The Indian RFIs system as a whole has been success-ful in mobilizing deposits from rural areas.** Butthe village level cooperatives and land developmentbanks have not been so successful.*** Despitethis, the scope for mobilization of rural depositscould be further explored. This, however, wouldrequire an altogether new approach. Before this isdiscussed, it would be worthwhile to see whethersome of the existing deposits schemes are suitable

to rural people. Here again the question ofassessing instruments of intermediation isimportant. For example, insisting on minimumbalance for a saving deposit account excludesagricultural labourers and marginal and smallfarmers from becoming savings account holders.Similarly, a recurring deposit scheme whichrequires the saver to deposit cash every monthdiscourages farmers with field crops that mature atthe end of three or four or more months fromjoining the scheme. Another example is that of adeposit scheme which allows a loan facility for anamount smaller than the deposit at an interest rate

higher than the interest rate on deposit. This has theeffect of withdrawing deposits or borrowing onlythat amount for a period which would cost less thanor equal to the return on deposit.

All these deposit schemes are almost irrelevantfor farmers who may prefer to build margin moneyby depositing small amounts over a period with anassurance that they could finance the remaining cost

*Interest rates on indirect rural credit for AIS and AMPSat present range from 14 to 18 per cent. There also existsa provision to extend such credit at 11.5 per cent but onlyto a limit of Rs 5,000! (RBI, 1984).

**This is reflected in the credit deposit ratio being sig-nificantly lower than 100 per cent and also in the lowshare of refinance in total rural credit. The former is 70

per cent (86 per cent for cooperatives as against 59 percent for commercial banks), and the latter is 24 per centin 1980-81. For 1981-82, the corresponding figures are 74and 19 per cent (see Singh and Asokan, 1988).

***There are however good exceptions like those inKerala, Gujarat, and Punjab.


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of a productive asset by borrowing from banks. RFIswould do well to promote schemes (other than theregular savings and term deposit schemes) similarto the famous Pigmy deposit and credit-linkedschemes of Syndicate Bank where there is no needto maintain a minimum balance by account holders(for some discussion on these, see Bhatt, 1970; Ran-

garajan, 1978; Thingalaya, 1978; Bandyopadhyayand Khankhoje, 1985). They could also innovatevery short duration savings deposits with andwithout withdrawal facilities that carry different in-terest rates. All such schemes may also help RFIsreduce their cost of funds and thereby improve theirinterest spread.

Problems Encountered by RFIs

We have so far discussed 'how' RFIs' policies couldbe better matched with the needs of rural borrowersand depositors. We analyse here the problems faced

by RFIs and the policy support to overcome them.

First, RFIs do not have adequate funds to ex-tend working capital credit for direct and indirectrural credit at a particular time in a year. This is be-cause the time at which demand for credit arisesdoes not coincide with the time at which RFIs canmobilize deposits (Desai, 1987), Under such cir-cumstances, RBI/NABARD may consider providingtemporary credit accommodation on a continuingbasis which is more suitable than refinance. This isbecause refinance presumes availability of somefunds with RFIs which indeed is not the case. Such

a policy would help converge inputs supply anddemand forces arising respectively from temporarycredit accommodation and refinance by theRBI/NAB ARD for APS credit. This, in turn, wouldreduce inflationary tendencies, if any, arising fromrural credit. This is because credit for inputs supply together with that for their demand would havea potential to induce more agricultural output andvalue added. Moreover, trading business for farminputs is very different from such business for finalconsumer goods or agricultural commodities.

The second problem is related to internalmanagement capabilities of RFIs. Since late 1960s,RFIs have undertaken major innovations for promot-ing rural credit. These include creation of a suitableorganizational structure by establishing a separatedepartment, division and/or branch/cell for agricul-tural finance, equipping it with suitably qualifiedpersonnel, formulating relevant-credit projects, anddecentralization in decision making. But there are

important limitations. They mainly centre aroundthe type of rigour followed in and information col-lected for loan appraisal, documentation require-ments, follow-up of credit sanctioned (Thingalaya,Khankhoje, and Godse, 1985), extent of decen-tralization for identifying more promising businessopportunities, separation of rural credit operationsfrom rural deposits mobilization operations, andlack of content in the training programmes especial-ly in relation to financial services for AIS and AMPS.Each of these needs to be corrected. Similarly, RFIshave not innovatively promoted non-financial ser-vices with the assistance of the government exten-sion machinery and inputs industries. One such in-novation is Syndicate Bank's Agriculture Founda-tion which has even been suggested for adoption byother banks (Bandyopadhyay and Khankhoje, 1985).Banks, in fact, could promote more effective exten-sion services by improving coordination with thegovernment extension machinery which of late hasbeen strengthened. Similarly, banks could improvesupply of farm inputs and that of marketing andprocessing services by promoting financial andother services respectively for AIS and AMPS as sug-gested earlier. *

The third problem facing RFIs is lack of govern-ment support for enacting law of limitation, updat-ing land records, evolving patronage for RRBs fromstate governments and sponsoring banks, formulat-ing firm district development plans, and above alldealing with loan delinquencies (Bandyopadhyayand Khankhoje, 1985). Without government sup-port, RFI's commitment to sound rural banking can-

not be sustained.

Conclusion

In sum, financial institutions including the RBI andNABARD need to take action on a priority basis toforge effective and efficient backward and forwardlinkages of APS with AIS and AMPS by:

altering the scope of direct as well as indirect rural credit

promoting more flexible refinance and/ortemporary credit accommodation, espe

cially for working capital credit for thethree sub-systems

* This suggestion could well be an important answer toovercome the oft-repeated problem of lack of backwardand forward linkages being a contributory factor to the

poor performance of IRDP. (For discussion on thisproblem, see Rath, 1985; Dantwala, 1985; and SBI, 1987.)

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evolving more suitable intermediation instruments for 'kind' loans, credit eligibilitycriteria, margin, collateral, interest rates,loan recoveries, etc. for these three sub-systems

developing credit-linked deposits andsimilar other schemes

evolving more appropriate intra and inter-organizational innovations to serve thethree sub-systems.

References

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Economic Papers, March.

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