UNIT 1 RURAL CREDIT

Structure

1 . I Inlroduction ()l?jzct1vr.s

I .-2 Need for Credil 1.3 Risks in Agriculture

1.4 Agricultural Holdings

1.5 Credit for Agriculture and other Purposes 1.6 Credit Kec~uirements in India . 1.7 Rural Credit Agencies

1.7.1 Cooperatives 1.7.2 Cormnel.cial Banks 1.7.3 Regional Rural Banks (RKBs)

1.7.4 National Bank for Agriculture and Rural Devdoplnetlt (NAB ARD) L .7.S Rcaerve Balk of India (RBI)

' 1.7.6 (3overnmental Support to Kulal Crcdit

1.8 Summary

I .9 Answers to SAQs

1.1 INTRODUCTION

In this unit we will review the signiticance and basic need of credil alongwilh risks in agriculture and structure of agricullural holdings. l11e different purposes of credit in agriculture and allied activities will be outlined and tlie estimates of credit requireinents in India will be examined. An overvie5.v will be taken of the agencies that have contributed in nleeting the credil needs. The topics discussetl in this unit represent lhc essentials of rural credil and serve as pre-requisites f('r a proper understd~ding of the rcma~ndcr of the block.

Objectives

Aftcr studying h i s unil, you should be able to

explain the significance of credit in agricultural development and the basic reasoils for big spurt in dc~nand for agricultural credil.

state the future role of credit in rural development, del'ine major types of risk in agricullure m d identify ways to counter thein,

analyse Ule distribution of agricullural holdi~lgs m d visualise its significance in designing agricultural credit schemes,

state purposes for which institutional rural credl is disbursed,

,analyse the trends in agricultural credit requirements in India,

list rural credit agencies and their ob.jectives, functions and perfornmanccs, and

describe role of inter-agency linkages.

1.2 NEED FOR CREDIT

In this section we are going to tell you lhat economic tleveloplncllt in India cenlrcs around i b agricultural development, thal agricultural development at present stage of economy is possible mainly through increased Iand productivity via adoption of iiriproved agricultural technology and adequate infrastructural support. 'Ihese unperatives srgnily the increasing need for credit.

Indja ha9 been confronting number of econonlic problems mainly stenlrnillg from its vast and growing popularion such as sectoral and regional imbal;lnces, unemploynlent and underemployment, poor rate of economic growth and widespread poverty. Ally approach

Credit Srhc~lics to ecoilonlic development is not likely to fructify unless agricultural development continues to get due einphasis because agricultural economic sustains the 1ivelihtx)d of 1

76.7 per cent of population (1981 censuq) and contributes about (me-third of national 1

incoine according to 1988-89 statistics. Credit has worked as a powerful instrunlent in proinoting economic development w~th equity and social justice and nlore particularly t o increase agricultural production and to improve the level of living of rural population.

Poverty is inore widespread in rural sector of our economy. The 1981 census indicated that about 40 per cent oC those who depended on Iaancl k)r livelihood were agricultural labourers with no land, of the other 60 per cent tluee-fourlll owned one bur# of the tolal I u ~ d available .and the residual one fourth owned three-fourth of the land. Thus, rural households which constitute a substanual majority of the 26 per cent of our population living below poverty line are left with very little or no funds to put in productive process, Illerefore, there is dire need of adequate credit in our agricultural sector.

Agricultural development in future will basically depcnd upon increasing pn~ductivily in agriculture because there is very little or no scope of bringing additional area under cultivation. This will be possible through extensive use of new md inlproved technology. Ille new and improved technology has enhanced the credit need in agriculture as it requires high yielding variety seeds, heavy doses of fertilizers, pesticides, irrigatioil as well as investment in power and machinery. As the n~ajority of farmers in the country have very little marketable surplus, they are unable to nlect their farm financial requiremenis lion1 their own funds. As a result, the full potential of new technology ha! not been fully exploited which is evident from existing gaps between yieu obtained on research stations, natiolral denionsvations and that obtained on fariners' fields. ThereQre, the need for agricultural credit will continue to grow for years to come. '

. .i 13esides, the agriculture is to be increasingly supporlcd with adequate ~ntrastrudmt: 111 terms of irrigation (tlle existing irrigated area being only about one-third of thc total cultivated area), Wansport, lnarketing and storage fdcil ities and modem institutions for tapping the full potential of new rechnology in agriculture. This increasing capilal requirement in agriculture will have to be fil~allced through credit.

The above scenario reveals that unless credit is made available to farmers, agricultural labourers, rural artisans, small trade and commerce in rural sector, in adequate amount, at right time, at reasonable cost 'and at suitable terms and conditions almost at their doorstep, the pace of rural development catmot be stepped up. This calls for an efficient rural credit system.

'The agricultural credit system was reorganised to meet the new challenges in agriculture arising fro111 flle emergence of green revolution in the late sixties. As a result, the production of foodgrains has gone up from a stagnant 80 m. tomes, to over 170 nl. ttnmes. The credit support has also been responsible for white revolution in milk, a blue revolution in fish .and yellow revolution in edible oils. Yet, the quality of life for majority of the farmers has not iinproved substantially. Therefore, the need for rural credit will co~~tinue to grow in future.

1.3 RISKS IN AGRICULTURE

b~ this section we shall give you an idea of different types of risks faced in agriculture and the risk management alternatives particularly through agricultural financial system.

Agricultural production depends upon a number of factors ranging from weather conditions to input applications .and institutional support. In the non-farming sector. the available technology is much more dependable and the borrower carry much less risk in taking it up. Rut the agricultural technology is highly location specific, the success o i ' adopting it successfully also depends upon many i~atural factors, which make it even more uncertain and risky.

In our country, despite massive investment in development of water resources, only about one-third of the total area under principal crops hiis assured irrigation facilities. Therefore, farming in the country still depends heavily upon raingod. As a result, there are yeii to year fluctuations in farm yields, production, prices and income. Farmer has to, therefore, plan his area under crops, level of resourced use and other farm rehted decisions under an environment of risk *and uncertainty.

Several types d risks and uncertainty are important to farmer as he formulates plans and courses of action which commit resources at the present for a product tixthcoming at a future date. Major types of risks faced by farmers are the following:

Yield Risk

Also known as the weather risk is the risk that realized yields inight bc lower than the expected yields leading to lower prtduction. Yield risk .are caused by unfavourllble wealher resulting into floods, droughts, hailstorms etc., and also by diseases, insects md pests.

Price Risk

' Also known as the market risk is the risk that realised product prices inight be lower than the expected product prices and that realized input prices inight be higher Ihan the expected input prices leading to lower gross returns and higher cost of production than expected.

'lbere are other sources of risk and uncertainty such as risk and uncertainty ruising out of , changes in goven~mental actions, actions of other business and people such as landlord, lender etc., and changes in technology. Rut these risks and uncertainties -are experienced by fiuincrs less frequently.

Risk Management Alternatives

Product diversification, flexibility in enterprise and resource organizatioil to adjust to changing conditions as well as choices of enterprises with low yield variability art: some of the inforinal ways of countering yield risk. To counter price risk, farnler can choose enterprises with low price variability and can inake use of forward contracts for sale of !P is produce and purchase of inputs. Rut both these sets of altenlatives are limited in scope.

I b e Governinent's price support programme for major crops, Comprehensive Crop Insurdice Scheillc (CCIS) introduced in April 19135 for cereals, pulses and oilseed crops, the policy of conversion of short term loans into medium term loans by cooperative credit agencies, and relief payments by Government have greatly benefited the farmers in managing their risks in agriculture. But slill a majority of small rind marginal farmers are cilher not participating in Ule Government programmes or are out of Ihc reach of the programmes.

1;iniincial intennedillries such as banks who link suppliers of funds (savers) and buyers of funds (borrowers) can be helpful to f.hfmers in Inore efficiently nrmaging their risks in agriculture. Because of vagaries of weather, pests and governmental actions, farmers commonly experience wide swings in prices received, crop yields and hence incomes. To survive, they must adjust to these risks by holding surplus crops, livestock, gold, money, or other form of savings - including deposits - that can be easily liquidated. Unutilized institution credit reserves is an important alternative for managing the risks. To be useful in risk mlinageinent, a financial system must offer a large number of people convenient deposit services and also be tlexible and dependable enough to provide a large number of credit worthy people access to loans.

1.4 AGRICCTLTURAL HOLDINGS

H t l n l Credit

In this section you will l e g how to malyse the structure of agricultural holdings and its importance in relation to-agricultural credlt.

Credit Schemes The distribution pattern of agricultural land holdings hw a large significance in designing credit policies and programmes. Credit schemes play .an important role in resource allocation and risk management. Therefore, for loan targetting to speed development in a given area, to help a certain group of farmers or to boost a particular enterprise, analysis of land distribution pattern becomes an important aspect. The all India distribution of land holdings is presented in Table 1.1.

Following the unprecedented expansion of rural population from 290 million in 1951 to 520 million in 1981, the per capita land available has shrunk. In 1970, there were 70 million holdings; and by 1985 they increased to about 98 million; the size of average holding came down by 40% to 1.68 ha in the process. According to 1985-86 statistics,

I 58% of the holdings have less than one hectare .and about 18% between one .and two hectares. Thus, holding upto two hectare constitute about three-fourth (76%) of the total holdings and own only about one-fourth (28%) of area operated. Whereas, holdings of more than two hectares constitute about one-fourth (23.8%) of the total holdiilgs and owl about three-fourth (71%) if area operated. In view of such skewness in the distribution of land holdings in the country, the agricultural policy in general and credit policy in particular has to be designed with great care to strike the right b d m between equity and efficiency.

Table 1.1: All India Distribution of Land Holdings

These 75 million marginal and small farmers alongwith about 60 million landless agricultural labourers community and the society, majority of whom are below the poverty line, have been designated as the weaker section of the rural community and the society. Therefore, they deserve special attention in development policy and planning. Credit has been recognised as one of the powerful policy instrument for promoting growth with equity. Therefore, efforts have to be accelerated to channel a larger flow of timely credit assistance at concessional term and conditions to these weaker sections of rural community. Consistent with the diversity of economic activities undertaken by the weaker sections of the rural community, the technical capability of the financing institutions has to be continuously strengthened at the villaage level to enable them to play an active role.

Category of

Holdings

Marginal (I 1 ha)

Small (1-2 ha)

Semi-mediu m(2-4 ha)

Keeping in view the fact that land is a basic resource, the scope for large absorption of " investment credit on marginal and small farms appears to be narrow, because of smallness

of their holdmgs. Therefore, short term credit holds a special significance for Ulem and efforts are needed to increase their share in short term loans.

I

No. of Operational Holdings ('000)

7920 (8.1) (29.6) (28.7)

(1980-81)

501 22 (56.4)

16072 (18.1)

12455 (14.0)

Large (10 and

A11 holdings

Area Operated ('000 ha)

(1985-86)

56748 (58.1)

17881 (18.3)

13253 (13.5)

(1980-81)

19735 (12.1)

23169 (14.1)

34645 (21.2)

Average Size of Holdings (ha)

Figures in brackets indicate the pevcentaRe in respecttve colurnn totals. Source: Agrtc~~ltrrrul Statistics at a Glance, Feb. 1998.

2166 (2.4)

88883 (100.0)

(19135-86)

21606 (13.2)

25533 (15.6)

36579 (22.3)

(1990-91)

0.39

1.43

2.76

(1980-81)

0.39

1.44

2.78

1929 (2.0)

9773 1 (100.0)

(1985-86)

0.38

1.43

2.76

37705 (23.0)

163797 (100.0)

33187 (20.2)

163913 (100.0)

17.41

1.84

17.20

1.68

17.33

1.57

t 1.5 CREDIT FOR AGRICULTURE AND OTHER , PURPOSES i

In this section you will be given an idea of the various purposes/schemes for which credit support is given by the rural credit agencies in agriculture and allied activities.

Modernization of agriculture and diversification of rural economy has given rise to huge requirements of credit for working capital as well as for fixed investment. In accordance with the national policy objective of "growth with social justice", special programmes for the development of agriculture and allied activities have been drawn-up with focus on small farmers, marginal farmers and other weaker sections of the rural population. The small and marginal farmers .are encouraged to undertake non-farm activities to improve their income through product diversification.

The v.arious purposes for which rural credit is provided by cooperatives, commercial banks and regional rural banks are summarized below:

1) Crop Loans

To purchase seed, fertilizer, pesticides/insecticides and to meet expenses on agricultural operations.

2) Minor Irrigation

Well, boring, rahat, pumpset, tubewell, irrigation channels, sprinkler irrigation, drip img ation p&phouse/farmhouse, etc.

3) Farm Mechanization .

Purchase of tractor, power tiller, power thresher, and various other agricultural implements. Repair of tractor, engine and pumpset. . 4) Horticulture and Forestry

i) Orchards -mango, lemon, grapes, apple, lichi, orange, guava, appricot, etc.

ii) Nursery development -potato, vegetables, flower, bettlevine, etc.

iii) Social forestry - Popular Eucaliptus, etc.

5) Land Development

i) Waster and fallow land development.

ii) Land consetvation.

6) Miscellaneous Purposes

i) Livestock rearing : Cow, buffalo, goat, sheep, poulty, piggery, poney, camel ahd rabbit rearing.

ii) Rsheries : ponds, fingerlings, net, boat,etc.

iii) Dunlop bullock cart.

iv) Gobar Gas

v) New Sources of energy : Solar pump, wind mill etc.

7) Small and Cottage Industry

Woodwork, bressware, oil expeller, sugarcane expeller, jaggery and khandsari units, basket making, sports material unit, shoe making, bee-keeping, black-smithy, rope making, match box unit, bangles, carpet and mat industry, jari work, stone work, hand printing and colouring, sewing machine, and cycle industry, manufacturing of radio and motor parts, plastic goods, tiles and marble work, seed and fertilizer stores etc.

Ruri~l Credit

Credit Schemes 8) Rural Housing

i) Construction of new house.

ii) Repair of old house.

9) Consumption Credit

To the weaker sections in nual areas viz., Cultivators with land holdmgs upto 0.5 acre, whether as owner or tenant, landless labourers, rural artisans, and other people of meagre means such as carpenters, barbers, washerman etc., consumption credit can be granted by institutional agencies. The loans are an integral part of the credit extended for main business or activity of the borrower. As a support to consumption credit, the risk fund for coilsumptioil credit has been operating as a non-plan scheme since 1977-78 covering all the states and Union territories.

1.6 CREDIT REQUIREMENTS IN INDIA

In this section you will be given estimates of agricultural credit requirements in India at different points in time to show how rapidly the credit requirements have been growing and developing into a future challenge for agricultural financial system of the country.

Increasing importance of agricultural credit is evident from continuously increasing credit requirements in agriculture.

In 1950-51, the Rural Credit Survey Committee estimated that the mnu'al borrowings of the cultivators were Rs. 750 crore. Cooperatives which dominated the institutional agricultural credit at that time provided 24.23 crore (3.2 per cent of the total boGrowings), the government provided 3.8 per cent of the total borrowings, and the remaining credit was met by non-institutional sources (93.0 per cent). The Rural Debt and Investment Survey conducted in 1961-62 revealed that the borrowings of the cultivators had gone upon Rs. 1034 crores. Cooperatives provided 214.35 crores of agricultural credit in 1960-61. The All India Rum1 Credit Review Committee (1969) basing its estimates on the exercises done by the Planning Commission for the Fourth Five Year Plan worked out totaI production credit needq in agriculture at Rs. 2000 crore by 1973-74. The mediuin term credit requireineilts were assessed at Rs. 500 crore per year and that for long term credit at Rs. 1500 crore during the period 1969-70 and 1973-74. Thus, total credit requiremei~t in agriculture was estimated at Rs. 4050 crore per year during the Fourth Plan period. However, the institutional sources of credit provided only Rs. 1186.70 crore (29.3 per cent of' the credit requirement) in the 1973-74, comprising 73.8 per cent (876.70 crore) from cooperatives, 18.5 per cent Rs. 219.20 crore) from commercial banks, and 7.7 per cent (Rs. 90.8 crore) k?om government (Table 1.2).

According to estimates of the National Commission on Agricvlture (1976), the total credit requirements of all the f i e r s in the country by the year 1985 were projected to be Ks.16,549 crore for short, medium and long term purposes of which 28.34 per cent was for small and marginal f i r s . Against this, flow of institutional credit for agriculture by the end of 1985 (July-June) was of the order of Rs.6166.80 crore (37 per cent of the credit requirement) comprising R s . ~ 154.30 crore of cooperative credit (5 1.1 per cent), Rs.2461 crore of commercial bank credit (39.9 per cent), Rs.310.10 crore of regional rural bank credit (5.0 per cent) and Rs.241.40 crore of government credit (4.0 per cent) as is shown in Table 1.2.

M.L.Dantwala estimated that the direct demand for agricultural credit was Ks.27,551 crores in 1989-90. However, the available statistics suggest that flow of institutional agricultural credit in 1989-90 was estimatedltargetted to be Rs.13,260 crores (48 per cent of the demand ) comprising Rs.5453 crores of cooperative credit (41.1 per cent ), Rs.7515 crores of credit from commercial banks .and regional rural banks (56.7 per cent) and Rs.292 crore of government credit (2.2 per cent). According to Dantwala, the direct demand of agricultural credit will rise to Rs.57,316 crore by 1994-95. These estimate are based on the assumption of 5 per cent per m u m increase in input price over 1984-85 prices. The agricultural credit requirements and agricultural credit availability at different points in time are given in Table 1.2.

Table 1 2 Agricultural Credit Requirement and Dhbursement of Direct Institutional Finance for Agriculture (July - June )

1 ( Rs. in crores)

NA = Not Available, P = Provisionul, T = Turget, E = Estimate, * Relate to year 1960-61, Government Louns taken us short-term loam and relate to April-March

Source: I ) Agricirlturul Statistics cct u Glace, Feb.1990. 2 ) Report ort Currency and Finunce, Vol.I, 1975-76, 1987-88,1990-91. 3) Economir Survey, Part -11, 1991-92.

From the above observations, the following inferences can be drawn:

1 ) Consequent to the impact of green revolution in the country atid on the general awareness of its farming community of the possibilities of increased income through use of modem techniques in agriculture and its diversification, agricultural credit demand has been increasing manifold.

Particulars (1950-51) (1961-62) (1973-74) (1984-85)

Agril. Credit requirement 750.0 1034.00 4000.00 16549.00

Direct Institutional Finance 24.23 214.35* 1186.70 6166.80 for Agriculture

a) Cooperatives: 24.23 214.35 876.70 3 154.30 i) Shorl termes 22.90 182.82 663.10 - 2323.30 ii) Medium term 19.93 55.50 369.70 iii) Long term 1.33 1 1.60 158.10 46 1.30

b) Commercial Banks: N.A. N.A. 219.20 2461.00 i) Short tenn N.A. N.A. 105.40 1034.90 ii) Term Loan N.A. N.A. 113.80 1426.10

c) Regional Rural Banks: 310.10 i) Short term 13 1.70 ii) Termban 178.40

d) State Governments N.A. N. A. 90.80 24 1.40

2) The rise in agricultural cre&t requirement is largest in short term credit followed by medium and long term credit.

(1989-90)

2755 1.00

13260.20

5453.40 4079.20 639.30 734.90

6867.80 28 19.40 4048.40

647.20 335.60 311.60

291.80

3) The credit gap, that is the difference between the credit requirement and institutional credit availability in agriculture has been narrowiilg down as result of progressive institutionalisation and strengthening of agricultural credit system.

4) To meet the fast growing requirement of agricultural capital, agricultural credit will continue to hold a vital place in national agricultural policy and programmes.

1

h.. = . I. -

1.7 RURAL CREDIT AGENCIES

In this section you will be g i v a a concised idea of the various rural credit agencies operating in India, alongwith their objectives, structure, functions and performance.

L t Rural credit agencies in India consist of institutional and non-institutional sources. The I I

non-institutional sector consists mainly of the professional and agricultural money-lenders,

I land lords, commission agents, traders and the relative and friends. These non-institutional L 'agencies dominated the rural credit accounting for about 93 per cent of total borrowings of

Rural Credit

Credit Schemes

.a

agriuculturists in 1950-51. The non-institutional agencies still continue to play an active role and account for about 30 to 40 per cent of total agricultural credit. Although these lenders charge usurious rates of interest and follow unethical practices, they continue to be active because the farmers find it more expedient to resort to them rather than agencies in the organised sector. The main reason for this is that their lending procedure are relative simple, credit assistance timely and the assistance is not tied with purpose of borrowing. Since non-institutional credit does meet a sizeable portion of rutal credit requirements, the Rural Credit Policy does not aim at eliminating these non-institutional sources altogether but seeks to regulate their operations so that supplementary sources of credit could be available.

The promotion of institutional sources of lending to the rural sector has long been an important approach of the governments' agricultural development policy. It acquired added significance and urgency with the advent of green revolution in the mid-sixties with its requirements of modem high value inputs like HYV seeds, chemical fertilisers, insecticides and pesticides, mechanisation and the need to provide infrastructural support through development of land and water resources, transport, marketing and storge facilities. To meet the growing credit needs, the thrust of the Rural Credit Policy in India has been progressive institutionalization of rural credit under a multi-agency approach involving cooperatives, commercial banks and regional rural banks. Presently, these institutional sources together account for about 60 per cent of total rural credit.

The institutional credit structure for purveying rural credit in India to farmers and other rural borrowers consists of three distinct types of organisation.

1) Cooperatives

2) Commercial banks, and

3) Regional rural banks

In addition to these three types of institutions, government also provides a small amount of rural credit as a measure of relief. At the apex (national level) of the above rural credit structure is the National Bank for Agricultural and-Rural Development (NABARD) which was set up in July 1982. Until then Reserve Bank of India (through its rural credit department) served as the apex bank. The institutional credit structure is presented in Figure 1.1. A concised account of the functional distinction and relationship of these institutions follows.

1 Banks I \ 1 , -,

bq LAMPS

NABARD

Government E@l

Branch I PLDB I Farmers/Rural Borrowers

NABARD National Bank for Agriculture and Rural Development.

SCB State Cooperative Bank

SLDB State Land Development Bank

CCB Central Cooperative Bank

PLDB Primary Land Development Bank

RRB Regional Rural Bank

PACS : Primary Agricultural Credit Societies

FSS Farmers' Service Societies

LAMPS Large Sized Advivasis Multi-Purpose Cooperative Societies

Figure 1.1: Institutional Rural Credit Structure in lndii%@

1.7.1 Cooperatives

The institutional credit system in the rural sector commenced with the adoption of Cooperative Soc~eties Act in 1904. Since then, the building up of the cooperative as a part of the schemne of planned development has been one of the primary goals of the national policy in India. With the active support from the governmenl and other national institutioi~s, cooperatives have emerged as the principal institutional agency for rural credit. About 40 per cent of the aimual disbursement of direct institutional finance for agriculture is by cooperative, according to 1989-90 statistics.

The Cooperative Credit structure consists of two wings, i.e, short term and long term. The short termcredit structure in each state comprises a three-tier structure with State Cooperative Rank (SCB) at the apex (state level); Celltral Cooperative Banks (CCBs) at the district level; and Prlmary Agricultural Credit Societies (PACS) at the 1owestJprimary) village level. A limited quantity of credit also flows through the short term credit structure for medium term investment. Special types of primary cooperatives have also been organised to cater to the special needs of tribals and weaker sections of the society. These are farmers' Service Societies (FSSs) and Large Sized Adivasis (tribals) Multi-purpose Cooperalive Societies (LAMPS). Tlle PACSs provide fann credit to the member farmers. ?11e CCBs which are the federations of PACSs extend f i n m c i n r e f i n c g facilities to PACSs and the SCBs which are federations of CCBs provide financinglrefinancing facilities to CCBs (Figure 1 .I). There are 27 SCBs, 337 CCBs and approximately 94,000 PACSs in this wing of the Cooperative Credit Structure. There are 2525 FSSs and 2958 LAMPS in the country.

The other wing consists of land development banks catering to long termlinvestment credit of their inembers in agriculture and allied sectors. Primary Land Development Banks (PLDBs) provide farm credit to the member farmers. State Land Development Banlcs (SLDBs) extend fina~cingIrefin.dl~cing to PLDBs. In some states of the country, the LDB structure is unitary and not federal. Therefore, the branches of SLDBs are directly providing long term credit to their member Farmers. There are 19 SLDBs, one for each state. Eight SLDBs lend directly through their own branches numbering about 1029, while 11 SLDBs lend through their affiliated PLDBs numbering about 890. The details of Cooperative banks are dealt in Unit 2.

1.7.2 Commercial Banks

Commercial BailEcs were brought into rural financing through nationalisation of 14 major commercial banks in June 1969. 'Illis had to be done in view of the effective credit support required for diffusion of llew technology in agriculture and the iwdbility of cooperatives to meet the challenge. Subsequently, in April 1980, six more commercial banks were natio~ralised to further expand the institutional credit structure to meet the Fast rising demand of rural credit. At present there are 28 public sector commercial banks comprising the 20 nationalised banks, and State Bank of India and its seven subsidiaries.

Cormrcial banks since natio~lalisation have made major strides in rural financing and have become a11 important source of rural finance alongwith cooperatives. At present ilearly 52 per cent of the direct institutional finance for agriculture is accounted for by the commercial banks through their branches in the rural areas and also through the medium of PACSs in tllejurisdictio~l of the weak CCBs. The operations of each rural branches of commercial banks are confined to about 15-20 compact villages, called the Service Area of the branch. Comnlercial banks provide short term lou~s and term loans. 'll~ey also participate in the government sponsored programmes such as Integrated Rural Development Programmes (IRDP), Comprehensive Crop Insurance Scheme (CCIS), Different Interest Rate Scheme (DIR) and the 20 Point Progralnme etc.

As at the end of June 1991, of the total commercial bank branches of 60,190 (8262 in June 1969), 58.4 per cent (22.2 per cent in June 1969) were rural branches. These rural branches mobilised rural deposits which were 15.3 per cent (3.1 per cent in June 1969) of the aggregate bank deposits of Rs.2,00,036 crore at the end of March 1991 (Rs.4665 crore in June,1969).

Of the total outstanding net bank credit of Rs.1,09,283 crore at the end of March 1991 (Rs.3599 crore at the end of June 1959), 39.2 per cent (14 per cent at the end of June 1969) was a~ricultural credit. The ~ooulation txr bank office at the end of June 1991 had come

Rural Credit -..

Credit Schemes down to 11,000 from 65,000 at the end of June 1969. The detailed role of commercial banks in rural banking is discussed in Unit 2.

1.7.3 Regional Rural Banks (RRBs)

In September 1975, Regional Rural Banks were established combining the good features of both cooperatives and commercial banks and for low cost of operation in rural credit. These banks were estdablished "for development of rural economy by providing for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural area, credit and other facilities paarticularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs". XIUS, these banks were set up exclusively for the benefit of small and marginal farmers and other weaker sections in the m a 1 area because it was felt that institutional credit agencies existing till then were not paying adequate attention to Ule weaker sections in providing credit. The RRBs also finance PACSs .and FSSs if the societies have a preponderance of smalllmarginal hrmers .and landless labourers etc. According to 1989-90 statistics, RRBs account for ahu t 5 per cent of direct institutional finance for agriculture.

The RRBs axe opened with the joint participation of commercial banks, state government and the central government. The authorised capital of every RRB is Rs. 5 m r e while the issued capital is Rs.1 crore of which 50 per cent is subscribed by the central government, 35 per cent by the sponsoring commercial bank and 15 per cent by the concerned state government.

The operations of each RRB are confined to one or two districts only. RRBs provide both short term and term loans. They also participate in government sponsored programmes such as Integrated Rural Development Programme (IRDP), Comprehensive Crop Insurance Scheme (CCIS), Differential Interest Rate Scheme (DIR), and the 20 Point Programme etc.

At the end of Sept. 1990, there were 196 RRBs (6 in 1975) operating in the country covering 380 districts (12 in 1975) with 14,511 branches (17 in 1975).

The aggregate deposits wre Rs.4267 crore and the outstanding credit was Rs.3547.5 crore at the end of Sept.1990. Their overdues were 32.7 per cent. The viability of these banks continue to be a cause of anxiety. Out of the 196 RRBs, only 44 were making profits while the remaining 152 were in loss.

1.7.4 National Bank for Agriculture and Rural Development (NAB ARD)

The NABARD was set up on July 12,1992 because the need for taking +an integriated view was felt with the growing involvement of banking system in rural financing. It took over functions of the erstwhile Agriculture Credit Department, Rural Planning and Credit Cell of the RBI and the Agricultural Refinance and Development Corporation (ARDC), the associate institution of the RBI.

NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in the rural areas. It serves as an apex refinancing agency for institutions providing investment and production credit for promoting various developmental activities in the rural areas; takes measures towards institutions building for improving absoqtive capacity of Credit Delivery System including monitoring, formulation of rehabilitation schemes, restructuring ~f credit institutions, training of persomel etc; coordinates rural financing activities of d l the institutions engaged in the developmental work at field level and maintains liaison with the Centrd GovernrnentlState Governments, RBI and other national institutions concerned with policy formulation; and also undertakes monitoring .and evaluation of projects refinanced by it.

1.7.5 Reserve Bank of India (RBI)

The Reserve Bank of India through its Rural Credit Dep.utment plays a significant role in providing support to rural credit. Until the establishment of the NABARD in July, 1982, the RBI acted as the apex bank for rural credit. It provided refinance facilities to the cooperative credit system and the regional rural banks at a concessional rate of interest for

seasonal agricultural operations and for investment in agriculture. It maintained two separate funds; (i) National Agricultural (Long Term Operations) Fund for providing loan ;~ssistiance to cooperative credit institutions for investment; and (ii) National Agricultural Credit (Stabilization) Fund for providing relief as medium term loans to enable the cooperative to convert the short tenn loans of the farmers into medium term loans at the time of natural calainities resulting into more than 50 per cent of crop loss.

The Reserve Bank of India as the Central Bank of the country plays a crucial role in the sphere of rural credit by giving overall direction to rural credit and financial support to NABARD for its operations.

NABARll's refilunce is available to the SLDBs, SCBs scheduled CBs and RRBs. While the ultimate beneficiaries of investment crcdit can be individuals, partnership concerns, companies and slate owned corporations or cooperative societies, production credit is generally given to individuals. It provides refinance for short term loans (not exceeding 18 u

months ) and medium term loans (not exceeding 5 years) to credit cooperatives and RRBs; and for term loans (not exceeding 25 years) on schematic basis to all credit institutions. ' I le important schemes that are covered for refinance by the NABARD are - minor irrigation; land development/Co~mnand Area Development; farin mechanisation; planlation/horticulture; poultrylsheep breediilg/piggery; fisheries; dairy development; storagelmiket years; IRDP and other schemes.

NARARD provides credit for promotion of agriculture, small sc-ale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas. It also provides long term assistance in the form of loans to State (;overninents (not exceeding 20 years) for contribution to share capital of cooperative credit institutions. It also provides medium term loans to cooperatives for stabilisation arrangement. It mainlains a Research and Development Fund for research in agriculture and rural development. The assistance obtained, from the International Development Agency (IDA) and World Bank, for agricuture and rural development is routed through NABARD.

'Tile NABARD is owned by the Central Government and the RBI. The authorised share capital d NABARD is Rs.500 crore and paid up capital is Rs.100 crore contributed equally by the RBI and the Central Govemnent. Deposits received from the Central Government and the State Governments are also a source of their resources. ' I le ndtiorlal bank also raises resources through market borrowings by floating bonds and debentures. Borrowings from the RBI and Government of India are other sources of their resources.

NABARD operates throughout the country through its 16 regional offices located in the capitals of all the major states and three sub-offices. District level offices numbering 114 have also been opened by the NABARD to prepare potential linked credit plans for each district.

Term loan disbursement of NABARD by way of refinance under schematic lendings was Rs.1702 crore during the financial year 1989-90. Refinance commitments under the new schemes approved during the same period were &.2039 crore. Refinance provided for implementatioi~ of the IRDP touched Rs.549 crore during the period.

1.7.6 Governmental Support to Rural Credit

Govenlmeilt entered the field of agricultural credit primarily to provide relief from distress caused by droughts, floods and other natural calamities. The loans were called as Takavi. Advancing of loans by the government to finance the emergent needs of agricvlturists on a regulaar basis began towards the end of' the 19th century.

Startiilg as loans to provide relief to the agricullurists who were adversely affected by famine, floods and other natural calamities and to assist them to tide over emergencies, takavi loans (Govetnment loans) subsequently became regular loans for productive purposes. The Government departments namely revenue and community development which handled Takavi loans are burdened with multifarious duties resulting in too much delay in the disbursement of loans and inadequate supervision or lack of coordination to ensure proper use of loans. The committee on Takavi lom and cooperative credit appointed by Lhe Government of India in 1961 recommended the discontinuance of Takavi

Run1 Credit

Credit Schemes loans for normal production and land improvement purposes to agriculturistis direct and suggested that, barring certain exceptional cases, funds available with the governinent for granting loans to agriculturists should be utilised to supplement the resources of cooperatives. Therefore, the governmental efforts since then have been directed inore towards strengthening of institutioiral credit framework by way of financial and legislative support rather that1 coming up as an agency for direct lending to farmers.

With a view to ensuring increased flow of credit for the agricultural development programmes and to improve the income opportunities of the rural poor, both centrial and the State Governments have been taking several measures, important amollg thein are summarized as follows:

1) Cooperative laws have been amended to provide for universal inen~bership to enable sinall rind inarginal farmers, tenmt cultivators, agricultural labourers, rural artisans etc. to become members without facing procedural problems.

2) Some state governments provide long lerm loans to persons belonging lo weaker sections to enable them to purchase shares and become members of cooperatives.

3) Cooperative loans provide for reservation of seats on the managing committee of credit cooperatives for the representatives of the weaker sections.

4) Governinent subsidies are provided for the poorest of weaker sections such as tribals a ~ d scheduled castes to relieve their interest burden on institutional loans.

5) In appropriate cases, managerial subsidies *are also provided to cooperatives in the initial stages of their organisation.

6) The Cencrial Government provides assistance to institutional credit agencies through plan schemes in the banking sector and cooperative sector. In the banking sector, loans are given to NABARD to meet its refinance obligations and for sl~.are capital to RRBs. In the cooperative sector the Central Government and State Government provides resources to the LDBs on a matching basis by investment in debentures floated by them.

7) In order to correct the regional iinbal.ance in the cooperative development, Central Government provides assistance to CCBs, located in the identified weak areas to cover the deficit in their interest resources to enable thein to borrow from tile NABARD for their loatling programmes. A term loan at concessional rate is released to the State Governments who, in turn, together with their matchins contribution utilize it for augmenting the internal resources of CCBs.

8) In order to give relief to cultivators whose capacity to repay the production loans is impaired due to natural calamities leading to crop failure, agricultural credit stabilization funds have been constituted at v.arious levels of the cooperative credit structure and at the national level in the NABARD. The short term dues of the cultivators are converted into medium term loans by recourse to the agricultural credit stabilization funds at a prescribed proportion. l l ~ e CCBs atld the SCBs meet 25 percent of the conversion, the NABARD, 60 per cent and tl~e S Pate Government, 15 per cent.

Under the Central Scheme, the Central Government provides financial assistance by way of subsidy (75%) and long term loans (25%) for building up the stabilization funds of the SCBs. The loan is payable in 25 years of which for the first 10 years only Ule interest is payable. Government subsidy ranging between 25 per cent and 33 per cent of the cost of investment is provided to the selected beneficiaries under the comprehenqive Integrated Rural Development Programme (IRDP) which envisages a package of assistance to the nual population living below poverty line.

Thus, the strategy of government is to provide assistance to institutional credit agencies through plan schemes to improve the economy of the rural areas through a package of infrastructure on farm development activities with the ob-jectives of optimum utilisation of land, water, human and livestock resources.

I .is1 agci~cics 111;~L ],roviclc r'ural crcrlit.

Stale (lit* rolc o l NiZI3AKI).

Wha( is (!ic cotllrihulion 01' s(a(c i n pro\-iding crctli! lo rur.~i pcol-)!i:'.'

1.8 SUMMARY.

In this unit we have covered the following points:

1) Rural credit is key to development of ma1 sector.

2) Risks are higher in agriculture than in industry.

3) Majority of agricultural holdings in India are margin4al and small. Therefore, credit schemes have to be designed to suit their specific needs.

4) Every type of productive activity in agricultural and allied sector is now covered for providing credit support by credit agencies.

5 ) Agricultural credit requirements in India are growing fast and that non-institutional agencies ae still active in meeting agricultural credit needs.

6 ) Multi-agency system of rural credit has shown impressive per1orinance in meeting the challenge of growing credit requirements in the country.

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1.9 ANSWERS TO SAQs

Ruri~l Credit

Refer respective text in the unit.