Rural Finance in Indian Economy

Rural Finance In Indian Economy
To revise the financial capability of the lending agencies in rural ares to analysis the
drawbacks & advantage of flow of credit in rural areas.
The rural credit system should be strengthen
To study the role of rural finance in Indian Economy.
Assigned project task is completed by going through various books, committee

reports regarding Indian agriculture & non-farming sector, also role of various financial
institutions in this grassland.
The project report entitled here is purely study project and does not include any
predictions or forecast regarding the future trends in the rural sector.
The project is based on various references taken from book & reports mentioned in
the bibliography at the end of the assign project.
1.0 Meaning of an Underdeveloped Economy:
There is a big difference between underdeveloped and developed countries. The

United Nations group of experts states, We have had some difficulty in interpreting the term
underdeveloped countries. We frankly consider that, per capita real income is low when
compared with the per capita real incomes of the United States of America, Canada, Australia
& Western europe. Briefly a poor country.
The term underdeveloped countries is relative. In practical, those countries which
have real per capita incomes less than a quarter of the per capita income of the United States,
are underdeveloped countries. But recently UN publication prefer to describe them as
Developing economies. The term developing economies signifies that though still
underdeveloped, the process of development has been initiated in these countries. Thus, we
have two economies developing economies & developed economies. The World Bank
issued in its World Development Report (1991) classified the various countries on the basis of
Gross National Product (GNP) per capita. Developing countries are divided into: (a) Low
income countries with GNP per capita of $580 and below in 1989; and Middle income
countries with GNP per capita ranging between $ 580 and $ 6,000. As against them, the
High-income Countries which are mostly members of the Organisation for Economic Cooperation and development (OECD) and some others have GNP per capita of more than $
6,000.
The above data given in the table noted that in 1989 low income countries comprise
nearly 57 percent of the world population (2,948 million), but account for only 5 percent of
total world GNP. The middle income countries, which are less developed than the highly
developed than the low income countries comprise about 21 percent of world population but
account for 11 percent of world GNP. Taking these two groups which are popularly described
as developing economies or underdeveloped economies, it may be stated that they comprise
over three-fourths of the world population but account for about one-sixth of the world GNP.
Most countries of Asia, Africa, Latin America and some countries of Europe are included in
them.
Distribution of World Population & World GNP among various groups of Countries in 1989
GNP
Total
GNP
(Billion US Population Capita

$)
981 (4.7)
(million)
2,948
(US $)
330
2. Middle Income Economies
2,253
(56.6)
1,105
2,040
3. High Income Economies
(10.9)
15,230
(21.2)
831 (16.0)
18,330
1. Low Income Economies
(73,4)
Per
4. Other Economies
___
323 (6.2)
___
World
20,736
5,206
3,980
India
(100.0)
283 (1.4)
(100)
832 (15.9)
340
India with its population of 832 million in 1989 and with its per capita income of $340 is
among poorest of the economies of the world. It had a share of 15.9 per cent in world
population, but a little more than 1 percent of world GNP.
Three observation made here regarding the U.N. classification of developed and
developing countries on the basis of per capita income. First, there is gross inequality of
incomes between the rich and the poor countries. Second, the gap in per capita income (and
naturally in the level of living) between the rich and poor countries is even widening over the
yearsthe annual rate of growth of per capita income of the rich countries was higher during
1965-89 as compared with the poor countries. More recently, the growth rate among lowincome countries has also shown an increase and if this is sustained, the gap may show a
decline over a period. Third, all the high income countries are not necessarily developed
countries. For instance, the high income oil-exporting countries have high per capita income
but this is mainly due to their exports of oil; really speaking, they are not developed
economies. Recently, with a decline in world oil prices, the GNP per capita has started
showing a decline in this group.
Definition:
A country which has good potential prospects for using more capital or more labour or
more available natural resources, or all of these, to support its present population on a higher
level of living or if its per capita income level is already fairly high, to support a large
population on a not lower level of living. As per this definitions the problem of development
is mainly the problem of development is mainly the problem of poverty and prosperity. The
basic criterion then becomes whether the country has good potential prospects of raising per
capita income, or of maintaining an existing high level of per capita income for an increased
population.
1.1 Basic Characteristics Of The Indian Economy As An Underdeveloped Economy:
India is an underdeveloped economy. Its is a vast country having an area of 3.3
million sq. km. It has almost 5,76,000 villages. The population of India is widely scattered
over villages and towns. Nearly 75% of the population lives in rural & semi urban areas,
while the rest lives in towns. There is doubt that the bulk of its population lives in conditions
of misery. Poverty is not only acute but is also a chronic malady in India. At the same time,
there exist unutilized natural resources. It is, therefore, quite important to understand the
basic characteristics of the Indian economy, treating it as one of the underdeveloped but
developing economies of the world.
1. Low per capita income:- Underdeveloped economies are marked by the existence of
low per capita income. The per capita income of an India is lowest in the world. The
per capita income in Switzerland in 1989 was about 88 times, in West Germany about
60 times, in U.S.A. 61 times and in Japan 70 times of the per capita income in India.
It is also important that developed economies are growing at a faster rate than the
Indian economy and as a consequence, the disparity in the levels of income has
become wider during period 1960-89.
2. Occupational pattern:- Primary producing. One of the basic characteristics of an
underdeveloped economy is that it is primary producing. A very high proportion of
working population is engaged in agriculture, which contributes a very large share in
the national income. In India, in 1981, about 71 per cent of the working population
was engaged in agriculture and its contribution to national income was 36 per cent. In
Asia, Africa and Middle East countries countries from two-thirds to more than fourfifths of the population earn their livelihood from agriculture, and in most Latin
American countries from two-thirds to three-fourths of population engaged in
agriculture in developed countries is much less than the proportion of population
engaged in agriculture in underdeveloped countries.
3. Heavy Population pressure:- The main problem in India is the high level of birth rates
coupled with a falling level of death rates. The rate of growth of population which
was about 1.31 per cent per annum during 1941-50 has risen to 2.11 per cent during
1981-91. The chief cause of this rapid spurt to population growth is the steep fall in
death rate from 49 per thousand during 1911-20 to 9.6 per thousand in 1990; as
compared to this, the birth rate has declined from about 49 per thousand during 191120 to 29.9 per thousand in 1990. The fast rate of growth of population necessitates a
higher rate of economic growth in order to maintain the same standard of living of the
population. To maintain a rapidly growing population, the requirements of food,
clothing, shelter, medicine, schooling, etc. all rise. Thus, a rising population imposes
greater economic burdens and, consequently, society has to make a much greater
effort to initiate the process of growth.
4. Prevalence of chronic unemployment and underemployment: In India labour is an

abundant factor and, consequently, it is very difficult to provide gainful employment
to the entire working population. In developed countries, unemployment is of a
cyclical nature and occurs due to lack of effective demand. In India unemployment is
structural and is the result of a deficiency of capital. The Indian economy does not
find sufficient capital to expand its industries to such an capacity that the entire
labour force is absorbed.
5. Low rate of capital formation: Another basic characteristic of the Indian economy is
the existence of capital deficiency which is reflected in two ways first, the amount
of capital per head available is low; and secondly, the current rate of capital formation
is also low. Following table reveals that gross capital formation in India is less than
that of developed countries.
Gross Domestic Investment and Saving (As per cent of Gross Domestic Product)
Gross Domestic
Gross Domestic
Investment
As
Saving
1965
1989
1965
1989
Japan
28
33
30
34
Australia
26
26
23
23
Germany
23
22
23
27
U.S.A.
12
15
12
13
U.K.
13
21
12
18
India
17
24
15
21
per Colin Clark to maintain the same level of living a country requires an additional
investment of 4 percent per annum if its population increases at the rate of 1 percent per
annum. In a country like India where the rate of population growth is 2.11 percent (during
1981-91), about 8 percent investment is needed to offset the additional burdens imposed by a
rising population. Thus, India required as high as 14 percent level of gross capital formation
in order that it may cover depreciation and maintain same level of living. A still higher rate of
gross capital formation alone can give a way for economic growth to improve living standard
of the population.
2.0 History Of The Rural Economic Structure Of India

2.1 Indian Economy in the Pre-British period:The Indian economy in the pre-British period consisted of isolated and self-sustaining
villages on the one hand, and towns, which were the seats of administration, pilgrimage,
commerce and handicrafts, on the other. Means transport & communication were highly
underdeveloped and so the size of the market was very small..
a. The structure and organization of villages: The village community was based on a
simple division of labour. The farmers cultivated the soil and tended cattle. Similarly,
there existed classes people called weavers, goldsmiths, carpenters, potters, oil
pressers, washer men, cobblers, barber-surgeons, etc. All these occupations were
hereditary and passed by tradition from father to son. Most of the food produced in
the village was consumed by the village population itself.
The raw materials
produced from primary industries were the feed for the handicrafts. Thus
interdependence of agriculture and hand industry provided the basis of the small
village republics to function independently. The villages of India were isolated and
self-sufficient units which formed an enduring organization. But this should not lead
us to the conclusion that they were unaffected by wars or political decisions. They did
suffer the aggressors and were forced to submit to exactions, plunder and extortion,
but the absence of the means of transport and communications and a centralized
government helped their survival.
b. Classes of Village India: There were three distinct classes in village India: (i) the
agriculturists, (ii) the village artisans and menials, and (iii) the village officials. The
agriculturists could be further divided into the land-owning and the tenants. Labour
and capital needed was either supplied by the producers themselves out of their
supplied by the producers themselves out of their savings or by the village
moneylender. These credit agencies supplied finance at exorbitant rates of interest but
since the moneylender and the landlord were the only sources of credit, the peasants
and even the artisans were forced to depend on them. The village artisans and menials
were the servants of the village. Most of the villages had their panchayats or bodies
of village elders to settle local disputes. The panchayats were the court of justice.
2.2 Industries & handicrafts in Pre-British India:
The popular belief that India had never been an industrial country, is incorrect. It was true
that agriculture was the dominant occupation of its people but the products of Indian
industries enjoyed a worldwide reputation. The muslim of Dacca, the calicos of Bengal, the
sarees of Banaras and other cotton fabrics were known to the foreigners. The chief industry
spread over the whole country was textile handicrafts. The textile handicrafts includes
chintzes of Lucknow, dhotis and dopattas of Ahmedabad, silk, bordered cloth of Nagpur and
Murshidabad. In addition to cotton fabrics, the shawls of Kashmir, Amritsar and Ludhiana
were very famous. India was also quite well-known for her artistic industries like marblework, stone-carving, jewellery, brass, copper and bell-metal wares, wood-carving, etc. The
cast-iron pillar near Delhi is a testament to the high level of metallurgy that existed in India.
In this way Indian industries, Not only supplied all local wants but also enabled India to
export its finished products to foreign countries.
Decline Of Indian Handicrafts And Progressive Ruralisation Of The Indian Economy:
Before the beginning of Industrial Revolution in England, the East India Company
concentrated on the export of Indian manufactured goods, textiles, spices, etc., to Europe
where these articles were in great demand. But the Industrial Revolution reversed the face of
Indians foreign trade.
Tremendous expansion of productive capacity of manufactures
resulted in increased demand of raw materials for British industry and the need to capture
foreign markets. Following principal causes that led to the decay of handicrafts were as
follows:a. Disappearance of Princely courts: The growth of industries is only possible due to
patronage of nawabs, princes, rajas & emperors who ruled in India. The British rule
meant the disappearance of this patronage enjoyed by the handicrafts. Cotton and silk
manufactures suffered especially.
b. Competition of machine-made goods: The large-scale production that grew as a result
of Industrial Revolution meant a heavy reduction in costs. It also created a gigantic
industrial organization and, consequently, the machine-made goods began to compete
with the products of Indian industries nad handicrafts. This led to the decline of
textile handicrafts. Whereas the British emphasized the free import of machine-made
manufactured goods they did not allow the import of machinery as such. The decline
of Indian handicrafts created a vaccum which could be filled by the import of British
manufactures only.
c. The development of new forms and patterns of demand as a result of foreign
influence: With the spread of education, a new classs grew in India which was keen to
imitate western dress, manners, fashions and customs so as to identify itself with the
British officials. This led to a change in the pattern of demand. Indigenous goods
went out of fashion and the demand for European commodities got a fillip. Besides,
there was a loss of demand resulting from the disappearance of princely courts and
nobility. Thus, the British rule, silently but surely, alienated the Indians not only from
Indian culture but also diverted in its favour their form and pattern of demand for
goods.
2.3 Indian Population an Overview:India is one of the most populated countries in the world, next only to China.
Although India occupies only 2.4% of the total area of the world it supports over 15% of the
world population, as revealed by statistics. India is land of diversity, spread across its cultures,
landscape, languages and religion. India has been invaded from the Iranian plateau, Central
Asia, Arabia, Afghanistan, and the West. The Indian people have absorbed these influences
producing a remarkable racial and cultural synthesis. Religion, caste, and language are major
determinants of social and political organization in India today. The government has
recognized 16 languages as official; Hindi is the most widely spoken.
Although Hinduism is the popular religion, comprising 83% of the population, India is also
home to one of the largest population of Muslims in the world--- more than 120 million. The
population also includes Christians, Sikhs, Jains, Buddhists, and Parsis. The caste system
reflects Indian historical occupation and religiously defined hierarchies. Traditionally, there
are four castes identified, plus a category of outcastes, earlier called "untouchables" but now
commonly referred to as "dalits," the oppressed. In reality, however, there are thousands of
sub-castes and it is with these sub-castes that the majority of Hindus identify. Despite
economic modernization and laws countering discrimination against the lower end of the
class structure, the caste system remains an important factor in Indian society. Poverty is one
of the major problems facing India. An estimated 30-40 percent of the population lives in
poverty. Four out of five of India's poor live in rural areas. About 70% of the people live in
more than 550,000 villages, and the remainder in more than 200 towns and cities.
Statistics
Population: 966,783,171 (July 1997 est.)
Age structure: 0-14 years: 35% (male 173,420,822; female 163,433,648)
15-64 years: 61% (male 304,048,569; female 281,625,342)
65 years and over: 4% (male 22,536,104; female 21,718,686) (July 1997est.)
Population growth rate: 1.72% (1997 est.)
Birth rate: 26.19 births/1,000 population (1997 est.)
Death rate: 8.87 deaths/1,000 population (1997 est.)
Net migration rate: -0.08 migrant(s)/1,000 population (1997 est.)
Sex ratio: at birth: 1.05 male(s)/female
under 15 years: 1.06 male(s)/female
15-64 years: 1.08 male(s)/female
65 years and over: 1.04 male(s)/female
total population : 1.07 male(s)/female (1997 est.)
Infant mortality rate: 65.5 deaths/1,000 live births (1997 est.)
Life expectancy at birth: total population: 62.41 years male: 61.68 years female: 63.18 years
(1997 est.)
Total fertility rate: 3.29 children born/woman (1997 est.)
3.0 Natural Resources In Process Of Economic Development In Rural India:

To ahieve the development in national output, it is essential to combine natural
resources, human resources & capital. The existence or the absence of favourable natural
resources can facilitate or retard the process of economic development. Natural resources
include land, water resources, fisheries, mineral resources, forests, marine resources, climate,
rainfall and topography.
1.
Land Resources: The total geographical area of India is about 329 million hectares, but
statistical information regarding land classification is available for only about 305
million hectares; this information is based partly on village papers and partly on
estimates. We can explain land utilization pattern from the following table:Land utilization pattern, 1986-87 (million hectares)
Particulars
Area
Percent
1. Total geographical area
329
--
2. Total reporting area
305
100
3. Barren land not available for cultivation
41
13
4. Area under forests
67
22
5. Permanent pastures and grazing land
12
6. Culturable waste lands, etc.
19
7. Fallow lands
26
8. Net area sown
140
46
9. Area sown more than once
37
12
10. Total cropped area (8+9)
177
58
2.
Forest Resources: Forest are an important natural resource of India. They have a
moderating influence against floods and thus they protect the soil against erosion.
They provide raw materials to a number of important industries, namely, furniture,
matches, paper, rayon, construction, tanning, etc. The total area under forests was 67
million hectares in 1986-87 which was about 22 percent of the total geographical
area, a recent estimate has put it at 75 million hectares or 23 percent of the total
geographical area. Forests in India are mostly owned by states (95%); a small portion
is under the ownership of corporate bodies and private individuals.
3. Water Resources: India is one of the wettest countries in the world, with average annual
rainfall of 1100 m.m.
Indias water policy, since Independence, has mainly
concentrated on highly visible large dams, reservoirs and canal systems, but has
ignored minor water works such as tanks, dugwells and tubewells.
4. Fisheries: Broadly speaking, fishery resources of India are either inland or marine.
The principal rivers and their tributaries, canals, ponds, lakes, reservoirs comprise the
inland fisheries. The rivers extend over about 17,000 miles, and other subsidiary
water channels comprise 70,000 miles. The marine resources comprise the two wide
arms of the Indian Ocean and a large number of gulf and bays along the coast. About
1.8 million fishermen draw their livelihood from fisheries, though they generally live
on the verge of extreme poverty. Out of a total catch of 3 million tones of fish in
1988-89, over 1 million tones came from inland fisheries and nearly 2 million tones
from marine sources. India is the seventh largest producer of fish in the world and is
second in inland fish production, which contributes 45 per cent of total production in
the country. Fish production reached the level of 5.4 million tonnes in 1997-98,
comprising 3.0 million tonnes of marine fishery and 2.4 million tonnes of inland
fishery and is expected to reach 5.6 million tonnes in 1998-99 with 3.0 million tonnes
of marine fishery and 2.6 million tonnes of inland fishery, respectively. During 199899, the export of marine products came down to US$ 1,038 million from US$ 1,208
million during 1997-98
3.1 Infrastructure In Process Of Economic Development In Rural India:

The prosperity of a Rural India depends directly upon the development of agriculture
and industry. Agricultural production, however, requires power, credit, transport facilities,
etc. Industrial production requires not only machinery & equipment but also skilled manpower, management, energy, banking facilities, marketing facilities, transport services which
include railways, roads, shipping, communication facilities, etc. All these facilities and
services constitute collectively the infrastructure of an economy and the development and
expansion of these facilities are an essential pre-condition for increasing agricultural &
industrial production in a rural area.
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Types of Infrastructural facilitiesoften referred towards economic and social development

of rural India:
1. Energy: The most important single factor which can act constraint on economic
growth of a country is the availability of energy. There is a direct correlation between
the degree of economic growth, the size of per capita income and per capita
consumption of energy. Since energy is an essential input of all productive economic
activity, the process of economic development inevitably demands increasing higher
levels of energy consumption. There are broadly two sources of energy commercial
energy & non-commercial energy. Following are the various commercial energy:coal & lignite, Oil & gas, Hydro-electric resource, Uranium. & non-commercial
energy are Fuelwood, Agricultural wastes, Animal dung.
2.
Power: Electric power, which is one form of energy, is an essential ingredient of

economic development and, it is required for commercial and non-commercial uses.
Commercial uses of power refer to the use of electric power in industries, agriculture
and transport. Non-commercial uses include electric power required for domestic
lighting, cooking, use of mechanical gadgets like the refrigerators, air conditioners,
etc. With the growth of population and with the increase in the use of modern
gadgets in daily life, it is quite natural that the demand for electricity for domestic use
should grow at a fast rate.
3. Transport: If agriculture and industry are regarded as the body and the bones of the
economy, which help the circulation of men and materials. The transport system
helps to broaden the market for goods and by doing so, it makes possible large-scale
production through division of labour. It is also essential for the movement of raw
materials, fuel, machinery etc., to the places of production. The more extensive and
continuous the production in any branch of activity the greater will be the need for
transport facilities. Transport development helps to open up remote regions and
resources for production. Regions may have abundant agricultural, forest and mineral
resources but they cannot be developed if they continue to be remote and
inaccessible.
Modes of transport & communication facilities:
Indian Railways: The most important form of transport system in India is the
Indian railways, which is also the countrys largest single undertaking with a capital
investment of around Rs. 15,000 crores. In 1950-51, railway route length was 53,600
kms but by 1990-91 it had increased to nearly 62,400 kms-an increase at the rate of
0.4 percent per annum.
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Roads & Road Transport: Road transport plays an important role in rural economy of
country, since it is most suitable for short distances. It has also the advantage of doorto-door service, flexibility, speed and reliability.
The utility of other modes of
transport such as railways, internal waterways, ports, etc. increase when linked to the
road transport system. Road construction and maintenance generate sizeable
employment opportunitiesfactor of great importance in the context of growing
population and growing unemployment in the country. The rural road network now
connects about 70 percent of our villages.
Inland water transport: Inland water transport is the cheapest mode of transport, for
both long and short distances, so far as the points of origin and destination of traffic
are concerned. It is cheap as energy consumption is low. India has over 14,500 kms.
Of navigable inland waterways comprising a variety of river systems, canals,
backwaters, creeks, etc.
4.
Communications: The communication system comprises posts and telegraphs,

telecommunication system, broad casting, television and information services. By
providing necessary information about the markets and also supplying necessary
motivation, the communication system helps to bring buyers and sellers together
effectively and helps to accelerate the growth of the economy.
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4.0 Microfinance In An Indian Context:Microfinance institutions (MFIs), specialised financial institutions that serve the poor,
derive from the success of some micro enterprise credit programmes performed mainly by
practitioners in developing countries. microFinance (mF) is being practiced as a tool to attack
poverty the world over. During the last two decades, substantial work has been done in
developing and experimenting with different concepts and approaches to reach financial
services to the poor, thanks mainly to the initiatives of the Non-Governmental Organisations
(NGOs) and banks in various parts of the country.
Despite having a wide network of rural bank branches in the country and
implementation of many credit linked poverty alleviation programmes, a large number of the
very poor continue to remain outside the fold of the formal banking system. Various studies
suggested that the existing policies, systems and procedures and the savings and loan products
often did not meet the needs of the hardcore and assetless poor. Experiences of many antipoverty and other welfare programmes of the state as well as of international organisations
have also shown that the key to success lies in the evolution and participation of community
based organizations at the grassroots level.
Micro-finance and Poverty Alleviation:
Most poor people manage to mobilize resources to develop their enterprises and their
dwellings slowly over time. Financial services could enable the poor to leverage their
initiative, accelerating the process of building incomes, assets and economic security.
However, conventional finance institutions seldom lend down-market to serve the needs of
low-income families and women-headed households. They are very often denied access to
credit for any purpose, making the discussion of the level of interest rate and other terms of
finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms
of loan as the lack of access to credit itself.
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The lack of access to credit for the poor is attributable to practical difficulties arising
from the discrepancy between the mode of operation followed by financial institutions and the
economic characteristics and financing needs of low-income households. For example,
commercial lending institutions require that borrowers have a stable source of income out of
which principal and interest can be paid back according to the agreed terms. However, the
income of many self employed households is not stable, regardless of its size. A large number
of small loans are needed to serve the poor, but lenders prefer dealing with large loans in
small numbers to minimize administration costs. They also look for collateral with a clear title
- which many low-income households do not have. In addition bankers tend to consider low
income households a bad risk imposing exceedingly high information monitoring costs on
operation.
In other words, although microfinance offers a promising institutional structure to
provide access to credit to the poor, the scale problem needs to be resolved so that it can reach
the vast majority of potential customers who demand access to credit at market rates. To be
successful, financial intermediaries that provide services and generate domestic resources
must have the capacity to meet high performance standards. They must achieve excellent
repayments and provide access to clients. And they must build toward operating and financial
self-sufficiency and expanding client reach. In order to do so, microfinance institutions need
to find ways to cut down on their administrative costs and also to broaden their resource base.
Cost reductions can be achieved through simplified and decentralized loan application,
approval and collection processes, for instance, through group loans which give borrowers
responsibilities for much of the loan application process, allow the loan officers to handle
many more clients and hence reduce costs.
Savings facilities make large scale lending operations possible. On the other hand,
studies also show that the poor operating in the informal sector do save, although not in
financial assets, and hence value access to client-friendly savings service at least as much
access to credit. Savings mobilization also makes financial instituttions accontable to local
shareholders. Therefore, adequate savings facilities both serve the demand for financial
services by the customers and fulfill an important requirement of financial sustainability to
the lenders. Microfinance institutions can either provide savings services directly through
deposit taking or make arrangements with other financial institutions to provide savings
facilities to tap small savings in a flexible manner.
Convenience of location, positive real rate of return, liquidity, and security of savings
are essential ingredients of successful savings mobilization. Once microfinance institutions
are engaged in deposit taking in order to mobilize household savings, they become financial
intermediaries. Consequently, prudential financial regulations become necessary to ensure the
solvency and financial soundness of the institution and to protect the depositors.
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Governments should provide an enabling legal and regulatory framework which

encourages the development of a range of institutions and allows them to operate as
recognized financial intermediaries subject to simple supervisory and reporting requirements.
One way of expanding the successful operation of microfinance institutions in the
informal sector is through strengthened linkages with their formal sector counterparts. A
mutually beneficial partnership should be based on comparative strengths of each sectors.
Informal sector microfinance institutions have comparative advantage in terms of small
transaction costs achieved through adaptability and flexibility of operations. They are better
equipped to deal with credit assessment of the urban poor and hence to absorb the transaction
costs associated with loan processing. On the other hand, formal sector institutions have
access to broader resource-base and high leverage through deposit mobilization.
Therefore, formal sector finance institutions could form a joint venture with informal
sector institutions in which the former provide funds in the form of equity and the later
extends savings and loan facilities to the urban poor. Another form of partnership can involve
the formal sector institutions refinancing loans made by the informal sector lenders. Under
these settings, the informal sector institutions are able to tap additional resources as well as
having an incentive to exercise greater financial discipline in their management. Microfinance
institutions could also serve as intermediaries between borrowers and the formal financial
sector and on-lend funds backed by a public sector guarantee.
Weaknesses of Existing Microfinance Models
One of the most successful models discussed around the world is the Grameen type.
The bank has successfully served the rural poor in Bangladesh with no physical collateral
relying on group responsibility to replace the collateral requirements. The brief idea about
Grameen is given in the next part of this report. This model, however, has some weaknessed.
It involves too much of external subsidy which is not replicable Grameen bank has not
oriented itself towards mobilising peoples' resources. The repayment system of 50 weekly
equal instalments is not practical because poor do not have a stable job and have to migrate to
other places for jobs. If the communities are agrarian during lean seasons it becomes
impossible for them to repay the loan. Pressure for high repayment drives members to money
lenders. Credit alone cannot alleviate poverty and the Grameen model is based only on credit.
Micro-finance is time taking process. Haste can lead to wrong selection of activities and
beneficiaries.
Another model is Kerala model (Shreyas). The rules make it difficult to give adequate
credit {only 40-50 percent of amount available for lending). In Nari Nidhi/Pradan system
perhaps not reaching the very poor. Most of the existing microfinance institutions are facing
15
problems regarding skilled labour which is not available for local level accounting. Drop out
of trained staff is very high. One alternative is automation which is not looked at as yet. Most
of the models do not lend for agriculture. Agriculture lending has not been experimented.
Risk Management : yield risk and price risk
Insurance & Commodity Future Exchange could be explored
All the models lack in appropriate legal and financial structure. There is a need to
have a sub-group to brainstorm on statutory structure/ ownership control/ management/
taxation aspects/ financial sector prudential norms. A forum/ network of micro-financier (self
regulating organization) is desired.
5.0 Rural Market Contribution In Total Indian Economy

When you consider a rural market then the measure part of the rural buiness directly or
indirectly connected with agriculture. In this condition,whenever you study about rural market
you have to consider the impact of agriculture towards Indian Economy.
5.1 Profile of Rural people:-If we classify the rural people by their occupation, we find
cultivators as the predominant occupation group who account 72% of rural households.
Distribution of rural households by their profession or business activity
Occupation
Percentage of Households
Cultivators
72
Agricultural labourers
15
Other non-cultivators
11
Artisans
All house holds
100
However this group of cultivators contain both prosperous and well as marginal cultivators
within itself. This is rural Indias picture where 20% of rural households (mostly cultivators)
control about 66% of assets in rural India. In this way rural population broadly divided into 6
categories:
16
1.
Proprietors of land includes feudal tribute gatherers like zamindars, rich

moneylenders and traders who acquire large tracts of land and companies or persons
who own large populations.
2. Rich farmers who belong to dominant caste of the area.

3. Small peasants or marginal farmers owning uneconomic land holdings.
4. Tenant farmers operating on rented lands belonging to large land holders and working
on small uneconomic land holdings.
5. Agricultural labourers who work on lands of landlords and rich farmers.
6. Artisans and others, which include the unemployed also.
5.2 Stastitical Profile Of The Rural Business in India
TABLE: VILLAGE & SMALL INDUSTRIES (Production)

Industry
Unit #
<-------------------- Production --------------->
1973-74
1979-80
1984-85
1985-86
1990-91
1995-96!
M.Sq.Mtres
56.00
82.00
103.98
108.58
1088.8
1052.63
Value
(Rs. crores)
33.00
92.00
157.62
186.30
285.95
353.49
122.00
348.00
807.06
900.38
1994.06
356216
7020
Traditional
Industries:
Khadi
Village
Value
Industries
(Rs. crores)
Handlooms
Mill Meters
2100.00
2900.00
3600.00
3692.00
4888
Value
(Rs. crores)
840.00
1740.00
2880.00
2953.60
3633
Lakh Kgs. of
raw
29.00
48.00
76.70
78.97
12836
63.00
131.00
345.69
310.14
868
1065.00
2050.00
3500.00
3800.00
11325
Sericulture
13909
silk
(value
Rs.crores)
Handicrafts
Value
(Rs. crores)
17
25200

Coir
Lakh tonnes of
1.50
1.85
1.49
1.83
2.11
2.63
Value
(Rs. crores)
60.00
86.00
100.50
139.51
161.00
Value
(Rs. crores)
21.83
4447.00
7790.87
8289.93
16272.95
25553.489
Small Scale
Industries
Value
(Rs. crores)
7200.00
21635.00
50520.00
61228.00
155340
219968
Powerlooms
Mill Meters
2400.00
3450.00
4930.00
5886**
10988
17201
Value
(Rs. crores)
1980.00
3250.00
6423.00
7668.51
12337
Sub-total (B)
Value
(Rs. crores)
9180.00
24885.00
56943.00
64768.51
167677
219968
Total (VSI)
(Rs.
crores)
11353.00 29332.00 64733.87 73058.44
183949.95
245521.48
fibre
Sub-total (A)
Modern Industries:
TABLE: VILLAGE & SMALL INDUSTRIES (Employment)
Industry
Unit #
<-------------- Employment (Lakh persons) -------->
1973-74
1979-80
1984-85
1985-86
1990-91
8.84
11.20
13.05
15.00
14.15
1995-96
Traditional Industries:
Khadi
M.Sq.Mtres
Value
(Rs. crores)
Village
Value
Industries
(Rs. crores)
N.A.
9.27
16.13
18
24.84
25.50
34.42

Handlooms
Mill Meters
52.40
61.50
76.80
73.70
96.87
128.00
12.00
16.00
20.43
53.60
52.00
59.50
15.00
20.30
27.40
28.00
43.84
65.50
5.00
5.59
5.89
8.00
5.46
Value
(Rs. crores)
Sericulture
Lakh Kgs. of raw
silk
(value Rs.crores)
Handicrafts
Value
(Rs. crores)
Coir
Lakh tonnes of
fibre
N.A.
Value
(Rs. crores)
Sub-total (A)
Value
(Rs. crores)
Modern Industries:
Small Scale Industries
Value
(Rs. crores)
Powerlooms
Mill Meters
102.21
130.72
168.41
203.80
246.74
253.00
39.65
67.00
90.00
96.00
124.3
152.61
10.00
11.00
32.19
35.32
55.00
N.A.
Value
(Rs. crores)
5.3 Agricultural Impact on National Economy:

Agriculture is a backbone of the Indian Economy. It is important to note that importance is
given to industrialization in last four decades, agriculture is largest industry in the country.
5.4 Agricultural Production

The agricultural sector as a whole is estimated to record a real
growth rate of 6.6 per cent during 1998-99. The overall growth
in agricultural production during 1998-99 has been provisionally
estimated at 6.8 per cent, as against a negative growth rate of (-)
5.4 per cent during 1997-98. In spite of the damage caused to the
cotton crop in Punjab by excessive rains and unexpected cyclonic storms in Andhra Pradesh
19
in October 1998, cotton production was estimated to be higher at 13.3 million bales in 199899, as against 11.1 million bales produced in 1997-98. Similarly, the sugarcane output is
expected to touch 282.7 million tonnes during 1998-99, compared to 276.3 million tonnes
during 1997-98. The production of oilseeds is also likely to be higher at 25.3 million tonnes
during 1998-99, as against 22.0 million tonnes during 1997-98.
Foodgrains Production
The production of kharif foodgrains estimated at 102.5 million
tonnes during 1998 showed a marginal growth of 1.4 per cent
over the production achieved (101.1 million tonnes) in 1997.
The rabi foodgrains production for 1998-99 is expected to go up
to 98.4 million tonnes compared to 91.3 million tonnes in 199798. The foodgrains production is estimated to be 200.9 million tonnes in 1998-99 compared to
192.4 million tonnes during 1997-98, recording an impressive increase by 4.4 per cent
(Advance Estimates). During 1998-99, efforts have also been initiated by various government
agencies to double the food production in the next decade.
During 1998-99 rice production is estimated to increase to 84.5 million tonnes from 82.3
million tonnes produced in 1997-98, while the wheat production during 1998-99 is estimated
at 70.6 million tonnes, compared to the previous year's level of 65.9 million tonnes, an
increase by 7.1 per cent. Production of pulses in 1998-99 is expected to be around 15.2
million tonnes, as against 13.1 million tonnes during 1997-98.
Agricultural Production-Major crops (in million tonnes)
Year
Crops
1995-96
Achievement
1996-97
Target
Achieve
ment
1997-98
%
change
over
Target
Achievement
1995-96
%
change
over
Target
1998-99
Production
(Adv.
Est.)
1996-97
%
change
over
1997-98
Rice
77.0
81.0
81.7
6.1
83.0
82.3
0.7
84.2
84.5
2.7
62.1
65.0
69.4
11.8
68.5
65.9
(-) 5.0
70.0
70.6
7.1
34.1
17.6
33.5
31.1
(-) 8.8
34.3
30.6
Wheat
32.5
Coarse
Cereals
Pulses
Total
Foodgr-
29.0
29.0
12.3
15.0
14.2
15.4
15.0
13.1
(-) 7.7
15.5
15.2
16.0
180.4
193.5
199.4
10.5
200.0
192.4
(- 3.5
204.0
200.9
4.4
20

ains
Oilseeds
Sugarcane
Cotton*
22.1
23.0
24.4
10.4
25.5
22.0
(-) 9.8
27.0
25.3
15.0
281.1
270.0
277.6
(-) 1.2
280.0
276.3
(-) 10.5
300.0
282.7
2.3
12.9
13.0
14.2
10.0
14.8
11.1
(-) 21.8
14.8
13.3
19.8
* Million bales of 170 kg. each.
Agricultural Exports and Imports
The share of exports of agriculture and allied products in the total exports had
declined marginally, from 18.9 per cent during 1997-98 to 17.8 per cent during 1998-99.
During the same period, the value of exports of agriculture and allied products amounted to
US$ 5,994 million, showing a decline of 9.6 per cent from a level of US$ 6,634 million in
1997-98. Major items of agricultural exports were basmati and non-basmati rice, raw cotton,
meat, oilmeals, tea, coffee, unmanufactured tobacco, cashew, spices, fresh and processed
fruits and juices, vegetables and marine products, etc.
Agricultural imports related to food and other items constituted 5.8 per cent of the
total imports during 1998-99, as against 4.0 per cent during corresponding period of the
previous year. Important agricultural items imported during the year were vegetable oils
(edible), sugar, wheat and fruits & nuts. During 1998-99, the volume of agricultural imports
aggregated US$ 2,409 million, as against US$ 1,678 million during the corresponding period
of the previous year, recording a growth of 43.6 per cent.
Agricultural markets:
There were 7,062 agricultural regulated markets operating in India, 162 agricultural
commodities considered for grading standards and 3,253 cold storage with capacity of 8.73
million tonnes as on end March 1998. With the introduction of economic reforms, futures
trading was permitted in coffee, cotton, castor oil and jute goods during 1997-98. Earlier
futures trading were permitted in gur, potato, castor seed, pepper, turmeric, etc. Further,
during 1998-99, futures trading was introduced in oilseeds, oil cakes and edible oils. A
network of co-operatives at the national, state and primary level operates to help farm
21
producers with access and further reach for sale of produce. As per the Annual Report (199899) of Ministry of Agriculture, Government of India, the value of agricultural produce
marketed through co-operatives has registered a remarkable growth of 21.6 per cent, from
Rs.9,500 crore in 1994-95 to about Rs.11,551 crore in 1995-96.
5.5 Agriculture role in Indian Economy

Agriculture for Industrial Development:
Indian agriculture has been the source of supply of raw materials to our leading
industries.
Cotton and jute, textiles, sugar, plantations all these directly depend on
agricultural output. There are many industries, which depend on agriculture indirectly. Many
of our small scale and cottage industries like handlooms, oil crushing, etc depend on
agriculture for their raw materials.
But then, in recent years, agriculture is losing its significance to industries such as
iron and steel, engineering, chemicals, etc. However in recent years, the importance of food
processing industries is being increasing recognized both for generation of income and
generation of employment.
Agriculture in economic planning:
Importance of agriculture in the national economy is indicated by many facts. For
example, agriculture is main support for transport sector as railways and roadways secure
bulk of their business from the movement of agricultural goods. Further it is seen that good
crops implying large purchasing power with the farmers lead to greater demand for
manufactures and therefore better prices. In other words prosperity of farmers is also the
prosperity of the industries and vice-versa. Agriculture is backbone of the Indian economy
and the prosperity of agriculture can also stand for the prosperity of the economy. At the
same time it is true that per capita productivity in agriculture is less than in the industry.
Many scholars think that so long as the Indian Economy is dominated by agricultural activity,
per capita income will not rise to an extent, which is necessary and desirable.
22
5.4 Capital Formation in Agriculture

The Gross Capital Formation in agriculture, at 1993-94 prices, increased from Rs.18,214
crore in 1994-95 to Rs.20,995 crore in 1997-98. The share of private sector investment in
agriculture has been registering an increasing trend over the last four years. It increased from
Rs.13,244 crore in 1994-95 to Rs.15,555 crore in 1996-97 and further to Rs.16,579 crore in
1997-98. The rising trend in the private investment in agriculture is attributable mainly to
accelerated flow of institutional credit. It is explain graphically as follows:
The public sector capital investment in agriculture which has been declining from Rs. 4,970
crore in 1994-95 to Rs.4,776 crore in 1995-96 and further to Rs.4,347 crore in 1996-97
showed an increase from Rs.4,347 crore in 1996-97 to Rs.4,416 crore (at 1993-94 prices) in
1997-98.
23
6.0 Changing Scenario Of Rural Credit

Indian rural credit structure is regarded all over the world as quite unique and innovative. It
required a careful feasibility study to understand rural structure.
Evolved over a period of
last eight decades, it can perhaps claim the honour of being a very important constituent of the
most complex rural economy in the third world countries. In India there is different caste,
religion of people living together, the language of every state, caste is different than each
other. The land, weather, water availability is different in different area, which give lots of
problem in applying various policies. One of the distinguishing features has been its ability to
adapt itself, without much turmoil and stress, to the socio-economic dynamics of the rural
scenario. Over the years it has developed into a multi faceted structure to service almost the
entire cross-section of rural population spread thoughtout the length and breadth of our
country.
In rural areas the indigenous moneylenders continued to be the banker in need. Since
these money-lenders had virtual monopoly in supplying credit in rural areas, the poor were
often subjected to exploitation. With the overriding monopoly the money-lenders often
resorted to usurious practices--- levying the exobirant rate of interest, demanding
gift/contribution to the temple funds out of the amount of credit, demanding advance interest,
etc. Besides, often the money-lenders resorted to unethical practices like taking thumb
impression on a blank paper for inserting some arbitrary amount, manipulation of account to
inflate the balance due. The poor villager could not escape the clutches of these indigenous
bankers as they had to keep on borrowing from them under distress since they were the only
source of credit for all type of requirements--- production and consumption. The conditions
of the poor peasantry were perpetually so pathetic that an adagethey are born in debt, they
live in debt & die in debt was the usual description of their plight.
To mitigate the sufferings of the poor farmers the infrastructure of co-operative credit
was brought into being in the matter of agricultural finance. The Co-operatives Societies Act
of 1904 provided the formation of primary agricultural co-operatives credit societies. Later in
1912, the co-operative movement was extended to formation of non-agricultural co-operative
credit societies also.
The commercial banks on the other hand were participating in rural banking only as
an alien since they were programmed for meeting the financial requirements of trade and
commerce. In a view of the huge gap in rural credit from institutional sources and in a bid to
meet the growing needs of financial assistance to modernizing farming, the government
adopted the multi-agency approach. This was intended to increase the farm productivity and
thus raise the living standards of the poor farmers. The formation of State Bank Of India
which was formed my taking over the Imperial Bank of India by the Government was with a
24
objective of extension of banking facilities on a large scale more particularly in the rural and
semi-urban areas and for other diverse purposes. This was an important milestone in the
banking of rural India. Momentum was gained more prominently after the concept of Social
control over commercial banks was propagated in 1967. With the setting up of National
Credit Council in 1968 to asses the demand for bank credit for various sectors of economy
and to determine priorities for the grant of loans, etc. it came to be felt increasingly that banks
should become instruments of economic and social development.
To this effect nationalization of 14 major Indian commercial banks in July 1969 can
be described as a major landmark in the history of Indian financial system and a big leap
towards rural banking.
With emphasis on lending to priority sectoragriculture, rural
artisans and handicrafts, small scale industries, small business and retail trade and other
weaker sections of the society rural banking came to the fore. The step was initiated to
utilize effectively the professional skills and acumen developed by the banking system for
achieving the basic objective of balanced socio-economic development.
Both the Co-operative and Commercial banks made substantial development in
providing credit to agricultural and rural economy. The total share of co-operatives in total
borrowing of the rural household grew from 5,204 in july 1964 to 12,065 in Dec 1974. But
still it was noticed that two-thirds of the total credit was taken from non-institutional sources.
The demand for rural credit was on the increase owing to adoption of modern agriculture,
which increasingly required larger amounts of capital both short term & long term.
6.1 Structure of Rural Credit In India

In the village itself no form of credit organization will be suitable except the Co-operative
SocietyCo-operation has failed, but co-operation must succeed.
--All-India Rural Credit Survey
National Policy & Itss Aim:

Agricultural credit is one of the most crucial inputs in all agricultural development
programmes. From olden days private money-lenders are main sources of credit towards
agricultural or rural products. After independence multi-agency approach consisting of cooperatives, commercial banks and regional rural banks are adopted due to its cheaper and
25
adequate credit to farmers. The major policy in the sphere of agricultural credit has been its
progressive institutionalization for supplying agriculture and rural development programmes
with adequate and timely flow of credit to assist weaker sections and less developed regions.
The basic aim of this Policy are as follows:a. To ensure timely & sufficient flow of credit to the farming sector;
b. To avoid money-lender chain from rural scene.
c. To reduce regional imbalance through their credit facilities.
d. To provide larger credit support to areas covered by special programmes. e.g.
National Oilseeds Development Project.
Need of Credit for Farmers:Farmers need finance mainly for the following thingsto pay current expenses of
cultivation such as the purchase of seed, manures, etc.; the purchase of cattle, implements and
raw materials; acquire new land; or improve land by irrigation, drainage, wedding and
planting; pay up old debts to build and repair houses, to purchase food stuffs and other
personal necessaries; pay land revenue to the Government; meet expenses connected with
marriage and other social events in the family, but jewellery and conduct law suits. The credit
need of agriculturists can, therefore, be broadly divided into directly productive & indirectly
unproductive expenses. Unfortunately fact is that underdeveloped and old countries are in
need of both the types of credit.
26
7.0 Sources Of Rural Credit

There are mainly two sources available to the farmers private agencies &
institutional. Private agencies means relatives, landlords, agricultural moneylenders,
professional private moneylenders, traders & commission agents, others. Where institutional
agencies are a. commercial banks, b. the state bank, c. co-operative societies & land mortgage
banks d. agricultural finance Corporation.
Private agencies giving 93% of the total credit requirements in 1951-52 and
institutional sources including government giving for only 7% of the total credit needs. But
in 1960-61, the share of private agencies came down to
81.3 which was as follows:-
Relatives 8.8%, Landlords 0.6%, Agricultural moneylenders 36.0, Professional private

moneylenders 13.2%, traders & commission agents 8.8%, other sources 13.9. that time
institutionals sources were 18.7 and the break up was government 2.6%, Co-operative 15.5%,
Commercial banks 0.6%. As per the All India Debt and Investment Survey (1981), estimated
that the share of private agencies had further slumped to about 37% & share of institutional
credit jumped to 63% break up was 30% of co-operative & 29% of commercial banks.
Government & Reserve Bank of India is supporting commercial bank & co-operatives to meet
the growing demand for agricultural credit.
8.0 Private Agencies Sources:
Money lenders: Though there are drawbacks, moneylenders are by far the most important
source of agricultural credit in India. That we have already seen before, It is therefore,
clear that the basic problem of the agricultural economy of India is the huge indebtedness
of farmers and their exploitation by private moneylenders. For that government of India
make provisions in act as follows a. maintenance of accounts in prescribed forms, b.
furnishing of the receipts and periodical statements, c. fixing of maximum rates of
27
interest, d. Protection of the debtors from molestations and intimidations, e. licensing of

moneylenders, and f. penalties for infringement of the provisions. The basic objectives of
such legislative enactments can be stated as: I. To bring about an improvement in the
terms on which private credit was available to agriculturists and to place legal restrictions
on the unreasonable exactions of moneylenders, II. To enable civil courts to do greater
justice as between lenders and borrowers than was possible in the prevailing
circumstances under the ordinary Code of Civil Procedure.
Traders & commission agents: Traders & commsiion agents supply funds to farmers for
productive purposes much before the crops mature. They force the farmers to sell their
produce at low prices and they charge a heavy commission for themselves.
Landlords & others: Farmers, predominantly small farmers & tenants, depend upon
landlords and others to meet their financial requirements. This source of finance has all
the defects associated with moneylenders, traders and commission agents. Interests rates
are exorbitant. Often the small farmers are cheated and their lands are appropriated.
What is worse, this source of finance is becoming more importantfrom 3.3 percent in
1951-52 to 14.5 percent in 1961-62 but declined to 8.8 percent in 1981.
9.0 Institutional sources of credit:
These are the funds made available by co-operative societies, commercial banks, &
regional rural banks & state governments also. The need for institutional credit arises because
of the weakness or inadequacy of private agencies to supply credit to farmers. Private credit
is defective because:I. It is based on profit motive &, therefore, it is always exploitative.
II. It is very expensive and is not related to the productivity of land.
III. It does not flow into most desirable channels and to most needy persons.
IV. It is not available for making agricultural improvementsand much of the necessary
improvements are not undertaken as funds are not available for long periods at low
rates of interest
V. It is not properly integrated with the agriculturists other needs.
Problems in Institutional sources:
The government was of the view that multi-agency approach to rural credit was the real
solution to the emancipation of small farmers from the clutches of the money-lenders. But
withing a short period, number of problems have surfaced such as:
28
a) There was no coordination between different agencies operating in the same area
and, as a result, there was multiple financing, over-financing in some areas and
under-financing in others.
b) Despite the adoption of lead bank scheme and district credit plans, the different
agencies often failed to formulate and develop meaningful agricultural credit
programmes in given blocks and districts.
c) Despite guidelines issued by RBI, different agencies adopted different procedures
and policies in the matter of providing loans and their recover. The result was
unnecessary competition among the different agencies.
d) There were practical problems in the recovery of loans when different agencies had
lent to the same person against the same securities. Ultimatlely, there were heavy
overdues.
The major problem faced by lending institutions, particularly co-operatives, is the most
unsatisfactory level of overdues. The ration of overdues to that of demand is around 40 to 42
percent in the case of co-operatives and 47 percent in the case of Regional rural banks.
Accordingly, health of rural credit institutions, both co-operative and commercial banks, is in
a very sad state in several parts of the country.
1.
Co-operative credit societies [9.1]
It is the cheapest and the best source of rural credit. The rate of interest is low. Since 1951,
the co-operative credit movement has started helping the farmers in a big manner. During
1989-90 there were about 88,000 primary agricultural credit societies.
The stranglehold of
the moneylenders on the peasants is not met by the co-operatives. Besides, the small farmers
find it difficult to meet all their credit requirements from the co-operatives.
Primary Agricultural Credit Society:
The co-operative movement was started in India largely with a view to providing
agriculturists funds for agricultural operations at low rates of interest and protect them from
the clutches of moneylenders. The organization of the co-operative credit for short period
may be briefly outlined as follows:
A co-operative credit society, commonly known as the primary agricultural credit
society (PACS) may be started with ten or more persons, normaly belonging to a village. The
value of each share is generally nominal so as to enable even the poorest farmer to become a
member. The members have unlimited liability, that is each member is fully responsible for
the entire loss of the society in the event of failure. This will mean that all the members
29
should know each other intimately. The management of the society is under an elected body
consisting of President, Secretary & Treasurer. The management is honorary, the only paid
member being normally. Loans are given for short periods, normally for one year, for
carrying out agricultural operations, and the rate of interest is low. Profits are not distributed
as dividend to shareholders but are used for the welfare of the village. In the construction of a
well, or maintenance of a school, and so on. The usefulness of the primary credit societies has
been rising steadily. In 1950-51, it advanced loans worth Rs.23 crores; this rose to Rs. 200
crores in 1960-61, and to Rs. 4200 crores in 1988-89.
Financial Strength of PACs.: To make all primary agricultural societies viable and ensure
adequate and timely flow of co-operative credit to the rural areas the Reverse Bank of India,
in collaboration with State governments, had been taking a series of steps to strengthen weak
co-operative banks and to correct regional imbalances in co-operatives development. Steps
were taken to reorganize viable PACs and for amalgamation of non-viable societies with
farmers service societies or large sized multipurpose societies. These efforts are being
intensified by providing larger funds to weak societies to write off their losses, bad debts and
overdues.
PACs and Weaker Sections: The major objective of the co-operative development
programmes is to ensure that the benefits of co-operative activities flow increasingly to
weaker sections including scheduled castes and scheduled tribes. The government seeks to
achieve this through expanding the membership of the weaker sections in the existing PACs
and ensuring larger flow of funds and services to them. In the tribal areas, large sized
multipurpose societies are being organized mainly for the benefit of the tribals.
Co-operative Central Banks: These are federations of primary credit societies in specified
areas normally extending to the whole district meance they are sometimes called as district
co-operative banks. These banks have a few private individuals as shareholders who provide
both finance of management. Their main task is to lend to village primary societies, but they
were expected to attract deposits from the general public. But the expectation has not been
fulfilled and many of the co-operative central banks act as intermediaries between the State
Co-operative Bank on the one hand and the village primary credit societies on the other.
State Co-operative Bank: This bank forms the apex of the co-operative credit structure in
each state. It finances and controls the working of the central co-operative banks in the State.
It serves as a link between the Reserve Bank of India from which it borrows and the cooperative central banks and village primary societies. The State Co-operative Bank obtain its
working funds from its own share capital and reserves, deposits from the general public and
loans and advances from the Reserve Bank now NABARDhas formulated a scheme for the
rehabilitation of weak central co-operative banks. NABARD is providing liberal assistance to
30
the State Governments for contributing to the share capital of the weak central co-operative
banks selected for the purpose. The State Co-operative bank is not only interested in helping
the co-operative credit movement but also in promoting other co-operative ventures and in
extending the principles of co-operation.
Problem of overdues to Co-operative credit
A highly distressing fact of co-operative credit is the heavy overdues of co-operative
credit institutions, now estimated between Rs.9,000 crores to Rs.10,000 crores. According to
the RBI study team on overdues lack of will and discipline among cultivators to repay loans
was the principal factor responsible for the prevalence of overdues of co-operatives.
Defective lending policy pursued by co-operatives, the apathy of management in taking quick
action against recalcitrant members and absence of favourable climate were other contributing
factors.
Apart from these commonly factors normally responsible for a high level of overdues,
intervention of external forces such as loan waivers, concession in various forms towards
repayment of principal and interest has also affected the recovery performance of credit
institutions to a significant extent. The problem is further aggravated on the account of the
state governments in ability to meet the financial commitments to co-operative banks.
In recent years, the farmers are getting organized and one of their chief demands of the
farmer union is to cancel their debts to the co-operative societies and banks. States have
meekly surrended to such demands to write off the debts in a matter of extreme concern, as it
hampers the recovery of dues from the farmers. The problem of loan overdues is a matter of
serious concern, as it affects the recycling of funds and credit expansion on one hand and
economic viability of the lending institutions, specially the co-operatives and RRBs, on the
other.
2.
Land development banks[9.2]: The need for long-term loan is being satisfied by land
development banks (formerly the were called land mortgage banks). The objective of
such banks is to provide long-term credit to the cultivators against the mortgage of their
lands. The loans from the land development banks are quite cheap and are spread over
a long period of 15 to 20 years. It is, therefore, convenient ot borrow from these banks
if previous debts have to be cancelled or if additional land is to be purchased or if
improvements have to be made. Though land development banks have been making
considerable progress in recent years in this country, they have not really contributed
much to the financial need of the farmers. Most farmer are not even aware about this
bank & 70% of the land development banks are located in the three South Indian States
of Tamil Nadu, Andhra Pradesh & Karnataka. The loan sanction by this bank has been
31
increase annually from Rs. 3 crores to Rs. 770 crores between 1950-51 and 1989-90.
major drawback of this bank is they lend against the security of land, and big landlords
have taken advantage of them and, by and large, small peasants have not benefited from
them.
The Structure of LDBs:- The long term credit structure consists of the central land
development banks (generally one for each State) and primary land development banks.
In some States, there are no primary land developments banks but in their place, there
are branches of central land development banks.
Problems of LDBs:- Land development banking is yet to take strong roots in India
barring few States. However, LDBs have contributed in large measure to agricultural
development by lending specially for minor irrigation.
All their loans are for
productive purposes benefiting mostly the small farm holders.
Though land
development banking has made considerable progress in recent years, it has not really
contributed much to the improvement of the financial position of the farmers. A large
number of factors are responsible for the relative ineffectiveness of LDBs.
Overdues Problems:- mounting overdues in most of the LDBs have crippled the
structure badly, in recent years. Overdues at the level of primary land development
banks have been put between 42 to 44 percent. Overdues have caused innumerable
financial problems besides limiting the capacity of LDBs to lend and operate as viable
units. The financial discipline imposed on the banks in the matter of eligibility to
undertake fresh lending based on recovery performance has been the main limiting
factor quantitative growth of credit operations. To some extent, the banks themselves
are to be blamed for this predicament due to faulty loaning policies, inadequate
supervision, over-utilisation of loans, ineffective measures for recovery etc. Which have
contributed to the deterioration in recovering the loans.
3.
Commercial Banks[9.3]: The commercial banks in India have long confined their
operations to urban areas, receiving deposits from the urban public and financing trade
and industry in urban public and financing trade and industry in urban areas.
Commercial banks are extending financial support to agriculture both directly and
indirectly Direct finance is extended for agricultural operations for short and medium
period. Indirect finance to farmers is made through providing advances for the
distribution of fertilizers, other inputs, etc, and also through financing primary
agricultural credit societies. Financing of investment in agriculture is a major aspect of
the farm credit activities of banks Credit needs of service units providing services for
warehousing, processing, marketing, transporting, and repairing of tractors etc.
32
Direct Finance by Commercial Banks:- At the time of bank nationalization, it was

clearly conceded that the commercial banks did not have the necessary experience or
the personnel to deal with the farmers directly. While the co-operative had been
specializing in rural credit since the beginning of the century.
Even then the
nationalized banks were expected to go vigorously in the support of the farmers in

general and the small cultivators in particular. In the initial stages, for obvious reasons
the nationalized banks concentrated their attention on large cultivators and other special
category farmers such as those engaged in raising high-yielding varieties of foodgrains. At present short term crop loans accounted for nearly 40 to 45% of the total
loans disbursed by the commercial banks to the farmers.
Term loans for varying periods for purchasing pump-sets, tractors and other
agricultural machinery, for construction of wells and tube-wells, for the development of
fruit and garden crops, or leveling and development of land, etc. are provided. These
term loans accounted for about 35 to 37% of the total loans disbursed by commercial
banks. Finally, commercial banks extend loans for such activities such as dairying,
poultry farming, piggery, bee keeping, fisheries and others these loansaccount for 15
to16%. Region wise, southern region accounts for the bulk of credit disbursed by
commercial banks viz. 52% of the total credit extended.
Indirect Finance by Copmmercial Banks: Even though the scope for direct financing
by commercial banks would be limited for some years to come, there is a considerable
scope for indirect financing by commercial banks. For instance, commercial banks are
financing co-operative societies to enable them to expand their production credit to the
farmers. More especially they increasingly finance co-operatives engaged in marketing
and processing of agricultural produce or in the activities ancillary to agriculture such
as dairy farming, poultry farming, etc. In this connection, the Stated Bank of India and
its subsidiaries are already playing an active role in financing co-operative marketing
and processing. Commercial banks are providing indirect finance for the distribution of
fertilizers and other inputs.
Commercial banks extend credit to manufacturing or distribution firms and
agencies and co-operatives engaged in the supply of pump-sets and other agricultural
machinery on the hire-purchase basis.
They finance the operations of the Food
Corporation of India, the state governments and others in the procurement, storage and
distribution of food grains.
Finally, commercial banks increasingly subscribe to the debentures of the
central land development banks and also extend advances to the latter. This enables
33
land development banks to expand their medium and long-term advances to farmers for
the purpose of land improvement and land development.
Commercial Banks & Small Farmers: It has been estimated that nearly 70 percent of
farmers owning less than 2 hectares of land are not getting bank credit; only large
landowners have been found creditworthy and suitable for banks advances. But such a
situation cannot continue for long. Under the direction of the Planning Commission,
Small farmers Development Agencies have been set up to identify small farmers and
work out economically viable schemes of agricultural development. Commercial banks
have to group them into various categories for credit support so as to enable them to
become viable cultivators. For instance, in areas where the subsoil water table is high,
the small cultivator has to be helped by banks to convert his dry holding into wet
holding. With pump set loan, the cultivator can change the cropping pattern into double
or even multiple cropping activity. As regards small cultivators near urban areas and
with irrigation facilities, commercial banks can help them to go in for poultry farming
and maintaining one or two vegetable cultivation or combine it with small milch cattle.
Problems of Commercial Banks in Agricultural Credit:- The credit needs of the
agricultural sector in the next few years are estimated to rise to Rs.50,000 to Rs.60,000
crores. To meet the needs is an enormous task, and responsibility will have to be borne
by co-operatives and commercial banks. As resources available to commercial banks in
the agricultural sector will naturally be limited, it is important that every commercial
bank attempts to make optimum use of its limited resources in this sector. In the field
of financing of agriculture, the problem is not merely quantitative but also of coverage
vis--vis the organization and the personnel available to the nationalized banks. The
majority of the rural population consists of small farmers. Further, there are 5,50,000
villages spread throughout the country. To reach all of them with only about 47,000
banking offices is, no doubt, a stupendous task. Even with the completion of branch
extension programmes of the commercial banks now in hand or those which may be
undertaken during the next 5 to 10 years, commercial bank may not be in a position to
cover many of the villages. Moreover in recent years, the rural branches of commercial
banks in general and branches of RRB in particular, have been under severe financial
strain on account of higher transaction cost involved in handling of large number of
small size loan accounts and somewhat lower interest income as a result of
concessional rate of interest on small size loans.
The lower proportion of current deposits in total deposits of rural branches
has also placed them at a disadvantage with regards to cost of resources. Finally, the
presence of overdues, particularly after the implementation of Agricultural and Rural
34
Credit Debt Relief Schemes, 1990 has further adversely affected the viability of rural
branches of commercial banks.
Under these conditions, if the development of agriculture is not to suffer for
want of credit and if there has to be some improvement in the lot of innumerable small
farmers, new dimensions will have to be given to schemes of financing agriculture.
4.
Regional Rural Banks [9.4]: These banks were first set up in 1975 specifically to give
direct loans and advances to small and marginal farmers, agricultural labourers, rural
artisans and other of small means. The loans are given for productive purposes. There
were 196 RRBs which have been lending around Rs. 3600 crores annually by way of
loans to rural people. Over 90 percent of the loans of RPBs are given to the weaker
sections in rural areas. The regional banks, though basically scheduled commercial
banks, differ from the latter in certain respects:
The area of regional rural banks is limited to a specified region comprising one or
more districts of a State.
The regional rural banks grant direct loans and advances only to small and marginal
farmers, rural artisans and agricultural labourers and other of small means for
productive purposes.
The lending rates of the regional rural banks should not be higer than the prevailing
lending rates of co-operatives societies in any particular State. The sponsoring banks
and the Reserve Bank of India provide many subsidies and concessions to RRBs to
enable the latter to function effectively
Concessions to RRBs: From the beginning, the sponsor banks have continued to
provide managerial and financial assistance to RRBs and also other concessions such as
lower rate of interest on the latters borrowing from sponsor banks. Further, the cost of
staff deputed to RRBs and training expenses of RRB staff are borne by the sponsor
banks. The Reserve Bank of India has been granting many concessions to RRBs.
Progress of RRBs: There are now 196 regional rural banks in 23 States with 14,500
branches. As at the end of September 1990 the regional rural banks had advanced
Rs.3,560 crores by way of short-term crop loans, term loans for agricultural activities,
for rural artisans, village and cottage industries, retail trade and self employed,
consumption loans etc. Nearly 90 percent of the loans of RRBs, were provided to the
weaker sections. State wise Uttar Pradesh found large number of offices.
Objectives of RRBs:
35
RRBs had followed instructions given by RBI and Government of India regarding
loan policies, procedures, etc.
The basic aim of setting up RRBs viz, developing the rural economy by providing
credit for the development of agriculture, trade, commerce industry and other
productive activities in rural areas, was being fulfilled and
RRBs had successfully maintained their image as a small mans bank by confining
their credit facilities to the target groups viz, small marginal farmers, agricultural
labourers, artisans and small enterprises for productive activities.
The recovery position on the whole was not satisfactory.
Problems in functioning of RRBs:

a. On account of the many restrictions place on the business they can undertake,
RRBs have lowearning capacity.
b. The wage and salary scales of RRBs have been rising and, in fact, with the recent
award of a tribunal, their scales would approximate those of commercial banks;
with the increase in salary scales, an important rationale for the setting up of RRBs
has ceased to exist.
c. The sponsoring banks are also running their own rural branches in the very area of
operations of the RRBs; this has given rise to certain anamolies and to avoidable
expenditure on controls and administration.
5.
Reserve Bank of India [9.5]:

RBI had shown keen interest in agricultural credit and maintained a separate
department for this purpose. RBI extended short-term seasonal credit as well as
medium-term and long-term credit to agriculture through State level co-operative
banks and land developments banks. RBI had also set up the Agricultural Refinance
Development Corporation (ARDC) to provide refinance support to the banks to
promote programmes of agricultural development, particularly those requiring term
credit. With the widening of the role of bank credit from agricultural development
to rural development the Government propo9sed to have a more broad-based
organization at the apex level to extend support and give guidance to credit
36
institutions in matter relating to the formulation and implementation of rural

development programmes. A National Bank for Agriculture and Rural Development
(NABARD) or National Bank was, therefore, set up to take over the agricultural
credit functions of RBI on the on hand and the refinance functions of ARDC on the
other.
9.5.a N A B A R D: an Overview 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 rural areas.
NABARD operates throughout the country through its Head Office at Mumbai,
25 Regional Offices and on Sub-Office, located in the capitals of all the
states/union territories. It also has 4 training establishments.
It is an apex refinancing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural
areas.
It takes measures towards institution building for improving absorptive capacity
of the credit delivery system, including monitoring, formulation of rehabilitation
schemes, restructuring of credit institution, training of personnel, etc.
It co-ordinates the rural financing activities of all the institutions engaged in
developmental work at the field level and maintains liaison with Government of
India, State Governments, Reserve Bank of India and other national level
institutions concerned with policy formulation.
It prepares, on annual basis, rural credit plans for all districts in the country; these
plans form the base for annual credit plans of all rural financial institutions
o
It undertakes monitoring and evaluation of projects refinanced by it.
It promotes research in the fields of rural banking, agriculture and rural

development.
37
10.0 Schemes & Facilities from the various banks

10.1 NABARD:RURAL NON-FARM SECTOR FINANCE SCHEME
Rural Non Farm Sector (RNFS) holds the key to faster economic
development of the country. It has potential and promise for
generating employment and increased income in the rural areas.
Hence, NABARD has identified financing, development and
promotion of RNFS as one of its thrust areas.
Schemes from NABARD for non-farming sector:
1. COMPOSITE LOAN SCHEME (CLS) - under ARF

Borrowers: Rural artisans, handicraftsmen, small entrepreneurs, groups of individuals,
partnership firms, co-operative societies, NGOs, etc.
Refinance ceiling -Maximum of Rs. 10 lakh per borrower.
Repayment period -3 to 10 years with suitable need based moratorium not exceeding 18
months.
Eligible activities -All manufacturing, processing, and approved service activities.
2. INTEGRATED LOAN SCHEME (ILS) - under ARF
Borrowers: Individuals, artisans, groups of individuals, associations (formal and informal),
proprietary/ partnership firms/ co-operative societies, registered institutions/ trusts, voluntary
agencies, private and public limited companies, etc.
38
Refinance Repayment period 3 to 10 years with suitable need based moratorium not
exceeding 18 months.
Eligible activities Manufacturing, processing and approved service activities in the cottage,
village and tiny industry sector and modernization/ renovation/ expansion/ diversification of
existing units.
3. Small Road and water Transport Operators SCHEME (SRWTO) - Under ARF
Borrowers Individuals, groups of individuals, including partnership/ proprietary firms and
co-operative enterprises. The borrowers should be from the rural areas and should utilise the
vehicle mainly for transportation of Rural Farm and Non-Farm Products and inputs and
passengers to/ from marketing centres. The borrower or his employee should possess a valid
driving licence and the vehicle should be duly registered with the Regional Transport
Authority as public transport vehicle.
Refinance ceiling Maximum of Rs.15 lakh per borrower
Repayment period 5 years with moratorium of 6 months.
Eligible vehicles Transport vehicles including Light Motor vehicles, Jeeps, Autorickshaws,
Water transport units (boats, launches etc.)
4. Schemes under pre - sanction procedure
(i) Term Loan to SSI units (through CBs & Scheduled PCBs)
Borrowers : Individuals, Proprietary / Partnership concerns, Private/ Public Limited
Companies, Promotional/ Developmental Organisations, State Level Federations/
Corporations, Joint Sector Undertakings.
(ii) Term Loan to Industrial Co-operatives (through SCBs)
Borrowers : Industrial Co-operative Societies identified as viable/ potentially viable by the
State Government.
iii) Project Finance for Agro-Industries (through CBs, Scheduled PCBs and SCBs)
Borrowers
1.
State level corporations such as agro-industries corporations, forest/ tribal

development corporations, KVIC/ KVIB, state level cooperative societies/ federations,
39
co-operative marketing/ processing and industrial societies, joint sector undertakings,

registered societies in KVIC/ KVIB fold.
2. Public/ private limited companies, partnership firms and proprietary concerns.
Repayment period: 3 to 10 years with moratorium of 12 months.
5. Soft Loan Assistance Scheme for Margin Money

Beneficiaries and purpose: Entrepreneurs having necessary talent/ skills, but who lack
monetary resources to meet the margin requirements stipulated under the relevant schemes
covering both ARF and prior sanction.
Purpose
To set up new units as well as for modernisation/ renovation/ expansion/
diversification of existing units even if the units were not initially refinanced by the Bank.
Eligibility criteria Refinance will be available on the banks' satisfying the eligibility criteria
based on recovery performance/the position of NPAs, as prescribed by NABARD from time
to time.
FARM SECTOR FINANCE SCHEME:
A) Refinance Assistance for financing farm mechanization
i) Tractors:
(a) The quantum of refinance in respect of financing for acquisition of second tractor has been
enhanced from existing level of 40% to 90% ( 95% in case of SCARDBs) of the loan amount
as in the case of first tractor.
(b) Though the minimum land holding required for financing tractors is 8 acre perennially
irrigated land, necessary discretion has been given to banks to evolve their own area specific
norms, if need be, and report such norms evolved by them to the concerned RO of NABARD.
(c) Refinance facility for financing purchase of second hand tractors has been extended to
Gujarat in addition to Punjab, Haryana and Rajasthan.
ii) Power Tillers:
(a) Though the minimum land holding required for financing power tillers
is 6 acres of perennially irrigated land, necessary discretion has been
given to banks to evolve their own area specific norms, if need be, and
report such norms evolved by them to the concerned RO of NABARD.
40
(b) Banks have also been advised to give focused attention on financing
power tillers by preparing a three year banking plan for a compact area
for the benefit of the small farmers.
C) Swarnajayanti Gram Swarozgar Yojana (SGSY)
SGSY, formed by restructuring ongoing self employment programmes, viz. IRDP, TRYSEM,
DWCRA, etc., is under implementation from 01 April 1999. The programme envisages
formation of SGSY Groups and their linkage with the banks. Individuals as also SGSY group
members, below poverty line are assisted under the programme
D) Scheme for setting up of Agriclinic and Agribusiness centers
In pursuance of the announcement made by the Union Finance Minister in the budget speech
for the year 2001-02, National Bank in consultation with the Ministry of Agriculture, GOI and
select banks formulated a scheme for financing Agriculture Graduates for setting up
Agriclinics and Agribusiness Centres The scheme aims at supplementing the existing
Extension Network to accelerate the process of technology transfer to agriculture and
supplement the efforts of State Agencies in providing inputs and other services to the farmers.
E) Scheme for financing farmers for purchase of land for Agricultural purposes
In response to the Hon'ble Union Finance Minister's emphasis on the need to step up priority
sector lending and to examine financing farmers for purchase of land for agricultural
purposes, the Working Group constituted by Indian Banks Association formulated a above
scheme in consultation with the Government of India, RBI and NABARD.
The objective of the Scheme is to finance the farmers to purchase, develop and cultivate
agricultural as well as fallow and waste lands as also consider financing purchase of land for
establishing or diversifying into other allied activities.
Eligibility (i) Small and marginal farmers i.e.. those who would own maximum of 5 acres of
non- irrigated land or 2.5 acres of irrigated land including purchase of land under the scheme
and (ii) Share croppers / Tenant farmers are eligible.
F) Central Sector Capital Subsidy scheme for Investment Promotion (IPS)
A Central Sector Capital Subsidy scheme (Investment Promotion Scheme) launched
by the Government of India in collaboration with NABARD for development of privately
owned non-forest wastelands in the country is under implementation since 1998. Of the 40
41
schemes covering about 1500 ha sanctioned till date, the coverage is mostly confined to the
States of Tamil Nadu, Andhra Pradesh and Maharashtra, with Tamil Nadu accounting for
more than 20 schemes. The scheme provides for subsidy upto 25% of bank loan with a ceiling
of Rs. 25 lakh for taking up plantation and other on-farm developments in private wastelands.
In view of the availability of substantial area under non-forest wasteland in all States and the
need to develop them, a nationwide awareness and publicity campaign was launched by the
Government of India in association with NABARD for popularizing the Investment
Promotion Scheme (IPS). As a part of this effort, workshops are being organized by
NABARD in different States/ regions.
G) Refinance Scheme for financing Farmers Service Center (FSC)
NABARD has decided to extend 100% refinance facility to banks for financing Farmers
Service Centres (FSC) set up in collaboration with Mahindra Shubhlabh Services Ltd (MSSL)
for providing various extension services to farmers including supply of agri-inputs. FSC is
intended to benefit farmers by way of higher yields and productivity through private sector
participation in technology transfer and extension services.
Scheme for Rural Finance [10.2]:

SBI Caters to the needs of agriculturists and landless agricultural labourers through a
network of 6600 rural and semi-urban branches.There are 972 specialized branches which
have been set up in different parts of the country exclusively for the development of
agriculture through credit deployment.These branches include 427 Agricultural Development
Branches (ADBs) and 547 branches with Agricultural Banking Divisions (ADBs) and 2
Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hitech
commercial agricultural projects.
The Bank has achieved tremendous growth in agricultural credit.As on March 2001 ,it has
covered 48 lakh farmers with loan outstanding of Rs. 14962 crores , accounting for 28% of
total agricultural advances of Public Sector Banks (PSBs)
Crop Loan
SBI offers financial assistance to meet cultivation expenses for various crops as short
Term Loan. With a repayment period not exceeding 18 months, the Crop Loan is extended in
the form of direct finance to cultivators.
42
Eligibility-Agriculturists, Tenant farmers and Share Croppers who actually cultivate the lands
are eligible for these loans. All categories of farmers - Small/Marginal (SF/MF) and others are
included.
Produce marketing loan scheme
The Bank extends financial assistance to help farmers store produce on their own to avoid
distress sale. The repayment period of the produce marketing loan (PML) does not exceed 6
months. Further, this facilitates immediate renewal of crop loans for next crop.
Eligiblity-All categories of farmers - Small/Marginal (SF/MF) and others - are eligible.
The Bank verifies the following aspects before granting the loan:
1) Service Area Approach.
2) Stocks at the borrowers' residence/godown.
3) Stock statement for valuation.
Loan Amount
Security to be furnished
Upto Rs.25,000
DPN, DPN take delivery letter Hypothecation of

stocks.
Above Rs.25,000
Hypothecation of stocks.Mortgage of properties.
Kisan credit card scheme

The SBI offers the Kisan Credit Card for farmers under short-term credit introduced as per
RBI/NABARD guidelines, providing a running account facility tofarmers to meet their
production credit need and contingency needs.
Eligibility-All agricultural clients having good track record for the last two years are eligible
for the Kisan Credit Card. Minimum credit limit: Rs.3000/- New borrowers requiring crop
loans can also avail this product.
Credit limit is based on operational land holding, cropping pattern and scale of finance.
Withdrawals can be made using easy and convenient withdrawal slips. The Kisan Credit Card
is valid for 3 years, subject to annual review.
Agriculture term loans
43
SBI gives agricultural term loans in the form of direct finance to cultivators to create
assets facilitating crop production/income generation. Repayments span not less than 3 years
and not exceeding 15 years. Activities broadly covered are land development, minor
irrigation, farm mechanization, plantation and horticulture, dairying, poultry, sericulture, dry
land, waste land development schemes, etc.
Eligibility-All categories of farmers-small/medium-and agricultural labourers are eligible for
agricultural term loans, provided they have necessary experience in the activity and the
required land area.
Land Development Schemes
The SBI gives credit solutions for land development programmes in the form of direct
finance to cultivators aimed at better productivity. Loans under this head cover various
activities like land clearance (removal bushes, trees, etc.), land leveling and shaping,
contour/graded bunding, bench terracing for hilly areas, contour stone walls, staggered
contour trenches, disposal drains, reclamation of saline/alkaline soils and fencing.
Eligibility:Loans cover various activities like digging of new wells (open/bore wells),
deepening of existing wells (traditional/inwell bore), energisation of wells (oil
engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation system and
lift irrigation system.
Minor Irrigation Schemes
SBI provides credit for creating new source of irrigation by exploiting underground water,
energisation of wells, conveyance of water, judicious use of available water, etc.
Loans cover various activities like digging of new wells (open/bore wells), deepening of
existing wells (traditional/inwell bore), energisation of wells (oil engine/electrical pump set),
laying of pipe lines, installing drip/sprinkler irrigation system and lift irrigation system.
Farm Mechanisation Schemes

SBI provides credit for purchase of farm equipment and machinery for agricultural
operations.
44
This mode of finance covers activities ranging from: Purchase of tractors, trailers, cultivators,
cage wheels, power tillers, combine harvesters, power sprayers, dusters, etc.
Eligibility- is ascertained on the basis of minimum area requirements: Tractors - 8 acres of
irrigated area Power tiller - 5 -6 acres Combine harvester - 20 acres
Financing of Combine Harvesters:
o
o
o
o
A farmer should own minimum 8 acres of irrigated land.

Non-farmer entrepreneurs capable of utilizing combine harvester for custom hiring
work are also eligible.
Combine harvester should be utilised for a minimum of 1000 hours of productive
work in a year.
Unit cost will include cost of combine harvester and accessories, if any.
Kisan Gold Card Scheme:

Eligibility-Farmers with excellent repayment record for at least past 5 years. New farmers
are not eligible for the product.
Purpose-Investment credit for which term loans are ordinarily sanctioned. The scheme
also includes major family expenditures like marriages and education of children.
Land Purchase Scheme:
Eligibility-Small/marginal farmers, tenants, share-croppers owning less than 5 acres of
unirrigated / 2.5 acres irrigated land in their own name and landless agricultural
labourers are eligible to avail loan under the scheme, provided they are our existing
borrowers with record of prompt repayment of loans. Own land before and after
purchase should not exceed 5 acres irrigated / 2.5 acres irrigated.
Security-Land to be purchased with Bank finance will be mortgaged as security. No
other security will be insisted upon.
Repayment-Entire loan will be repayable in 10 years in half-yearly instalments.
Adequate gestation period will be allowed for development of land for cultivation.
Self Help Groups (SHGs)
SHGs are self managed homogeneous groups of economically backward people that promote
savings among themselves and pool the savings. These pooled resources are supplemented by
external resources i.e. bank credit when these groups gain experience. The Self Help Groups
45
Linkage Programme of SBI is under implementation since 1992. At the end of March 2001,
the Bank has financed 25,000 self-help groups with aggregate credit limit of Rs 46 crore.
10.3 Various Finance Scheme Offered From Government:

Maharashtra Rural Credit Project (MRCP) - India - Out line of the project features and Impact
General: Access to credit has long been considered a major poverty alleviation strategy in
India. A variety of credit-linked programmes supplemented by subsidies have been
implemented. The Integrated Rural Development Programme (IRDP) operating since 1978-79
has been a major national rural poverty alleviation programme with a large credit component.
Under this programme, nearly 53 million families below poverty line were assisted with bank
credit of Rs.31 billion and subsidy of Rs. 10.5 billion upto 31st March 1998, but its impact
had not matched the resources spent. This was due to reasons like provision of supply rather
than demand-led credit, loans not tailored to meet needs of individual enterprises, lack of
aftercare support, weak linkages lack of supervision over loan utilisation etc. Further, there
was no effective involvement of the people at any stage of implementation of the programme.
As a result, the incidence of high overdues and high transaction cost for the banks in
financing the rural poor became a matter of concern for the policy-makers.
Maharashtra Rural Credit Project (MRCP)
Against this backdrop the MRCP supported by IFAD was evolved as an innovative approach
to poverty reduction with peoples participation. The strategy for implementation of this
project has been devised in such a manner that the rural poor assume centre-stage and their
participation ensured at all stages of the project viz. planning, implementation and
monitoring. The experience gained shows that once the peoples participation is invoked at
the planning stage itself a strong sense of ownership of the project develops among the people
which stimulates them to actively involve in the subsequent phases of the project.
The MRCP being implemented with an outlay of US$ 48.35 million is financed by an IFAD
loan of US$ 29.2 million supplemented by a contribution of US$ 14.97 million from
Government of India/Government of Maharashtra and US$ 1.65 million from participating
banks. The Project which is implemented by a number of banking institutions, Government
agencies and Non Governmental Organisation (NGOs) since 1994-95 was designed with the
principal goal .
46
Credit-Cum-Subsidy Scheme for Rural Housing.

Introduction:- The Credit-Cum-Subsidy Scheme for Rural Housing has been conceived for
rural households having annual income upto Rs.32,000/-.
Objective- To enable/facilitate construction of houses for all rural households who have some
repayment capacity.
Target Group- The target group under the scheme will be the rural households having an
annual income of Rs. 32000/- only. However preference will be given to rural households
who are below poverty line.
Salient Features:
Subsidy upto Rs.10,000/- per eligible household in plain areas and Rs.11,000/- in
hilly/difficult areas.
Loan upto Rs."2"0,000/- per household.
Sanitary latrine and smokeless chulha are integral part of the house.
Achievement
The scheme has been launched with effect from 1 April, 1999 and is in the process of
implementation.
Funding Pattern
Funds are shared by the Centre and State in the ratio of 75:25.
Implementing Agency
The Implementing Agency for the Credit Cum Subsidy Scheme for Rural Housing may be the
State Housing Board,State Housing Corporation, specified Scheduled Commercial Bank,
Housing Finance Institution or the DRDA/ZP.
Council for Advancement of Peoples Action & Rural Technology (CAPART)

Recognising the need for an organisation that would coordinate and catalyse the
development work of voluntary agencies in the country, particularly to ensure smooth flow of
benefits to the underprivileged and socio-economically weaker sections of society,
Government of India, in September, 1986 set up the Council for Advancement of Peoples
Action and Rural Technology (CAPART), a registered society under the aegis of the
47
Department of Rural Development, by merging two autonomous bodies, namely, Peoples

Action for Development of India (PADI) and Council for Advancement of Rural Technology
(CAPART).
The main objectives of the CAPART are :
To encourage, promote and assist voluntary action for the implementation of projects
intending enhancement of rural prosperity.
To Strengthen and promote voluntary efforts in rural development with focus on

injecting new technological inputs;
To act as a catalyst for the development of technology appropriate for rural areas.
To promote, plan, undertake, develop, maintain and support projects/schemes aimed

at all-round development, creation of employment opportunities, promotion of selfreliance, generation of awareness, organisation and improvement in the quality of life
of the people in rural areas through voluntary action.
48
Agriculture and its associated activities are found constituting the economic base and
the main source of livelihood and employment for the people in the state.
However,
unprecedented growth of population on one hand and decreasing rate of available agriculture
land along with degradation of supporting natural resources as required for sustaining crop
productivity on the other have been seriously forcing the problems of sustaining livelihood
for farming communities. It is becoming difficult to do the farming activity without external
or internal sources. In this context the significance of extending non-farm sector becomes
only alternative but it also required finance assistance for its development.
Means a lot of hard work & government awareness is required to flow the finance
assistance in Rural Economy. But various scheme which are provided by the various banks &
government should be specific in its eligibility criteria to stop the misuse of these funds by
large farmers and to ensure that the credit reaches the farmers who is in need of finance.
As per the above evaluation of the major problems and issues relating to the rural
financial system I can submit the following observations & recommendations:
Interest rates: Interest rates must be different for different categories. First it should
be concessional rate exclusively for small and marginal farmers at 1.5% to 11.5% &
Secondly, there should be a higher rate of interest applicable to the rest of the
agricultural borrowers upper limit for it is15.5%
Infrastructure Development: tempo of agricultural lending has been low in the eastern
regional states like Bihar, Orissa and West Bengal & in the North Eastern States. So
49
Agricultural and Rural Infrastructure Development Corporation should be setup in

these area which will concentrate on building up necessary backward and forward
linkages and supporting services as well as formulate location specific schemes for
accelerating the transformation of agriculture and to arrange for funding of the
schemes.
Insurance scheme: Crop insurance scheme which was introduced in India from
Kharif 1985 covering major cereal crops, oilseeds and pulses. The sum insured was
limited to Rs.10,000 per farmer irrespective of quantum of crop loan and the total
sum insured would be limited to 100 percent of the crop loan disbursed. Proper
research should be done by statutory crop insurance corporation.
Recovery of dues: Recovery is important for survival of the banks, it is important that
a common legal framework covering cooperatives and commercial banks for
recovery of dues for the country as a whole should be formulated. & The government
should setup State level tribunals for adjudication.
Rationalisation: In present scenario each village is allotted to a commercial bank
branch under the Service Area approach. As per the analysis each block should be
allotted to a bank which has the largest presence in the block through its branches.
Which will reduce the cost of supervision, improve quality of monitoring and be
beneficial to the customers.
Bibliography
Sr.No.
1.
Name
Author
Indian Economy
Ruddar Datt.
K.P.M. Sundharam.
2.
3.
4.
State Bank of India journals

Agricultural Financing In India
Economic Survey, 1998-99.
S.N.Ghosal
Monthly Review of the Indian Economy,
CMIE, March-April 1999
5.
Romeo S. Mascarenhas
Rural Marketing
Webliography
www.nabard.org
www.rbi.gov
www.sbi.co.in
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Rural Finance In Indian Economy

The rural credit system should be strengthen

To study the role of rural finance in Indian Economy.

Assigned project task is completed by going through various books, committee

1.0 Meaning of an Underdeveloped Economy: