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1987-88 9255
1988-89 9785
1989-90 10186
1990-91 8983
1991-92 11303
1992-93 13000
1993-94 15100
1994-95 16700
1999-2000 43000
2000-01 51500
(Budget proposal)
CROP LOAN
Crop loan is a short term credit and is generally obtained from primary
credit co-op. Society of a village or also from commercial bank. The period
of loan is about one year except for sugarcane for which the period is 18
months. There are two criteria for granting crop loan.
1. One third of gross value
2. Cost of cultivation.
1. One third of gross value approach takes into account the yield and
price of the crop, its cost of cultivation and family expenditure. If
the gross value is more, more amount of loan becomes available.
For e.g. Rice.
I II
2
Yield (Q.) 25
0
4
Price (Rs/Q) 0 400
0
8
0
Gross value (Rs.) 10,000
0
0
2
7
One third (Rs.) 3330
0
0
There are three basic considerations, which must be taken into account before a lending
agency decides to agency decides to advance a loan and the borrower decides to borrow:
1. returns from the Proposed Investment,
2. repaying capacity, it will generate and
3. The risk bearing ability of the borrower.
These are known as the Three R’s of credit.
Returns: The First Test
Emphasis here should be on additional returns and additional costs involved in utilizing the
borrowed funds. It involves working out the optimum combination of farm enterprises and
the returns thereof, resulting from the additional availability of resources made possible
through borrowed funds. The following points
1. Estimates of returns should be made on the basis of resources including borrowed
funds.
2. Estimates of returns and costs should be made at the margin, not on an average.
3. Not only the MR=MC principles be kept in view while deciding the amount of credit
but the law of equi-marginal returns must be fully exploited.
4. The level of other resources should be considered before deciding upon the amount
of working capital tobe used. The possibilities of enhancing the level of other most
limiting resources to farm production should also be examined.
5. Due care should be taken that more than the required amount of money is not
advanced or obtained. At the same time, an inadequate amount of funds would not
serve the purpose. Funds should, therefore, be advanced neither inadequately or
excessively, but just the amount that can be profitably used.
6. Money needed for consumption purposes should also be considered for their
marginal value to the farm-family satisfaction against the marginal productivity of
the production loans.
Repaying Capacity-The Second Test
Although necessary, it is not sufficient to only analyse the productivity or the additional
returns that will accrue due to the borrowed funds. A loan may be productive but still it may
not generate sufficient income to leave funds sufficient enough to repay the loan. Repaying
capacity is the portion of the amount that a farm family will earn from a year’s operation,
which shall be available for the repayment of the loan. It should be based on an estimate of
anticipated income from all sources of the borrower during the year. Repaying capacity, is
therefore, worked out as a residual after meeting the requirements of the family
consumption and payment of other dues, debts and repayments.
There can be two types of loans
Self liquidating,
Non-liquidating or partially self-liquidating loans.
The repaying capacity should be determined separately for self-liquidating and non-
liquidating loans.
In case of the self-liquidating loans the amount gets absorbed in the production process in
one year or production period and the formula here is:
Repaying capacity= Gross Income- [Living expenses+Working expenses (not including loan)
+ taxes + other loans and payments].
In case of non-liquidating or partially liquidating loans, the resource acquired with the funds
are not directly consumer or are consumed over a number of years. They do not become
completely a part of the first year’s costs and the returns from the investment are spread
over a period of several years. For non-liquidating or partially liquidating loans, the repaying
capacity is worked out as
Repaying capacity= gross cash income- (all working expenses+ other loans+taxes and
payments due).
Risk Bearing Ability-The Third Test
It is necessary but again not sufficient that the credit should be productive and generate
sufficient repaying capacity. It is also essential that the borrower should be able to
withstand the shocks of probable financial losses. This is known as the risk-bearing ability of
the borrower. Assessment of risk-bearing ability is necessary because the returns and
repaying capacity analysis are made on the basis of averages. i.e., estimated production,
prices and costs etc. but these averages seldom hold true. Agricultural business is subject to
the vagaries of nature ad is exposed to many other hazards such as pest attacks, diseases
and price fluctuations. Variations in income occur as a rule rather than an exception. The
variability in income has, therefore, to be counted for in order to arrive at a fairly stable and
reliable estimate of the repaying capacity.
The overall variability in returns has been estimated to be 21% in Ludhiana district. Such
variability coefficients are needed especially by the financial organizations in all parts of the
country where they wish to operate. The gross income should be deflated by this coefficient
and the analysis should the follow the same pattern as for repaying capacity.
COMMERCIAL BANKS
The commercial banks form the core of the organised banking system and constitute
quantitatively the most important group of financial intermediaries in the country,
compresing both scheduled and non-scheduled banks. Deposits paid up capital and
borrowings from the Reserve Bank of India form the resources of the commercial banks.
Commercial banks are the most important intermediaries for promoting and mobilizing the
savings and for allocating investment among the different productive sectors. The short
term and medium term credit needs of both industry and agriculture are met by the
commercial banks and they also help finance developmental plans by investing funds in the
government securities. Initially, the commercial banks were concentrating only on the
financing of the trade and industry.
However, with the nationalization of the banks, they are now actively involved in the
disbursement of agricultural credit. On account of the branch licensing policy adopted by the
RBI, the rural branches of the commercial banks account for a large percentage of the total
network and the Agricultural Development Branches, Gram Vikas Kendras and Rural Service
Centres were set up to cater exclusively to the needs of agriculture and the allied activities.
Under the ‘Lead Bank Scheme’ all districts were allotted to commercial banks that were
entrusted with the responsibility of preparing credit plans for their lead districts. The ‘Village
Adoption Scheme’ was formulated by commercial banks to carry out leading operations in
contributing significantly to the development of agriculture
Export finance
The financial function in the export department is similar to the financial function in an other
organisation, but with this essential difference – that there are a host of government,
banking and export insurance regulations one should strictly adhere to, and quite a few
insurance regulations one should strictly adhere to, and quite a few precautions to be taken
since the export deal will be in foreign exchange and any inappropriate handling will result
in a serious loss of foreign exchange, apart from the other consequences.
The areas where finance would be essentially needed, after one obtains an export order will
be:
a. Procuring raw materials and components, and manufacturing the product.
b. Refinance facilities so as to get the proceeds of export bills at the time of negotiation
of export benefits are realized.
c. Refinance facilities for long-term credits offered for the export of products.
The schemes of export financing available to an exporter in India are reasonably liberal and
it may be safely stated that no export contract would normally be frustrated for lack of
finance. Financial institutions, like commercial banks, require basic procedural formalities to
be completed between the buyer and the exporter to enable them to provide the necessary
financial facilities to the exporter, whether such facilities extend over a short, medium or
long term.
Finance
Pre-shipment Finance
The procedure adopted for preshipment credit against a deferred payment contract are the
same as those applicable to short-term contracts. Pre-shipment credit is allowed by banks
against a contract/letter of credit.
Post-shipment Finance
When an exporter enters into a deferred payment contract, the entire contract value,
excluding the advance payment received by him, is realized by him over an extended period
of, say, upto 5 years. This imposes a severe burden on his finances. To relieve him of this
burden, as also to give incentives to exporters, the Reserve Bank of India has authorised
commercial banks to extend to the exporters a "Term Export Credit" as post-shipment
credit.
Depending on the nature of the deferred payment contract, post shipment credit is given
either directly by a commercial bank or in collaboration with Exim Bank.
Export –Import Bank of India
The Export-Import Bank of India (EXIM Bank) is a public sector financial institution,
established on January 1, 1982. It has taken over the various export financing of the
Industrial Development Bank of India. It was established by and Act of Parliament for the
purpose of financing, facilitating and promoting foreign trade of India. It is the principal
financial institution for co-ordination the working of institution engaged in financing export
of consultancy and related services, finance export oriented industries and provide
international merchant banking services.
Lending Programmes
The main focus of EXIM Bank operation is on export credits for medium-term and long-term
exports. Whenever a buyer of exported goods services from India, is allowed to defer
payment, an export credit arises. Deferred export credit is available for the sale of Indian
machinery, manufactured equipment and related services. Capital goods eligible for export
credit have been identified.
It is divided into group A which is eligible for term credit beyond 2 years, and group B which
is eligible for credit upto a maximum of 2 years. Such credit given may be in the form of
supplier’s credit or buyer’s credit. Supplier’s credit arises when Indian exporters credit to
the overseas buyer and finances himself through EXIM Bank. The deferred export credit
takes the form of buyer’s credit when EXIM Bank extends credit directly to the buyer. EXIM
Bank operates three broad programmes of financing. These are – Loans, Re-discounting and
Guarantees.
The leading and rediscounting programmes are divided into nine categories as indicated
below:
a. Provide financial assistance to exporters
This enables the Indian exporter to extend term credit to an importer overseas for
the purchase of Indian capital goods. The exports include equipments, machinery
and related services, project exports, turnkey projects, construction projects, etc.
Export of this nature arise when an Indian company contracts supply agreements for
the supply of equipments and services or a project export agreement involving the
setting up of a textile mill, sugar plant etc.
b. Technology and consultancy services
Indian companies borrow funds from EXIM Bank and provide deferred credit to
overseas buyers of Indian technology or consultancy services.
c. Overseas investment financing
The bank provides financing when an Indian company establishes a joint venture
overseas, and requires funds towards equity participation.
d. Pre-shipment credit
This loan of credit is available for companies that have won an export contract for
capital goods and are seeking finance to produce the goods which entails a
production period exceeding six months.
e. Overseas buyers’ credit
This is offered directly to foreign importers for the import of Indian capital goods and
relative services with repayment terms spread over a period of years.
f. Lines of credit to foreign governments
Lines of credit are offered to foreign governments and foreign financial institutions.
Such lines provide long-term finance for import of Indian capital goods, and related
services.
g. Relending facility to bank overseas
This facility to overseas bank is made available to enable them to provide term
finance to importers for import of Indian capital goods. The overseas banks will
facilitate the foreign buyer, the EXIM Bank, and supplier to avail of these facilities.
h. Export bills re-discounting
This lending programme is available to commercial banks in India that are authorised
to deal in foreign exchange. Such banks can re-discount their short-term usance
export bills with the EXIM Bank. EXIM Bank provides funds under this programme for
a period of 90 days.
i. Refinance of export credit
Under this Programme, the commercial banks in India, who are authorised to deal in foreign
exchange, can obtain from EXIM Bank 100% refinance of term loans extended for export of
Indian capital goods. This credit is commercial banks can obtain financing participation
under EXIM Bank’s other programmes.
ECGC
Export Credit & Guarantee Corporation. Export transactions by their very method and
operations involved, carry substantial risks which are both commercial and political in
nature. This scheduled banks, which are authorised to extend easy financial terms for
export endeavors are not equipped to take care of these risks. Besides, it also provides
financial guarantees to banks and exporters for exports against deferred credit payment
terms.