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Stages of Measuring Advertising

Advertisers are always interested in knowing the answers to a few questions like:

Was the advertising worth of the money spent?

Was the advertising campaign really successful in attaining the advertising goals?
Were the T.V. commercials as good as those of the competitors?
Is the print advertisement capable of creating awareness about the product
among the consumer?

The answers to such questions are sought by various tests that are conducted prior to
the implementation of the advertising campaign, during its implementation and after it
have been implemented. These are called Pre-Tests, Concurrent Tests and Post-
Tests. While each of these tests is conducted to evaluate the effectiveness of the
advertising effort, the objectives vary.

Pre-tests are conducted before exposing target consumers to the advertisement.

During pretesting research is done on three vital questions:

Do consumers feel that the advertisement communicates something desirable

about the product?
Does the message have an exclusive appeal that differentiates the product from
that of the competitors?
Is the advertisement believable?

Although a lot of money is spent on pretesting yet the advertisers like to confirm the
results by post-testing of their promotional campaigns due to the following reasons:

There is a need to produce more effective advertising by retaining the good and
removing the bad.
The advertising executives can prove to the satisfaction of the management that
a higher advertising budget will benefit the firm.
There is a need for measuring the results to determine the level of expenditure
that is most promising.

Table 1: Classification of various pre and post-tests for measuring communication effects
and sales effect

7.1 Communication Effect Test

The exact communication effect can be measured by knowing whether the specific
objective of communication is achieved or not. If the objective is to create brand
awareness - statistical models and research methods can be used. Pre and Post
evaluations of communication effects can be made for the entire advertising campaign
and such evaluations are known as pre-tests and post-tests.


Pre-tests are taken before the campaign is implemented and they can occur at any
time from idea generation to implementation stage and are conducted before the ads are
exposed to the audience in the media.
These essentially check the potential of an advertising idea or concept and are usually
done in in-lab conditions. Such tests may be conducted at three possibly different
stages in the development of the ads. These tests mostly use qualitative techniques.

The first stage is when the ads are still at the idea or concept stage. Often alternative
brand promises are tested here to shortlist the most relevant one. At this stage,
adcepts (visual or text representation of the concept) are used to test their potential
and connect with the audience.

The second stage, tests are done when the ideas have been developed into campaigns.
Here, approaches or appeals based on shortlisted ideas are tested.

The third stage tests are done when the selected campaign has been given final shape
and produced in finished form. These tests act as a final feedback and disaster check
before the ad is released in the media. The feedback might also be helpful in some fine-
tuning and polishing up of the ad before release.

Value Addition 7: Activity

Stages of Pre-Tests
Identify and arrange the following activities in the first, second and third stage of pre-
test for measuring communication effect of advertising:

1. Test of the finalized ad campaign,

2. Test of adcepts or idea/concept of ad,
3. Test of approaches or appeals of campaign.


1. Test of adcepts or idea/concept of ad Stage I

2. Test of approaches or appeals of campaign Stage II
3. Test of the finalized ad campaign Stage III

Following Pre-test methods are available with the advertisers for finding out the
communication effects.

Copy Testing: Copy testing is the study of advertising (print, T.V., radio, billboards,
Internet, etc.) prior to launching it. No one knows how the target audience will respond
to a given ad. Copy test helps take the guesswork out of advertising. It predicts how
effectively an ad will perform, based on the analysis of feedback gathered from the
target audience. Each test will either qualify the ad as strong enough to meet company
action standards for airing or identity opportunities to improve the performance of the

Value Addition 8: Did You Know?

9 Principles of PACT (Positioning Advertising Copy Test)
In 1982, 21 leading advertising agencies came out with a public document that specified
the PACT (Positioning Advertising Copy Testing) Principles that describe the essentials of
a good copy testing system. As per the PACT, a good copy testing system should be able
to satisfy the 9 criterions that came to be popularly known as 9 principles of PACT. It
also specified various types of copy testing measurements for example; recall measures,
persuasion measurement, diagnostic measurement, and non-verbal measurement.
PACT states a good copy testing system must meet the following criteria:

1. Provides measurements that are relevant to the objectives of the advertising.

2. Requires agreement about how the results will be used in advance of each
specific test.
3. Provides multiple measurements, because single measurements are generally
inadequate to assess the performance of an advertisement.
4. Based on a model of human response to communications the reception of a
stimulus, the comprehension of the stimulus, and the response to the stimulus.
5. Allows for consideration of whether the advertising stimulus should be exposed
more than once.
6. Recognizes that the more finished a piece of copy is, the more soundly it can be
evaluated and requires, as a minimum, that alternative executions be tested in
the same degree of finish.
7. Provides controls to avoid the biasing effects of the exposure context.
8. Takes into account basic considerations of sample definition.
9. Demonstrates reliability and validity.

Source: http://en.wikipedia.org/wiki/Copy_testing

Concept Pre-Testing: Concept pre-testing provides information at the earliest possible

stage in the development of an advertising campaign before investing huge amount.
Concept pre-testing could be of any element like body copy, headlines, themes, colors;

Value Addition 9: Example

Concept Pre-Testing
A new fairness soap is to be launched by a firm. The general perception is that the
fairness creams last on the face for a longer time and are therefore effective, but a soap
that is washed off instantly after its application is not related to causing fairness.

The company decides to test the concept of the advertisement created for its fairness
soap. The campaign clearly demonstrates fairer skin as a result of consistent use of this
particular soap. Now, a test that is attempted to measure whether the company will be
able to put across its message through this ad campaign is essentially measuring the
communication effect, at a pre-launch stage, for the very concept of the advertisement
and not for its design, colour, copy or media used.

Consumer Jury: Advertisers use a test audience called a consumer jury of potential
buyer to test the advertised product known as jurors. Consumer juries may be asked to
rate a selection of layouts or copy versions presented in paste-ups on separate sheets.
Viewers are asked to evaluate ads and give their reactions when two or more ads are
tested, viewers are asked to rate or rank them according to their preferences.

Various ways of conducting tests on the consumer jury are:

The order of merit: Under this test points are given by jurors to determine the best and
worst advertisement. These points are then added together to determine which ad has
got the maximum points.

Portfolio test: It is a method of pre-testing an advertisement, after looking through a

portfolio of different versions of a particular advertisement, respondents chosen from the
target market are asked to recall in detail those that they can remember. The
respondents consider each advertisement and decide on the best one. Their recall level
indicates an advertisements ability to affect consumers knowledge and interest for the

Mock magazine test: This is very similar to the portfolio test used for print media.

Perceptual Mapping: The Perceptual mapping of attitude change compares groups or

individuals through time or between experimental conditions and evaluates the
differences in perceptions held by consumers in different experimental conditions with
the use of multi dimension scaling.

For the broadcast ads Pre-testing can be done using the following methods:

In-home projection tests: In the consumers home itself a movie projector is set up
and the ad is screened. They are questioned both before and after exposing them to the
ad. The responses gathered from such an exercise enables the advertisers to know the
strengths and weaknesses of the ad.

Trailer tests: As in case of any trailer activity two different groups of customers are
identified. One group is exposed to the ad that contains coupons for purchasing some
selective articles while the other group is not given the coupons. If the consumers of the
first group use coupons for purchasing articles it can be inferred that the ad was

Theatre test: A set of target audience is shown the trial ads in a theatre. They are then
given a questionnaire to be filled. The information provided by them through the
questionnaire helps in assessing the theme of different ads. This helps in selecting the
best one.

Live telecast tests: As against the above artificial testing environments, a real life live
environment is chosen. The audience of this environment is exposed to the test ads
through live telecasting. From the reactions of reviewers the final ad is created.

Projective Technique: This method is a way of getting at the deep down motivations,
desires and preferences of consumers to get reactions to vague and unclear stimuli that
can be interpreted in a variety of ways. Thus instead of showing them an advertisement,
the researcher shows some pictures, words or situations and asks the respondents to tell
a story about it, fill the details or complete them.

The types of projective techniques are as follows:

Association: The researcher presents a word, or some unidentified shape and the
respondent is asked to tell the first word, thought or image that occurs to him.

Construction: The researcher presents a scene or picture and the respondent is asked to
make a story about it.

Completion: The researcher shows an incomplete sentence or picture and the respondent
are asked to complete it with any words or in any way he wishes.
Laboratory Research Device: It uses specially designed equipment to measure the
physiological reactions heartbeat, blood pressure, pupil dilation, and perspiration of
the respondent to an ad. Some such technique include measuring interest levels by
tracing eye ball movements of the audience through eye cameras, or measuring
attention and stimulation levels by tracing brain waves through EEG and measuring an
audience pupil size when he is exposed to a visual stimulus, such as an advertisement or
package and so on. Although these tests are able to capture the power of seeking
attention by an ad, they fail to measure the intensity of the intentions behind them.


Post-tests are conducted after the ads are exposed in the media. They are designed to
determine if the campaign is accomplishing the objectives required and to serve as input
of how well its doing. Since these tests are done after the media release of the ads,
they are administered on the actual or real audiences. These primarily test the
effectiveness of the ads in terms of creating recognition, generating awareness and
persuasion. The results of these tests are more quantitative in nature.

Few of the methods of this type of tests are:

Recall Tests: The most popular posttests are the brand recall test. These essentially
check on the recall levels of the ads, its content, and the brand advertised. They
measure the brand awareness levels and the message comprehension levels. Scores are
based on percentage of respondents who can accurately recall the ad, idea
communication and likelihood of purchase.

Aided recall: In this method individuals are shown advertisements in which the brand
name has been marked and they are asked to tell which product is advertised. This is
used to test the ability to remember brand marks, packages and slogans. In this type of
test, guessing is discouraged and inaccuracy of memory is detected. This method shows
association between some features of the advertising campaign and the brand name
with the target audience.

Unaided recall: It involves asking the respondents if they have seen the publication by
showing them only its cover and not inside ads contained in it. They are then asked to
name all the ads that can be recalled in the publication. This method is based on the
memory alone and individuals are not given any help or aid to recall as in the case

Methods of Unaided recall:

DAR: Day-After-Recall. If brand recall test is done within a day after the ad is released in
media, then it is called the day after recall test. Usually it checks for unaided and aided
recall, messages recall, and whether the message recall is specific or vague.

TPT: Total Prime Time. Here, the viewers television viewing time is researched. This test
just measure the awareness part of the ads i.e. only half effectiveness of the ad and
does not tell anything about how far it has been effective in convincing or persuading the

Recognition Test/Readership/Viewership/Penetration Test: It determines the

readership of the advertisement in the newspapers and journals. This test is conducted
by personal interviews with readers, and magazines or newspapers. The interviewers
locate the readers of the particular issue of the magazine in question. They, then, go
through the magazine page by page with the respondent indicating those advertising
elements which he or she recognize as having read. The data collected by this test
indicate the proportion of qualified readership of a publication that claims to have seen,
read some or read most of the elements of the individual advertisement.

Triple Association Test: This test is useful only when the advertising features a
specific theme or slogan that the reader may remember. This test measures the degree
of consumer association with the product, the brand name and copy theme and is
therefore termed as triple association test. The test may be modified to suit newspaper,
radio or television advertising for the measurement of consumer awareness.

Brand Persuasion Test: This test measures the ads on their ability to influence brand
preference levels in the category. These are done only after the ads have been exposed
in the media and audience have become familiar with them. Beyond measuring brand
preference level, this test measures the shift in the attitude of the audience towards the
brand on the key identified attributes. For example, in the refrigerators category apart
from measuring how many prefer a whirlpool, or a Godrej or Samsung, t

he test will check how people rate the different brands on other attributes like; cooling,
space, range, size etc.

It is presumed that a favorable change in attitude predisposes audience to buy the

product. It is an indirect measurement and studies the change in consumer behaviour
over a period of time through a variety of direct questions in a completely structured

Sales Effect Test: Advertising is aimed at improving the sales volume of a concern
company so its effectiveness can be evaluated by its impact on sales. Most of the
managers believe that the advertisement directly affects the sales volume and hence
they evaluate the effectiveness of the advertising campaign by the increase in the sales
volume. The effectiveness of an advertisement or advertising campaign in boosting sales
of a product is generally hard to measure as sales may be influenced by factors other
than advertising, such as the product's price, product features, its availability and the
actions of competitors.

Value Addition 10: Examples

Communication Effect
1. Maaza was rated at 8th position as per : Brand Equity Most Trusted Brand Survey done by
Economic Times. In 1993, Maaza became a part of Coca-Cola family. Coca-Cola India attributed
Maaza in top 10-brand position to, "the brand's strong heritage and consistent communication
campaigns that have helped establish it as an alternate for mangoes regardless of season." Various ads
of Maaza had commendable communication effect. For example

"Taaza mango Maaza mango",

"Bina Guthli Aam", and
The current "Har Mausam Aam".

1. During one of the highest rated and most expensive event on prime time is Snow
Bowl. Coca-Cola gives its creative and innovative commercials during this
program so that people watching it are reminded of its products.
7.2 Sales Effect Test

The sales effect of advertising is very difficult to measure because of many factors
influencing sales besides advertising. It becomes easier to measure the sales effect only
when these other factors are absent, constant or controllable to a large extent. For
example, in the case of direct marketing it is easiest to measure the sales effect of
advertising as the sales are influenced only direct marketing. On the other hand, an
advertisement that is meant to be promoting only the brand or building goodwill for the
company cannot be evaluated in terms of sales effect, as sales may not result from such
advertising. There are various pre and post-test research methods or tests to evaluate
the sales effect of advertising.

Pretests for sales effect

During these tests advertisers place their ads in a test Market and they try to find out
which advertisement is most suitable. This can be measured in following ways:

Inquiry test: This is designed to measure advertising effectiveness on the basis of

inquiries generated from ads appearing in various print media. The inquiry may be in the
form of the number of coupons returned, phone calls generated or direct inquiries
through reader cards e.g. if an individual calls in response to an ad then advertiser may
ask how you found about the company/product or where they saw the ad.

Split Run Test: This test is the modification of the above test and is normally used to
test the print ad. The advertiser prepares the two different copies of the ad carrying
different coupons, free gifts or free booklets. The ad is then run in such a way that 50%
of the medium carries one copy and other 50% carries another copy. Thus different
responses generated in different media for the ad will examine specific elements of the
ad or variation on it.

Intend to buy Test: In this test, readers of a magazine, who have read the
advertisement, are asked about the effect of an ad is on their buying intention for a
product. Once they express an intention to buy, a further probe of the element of ad that
influenced them most to do so is assessed. It is assumed that an intention to buy will be
converted into actual purchase sooner or later.

Sales Experiments in Test Markets: The ad campaign is run on a small scale to find
out the effectiveness of the ad before the ad campaign is run for the entire market. The
advertiser selects a control market and a test market. The existing ad campaign
continued in the control group and the new campaign is run in the test market. Test
period is divided into three stages a) pre test period (b) actual test period and (c) post
test period.

The sales results of the control group are evaluated against the results of the test group
to test the effectiveness of ad campaign.

Post-Testing for measuring Sales Effect:

Sales and profit effects of advertising can be measured through two ways:

Historical Sales: This test involves correlating the past sales and profit with past
advertising expenditure using advanced statistical techniques. The result can reveal how
far advertisement was effective in generating or increasing sales. The test can be used
to different products, territories and ad media.
Experimental Tests: Experiment is conducted to assess impact of advertisement on
sales. Instead of spending same percent of sales for advertisements in all territories or
for products, a company may spend different percentages of sales for advertisements
and find out whether high spending territory or product have generated more sales.

In an experiment, one element of marketing mix may be changed at a time in the test
market and then sales of another similar market is compared where marketing mix
remained same. The elements presence or absence is a reason for differences in sales.

Such an experiment may be carried out on two groups of consumers instead of two

Inventory of company can be audited to determine product and brand sales before and
after the campaign.

Value Addition 11: Pause and Think

Evaluating Advertising is not Easy
Jerome Mccarthy had said about 4 decades back that Evaluating advertising
effectiveness is not easy. It is relevant even today. DAGMAR (Defining advertising goals
for measuring advertising results) Approach specifies two aspects of defining advertising:
sales and communication. These later can be used as standards or yardsticks to measure
the effectiveness of advertising.

While sales can be measured quantitatively, besides advertising sales may be a result of
other marketing mix variable and external factors.

Communication, on the other hand, being qualitative, is difficult to measure because of

its qualitative nature. At most what can be measured is the recall value and recognition
ability of the message.

This makes the exact measurement of advertising effectives difficult.

Only a comprehensive evaluation of a number of parameters can provide an insight into

the effectiveness of advertising, such as,

i. The cost of advertising.

ii. Percentage of audience to whom the message reached.
iii. Consumer perception of the ad message.
iv. Change in attitude after seeing the Ad.
v. No of enquiries generated by an Ad.

Concurrent Testing

Besides pre and post test mechanism for evaluating the ad effectiveness, there is
another category of tests. As the name suggests, the testing of the ad effectiveness
happens simultaneously, that is, concurrently as the ad campaign is been run. The major
objective of this kind of test is to be aware of the limitations or shortcomings of the ad
before it is too late. Such an attempt saves huge loss in case the ad campaign is not
appropriate with some of its dimension. Although avoiding costly mistakes is the prime
objective of conducting the pre-test for an advertisement, concurrent test gives the firm
a specific advantage over pre-test. This is, while pre-test is conducted on limited market
area, concurrent test covers full market area. Because of the limited scope of pre-
testing, certain limitations might not surface and the firm may remain ignorant about
them even after pre-test stage. This shall become evident from concurrent test, such
that the firm can take timely action and modify the ad suitably. Concurrent testing also
has a merit over post-testing. Post test are undertaken after a time lag between the
launch of the ad and the test itself. Due to this time lag the recall value of the ad is
hampered. Concurrent test overcomes this shortcoming and the tests are performed
while the ad is been run and is fresh in the minds of the viewers/readers.

There are five methods of concurrent testing to evaluate the effectiveness of an


1. Telephonic Survey- Under this method, prospective consumers are selected and
are telephoned. Their responses to different dimensions of advertising are
recorded and analyzed later.
2. Interview Test - Under this method, prospective consumers are selected and
are interviewed. Such a face-to-face interaction is generally possible at POP
(Point-of-Purchase). Their responses to different dimensions of advertising and
visibility in the retail store are noted down and analyzed later.
3. Passers-by-Count test In this type of test, the number of viewers stopping to
view a signboard/billboard/poster are counted. The more the number of viewers
who halt and observe the advertisement, the more effective the print ad
4. Customer Diary Test In this type of test, some selected prospective
consumers are provided with diaries and are requested to note down their
opinions about the strengths and weaknesses of the ad whenever they read or
view the ad. These constantly updated diaries become a good source of
information for evaluating the effectiveness of an ad while it is running in the
5. Mechanical Tests In this type of test, the readers or viewers of the ad are
observed while they are actually reading or viewing the ad with respect to their
eye movement, etc.
Rural Indebtedness in India: Causes, Consequences and Measure
for Removal
Poverty is perhaps a major cause for rural indebtedness. The low level of rural incomes,
the uncertain and primitive farming of small landholdings makes it impossible to meet
the needs required for their living. Often, the rural people take debts to meet these

One of the major problems concerning to the rural society is indebtedness. This problem
is just not related to one individual but is passed on from one generation to the next
generation. Taking or incurring debt for the purpose of agricultural production is indeed
necessary as it contributes to production.

However, the rural people incur debts for nonproductive purposes such as to meet the
family needs, perform social functions (related to marriages, birth, death), litigation, etc.
Since money taken does not contribute to production but instead to consumption, it
drags the rural people into indebtedness.

Thus, it becomes impossible to repay these loans. To clear these loans, the rural people
incur debts again. In this way, they are stuck in the clutches of indebtedness, which
passes on from one generation to another. For many small farmers, the agricultural pro-
duction is so less that they are not able to provide for such unproductive expenditure.

Causes of Indebtedness:
Poverty is perhaps a major cause for rural indebtedness. The low level of rural incomes,
the uncertain and primitive farming of small landholdings makes it impossible to meet
the needs required for their living. Often, the rural people take debts to meet these

Ancestral/Inherited Debt:
Most of the rural debts of the present day are inherited from the past and which
increases with the passage of time. An inheritor is liable to the repayment of the debt
only to the extent of the property inherited by him.

Despite this law, the rural people continue to repay the debts of their forefathers, as
they are not fully conversant with law as they are illiterate. As these people are bound
by the traditions and values they regard it as their sacred social duty to repay the debts
of their forefathers.

Such increasing debt is passed on from one generation to another making its repayment
increasingly difficult, whenever it is passed on. Thus, the Royal Commission has rightly
stated that the Indian farmer is born in debt, lives in debt and dies in debt.

Social and Religious Needs:

Villagers are mostly bound by the social traditions and customs, which are considered to
be sacred and had to be performed. Some of these ceremonies are marriage, births,
deaths, religious occasions, etc. The expenditure is usually very high for the performance
of these ceremonies. In order to meet these needs, the villagers take loans. As their
incomes are not sufficient enough, they are not able to repay these loans. Thus, they
remain unpaid and increase with the passage of time.

Generally, the agriculturists in India are involved in various kinds of disputes related to
land, property, etc., which force them to go to a court of law. Often, they view it impor-
tant to win the case as it is related to the family prestige and honour. Such litigations
involve heavy expenditure and time. In order to meet these needs, the agriculturists
take loans that they are not able to repay and are caught into indebtedness.

Backwardness of Agriculture:
Indian agriculture is an uncertain business. It virtually depends on unreliable rains for
the supply of water. If there are no rains or untimely rains, the entire crop is lost and the
credit invested in the agriculture goes waste. As a result, the loan taken for the produc-
tive purposes also becomes a burden, leading to indebtedness of the farmers.

Excessive Burden of Land Revenue and Rent:

Land revenue, where it is levied by the government in some states and the rent payable
to the landowners is becoming excessive burden on small farmers. In order to pay these
land revenue, mid-rent, the farmers take loan. Sometimes, the farmers have to pay
these rents and land revenues even during the floods and drought. This make the
farmers run into debts.

Defective Money Lending System:

The village money lending system is very much defective. The sole aim of the money-
lenders is to extract the maximum from the farmers. The moneylenders make wrong
entries in their account books, charge very high interest rates and extract high prices for
the goods they sell to the farmers but purchase the farmers produce at very low prices.

In course of time, as the amount debt increases, the moneylenders are much interested
in seizing the farmers lands, and other valuable assets than the debt being repaid by the
farmers. Thus, the farmers are trapped in the hands of the moneylenders.

Consequences of Indebtedness:
There are many economic and non-economic consequences, which are caused by rural
indebtedness. They are categorized into economic, social and political consequences. Let
us have a look at them in detail.

Economic Consequences:
As the farmer is deprived of the substantial part of his produce in clearing the debts,
payment of interests and principal amounts, he loses interest in agricultural production.
This leads to low agricultural production and income.

The farmer is forced to sell all his produce to the moneylender and he is deprived of
selling his produce in the open market and obtaining the prices of the market. Such a
situation adversely affects the inducement for work and agricultural production of the
The trade between the moneylender and the farmer is always beneficial to the mon-
eylender. The farmer is priced heavily for what he purchases and receives little for what
he sells to the moneylender. Thus, such trade leads to loss of a substantial part of his

In the process of obtaining loans, payment of interest and repayment of principal to the
moneylender, the farmer often loses his land, as he is not able to repay the loan. As a
result, the farmer, the owner of the land, becomes a landless labourer.

Social Consequences:
The relations between the moneylenders and the farmers become venomous and poi-
soned the social life. Therefore, the social groups get divided into two classesthe
exploiting class and the exploited class. Due to the loss of land, the farmer feels
deprived and pushed down in the social hierarchy. Land ownership gets concentrated in
few hands, which builds up tensions between the moneylenders and farmers.

As the farmers lose their lands, they have to render services to the farmer. Their self-
respect is lost as they become slaves. Though there are many laws to protect them, they
are difficult to enforce where the farmers are illiterate or do not have enough resources
to go to the courts.

Political Consequences:
The indebted farmers are treated by the moneylenders as mere commodities of votes.
The moneylenders use these farmers as their private property. As their economic posi-
tion is not sound, they do not have a political status of their own.

Their political participation is completely dominated by the moneylenders who use them
for their own political advantages. To free themselves from the clutches of the
moneylenders, farmers indulge in illegal means to repay loans.

The moneylenders in their attempts to drag and squeeze the farmers indulge into all
kinds of illegal practices and poison the political atmosphere of the villages. Thus, the
rural indebtedness adversely affects all the aspects of rural life. It hampers the
agricultural production and rural economy, reduces the farmer to a landless labourer and
poisons the social and economic life of the rural people.

Measures for the Removal of Indebtedness:

The problem of indebtedness can be solved by two means. The first is to take up
measure to reduce the burden of present indebtedness and the second is to prevent the
evil from rising again in the future.

To reduce the present burden of indebtedness, the following measures have to

be taken:
1. Canceling all the debts paid to the moneylenders by the farmers, which are more than
the principal amount itself, debts which are already been repaid but still stand in the
account books of the moneylenders, debts that are created by the moneylenders by
fraud, loans for which repayments have been received in the form of money, produce
and other services like labour from the indebted farmers.
2. Debts should be properly scaled down. According to law, the inheritors are liable to
pay the debts only to the extent they have inherited. In this way, most of the debts will
be reduced. Debts that are so excessive and standing are since a long time, should be
settled between the concerned parties or through the village panchayats. Debts, which
do not have records or exist with incomplete records, should also be reduced.

3. Apart from the above two steps, the remaining part of the debts should be handled by
special institutions such as banks. Such banks pay the amount to the moneylenders on
one hand and recover the same from the debtors on easy terms. These banks also
collect funds and provide credit facilities to their members.

To control the problem of indebtedness in future, the following steps are

1. The income of the farmers should increase so that they could meet the unproductive
expenses and are not forced to take any loan. In order to achieve this goal, it is
necessary that agriculture should be conducted on scientific basis not depending totally
on the natural climatic factors. Some other measures have also been undertaken such as
the introduction of land reforms providing market for the agricultural produce, etc.

2. The panchayats and such other village level institutions should try to solve the village
disputes and try to prevent them from going to the courts of law, which need heavy

3. Information regarding the laws and their implementation should be given to the
villagers so that they do not get into the clutches of the moneylenders for generations.

4. Adequate credit facilities on reasonable terms should be arranged to the farmers. Co-
operative credit is a good solution in this regard. Private lending should be eliminated in
this field.

The above-mentioned two types of measures should be carried on simultaneously. Mere

prevention without any preventive measures for future would not help the situation;
moreover, there is every possibility of this evil to rise again and again. Thus, both these
measures should go hand in hand so that the problem of rural indebtedness vanishes

NABARD is a development bank established under statutory provisions. Let us briefly go

through important characteristics of this development bank to get a clear understanding
of its role and functions.

Role and Functions of NABARD

The National Bank for Agriculture And Rural Development is popularly referred to as

NABARD is designated as an apex development bank in the country.This national bank

was established in 1982 by a Special Act of the Parliament, with a manadate to uplift
rural India by facilitating credit flow in agriculture, cottage and village industries,
handicrafts and small-scale industries. It is also required to support non-farm sector
while promoting other allied economic activities in rural areas. NABARD functions to
promote sustainable rural development for attaining prosperity of rural areas in India.

It is basically concerned with matters concerning policy, as well as planning and

operations in the field of credit for agriculture and other economic activities in rural areas
in India. It is worth noting with refernce to NABARD that RBI has sold its own stake to
the Government of India. Therefore, Government of India holds 99% stake in NABARD.

Role of NABARD:

It is an apex institution which has power to deal with all matters concerning
policy, planning as well as operations in giving credit for agriculture and other
economic activities in the rural areas.
it is a refinancing agency for those institutions that provide investment and
production credit for promoting the several developmental programs for rural
It is improving the absorptive capacity of the credit delivery system in India,
including monitoring, formulation of rehabilitation schemes, restructuring of credit
institutions, and training of personnel.
It co-ordinates the rural credit financing activities of all sorts of institutions
engaged in developmental work at the field level while maintaining liaison with
Government of India, and State Governments, and also RBI and other national
level institutions that are concerned with policy formulation.
It prepares rural credit plans, annually, for all districts in the country.
It also promotes research in rural banking, and the field of agriculture and rural

Functions of NABARD:

NABARD gives high priority to projects formed under IRDP.

It provides refinance for IRDP accounts in order to give highest share for the
support for poverty alleviation programs run by IRDP.
Other than the activities included under IRDP, it also makes the service area plan,
to provide backward and forward linkages and also infrastructural support.
NABARD also prepares guidelines for promotion of group activities under its
programs and provides 100% refinance support for them.
It is making efforts to establish linkages between Self-help Group(SHG) that are
organized by voluntary agencies for poor and needy in rural areas and other
official credit agencies.
It refinances to the complete extent for those projects that are taken under
the National Watershed Development Programme and the National Mission of
Wasteland Development.
It also has a system of District Oriented Monitoring Studies, under which, study is
conducted for a cross section of schemes that are sanctioned in a district to
various banks, to ascertain their performance and to identify the constraints in
their implementation, It also initiates appropriate action to remedy them.
It also supports Vikas volunteer Vahini programs which offer credit and
development activities to poor farmers.
It also inspects and supervises the cooperative banks and RRBs to periodically
ensure the development of the rural financing and farmers welfare.
NABARAD also recommends about licensing for RRBs and Cooperative banks to
NABARD also provides assistance and support for the training and development of
the staff of various other credit institutions, that are engaged in credit
It also runs programs for agriculture and rural development.
It is engaged in regulations of the cooperative banks and the RRBs, and manages
their talent acquisition through IBPS CWE conducted across the country.

Efforts of RBI toward Promoting Agricultural Finance

The Reserve Bank of India in a developing economy like ours may be regarded as an
engine of growth. It not only regulates bank finance, but deliberately promotes
development finance.

It has made special efforts in catering to the growing financial needs of agriculture,
industry and export sectors of the country.

Agriculture is the king-pin of Indias rural economy. Thus, rural credit agricultural
finance is the prerequisite of agricultural growth and development.

Since the inception of planning in our country, the Reserve Bank of India has been
paying specific attention to promoting rural/agricultural finance.

Agricultural Credit Department:

In fact, the Reserve Bank of India Act, 1934 did assign to the Reserve Bank the
responsibility of developing an institutional credit system for the agricultural sector in
the country. As such, the Agricultural Credit Department of the Bank was constituted
along with the establishment of the Reserve Bank in April 1935, whose main task
was to develop co-operative credit movement in agricultural finance.

The main functions of the Banks Agricultural Credit Department were spelt
out as under:
(i) To maintain expert staff to study all questions of agricultural credit, who shall be
available for consultation by the Central Government, State Governments, State Co-
operative Banks and other banking organisations;

(ii) To co-ordinate the operations of the bank in the disbursal of agricultural credit
and its relations with state co-operative banks and any other banks or organisations
engaged in the business of agricultural credit;

(iii) To finance the movement of crops and other agricultural operations through
state co-operative banks and other suitable agencies of rural credit.
The Agricultural Credit Department of the bank, however, primarily confines itself to
research rather than financing of agriculture.

Though there was a provision in the Act empowering the Reserve Bank to provide
finance for agriculture through state co-operative banks, no significant progress was
made by the bank in this direction till the mid-fifties. In 1945-46, the bank provided
accommodation to cooperative banks only about Rs. 1 lakh. It, however, increased to
Rs. 5.37 crores in 1950-51.

All-India Rural Credit Survey Committee:

The activities of the bank in the sphere of rural finance showed a marked expansion
and new vista with the appointment of the All-India Rural Credit Survey Committee
in 1951 and the Banks acceptance of its major recommendations of its Report
(1954). The Committee observed that the non-institutional sources accounted for
nearly 93 per cent of the total agricultural credit in 1951-52. It further remarked that
the agricultural credit fell short of the right quantity, was not of the right type, did
not serve the right purpose and often failed to go to the right people.

The Committee also observed that the performance of the co-operatives in the realm
of agricultural finance was not only insignificant (accounting for just 3 per cent in the
total agricultural credit), it was also deficient in more than one way. Nonetheless, the
co-operative agency in rural finance is supposed to be the least unsatisfactory
channel of credit to cater to the needs of the cultivators. The Committee thus
commented that Co-operation has failed, but co-operation must succeed.

To strengthen the co-operative credit movement in the rural sector, the

Committee recommended the Integrated Scheme of Rural Credit, with the
following main features:
(a) State Partnership:


The scheme envisages State partnership through contribution to the share capital of
co-operative credit institutions.

(b) Co-ordination:
The scheme implies full coordination between credit and other economic activities
marketing and processing, in particular.

(c) Administration:
The scheme insists on administration through an adequately trained and efficient
staff, responsive to the needs of the rural population.

(d) Production-oriented Loan Policy:

The scheme envisages a crop loan system for granting short-term co-operative credit
to the farmers. It, thus, forms a production- oriented loan policy.

Under the Integrated Scheme of Rural Credit, the Reserve Bank had to play a crucial
role in the following respects:
i. Development of co-operative credit,

ii. Expansion of co-operative economic activity: processing and marketing,

iii. Training of co-operative staff.

The Reserve Bank was further directed to work as an active collaborator in drawing
up schemes of development of co-operative credit organisations with the
Government of India and the State Governments.

State Bank of India:

The Reserve Bank of India became the major shareholder of the State Bank of India
(SBI) when it was constituted in 1955. The SBI played a crucial role as a rural-
oriented commercial bank in providing financial assistance to the co-operative sector
in rural areas.

Agricultural Credit Funds:

The Reserve Bank of India then established the National Agricultural Credit (Long-
Term Operations) Fund in February 1956, to enable the Bank to provide long-term
loans and advances to Land Development Banks and the State Governments for
participating in the share capital of co-operative banks and credit societies.

Later on, it was renamed as the National Rural Credit (Long-term Operations) Fund,
as its finance extended besides agriculture to others in rural areas. Similarly, another
Fund called the National Agricultural (Stabilisation) Fund was constituted by the bank
in June 1956, for the purpose of granting medium-term loans to State Co-operative
Banks (SCBs) when, on account of drought, famines, etc., they are not in a position
to repay their short-term debts to the bank.

Another fund, named the National Agricultural Credit (Relief and Guarantee) Fund,
was also created by the bank for the purpose of giving grants to co-operative credit
institutions through the state governments to enable them to write off their
irrecoverable arrears on account of severe famines.

Chart 1 below depicts the flow of assistance of the first two major funds of the
Reserve Bank.
All-India Rural Credit Review Committee:
In 1966, the Reserve Bank of India appointed a committee, called the All-India Rural
Credit Review Committee, to review the developments that had taken place in the
field of rural credit since 1954. The committee, in its Report (1969), suggested that
extensive and intensive efforts are needed to ease the problem of agricultural credit;
hence, besides co-operatives, commercial banks, especially the nationalised banks,
should also take a keen interest in the provision of rural finance. The committee also
recommended the enlargement of the Reserve Banks promotional role in building up
of the co-operative credit structure and developing a strong co-operative movement
in the country.

Agricultural Refinance and Development Corporation:

On July 1, 1963, the Reserve Bank of India setup an institution called the Agricultural
Refinance Corporation (ARC), to work as a refinancing agency in providing medium-
term and long-term agricultural credit. It was meant to provide refinancing facilities
to the SCBs, CLDBs, and scheduled commercial banks.

In 1975, this institution was renamed as Agricultural Refinance and Development

Corporation (ARDC) with a view to emphasise its developmental and promotional
role, besides refinancing activities.

The main aims and objectives of the ARDC have been specified as under:
1. Optimum Utilisation of Resources:
To support the national policies for increasing agricultural output, productivity and
employment by efficient utilisation of natural resources such as land and water.

2. Ecological Balance:
To ensure that the ecological balance in the environment is maintained.

3. IRDP:
To support the integrated rural development programme (IRDP) and promote the
growth of secondary and tertiary sectors in rural areas.

4. Post-Harvest Technology:
To promote postharvest technology by laying greater stress on marketing and a
strong infrastructure.

5. Distributive Justice:
To fit well together justice into growth by providing increased assistance to small
farmers and weaker sections.

6. Regional Balance:
To reduce regional imbalances by accelerating the growth rate in backward regions.

7. Institution Building:
To secure and encourage institution building.

8. Technological Development:
To foster appropriate technological development for securing optimum benefits from
investments and acquisition of necessary knowhow by farmers and other rural

9. Training:
To strengthen the professional capabilities and competence of the staff in the
participating banks and implementing agencies by organising and coordinating
training programmes.

10. Research:
To promote action-oriented research for agricultural and rural development.

The Corporation, thus, provided refinance covering various activities for promoting
the development of agriculture.

It has been observed that the Corporation implemented its lending policy, keeping in
tune with the national priority order, for granting a major portion of refinance in
favour of minor irrigation schemes, followed by farm mechanisation, storage and
market yards, plantation and horticulture, IRDP, land development, etc.

The ARDC also provided detailed guidelines for project formulation. Further, it
pursued the implementation of rehabilitation programmes drawn for PLDBs and
SLDBs in certain states.

The Corporation disbursed an increased amount of refinance for the schemes in the
less developed areas.

The Corporation also made special efforts in solving the problems of small and
marginal farmers by assisting IRDP, Small Farmers Development Agency, etc.

When the NABARD came into existence in July 1982, it has taken over the entire
undertaking of the ARDC as well as the Reserve Banks refinancing functions in
relation to the SCBs and RRBs.

Agricultural Credit Board:

Following the recommendation of the All-India Rural Credit Review Committee. The
Reserve Bank of India constituted the Agricultural Credit Board in February 1970. The
Board is regarded as a high-powered body for the formulation and review of policies
in the field of rural finance. It has also to ensure close co-ordination between the
activities of the co-operative credit institutions and the policies and operations of the

The Board is empowered to grant refinance facilities to co-operative and commercial

banks for agricultural purposes and to co-operative banks for non-agricultural
purposes as well.

With the establishment of the NABARD, however, the Board has ceased to function.

Financing Functions of the RBI:

It should be noted that the RBI, statutorily, is not allowed to give direct finance to
the agriculturists. It, however, provides indirect assistance to the agricultural sector
through the co-operative sector, since it maintains a direct relationship with the
SCBs, the apex tier of the credit system.

Through the medium of co-operative credit system, the Reserve Bank, thus,
provides three types of loans to the agriculturists, as under:
i. Short-term credit,

ii. Medium-term credit, and

iii. Long-term credit.

Short-term and medium-term loans to the agricultural sector are made available
through the state co-operative banks. Long-term credit was provided through the
State Land Development Banks by purchasing their debentures by the RBI in the

Now, the Reserve Bank acts only as a coordinator for mobilising institutional support
to the ordinary debentures of the LDBs. Moreover, the bank provides short-term
working capital finance to cottage and small scale industries in the co-operative
sector through the SCBs.

The Reserve Bank of India purchases or rediscounts the bills of exchange of SCBs,
thereby providing refinance facilities.

The Bank has also made provision of long-term loans to State Governments through
the National Agricultural Credit Fund.

Commercial Banks and RRBs:

In the post-nationalisation era, the RBI has initiated several measures to induce
commercial banks to increase their share in agricultural financing. The RBI
introduced the Small Loans Guarantee Scheme in 1971 for providing guarantee to
commercial banks (including the RRBs) against the risk of lending to farmers and
agriculturists, among others.
Regional Rural Banks are specially confined to rural finance. The RBI Act included
them in the Second Schedule and as such, they are entitled to receive refinance
assistance from the Reserve Bank. To improve their resource position, the RBI has
been providing them with refinance facility up to 50 per cent of their eligible loans
and advances at a concessional rate of interest, i.e., 3 per cent lower than the
operating bank rate.

In June 1977, the RBI appointed a committee to evaluate the performance of the
RRBs regarding fulfillment of their objectives as well as to indicate their precise role
in the rural credit structure. The Committee in its Report (1978) made a number of
recommendations regarding modifications and reorganisation of the RRBs. It was
also suggested that RRBs should be established in areas where the cooperative
organisation was not able to adequately serve the credit needs.

Following a recommendation of the Committee, the RBI constituted a Steering

Committee, in October 1978, which was to look into the matter of establishment,
management, loaning policies and other aspects of the RRBs. The Committee had
also to identify districts for setting up the RRBs.

Multi-Agency Approach in Agricultural Financing:

In serving the credit needs of the agricultural sector, the RBI has adopted the policy
of multi-agency approach. Under this approach, besides co-operatives, other
agencies like commercial banks. RRBs and LDBs have been recognised as supporting
sources of institutional credit in rural areas.

A major weakness of this approach has been that the farmers are required to contact
a number of different agencies to meet their various types of credit needs. For
instance, to obtain short-term credit, the farmers have to approach the PACs,
commercial banks or the RRBs. For their long term needs, they have to contact the
LDBs. Again, there are separate agencies, providing agricultural inputs, farm
equipment, marketing facilities etc.

The Reserve Bank appointed the Working Group on Multi-Agency Approach in

Agricultural Financing. In its Report (1978), the group stressed that co-operatives
should play a dominant role in providing credit for agriculture and allied activities in
the rural sector of the economy. This is because only the cooperative possess such
organisational potential of dealing with millions of farmers scattered throughout the
country. Commercial banks and the RRBs have to play only a supplementary role in
the area of rural finance.

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