EXECUTIVE SUMMARY

With the help of bank agricultural sector has come up with tremendous changes And even
developed at large scale. Indian banks have come up with many schemes related to agricultural
to support farmers and other people who become a part of the agriculture. There are many
regional rural banks set up in each state to look after the welfare of farmers as well as their
agriculture. A dynamic and growing agriculture sector needs adequate finance through bank to
accelerate the overall growth.

With the government's keen interest and special budget allocation for agriculture in the 11th five
year plan, it is now the hands of farmer to reap the benefit of the scheme offered by the banks.

As in the rest of the country, agriculture is the prime employer and provides livelihood and food
security to a large section of the population in Meghalaya who are also the most economically
vulnerable. Almost two thirds of the total work force depends on agriculture and allied activities
for its livelihood, while the contribution of agriculture to the state’s GDP is a little over 16%.

Consistently low investments in agriculture over time leading to near absence of capital
formation in the sector has also stagnated the pace of agricultural productivity in the State. As the
growth of other sectors and of the overall economy rests on the performance of agriculture, there
is urgent need for in increasing investments in agriculture.

1
 1.INTRODUCTION

India is agricultural based country and its 70% population stay in rural area. The cooperatives
which are the life blood of the Indian economy and the mechanism for any developmental
programs. Especially in an agriculture dominated rural sector, cooperative banks play a vital role
in bolstering the common individual and financing his business and Personal needs.

The cooperative credit structure is serving the Indian society since 1904 and since then it has
seen several ups and downs. Despite of several limitations such as restriction of area of
operations, limited clients, small volume of business, political interference, this movement is
standing since last 108 years and serving the societies.

National Bank for Agriculture and Rural Development (NABARD) was established on 12 July
1982 by an Act of the Parliament to promote sustainable and equitable agriculture and rural
prosperity through effective credit support, related services, institutional development and other
innovative initiatives.

NABARD was established on the recommendations of Shivaraman Committee, (by Act 61, 1981
of Parliament) on 12 July 1982 to implement the National Bank for Agriculture and Rural
Development Act 1981.
It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell
(RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation
(ARDC). It is one of the premier agencies providing developmental credit in rural areas.
NABARD is India's specialized bank for Agriculture and Rural Development in India.

Formal Financial institutions in the country have been playing a leading role in the microfinance
programme for more than two decades now. They have joined hands proactively with informal
delivery channels to give microfinance sector the
necessarymomentum. N A B A R D , d u r i n g t h e e a r l y e i g h t i e s , c o n d u c t e d a s e r i e s o
f research studies ina s s o c i a t i o n w i t h M Y R A D A ( a l e a d i n g N G
O f r o m S o u t h I n d i a ) a n d a l s o independently which showed that d
espite having a wide network of rural bank branches that implemented spe
c i f i c p o v e r t y a l l e v i a t i o n p r o g r a m m e s a n d s e l f - employment opportunities through
bank credit for almost two decades, a very large n u m b e r o f t h e p o o r c o n t i n u e d t o
r e m a i n o u t s i d e t h e f o l d o f t h e f o r m a l b a n k i n g system. These studies also showed
that the existing banking policies, systems and procedures, and deposit and loan products were
perhaps not well suited to meet the most immediate needs of the poor.

It also appeared that what the poor really need was a better access to these services and products
rathcredit.A g a i n s t t h i s b a c k g r o u n d , a n e e d w a s f e l t f o r a l t e r n a t i v e p o l i c i e s , s
ystems and procedures, savings and loan products, other complementary se

2
r v i c e s , a n d n e w delivery mechanisms, which would fulfill the requirements of the poorest,
especially of the women members of such households.

The core of SHG bank linkage in India has been built around an important aspect of human
nature the feeling of self worth

Poverty, food security, unemployment, quality education, and lack of other basic infrastructures
are the common problems of rural India. Education, physical infrastructure, social infrastructure
and political power and economic power play important role in developing rural regions. Rural
development in India is one of the most important factors for the growth of Indian economy.
Rural development implies the economic betterment of people as well as social transformation in
the rural areas.

Rural development is the process of improving the quality of life and economic wellbeing of
people living in rural areas. It plays an important part in the development of rural business and
economy. According to ministry of rural development health, education, drinking water, housing
and road are important to improve the quality of life in rural areas. Government play an
important role in the development of rural business and economy through its rural development
programmes. A wide range of government programmes has been undertaken so far, to alleviate
rural poverty and ensure improved quality of life for the rural population. The problems of rural
area remain as it is even after implementing the rural development programmes. Bhavsar (2012),
Chopra, N. (2012), and Das et. al (2006), opine that cooperatives have immense potential to
deliver goods and services in areas where both the state and the private sector have failed. This
study examines the role of cooperatives in rural development and the finds that cooperatives play
major role in employment generation, poverty alleviation, improved quality of life and
improvement in socio- economic conditions of the rural people.

3
 1.1 OBJECTIVES OF STUDY

 To study the performance of cooperative banking in respect of agricultural finance.

 To study the role of cooperative bank in agricultural credit.
 To study the agricultural credit structure of the cooperative bank.
 To analyze the different schemes/ options of fund provided co operative bank under
agriculture credit
 To gain deep knowledge about the role of banking in agriculture sector.

1.2 RESEARCH AND METHODOLOGY

4
Primary Data: Data which has not been previously published i.e. the data is derived from a
new or original research study & collected directly from first hand sources by means of surveys
observation or experimentation is known as Primary Data.

Secondary Data: Data which has already been collected by someone or an organization for
some other purpose or research study is known as Secondary Data.

Research
methodology

Secondary
Primary data
data

Books Newspapers Internet

Method of Data Collection:

Secondary Data: Secondary Data was collected from various sources such as books,
internet, and newspapers.
2. PROFILE OF COMPANY

5
 2.1.NABARD

NABARD stands for National bank for agriculture and rural development and it has formed with
the objective to provide loan to the farmers, artisans and very small scale income group and
casual labors. Currently NABARD is the regulator of all the RRBs (Regional rural banks) and
RRBs fulfill the objectives which were made for NABARD. RRBs provide the loan and
refinancing help to the farmers and rural people with low income. It encourages the agriculture
by providing loan for agriculture, seeds, irrigation, small and day to day needs of the farmers,
artisans and other low income group rural people. It was formed with the existence of
CRAFICARD – Committee for review of arrangements for institutional credit for agriculture and
rural development.

NABARD has been instrumental in grounding rural, social innovations and social enterprises in
the rural hinterlands. It has in the process partnered with about 4000 partner organizations in
grounding many of the interventions be it, SHG-Bank Linkage programmed, tree-based tribal
communities’ livelihoods initiative, watershed approach in soil and water conservation,
increasing crop productivity initiatives through lead crop initiative or dissemination of
information flow to agrarian communities through Farmer clubs. Despite all this, it pays huge
taxes too, to the exchequer – figuring in the top 50 tax payers consistently. NABARD virtually
ploughs back all the profits for development spending, in their unending search for solutions and
answers. Thus the organization had developed a huge amount of trust capital in its 3 decades of
work with rural communities.

1.NABARD is the most important institution in the country which looks after the development of
the cottage industry, small industry and village industry, and other rural industries.

2.NABARD also reaches out to allied economies and supports and promotes integrated
development.

3.NABARD discharge its duty by undertaking the following roles :

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1. Serves as an apex financing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural areas

2. Takes measures towards institution building for improving absorptive capacity of the
credit delivery system, including monitoring, formulation of rehabilitation schemes,
restructuring of credit institutions, training of personnel, etc.

3. Co-ordinates the rural financing activities of all institutions engaged in developmental

work at the field level and maintains liaison with Government of India, state
governments, Reserve Bank of India (RBI) and other national level institutions
concerned with policy formulation

4. Undertakes monitoring and evaluation of projects refinanced by it.

5. NABARD refinances the financial institutions which finances the rural sector.

6. NABARD partakes in development of institutions which help the rural economy.

7. NABARD also keeps a check on its client institutes.

8. It regulates the institutions which provide financial help to the rural economy.

9. It provides training facilities to the institutions working in the field of rural upliftment.

10. It regulates the cooperative banks and the RRB’s, and manages talent acquisition
through IBPS CWE.

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 2.2 MISSIONS OF NABARD

1Promoting sustainable and equitable agriculture a

nd rural d e v e l o p m e n t t h r o u g h e ff e c t i v e c r e d i t s u p p o r t , r e l a t e d s e r
v i c e s , i n s t i t u t i o n b u i l d i n g a n d o t h e r innovative initiatives

2. In pursuing this mission, NABARD focuses its activities on

3.Credit functions, involving preparation of potential-linked credit plans annually for all districts
of the country for identification of credit potential, monitoring the flow of ground level rural
credit, issuing policy and operational guidelines to rural
financingi n s t i t u t i o n s a n d p r o v i d i n g c r e d i t f a c i l i t i e s t o e l i g i b l e i n s t i t u t i o n s n
d e r v a r i o u s programmes.

4.Development functions , concerning reinforcement of the credit functions andmaki

ng credit more productive

5.Supervisory functions ensuring the proper functioning of cooperative banks and

regional rural banks.

NABARD's credit functions cover planning, dispensation and monitoring of credit.This

activity involves:
1.Framing policy and guidelines for rural financial institutions
2.Providing credit facilities to issuing organizations

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3.Preparation of potential-linked credit plans annually for
a l l d i s t r i c t s f o r identification of credit potential
4.Monitoring the flow of ground level rural credit

2.3 FUNCTIONS OF NABARD

The major functions of NABARD are as follows:

1.It acts as an apex body for meeting the credit needs of all types of agricultural and rural
development.
2.It provides refinancing facilities to State Co-operative Banks (SCBs), Land Development Bank
(LDBs), Regional Rural Banks (RRBs) and other approved financial institutions for financing
rural economic activities.
3.It co-ordinates all agricultural and rural development activities with the objective of tying them
up with planned development activities in the rural sector.
4.It provides short-term, medium-term and long-term credit to SCBs, LDBs, RRBs and approved
financial institutions.
5.It provides long-term assistance (not exceeding 20 years) to State Governments.
6.It has the responsibility of inspecting co-operative banks and RRBs.
7.It maintains a research and development fund to promote research in agriculture and rural
development.

Credit Functions:

1.Framing policy and guidelines for rural financial institutions.

2.Providing credit facilities to issuing organizations
3.Monitoring the flow of ground level rural credit.
4.Preparation of credit plans annually for all districts for identification of credit potential.

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Development Functions:

1.Help cooperative banks and Regional Rural Banks to prepare development actions plans for
themselves.
2.Help Regional Rural Banks and the sponsor banks to enter into MoUs with state governments
and cooperative banks to improve the affairs of the Regional Rural Banks.
3.Monitor implementation of development action plans of banks.
4.Provide financial support for the training institutes of cooperative banks, commercial banks
and Regional Rural Banks.
5.Provide financial assistance to cooperative banks for building improved management
information system, computerization of operations and development of human resources.

Supervisory Functions:

1.Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than
urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.
2.Undertakes inspection of State Cooperative Agriculture and Rural Development Banks
(SCARDBs) and apex non- credit cooperative societies on a voluntary basis.
3.Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative
Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs).
4.Undertakes portfolio inspections besides off-site surveillance of Cooperative Banks and
Regional Rural Banks (RRBs).

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 2.4 HISTORY OF NABARD

NABARD was established on the recommendations of B.Shivaraman Committee, (by Act 61,
1981 of Parliament) on 12 July 1982 to implement the National Bank for Agriculture and Rural
Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural
Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and
Development Corporation (ARDC). It is one of the premier agencies providing developmental
credit in rural areas. NABARD is India's specialised bank for Agriculture and Rural
Development in India.

The initial corpus of NABARD was Rs.100 crores. Consequent to the revision in the
composition of share capital between Government of India and RBI, the paid up capital as on 31
March 2015, stood at Rs.5000 crore with Government of India holding Rs.4,980 crore (99.60%)
and Reserve Bank of India Rs.20.00 crore (0.40%).[4] RBI sold its stake in NABARD to the
Government of India, which now holds 99% stake.[5]

International associates of NABARD include World Bank-affiliated organizations and global

developmental agencies working in the field of agriculture and rural development. These
organizations help NABARD by advising and giving monetary aid for the upliftment of the
people in the rural areas and optimizing the agricultural process.

NABARD role in rural development in India is phenomenal.[9] National Bank For Agriculture &
Rural Development (NABARD) is set up as an apex Development Bank by the Government of
India with a mandate for facilitating credit flow for promotion and development of agriculture,
cottage and village industries. The credit flow to agriculture activities sanctioned by NABARD

11
reached Rs 1,57,480 crore in 2005-2006. The overall GDP is estimated to grow at 8.4 per cent.
The Indian economy as a whole is poised for higher growth in the coming years. Role of
NABARD in overall development of India in general and rural & agricultural in specific is
highly pivotal.

Through assistance of Swiss Agency for Development and Cooperation, NABARD set up the
Rural Innovation Fund. Vrajlal Sapovadia Rural Infrastructure Development Fund (RIDF) is
another noted scheme for the bank for rural development.[10] Under the RIDF scheme Rs.
51,283 crore have been sanctioned for 2,44,651 projects covering irrigation, rural roads and
bridges, health and education, soil conservation, water schemes etc. Rural Innovation Fund is a
fund designed to support innovative, risk friendly, unconventional experiments in these sectors
that would have the potential to promote livelihood opportunities and employment in rural areas.
[11] The assistance is extended to Individuals, NGOs, Cooperatives, Self Help Group, and
Panchayati Raj Institutions who have the expertise and willingness to implement innovative
ideas for improving the quality of life in rural areas. Through member base of 25 crore, 600000
cooperatives are working in India at grass root level in almost every sector of economy. There
are linkages between SHG and other type institutes with that of cooperatives.

The purpose of RIDF is to promote innovation in rural & agricultural sector through viable
means. Effectiveness of the program depends upon many factors, but the type of organization to
which the assistance is extended is crucial one in generating, executing ideas in optimum
commercial way. Cooperative is member driven formal organization for socio-economic
purpose, while SHG is informal one. NGO have more of social color while that of PRI is
political one. Does the legal status of an institute influences effectiveness of the program? How
& to what an extent? Cooperative type of organization is better (Financial efficiency &
effectiveness) in functioning (agriculture & rural sector) compared to NGO, SHG & PRIs.[12]

Recently in 2007-08, NABARD has started a new direct lending facility under 'Umbrella
Programme for Natural Resource Management' (UPNRM). Under this facility financial support
for natural resource management activities can be provided as a loan at reasonable rate of
interest. Already 35 projects have been sanctioned involving loan amount of about Rs 1000

12
crore. The sanctioned projects include honey collection by tribals in Maharashtra, tussar value
chain by a women producer company ('MASUTA'), eco-tourism in Karnataka

3 CONCEPTUAL FRAMEWORK

3.1 INTRODUCTION TO INDIAN BANKING SYSTEM

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also nonbanking institutions
that provide certain banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry. A banking system also referred as a system provided by
the bank which offers cash management services for customers, reporting the transactions of
their accounts and portfolios, through out the day. The banking system in India, should not only
be hassle free but it should be able to meet the new challenges posed by the technology and any
other external and internal factors. For the past three decades, India’s banking system has several
outstanding achievements to its credit. The Banks are the main participants of the financial
system in India. The Banking sector offers several facilities and opportunities to their customers.
All the banks safeguards the money and valuables and provide loans, credit, and payment
services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer
investment and insurance products. As a variety of models for cooperation and integration among
finance industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks continue to
maintain and perform their primary role—accepting deposits and lending funds from these
deposits.

History of Indian Banking System

13
The first bank in India, called The General Bank of India was established in the year 1786. The
East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840)
and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in
1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras)
were called as Presidency Banks. Allahabad Bank which was established in 1865, was for the
first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head
Quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In 1921, all presidency
banks were amalgamated to 22 form the Imperial Bank of India which was run by European
Shareholders. After that the Reserve Bank of India was established in April 1935. At the time of
first phase the growth of banking sector was very slow. Between 1913 and 1948 there were
approximately 1100 small banks in India. To streamline the functioning and activities of
commercial banks, the Government of India came up with the Banking Companies Act, 1949
which was later changed to Banking Regulation Act 1949 as per amending

Act of 1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive powers for
the supervision of banking in India as a Central Banking Authority. After independence,
Government has taken most important steps in regard of Indian Banking Sector reforms. In 1955,
the Imperial Bank of India was nationalized and was given the name "State Bank of India", to act
as the principal agent of RBI and to handle banking transactions all over the country. It was
established under State Bank of India Act, 1955. Seven banks forming subsidiary of State Bank
of India was nationalized in 1960. On 19th July, 1969, major process of nationalization was
carried out. At the same time 14 major Indian commercial banks of the country were
nationalized. In 1980, another six banks were nationalized, and thus raising the number of
nationalized banks to 20. Seven more banks were nationalized with deposits over 200Crores. Till
the year 1980 approximately 80% of the banking segment in India was under government’s
ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act was
amended in 1993 and thus the gates for the new private sector banks were opened. The following
are the major steps taken by the Government of India to Regulate Banking institutions in the
country:-
 1949: Enactment of Banking Regulation Act.

14
  1955: Nationalisation of State Bank of India.
 1959: Nationalization of SBI subsidiaries.
 1961: Insurance cover extended to deposits.
 1969: Nationalisation of 14 major Banks.
 1971: Creation of credit guarantee corporation.
 1975: Creation of regional rural banks.
 1980: Nationalization of seven banks with deposits over 200Crores.

EVALUATION OF INDIAN BANKING

The period of last six decades has viewed many macro economic development of India. The
monitory, external and banking policies have undergone several changes. The structural changes
in the Indian financial system specially in banking system has influence the evaluation of Indian
Banking in different ways. After the independence and implementation of banking reforms, we
can see the changes in the functioning of commercial banks. In order to understand the changing
role of commercial banks and the problems and challenges, it would be appropriate to review the
major development in the Indian banking sector. Evaluation of Indian banking may be traced
through four distinct phases 1. Evolutionary phase (Prior to 1947) 2. Foundation phase (1947-
1969) 3. Expansion phase (1969-1990) 4. Consolidation and Liberalization phase (1990 to till).

BANKING STRUCTURE IN INDIA

Indian banking system consists of “Non Scheduled banks” and “scheduled banks”.

Non Scheduled banks refer to those that are not included in the second schedule of the Banking
Regulation Act of 1965 and thus do not satisfy the conditions laid down by that schedule.

Schedule banks refer to those that are included in the Second Schedule of Banking Regulation
Act of 1965 and thus satisfy the following conditions: a bank must

 have paid up capital and reserve of not less than R s. 5 lakh

 Satisfy the Reserve Bank of India (RBI) that its affairs are not conducted in a manner
detrimental to the interest of its deposits.

15
Scheduled banks consists of “scheduled commercial banks” and scheduled cooperative banks.
The former are further divided into four categories:

 Public sector banks (that are further classified as “Nationalized Banks and the “State
Bank of India (SBI) banks”).

 private sector banks (that are further classified as “Old Private Sector Banks” and “New
Private Sector Banks” that emerged after 1991).

 Foreign banks in India.

 Regional rural banks (that operate exclusively in rural areas to provide credit and other
facilities to small and marginal farmers, agricultural workers and small entrepreneurs).
These scheduled commercial banks except foreign banks are registered in India under
the Companies Act.

16
Reserve Bank of India (RBI):
The country had no central bank prior to the establishment of the RBI. The RBI is the supreme
monetary and banking authority in the country and controls the banking system in India. It is
called the Reserve Bank’ as it keeps the reserves of all commercial banks.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second schedule of the RBI Act, 1934.
These banks have a paid-up capital and reserves of an aggregate value of not less than Rs.5 lakh
hey have to satisfy the RBI that their affairs are carried out in the interest of their depositors.

17
All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks are
scheduled banks. Non- scheduled banks are those which are not included in the second schedule
of the RBI Act, 1934. At present these are only three such banks in the country.

Commercial Banks:
Which dominate this industry, offer a full range of services for individuals, businesses, and
governments. These banks come in a wide range of sizes, from large global banks to regional and
community banks.

 Commercial banks accept various types of deposits from public especially from its
clients, including saving account deposits, recurring account deposits, and fixed deposits.
These deposits are returned whenever the customer demands it or after a certain time period

 Commercial banks provide loans and advances of various forms, including

an overdraft facility, cash credit, bill discounting, money at call etc. They also give demand
and term loans to all types of clients against proper security.

Cooperative Banks:
Co-operative Banks People who come together to jointly serve their common interest often form
a co-operative society under the Co-operative Societies Act. When a co-operative society
engages itself in banking business it is called a Co-operative Bank. The society has to obtain a
licence from the Reserve Bank of India before starting banking business. Any co-operative bank
as a society is to function under the overall supervision of the Registrar, Co-operative Societies
of the State. As regards banking business, the society must follow the guidelines set and issued
by the Reserve Bank of India. Types of Co-operative Banks There are three types of co-operative
banks operating in our country. They are primary credit societies, central co-operative banks and
state co-operative banks. These banks are organized at three levels, village or town level, district
level and state level.

(i) Primary Credit Societies: These are formed at the village or town level with borrower and
non-borrower members residing in one locality. The operations of each society are restricted to a

18
small area so that the members know each other and are able to watch over the activities of all
members to prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level having some of the
primary credit societies belonging to the same district as their members. These banks provide
loans to their members (i.e., primary credit societies) and function as a link between the primary
credit societies and state co-operative banks.

(iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the
states of the country. They mobilize funds and help in its proper channelization among various
sectors. The money reaches the individual borrowers from the state co-operative banks through
the central co-operative banks and the primary credit societies

Public Sector Banks:

These are banks where majority stake is held by the Government of India or Reserve Bank of
India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of
Boroda and Dena Bank, etc. (PSBs) are banks where a majority stake (i.e. more than 50%) is
held by a government. The shares of these banks are listed on stock exchanges. There are a total
of 27 PSBs in India [21 Nationalized banks + 6 State bank group (SBI + 5 associates)].

In 2011, IDBI bank and in 2014 BharatiyaMahila Bank were nationalized with a minimum
capital of Rs500crore.

Private Sector Banks:

The private-sector banks in India represent part of the Indian banking sector that is made up of
both private and public sector banks. The "private-sector banks" are banks where greater parts of
state or equity are held by the private shareholders and not by government.

Banking in India has been dominated by public sector banks since the 1969 when all major banks
were nationalised by the Indian government. However, since liberalisation in government
banking policy in the 1990s, old and new private sector banks have re-emerged. They have

19
grown faster & bigger over the two decades since liberalisation using the latest technology,
providing contemporary innovations and monetary tools and techniques.In case of private sector
banks majority of share capital of the bank is held by private individuals. These banks are
registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd.,
Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat
Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc

Foreign Sector Banks:

A type of foreign banks that is obligated to follow the regulations of both the home and host
countries. Because the foreign branch banks loan limits are based on the parent bank’s capital,
foreign banks provide more loans than subsidiary banks .Foreign Banks: These banks are registered
and have their headquarters in a foreign country but operate their branches in our country. Some of the
foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC),
Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of
foreign banks operating in our country has increased since the financial sector reforms of 1991.

Regional Rural Banks

(also RRBs) are local level banking organizations operating in different States of India. They
have been created with a view to serve primarily the rural areas of India with basic banking
and financial services. However, RRBs may have branches set up for urban operations and their
area of operation may include urban areas too.

The area of operation of RRBs is limited to the area as notified by Government of India covering
one or more districts in the State. RRBs also perform a variety of different functions.

20
 3.2 ROLE OF BANKS IN AGRICULTURE SECTOR

Some of the major important role of commercial banks in a developing country are as follows:
Besides performing the usual commercial banking functions, banks in developing countries play
an effective role in their economic development. The majority of people in such countries are
poor, unemployed and engaged in traditional agriculture.

There is acute shortage of capital. People lack initiative and enterprise. Means of transport are
undeveloped. Industry is depressed. The commercial banks help in overcoming these obstacles
and promoting economic development. The role of a commercial bank in a developing country is
discussed as under.

1. Mobilizing Saving for Capital Formation:

The commercial banks help in mobilizing savings through network of branch banking. People in
developing countries have low incomes but the banks induce them to save by introducing variety
of deposit schemes to suit the needs of individual depositors. They also mobilize idle savings of
the few rich. By mobilizing savings, the banks channelize them into productive investments.
Thus they help in the capital formation of a developing country.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide short-
term, medium-term and long-term loans to industry. In India they provide short-term loans.
Income of the Latin American countries like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks also advance long-term loans to industry.

In India, the commercial banks undertake short-term and medium-term financing of small scale
industries, and also provide hire- purchase finance. Besides, they underwrite the shares and
debentures of large scale industries. Thus they not only provide finance for industry but also help
in developing the capital market which is undeveloped in such countries.

21
3. Financing Trade:
The commercial banks help in financing both internal and external trade. The banks provide
loans to retailers and wholesalers to stock goods in which they deal. They also help in the
movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.

4. Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a number of
ways. They provide loans to traders in agricultural commodities. They open a network of
branches in rural areas to provide agricultural credit. They provide finance directly to
agriculturists for the marketing of their produce, for the modernization and mechanization of
their farms, for providing irrigation facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep breeding,
poultry farming, pisciculture and horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas are provided financial
assistance through the regional rural banks in India. These regional rural banks operate under a
commercial bank. Thus the commercial banks meet the credit requirements of all types of rural
people.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not possess sufficient
financial resources to buy durable consumer goods. The commercial banks advance loans to
consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In this way,

22
they also help in raising the standard of living of the people in developing countries by providing
loans for consumptive activities.

6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing countries. They
provide loans for the education of young person’s studying in engineering, medical and other
vocational institutes of higher learning. they advance loan to young entrepreneurs, medical, and
engineering graduates and other technically trained persons in establishing their own business.
such loan facilities are being provided by a numbers of commercial banks in India.

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 3.3 ROLE OF BANKS IN AGRICULTURE AND RURAL DEVLOPMENT

In the last few years, the Indian economy has emerged as one of the fastest growing economies
in the world. However, the vulnerability of the Indian economy with respect to the performance
of the agricultural sector despite other macroeconomic indicators and sectors gaining in strength
is well known. For example, the Indian economy grew at an estimated 3.7 per cent in 2002-03
against 5.6 per cent during 2001-02. This was largely because of the negative growth of 4.4 per
cent in the agriculture sector. Many economists and policy-makers increasingly believe that the
future growth of the domestic economy, to a large extent, will depend on the robust performance
of the agricultural and rural sector. The manufacturing and service sectors cannot sustain the
economy’s growth if the rural sector underperforms. The contribution of the banking and
financial sector to the current economic growth of the Indian economy is very significant. This is
reflected in the growth in aggregate deposits and advances for scheduled commercial banks,
which stood at 15.4 per cent and 27.9 per cent during 2004-2005.

However, the access of banking services to the rural, agriculture and the common man in general
is not as promising. As Mr. V. Leeladhar (Deputy Governor, RBI, on the occasion of the
Commemorative lecture at the Fedbank Hormis Memorial Foundation, Ernakulam) said “Despite
making significant improvements in all the areas relating to financial viability, profitability and
competitiveness, there are concerns that banks have not been able to include a vast segment of
the population, especially the underprivileged sections of the society, into the fold of basic
banking services.” The focus of Indian banks on financial inclusion i.e. delivery of banking
services at an affordable cost of the low-income groups has been dismal. In India, the focus of
the financial inclusion at present is more or less confined to ensuring a bare minimum access to a
savings bank account without frills to all. Having a current account/savings account on its own,
cannot be regarded as an accurate indicator of financial inclusion

Need For Banking in Rural and Agricultural Areas The rural population in India suffers from a
great deal of indebtedness and is subject to exploitation in the credit market due to high interest
rates and the lack of convenient access to credit. Rural households need credit for investing in
agriculture and smoothening out seasonal fluctuations in earnings. Since cash flows and savings

24
in rural areas for the majority of households are small, rural households typically tend to rely on
credit for other consumption needs like education, food, housing, household functions, etc. Rural
households need access to financial institutions that can provide them with credit at lower rates
and at reasonable terms than the traditional money-lender and thereby help them avoid debt-traps
that are common in rural India.

The banking sector has witnessed a huge growth in the recent years. However, despite such a
growth, the credit flow by banks to the rural and agricultural sectors remains dismal, which,
more or less, has resulted in financial exclusion of the rural masses. The rural and agricultural
sectors have to play a very important role if a target of 8% GDP growth per annum as envisioned
in the tenth plan is to be achieved. And the banks and the Chartered Accountants have a huge
role to play in boosting the rural and agriculture sector through product innovation, broadening
the reach, promotion of SHGs/Micro enterprises and providing know-how. This article provides
an overview of the concept.

Challenges For Rural and Agricultural Credit Agriculture is a matter of livelihood and food
security, with nearly 60 per cent of the population depending on it. At the same time, to
withstand the global competition, enhanced productivity and sustainability of the agriculture
sector has become imperative. In addition, the majority of the country’s population, more so
marginal and disadvantaged sections of society, stay in villages. Hence, the role of banks in the
enhancement of agriculture productivity, expansion of rural credit and poverty eradication
assumes high priority. Despite decades of efforts and experimentation in banking, the organised
fi nancial sector is still not able to meet the credit gap in the rural sector. The lower levels of per
capita income, lack of infrastructure in the rural areas, focus in the urban sector and lack of
proper connectivity were the main hindrances for banks to venture into rural areas. Directed
lending, cumbersome procedures, delay in sanctioning loans and lack of statutory backing for
recoveries were other major impediments to the growth of banking in the rural sector. The focus
in the past has always been to make available cheaper credit. When banks are forced to lend
cheap, there has been a tendency for a scramble for credit by the non-target group of
beneficiaries. While interest rates of scheduled banks for advances over Rs. 2 lakh is completely
deregulated, loans up to Rs. 2 lakh are subject to maxi mum of prime lending rate (PLR). In the

25
process of recovering the opportunity lost on income, the banks used to charge a high rate of
interest for loans above 2 lakhs. This led to acceleration in the process of willful defaulting. This
has really damaged the credit culture and structure in the rural sector resulting in shutting down
of non-viable outlets of rural branches of commercial banks, co-operative banks and RRBs in
last few years.

Role of Government/RBI in Meeting the Challenges The number of reports on the rural credit
delivery system matches the population of co-operative credit institutions, is a common saying in
banking circles. As the agriculture sector becomes more commercial, there would be a greater
need for credit. Banks need to change their strategy towards agriculture lending, from ‘directed’
credit to the one that is business opportunity-led. A substantial jump in the credit flow to
agriculture is envisaged in the Tenth Plan at Rs.7,36,570 crore, which is more than three times of
what was achieved during the Ninth Plan. The contribution by commercial banks is projected at
Rs.3,81,652 crore. In order to achieve this target, the Government has directed banks to double
the flow of farm credit from the level achieved as on 31.03.2004 in the next three years. In this
context, the Government/RBI needs to take a number of initiatives: Revitalising RRBs:
Although, RRBs have established themselves as a strong alternative mechanism for rural credit
delivery, their potential and relevance is rather neglected in the current scenario. The issue of
capital infusion of RRBs assumes critical importance to enlarge the scope of RRB operations.
RRBs need to be provided with adequate capital support to enable them to have a net capital
adequacy ratio (CAR) of 5 per cent. The share of sponsoring institutions in the capital structure
of RRBs also needs to be enlarged to make them majority shareholders. By acquiring the
majority shareholding in RRB, the sponsor banks/institutions can convert them into vibrant and
professional subsidiaries and area-specific special business units (SBU). In the long run, they
may merge all their agricultural and rural activities under the umbrella of these SBU. The
government should further amalgamate regional rural banks (RRBs) with the sponsor banks to
increase the Crop Insurance: The Agriculture Insurance Company of India (AIC) should further
spread crop insurance awareness level among the Indian farming community, which is abysmally
low. The Union and State Governments should give time-bound subsidy on premiums of crop
insurance to increase the coverage of the AIC. Promoting Micro-finance/ Micro enterprise:

26
Micro-finance refers to the provision of small-scale savings, credit, insurance, and any other
financial services to those who cannot access them from formal financial institutions. Due to
issues of risk and cost associated with servicing the larger numbers of small low capital input
businesses, the formal sector lending to micro enterprises is low. Banks offer a variety of
potential advantages for financing micro-enterprises like commercial outlook and relatively
sophisticated skills. Apart from acting as a credit provider, the banks should act as agents of
change by helping people in acquiring the basic knowledge of business, policy environment, etc.
Well-defined investment policy: RBI/NABARD should also provide a well-defined investment
policy for the abovementioned institutions. This will help these institutions in better deployment
of surplus funds. In comparison to PSB’s and Private Sector banks these institutions can’t afford
to have statistically sophisticated models for investment and treasury management. In that regard
they seek the guidance and assistance from the supervisor in this area. Learning from other
countries/Adopting new models: Banks also need to look at the models followed by banks in
other countries. For example, Bangladesh Grameen Bank model and micro-finance experience of
Philippines are quite well-known. Banking Correspondents in Brazil is another successful model
where banks can create a network of “banking correspondents”. These banking correspondents
are small outlets, which provide basic banking services, example drug stores, petrol pump, small
stores in the neighbourhood, etc. The widely spread post-offices network in the country can also
be used to deliver banking services. Banks and regulators need to look at these models and their
feasibility in the Indian scenario to bridge the banking divide.

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 3.4 SCHEMES OF BANKS RELATED TO AGRICULTURE

KisanVikasPatra (KVP) Re-Introduced

 The re-launched KisanVikasPatra (KVP) will be available to the

 investors in the denomination of Rs. 1000, 5000, 10,000 and 50,000, with no upper

 ceiling on investment. The certificates can be issued in single or joint names and can
be transferred from one person to any other person / persons, multiple times. The
facility of transfer from one post office to another anywhere in India and of
nomination will be available. The certificate can also be pledged as security to avail
loans from the banks and in other case where security is required to be deposited.
Initially the certificates will be sold through post offices, but the same will soon be
made available to the investing public through designated branches of nationalized
banks.

 KisanVikasPatras have unique liquidity feature, where an investor can, if he so

desires, encash his certificates after the lock-in period of 2 years and 6 months and
thereafter in any block of six months on pre-determined maturity value. The
investment

 made in the certificate will double in 100 months.

 Reintroduction of KisanVikasPatra (KVP) is a welcome step not only in the

 direction of providing safe and secure investment avenues to the small investors but
will

 also help in augmenting the savings rate in the country. The scheme will also
safeguard

28
  small investors from fraudulent schemes. With a maturity period of 8 years 4 months,
the collections under the scheme will be available with the Govt. for a fairly long
period to be utilized in financing developmental plans of the Centre and State
Governments and will also help in enhancing domestic household financial savings in
the country.

* INTEREST RATE –8.7%

HISTORY__

KisanVikasPatra (KVP) – a certificate savings scheme was launched by the Government on 1st
April, 1988. The scheme provided facility of unlimited investment by way of purchase of
certificates from post offices in various denominations. The maturity period of the scheme when
launched was 5 ½ years and the money invested doubled on maturity.

The scheme was very popular among the investors and the percentage share of gross collections
secured in KVP was in the range of 9 % to 29 % against the total collections received under all
National Savings Schemes in the country. Gross collections under the scheme in the year 2010-
11 were Rs. 21631.16 crores which was 9 % of the total gross collections during the year. In the
year of its closure, the scheme secured gross collections of Rs. 7575.95 crores (April 2011 to
November 2011).

A.KrishiAmdaniBeemaYojana

 To give an impetus to the dying agricultural practice

 There is 14 crore hectares of agricultural land in India, of which only 44 per cent in
under irrigation

 Pradhan Mantri Gram SinchaiYojana would be introduced so that more agricultural

land is irrigated.

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  Talking about the plight of small and marginal farmers he said that most of them were
leaving the agricultural practice because of the uncertainty over the produce and
returns.

 KrishiAmdaniBeemaYojana so that the farmers don’t bear any financial burden if their
produce gets destroyed due to unexpected weather or for any other reason.

B .PradhanMantri Gram SinchaiYojana

 Ensure Water Supply To Farmers Round The Year.

 Basic Contours Of The Agri-Irrigation Programmed Would Be On Lines Of The

Pmgsy, Under Which Each Irrigation Project Would Be Selected For Releasing Funds
By The State Government After Seeking Nod Of The Concerned Zillaparishad.

 Importance In The Wake Of Poor Implementation Of Various Irrigation Projects In

Some States Despite Release Of Central Funds By Different Ministries Under Various
Schemes For Several Years.

 Besides, Water Is Necessary For Farmers As Country’s 50 Per Cent Of The

Agriculture Land Is Rained.

C.PradhanMantriSansadAdarsh Gram Yojana

 The SaansadAdarsh Gram Yojana was launched last week, for the development of model
villages. Under the Yojana, Members of Parliament (MPs) will be responsible for
developing the socio-economic and physical infrastructure of three villages each by 2019,
and a total of eight villages each by 2024.

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  The first Adarsh Gram must be developed by 2016, and two more by 2019. From 2019 to
2024, five more Adarsh Grams must be developed by each MP, one each year. This
implies that a total of 6,433 Adarsh Grams, of the 2,65,000 gram panchayats, will be
created by 2024. Key features of the Yojana are outlined below.

Objectives

Key objectives of the Yojana include:

 The development of model villages, called Adarsh Grams, through the implementation
of existing schemes, and certain new initiatives to be designed for the local context,
which may vary from village to village.

 Creating models of local development which can be replicated in other villages.

Identification of villages

MPs can select any gram panchayat, other than their own village or that of their spouse, to be
developed as an Adarsh Gram. The village must have a population of 3000-5000 people if it is
located in the plains, or 1000-3000 people if located in hilly areas.

LokSabha MPs can choose a village from their constituency, and RajyaSabha MPs from the state
from which they are elected. Nominated members can choose a village from any district of the
country. MPs which represent urban constituencies can identify a village from a neighboring
rural constituency.

Funding

No new funds have been allocated for the Yojana. Resources may be raised through:

31
  Funds from existing schemes, such as the Indira AwasYojana, PradhanMantri Gram
SadakYojana, Mahatma Gandhi National Rural Employment Guarantee Scheme, and
Backward Regions Grant Fund, etc.,

 The Member of Parliament Local Area Development Scheme (MPLADS),

 The gram panchayat’s own revenue,

 Central and State Finance Commission Grants, and

 Corporate Social Responsibility funds.

D.SOIL HEALTH CARD SCHEME FOR EVERY FARMER

AIM_

Farming as an activity contributes nearly 1/6th of our Gross Domestic Product and a majority of
our population is dependent on it for their livelihood. Deteriorating soil health has been a cause
of concern and that has been leading to sub optimal utilization of farming resources. Imbalanced
use of fertilizers, low addition of organic matter and non-replacement of depleted micro and
secondary nutrients over the years, has resulted in nutrient deficiencies and decrease in soil
fertility in some parts of the country.

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 Soil health needs to be assessed at regular intervals so as to ensure that farmers apply
the required nutrients while taking advantages of the nutrients already present in the
soil.

 Government has launched a scheme to provide every farmer a Soil Health Card in a
Mission mode. The card will carry crop wise recommendations of nutrients/fertilizers
required for farms, making it possible for farmers to improve productivity by using
appropriate inputs.

 Central Government provides assistance to State Governments for setting up Soil

Testing Laboratories for issuing Soil Health Cards to farmers. State Governments
have adopted innovative practices like involvement of agricultural students, NGOs
and private sector in soil testing, determining average soil health of villages, etc., to
issue Soil Health Cards.

 A Soil Health Card is used to assess the current status of soil health and, when used
over time, to determine changes in soil health that are affected by land management. A
Soil Health Card displays soil health indicators and associated descriptive terms. The
indicators are typically based on farmers’ practical experience and knowledge of local
natural resources. The card lists soil health indicators that can be assessed without the
aid of technical or laboratory equipment.

BENEFITS

 The scheme will provide all 145 million farm owners in the country with a soil health
card in the next three years.

 The budget allotted Rs.100 crore for issuing cards and an additional Rs.56 crore to set
up 100 mobile soil testing laboratories across the country.

33
  The soil health card details existing nutrient status of the soil and crop-wise
recommendations of nutrients and fertilizers required, making it easier for farmers to
improve productivity by using appropriate inputs.

 “Applying fertilizer, best quality seeds and ample water is not enough. Farmers should
nurture their soil and know what inputs to use and in what quantities,” Mode said
while launching the scheme. “Starting soil health laboratories could be an
employment avenue for rural youth. In Gujarat where every farmer has a soil health
card unnecessary expenses on inputs have come down and farmers have saved a lot of
money.”

 The agriculture ministry released Rs.86 core for the soil health card scheme. In
comparison, between 2007-08 and April 2014, the ministry had spent Rs.112 core on
the scheme. The flagship scheme of the ministry has been sanctioned Rs.568 core for
the next three years.

 Imbalanced use of fertilizer is has led to declining crop productivity in the country,
further fuelled by a skewed fertilizer policy where urea is heavily subsided, leading to
overuse.

 While urea consumption increased from 59% to 66% of total consumption in 2012-13
over 2010-11, per hectare consumption of fertilizer declined from 140kg to 128kg
over the same period, noted the Economic Survey of 2014. Current trends in farm
output reveal that the marginal productivity of soil in relation to the application of
fertilizers is declining, it reported.

Loan Facilities for Short Term Agricultural Operations

34
 Crop Loans

Crop Loans are also called short term loans for “Seasonal Agricultural Operations.” The
Seasonal Agricultural Operations connote such activities as are undertaken in the process of
raising various crops and are seasonally recurring in nature. The activities include, among others,
ploughing and preparing land for sowing, weeding, transplantation where necessary, acquiring
and applying inputs such as seeds, fertilizers, insecticides etc. and labour for all operations in the
field for raising & harvesting the crops. Thus, the credit required to meet the current expenditure
for raising the crops on land till the crops are harvested is construed as production or short term
credit for seasonal agricultural operations.

Kisan Credit Card Scheme

Crop loans are generally disbursed by the banks through the mode of Kisan Credit Card (KCC).
The Kisan Credit Card Scheme is in operation throughout the country and is implemented by
Commercial Banks, Cooperative Banks and RRBs. All farmers including small farmers, marginal
farmers, share croppers, oral lessees and tenant farmers are eligible for issuance of KCC. KCC
holders are also covered under Personal Accident Insurance Scheme (PAIS) against accidental
death/permanent disability. Bank assesses farmer’s eligibility on the basis of land available for
cultivation and the scale of finance fixed by the District Level Technical Committee in that
district and the credit history of the farmer. The scope of the KCC has recently been broad-based
to include term credit and consumption needs. Government has advised the banks to convert
Kisan Credit Card into a Smart Card cum Debit Card.
Some of the main features of KCC scheme are :
 Assessment of crop loan component based on the scale of finance for the crop plus
insurance premium x Extent of area cultivated + 10% of the limit towards post-harvest /
household/consumption requirements + 20% of limit towards maintenance expenses of farm
assets.

 Flexi KCC with simple assessment prescribed for marginal farmers.

 Validity of KCC for 5 years.

35
 For crop loans, no separate margin need to be insisted as the margin is in-built in scale of
finance.

 No withdrawal in the account to remain outstanding for more than 12 months; no need to
bring the debit balance in the account to zero at any point of time.

 Interest subvention /incentive for prompt repayment to be available as per the

Government of India and / or State Government norms.

 No processing fee up to a limit of Rs. 3.00 lakh.

 One time documentation at the time of first availment and thereafter simple declaration
(about crops raised/ proposed) by farmer.

 KCC cum SB account instead of farmers having two separate accounts. The credit
balance in KCC cum SB account to be allowed to fetch interest at saving bank rate.

 Disbursement through various delivery channels, including ICT driven channels like
ATM/ PoS/ Mobile handsets.

To know the details and for obtaining KCC contact your nearest bank branch. For locating
nearest bank branch click branch locater.
Rate of interest and collateral requirement on crop loans

In terms of Govt. of India instructions for 2013-14, all the crop loans upto Rs. 3 lakh are being
disbursed at the interest rate of 7% p.a. Govt. of India also provides interest subvention of 3%
p.a. to prompt repaying farmers, thus making available the crop loans to them at 4% p.a. To bring
more and more farmers within the institutional credit fold, Government has extended this scheme
to crop loans borrowed by farmers from Private Sector scheduled commercial banks in respect of
loans given within the service area of the branch concerned.

Crop loans beyond Rs. 3 Lakh are being disbursed by the banks at the rate of interest as per RBI
and other conditions as approved by their Board of Directors. In terms of RBI instructions, no
separate security is required for crop loans upto Rs. 1 Lakh. Beyond Rs. 1 lakh the security is
decided by the individual bank in terms of RBI guidelines.

Rate of interest for post harvest storage loan

36
At present concessional crop loan @7% with interest rate subvention is available to farmers as
pre-harvest loan. However, in case of post-harvest loan against the negotiable warehouse
receipts, the farmers are granted loan at commercial rates. In order to discourage distress sale by
farmers and to encourage them to store their produce in warehousing against warehouse receipts,
the benefit of interest subvention is available to small and marginal farmers having Kisan Credit
Card for a further period of upto six month post harvest on the same rate as available to crop loan
against negotiable warehouse receipt for keeping their produce in warehouses.

37
 3.5 REGIONAL RURAL BANKS

Regional Rural Banks (RRBs) were set up as government-sponsored, regional based rural
lending institutions under the Regional Rural Banks Act, 1976. RRBs were configured as hybrid
micro banking institutions, combining the local orientation and small scale lending culture of the
cooperatives and the business culture of commercial banks. Their mission was to fulfill the credit
needs of the relatively unnerved sections in the rural areas -small and marginal farmers,
agricultural laborers and socio-economically weaker sections.

Shareholding pattern of RRBs among the three sponsoring entities is 50:35:15 among central
government, sponsoring bank and state government respectively.

Recapitalization and amalgamation of RRBs

RRBs became financially weak with many having high NPAs because of the difficult loans they
are giving. A committee chaired by Dr. K.C. Chakrabarty reviewed the financial position of all
RRBs in 2010 and recommended for recapitalization of 40 out of 82 RRBs.

According to the Committee, the remaining RRBs are in a position to achieve the desired level of
CRAR on their own. Accepting the recommendations of the committee, the central government
along with other shareholders started to recapitalize eh RRBs by injecting funds into them. In the
same manner the process of amalgamation continued.

Amalgamation of RRBs were made in two phases and the number of RRBs were brought down
during the first phase significantly. In the second phase of amalgamation and restructuring,
which is ongoing from 2012, geographically extensive RRBs within a State under different
sponsor banks are amalgamated to have just one RRB in medium-sized states and two or three
RRBs in large states. Amalgamation of RRBs into sponsoring banks and their merger brought
down the number from 196 in late 1990s to 56 by 2016.

Most of the reform measures enabled the RRBs to make a smart recovery without being a burden
and at the same time keeping their original risky mission of extending lending to the rural

38
people. But still their NPAs remains high at around 6% (gross) and in the future also their
activities need additional capital in the context of advanced capital requirements and regulatory
standards. Hence, to enable them to acquire more capital the government has enacted RRB
Amendment Act (2015). The amendment is aimed to help them to mobilize resource from
financial markets. This Act let them to mobilize additional capital by keeping a combined
government holding of at least 51%.

RRBs Amendment Act 2015

The Regional Rural Banks (Amendment) Act, 2015, came into effect from 4 th February 2016.
The Act raises the amount of authorized capital to Rs 2,000 crore and states that it cannot be
reduced below Rs One crore. The Act allows RRBs to raise capital from sources other than the
existing shareholders -central and state governments, and sponsor banks. Here, the combined
shareholding of the central government and the sponsor bank cannot be less than 51%.

For the sponsoring banks, they can provide various initiating assistance to the RRBs beyond the
initial five years (previously, the sponsoring bank’s responsibility will be over in five years). The
Act states that the central government may by notification raise or reduce the limit of
shareholding of the central government, state government or the sponsoring bank in the RRB.
For this, the central government may consult the state government and the sponsor bank.

The nationalization of the banks in 1969 boosted the confidence of the public in the Banking
system of the country. However, in the early 1970s, there was a feeling that even after
nationalization, there were cultural issues which made it difficult for commercial banks, even
under government ownership, to lend to farmers. This issue was taken up by the government and
it set up Narasimham Working Group in 1975.
On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was
promulgated in September 1975, which was replaced by the Regional Rural Banks Act
1976.Genesis of Regional Rural Banks Regional Rural Banks came into existence on Gandhi
Jayanti in 1975 with the formation of a Prathama Grameen Bank.

39
The rural banks had the legislative backing of the Regional Rural Banks Act 1976 . This act
allowed the government to set up banks from time to time wherever it considered necessary. The
RRBs were owned by three entities with their respective shares as follows: Central Government
→ 50% State government → 15% Sponsor bank → 35% Regional Rural Banks were conceived
as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be
sponsored by a “Public Sector Bank”, however, they were planned as the self sustaining credit
institution which were able to refinance their internal resources in themselves and were excepted
from the statutory pre-emptions. Problems with Regional Rural Banks But the original
assumptions were belied as within a very short time, most banks were making losses.

The RRB concept was based upon the policy that they would lend only to the weaker sections of
rural society, charging lower interest rates, opening branches in remote and rural areas and keep a
low cost profile. But the commercial motivation was absent. Initially the banks expanded and by
the end of year 1985 RRBS had opened 12606 branches. During this period their credit deposit
Ratio (C.D.R) expanded very fast. In 1976 it was 165% and gradually declined to 104 % in
December 1986. The Credit Deposit Ratio continuously declined thereafter. Later, the questions
started being raised about the viability of these banks. The Khusrau Committee of 1989, noted
that the weaknesses of RRBs are endemic to the system and non-viability is built into it, and the
only option was to merge the RRBs with the sponsor banks. The objective of serving the weaker
sections effectively could be achieved only by self-sustaining credit institutions. RRBs were
finding themselves unable to sustain because of the mounting losses due to imprudent
commercial policy. Thus, Khusrau Committee (aka Agricultural Credit Review Committee) said
that the RRBs have no justifiable cause for continuance and recommended their mergers with
sponsor banks. But by that time, the branch network had expanded so large that it would be
political unwise for the government to merge the RRBs with sponsor Banks. Recommendations
of Narsimham Committee on RRBs TheNarsimham Committee in 1990s also reiterated that the
RRBs should be merged with the sponsor banks. By 1993, 172 of the 196 RRBs were recorded
unprofitable. The paid up capital which was ` 25 Lakh at that time was not able to absorb the
loan losses of most of the RRBs.

40
The loan recovery was around 40%. The First Narasimham Committee recommended that the
RRBs should also be permitted to engage in all types of banking business and should not be
forced to restrict their operations to the target groups. The Narasimham committee also
recommended that there should be mergers of the RRBs with their sponsor bank, BUT the
“sponsor banks might decide whether to retain the identities of sponsored RRBs or to merge
them with rural subsidiaries of commercial banks to be set up on the recommendation of the
committee”. The first recommendation of letting the RRBs do all businesses was accepted by the
government. Some measures were taken by the Reserve Bank of India also. It allowed the RRBs
to relocate their branches if they were making losses at one location for more than 3 years. They
were also allowed to finance the non-target groups to the extent not exceeding 40 percent of their
incremental lending. This limit was subsequently enhanced to 60 percent in 1994. As a result, the
RRBs diversified into a range of non-priority sector (NPS) advances, including jewel and
deposit-linked loans, consumer loans and home loans Some efforts were done by NABARD with
funding support of the Swiss Development Corporation (SDC). It took a number of HR and
Organizational Development in these banks.

Turnaround of RRBs The above discussion makes it clear that most RRB were making loss and
had deviated from the original idea that had created them. But there were some profit making
RRBs also. Some reforms led the rise in the number of the profit making RRBs but most of them
were having a low credit deposit ratio. This was coupled with the decreasing percentage of loans
to small and marginal farmers out of the total loans disbursed by the RRBs. The RRBs NPA level
was high. In the early 2000s there was no prescribed CRAR (capital to risk weighted asset ratio)
for the RRBs.

In 2005, based upon the recommendation of an internal working group the RRBs were asked to
maintain a capital to risk weighted asset ratio at 5% and over the period of time they were
expected to align themselves to Basel I standards. However, the major reform was to merge the
RRBs with the sponsor banks. Number of Regional Rural Banks in India Number of Regional
Rural Banks in India Year Banks Dec-75 6 Dec-80 85 Dec-85 188 Mar-90 196 Mar-06 133 Mar-
11 82 Mar-13 64 Mar-14 57 There were 196 RRBs sponsored by 27 SCBs and one State
Cooperative Bank were operating in the country with a network of 14,484 branches spread over

41
523 districts as on March 31, 2005. The government started the process of consolidation and
amalgamation in 2005, bringing the number down to 82 in 2010. As of March-end, 2011, the
total number of RRBs stood at 82. This number fell to 64 in March 2013. As of March 2014, the
number of RRBs has been reduced to 57. After the 2014 elections, the new NDA government has
put hold on further amalgamation of the Regional Rural Banks.

The focus of the new government is to improve their performance and exploring new avenues of
investments in the same. Currently, there is a bill pending to amend the RRB Act which aims at
increasing the pool of investors to tap capital for RRBs. Regulation of RRBs Regional Rural
Banks are regulated by National Bank for Agriculture and Rural Development (NABARD).
Please note that currently seven states viz. Tripura, Nagaland, Manipur, Mizoram, Arunachal
Pradesh Meghalaya and Puducherry, have state-level RRBs. Gujarat and Karnataka too have
demanded formation of state level RRB. In case of West Bengal, the state Assembly took
unanimous resolution in favor of State level RRB in the year 2004.

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3.6 ROLE OF REGIONAL RURAL BANKS FOR RURAL DEVELOPMENT
IN INDIA

Rural development has to play a phenomenal role in the overall socio-economic development of
a country like India, where the majority of the population lives in rural areas. The rural sector
affects directly or indirectly almost all the economic activities in the country and provides
employment to the maximum number of people. A large part of the revenue of the government is
also generated from the rural. The necessity of rural finance was felt to provide protection &
reliance to rural people like moneylenders, landlords & traders etc. but they exploit farmers and
small entrepreneurs by charging exorbitant rate of interest & force farmers to sell their product at
low price to them. Rural people also face the risk of unpredictable production of crops due to
high dependency on monsoon. Including problem of finance they also suffer from lack of seeds,
fertilizers, water supply and other facilities which lead to rural in deftness’.

The Regional Rural banks were established on October, 2nd 1975. The main objectives of these
banks are to provide credit and other facilities particularly to small and marginal farmers,
agricultural laborers’, rural artisans and small entrepreneurs so as to develop agriculture, trade,
commerce, industry and other productive activities in rural areas. The aim of rural banks is to
bridge the credit gaps existing in the rural areas and they are supposed to be effective instruments
of economic development in rural India. They will extend productive credit to the rural
community and they will have purely rural orientation in their activity and in the manner of
extending their activity.

The history of regional rural banks in India dates back to the year 1975. It’s the Narsimham
committee that conceptualized the foundation of regional rural banks in India. The committee
felt the need of ‘regionally oriented rural banks’ that would address the problems and
requirements of the rural people with local feel, yet with the same level of professionalism of
commercial banks. Five regional rural banks were set up on October 2nd with a total authorized
capital of Rs. 1 Crore, which later augmented to Rs. 5 Crore. There were five commercial banks,
viz. Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India and
United Commercial Bank, which sponsored the regional rural banks. The equities of rural banks

43
were divided in a proportion of 50:35:15 among the Central Government, the Sponsor bank and
the concerned State Government.

ROLE OF REGIONAL RURAL BANKING CONCERS FOR RURAL DEVELOPMENT

Regional Rural Banks were established with the following responsibilities in mind:

• Taking the banking services to the doorstep of rural masses, particularly in hitherto unbanked
rural areas.

• Identify the financial need specially in rural areas

• Making available institutional credit to the weaker section of the society who had by far little or
no access to cheaper loans and had perforce been depending on the private money lenders.
• To enhance banking & financing facilities in backward or unbanked areas.

• Mobilize rural savings and channelize them for supporting productive activities in rural areas.

• To provide finance to the weaker sections of society like small farmers, rural artisans, small
producer, rural laborers’ etc.

• To create a supplementary channel for the flow the central money market to the rural areas
through refinances.

• To provide finance to co-operative societies, Primary Credit societies, Agricultural marketing

societies.

• Generating employment opportunities in rural areas and bringing down the cost of providing
credit to rural areas.

44
• Enhance & improve banking facilities to semi urban, rural & other untapped market. With these
objectives in mind, knowledge of the local language by the staff is an important qualification

FUNCTIONS OF RRB

Every RRB is authorized to carry on to transact the business of banking as defined in the
Banking Regulation Act and may also engage in other business specified in Section 6 (1) of the
said Act.
In particular‚ a RRB is required to undertake the business of
(a) Granting loans and advances to small and marginal farmers and agricultural
laborers‚ whether individually or in groups, and to cooperative societies‚ including agricultural
marketing societies‚ agricultural processing societies‚ cooperative farming societies‚ primary
agricultural credit societies or farmers’ service societies‚ primary agricultural purposes or
agricultural operations or other related purposes, and

(b) Granting loans and advances to artisans‚ small entrepreneurs and persons of small means
engaged in trade‚ commerce‚ industry or other productive activities‚ within its area of operation.
The Reserve Bank of India has brought RRB’s under the ambit of priority sector lending on par
with the commercial banks. They have to ensure that forty percent of their advances are
accounted for the priority sector. Within the 40% priority target, 25% should go to weaker
section or 10% of their total advances to go to weaker section.

The main purpose of the National Bank for Agriculture and Rural Development is to provide
credit for the development and publicity of small scaled industries, handicrafts, rural crafts,
village industries, cottage industries, agriculture, etc. The NABARD also supports all other
related economic operations in the rural sector, promotion of sustainable growth in the rural
sector. The NABARD also plays the role of a contributor to the rural development by the means
of promoting institutional development, facilitating refinance to loan providers in the rural
sector, inspection, monitoring, and evaluation of client financial corporations. National Bank for
Agriculture and Rural Development (NABARD) was established as the premiere rural
development bank. Sindhanur Urban Souharda Co-operative Bank:

45
The main purpose of the Sindhanur Urban Souharda Cooperative Bank is to provide financial
support to the rural sector. The Sindhanur Urban Souharda Co-operative Bank is more commonly
known as the SUCO Bank. United Bank of India: The role played by the United Bank of India
(UBI) as one of the regional rural banks is phenomenal. The UBI has propagated the network of
branches in order to actively take part in the rural improvement and development. Syndicate
Bank: The Syndicate Bank has it grass roots in the rural sector. The development of the
Syndicate Bank was in accordance to the development of the banking sector in India and. The
Syndicate Bank has performed actively in the development of the rural sector in India. The
Regional Rural Banks in India has actively contributed to the growth of the rural sector.

The growth of the rural industries in India and the development of the rural business and
economy have been dependent largely on the investment and financial aids provided by the
Regional Rural Banks in India. Regional Rural Banks in Tamil Nadu: Indian Bank has sponsored
two Regional Rural Banks (RRBs) viz., Saptagiri Grameena Bank and Pallavan Grama Bank.
Pallavan Grama Bank with Head Quarters at Salem is operating in 14 districts of Tamilnadu
viz., Salem, Namakkal, Krishnagiri, Dharmapuri, Villupuram, Cuddalore, Coimbatore, Karur,
Erode, Nilgiris, Vellore, Tiruvannamalai, Kancheepuram and Tiruvallur. The third RRB
sponsored by Indian Bank is Puduvai Bharathiar Grama Bank at Union Territory of Puducherry
with its head-quarters at Puducherry
The banks need to encourage the agricultural sector by providing larger amount of term loans.
Generally, nonagricultural sector indirectly helps the rural economy in many ways. Keeping in
view, the RRBs may enhance the percentage of loan to this sector. This finding may be
considerable use to rural banking institutions and policy makers in developing and shaping the
appropriate credit structure as RRBs are integral part of the rural credit structure in India. The
importance of the rural banking in the economic development of a country cannot be overlooked.
As Gandhiji said “real India lies in villages,” and village economy is the backbone of Indian
economy. Without the development of the rural economy, the objectives of economic planning
cannot be achieved. Hence, banks and other financial institutions are considered to be a vital role
for the development of the rural economy in India.

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 3.7 ROLE OFCOOPERATIVE BANKS IN CHANGING AGRICULTURE
BANKING SCENARIO

With one of the largest acreage of cropland in the World and 11%of world’s land under
agriculture, India continues to be one of the most prominent agricultural economies of the world.
There is a huge untapped potential in the Indian market for food and agribusiness, both in mature
sectors such as agri-inputs, edible oil and sugar, as well as the emerging sectors like dairy,
poultry, fruits & vegetables
and biotechnology. India is the seventh largest and second most populous country in the world.

Population of India rose from 361 million in 1951 to 846.3 million in 1991,breaching the billion
marks in the year 2000. The population is expected to increase at the rate of 1.54% per annum
until 2010, or another 162 million people. The estimates made by the Planning Commission
indicate that the Indian population will be of the order of 1.6 billion by the year 2050.A new
spirit of freedom is now stirring the country, bringing sweeping changes in its psyche. Today,
India is one of the most exciting emerging markets in the world .Skilled managerial and technical
manpower that match the best available in the world and a large middle class provide India with
a distinct cutting edge in global competition.

The Indian economy recorded a growth of 5.4% during 2001-02 and has grown at the level of
9% for three years since 2005-06 and the accelerated growth
performance was attributed mainly to agriculture sector which grew at a rate of4%. Agriculture
accounted for about 22% of the Indian GDP with 65% of
population engaged in agriculture. Cropland in India accounts for almost half the geographical
area of 328.8 million hectares. The production of food grain in India during 2001-02 was 209.2
million tons and has crossed 230 million tons during 2007-08.

India is the world’s second largest producer of wheat and paddy and the leading producer of
fruits and vegetables. However, the productivity of Indian crops remains at 40-50% of global
average, largely due to lack of adoption of modern agriculture technology and inputs. To keep
pace with the needs of the expanding population, India needs383.2 million tons of food grains at

47
current levels of per capita availability by 2020and it may even go up since economic growth
translates into higher purchasing power and hence higher consumption.
Credit is one of the crucial inputs for propelling the growth of agriculture. For the past few
decades, institutional finance is coming in a big way to help the Indian farmer in increasing the
productivity and production. All Rural Financial Institutions have played a crucial role and the
role of Cooperatives was laudable till the end of20th century as the largest purveyor of
agricultural credit. However, with the liberalization and the reforms that had swept the banking
industry in the past decade and half had diminished their leadership position and made the way
for the new players to fill the gap. The share of the cooperatives in agriculture which used to be
around 70% even in late ‘90s had slipped down to less than 30% due mainly to inertia to keep
pace with the changes and efforts not matching with those of competitors especially from
Commercial Banks of Public and Private sectors. A table illustrating the scenario is given below:

When the cooperative banks’ share in the agricultural sector is declining, public sector
commercial banks & private sector banks are emerging as new champions in agricultural and
rural banking. ICICI bank experienced a 37% growth in ruraland agricultural portfolio from
Rs.146.87 billion to Rs.201.79 billion during 2006-07. Agricultural lending accounts for around
10% of SBI’s loan book in the financial year 2007 at a year-on-year growth of 33%. (Business
Outlook, July 20,2007).The present banking scenario in India is witnessing sea changes.
Adoption of policy reforms in Indian economy has resulted in the change of economic order
towards the process of Liberalization, Privatization and Globalization (LPG). The
Liberalization of the financial sector in India is exposing Indian banks to a new economic
environment that is characterized by increased competition and new regulatory requirements. As
a result, there is a transformation in every sphere of activities of the banks in India, especially in
Governance, nature of business, style of functioning and delivery mechanisms. The new
generation banks brought the necessary competition into the industry and are spearheading
changes towards
higher utilization of technology, improved customer service and innovative products.In spite of
their huge and monolithic and bureaucratic organizational structure,
public sector banks also proved to be surprisingly nimble and flexible to meet the emerging
needs of customers. Thus, there is a paradigm shift form the seller’s market to buyer’s market in

48
the industry which forced the bankers to change their approach from conventional banking to
convenience banking and mass banking to class banking. The shift has also increased the degree
of accessibility of bank to common man for his varied of needs and requirements.

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 4. COLLECTION OF DATA

Appendices

1. Why you are a customer of NABARD?

2. Are you satisfied with their services? If yes/no, why?
3.Are appearance of the physical facilities of NABARD is in keeping with the type of service
provided satisfied?
4.When NABARD promises to do something by a certain time, it does so.?
5. Does NABARD keeps its records accurately.?
6. Do you receive prompt service from NABARD employees.?
7. Are Employees of NABARD polite.?
8. Do Employees of NABARD give customers personal attention?
9. Are NABARD’s operating hours convenient to all their customers.?
10. Can you feel safe in your transactions with NABARD’s employees.?

50
Are you satisfied with their services?
yes no

30.00%

70.00%

51
Are appearance of the physical facilities of NABARD is in keeping with the type of service provided satisfied?
yes no

32.00%

68.00%

When NABARD promises to do something by a certain time, it does so.?

yes no

13.00%

87.00%

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 Does NABARD keeps its records accurately.?
yes no

21.51%

78.49%

. Do you receive prompt service from NABARD employees.?

yes no

11.00%

89.00%

53
 Are Employees of NABARD polite.?
yes no

23.00%

77.00%

Do Employees of NABARD give customers personal attention?

yes no

40.00%

60.00%

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Are NABARD’s operating hours convenient to all their customers.?
yes no

20.00%

80.00%

Can you feel safe in your transactions with NABARD’s employees.?

yes no

18.00%

82.00%

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CONCLUSION

Cooperative banks belong to the oldest forms of the collective action in India playing essential
role in the realization of the agricultural and in local development.

They serve both rural and urban population, and are main banks in India supporting development
of agriculture and rural areas. Their key role is to give credits financing various rural based
Entrepreneurships
.
Agricultural credits play a number of significant functions of which the primary include the
intensification and growth of the agricultural production.

In a developing State with huge deficits in terms of quality and quantity, the State has to
shoulder the primary responsibility of providing cooperative credit. Considering the low living
standards of common man, incomplete and imperfect markets, and other sociopolitical
considerations it is the primary duty of the government to ensure that its citizen shave easy
access to cooperative credit.
There is a great deal of discussion as to whether microfinance reaches the so-called‘ p o o r e s t o f
t h e p o o r ’ a n d w h e t h e r, i f i t d o e s , i t b e n e f i t s t h e m . I t s e e m s t o b e generally
agreed that the main beneficiaries of microfinance are ‘the economicallyactive poor’. It is not
clear whether the SHG system reaches very poor people as effectively as the more
internationally familiar Bangladesh Grameen Bank system,which is of course also being
used in India and is growing, albeit from a smaller base, as rapidly as the SHG system.
It appears most probable, however, that it doesnot.There is even less evidence as to whether the
distribution of benefits within SHGs isequitable. It was found that poorer people in some
SHGs in the Northern areas of Pakistan which have been promoted and financed by the Aga
Khan Rural SupportProgramme (AKRSP) were benefiting very little from their
membership. Somemembers had never taken loans, either because they were nervous of the
debt or hadno profitable investment opportunities, and were doing no more than lend
their savings as free collateral for loans taken by their less poor fellow members.
Similar situations have been found in Bangladesh, Kenya and elsewhere.A l t h o u g h b a n k i n g

56
w i t h S H G s i s s l o w l y c o m i n g t o b e a p p r e c i a t e d a s p r o f i t a b l e business, but the
original and still the over-riding aim is to provide poor people with access to formal financial
services.
Now, It is very much clear that co-operative banks have very much importance in national
development. Without the help of co-operative banks, millions of people in India would be
lacking the much needed financial support.
Co-operative banks take active part in local communities and local development with a stronger
commitment and social responsibilities. These banks are best vehicles for taking banking to
doorsteps of common men, unbanked people in urban and rural areas.
Their presence in the social, economic and democratic structure of the country is essential to
bring about harmonious development and that perhaps is the best justification for nurturing them
and strengthening their base. These banks are sure to win in the race because they are from the
people, by the people and of the people.

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 SUGGESTIONS AND RECOMMENDATIONS

1. The Cooperative Banks should try to increase their deposits by opening branches in
business areas, improve the services to their clients, introduce different types of
deposit schemes and offer competitive rates of interest.

2. Cooperative Banks should change their loan policies on the basis of crop loan
Systemes

3. The Cooperative Banks must maintain adequate liquid resources, margin, properly
scrutiny of loans and should try to qualitative improvement to the staff.

4. Cooperative Banks should try to co-ordinate between the Board of Management,

Members, Depositors and Employees of bank.

5. Accountability and transparency need to be brought in the implantation of the

schemes.

6.RBI should identify the places without bank facilities and help the people in those places to
have a branch of urban cooperative banks.

7. Semi-urban and rural area customers must be educated periodically by the urban cooperative
banks to realize the importance of savings habit in the form of deposits.

8. The State and Central Government should cooperate all the urban cooperative banks to
educate the banking habits among the people of India and to express their transparency of
functions and operations.

9.The successful credit operations can be achieved with the cooperation of the customers. The
urban cooperative banks should transparently express the availability of the loans and documents
demanded. This would help the customers to avail the loans without any procedural delays.

10.The agricultural sector as well as the industrial sector must be intensely monitored by the
urban cooperative banks and help those sectors by disbursing the loans as per the direction of
RBI, State and Central Governments without any delay.

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REFERENCES

1. www.nabard.org
2. Annual Report Statement of NABARD
3. www.wikipedia.com
4. https://www.nabard.org
5. http://farmer.gov.in/nabard.html
6. http://economictimes.indiatimes.com/topic/Nabard

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