PROJECT REPORT ON

“A STUDY OF PROMOTION OF RURAL

FINANCING BY RANCHI GRAMIN BANK”
 Table of contents

Sr.No. Name of the topic Page

Nos.
1. Executive Summary
2. Rural & Agriculture Credit. 1

3. Muhammad Yunus & Grameen Bank.

4. Role of Agriculture in Indian Economy.

5. Challenges for Rural & Agriculture Credit in Past Reforms Era.

6. Government Response to Rural Credit Scenario

7. Need For Regional Rural Banks

8. Introduction-Regional Rural Banks.

9. Roles & Limitations of Regional Rural Banks.

10. Regional Rural Banks & Economic Reforms.

11. Rural Banking Faces Twin Challenges.

12. More Recent Measures

13. Comparison of RRBs with State Cooperative Banks.

14. The Question of Ownership.

15. Regional Rural Banks Today.

16. NABARD.

17. Com mercial Banks Contribution.

18. Key Performance Indicators- Regional Rural Banks.

19. Important Trends.

20. Bibliography.

.
 EXECUTIVE SUMMARY

Rural financial services were defined in comprehensive terms and should

include provision of Credit, saving mobilization, and a payments system for transfer
of funds to and away from the rural sector. In view of low incomes and high risks in
rural areas, effective provision of these services serves important goals of accelerated
growth, poverty alleviation and reduced exposure to vulnerability. The diversity
within the rural sectors requires a variety of diversified formal and informal
institutions for the provision of each component of rural financial services to its
clients.

The major finding of the project is that rural sector has suffered from policy
neglect, poor design and weak implementation of delivery system. The services
provided have been inadequate as well as inconvenient, inappropriate, unsafe,
unaffordable and causing a great deal of inconvenience. In relative terms, most
attention has been paid to provision of agricultural credit to and mobilization of
deposits from the wealthy people in rural areas. Provisions of insurance, credit for
non-farm purposes and for the landless and small farmers and the mobilization of
savings of the poor and poorest in rural areas have not received much attention from
the policy makers.

The fact that there is no permanent institutional mechanism, which can

analyze the situation in the area of rural finance and come out with policy proposals
to rectify the policy mistakes, though many financial institutions are trying to enter in
rural banking.

Last but not the least, there is a need to create synergies and linkages between
different organizations involved in providing rural financial services i.e. savings,
credit, insurance and transfer of funds. The innovative financial products, based on
best practices in national and for international experience and suited to different kind
of clients are helpful in improved delivery of services.
 RURAL AND AGRICULTURE CREDIT

Credit is a key factor in agriculture development. Agriculture credit is

required for purchase of land, fertilizer, cattle’s new equipment etc. About 75% of the
Indian population lives in rural areas and about 80% of this population is dependent
on agriculture for its livelihoods. Agriculture accounts for about 37% of the national
income. The development of the rural areas and of agriculture and its allied activities
thus becomes vital for the rapid development of economy as a whole.

An equally important concern that needs attention is the flow of institutional

credit to agriculture. The growth of commercial banks’ lending to agriculture and
allied activities witnessed a substantial decline in the 1990s as compared with the
1980s.
 ROLE OF AGRICULTURE IN INDIAN ECONOMY

1. EMPLOYMENT

Agriculture is the major source of employment to the people in rural areas. In

1951, 72% of India’s work force was engaged in agriculture. In 1999-00about
57% of the work force is engaged in agriculture. Besides providing direct
employment in agriculture, it also affects employment indirectly in other
sectors.

2. CONTRIBUTION IN THE NATIONAL INCOME

Agriculture contributes to the national income of the India to good extent in

1951 the share of agriculture in national income was over 56%. In 2002-2003
it was about 20%.

3. CAPITAL FORMATION

Capital formation depends upon savings and investment. People in rural areas
tend to save money, however, small amount it may be. The savings of rural
people who largely depend upon agriculture facilitates investment and hence
generates capital formation in the country.

4. FOREIGN EXCHANGE

Agriculture product like tea, tobacco, spices, etc. contribute a good share in
India’s exports in 1960-1961 the share of agriculture and allied product in the
total exports of India was about 44%. In 2002-2003 export earnings was about
13%.

5. GOVERNMENT REVENUE

Direct revenue by way of land revenue to the state governments. Indirect

revenue by way of taxes and duties on consumer goods, and also on
agricultural inputs used by farmers.
 MUHAMMAD YUNUS & GRAMEEN BANK

NOBEL PEACE PRIZE WINNER MUHAMMAD YUNUS

Muhammad Yunus’ ideas about lending to the poor to lift millions out of
poverty. Have changed lives in his native Bangladesh and beyond. Known as the
“banker to the poor,” Yunus, winner of the 2006 Nobel Peace Prize, has helped people
rise above poverty by giving them small, usually unsecured loans through his
Grameen Bank.

Through Yunus’s efforts and those of the bank he founded, poor people around
the world, especially women, have been able to buy cows, a few chickens or the cell
phone they desperately needed to get ahead.

Yunus is the first Nobel Prize winner from Bangladesh, a poverty-stricken

nation of about 141 million people located on the Bay on Bengal.

Yunus received a Ph.D. in economics from Vanderbilt University in 1970 and

taught at Middle Tennessee University from 1969 to 1972. After returning to
Bangladesh, he joined the University of Chittagong as head of the Economics
Department. He also holds honorary doctorate degrees from dozens of universities
around the world.
 Yonus has won dozens of international awards, including the Simon Bolivar
Prize, the Indira Gandhi Peace Prize, the Seoul Peace Prize and the Freedom Award
of the International Rescue Committee.

He has also been appointed as an International Goodwill Ambassador for

UNAIDS by the United Nations and inducted as a member of France’s Legion
d’Honneur.

From 1993 to 1995, Yunus was a member of the International Advisory Group
for the Fourth World Conference on Women, a post to which he was appointed by the
U.N. secretary general. He has served on the Global Commission of Women’s Health,
the Advisory Council for Sustainable Economic Development and the U.N. Expert
Group on Women and Finance.

In addition to Grameen Bank, Yunus has created numerous other companies in

Bangladesh to address poverty and development issues. Those companies are
involved in a range of industries, including mobile telephony, Internet access, capital
management and renewable energy.

Grameen Bank was the first lender to hand out microcredit, giving very small
loans to poor Bangladeshis who did not quality for loans from conventional banks.
No collateral is needed and repayment is based on an honor system.

Grameen, which means rural in the Bengali language, says the method
encourages social responsibility.
A LOOK AT GRAMEEN BANK

WHAT IS IT: The Grameen Bank hands out microcredit, or very small loans, to the
poor peoples of Bangladesh who, do not qualify for loans from conventional banks.
No collateral is needed and repayment is based on an honor system.

HOW DID IT START: In 1974, Yunus, then an economics professor recently

returned from the United States, lend a total of $27 to 42 villages who, made bamboo
furniture. The loans, which were all paid back, allowed them to cut out the
middlemen and purchase their own raw materials. Emboldened by his experiment,
Yunus won government approval in 1983 to open Grameen, Bengali for “rural.”

WHO QUALIFIES: Anyone can qualify, but they must belong to a five-member
group. Once the first two members begin to pay back their loans, the others can get
theirs. While there is no group responsibility for returning the loans, the bank believes
it creates a sense of social responsibility, ensuring all members pay back their loans.

DOES IT WORK: Grameen claims a 99 percent repayment rate. According to a

recent Grameen survey, 58 percent of the families of Grameen borrowers have
crossed the poverty line.

WHO OWNS THE BANK: The government of Bangladesh owns 6 percent of the
bank while the borrowers own the other 94 percent.

WHAT ARE THE NUMBERS: The bank has handed out $ 5.72 billion since its
inception to 6.61 million people had been repaid $ 5.07 billion. Women account for
97 percent of the loan takers. Grameen Bank has 2,226 branches, works in 71,371
villages and has a total staff of 18,795.
OTHER INFORMATION

Earns Profit-Ever since Grameen Bank came into being, it has made profit
every year except in 1983, 1991 and 1992. It has published its audited balance-sheet
every year, audited by two internationally reputed audit firms of the country.

Revenue and Expenditure: Total revenue generated by Grameen Bank in 2006

was Tk 9.43 billion (US $134.90 million). Total expenditure was Tk 8.03 billion (US
$ 114.90 million). Interest payment on deposits of Tk 3.47 billion (US $ 35.35
million) was the largest component of expenditure (43 per cent). Expenditure on
salary, allowances, and pension benefits amounted to Tk 2.03 billion (US $ 28.97
million), which was the second largest component of the total expenditure (25 per
cent). Grameen Bank made a profit of Tk 1398 million (US $ 20.00 million) in 2006.
Entire profit is transferred to a Rehabilitation Fund created to cope with disaster
situations. This is done in fulfillment of a condition imposed by the government for
exempting Grameen Bank from paying corporate income tax.

Low Interest Rates: Government of Bangladesh has fixed interest rate for
government-run micro credit programmes at 11 per cent at flat rate. It amounts to
about 22 per cent at declining basis. Grameen Bank’s interest rate is lower than
government rate.

There are four interest rates for loans from Grameen Bank : 20% (declining
basis) for income generating loans, 8% for housing loans, 5% for student loans, and
0% (interest-free) loans for Struggling Members (beggars). All interests are simple
interest, calculated on declining balance method. This means, if a borrower takes an
income-generating loan of say, Tk 1,000, and pays back the entire amount within a
year in weekly installments, she’ll pay a total amount of Tk 1,100, i.e. Tk 1,000 as
principal, plus Tk 100 as interest for the year, equivalent to 10% flat rate.

Deposit Rates:

Grameen Bank offers very attractive rates for deposits. Minimum interest
offered is 8.5 per cent. Maximum rate is 12 per cent.
BEGGARS AS MEMBERS

Begging is the last resort for survival for a poor person, unless he/she turns
into crime or other forms of illegal activities. Among the beggars there are disabled,
blind, and retarded people, as well as old people with ill health. Grameen Bank has
taken up a special programme, called Struggling Members Programme, to reach out
to the beggars. About 100,505 beggars have already joined the programme. Total
amount disbursed stands at Tk. 107.16 million. Of that amount of Tk. 74.39 million
has already been paid off.
 CHALLENGES FOR RURAL & AGRICULTURE
CREDIT IN THE PAST REFORMS ERA

TECHNICAL RELATED PROBLEM

PROBLEM OF TECHNOLOGY

Indian farmers especially the small and marginal farmers use outdated
technology. They do not use latest technology such as tractors, land tillers. This is
mainly due to problem of finance. Only the large farmers do get loans to purchase
tractors, land tillers, etc. as a result of this, the agriculture productivity of small
farmers does get affected.

POOR QUALITY OF SEEDS

Indian farmers especially the small and marginal farmers use poor quality of
seeds. They use farm seeds rather than laboratory developed seeds. The use of HYV
seeds is limited in India. As a result of this the agriculture productivity is low in India.

PROBLEM OF FERTILIZERS

Indian agriculture is affected by the problem of fertilizers. There is inadequate

use of fertilizers and also poor quality of fertilizers. Even today some of the small and
marginal farmers use only natural fertilizers such as cow dung, and leaves as manure
or fertilizers they do not use good quality chemical fertilizers and in proper quantity,
which in turn affects agricultural production.

FINANCE RELATED PROBLEMS

AGRICULTURE INDEBTEDNESS
 A good no. of Indian farmers, especially the small and marginal farmers are
subject to indebtedness. As a result the production and productivity of their land gets
affected as they continue to repay debts, and are not in position to undertake farm
development activity.

The small farmers continue to obtain loans from moneylenders at high interest
rates due to the difficulties in obtaining loans or credit from organized sector like
banks. Some of the farmers are also ignorant about bank facilities. It is said that
Indian farmers born in debt lives in debt and dies in debt.

PROBLEM OF MONEYLENDERS

The farmers depend upon the unorganized sector the money lenders for their
credit requirements. They borrow funds at high interest, ranging from 15% to 50%
per annum and even more. Again the moneylenders manipulate the loan records and
cheat the illiterate farmers.

PROBLEM OF INSTITUTIONAL CREDIT

Indian farmers find it difficult to obtain intuitional finance due to various

formalities in obtaining finance and also due to inadequacy of bank branches in rural
areas. Some of small farmers are not even aware of intuitional finance facilities.

However it is to be noted that over the years the share of intuitional finance in
agriculture credit has increased.
 GOVERNMENT’S RESPONSE TO
THE RURAL CREDIT SCENARIO

In the early 1970s the Central Government observed that despite a wide
banking network and development initiatives in the first 25 years since Independence,
a critical gap still existed in meeting the credit needs of the rural poor. To find a
solution, the Government appointed a working group on rural credit, the Narasimhan
Committee, in July 1975. The committee observed that the cost structure of
commercial banks, the attitude of bank employees and the lack of a professional
approach in the co-operative credit system were the main stumbling blocks to rural
credit. The committee also observed that the deposits collected by banks from rural
areas were not totally deployed there. The panel, therefore, recommended the creation
of a new set of regionally-oriented rural banks which would combine a co-operative’s
local feel and a commercial bank’s business acumen.
 NEED FOR REGIONAL RURAL BANKS

REGIONAL RURAL BANKS EMERGE

The Government accepted the recommendations of Narasimhan Committee

and, accordingly, the ordinance of Regional Rural Banks, 1975 was promulgated on
September 26, 1975. This was replaced by the Regional Rural Banks Act, 1976 on
February 9, 1976. The mandates of these rural financial institutions were to:

 Take banking to the doorsteps of the rural masses, particularly in areas

without banking facilities.

 Make available cheaper institutional credit to the weaker sections of society,

who were to be the only clients of these banks.

 Mobilize rural savings and canalize them for supporting productive activities
in rural areas.

 Generate employment opportunities in the rural areas.

 Bring down the cost of providing credit in rural areas

The regional rural banks were to form with: Central Government (50 per
cent), State governments (15 per cent) and commercial banks (35 per cent) (as
per the recommendations of Narshiham committee). The number of RRBs rose from
just six in 1975 to 196 by 1987, covering 476 districts. They financed only the weaker
sections of the rural community – small and marginal farmers, agricultural labourers,
small traders, and so on. Along with commercial banks, RRBs participated
enthusiastically in poverty alleviation schemes (IRDP, for example) and
disadvantaged area (drought-prone regions and deserts) development programmes.
They quickly became an important and integral part of the rural credit system.
However, their financial viability was initially overstretched by policy rigidities
coupled with a low capital base in an environment of inadequate infrastructure and
deeper social and economic disparities.

After the financial sector reforms, several measures to improve the viability of
RRBs were initiated. More importantly, re-capitalization to cleanse their balance
sheets was taken up in 1993-94. Other important reforms are as follows:

 Measures included deregulation of interest rates on advances as well as

deposits.

 Permission to lend to others outside target groups.

 Provision for rationalization of branch network- relocation and merger of loss-

making branches.

 Introduction of prudential norms on income-recognition.

 Asset classification and provisioning.

 Preparation of development action plans and signing of memorandum of

understanding with sponsor bank for sustained viability in a planned manner.

 Provision of greater role space and larger operational responsibilities to

sponsor banks in the management of RRBs

 Encouragement to function as self-help promoting institutions and financing

of self-help groups and introduction of Kisan Credit Cards to simplify
provision of production credit to their clients.
 REGIONAL RURAL BANKS

INTRODUCTION

Regional Rural Banks were established under the provisions of an ordinance

promulgated on 26th September 1975 and the RRB Act, 1976 with an objective to
ensure sufficient institution credit for agriculture and other rural sectors. The RRBs
mobilize financial resources from rural / semi-urban areas and grant loans and
advances mostly to small and marginal farmers, agricultural labourers and rural
artisans. 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.

As stated earlier RRBs are jointly owned by Government of India, the

concerned State Government and sponsor Banks (27 scheduled commercial banks and
one State cooperative Bank); the issued capital of a RRB is shared by the owners in
the proportion of 50 %, 15% and 35% respectively.

The institution of Regional Rural Banks (RRBs) was created to meet the
excess demand for institutional credit in the rural areas, particularly among the
economically and socially marginalized sections. Although the cooperative banks and
the commercial banks had reasonable records in terms of geographical coverage and
disbursement of credit, in terms of population groups the cooperative banks were
dominated by the rural rich, while the commercial banks had a clear urban bias. In
order to provide access to low-cost banking facilities to the poor, the Narasimham
Working Group (1975) proposed the establishment of a new set of banks, as
institutions which “combine the local feel and the familiarity with rural problems
which the cooperative possess and the degree of business organization, ability to
mobilize deposits, access to central money markets and modernized outlook which
the commercial banks have”. The multi-agency approach to rural credit was also to
sub serve the needs of the input-intensive agriculture strategy (Green Revolution)
which had initially focused on ‘betting on the strong’ but by the mid-seventies was
ready to spread more widely through the Indian countryside.

In addition the potential and the need for diversification of economic activities
in the rural areas had begun to be recognized, and this was sector where the RRBs
could play meaningful role. The RRBs Act, 1976 succinctly sums up this overall
vision to sub-serve both the developmental and the redistributive objectives:-

The RRBs were established” with a view to developing the rural economy by
providing, for the purpose of development of agriculture, trade, commerce, industry
and other productive activities in the rural areas, credit and other facilities,
particularly to small and marginal farmers, agricultural laborers, artisans and small
entrepreneurs, and for matters connected therewith and incidental thereto”

Table-1 Expansion of Regional Banking:-1975-1990

Dec.1975 Dec.1980 Dec.1985 Mar.1990

Banks 6 85 188 196
Branches 17 3279 12606 14443

The following one-and-a-half decades saw large-scale efforts to increase the

number of banks, bank branches, and disbursements nationwide. By 1991, there were
196 RRBs with over 14,000 predominantly rural branches in 476 districts with an
average coverage of three villages per branch. These banks had disbursed over Rs.3,
500 crore in credit and mobilized over Rs.4, 100 crore in deposits. Perhaps the most
significant achievement of the RRBs during this period was in enabling the weaker
sections of the rural community access to institutional credit. The bulk of the
loans from RRBs were to the priority sectors, which accounted for over 70 per cent of
the total. Agriculture and allied activities took up more than 50 percent of the total
advances.

The year 1990 marks the end of the expansion phase of regional banking,
beyond which there has been no growth in the number of Regional Rural Banks
(including branches).

In addition, the RRBs were instrumental in extending credit for poverty

alleviation schemes (e.g. IRDP) and disadvantaged area (drought-prone regions and
deserts) development programmes.

The expansionary phase of the late seventies and the eighties while more
focused on outreach was not devoid of blueprint for viability of the RRBs, unlike
what the mainstream academia and press claim to be the case. It was understood that
the RRBs to survive as credit institutions could not remain unviable for long time,
though the RRBs might not become viable in the initial years. This expectation was,
however, tempered by the prevalent situation on the field and the ultimate objectives
for which these specialized institutions were created. It was realized early that
question of viability of the RRBs could not be the same as other business ventures. A
business unit has all the freedom to take decisions on many matters such as opening
branches, deploying its resources, staff recruitment, its purchases, methods
rendering services etc. But the RRBs could not be flexible in many of their affairs;
even their clientele was specific, scattered, remote and not assisted by anyone.
Keeping in view the objectives, structure and the nature of operations of the RRBs,
these institutions could certainly not be evaluated on the basis of mere financial
viability. There was a general agreement that the viability of the RRBs had to be
assessed in terms of composite criteria including increase in business per branch,
recovery rate, productivity of staff, cost effectiveness of operations, closer
monitoring, socioeconomic upliftment and improvements in the standards of living of
the clientele. Again in respect to the viability question, there was considerable
flexibility accorded to banks on the time dimension. It was estimated that the RRBs
would need about seven years to become viable, though for the RRBs with large
number of infant branches even this period might not be adequate. Between 1980 and
1987, while the number of RRBs increased a little more than two-fold the number of
branches of RRBs increased more than four-fold. It was not totally unexpected
therefore that by the end of the 1980s several of these banks were showing losses on
their books.

Table 2:- Purpose wise Advances of RRBs, Outstanding (end of Sept, 1990)
Rs. Crores
1 Short Term (crop loan) 615

2 Term Loan and Agriculture Activities 669

3 Allied Activities 555

4 Rural Artisans, Village & Cottage Industries 277

5 Retail Trade and Self-employed etc. 1052

6 Consumption Loan 54

7 Other Purpose 290

8 Indirect Advances 43

Total 3555
 ROLES & LIMITATIONS OF
REGIONAL RURAL BANKS

ROLES OF REGIONAL RURAL BANKS

PROVISION OF CREDIT

The main function of RRBs is to provide short term and long-term finance to
farmers. The finance is provided for the following purposes:

 Short term finance to meet working capital needs such as payment of wages,
purchase of seeds and fertilizers, transportation expenses, etc.

 Medium term finance to meet medium term needs such as purchase of cattle,
digging of wells etc.

 Long term finance to meet fixed capital needs such as purchase of land,
purchase of tractors, etc.

They provide finance at low interest rates. This has resulted in less
dependence on money lenders in respect of agricultural credit.

RESEARCH AND DEVELOPMENTS

The RRBs finances research and development in the field of agriculture. Such
R & D activities help to develop new and better inputs, techniques and technology, as
a result, better quality of seeds, fertilizers and farm equipment is developed. This
helped to improve the production and productivity of agricultural crops.

COMMUNITY DEVELOPMENTS

RRBs have helped in improving the life in rural areas. They provide social
education to farmers and others in villages so that they give up their bad habits like
gambling, drinking liquor etc.
 Through workshops and documentaries the RRBs have made attempts to
make rural masses about social evils like child marriages, reckless spending during
festivals, marriages etc.

MARKETING SERVICES

The RRBs assists the farmers in their marketing activities. They provide
advice to the farmers in respect of proce, packing, transportation; etc. the marketing
advice helps the farmers to take proper marketing decisions. This in turn helps the
farmers to get better prices for their products.

SUPPLY OF FUNDS

The RRBs not only provide funds, but they also make efforts to supply good
quality inputs like seeds ,fertilizers, pesticides, etc. this helps to improve the
productivity of land. The inputs are provided at good rates as part of the discount on
bulk purchases is passed on to the farmers.

LIMITATIONS OF REGIONAL RURAL BANKS

The institutional agriculture credit in India is faced with many problems. The
Indian continues to depend on the money lenders for his financial requirements in
spite of the institutional framework.
The various problems are:

INADEQUATE FINANCE

A basic feature of the credit problem is its overall inadequacy; particularly of

the institutional credit. The credit provided by the cooperative banks and commercial
banks is not sufficient to meet the requirements of the farmers. The banks mostly
provide short term credit and not the long term credit. There is a need of more long
term finance from land development banks.
 Not only the right quantity of long term institutional finance is available, but
also it is not available at the right time. Hence the farmers depend upon moneylenders
for their requirements.

PROBLEM OF SECURITY

Normally the banks insist on security to sanction loans to the farmers. The
security may be in form of land or other assets. The small and marginal farmers find it
difficult to obtain funds as they have limited amount of land to offer as security.

PROBLEM OF MAINTAINING BRANCHES

The commercial banks as well as the cooperative banks find it difficult to

maintain branches in rural areas. This is due to low banking business and high
overheads in form of staff salaries, offices rent, and other overheads. Hence the banks
do not give much importance to set up branches in certain rural areas. The
commercial banks also have face problems in sanctioning and monitoring of a large
no. of small advances in their rural branches, as it is time consuming and
unprofitable.

LACK OF TRAINED MANPOWER

The banks often face problem of untrained manpower in rural areas. The staff
and the officers often lack knowledge of the financial requirements of the farmers and
again they may have a negative attitude towards the farmers. In order to achieve
about the financial requirements of the farmers.

PROBLEM OF RECOVERY

There is the problem of recovery of credit provided to the farmers both the
rich farmers as well as the poor ones. The large and rich farmers deliberately avoid
repaying loans and the small farmers find it difficult to repay their loans. Also quite
often, there is political pressure on the banks to write off the loans. This result in
demotivation to the banks to provide credit in rural areas.
CORRUPT OFFICIALS

The officials of banks adopt corrupt practices. They often provide finance to
their friends and relatives. Small and marginal farmers face great difficulty in
obtaining finance. Hence they have to depend upon the money lenders for their
financial requirements. Not only the officials favour their friends and relatives to
obtain loans. But they are also corrupt in sanctioning loans. They do ask for the bribes
and adopt other corrupt practices at the time of sanctioning, and disbursement of
loans.
 REGIONAL RURAL BANKS
AND ECONOMIC REFORMS

In the year 1989 for the first time, the conceptualization of the entire structure
of Regional Rural Banks was challenged by the Agricultural Credit Review
Committee (Khusro Committee), which argued that these banks have no justifiable
cause for continuance and recommended their mergers with sponsor banks. At the
time such a policy move was politically unthinkable, so the Reserve Bank and the
Government of India quite prudently pushed the khusro committee report under the
carpet without a public debate. With the onset of the neo-liberal economic reforms
and the liberalization of the financial system, the RRBs came under the scanner ones
again, but this time in a policy regime that was too willing to let the market principles
rule.

The committee on financial Systems, 1991(Narasimham committee) stressed

the poor financial health of the RRBs to the exclusion of every other performance
indicator.172 of the 196 RRBs were recorded unprofitable with an aggregate loan
recovery performance of 40.8 percent. (June 1993) The low equity base of these
banks (paid up capital of Rs.25 lakhs) didn’t cover for the loan losses of most RRBs.
In the case of a few RRBs, there had also been an erosion of public deposits, besides
capital. In order to impart viability to the operations of RRBs, the Narasimham
Committee suggested that the RRBs should be permitted to engage in all types of
banking business and should not be forced to restrict their operations to the target
group’s proposal which was readily accepted.

This recommendation marked a major turning point in the functioning of

RRBs as we shall see below. For the time being though, the suggestion of mergers of
the RRBs with their sponsor bank, which the Committee on Financial Systems had
put forth in a slightly modified form-‘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’- was put on
hold.
 In the ensuing years, reforms of the RRBs largely followed the same format as
that of the commercial banks, irrespective of the fact that their very role in the society
required a special status and a different set of policies. Since the early 1990s, there
was a complete freeze on recruitment of new staff in the RRBs. As a part of
comprehensive restructuring programme, recapitalization of the RRBs was initiated in
the year 1994-45, a process which continued till 1999-2000 and covered 187 RRBs
with aggregate financial support of Rs.2188.44 crore from stakeholders.

Simultaneously, prudential norms on income-recognition, asset classification

and provisioning for loan-losses following customary banking benchmarks were
introduced. From 1996/1997, there has been a tendency to allow greater role and
larger operational responsibilities to sponsor banks in the management of RRBs. The
rest of the section discusses a few of the major policy changes and their observed
outcomes.

 PROVISION FOR RATIONALIZATION OF BRANCH NETWORK

INCLUDING RELOCATION AND MERGER OF LOSS-MAKING
BRANCHES

One of the regulations that the RRBs faced was regarding the limited area of
operations and their narrow client base. In 1993, RBI gave permission to
RRBs to relocate branches that were consistently making losses for more than
three years. This policy provided an opportunity to the RRBs shift branch
premises to more commercially promising areas from localities where they
had incurred sustained losses. As Table 3 indicates, between 1996 and 2003,
about 459 offices of RRBs were closed and relocated to semi-urban and urban
centers so that the overall number of branches of RRBs would remain
constant.

In addition, there were relocations within the rural areas from remote
locations to commercial places (not captured by the data). The transfer of
banking business to semi-urban and urban centers was even more drastic with
a 6 percent decline in share of rural areas in credit amount outstanding, over
the seven years, as the banks adjusted their clientele.
Table 3:- Relocation OF RRBs Business from Rural to Semi-Urban & Urban
Areas

Distribution of Credit Outstanding

Number of offices (%)

1996 2003 1996 2003

Rural 12448 11989 77.45 71.51

Semi-Urban 1844 2183 17.72 21.76
Urban 373 477 4.78 6.50
Metropolitan 7 22 0.06 0.24
All-India 14672 14671 100.00 100.00

Sources: RBI, Basic Statistical Returns, March 1996 and March 2003.

 PERMISSION TO LEND TO OTHERS OUTSIDE TARGET GROUPS

AND DEREGULATION OF INTEREST RATES

Before the initiation of banking reforms, lending from the RRBs was largely
restricted to the priority sector. From September1992 onwards, the RRBs were
allowed to finance 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. The RRBs adopted new innovations for credit delivery with
lower risk of default such as self-help Group linked lending, non priority
sector collateralized lending, Kisan Credit Card scheme for landed
agriculturists, etc. As a proportion of total advances, priority sector lending
dipped from around 70 percent in 1990 to 57 percent in 2001.Even among the
categories that were eligible as priority sector, the attempt was to minimize
credit risk and make easy loans. Between 1995 and 2003, while short term
agriculture credit under the priority sector increased at about 29 percent per
annum, term loans declined by 2.6 percent a year.

Sinha et al (2003) in a field study of 5 RRBs find that non-priority sector

advances increased sharply in the second-half of the 1990s for all the sample
 banks. Of these, 4 banks have a significant 25 percent of their portfolio
invested in non-priority sector loans. The interviewed RRB managers agree
that this was a deliberate strategy to improve viability. Non-priority sector
advances are mostly collateralized and therefore carry low risk; they are
generally market –based and of a higher value extended to higher-income
clients or to low income clients through deposit and jewelry linked loans; and
banks have freedom to charge cost-covering interest rates on non-priority
sector advances. The bank managers candidly accept that the RRBs have been
able to raise their profitability by refusing to serve low-income clients!

 RISING INVESTMENTS IN BANKS’ PORTFOLIOS

The RRBs in following the trend set by the commercial banks increased the
share of investment assets in the portfolio. Not only did the share of
investments in government securities increase beyond the SLR norms,
simultaneously there was diversion of an increasing share of the investment
portfolio into other approved securities such as PSU bonds and debentures.
The importance of investments in the portfolio of the RRBs can be gauged
from the fact that the interest on investments was about 52 percent of the total
income in 2003 while interest on advances was 37 percent of the income.
Mujumdar (2001) attacks this reverse flow of funds from the rural to the urban
areas as the most retrogressive policy initiated by the RBI. Priority sectors –
including agriculture, small industry, retail trade, the whole range of non- farm
activities in the rural sector – have no access to the capital market and hence
the emphasis should be to promote flow of resources from the urban to the
rural areas. However, an indulgent RBI has yielded to the biased perspective
that there aren’t enough avenues to invest bank resources in the rural sector.
 RURAL BANKING FACES TWIN CHALLENGES

Banking in rural India is faced with the twin challenges of regulation and
distribution. Regulation with respect to banking has been designed for delivery in
urban India and distribution required more manpower to be deployed in rural areas.
Initiatives like cheque transaction – where the electronic image and not the actual
cheque is sent – have in mind the urban customer, about 500-600 million people in
India still do not have bank accounts. For the rural segment, one needs to design no-
frills products and deliver hard core value. The other handicap was that while Rs 1-
crore business in microfinance required 30 people in terms of manpower, the same
volume of business in other portfolios required only one person. Also, contract
farming and supply chain integration has not gone the way they should have. Power,
telecommunications, banking and transportation had reduced the urban-rural divide.
Besides traditional banking services, people in the rural and semi-urban areas are
expressing interest in liability and investment products. Rural India is fast
transforming a nation of savers into a nation investor.
 MORE RECENT MEASURES

It is only in the past few years that the unwanted effects of reform measures
on rural banking have begun to be recognized in certain official quarters. That the
improved performances of the RRBs – 163 out of 196 RRBs were earning profits in
2003-2004 was largely a result of the banks abrogating their credit intermediation role
rather than a sign of their genuine health and vibrancy is pitifully obvious. Moreover,
the agrarian distress and stagnation of the rural economy has become too stark and
imminent and, of course, the political ramifications of the crisis can no longer be
ignored.

Among the various official committees that were set up review the situation
and make policy recommendations on the future course of development of the RRBs,
the Parliamentary Estimates Committee (2002-03) had come up with a number of
useful suggestions to tackle the shrinking credit delivery to the priority sector and the
rural areas:

 Among RRBs which are making absolute profit, the credit-deposit ratio
should not be lower than 75% and for those which are making profits but still
have accumulated losses, an increasing trend of the ratio should be ensured
and their investment portfolio should get reduced accordingly.

 The priority sector lending by RRBs has been declining and as per latest
figures, priority sector lending to agriculture and other allied activities comes
to about 57 % of the total lending……..There could be no rationale for fixing
the same norms for lending to priority/agricultural sector by the RRBs as in
the case of commercial banks. The RBI should apply proper checks to ensure
that the present level of 57% of lending by the RRBs to the priority sector is
not allowed to decline further. And it should look into the …….desirability of
enhancing the percentage of lending to the priority sector.
  The committee is constrained to note that the percentage of loans to small and
marginal farmers out of total loans disbursed by the RRBs has been declining
steadily. The RRBs do not maintain separate details of number of accounts of
small and marginal farmers. In the absence of such information it is difficult
to understand as to how RRBs ensure credit disbursement to small/marginal
farmers and other weaker sections of society as per the guidelines issued by
the Government/the RBI. The committee recommended that the RRBs should
take steps for compiling and maintaining data regarding credit facility
extended to small and marginal farmers and other weaker sections of the
society to monitor that credit facilities being provided by the RRBs reach the
targeted beneficiaries.

 A number of RRBs were charging compound interest on agriculture loans.

Even on the subsidy part, certain RRBs were charging compound interest,
which was in utter violation of the guidelines issued by the RBI. The
committee is of the view that this trespass should be dealt with severely……
More distressing is the fact that even though in the case of a number of banks
this irregularity was pointed out in the Inspection Reports by NABARD,
neither had the RRBs taken any corrective measures in this regard nor was
any serious note of it taken by the sponsor banks……It appears the RBI,
NABARD and the sponsor banks seem content with issuing of circulars and
conducting mandatory inspections without ensuring compliance of the
guidelines issued by them and rectification of irregulations noticed during
inspections.

On the issue of NPAs of the RRBs, the committee expressed its dissatisfaction
at the current levels. While the official statistics highlights the decline in NPAs from
34 percent in March 1996 to 3.99 percent in March 2006.Very few of the above
recommendations were, in fact, accepted by the RBI/Government of India. From the
year 2003-04, the RBI revised upwards the lending target for priority sector to 60
percent of the total advances for the RRBs. Ambitious overall credit targets were laid
down for the RRBs by the Union Government.
 The farm credit target for the RRBs at Rs 11,900 crore for the fiscal year
2005-2006 is 40 percent higher than Rs 8,500 crore target set during the fiscal year
2004-2005. But little else happened. In reviewing the action taken by the RBI/GOI on
the proposals of the Estimates Committee (2002-2003), the committee in 2004-2005
finds that ’no specific action has been taken’ on most of the major recommendations.

 NO FURTHER MERGER OF RRBS

There is a need for policy refinement regarding further merger of RRBs. The
Vyas Committee had recommended merger of all RRBs in the same State.
Currently, RRBs of the same sponsor bank are merged at State-level. By April
2007, the number of RRBs was reduced to 96. If sponsor banks are to have the
requisite initiative to support their RRBs fully, they would need assurance that
there will be no further mergers. The Committee is of the view that further
merger of all RRBs at State-level is not required. It may also not be desirable
if there has to be a firm reinforcement of the rural orientation of these
institutions with a specific mandate on financial inclusion. The Committee,
therefore, recommends that the process of merger should no proceed beyond
the level of sponsor bank in each State.

 RECAPITALIZATION OF RRBS WITH NEGATIVE NET WORTH

Recapitalization of RRBs with negative net worth has to be given a serious

consideration as it would facilitate their growth, provide lenders a level of
comfort and enable their achieving standard capital adequacy ratios. As on
March 2004, 98 RRBs were in need of Rs 3,050 crore for making the net
worth positive. The position, as on 31March 2006, is that 40 RRBs would
require Rs. 1,718 crore.

 WIDENING NETWORK AND EXPANDING COVERAGE

As on 01 April 2007, RRBs were covering 535 districts. They may be directed
to cover all unbanked areas in these districts, taking the village as a unit, either
by opening a branch (wherever feasible) or through the BF/BC model in a
 time bound manner. As on 01 April 2007, 87 districts in the country were not
covered by RRBs and their area of operation may be extended to cover these
districts.

 COMPUTERIZATION

With a view to facilitate the seamless integration of RRBs with the main
payment system, there is a need to provide computerization support to them.
Banks will be eligible for support from the Financial Inclusion Funds on a
matching contribution of 50% in regard to districts other than tribal districts
and 75% in case of branches located in tribal districts under the Tribal Sub
plan.

 STRENGTHENING BOARDS OF MANAGEMENT

Further ,now that RRBs are being merged and are becoming large size
entities, it is necessary that their Boards of Management are strengthened and
powers delegated to them on policy and business operations ,viz. introduction
of new liability and credit products, investment decisions, improving market
orientation in raising and deployment of resources, non-fund based business,
career progression, transfer policy etc.

 TAX INCENTIVES

From 2006-07, RRBs are liable to pay income tax. To further strengthen the
RRBs, profits transferred to reserves could be exempted from tax till they
achieve standard capital adequacy ratios. Alternatively, RRBs may be allowed
tax concessions to the extent of 40% of their profits, as per provisions under
sec.36 (1) (viii) of the Income Tax Act.

 Implementation of RBI initiatives for financial inclusion:-

All recent circulars relating to financial inclusion, viz., no frills accounts,

GCC, One Time Settlement (OTS) for loans up to Rs 25, 000, use of
intermediaries, etc., should be implemented by RRBs.
 NRFIP FOR RRBS

The strategy recommended earlier for NRFIP for commercial banks would be
equally applicable for RRBs. The process of undertaking a survey,
identification of excluded households, dissemination of the information,
settings of bank-wise/ branch-wise targets etc., could be followed. RRBs will
have certain handicaps in executing the plan. They would require promotional,
funding and technology support in different areas as outlined below. RRBs
may Endeavour to cover to a large part of their incremental lending thru’ the
group mode (SHGs/JLGs) as it will enhance their outreach to the financially
excluded. Lending thru’ group mode would also keep NPAs at low level.

 STRATEGIC MICROFINANCE PLAN WITH NABARD SUPPORT

RRBs have potential and capability to emerge as niche operators in

microfinance. They are playing major role in SHG-Bank Linkage
Programmed especially also as SHPIs. It is significant that as an institution
they have the expertise and potential to fulfill both the requirements of SHGs
– formation plus nurturing and financial service provisions (credit plus).Their
dual role has special meaning in areas which face severe financial exclusion
and which do not have a sufficient presence of well performing NGOs.
However, to upscale the programmed to a level where it can really make a
visible impact, RRBs need handholding particularly in the areas of training,
promotion and development, NABARD may provide required assistance.

NABARD should prepare a strategic action plan RRB-wise, for promotion

and credit linkage of SGHs. RRBs may be asked to form, nurture and credit
link at least 3,000 SHGs in all districts covered by them in North-Eastern,
Eastern and central Regions. A Memorandum of Understanding (MoU) may
be signed by RRBs with NABARD for a period of 5 years – with NABARD
providing the promotional and development assistance out of the “Financial
Inclusion Promotion and Development Fund” and RRBs forming, nurturing
and providing financial services to SHGs. RRBs may accomplish the task
with the support of individual rural volunteers, BFs, their staff members, etc.
 NABARD may closely monitor the programme-with focus on qualitative
aspects.

 SEPARATE CREDIT PLAN FOR EXCLUDED REGIONS

The Committee recommends that RRBs operating in predominantly tribal

areas and having high levels of exclusion may prepare annual credit plans
having a separate component for excluded groups, which would integrate
credit provision with promotional assistance such as agriculture services and
BDSs for the farm and nonfarm sectors respectively including
entrepreneurship development and formation and strengthening of producer’s
organizations like dairy cooperatives. Refinance and promotional support may
be provided by NABARD to RRBs on a large scale for implementation of
these credit plans.

 NABARD TO SUPPORT HR DEVELOPMENT IN RRBS:-

RRBs should serve, with the support of NABARD, GoI, RBI and the sponsor
banks, as active financial inclusion players especially in areas with high levels
of financial exclusion. In order to build up the skills and expertise of the
personnel of RRBs, NABARD has played a crucial role since the inception of
RRBs. But for the efforts of NABARD and initiative of sponsor banks besides
RRB managements themselves in HR development and in implementation of
the reform package, the changes in business performance of RRBs would not
have been possible. The work could be accomplished by NABARD working
in close tandem with GoI and RBI besides the sponsor banks. NABARD
would continue to give special priority to RRBs to train their staff through the
training institutions like the bankers Institute of Rural Development (BIRD) at
Lucknow and the Regional Training Colleges at Mangalore and Bolpur,
specially set for meeting the training requirement of RRBs. NABARD my
design suitable training programmes to enable RRBs to meet the challenges in
post merger environment. This training may also cover members of the Board
of RRBs. This support should be provided by NABARD working in close
tandem with GOL, RBI and the sponsor banks.
 PILOT TESTING OF BF/BC MODEL BY RRBS:-

RRBs should adopt the BF and BC models as a major strategy of financial

inclusion. NABARD should extend the required support including running
pilots in selected banks. The proposal for a technology based intervention
under the BF/BC model would be equally relevant for RRBs. However, RRBs
would require some handholding in implementing the proposal. NABARD
may identify 10 RRBs across the country giving greater weightage to regions
manifesting higher levels of financial exclusion and work in strategic alliance
with these RRBs and their sponsor banks in implementing the proposal. The
RRBs identified by NABARD for the project will require, developing a core
banking software for proper integration of the technology model proposed.
NABARD should enter into a MoU with identified sponsor banks and RRBs
and provide initial funding and technology support.
 COMPARISON OF RRBS WITH
STATE COOPERATIVE BANKS

A note is about state government-run cooperative banks on how they compare

with RRBs. Both rural financial institutions are in same rural credit market but with
different ownership and management patterns. India’s cooperative banks were
instituted in the fifties, also to meet the rural credit requirements each district of the
country.

They are managed by the respective state governments under cooperative Act.
There are basically three-tier cooperative structures in most of the states. Primary
Agricultural Cooperatives at grass-root level, District cooperative Bank at District
level and State Cooperative Banks at State level with each supporting the lower one.

The co-operative credit system has come under increasing pressure from the
emerging competitive scenario of low interest rate regime. Cooperative Banks have
also continued to suffer from several weaknesses that do not augur well for building-
up their ability to compete with banking structure in the emerging liberalized
environment.
 In part they have not been successful due to excessive political interference in
their management. It may be noted that the elected boards of 478 cooperative banks
out of 1186 were superseded for a variety of reasons including political interference.

RRBs on the other hand are the result of a Parliamentary Act and they are
managed by the sponsor bank (which has the experience of running a big bank) with
an equity stake of 35%.

The Central Government and the local State Government hold 50% and 15%
equity stake in RRBs. The board of RRBs constitutes the officials of NABARD and
RBI. Each RRB, like cooperatives is confined to a single or two districts of the
country. RRBs were sought to be a blend of cooperatives and commercial banks.
State governments have no/limited role in the management of the bank.
 THE QUESTION OF OWNERSHIP

The approach of the Estimates Committee in looking at the Regional Rural

Banks was unique in that most other official committees in the recent years even
while noting the deteriorating patterns in credit activities by RRBs have completely
bypassed the subject while making the policy recommendations. Instead attention is
held by issues of ownership and requirements for RRBs as necessary steps towards
restructuring. At present there is no capital to risk weighted asset ratio (CRAR)
prescription for RRBs. The Internal Working Group on RRBs (RBI, 2005) has
recommended that the RRBs be asked to maintain a CRAR of 5 percent to begin
with, and over time they may align themselves to the Basle I standards. To wipe out
the accumulated losses, provide for the NPAs, and maintain 5 percent CRAR for the
RRBs in the existing scenario, the Working Group’s calculations show that capital to
the extent of Rs.3, 050 crore would have to be infused.

It is obvious that the RRBs are being restructured along the same lines as the
commercial banks. Is the step necessary? Hold that it is not. Even if one were to
believe in a case for CRAR for commercial banks on the lines that the new freedom
given to banks to determine their portfolio, including investments in stock markets
might result in high levels of risks in the system, which the regulars believe can be
contained through capital requirements, same logic cannot be applied to the RRBs
simply because such Portfolio choices can never be allowed for these institutions. On
the other hand, given that the income recognition and asset classification norms have
already caused these institutions to shy away from credit activities to an unacceptable
extent, further prudential norms involving high risk-weight on most loaning business
can only exacerbate these tendencies further.

It is widely established in the developing country contexts that the response of

banks to hitting regulatory constraints on their capital ratio is mostly through cutting
back loans or by switching from higher to lower risk weight assets, rather than by
raising capital. At a time when most rural areas are starved of credit, it is difficult to
comprehend the urgency to impose capital requirements on the RRBs.
 The subject of consolidation of the RRBs as a way of raising their viability
and profitability has recurred several times since the beginning of the reform process
but without any policy outcome. Various working group and committees have
prescribed different measures as also models for reconstructing the RRBs. Pick up the
most recent threads. The chalapathy Rao Committee (2002) had proposed that the
government reduce the number of RRBs to around 40 from the present 196. Option
for mergers could be mergers of RRBs following ‘one-sponsor bank approach’ or
they could be amalgamated with their sponsor banks, and thereafter the RRBs could
operate as ‘commercial entities ’.

The Vyas committee II (June2004), on the other hand, has forwarded a more
logical solution. After weighting the various options for amalgamation, it decided that
it could not consider “the option of merger with the sponsor bank, as it would go
against the rationale of third channel for rural credit with a clear rural focus and
regional orientation.” Instead, it recommended merger of RRBs so as to create a
zonal bank for RRBs in the North-East and Rural banks at the state level for the rest
of the country. These banks would work on a stand alone basis and the sponsor banks
plus NABARD would contribute to equity. In the latest document on the subject, the
Internal Working Group on RRBs (RBI, 2005) has also proposed consolidation of the
RRBs as the merged entities will have a larger area of operation and the merger
process will help in strengthening some of the weak RRBs. Eliminating the option of
merger of RRBs with sponsor banks, the group has put forth two option: merger
between RRBs of the same sponsor bank in same state and merger of RRBs
sponsored by different banks in same state.

Independent of the official deliberations, the All Indian Regional Rural Banks
Employees Associations (AIRRBEA) has proposed that the RRBs be amalgamated to
form zonal or state-level RRBs. They have cited two strong reasons to make the case.
“The RRBs must be restructured into zonal or state level RRBs under any public
sector apex banking institutions or NABARD, so as to ensure the unity of command
and cross subsidization…... As in any banking institution, if the central balance sheet
is prepared at the apex level, the losses of the few RRBs (in the Eastern, North-
Eastern and Central regions)…..can easily be taken care of with the huge aggregate
profit of a majority of the RRBs.” Further, a national body like that of NABARD
should monitor the activities of such RRBs. Opposing the demands of All-India RRB
officers Federation for amalgamation of RRBs with the sponsor banks as the only
route to sustainability, AIRRBEA has demanded de-linking of the RRBs from the
sponsor banks so as to ensure functional autonomy for the rural banks, and to relieve
the burden of ‘sole’ commercial orientation so that the rural credit activities can be
pursued more freely. (Emphasis ours)

The AIRRBEA statement clearly takes the issue of ownership beyond the
current preoccupation with profitability, and asserts that not only can viability issues
be handled better by restructuring the RRBs along the lines suggested by them, but
more importantly it can enable improved performance vis-à-vis credit activities,
which is the urgent need today. The control of sponsor banks on RRBs needs to be
seriously revaluated. At a time when the sponsor banks are themselves constrained to
make cuts in the manpower and credit to agriculture or the SSI sector, they are unable
to extend the help to the RRBs on which their sponsorship was premised. In a view, it
is necessary that along with the Vyas Committee recommendations, which have
astutely defined the post-merger banking structure in terms of state-level banks, the
policymakers also take into consideration the legitimate demand for functional
autonomy and to rid the RRBs of the ‘sole’ commercial orientation such that the
present decline of rural banking might be reversed.
 REGIONAL RURAL BANKS TODAY

At the end of fiscal 2005-2006, there were 133 RRBs spread over 23
states/Union Territories and with a network of 14,494 branches, accounting for 44.5
per cent of the total rural network of all scheduled commercial banks (including
RRBs). The rural and semi-urban branches of RRBs constitute 98 per cent of their
network. Their deposits and advances as on March 31, 2003, were Rs. 71,329 crore
and Rs.22, 028 crore respectively. Thus RRBs have done well in mobilizing rural
deposits and infusing the thrift habit in their clients.

Out of 196 RRBs, in 2002-2003 the number of profit making banks stood at
167 in 2001-2002 as compared with 170 in 2000-2001.However 111 RRBs out of
total 133 registered profits in the year 2005-06. The combined Net Profit of RRBs for
the year 2001-2002 aggregated Rs.608 crores as against the combined net profit of
Rs.601 crores in the previous year. The aggregate accumulated losses of RRBs
declined from Rs.2752.59 crores as on 31 March 2001 to Rs 2637 crores as on 31
March 2006.

As a result of the various reforms measures, the RRBs showed substantial

turn-around in their performance. The RRBs also displayed qualitative improvement
in their NPA management and gross NPAs as percentage of gross advances stood at
3.99% as on 31-3-2006, down from 32.8 at March-end 1998.Similarly, the recovery
performance of the RRBs steadily improved with the percentage of recovery to
demand raised at 80% as on 2005-2006 from 61.2% at end-June 1998(41.2% at end-
June 1993).

The bulk of the loans from RRBs have been to priority sectors, which
accounted for over 70 per cent of the total. Agriculture alone took up 46 per cent of
the priority sector advances. The involvement of RRBs in providing credit support to
small and retail trade and other non-farm rural activities is better than that of co-
operative and commercial banks. As on March 31, 2002, the outreach of RRBS in
terms of number of deposits and advances was 50.02 million and 11.94 million
respectively. Clientele for loans and deposits in the rural sector are low-value, but
large volume. RRBs have served this clientele in a more productive and efficient
manner vis-à-vis other Banks.

Per-employee, 885 accounts are handled by RRBs against the national average
of 464 accounts per employee in the banking industry.

RRBs have also taken a lead role in financing of Self Help Groups (SHGs)
mostly comprising of women leading to their economic and social empowerment. The
share of RRBs in SHG-Bank linkage programme is equally commendable as under:
BACKGROUND

NABARD was established on 12th 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).

MISSION

NABARD being an Apex Development Bank promotes agriculture and rural

development through refinance support to all banks for investment credit and to co-
operatives and RRBs for production credit. The objective of providing refinance to
eligible institutions is to supplement their resources for delivering credit for
agriculture, cottage & village industries, SSIs, rural artisans, etc. thus influencing the
quantum of lending in consonance with the policy of Govt. of India. It directs the
policy, planning and operational aspects in the field of credit for agriculture and
integrated rural development.

STRUCTURE

NABARD operates throughout the country through its 28 Regional Offices

and one Sub-office, located in the capitals of all the states/union territories. It has 336
District Offices across the country, one Sub-office at Port Blair and one special Cell at
Srinagar. It also has 6 training establishments.

NABARD ROLE AND FUNCTIONS

OVERVIEW

NABARD is set up by the Government of India as a development bank with

the mandate of facilitating credit flow for promotion and development of agriculture
and integrated rural development. The mandate also covers supporting all other allied
economic activities in rural areas, promoting sustainable rural development and
ushering in prosperity in the rural areas. With a capital base of 2,000 crore provided
by the Government of India and Reserve Bank of India.

NABARD’S ROLES AND FUNCTIONS ARE SUMMARIZED BELOW

DEVELOPMENT AND PROMOTIONAL FUNCTIONS

Credit is a critical factor in development of agriculture and rural sector as it

enables investment in capital formation and technological up gradation. Hence,
strengthening of rural financial institutions, which deliver credit to the sector, has
been identified by NABARD as a thrust area. Various initiatives have been taken to
strengthen the cooperative credit structure and regional rural banks, so that adequate
and timely credit is made available to the needy.
 In order to reinforce the credit function and to make credit more productive,
NABARD has been undertaking a number of developmental and promotional
activities such as:-

 Help cooperative banks and Regional Rural Banks to prepare development

actions plans for themselves.
 Enter into MoU with state governments and cooperative banks specifying
their respective obligations to improve the affairs of the banks in a stipulated
timeframe.
 Help Regional Rural Banks and the sponsor banks to enter into MoUs
specifying their respective obligations to improve the affairs of the Regional
Rural Banks in a stipulated timeframe.
 Monitor implementation of development action plans of banks and fulfillment
of obligations under MoUs.
 Provide financial assistance to cooperatives and Regional Rural Banks for
establishment of technical, monitoring and evaluations cells.
 Provide Organization development intervention (ODI) through reputed
training institutes like Bankers Institute of Rural Development (BIRD),
Lucknow www.birdindia.com, National Bank Staff College, Lucknow
www.nbsc.in and College of Agriculture Banking, Pune, etc.
 Provide financial support for the training institutes of cooperative banks.
 Provide training for senior and middle level executives of commercial banks,
Regional Rural Banks and cooperative banks.
 Create awareness among the borrowers on ethics of repayment through Vikas
Volunteer Vahini and Farmer’s clubs.
 Provide financial assistance to cooperative banks for building improved
management information system, computerization of operations and
development of human resources.
CREDIT FUNCTIONS

REFINANCE AGAINST INVESTMENT CREDIT

This is a long-term refinance facility. It is intended to create income

generating assets in the following

 Investment in agriculture and allied activities such as minor irrigation

projects, farm mechanization, land development, soil conservation, dairy,
sheep rearing, poultry , piggery, plantation/horticulture, forestry, fishery,
storage and market yards, biogas and other alternative sources of energy,
sericulture, apiculture, animals and animal driven carts, agro-processing, agro-
service centers, etc.

 Investment for artisans, small scale industries, tiny sector, village and cottage
industries, handicrafts, handlooms, power looms, etc.

 Activities of voluntary agencies and self help groups working among the rural
poor.

 Investment in share capital/securities of institutions involved in agriculture

and rural development

The credit is normally provided for a period of 3 to15 years

Sr.no. Year Amount (Rs.Lakhs)

1 1995-96 83.000
2 1996-97 128.484
3 1997-98 261.364
4 1998-99 467.486
ELIGIBLE INSTITUTIONS

NABARD provides refinance support to SCARDBs, SCBs, RRBs, CBs,

scheduled primary urban cooperative banks, North East Development Finance
Corporation Ltd. (NEDFI) etc. against their investment credit in the rural sector

PURPOSES

Some of the major purposes covered under investment credit are farm
mechanization, minor irrigation, plantation / horticulture, animal husbandry, storage /
market yards, fisheries, post harvest management, food / agro processing, non-farm
sector including rural industries, microfinance, purchase of land ( for small/marginal
farmers, share croppers etc.), rural housing and disbursements under poverty
alleviation programmes like SGSY and SC/ST Action plan etc. Hi-tech projects and
agri – export zones are identified as thrust areas and NABARD helps in techno-
financial appraisal of such projects besides providing refinance.

In recent years, refinance support has been extended to new activities like
financing of diesel generator sets in Madhya Pradesh and LPG kits to rural
households all over the country.

CRITERIA

The technical feasibility of the project, financial viability and generation of

incremental income to ultimate borrowers thereby, enabling them to have a
reasonable surplus after repayment of the lone installments are the necessary
conditions to be satisfied for sanctioning investment credit. The period of loan ranges
between 3 and 15 years depending on the purpose for which it is provided.

The refinance is provided to SCARDBs, SCBs, CBs and RRBs. However, the
beneficiaries of the programme are partnership concerns, companies, state-owned
corporations or cooperative societies. But, finally the assistance reaches the
individuals, who are members of the primary credit institutions.
 The refinance is usually 50% to 95% of the project cost. The balance will be
met by the banks or the concerned state governments or the Government of India in
the case of SCARDBs.With a view to ensure credit flow to certain thrust areas, the
quantum of refinance is enhanced to 100% as in the case of special category
beneficiaries like SC/ST members and self help groups

SUPERVISORY FUNCTIONS

OVERVIEW

As an apex bank involved in refinancing credit needs of major financial

institutions in the country engaged in offering financial assistance to agriculture and
rural development operations and programmes, NABARD has been sharing with the
Reserve Bank of India certain supervisory functions in respect of cooperative banks
and Regional Rural Banks (RRBs)

As part of these functions, it:

 Undertake inspection of Regional Rural Banks (RRBs) and cooperative bank

(other than urban/primary cooperative banks) under the provisions of Banking
Regulation Act, 1949.

 Undertakes inspection of state Cooperative Agriculture and Rural

Development Banks (SCARDBs) and apex non-credit cooperative societies
on a voluntary basis.

 Undertakes portfolio inspections, system study, besides off-site.

 Surveillance of cooperative banks and Regional Rural Banks (RRBs).

 Provides recommendations to Reserve Bank of India on opening of new

branches by State Cooperative Banks and Regional Rural Banks (RRBs).

 Administering the Credit Monitoring Arrangements in SCBs and CCBs

CORE FUNCTION

NABARD has been entrusted with the statutory responsibility of conducting

inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks
(DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking
Regulation Act, 1949. In addition, NABARD has also been conducting periodic
inspections of state level cooperative institutions such as State Cooperative
Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies,
Marketing Federations, etc.on a voluntary basis.

OBJECTIVES OF INSPECTION

 To protect the interest of the present and future depositors.

 To ensure that the business conducted by this banks is in conformity with the
provisions of the relevant acts, rules, regulations bye-laws etc.

 To ensure observance of rules guidelines etc. formulated and issued by

NABARD/RBI/Government.

 To examine the financial soundness of the banks.

 To suggest ways and means of strengthening the institutions so as to enable

them to play more efficient role in rural credit.

IMPORTANT SCHEMES OF NABARD

RURAL INFRASTRUCTURE DEVELOPMENT FUND (RIDF)

In 1995-96 RIDF-I set up with a corpus fund of Rs. 2000 crore for the purpose
of financing rural infrastructure projects such as irrigation projects, construction of
rural roads and bridges, etc. The RIDF fund has been continued in subsequent years.
The RIDF IX (last in the Series) was introduced in 2003-04.
The RIDF came to an end with the commencement of the Lok Nayak Jai
Prakash Narayan fund in February 2004.

LOK NAYAK JAI PRAKASH NARAYAN FUND (AGRICULTURE

INFRASTRUCTURE AND CREDIT FUND)

The fund came into existence in Feb-2004.It replaced the RIDF.NABARD has
prepared this scheme with the following three components:

 Finance for infrastructure through State Governments (Rs. 30000 crore).

Activities includes minor irrigation, rain fed agriculture, and flood control,
public sector cold storage facilities, etc. Eligible clients are state
Governments, state undertakings, and local bodies.

 Finance for investments in agriculture and commercial infrastructure

through banking system (Rs.18000 crore).

Activities includes priority areas like micro irrigation, rain fed agriculture,
post-harvest related support, agriculture marketing, investment credit, etc.
Eligible clients are corporate, NGOs, and individual, etc.

 Development measures and Risk Management Mechanism (Rs. 2000

crore).

REHABILITATION OF COOPERATIVE BANKS SCHEME

NABARD undertakes a rehabilitation programme for weak CCBs and SCBs.

Under this programme, it assists CCB and SCBs, which are financially and
administratively weak due to large overdue and untrained staff.
KISAN CREDIT CARD (KCC) SCHEME

This scheme was introduced in 1998-99 with a view to facilitate the flow of
timely and adequate short-term credit to the farmers. This scheme is operated through
cooperative banks, RRBs and commercial banks. The cooperative banks, RRBs and
commercial banks together issued about 414 lakh KCCs involving credit of about
Rs.97, 710 crore up to March 2004.

The KCC scheme is an ongoing scheme, which is envisaged to gradually

replace the traditional system and procedures in the issue of shot-term crop loan.

REFINANCE UNDER SGSY

NABARD has issued operational instructions to cooperative banks and RRBs

with regard to implementation of self employment projects under SGSY on similar
lines as was issued by RBI to commercial banks.

SELF-HELP GROUPS SCHEME

NABARD has been active in promoting and linking more and more self-help
groups (SHGs) to the banking system. The banks provide finance to SHGs.
NABARD provides 100% refinance assistance to banks at an interest rate of 6.5%
p.a. for financing SHGs.

The concept pf SHGs promoted by NABARD for financing the poor was
introduced in 1991-92 under this scheme, the SHGs are linked with formal credit
agencies (banks). By March 2004, over 1.7 crore rural poor families accessed
financial services and credit through 10.79 lakh credit linked SHGs. Around 90% of
these SHGs are exclusive women SHGs. More than 30,000 branches and 500 banks
which participate in the programme have extended loans amounting to Rs.3,904 crore
by March 31,2004 backed by refinance support of Rs.2,124 crore from NABARD.
MILESTONES OF NABARD

Some of the milestones in NABARD’s activities are:-

 With its effective overseeing and monitoring of the implementation of the

Government of India’s programme to double the flow of credit to agriculture
over.

 A three-year period from 2004-2005, the total disbursement of credit reached

Rs. 1, 25,309 during 2004-2005. Ground level credit flow to agriculture and
allied activities reached Rs 1, 57,480 crore in 2005-2006.

 Refinance disbursement to commercial banks, state cooperative banks, state

cooperative agriculture and rural development banks, RRBs and other eligible
financial institutions aggregated Rs 8,622.37 crore.

 As on 31 January 2007 through the Rural Infrastructure Development

Fund (RIDF), Rs. 59,795.35 crore have been sanctioned for 2,31,702 projects
covering irrigation, rural roads and bridges, health and education, soil
conservation, drinking water schemes, etc. Development among hosts of other
infrastructures, RIDF will create 20971 schools, 6239 primary health centers
and provide drinking water supply in 7267 villages.

 Watershed Development Fund, with cumulative sanctions of Rs. 578.95

crore for 427 projects in 124 districts of 14 states, has created a People’s
Movement in rural India.

 Farmers now enjoy financial access and security through 582.50 lakh Kisan
Credit Cards that have been issued through a vast rural banking network.
 District Rural Industries Project (DRIP) has generated employment for 23.34
lakh persons with 10.95 lakh units in 105 districts.
NABARD TODAY

 Initiates 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.

 Promotes research in the fields of rural banking, agriculture and rural

development.

 Functions as regulatory authority, supervising, monitoring and guiding

cooperative and regional rural banks.

 Undertakes monitoring and evaluation of projects refinance by it.

 Prepares on annual basis rural credit plans for all the districts in the country.
These plans form the base for annual credit plans of all rural financial
institutions.

 Coordinates the rural financing activities of all the institutions engaged in

developmental work at the field level and maintain liaison with the
government of India, state governments, Reserve Bank of India and other
national level institutions concerned with policy formulation.
COMMERCIAL BANK’S CONTRIBUTION

STATE BANK OF INDIA

State Bank of India Caters to the needs of agriculturists and landless

agricultural specialized branches which have been set up in different parts of the
country exclusively for the development of agriculture through credit deployment.
These branches include 427 Agricultural Development Branches (ADBs) and 547
branches with Development Banking Department (DBDs) which cater to
agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad
catering to the needs of hi-tech commercial agricultural projects.

Their branches have covered a whole gamut of agricultural activities like crop
production, horticulture, plantation crops, farm mechanization, land development and
reclamation, digging of wells, tube wells and irrigation projects, forestry, construction
of cold storages and godowns, processing of agri-products, finance to agri-input
dealers, allied activities like dairy, fisheries, poultry, sheep-goat, piggery and rearing
of silk worms. The branch also has farmer’s meet in villages to explain to farmers
about various schemes offered by the bank.

To give special focus to agriculture lending Bank has set up agri business unit.
Bank has also agri specialists in various disciplines to handle projects/ guide farmers
in their agri ventures. Advances are given for very small activity covering poorest of
the poor to hi-tech activities involving large fund outlays. They are the leaders in agri
finance in the country with a portfolio of Rs. 18,000 crores in agri advances to around
50 lakhs farmers.
 State Bank of India has sponsored 30 RRBs, which operate in 102 districts of
16 States viz. Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chattisgarh,
Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Madhya Pradesh,
Meghalaya, Mizoram, Nagaland, Orrissa, Uttaranchal and Uttar Pradesh, with a
network of 2336 branches.

VARIOUS SCHEMES OFFERED BY STATE BANK OF INDIA

CROP LOAN (ACC)

PURPOSE

To provide financial assistance to meet cultivation expenses for various crops.

ELIGIBILITY FOR CROP LOAN

Agriculturists, Tenant farmers and share Croppers who actually cultivate the lands are
eligible for these loans. All categories of farmers – Small/Marginal (SF/MF) and
others are included.

LOAN AMOUNT

Loan amount is worked based on the cost of cultivation incurred for each crop per
acre of crop cultivated and 90% of the cost of cultivation (Scale of Finance) is given
as loan.
KISAN CREDIT CARD SCEME (KCC) :-

PURPOSE

To extend adequate and timely support to farmers for their short term credit needs.

ELIGIBILITY FOR THE LOAN

Farmers with excellent repayment record for 2 years and new farmers with sizeable
deposits with branches for 3 to 4 years are eligible. Borrowers with good track record
in other Banks are also eligible. Farmers who have defaulted in repayment but have
liquidated the outstanding are also eligible.

LOAN AMOUNT

Loan amount is decided based on the cropping pattern, ancillary and contingency
needs of the farmer for the full year. 90% of the cost of cultivation (Scale of Finance)
is given as loan per acre. 100% of the cost is available as loan up to Rs. 50,000/- and
85% of the cost is available as loan above Rs. 1, 00,000/-
FARM MECHANISATION SCHEMES

PURPOSE

Credit for purchase of farm equipment and machinery for agricultural operations. The
scheme covers activities ranging from purchase of tractors and accessories, trailers.
Power tillers, combine harvesters, power sprayers, dusters, threshers etc.

ELIGIBILITY FOR TERM LOANS

Farmers owning mare than minimum acreage of perennially irrigated lands are
eligible (for power tillers 2 acres, for tractors 4 acres for > 35 HP and 6 acres for
above 35 HP and for combine 8 acres). Eligibility for purchase of other farm
equipment is decided on the income generated by the agri activity undertaken by.

LOAN AMOUNT

Up to Rs. 50,000/- 100% of the cost of the asset is provided as loan. Above Rs.
50,000/- up to 85% of the cost of the asset provided as loan.
LAND DEVELOPMENT SCHEMES

PURPOSE

To provide credit solution for land development projects in the form of direct finance
to cultivators for better productivity.

Loans under this head cover various activities like land clearance ( removal bushes,
trees, etc.), land leveling and shaping, contour/ graded bunding, bench terracing for
hilly areas, contour stone walls, staggered contour trenches, disposal drains,
reclamation of saline/ alkaline soils and fencing etc.

ELIGIBILITY FOR TERM LOANS

All farmers owning agricultural land are eligible.

LOAN AMOUNT

Up to Rs. 50,000/- 100% of the cost of the asset / project cost is provided as loan.
Above Rs. 50,000/- up to 85% of the cost of the asset / project is given as loan.
LOAN AGAINST WAREHOUSE RECEIPTS / COLD STORAGE RECEIPTS

PURPOSE

The Bank extends financial assistance to farmers storing produce in private /

government warehouse/ cold storages against pledge of warehouse / cold storage
receipt to prevent distress sale. The maximum repayment period of the loan is 6
months.

WHO IS ELIGIBLE FOR THE LOAN

All categories of farmers availing crop loan.

LOAN AMOUNT

The lone amount will be 60% of the value (minimum support price) of the produce
stored.
MINOR IRRIGATION SCHEMES

PURPOSE

To provide credit for creating irrigation facilities from underground / surface water
sources. All structures and equipments connected with it are also financed. Loans
cover various activities like digging of new wells (open/bore wells), deepening of
existing wells (traditional/in well bore), energisation of wells (oil engine/electrical
pump set), laying of pipe lines, installing drip/ sprinkler irrigation system and lift
irrigation system.

ELIGIBILITY FOR TERM LOANS

All farmers having a known source of water which can be exploited for irrigation
purpose.

LOAN AMOUNT

Up to Rs. 50,000/- 100% of the cost of the asset/ project cost is provided as loan.
Above Rs. 50,000/- up to 85% of the cost of the asset / project is provided as loan.
OTHER SCHEMES INCLUDES

 PRODUCE MARKETING LOAN SCHEME

 FINANCE TO HORTICULTURE
 FARM MECHANISATION SCHEMES
 AGRICULTURAL TERM LOANS (ATL)
 LAND DEVELOPMENT SCHEMES
 MINOR IRRIGATION SCHEMES
 LEAD BANK SCHEME
 FINANCING OF COMBINE HARVESTERS
 KISAN GOLD CARD SCHEME
 BROILER PLUS SCHEME
 KRISHI PLUS SCHEME
 ARTHIAS PLUS SCHEME
 DAIRY PLUS SCHEME
 LAND PURCHASE SCHEME
 KEY PERFORMANCE INDICATORS: RRBS

Amount in Rs. Crore

Nos. Indicators Year

31.03.2004 31.03.2005 31.03.2006

1. No. of RRBs 196 196 133

2. No. of districts 518 523 525
covered
3. No. of branches 14446 14484 14494
4. No. of staff 69249 68912 68629
5. Credit-deposit 46% 53% 56%
(CD) ratio (%)

KEY PERFORMANCE INDICATORS: RRBS

Amount in Rs. Crore

Nos. Indicators Year

31.03.2004 31.03.2005 31.03.2006

1. Owned Funds 5438 6181 6647

2. Deposits 56350 62143 71329

3. Borrowings 4595 5524 7303

4. Investments 36135 36761 41182

5. Loans 26114 32870 39713

outstanding
KEY PERFORMANCE INDICATORS: RRBS

Amount in Rs. Crore

Nos. Indicators Year

31.03.2004 31.03.2005 31.03.2006

1. Loans issued 15579 21082 25427

2. No. of RRBs 90 83 58
having
accumulated
losses
3. Accumulated 2725 2715 2637
losses
4. No. of RRBs in 163 166 111
profit
5. Net NPA (%) 8.55% 4.84% 3.99%

KEY PERFORMANCE INDICATORS: RRBS

Amount in Rs. Crore

Nos. Indicators Year

31.03.2004 31.03.2005 31.03.2006

1. Recovery (%) 73% 78% 80%

(as on 30 June)
2. Per branch 5.71 6.56 7.66
Productivity
3. Per staff 1.19 1.38 1.62
Productivity
 IMPORTANT TRENDS

 111 RRBs out of total 133 registered profit in the year 2005-06.

 CD Ratio has been increasing from 46% on 31 March 2004 to 53% on 31

March 2005 and further to 56% on 31 March 2006.

 Recovery percentage has been improving from 73% during 2003-04 to 80%
during 2005-06.

 Consequently, net NPAs have declined from 8.55% on 31 March 2004 to

3.99% on 31 March 2006.

 Loans disbursement registered an impressive 35% annual growth in 2004-05

and 21% in 2005-06.

 Per branch productivity has increased from Rs. 5.71 crore on 31 March 2004
to Rs. 7.66 crore on 31 March 2006.

 Per staff productivity has increased from Rs. 1.19 crore on 31 March 2004 to
Rs. 1.62 crore on 31 March 2006.
 BIBLIOGRAPHY

BOOKS

Development Issues of INDIAN ECONOMY: - Mario Dias

NEWS PAPERS

The Economic Times.

WEBSITES

 www.indiatogether.org

 www.thehindubusinessline.com

 www.nabard.org

 www.sbi.co.in

ARTICLES REGARDING MUHAMMAD YUNUS & GRAMEEN BANK:-

The Grameen Bank & Associated Press.