CHAPTER 1

RURAL FINANCING: A BRIEF OVERVIEW

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1.1 INTRODUCTION TO RURAL FINANCE

Rural finance refers to financial services such as savings, lending, insurance and remittance
services that can be provided by a variety of actors. These actors can be friends, relatives,
shopkeepers, traders, money lenders, traditional savings and lending groups, microfinance
programmes or banks. Rural finance is a term used to cover those financial services provided in
rural areas for agricultural as well as nonagricultural purposes.

Within the rural sector different groups and categories of individual require services designed
to meet their particular needs. While poorer groups might need savings facilities and micro-credit
to cover production costs and emergency expenses, farmers and farmers‟ organizations involved
in cash-crop production will probably require larger amounts of credit to finance production,
inputs, processing and marketing.

Rural finance comprises credit, savings and insurance (or insurance substitutes) in rural
areas, whether provided through formal or informal mechanisms. The word 'credit' tends to be
associated with enterprise development, whereas rural finance also includes savings and
insurance mechanisms used by the poor to protect and stabilize their families and livelihoods
(not just their businesses).

An understanding of rural finance helps explain the livelihood strategies and priorities of the
rural poor. Rural finance is important to the poor. The poorest groups spend the highest
proportion of their income on food – typically more than 60% and sometimes as much as 90%.
Under these circumstances, any drop in earnings, or any additional expenditure (health or funeral
costs, for instance) has immediate consequences for family welfare – unless savings or loans can
be accessed. Financial transactions are therefore an integral part of the livelihood system of the
poor.

Rural finance consists of informal and formal sectors. Examples of formal sources of credit
include: banks; projects; and contract farmer schemes. Reference is often made to micro-credit.
Micro underlines the small loan size normally associated with the borrowing requirements of
poor rural populations, and micro-credit schemes use specially developed pro-poor lending
methodologies. Rural populations, however, are much more dependent on informal sources of

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finance (including loans from family and friends, the local moneylender, and rotating or
accumulating savings and credit associations).

Rural Finance is a set of financial services that are not limited to credit only. Financial
services in rural finance include: loans, savings, investment, guarantee funds, remittance
services, inventory credit, trader finance and insurance.

1.2 DEFINITION OF RURAL FINANCE

The Consultative Group to Assist the Poor (CGAP) defines rural finance as 'financial
services offered and used in rural areas by people of all income levels', and agricultural finance
as 'a sub-set of rural finance dedicated to financing agriculture-related activities, such as input,
supply, production, distribution and wholesaling, and marketing'.

1.3 MEANS OF RURAL FINANCING

1. Informal financial institutions

They are not regulated by banking sector such as rotating and savings groups, church
groups or similar groupings of people.
2. Semi formal institutions
They are not regulated by banking sector but are usually licensed and supervised by
another government agency such as self help groups, NGOs involved in provision of
financial services and microfinance organizations (in some instances).
3. Formal institutions
They are subject to banking regulations and supervision such as microfinance institutions,
banks. In order to enhance the quality of rural livelihoods a more holistic approach to
development is needed. Governments need to design and implement agriculture friendly
policies that will encourage the development of financial sector and market oriented
enterprises. Governments and donors need to invest into human and institutional
development in rural areas.

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1.4 TYPES OF RURAL FINANCING

Rural Agricultural Rural Housing

Financing Financing
Types of
Rural
Financing
Rural
Rural Micro
Development
Financing
Financing

1. Rural Housing Finance

Rural housing finance is finance provided by banks and other Regional Rural
Banks (RRBs) in the rural areas for providing better housing and infrastructure
facilities in rural areas.

2. Rural Micro Financing

Micro-Finance refers to ―small savings, credit and insurance services extended to

socially and economically disadvantaged segments of society, for enabling them to
raise their income levels and improve living standards. The main aim of Micro-
Finance is too provide loan to the poor people or to below poverty line, who are not
able borrow from other sources and to make their living standard better.

3. Rural Development Finance

Rural development finance is the finance provided for the overall development of rural
area. Rural development financing finances economic development and job creation in
the rural areas.

4. Rural Agricultural Financing

Rural agricultural financing is the most important part of financing among the different
types of financing as 78% of Indian population depends on agriculture for their
livelihood.

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 CHAPTER 2

RURAL AGRICULTURAL FINANCING

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2.1 DEFINITION

“Agricultural finance is a sub-set of rural finance dedicated to financing agriculture-related

activities, such as input supply, production, distribution and wholesaling, and marketing. Finance
in agriculture is as important as development of technologies. Technical inputs can be purchased
and used by farmer only if he has money (funds). But his own money is always inadequate and
he needs outside finance or credit.”

2.2 AGRICULTURAL BACKGROUND IN INDIA

India is an agrarian economy and agriculture continues to be the mainstay of the Indian
economy. Directly or indirectly, almost one-third population depends on agriculture sector.
Agriculture remains a significant contributor, as its contribution to the national Gross Domestic
Product is about 25 per cent and provides livelihood for nearly two-thirds of population. The
backbone of Indian economy is considered as 'agriculture'. It has an important role in Indian
economy though the share of agriculture in GDP is declining It provides employment to about
65% of the labour force, which accounts for nearly 27% of GDP; it contributes 21% of total
exports, and raw materials to several industries. The Livestock sector contribution is estimated at
8.4 % of the GDP and 35.85 % of the agricultural output. It also provides raw material for
industrial growth like sugar, jute, cotton and agro-based industries such as food processing are
gaining importance. But the growth rate particularly in the last half-decade does not portray a
rosy picture of the Indian agriculture sector. It provides livelihood for nearly two-thirds of our
population. Agriculture provides raw material for industrial growth and use e.g. sugar, jute,
cotton, agro-based industries such as food processing are gaining in importance.

2.3 AGRICULTURE GROWTH RATE IN INDIA

Agriculture Growth Rate in India GDP had been growing earlier but in the last few years it is
constantly declining. Still, the Growth Rate of Agriculture in India GDP in the share of the
country's GDP remains the biggest economic sector in the country. India GDP means the total
value of all the services and goods that are produced within the territory of the nation within the
specified time period. The country has the GDP of around US$ 1.09 trillion in 2007 and this
makes the Indian economy the twelfth biggest in the whole world.

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 The growth rate of India GDP is 9.4% in 2006- 2007. The agricultural sector has always
been an important contributor to the India GDP. This is due to the fact that the country is mainly
based on the agriculture sector and employs around 60% of the total workforce in India. The
agricultural sector contributed around 18.6% to India GDP in 2005.

Agriculture Growth Rate in India GDP in spite of its decline in the share of the country's
GDP plays a very important role in the all round economic and social development of the
country. The Growth Rate of the Agriculture Sector in India GDP grew after independence for
the government of India placed special emphasis on the sector in its five-year plans. Further the
Green revolution took place in India and this gave a major boost to the agricultural sector for
irrigation facilities, provision of agriculture subsidies and credits, and improved technology. This
in turn helped to increase the Agriculture Growth Rate in India GDP.

The agricultural yield increased in India after independence but in the last few years it has
decreased. This in its turn has declined the Growth Rate of the Agricultural Sector in India GDP.
The total production of food grain was 212 million tones in 2001- 2002 and the next year it
declined to 174.2 million tones. Agriculture Growth Rate in India GDP declined by 5.2% in
2002- 2003. The Growth Rate of the Agriculture Sector in India GDP grew at the rate of 1.7%
each year between 2001- 2002 and 2003- 2004. This shows that Agriculture Growth Rate in
India GDP has grown very slowly in the last few years.

Agriculture Growth Rate in India GDP has slowed down for the production in this sector has
reduced over the years. The agricultural sector has had low production due to a number of factors
such as illiteracy, insufficient finance, and inadequate marketing of agricultural products. Further
the reasons for the decline in Agriculture Growth Rate in India GDP are that in the sector the
average size of the farms is very small which in turn has resulted in low productivity. Also the
Growth Rate of the Agricultural Sector in India GDP has declined due to the fact that the sector
has not adopted modern technology and agricultural practices. Agriculture Growth Rate in India
GDP has also decreased due to the fact that the sector has insufficient irrigation facilities. As a
result of this the farmers are dependent on rainfall, which is however very unpredictable. The
Indian government must take steps to boost the agricultural sector for this in its turn will lead to
the growth of Agriculture Growth Rate in India GDP.

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2.4 EMERGENCE OF AGRICULTURAL FINANCING IN INDIA
Finance in agriculture is as important as development of technologies. Technical inputs can
be purchased and used by farmer only if he has money (funds). But his own money is always
inadequate and he needs outside finance or credit. Professional money lenders were the only
source of credit to agriculture till 1935. They use to charge unduly high rates of interest and
follow serious practices while giving loans and recovering them. As a result, farmers were
heavily burdened with debts and many of them perpetuated debts. There were widespread
discontents among farmers against these practices and there were instances of riots also.

With the passing of Reserve Bank of India Act 1934, District Central Co-op. Banks Act and
Land Development Banks Act, agricultural credit received impetons and there were
improvements in agricultural credit. A powerful alternative agency came into being. Large-scale
credit became available with reasonable rates of interest at easy terms, both in terms of granting
loans and recovery of them. Although the co-operative banks started financing agriculture with
their establishments in 1930‟s real impetus was received only after Independence when suitable
legislation were passed and policies were formulated. Thereafter, bank credit to agriculture made
phenomenal progress by opening branches in rural areas and attracting deposits.

Till 14 major commercial banks were nationalized in 1969, co-operative banks were the main
institutional agencies providing finance to agriculture. After nationalization, it was made
mandatory for these banks to provide finance to agriculture as a priority sector. These banks
undertook special programs of branch expansion and created a network of banking services
throughout the country and started financing agriculture on large scale. Thus agriculture credit
acquired multi-agency dimension. Development and adoption of new technologies and
availability of finance go hand in hand. In bringing "Green Revolution", "White Revolution" and
now "Yellow Revolution" finance has played a crucial role. Now the agriculture credit, through
multi agency approach has come to stay. The procedures and amount of loans for various
purposes have been standardized. Among the various purposes "Crop loans" (Short-term loan)
has the major share. In addition, farmers get loans for purchase of electric motor with pump,
tractor and other machinery, digging wells or boring wells, installation of pipe lines, drip
irrigation, planting fruit orchards, purchase of dairy animals and fodder for them, poultry etc.

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2.5 NATURE OF INDIAN AGRICULTURE: THE BACKDROP
Though more than five decades have passed since independence and agricultural production
has increased several folds.

The following table & graph below depicts the growth of agriculture sector in decade wise
break-up from 1950 to 2002:

Agriculture growth rate in India:

1950-1960 1961-1970 1971-1980 1981-1990 1991-2002

3.1% 2.5% 1.9% 3.8% 2.8%

(Source: RBI Bulletin dated June 2009)

But certain features of Indian agriculture hamper the balanced growth and development.
Finance is the major constraint here. Despite the introduction of rural banking, credit societies,
kisan credit cards, the small and marginal farmers still go to the same old pawn broker or money
lender and become their victims. Low wages for agricultural labour due to excessive population
is another major issue, which is ailing this sector. Lack of opportunities, low skills of agriculture
laborers denies them to think something else other than agriculture and cheapness of labour leads
to adoption of labour-intensive methods of production instead of modern technology. Added to
all these, the Indian agriculture depend heavily on monsoon. Nearly 70% of the areas continue to
depend on monsoon rather than irrigation. Agricultural inputs, seeds, irrigation, electricity, plant
protection, fertilizers and agricultural investment are seen as other major problems characterizing
Indian agriculture.

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2.6 TYPES OF CREDIT REQUIREMENTS OF AGRICULTURE

Medium
Term(15 months
to 5 years)

Short Term(<15 Long Term(>5

months) years)

Types of
Credit
Requirements
of Agriculture

There are 3 different types of credit requirements of agriculture. They are as follows:

1. Short Term Credit

Short term credit is the credit for a short time span which is mostly less than 15 months.
This credit is mainly taken for crop loans and loans for other short term purposes. Crop
loan is a short term credit and is generally obtained from primary credit co-op. Society
of a village or also from commercial bank. The period of loan is about one year except
for sugarcane for which the period is 18 months. There are two criteria for granting
crop loan.
a. One third of gross value.
b. Cost of cultivation.

One third of gross value approach takes into account the yield and price of the crop,
its cost of cultivation and family expenditure.

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If the gross value is more, more amount of loan becomes available. For e.g. Rice.

I II
Yield (Q.) 20 25
Price (Rs/Q) 400 400
Gross value (Rs.) 8000 10,000
One third (Rs.) 2700 3330

Thus in second situation farmer is entitled for Rs.3330 per hectare which is higher than
in the first situation. Thus this method takes into account the productive aspect of a
crop.

In cost of cultivation, direct paid-out costs are only considered. They include items, like
seeds, manures, fertilizers, pesticides, diesel/electricity, hired labour etc. In this
approach, it is expected that all direct costs to be incurred by the farmer should be
covered and accordingly he should get adequate credit. If the cost of all these items of
input is Rs.3500/-. If the loan is granted according to first approach, then the amount
which is short is spent by the farmer from his own funds. Since crop loan is for one
season, its recovery is made in one installment after the harvest of the crop. Crop loan
is an annual requirement and farmer has to borrow fresh loan for new crop season every
time. Therefore, he has to repay the earlier loan with interest within stipulated time.
Since this loan is required every season/every year, the procedure of getting this loan is
simple and convenient and it is made available by the District Central Co-op. Banks
through the village Co-op. Credit Society. So the farmer gets his loan in the village
itself. If the loan is to be taken from commercial bank, it is available from the nearby
branch of the commercial bank. As for security, the farmer has to offer his land as a
security. There is a three tier structure providing crop-loans through co-operative
institutions.
a. Apex Bank- State Co-op. Bank.
b. District Central co-op. Bank.
c. Village co-operative Credit Society.

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2. Medium Term Credit
Medium Term Credit is used very rarely in agricultural financing. Medium term credit
is taken normally for a time period of 15 months to 5 years. It is beneficial for farmers
with medium term credit requirements and who can repay the loan easily.

3. Long Term Credit

The period of long-term credit is generally 5 to 20 years or even more in some special
cases. In any industry, long-term investment is necessary, to create permanent assets
which give returns over a period of time. The permanent investment is not only
necessary for a particular industry but even for the country. Because for continuity of
production and progress of the country. This applies to agriculture also. In Agriculture,
long-term investment comprises of sinking well, Land Leveling, fencing and permanent
improvements on land purchase of big machinery like tractor with its attachments
including trolleys, establishment of fruit orchard of mango, cashew, coconut, sapota
(chiku), orange, pomegranate, fig, guava, etc. There are many other items of long-term
capital investment. Investment once made in the beginning continuous to give returns
over a long period. Fruit orchards particularly do not give any income in the first 4 - 5
years as in case of other seasonal crops. So the expenditure incurred in the first 4-5
years becomes a capital cost. All the long-term investments mentioned above require
large amounts of funds. Although they have good potential to give returns in future,
individual farmers have no financial capacity to make such costly investments from
their own funds because they have no savings or very little savings. Therefore, they
have to resort to bank borrowing to meet such needs. The financial criteria terms and
conditions procedures of granting L.T. loans are altogether different from short-term
loans.

The special banks providing LT Loans are called Land Development Banks (LDB).
The history of LDB‟s is quite old. The first LDB was started at Jhang in Punjab in
1920. But the real impetus to these banks was received after passing the Land Mortgage
Banks Act in 1930‟s (LDB‟s were originally called Land Mortgage Banks). After
passing this Act LDB‟s were started in different states of India.

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2.7 SOURCES OF RURAL AGRICULTURAL CREDIT

Sources of
Agricultural
Credit

Public
Private Agencies Institutions

Traders and Co-operative Regional

Moneylenders Commission Landlords Commercial Rural Banks
Banks Societies
Agents and RBI

There are mainly two sources available to the farmers; they are private agencies & public
institutions. Private agencies means relatives, landlords, agricultural moneylenders, professional
private moneylenders, traders & commission agents, others. Where institutional agencies are
commercial banks, the state bank, co-operative societies & land mortgage banks agricultural
finance corporation.

Private Agencies Sources:

1. Money lenders
Though there are drawbacks, moneylenders are by far the most important source of
agricultural credit in India. That we have already seen before, It is therefore, clear that the
basic problem of the agricultural economy of India is the huge indebtedness of farmers
and their exploitation by private moneylenders. For that government of India make
provisions in act as follows a. maintenance of accounts in prescribed forms, b. furnishing
of the receipts and periodical statements, c. fixing of maximum rates of interest, d.

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 Protection of the debtors from molestations and intimidations, e. licensing of
moneylenders, and f. penalties for infringement of the provisions. The basic objectives of
such legislative enactments can be stated as to bring about an improvement in the terms on
which private credit was available to agriculturists and to place legal restrictions on the
unreasonable exactions of moneylenders, and to enable civil courts to do greater justice as
between lenders and borrowers than was possible in the prevailing circumstances under
the ordinary Code of Civil Procedure.
2. Traders & commission agents
Traders & commission agents supply funds to farmers for productive purposes much
before the crops mature. They force the farmers to sell their produce at low prices and
they charge a heavy commission for themselves.
3. Landlords & others
Farmers, predominantly small farmers & tenants, depend upon landlords and others to
meet their financial requirements. This source of finance has all the defects associated
with moneylenders, traders and commission agents. Interest rates are exorbitant. Often the
small farmers are cheated and their lands are appropriated.

Institutional sources of credit:

These are the funds made available by co-operative societies, commercial banks, & regional
rural banks & state governments also. The need for institutional credit arises because of the
weakness or inadequacy of private agencies to supply credit to farmers.

1. Co-operative credit societies

It is the cheapest and the best source of rural credit. The rate of interest is low. Since
1951, the co-operative credit movement has started helping the farmers in a big manner.
During 1989-90 there were about 88,000 primary agricultural credit societies. The
stranglehold of the moneylenders on the peasants is not met by the co-operatives. Besides,
the small farmers find it difficult to meet all their credit requirements from the co-
operatives. Loans are given for short periods, normally for one year, for carrying out
agricultural operations, and the rate of interest is low. Profits are not distributed as
dividend to shareholders but are used for the welfare of the village. In the construction of a

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 well, or maintenance of a school, and so on. The usefulness of the primary credit societies
has been rising steadily.

The following are the different types of credit providing institutions:

a. Co-operative Central Banks:
These are federations of primary credit societies in specified areas normally extending to
the whole district menace they are sometimes called as district co-operative banks. These
banks have a few private individuals as shareholders who provide both finance of
management. Their main task is to lend to village primary societies, but they were
expected to attract deposits from the general public. But the expectation has not been
fulfilled and many of the co-operative central banks act as intermediaries between the
State Co-operative Bank on the one hand and the village primary credit societies on the
other.

b. State Co-operative Bank:

This bank forms the apex of the co-operative credit structure in each state. It finances and
controls the working of the central co-operative banks in the State. It serves as a link
between the Reserve Bank of India from which it borrows and the co-operative central
banks and village primary societies. The State Co-operative Bank obtain its working
funds from its own share capital and reserves, deposits from the general public and loans
and advances from the Reserve Bank now NABARD has formulated a scheme for the
rehabilitation of weak central co-operative banks. NABARD is providing liberal
assistance to the State Governments for contributing to the share capital of the weak
central co-operative banks selected for the purpose. The State Co-operative bank is not
only interested in helping the co-operative credit movement but also in promoting other
co-operative ventures and in extending the principles of co-operation.

2. Commercial Banks
The commercial banks in India have long confined their operations to urban areas,
receiving deposits from the urban public and financing trade and industry in urban public
and financing trade and industry in urban areas. Commercial banks are extending financial
support to agriculture both directly and indirectly direct finance is extended for

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 agricultural operations for short and medium period. Indirect finance to farmers is made
through providing advances for the distribution of fertilizers, other inputs, etc, and also
through financing primary agricultural credit societies. Financing of investment in
agriculture is a major aspect of the farm credit activities of banks Credit needs of service
units providing services for warehousing, processing, marketing, transporting, and
repairing of tractors etc.

3. Regional Rural Banks

These banks were first set up in 1975 specifically to give direct loans and advances to
small and marginal farmers, agricultural labourers, rural artisans and other of small means.
The loans are given for productive purposes. There were 196 RRBs which have been
lending around Rs. 3600 crores annually by way of loans to rural people. Over 90 percent
of the loans of RPBs are given to the weaker sections in rural areas. The regional banks,
though basically scheduled commercial banks, differ from the latter in certain respects:

a. The area of regional rural banks is limited to a specified region.

b. The regional rural banks grant direct loans and advances only to small farmers.

c. The lending rates of the regional rural banks should not be higher than co-operatives.

4. Reserve Bank of India

RBI had shown keen interest in agricultural credit and maintained a separate department
for this purpose. RBI had also set up the Agricultural Refinance Development
Corporation (ARDC) to provide refinance support to the banks to promote programmes
of agricultural development, particularly those requiring term credit. With the widening
of the role of bank credit from “agricultural development” to “rural development” the
Government proposed to have a more broad-based organization at the apex level to
extend support and give guidance to credit institutions in matter relating to the
formulation and implementation of rural development programmes. A National Bank for
Agriculture and Rural Development (NABARD) or National Bank was, therefore, set up
to take over the agricultural credit functions of RBI on the on hand and the refinance
functions of ARDC on the other.

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2.8 SCHEMES FOR AGRICULTURE FINANCE

1. Kisan Gold Card Credit Scheme

ELIGIBILITY:
a. Farmers having good track record of repayment for the last two years.
b. Farmers who have closed their loan account without default and not our current
borrowers.
c. Farmers who have defaulted in repayment but closed the Loan within the stipulated
repayment period.
d. Farmers who are maintaining deposits with the Bank.
f. Good farmers who have not availed loans from any bank.
PURPOSE
The borrower is at liberty to utilize 50% of the amount for any purpose, including
consumption purpose and purchase of land.
AMOUNT OF LOAN
The amount of loan is limited to five times the annual farm income including income
from allied activities or 50% of the value of the land offered as collateral security,
whichever is less, subject to a maximum of Rs.10 lakh.
RATE OF INTEREST
Interest rate ranges from 1% below PLR.
SECURITY
Hypothecation of crops and assets, if any, created out of bank finance and existing
movable assets such as milch animals, pump sets etc. The loan will be secured by
equitable mortgage of properties worth double the loan amount, or term deposit receipts,
LIC policies of adequate surrender value, NSCs completed lock in period or more etc.
DISBURSEMENT
Cash disbursals are allowed to the full extent of the credit limit.
REPAYMENT
The repayment period shall be 10 years. The due date of the installment shall be fixed in
such a way to coincide with the date of generation of income.

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2. Kisan Credit Card Scheme
ELIGIBILITY
All agriculturists who are in need of short term production requirements. ATM facility
and Personal Accident Insurance Scheme for life up to Rs.50000/- and permanent
disability cover up to Rs.25000/- is available on request.
PURPOSE
To provide hassle free short-term credit to farmers on the basis of their land holdings for
purchase of inputs and draw cash to meet their production needs. I.e. Cultivation
expenses including allied activities with a consumption component.
AMOUNT OF LOAN
To be fixed on the basis of operational holdings and scale of finance with consumption
component 15% (maximum Ra.10000/-) of production credit. The scale of finance to
farmers who own cultivated land below one acre will be at the rate of Rs.40000/- (on pro
rata basis) and farmers who own more than one acre with intensive farming of land be
given at the rate of Rs.37500/- per acre and part thereof.
RATE OF INTEREST
Interest rate ranges from 2.50% below to 1.50% above BPLR for various limits.
REPAYMENT
Running Cash Credit account for 36 months subject to annual review and total annual
credit should exceed annual debit.

3. HOMESTEAD FARMING
PURPOSE
A scheme for financing farmers practicing mixed cropping / inter cropping along with
allied activities to enable them to undertake cultivation of various crops in a more
integrated way. The scheme provides the farmers with sufficient working capital required
for their homestead farming (Mixed cropping along with allied activities) by fixing scale
of finance based on land holding to meet the cost of entire farming activities.

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 AMOUNT OF LOAN
The farmers who own cultivated land below one acre be given the scale of finance on pro
rata basis at the rate of Rs.40000/- and farmers who own more than one acre of land be
given at the rate of Rs.37500/- per acre and part thereof.
RATE OF INTEREST
Interest rate ranges from 2.50% below to 1.50% above BPLR for various limits.
REPAYMENT
The facility will be sanctioned as an Agriculture Cash Credit limit (In case of Kisan
Credit Card running cash credit).

4. LOAN FOR ESTATE PURCHASE

ELIGIBILITY
The estate should be either in yielding stage with the crops in its prime yield age or
capable of being developed in to a viable unit. The yield / net income of the estate should
be sufficient to liquidate the proposed loan and interest accrued with in a period of 7 to
10 years. The proposed estate should be free from encumbrance and entire property
should be offered as security to the loan.
PURPOSE
To encourage those who prefer to settle down in agriculture and are in the look out of
good / viable estates for purchase and also to improve production in agriculture.
AMOUNT OF LOAN
The quantum of loan that will be considered for sanction will be 75% of the registered
value or 50% of the market value whichever is low. In exceptional cases 80% of the
registered value or 50% of the market share whichever is low is also considered. The loan
for the development of the estate like land development including working capital can
also is sanctioned.
RATE OF INTEREST
Interest rate same as PLR

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 REPAYMENT
Repayment of loan will be in quarterly/half yearly / yearly installments depending on the
harvest of the crops and the loan shall be repaid within a maximum period of 7 to 10
years.

5. SCHEME FOR FINANCING FARMERS FOR PURCHASE OF LAND FOR

AGRICULTURAL PURPOSES
ELIGIBILITY
Small and Marginal farmers - land maximum up to 5 acres of non-irrigated land or 2.5
acres of irrigated land including the land purchased under the scheme. Tenant,
sharecropper and landless agricultural laborers with a good record of prompt repayment
of our loans for the last 2 years are also eligible.
PURPOSE
To finance small and marginal farmers, share croppers, tenant cultivators for purchasing
land to expand activities and to make existing small and marginal units economically
viable to bring fallow lands and waste lands under cultivation to step up agricultural
production as well as productivity also to finance share croppers / tenant farmers to
enable them to diversify farming activities to allied areas to increase their income.
AMOUNT OF LOAN
Maximum loan under the scheme towards land cost shall not exceed Rs 5 lakh. Cost of
development/economic activity shall be financed under the bank‟s other financing
schemes.
RATE OF INTEREST
Interest rate ranges from 1.75% below to 2.00% above BPLR for various limits.
REPAYMENT
Repayment of the loan will be 7 to 12 years in half yearly / yearly installments with
maximum of 24 months moratorium period. Gestation period/repayment due dates etc
will be fixed according to income generation from the activity.

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6. SCHEME FOR CULTIVATION OF MEDICINAL PLANTS
ELIGIBILITY
All agriculturists are eligible.
PURPOSE
Scheme for financing cultivation of 22 medicinal plants cultivated extensively and is also
in great demand in the local as well as foreign market.
AMOUNT OF LOAN
Depending on the area of cultivation / project cost
RATE OF INTEREST
Interest rate ranges from 1.75% below to 2.00% above BPLR for various limits.
REPAYMENT
Repayment should coincide with harvesting and marketing or at the time generation of
income from the scheme.

7. SCHEME FOR CULTIVATION OF VANILLA

ELIGIBILITY
All agriculturists are eligible.
PURPOSE
This scheme is for financing cultivation of Vanilla, a cash crop, gaining ground in the
State of Kerala.
AMOUNT OF LOAN
Amount of finance will be Rs.250000/- per hectare for pure crops and Rs.210000/- per
hectare for intercrop.
REPAYMENT
The loan shall be repaid within a period of 7 years, in yearly installments. Farmers
eligible for two years gestation period and interest is repayable on the 3rd and 4th year and
the principal from the 5th to 7the year.

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8. RAIN WATER HARVESTING SCHEME
ELIGIBILITY
Farmers having land holding of 0.50 acre or more are eligible to be considered for
finance under this scheme.
PURPOSE
Scheme envisages construction of low cost tanks for collecting and storing rainwater and
using it for irrigation, by siphon arrangement, utilizing gravitation flow or by installing
motor pump.
AMOUNT OF LOAN
Maximum amount of finance will be Rs.88000/- per acre. Scheme can be adopted in
smaller areas also by reducing the cost proportionately.
RATE OF INTEREST
Interest rate ranges from 1.75% below to 2.00% above BPLR for various limits.
REPAYMENT
Repayment based on the income generated from the crops is raised and cropping pattern.
The maximum period eligible for repayment is 8 years in annual installments.

9. PRODUCE MARKETING LOAN (Advance against Warehouse Receipt)

ELIGIBILITY
Farmers / traders depositing farm produce in the warehouses of the central / state
warehousing corporations.
PURPOSE
a. To protect the farmers from the compulsion to sell their produce immediately after
harvest of produce despite an adverse market.
b. To finance farmers and traders against warehouse receipt.
AMOUNT OF LOAN
70% of the value of the warehouse receipt, valued at the market value or 70% of the
market price advised by Agri. Dept, HO whichever less is.

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 RATE OF INTEREST
For Farmers
Up to Rs.3 lakh - 3.50% below PLR 9.50%
Above Rs.3 lakh - 2.50% below PLR 10.50%
For Traders
2.50% below PLR 10.50% (Irrespective of the limit)
REPAYMENT
On demand / 6 months which can be extended up to 12 months subject to satisfactory
shelf life / market condition.

10. AGRI. LOAN TO NON-RESIDENT INDIANS

ELIGIBILITY
Agricultural advances are available to the resident family members (means spouse,
father, mother, brother, sister etc.) of Non-Resident Indians for land-based activities in
respect of the land held by them in India subject to:
a. The loan should be need based and the total land holding of the Non-Resident
Indian, in individual name or jointly with others, should not exceed 5 lakh.
b. The loan amount shall not be used for acquiring any additional land.
PURPOSE
To finance farmers only for land-based activities and to carryon agricultural activities on
the existing land.
AMOUNT OF LOAN
The maximum amount of the loan will be need based.
RATE OF INTEREST
Interest rate ranges from 2.50% below to 1.50% above BPLR for various short-term
limits and from 1.75% below to 2.00% above BPLR for various long-term limits.
REPAYMENT
The loan can be repaid out of the income generated from the agricultural activities or
remittances from abroad or by debit to their NRE/NRO/FCNR accounts.

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CHAPTER 3

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3.1 INTRODUCTION
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 Rs 2,000 crore provided by the Government of India and Reserve
Bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state
capitals and 391 district offices at districts.

Around 70 per cent of India's population of one billion lives in rural areas and depends on
agriculture and other allied activities for a livelihood. The task of sustainable rural development,
therefore, is an enormous one. It is important for the agricultural sector to lay greater emphasis
on increasing productivity and profitability through conservation of natural resources. The role
of universities in research and development, extension services and right application of
technology assumes importance in this context. Thrust is also required on strategies to generate
income potential through non-farm activities by building the entrepreneurial capacity of villagers
and providing them with ideas and resources to set up their own microenterprises. They must
also be imparted knowledge of the market for their products, because it is crucial for micro-
enterprises in the nonfarm sector to be sustainable. Sustainability is at the core of NABARD's
mission for rural development. NABARD (National Bank for Agricultural and Rural
Development) itself has been formed to promote sustainable and equitable agriculture and rural
development through effective credit support, related services, institutional development and
other initiatives.

1. NABARD is an apex institution accredited with all matters concerning policy, planning
and operations in the field of credit for agriculture and other economic activities in rural
areas.
2. NABARD operates throughout the country through its Head Office at Mumbai, 25
Regional Offices and on Sub-Office, located in the capitals of all the states/union
territories. It also has 4 training establishments.

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 3. It is an apex refinancing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas.
4. It takes measures towards institution building for improving absorptive capacity of the
credit delivery system, including monitoring, formulation of rehabilitation schemes,
restructuring of credit institution, training of personnel, etc.
5. It co-ordinates the rural financing activities of all the institutions engaged in
developmental work at the field level and maintains liaison with Government of India,
State Governments, Reserve Bank of India and other national level institutions concerned
with policy formulation.
6. It prepares, on annual basis, rural credit plans for all districts in the country; these plans
form the base for annual credit plans of all rural financial institutions. It undertakes
monitoring and evaluation of projects refinanced by it. It promotes research in the fields
of rural banking, agriculture and rural development.

3.2 ROLE AND FUNCTIONS

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.

1) NABARD is an apex institution accredited with all matters concerning policy, planning
and operations in the field of credit for agriculture and other economic activities in rural
areas.

2) It is an apex refinancing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas.

3) It undertakes monitoring and evaluation of projects refinanced by it.

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 4) It 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.

5) It co-ordinates the rural financing activities of all the institutions engaged in

developmental work at the field level and maintains liaison with Government of India,
State Governments, Reserve Bank of India and other national level institutions concerned
with policy formulation.

6) It prepares, on annual basis, rural credit plans for all districts in the country; these plans
form the base for annual credit plans of all rural financial institutions

7) It promotes research in the fields of rural banking, agriculture and rural development.

3.3 TYPES OF CREDIT BY NABARD

Types of Credit by
NABARD

Production Credit Investment Credit

1. Production Credit
NABARD provides short-term refinance for various types of production/marketing/
procurement activities. Refinance is expected to provide liquidity to co-operative banks
and enable them to effectively leverage their high cost funds to boost credit flow to the
agricultural sector.

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 a). Refinance in the form of a consolidated limit to SCBs on behalf of all eligible
DCCBs for financing Seasonal Agricultural Operations (SAO) which covers such
activities as are undertaken in the process of raising various crops and are seasonal in
nature. The activities include among others, ploughing and preparing land for sowing,
weeding, and transplantation where necessary, acquiring and applying inputs such as
seeds, fertilizers, etc., and labour for all operations in the fields for raising and harvesting
the crops. Rate of interest has been linked to NPA norms and a consolidated limit would
be sanctioned giving greater flexibility to SCBs in the availability of refinance.
Rate of Interest on NABARD refinance will be linked to NPA levels as under:

Level of NPAs ROI %

Up To 20% 5.25
Above 20% 5.75%

b). Refinance support in the form of consolidated limit to SCBs for financing approved
short-term agricultural/allied and marketing activities which are not covered under
normal credit covering secured advances.
R.O.I. 6.50% p.a

c). Refinance to SCBs on behalf of DCCBs and RRBs for financing Marketing of crops
for affording reasonable opportunities for remunerative price to growers for their produce
by enabling them to hold on to the produce for time being.
Ceiling of Rs.5 lakh per borrower. Maximum period of credit is up to 12months.
R.O.I. 6.00% p.a

d). Refinance support in the form of consolidated limit to SCBs on behalf of eligible
DCCBs for financing the working capital requirements of the Primary Weavers‟
Cooperative Societies (PWCS) for production and marketing of cloth.
R.O.I. 6.00% p.a

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e). Refinance support to State Cooperative Banks for financing procurement and
marketing of cloth and Trading in yarn by Apex/Regional Weavers' Cooperative
Societies.
R.O.I. 6.25% p.a

f). Refinance support to Scheduled Commercial Banks for financing working Capital
requirements of Primary Handloom Weavers' Cooperative Societies (PHWCS).
R.O.I. 6.25% p.a

g). Refinance support to State Cooperative Banks/Scheduled Commercial Banks for

financing working capital requirements of State Handloom Development Corporations
(SHDCs) for production / procurement and marketing of Handloom goods and State
Handicrafts Development Corporations (SHnDCs) for production / procurement and
marketing of Handicrafts goods.
R.O.I. 6.25% p.a

h). Refinance support to SCBs on behalf of DCCBs/DICBs for financing working capital
requirements of cottage, village, small scale primary and Apex Industrial Cooperative
Societies for production and marketing activities.
R.O.I. - Apex Societies: 6.25% p.a R.O.I. - Primary Societies: 6.00% p.a

i). Refinance support to SCBs on behalf of DCCBs/DICBs for financing working capital
requirements of Labour Contract and Forest Labour Cooperative Societies for activities
such as marketing, manufacturing or processing of goods and/or collection and marketing
of minor forest produce and engaged in any one or more of the 22 approved broad groups
of cottage and small scale industries.
ROI - Apex Societies: 6.25% ROI - Primary Societies: 6.00%

j). Refinance support to SCBs/DCCBs for financing working capital requirements of

Rural Artisans (including Weaver members of PACS/LAMPS/FSS) for production and
marketing or servicing activities of such rural artisans including weaver members of

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PACS/FSS/LAMPS engaged in any of the 22 broad groups of approved cottage and small
scale industries or handloom weaving industry
R.O.I: 6.00% p.a

k). Refinance support to SCBs/DCCBs for financing collection and marketing of minor
forest produce by Adivasis and persons belonging to the Scheduled Tribes covering all
types of minor forest produce which are fast moving and where operations are conducted
on a commercial basis.
Apex Societies: 6.25% p.a Primary Societies: 6.00% p.a

l). Refinance support to SCBs on behalf of DCCBs for financing procurement, stocking
and distribution of chemical fertilizers and other agricultural inputs.
a) Wholesale procurement, stocking and distribution of fertilizers/agricultural inputs by
SCBs: R.O.I. - 6.50% p.a
b) Retail distribution on cash and carry basis: R.O.I. - 6.25% p.a

m). Short Term refinance support to Regional Rural Banks (RRBs) for financing
Seasonal Agricultural Operations (SAO) for meeting the production credit needs of
farmers and Other than SAO such as production and marketing activities of artisans
(including handloom weavers) and village/cottage/tiny sector industries as also for
financing persons belonging to weaker sections and engaged in trade/business/service.
R.O.I.: P.A

NPA % ST-SAO ST-OSAO

Up to 20% 5.75 6.00

Above 20% 6.00 6.25

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2. Investment Credit (Medium Term and Long Term)
I) Institutions Eligible for Refinance:
a. State Co-operative Agriculture & Rural Development Banks (SCARDBs)
b. Regional Rural Banks (RRBs)
c. State Co-operative Banks (SCBs)
d. Commercial Banks (CBs)
e. State Agricultural Development Finance Companies (ADFCs)
f. Primary Urban Co-operative Banks

II) Purposes:
Investment in agriculture and allied activities such as minor irrigation, farm
mechanization, land development, soil conservation, dairy, sheep rearing, poultry,
piggery, plantation/horticulture, forestry, fishery, storage and market yards, bio-gas
and other alternate sources of energy, sericulture, apiculture, animals and animal
driven carts, agro-processing, agro-service centers, etc.

III) Loan Period

Up to a maximum of 15 years

IV) Refinance Windows

1. Automatic Refinance Facility: Release of refinance without prior sanction for
refinance limit up to Rs.20 lakh.
2. Project based lending.

V) Criteria for Refinance

a. Technical Feasibility of the project
b. Financial viability and bankability
c. Organizational arrangements for credit supervision

VI) Ultimate Beneficiaries

Although refinance is provided to SCARDBs/ SCBs/CBs /RRBs/ADFCs/ PUCBs, the
ultimate beneficiaries of investment finance may be individuals,

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 proprietary/partnership concerns, companies, state-owned corporations or co-operative
societies.

VII) Special Focus

i. Removal of regional imbalance
NABARD considers removal of regional imbalance as one of the thrust areas
and gives preference to the needs of less developed areas in terms of
allocation of resources, quantity of refinance etc.

ii. Special focus for North Eastern states

For the development of the North-Eastern region, the Bank has been making
special efforts through refinance on liberal terms and other supportive
measures for strengthening the rural credit delivery system.

iii. Hi-tech and Export-oriented Projects

NABARD issues guidelines for formulation of hi-tech and export-oriented
projects in farm and non-farm sectors. Besides, it undertakes consultancy
work for projects including appraisal of projects even in cases where
refinance is not availed from NABARD.NABARD provides long-term loans
to state governments for contribution to the share capital of co-operative
credit institutions subject to certain condition. This is to facilitate
strengthening of equity base of these credit institutions and improve their
viability. The maturity period of such loans is 12 years with a moratorium
period of initial 2 years and repayment in 10 annual installments.

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3.4 Schemes of NABARD

A) Swarnajayanti Gram Swarozgar Yojana (SGSY)

SGSY, formed by restructuring ongoing self employment programmes, viz. IRDP,

TRYSEM, DWCRA, etc., is under implementation from 01, April, 1999. The
programme envisages formation of SGSY Groups and their linkage with the banks.
Individuals as also SGSY group members, below poverty line are assisted under the
programme

B) Scheme for setting up of Agriclinic and Agribusiness centers

In pursuance of the announcement made by the Union Finance Minister in the

budget speech for the year 2001-02, National Bank in consultation with the Ministry of
Agriculture, GOI and select banks formulated a scheme for financing Agriculture
Graduates for setting up Agriclinics and Agribusiness Centers The scheme aims at
supplementing the existing Extension Network to accelerate the process of technology
transfer to agriculture and supplement the efforts of State Agencies in providing inputs
and other services to the farmers.

C) Scheme for financing farmers for purchase of land for Agricultural purposes

In response to the Hon'ble Union Finance Minister Mr. P. Chidambaram‟s emphasis

on the need to step up priority sector lending and to examine financing farmers for
purchase of land for agricultural purposes, the Working Group constituted by Indian
Banks Association formulated above scheme in consultation with the Government of
India, RBI and NABARD. The objective of the Scheme is to finance the farmers to
purchase, develop and cultivate agricultural as well as fallow and waste lands as also
consider financing purchase of land for establishing or diversifying into other allied
activities.

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 Eligibility

I. Small and marginal farmers i.e. those who would own maximum of 5 acres of
non- irrigated land or 2.5 acres of irrigated land including purchase of land under
the scheme and
II. Share croppers / Tenant farmers are eligible.

D) Central Sector Capital Subsidy scheme for Investment Promotion

A Central Sector Capital Subsidy scheme (Investment Promotion Scheme) launched

by the Government of India in collaboration with NABARD for development of
privately owned non-forest wastelands in the country is under implementation since
1998. Of the 40 schemes covering about 1500 ha sanctioned till date, the coverage is
mostly confined to the States of Tamil Nadu, Andhra Pradesh and Maharashtra, with
Tamil Nadu accounting for more than 20 schemes. The scheme provides for subsidy up
to 25% of bank loan with a ceiling of Rs. 25 lakh for taking up plantation and other on-
farm developments in private wastelands. In view of the availability of substantial area
under non-forest wasteland in all States and the need to develop them, a nationwide
awareness and publicity campaign was launched by the Government of India in
association with NABARD for popularizing the Investment Promotion Scheme (IPS).
As a part of this effort, workshops are being organized by NABARD in different States/
regions.

E) Refinance Scheme for financing Farmers Service Center (FSC)

NABARD has decided to extend 100% refinance facility to banks for financing
Farmers Service Centers (FSC) set up in collaboration with Mahindra Shubhlabh
Services Ltd (MSSL) for providing various extension services to farmers including
supply of agri-inputs. FSC is intended to benefit farmers by way of higher yields and
productivity through private sector participation in technology transfer and extension
services.

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 CHAPTER 4

FUNCTIONS OF NABARD

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4.1 Development and Promotional Functions of NABARD

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 will 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 the regional rural banks, so that adequate and timely credit is made available to the needy.
In order to reinforce the credit functions and to make credit more productive, NABARD has been
undertaking a number of developmental and promotional activities such as:-

(i) Help cooperative banks and Regional Rural Banks to prepare development actions plans
for themselves.
(ii) Enter into Memorandum of Understanding(MoUs) with state governments and
cooperative banks specifying their respective obligations to improve the affairs of the
banks in a stipulated timeframe
(iii) 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.
(iv) Monitor implementation of development action plans of banks and fulfillment of
obligations under MoUs.
(v) Provide financial assistance to cooperatives and Regional Rural Banks for establishment
of technical, monitoring and evaluations cells.
(vi) 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.
(vii) Provide financial support for the training institutes of cooperative banks.
(viii) Provide training for senior and middle level executives of commercial banks, Regional
Rural Banks and cooperative banks.
(ix) Create awareness among the borrowers on ethics of repayment through Vikas Volunteer
Vahini and Farmer‟s clubs.

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 (x) Provide financial assistance to cooperative banks for building improved management
information system, computerization of operations and development of human resources.

4.2 Supervisory Functions of NABARD

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.

Although the prime objective of the statutory inspections is to ensure general safety of
public deposits, NABARD, through these statutory inspections, has been simultaneously
endeavoring for further developing and strengthening the above institutions to enable
them to play a far more effective and efficient role in meeting the rural credit
requirements.

The general banking environment emerging out of the financial sector reforms
introduced by GOI/ RBI has also since been extended to cover cooperative banks and
RRBs. While the capital adequacy norm has not yet been made applicable to these
banks, the other prudential norms viz., income recognition, asset classification and
provisioning, which were made applicable by Reserve Bank of India to the commercial
banking sector have been extended to cover SCBs and DCCBs since 1996-97 and to
SCARDBs in 1997-98. These norms had already been extended to RRBs since
1995-96. The exposure of these institutions to the prudential norms also called for a
suitable strategy to be adopted by the NABARD to help these banks to adjust to the
new financial discipline.

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4.3 Current Focus

Under the revised strategy, a sharper focus of the NABARD‟s inspection was given on the
core areas of the functioning of banks pertaining to Capital Adequacy, Asset Quality,
Management Earnings, Liquidity and Systems Compliance (CAMELSC). Thus, NABARD‟s
focus in its statutory „on-site‟ inspections is on core assessments leaving the collateral appraisals
to supplementary inspections. The micro level aspects are to be taken care of by the banks
themselves by way of internal inspections or by other agencies such as auditors. In this direction,
through a series of workshops and meetings held with the Chief Executives and the Chief
Auditors of cooperative banks, NABARD attempted to ensure that the other areas, particularly
relating to the internal checks and controls, revenue and income realization by way of interest on
loans and deposits and other routine features of carrying out general banking transactions were
suitably taken care of by the respective banks and their concurrent/statutory audit systems.

Off-site Surveillance

As a part of the new strategy of supervision, a system of `Off-site Surveillance' has been
introduced as a supplementary tool to the on-site inspection. Its objectives are to obtain and
analyze critical data on a continuous basis, to identify areas of supervisory concern and to
identify early warning signals and risky areas requiring further probe. The system basically
envisages desk scrutiny of operations of cooperative banks and RRBs through a set of statutory
and non-statutory returns. While the periodical statutory on-site inspections attempt an overall
evaluation of the performance of the banks with a stipulated period, off-site surveillance
envisages continuous supervision supplementing the on-site inspections with additional
instruments of supervision.

4.4 Broad Powers and Functions of the Board of Supervision

(i) Giving directions and guidance in respect of policies and on matters relating to
supervision and inspection, reviewing the inspection findings, suggesting appropriate
measures
(ii) Reviewing the follow-up action taken by Department of Supervision (DoS) on matters of
frauds and internal checks and control.

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 (iii) Identifying the emerging supervisory issues in the functioning of cooperative
banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system,
management practices, frauds, etc.
(iv) Suggesting necessary follow-up measures
(v) Recommending appropriate training for Inspecting Officers of NABARD for imparting
necessary skills and knowledge
(vi) Suggest measures for strengthening of DoS
(vii) Recommend issue of directions by RBI
(viii) Oversee the quality of inspections carried out and the reports issued
(ix) Review the information generated through off-site surveillance and other supplementary
vehicles, action taken thereon
(x) Undertake any other functions entrusted from time to time by the Board of Directors of
NABARD

The Board of Supervision, since its formation on 20 November 1999, has held 31 meetings till
10 January 2007 and reviewed the financial position of Cooperative Banks and RRBs. Based on
the observations of BoS, authorities concerned have been apprised of the weaknesses.

4.5 Other Initiatives

i. The day-to-day functioning of the supervised banks is being monitored through various
statutory returns prescribed by the RBI/NABARD including OSS returns
ii. Periodic coordination Meets are conducted with RPCD, RBI to discuss the policy and
operational matters relating to supervision
iii. State level groups comprising RCS, Apex bank, Cooperation and Finance Department,
State Government, Director of Audit and non-compliant banks have been
constituted/convened for preparing/discussing suitable strategy for Section 11 non-
compliant banks and monitoring the progress of Action Plan prepared by them to
facilitate them re compliance with the provision
iv. Periodic discussions are held with the MD, Apex Banks, RCS, State Government etc. to
discuss the supervisory concerns.

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 CHAPTER 5

FUTURE OF AGRICULTURAL FINANCING

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5.1 CHALLENGES OF AGRICULTURAL FINANCING
As every business faces some or the other challenges in their business, the same is in the case
of agricultural financing. The following are the different types of challenges faced in agricultural
financing:
1. Moral hazard
In any lender-borrower relationship, there is a general problem of moral hazard that is the
result of specific personal characteristics and decisions of each individual borrower. In
this regard, farmers do not differ from any other borrower group in terms of information,
incentives, monitoring and enforcement problems associated with the lending process.

Firstly, it is obvious that the lender does not have the same information as the borrower.
The latter knows exactly what his/her own management capacity is and how the loan will
be used. The lender does not know the potential borrower to such an extent. In rural
financial markets, information about low income loan applicants is particularly difficult
to obtain.

Secondly, even if the loan applicant frankly shares all relevant information for the credit
decision, his/her future actions cannot be fully predicted. Therefore, it is crucial for
financial institutions to apply incentives so that borrowers behave in such a way that
repayment is assured.

Thirdly, the farmer may decide to change his/her economic behavior, invest the money
elsewhere or simply move to another part of the country. Many subsidized agricultural
credit programmes tried to manage this risk by imposing very costly regular monitoring
of the borrower. Finding cost efficient methods of monitoring borrowers is a particular
challenge in agricultural lending.

However, there are other risks beyond the general behavioral risks of a borrower. This
second category of loan loss risks is associated with the agricultural sector or agricultural
production. It refers to factors external to the farmer‟s repayment attitude.

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2. Farming is a risky business
Crops may fail, weather influences the productivity and sale prices fluctuate and are
difficult to predict when the crops are planted. If productivity is lower than expected,
farmers may not be able to repay loans. These risks and many other aspects of
agricultural risk will need to be identified, measured and actively managed in order to
stop lending institutions turning away from this clientele. Let's look at the various
external risk categories that need to be taken into accounting agricultural lending.
3. Production and yield risk
Agricultural yields are generally uncertain, as natural hazards such as the weather, pests
and diseases and other production calamities impact on farm output. Even slight changes
in weather conditions - less rain than usual - can seriously impact on farm production.
Pests and diseases may spread quickly, leading to a loss of part or all of the crop‟s
produce. The soil quality of the plots as well as their location also significantly influence
productivity and yield risk.
4. Price and Market risk
Price uncertainty due to market fluctuations is particularly significant where market
information is lacking or scanty, or where markets are imperfect – features which are
prevalent in many developing countries. The relatively long period of time between
planting a crop or starting Livestock activities and the realization of farm output implies
that market prices may change from what has been projected. This problem is particularly
relevant for longer term agricultural activities, such as perennial tree crops like cocoa or
coffee, as several years lie between planting and first harvest.
Price fluctuations may be particularly severe in export markets. Over-production,
however, may also considerably influence domestic market prices. In many countries,
price uncertainty has increased with liberalization of agricultural marketing. Private
buyers rarely fix a blanket-buying price prior to harvest, even though inter-linked
transactions for specific crops have become more common. These arrangements almost
always involve the setting of a fixed price or a range of prices prior to planting. Market
risk also includes the potential losses involved in marketing agricultural produce.
Transportation is a major challenge in many rural areas. Lower quality of badly stored
produce usually reduces prices.

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5. Lack of diversification
Price and market risk, as well as production and yield risk, is higher for farmers
concentrating on a single crop or livestock activity. Accordingly, many farmers apply risk
diversification techniques alongside risk mitigation techniques to reduce these risks.
Complementing market-oriented production with subsistence farming is one particular
safety-net arrangement, which provides survival measures if yield, production, price and
market risks diminish the profits made.
Small farmers‟ annual incomes often depend to a large extent on one main crop. This is
particularly challenging if harvests are no more frequent than semi-annually. The
situation becomes even more difficult if the farmer's plot is very small. Accordingly, an
alternative strategy for diversification is the generation of additional income between
seasons by engaging in off-farm activities. This can be essential for farmers that are
engaged in high-risk agricultural production, e.g. facing a continuous threat of droughts
or floods.
While diversification of agricultural production is a commonly applied technique, the
resulting effect on reducing income insecurity is often insufficient. Small farmers have a
long history of going through bad years when cash income comes close to zero, and good
years, in which only a small surplus is generated. As income risks directly affect the
potential performance of an agricultural loan, the lack of sufficient diversification and
risk mitigation remains a major challenge for agricultural lending.
6. Politicians may add to the risk
Political interference in agricultural markets is a common feature to be found in many
developing countries. Price intervention is popular for example, as low food prices are in
the interest of urban consumers. Abolishing price ceilings for basic food products in
former socialist states led to severe social unrest. Accordingly, stabilizing these prices has
been a common feature of political interventions in many countries. On the other hand,
fixed prices for agricultural produce are also frequently used by governments to ensure a
certain level of income for small farmers.
Changes in policy and state interventions can have a severely damaging impact on rural
financial markets. Agricultural lending has, in fact, a long-standing history of political
intervention and distortion, which has significantly contributed to the lack of interest

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 from commercial banks in lending to farmers. Promising debt cancellation is a common
feature of populist political campaigns and is enormously damaging to financial service
providers. Even well-intentioned credit programmes for specific target groups and
regions can also substantially distort prudent agricultural lending activities.
7. The Costs
Lending to small farmers can be a costly business. Clients are often widely dispersed, and
long distances have to be travelled by loan officers and/or customers. Providing small
loans is also more costly than lending large amounts, as the costs of loan appraisal,
monitoring and follow up do not decrease with the size of the loan. Lending costs are
mainly fixed costs. The key factors in determining lending costs are the need to collect
detailed information about the potential borrower and to be able to do close monitoring.
Information is vital in assessing and managing risk. Good client information can serve as
a partial substitute for lack of real collateral and as a means to counter moral hazard.
However, in rural settings it is often particularly difficult to obtain good information.

5.2 RECOMMENDATIONS FOR THE CHALLENGES

1. Multiple financing:
In majority of the cases, the landowners are availing the crop production finance from the
Banks showing the land records as if they are cultivating lands. In such cases, financing
tenant farmers for cultivation of same piece of land amounts to multiple financing. Some
remedy is required to tackle such situation and help tenant farmers. The suggested
remedies are:
a) Record the name of the actual cultivator in the land records. Noting the name of
the Tenant in the Record of Rights along with the name of the cultivator would
provide comfort level to the Branch Manager besides avoiding cases of double
financing.
b) In cases where landlords already availed crop production limits and are providing
inputs to the tenants, a provision may be made to extend a limit to cover
remaining cost of production and consumption needs.

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2. Financial literacy:
The lack of financial advice is one of the barriers for economic independence through
appropriate savings / credit / other financial services and investment decisions. The high
illiteracy of the disadvantaged is one reason for low-level transfer of farm technology.
The Bank‟s voluntarism can focus on opening Knowledge/Credit counseling centers for
education on financial services of the Bank, credit and repayment planning and facilitate
interface between the poorer sections of the farmers and the Research /Agricultural
Institutes. In short, Credit intervention alone would not bring about a change in growth of
Tenant farmers but access to all logistical linkages and market and treatment on par with
big farmers is critical. It is recommended that the following specific areas need to be
explored in greater degree:
a) Training centers for Tenant farmers.
b) Financial Literacy vehicles–Publicity vans of the Bank that can visit interior
areas with literature on financial services available and Audio Visual Equipments.
Suitable visuals and messages can be prepared in the vernacular and packaged as
an appealing programme (like a short movie).
Extending finance to corporate / companies for onward financing to farmers under
agriculture:
Financing corporate involved in procurement of agricultural produce either for processing
or processing and exports so that the financial requirements of the companies for
supplying inputs like seeds, fertilizers, extension services, etc., can be met by the
companies effectively. Similarly, there is scope for financing well run sugar mills for
similar activities for onward lending to farmers. The Banks will be encouraged in
meeting these requirements if such loans extended to companies can be included under
direct agricultural credit. In the backdrop of manifold increase required under inclusive
finance and the successful supply chain model of the Corporate engaged in contract
farming, such of those corporate can also effectively play the role as Business
Correspondents.

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Income generating activity:
Banks can expand the flow of farm credit significantly if they were to consider total
credit needs of cultivators. There is, therefore, a need to integrate investment and
production credit. In addition to crop production activity, the tenant farmers are to be
encouraged to take up alternative income generating activities like allied activities and
non-farm activities. Family approach to meet credit requirement of all family members
will facilitate them to earn additional income to meet day-to-day family expenses and
improve financial status.
Targeting small & marginal farmers and agricultural laborers:
The focus should be on group Collateral loans and Joint liability groups for all small and
marginal farmers on the lines of Tenant farmer groups needs to be encouraged. The flow
of credit to these segments should be more in terms of numbers assisted.
Identifying Areas of focus:
Private investment in linkage provider avenues like quality seeds, micronutrients.
Cold chains and establishment of large and sophisticated controlled atmosphere cold
storages in strategic locations for long storage of fruits and vegetables.
Construction of market yards, platforms for loading, assembling and auctioning,
weighing and mechanical handling equipments etc. Mobile infrastructure for post harvest
operations such as grading, packaging, quality testing, etc.
Encouraging Agro/food processing units and financing end to end activities of
Agriculture production under Agriculture finance. Ready to operate Green houses and
other latest technology for floriculture and vegetable cultivation projects suiting to small
holdings Development of Commercial Horticulture through production and post- Harvest
management.
Coordination and Participation in all Venture Capital Schemes:
The Agri Business development ventures promoted by various development
organizations like National Horticultural Board, Small Farmers Agri business
Consortium, APEDA and other departments promoting various Central / State sector
plans - wherein projects that provide the linkages need to be encouraged. Coordinated
efforts of the above development agencies along with those of NABARD and Banks
would facilitate enhanced Credit Flow to areas of high and inclusive growth potential.

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Extension Services and Technology Transfer:
The network of Agri Clinics and Agri-Business Centres / KVKs /Farmers Clubs to
provide better services related to technology transfer, setting up information kiosks in
villages for providing latest information relating to prices of agriculture inputs, outputs,
markets etc, encouraging corporate houses to provide extension services to the farmers
and educating the farmers regarding suitability of land, water and soil conditions for high
yielding and high value crops, etc.
Enhancing the limit under General Credit Card Scheme (GCC):
The present cap of Rs. 25,000/- may be increased to Rs. 50,000/- which can facilitate
financial deepening without collateral. To assess the higher requirement based to classify
the entire balance outstanding under GCC as Indirect Finance to Agriculture.

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 CHAPTER 6
FUTURE PLANS OF NABARD

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6.1 NABARD aims to lend 33% more

According to the Chairman of Nabard, Mr. U C Sarangi National Bank of Agriculture & Rural
Development is aiming to achieve a 33% growth in loan disbursements this fiscal, on the back on
agricultural lending.

"Last year, they disbursed Rs 24,000 crore and this year they are confident of increasing the
figure to Rs 32,000 crore". "They are expecting a much higher demand from the agriculture
sector this year following which they are confident of achieving the growth target." Out of the Rs
32,000 crore, Rs 27,000 crore would be refinancing while Rs 5,000 crore would be liquidity
support for the banking institutions in need of funds.

Nabard is also planning to raise funds through bond issues this fiscal. "They currently have Rs
13,000 crore in their kitty, out of which Reserve Bank of India provided them with Rs 5,000
crore. They had their own reserve of another Rs 5,000 crore and Rs 3,000 crore they are raising
through bonds. They will raise more such funds in the course of the year," Sarangi said. The
decision to approach the bond market will depend on the growth in the demand of loans from the
agriculture sector.

Earlier, addressing a FICCI banking conclave, chairman said that there had not been much
increase in institutional credit to the farm sector. "From 60% in 1991, institutional credit to farm
sector increased to 61% in 2001,".

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6.2 NABARD Plans To Set Up Self-Help Groups To
Expand Lending Among Farmers

Farmers would now be able to have better agricultural growth with the support of National Bank
for Agriculture and Rural Development (Nabard). The bank is aiming at facilitating agricultural
lending among small and marginal farmers. Nabard would be helping the needy farmers by
setting up directly self-help groups (SHGs), which would be directly credit-linked with banks.

The announcement was made by the chairman of Nabard Mr. U.C. Sarangi the Banking,
organized by the Federation of Indian Chambers of Commerce and Industry (Eastern Region).
To begin with, the bank would launch the project in five to six states. The advantage of the
project is that this scheme will ensure timely repayment of loan through group liability basis of
extending agricultural finance for the small and marginal farmers.

Initially lot of small and marginal farmers were usually left out of the purview of banking
facilities because banks were not sure about their repayment capacities. “The recovery rate in
case of SHG lending is as high as 95-98 per cent in almost all States. Forming such groups of
farmers will therefore help banks lend money without worrying about defaults.”

The bank would also be providing counseling sessions for farmers in order to ensure proper
utilization of the credit. As far the perspective of growth is regarded, the chairman of Nabard
said, “The credit deployment in the agriculture sector in 2007-08 was Rs 2, 40,000 crore and we
expect it to grow it to Rs 2, 80,000 crore in 2008-09.”

The refinance provided by the bank to various financial institutions to grow by 33 % at Rs

32,000 crore in 2008-09, up from Rs 24,000 crore last year. The bank, to provide liquidity
support to the financial bank, has also earmarked Rs 7,000 crore.

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6.3 Views of NABARD chief: Farm growth will be good

Nabard has disbursed Rs 24,000-25,000 crore to banks under the full debt waiver scheme for
farmers. This accounts for about 90 per cent of the total amount of Rs 30,999 crore.

The agricultural refinance institution is waiting for reports from States about the status of the
disbursements under the partial debt relief scheme, following which it will disburse the balance
amount.

Under its refinance scheme, Nabard has disbursed Rs 10,000 crore, in this financial year, so far.
The target for refinancing this year is Rs 33,000 crore, which includes Rs 21,000 crore for short-
term loans and Rs 12,000 crore for long-term loans.

Mr. Sarangi, Chairman said he is hopeful that banks would meet their farm credit targets this
fiscal as the Rabi harvest will be good.

“Agriculture growth will be positive. Only paddy crop in the Kharif season has been affected due
to floods. Sowing under Rabi season is yet to begin,” he said.

The farm credit target for banks this fiscal is Rs 3, 25,000 crore, of which Rs 1, 85,000 crore is
for short-term credit.

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 CHAPTER 7
CONCLUSIONS AND SUGGESTIONS

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CONCLUSION AND SUGGESTIONS
In India the rural finance institutions have some regulatory restrictions like they cannot
accept deposits. This makes them dependent on the government loans and donations for their
working capital. If they are allowed to accept deposits from their customers then they will be
able to generate their own sources of funds which they can disburse. This will enhance their
lending capacity. Since borrowing is often riskier than saving for example, a woman could save
or borrow to buy a sewing machine. If a child falls ill, savings could be tapped to pay for
medicine; debt repayment might preclude medical treatment. Furthermore, although not all
people are creditworthy or want debt, all people are deposit worthy and want assets.

Another aspect is that the rural finance institutions in India are not well regulated. The proper
regulation should be there since this market is now developing at rapid speed. There should be
collaborations between banks and rural finance institutions which will help both, the banks and
the rural finance institutions. The banks will be able to lend to priority sector described by RBI
and the rural finance institutions will get easy funding. With the loaning facilities other financial
services should also be given focus like micro-insurance, micro-deposits etc. According to a
1998 World Bank study report 1,000 clients of the rural finance institution Grameen Bank in
Bangladesh were escaping poverty every month. In the year 2007 more than 100 million people
received a microloan. For rural finance institutions the arrangement of funds is not the only
problem but the human resource i.e. finding training attracting and retaining the staff is also a
major concern. There should be more focus on the literacy of the borrowers to make them more
aware and also to make the proper use of the loan taken. The focus should not be only on rural
segment but the urban people who are BPL (Below Poverty Line) should also have access to the
rural finance facility. The growth in SHGs is very good in India but it is still not growing in
comparatively underdeveloped states like Jharkhand, Himachal Pradesh, Uttar Pradesh and
Madhya Pradesh than the states like Maharashtra, Bihar, Assam and Rajasthan. These states with
low growth but high need should be given more priority. And this also shows that this is also
related with literacy. Further there is a need of an independent regulator who will monitor cases
of abuses.

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 Agriculture and its associated activities are found constituting the economic base and the
main source of livelihood and employment for the people in the state. However, unprecedented
growth of population on one hand and decreasing rate of available agriculture land along with
degradation of supporting natural resources as required for sustaining crop productivity on the
other have been seriously forcing the problems of sustaining livelihood for farming communities.
It is becoming difficult to do the farming activity without external or internal sources.

Means a lot of hard work & government awareness is required to flow the finance assistance in
Rural Economy. But various schemes which are provided by the various banks & government
should be specific in its eligibility criteria to stop the misuse of these funds by large farmers and
to ensure that the credit reaches the farmers who are in need of finance.

At last I am concluding by project with a very famous saying:

“Don’t wait; the time will never be just right. Start where you stand and work with whatever
tolls you may have at your commands and the better tolls will be found as you go a long”

-William Surds

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ANNEXURE – I

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REFERENCES AND BIBLIOGRAPHY

I. Books

a) Dutta R, Sundharam K.P., Indian Economy

b) Ghosal S.N., Agricultural Financing In India
c) Reserve Bank of India Bulletin, August, 2009

II. Newspapers

a) Aug 22, 2009, NABARD aims to lend 33% more, DNA

b) Oct 09, 2009, Farm growth will be good: NABARD Chief, Business Line
c) Sep 24, 2009, NABARD plans to set up SHG‟s to expand lending among farmers,
The Economic Times

III. WebPages
a) www.google.com
b) www.ruralfinance.org/agricultural financing
c) www.nabard.org
d) www.rbi.org
e) www.indiammba.org
f) www.investpodia.org
g) www.livemint.org

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ANNEXURE-II

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Report on Response Collected From Mr. A. Y. Patil, AGM,
District Development Office, NABARD

While having a face to face interview with Mr. A. Y. Patil, AGM, District Development
Office, Nabard in Thane the following questionnaire round took place in which Mr. Patil gave
his suggestions regarding Nabard:

Q1) How NABARD helps Banks dealing in agricultural financing in augmenting?

Ans. Earlier Banks were having different approached to work. If one was moving in right
direction then other was in left. So NABARD played a very crucial role to bring them both in
the way. Big commercial banks were focused on only large and medium class people where
the poor were neglected because of less savings and borrowing capacity. The following are
the techniques used by Nabard to finance banks:
i. Provide Refinance to the banks.
ii. Conduct the workshop where the executive of the NABARD meet the executive and
employees of different banks and help them to understand the need and importance of
microcredit to the poor people.
iii. NABARD helps the banks to interface or try to convene the NGO„s and other
institutions with the banks which earlier they were avoiding to meet.
iv. NABARD„s is having rule for the banks that they have to keep aside a certain amount of
loan for the people of Below Poverty Line.

Q2) How NABARD manage their Repayment ratio?

Ans. It„s very interesting o know the repayment structure of the NABARD. NABARD
provides the loan to the MFI„s, Banks, Agriculture loan, other microcredit loan etc. at a very
nominal rate of interest and without any deposit of collateral. But their Repayment ratio is
more than 95%, let„s see what are the reasons and how it manage such a high repayment
ratio:

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 i. Before providing loan to the institutions NABARD see the credit rating of that
institute given by the rating agency. If they find that sufficient they grant according to
that.

ii. NABARD analyze the balance sheet and profit and loss statement of the
borrowing institutes.
iii. They (NABARD) sees the past record of the borrowing institutes i.e. there
repayment ratio, there schemes, there management and the executives who are working in
that institutes.
How do politicians influence moral hazard? Have they affected agricultural financing any
time?
Yes, politicians have influenced the moral hazard of agricultural financing. Many of the
policies of government have affected the procedure of lending of NABARD and also the
market of agricultural financing.
How NABARD gives loan to the Institutions?
While the doing survey it was found out that, NABARD follows the very strange way of
providing the loans. They give loans to the every ODD number people or institutes i.e.3, 5, 7,
9…. Etc.
As there are so many borrowers every day that it is difficult to provide to each and every one.
So in this way they try to eliminate the overcrowding problem.

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