Rural banking:

The banking system focused on financing the farmers

Micro-finance:

Banking with poor.

Major thrust of micro-finance

are self help groups(SHGs),Non governmental organizational(NGOs),Credit unions etc.

Types of funds

Short term
Purpose: cultivation, buying seeds, manure and fodder for cattle Period: 12-15 months

Medium term
Purpose: purchase cattle, to make improvements on land and agri implementations Period: 3-5 years

Long term
Purpose: purchase land, pay-off old debts, purchase useful machinery for long term usage Period: 15-20 years

 Two sources of credit

Institutional sources: consisting cooperatives and commercial banks including regional rural bank(RRBs) Non-institutional sources: includes moneylenders, traders and landlords

 Charge high rate of interest

Enter larger than actually borrowed sums Give no receipts for repayments

 Multi agency approach Institutional credit. Main objective of credit-to adopt modern

technology and improve agricultural practices and thus increase agricultural production.

Three agencies supply institutional finance to farmers. Co-operatives, Commercial banks,Regional rural banks(RRB). Co-operatives agricultural and rural development banks (CARDBs)-providing medium and long term loans. Primary agriculture and credit society(PACS) and Land development banks(LDB)-providing short term loans. National bank for agriculture and rural development (NABARD)-apex institution for agricultural credit and refinances above mentioned banks. RBI plays a crucial role by giving over-all direction to rural credit and also financially supports NABARD .

Differences objective Rate of interest

Private money lenders

Profit motive-thereby always unfair Very high and not related to productivity of land

Institutional form of credit

Maximize farmers income and raise its productivity very low compared to money lenders and different for different purposes Generally reaches to all kind of farmers or the person in need.

Reach

Many times does not reach the most needy person .

Problem of Multi-financing, Over-financing in some areas and under financing. Despite adoption of Lead Bank Scheme ,different agencies often failed to formulate and develop meaningful agricultural programs in given blocks and districts. Despite guidelines issued by RBI different agencies adopted different procedures and policies in the matter providing loans and their recovery.

It was needed to protect the farmers natural calamities like flood, Drought and pests etc. In 1985 government of India introduced a comprehensive crop insurance scheme through the India covering major crops like Cereals, Pulses, Oilseeds and further introduced seed insurance for the benefit of the farmers. Insurance was given to the farmers availing loan from co-operatives ,commercial banks and RRBs. The sum insured was equal to the crop loan or a maximum of Rs10,000/- . 1999-2000 scheme was terminated and replaced by National Agricultural and Insurance Scheme(NAIS).

 NGOs
Microfinance Institutions

Commercial Banks

 Short term loan Medium to long term loan given for: Purchasing pump-sets Tractors Construction of wells & tube-wells Development of crop Leveling and development of land Purchase of animals

 In 1969, RBI appointed AIRCRC which recommended

SFDA.
Functions of SFDA:

Investigate & identify problems of small farmers Help them secure loans Provide various services Draw up plans for investment or production activities Explore possibilities of adding to the income of small farmers

Objectives: Growth and production Benefits to the identified target groups Time frame program for attainment of full employment Generate additional employment and increase the income level of identified target

 Credit

for financing the distribution of fertilisers, pesticides, seeds, etc. Loans granted for financing distribution of inputs for the allied activities such as, cattle feed, poultry feed, etc. Loans to Electricity Boards for reimbursing the expenditure already incurred by them Deposits held by the banks in Rural Infrastructure Development Fund maintained with NABARD Subscription to bonds issued by Rural Electrification Corporation Subscriptions to bonds issued by NABARD Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture

 High transaction cost

Cultural barriers Delay in processing loan applications Small current deopsits

Main

Objective: To Provide Credit and other Facilities

to small & Marginal Farmers, Agricultural Laborers etc. Develop Agriculture, Trade, Commerce, Industry & other Productive activities in rural areas. Grant loans for marginal farmers , laborers, rural artists. Pay lower rate of interest on their borrowings from sponsor banks & earn upto 9% of interest on their deposit

Quality of lending is poor & proper procedure, follow-up & supervision is lacking.

Misuse & diversion of loans amounts into unproductive activities, resulting in large scale willful default.

Frequent natural calamities resulted in increasing overdues in several banks.

 The

Problem was one of improving the viability of RRBs without sacrificing the basic objectives for which they were set-up. Two issues were to be considered: Competition in the context of rural banking & establishing a viable banking structure. Recommended that commercial banks should segregate the operations of their rural branches through the formulation of one or more subsidiaries. Their focus should be to continue to lend to the target groups but they should not be forced to restrict lending operations to the target groups alone.

 Under this approach, each semi-urban & rural

branch of commercial banks was assigned a specific area comprising a cluster of villages within which it operate, adopting a planned approach.
It was to avoid duplication of efforts & scattered

lending over wider areas.

Allocation of villages Organizational Issues

Set up as apex bank and refinance institution for agricultural and rural credits. Capital Rs 2000cr Takes care of

Agricultural credit Refinancing of production, investment credit and SSI to promote rural development. Credits to co-operative banks, RRBs, LDBs (On terms of RBI)

Credit Planning
Annual district wise plans Monitoring at ground level

Financial Services
Financial support to RFIs, State Governments Support to innovations of NGO

Promotion and Development

Institutional development Development models and practices

Supervision

Upper poor and poor segment of society 35% of population is under BPL and has no access to finance Microfinance has reached only 15% penetration or rural credit need Current requirement of credit is Rs.2,40,000cr and available is only Rs.20,000 cr Loans to be used with the sole purpose of scaling up existing income generating activities & not consumption otherwise it will lead to a debt-trap

Seasonal nature of agriculture does not allow for weekly repayments Collateral free loans to women, sub-urban and urban areas to scale up income generating activities Loan range : Rs.2000 to Rs.12000 Payable in 50 weekly installments

After 25 weeks of repayment mid term loan of Rs. 2000 to Rs.4000 provided Diminishing ROI averaging at 26% nationally Joint liability system where entire group is liable in case of default Repayment rate is over 99%

Farmers need income for survival not debt relief Positive side = loan waiver for MFIs is that banks feel safe riding on robust delivery systems and collections Will increase the flow of Capital in this sector

- They can complement the activities to reduce the increasing gap - An attempt by the govt. to involve the money lender into mainstream banking - Good option since the money lender is part and parcel of the social fabric and understands the needs of the borrower. - If the money lenders can be regulated, then they can act as critical links in the rural banking system.

 1. 2.

Considerable gap between demand and supply for all financial services Majority of poor are deprived of financial services. This is due to the following reasons:Bankers feel that it is filled with risks and uncertainties. High transaction costs While MFIs have shown that serving the poor is not an unviable proposition, there are issues that have constrained MFIs while scaling up. These include:Lack of an appropriate legal vehicle Limited access to equity Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner.

1.
2. 3.

Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations. About 56 % of the poor still borrow from informal sources. 70 % of the rural poor do not have a deposit account 87 % have no access to credit from formal sources. Less than 15 % of the households have any kind of insurance. Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).

Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources. Design of apt MIS including user friendly software for tracking accounts and operations. Appropriate loan products for different segments.

Ability to innovate, adapt and grow. Bring out a compendium of small and micro enterprises for the MF clients. Identify and prepare a panel of locally available trainers. Ability to train trainers. Capacity to provide backward linkages or create support structures for marketing.

Designing financially sustainable models Aim for community participation & ownership Increase outreach and scale up operations Demonstrate that banking with the poor is viable Build professional systems and processes. Ensure transparency and enhance credibility through disclosures. Provide support for capacity building initiatives.

 400 million Indians live on less than $1

per day

hand to mouth Rural penetration of banks is less than 18% Informal credit agencies and extortionist money lenders charge up to 40% interest rates