A

REPORT

ON

“Agricultural Finance”
By

VISHAL ADAWADKAR (2)

AMIT RAMPURE (5)
ABHISHEK GOYAL (22)

Sinhgad Technical Education Society’s

SINHGAD INSTITUTE OF MANAGEMENT
Vadgaon (Bk), Sinhgad road
Pune-4110041

Index
1. Introduction…...…………………………..
……………..02
2. Needs………….………………………..……..
…….……...03
3. Constraints to Financial Services..……..
…..……04
4. Sources………………………………………….
.......….…05
5. Co-operative Credit Society...….
…………..….….07
6. Commercial
Banks………………………………………11
7. Regional Rural Banks..………………….…..
…..……13
8. NABARD.…..
…………………………………………..…..15
9. Trends……………………………………….….
……….…..17
10. Bibliography ………..……..
…………………………....18
 1. INTRODUCTION.

Rural development means nothing but the transformation of the

subsistence agricultural production to a market oriented agricultural
economy. Availability and access to financial resources is one of the key
elements to this transition. Financial resource is a very important, if not
the most important, factor in economic development.

Shortage of finance is one of the major problems facing small

farmers. Farmers need financial resource to buy improved agricultural
inputs and farm implements so that they can increase their output and
income level and break the cycle of poverty. Farmer’s investment in
these technologies cannot be real without having in place organizations
and systems that are capable of adequately providing rural financial
services to farmers. So, the effort to develop agriculture could suffer in
the absence of a strong financial base that aims at expanding access to
credit for small farmers.
 Agriculture is unorganized profession. Its success and failure
depends on climatic factors. It is also not possible to distinguish
productive and unproductive loans required for farmers. Therefore banks
do not show much interest in advancing loans to agriculture. Therefore
famers have to depend on moneylenders, mahajans etc. who exploits
them due to strong grip on socio-economic position in rural areas.

In this report focuses on different sources of agricultural finance

and problems and reforms associated with them.

2. NEEDS.
Credit needs of the farmers can be examined from two different
angles- TIME and PURPOSE.

 On basis of TIME

Agricultural credit needs can be classified into three categories:

Short time: (for periods up to 15 months) short term loans are required
for the purchase of seeds fertilizers, pesticides, feeds, marketing of
agriculture produce, payment of wages of hired labour, litigation and
variety of consumption and unproductive purposes. The period of such
loans is less than 15 months. Main agencies granting loans are
moneylenders & cooperative societies. These are expected to be repaid
after the harvest.

Medium term: (from 15 months up to 5 years) Medium term loans are

required for purchase of cattle, small agri implements, repair &
construction of wells etc. The periods of such loan extends from 15
months to 5 years. The loan is provided by moneylenders, relative of
farmers, co-operative societies and commercial banks etc.

Long term: (above 5 Years) Long term loans are required for effecting
permanent improvements of land, digging of tube wells , purchase of
larger implements, machinery like tractor and repayments of old debts.
The period of such loan extends beyond 5 years.

 On basis of purpose

Productive: Farmers need loans for the purchase of seeds fertilizers,

pesticides, feeds, marketing of agriculture produce, livestock, repair of
wells, payments of wages etc.

Consumption: farmers require loans for consumption as well. Between

the moment of marketing of agricultural produce and harvesting of next
crop there is long interval of time and most of farmers don’t have much
income to sustain in this period. Also times of flood drought, damages to
crop etc.

Unproductive: purposes such as litigation, performance of marriages,

birth or death, religious functions, festivals.

Institutional agencies do not grant credit for unproductive and

consumption purposes and farmers have to seek assistance from money
lenders and mahajans.

1. CONSTRAINTS TO FINANCIAL SERVICES.

 Cheap, Adequate and Timely supply.

The credit required by farmers has got to be cheap i.e. low
rate of interest. Today's profit oriented institutions are not likely to
supply cheap credit. Adequate and timely credit has got to be
available. Most of institutions require collateral for adequate credit.
The Banks procedure for granting loans is tedious too.

 Small Farmers and Landless Labourers.

 Those who have large land can mortgage their land and get
credit for specialized institutions. But lot of farmers own small piece
of land in India, therefore
To grant loans without any collateral is difficult one.

 Uncertainty shrouding credit requirements.

In industrial sector, due to forecasting of demand, prices
profits, one can prepare the plan of borrowing and repayment. In
case of agriculture everything is uncertain.

 Seasonality of many agricultural activities.

Agricultural activities in India are seasonal; carried out during
certain period which Results in variable demand for savings and
credit, uneven cash flow and lags between loan disbursal and
repayments.

 High information and transaction costs.

This linked to poor infrastructure (roads,
telecommunications) and lack of client information. (no personal
identification or functioning asset registries)the loans advanced are
small, interest earned is smaller but to grant loan certain machinery
is functioning which results in high transaction cost.

 Weak institutional capacity of rural-finance providers.

This is related to the limited availability of educated and
well-trained people in smaller rural communities. The staffs of rural
banks are not equipped with education, training, and other skills to
support functioning of those banks. Most of times the staff is from
neighborhood area.

1. SOURCES.
Sources of agricultural finance can be divided into two categories:

1. NON-INSITUTIONAL SOURCES.

Money Lenders, Traders, Commission agents, Landlords.

 At the time of independence the most important source of
agricultural credit was the moneylenders. Moneylenders accounted for as
much as 71.6 % of rural credit. The prominent position of moneylender is
due to non availability of other source. Therefore moneylender exploits
the farmer in number of ways as we have seen in bollywood films.

Therefore govt. has undertaken various steps to regulate activities

of moneylenders. For the purpose, various legislations were enacted.

2. INSITUTIONAL SOURCES.

SHARE OF SOURCES

As a result of the effort taken by the government to develop

institutional sources of credit, the role of non-institutional sources like
moneylenders in agricultural credit is declined considerably.

The share of non institutional sources is as high as 92.7% in 1951

fell considerably to 30.6% in 1991 (in 2002,it rose to38.9).The share of
institutional sources rose correspondingly from only 7.3% in 1951 to 66%
in 1991 (in 2002 is declined to 61.1 %).

The graph shows the share of both institutional sources. (in

percent)

Total credit to agriculture

The graph is progress of the agricultural credit has increased from 70-71
to 2006-07.

1. CO-OPERATIVE CREDIT SOCIETIES.

The Co operative banks in India started functioning almost 100
years ago. The Cooperative bank is an important constituent of the Indian
Financial System. Some cooperative banks in India are more forward than
many of the state and private sector banks. According to NAFCUB the
total deposits & lendings of Cooperative Banks in India is much more than
Old Private Sector Banks & also the New Private Sector Banks.

This exponential growth of Co operative Banks in India is attributed

mainly to their much better local reach, personal interaction with
customers, and their ability to catch the nerve of the local clientele.
Organization of Co-operatives

The co-operative banking structure in India comprises two main

components, viz., urban co-operative banks and rural co-operative credit
institutions.

The rural CCS in India has been organized into short term and long
term structure. The short term CCS is based on 3 tier structure except
states in northeast region.

Within the Short term, primary agricultural credit societies (PACS)

at the village level form the base level, while district central co-operative
banks (DCCBs) are placed at the intermediate level, and the State co-
operative banks (StCBs) at the apex level.

The Short Term CCS mostly provides crop and other working capital
loans primarily for a short period to farmers and rural artisans.

The long-term structure of rural co-operatives comprises State co-

operative agriculture and rural development banks (SCARDBs) at the
State level, and primary co-operative agriculture and rural development
banks (PCARDBs) at the decentralized district or block level. These
institutions focus on providing typically medium to long-tem loans for
making investments in agriculture, rural industries, and lately housing.

The graph shows the credit provided by cooperatives to agriculture over

the period.

In 1951-52 CCS provided 23 crore which is 3.1% of total

institutional credit while in 2005-06 it rises to 39,404 crore which is
21.8% of total institutional credit. However the percentage share in total
institutional creditCo-operative
SCARDBs: State declined. Agriculture and Rural Development Banks.
PCARDBs: Primary Co-operative Agriculture and Rural Development
Banks. Source: Report on trend and progress of banking
in India RBI.

EVALUATION:

There is no alternative for co-operatives at village levels for

provision of rural credit. The CCSs are beset with many problems. Many
institutions have continued to make losses over the years. The major
deficiencies in working of CC are as:

 Heavy dependence on outside funds

 The essence and basic features of Co-operative banking system
must be larger reliance on recourses mobilized locally and lesser
dependence on higher credit institutions. However many PACSs are at
present dependent on CCBs and failed miserably in mobilizing rural
savings. Therefore greater outside interference. Members were less
vigilant. This made cooperatives mediocre inefficient and static system.

 Problem of high level of Overdues

These Overdues have clogged the process of credit recycling since

they have substantially reduced the capacity of Co-operatives to grant
loans. Overdues impaired the eligibility for availing of refinance from
NABARD. This has also increased transaction cost for effecting recovery.

 High level of NPAs

The rural Co-operatives have high level of Non Performing Assets

(NPAs) the aggregate NPAs of SCB were estimated 6072 crore which is
16.3 % of Outstanding loans. CCBs have NPAs of 14520 crore which is
19.2%. These high levels of NPAs have seriously impacted the overall
health of Cooperatives and adversely affected their viability.

 Substantial losses

A large no. of Co-operatives has incurred substantial losses. In

2004-05 out of 20 SCARDBs 9 had suffered losses. Out of 727 PCARDBs
as many as 465 suffered losses.

 PACS are too small in size to economical & viable.

PACS are most important link in rural credit. However most of them
are too small in size to be economical and viable. Several of them are
dormant while some are defunct.

 Greater benefits to Larger landowner

Because of strong socio economic position and grip over the rural
economy, large landowners have concerned greater benefits from
cooperatives. These opposites of what planners intended.30% of farmers
holding less than 1 hectare are members of PACSs whereas almost all
farmers holding above 4 hectares are members of PACSs

 Regional disparities in distribution of credit

 There are considerable regional disparities in their distribution of
credit by cooperatives with Six states accounting for more than three
fourth of the loans provided by PACSs

 Domination of government.

The powers which vest in Govt under law are pervasive. Over years state
has gained almost total financial and administrative control over
cooperatives. “If people cannot or will not do it, the state can and will do
it”

Co-operatives virtually become government directed, government

driven, government regulated enterprises; giving rise to red tapism and
administrative interferences by the governments in the day to day
working of cooperatives.

REFORMS:

The Govt. of India constituted a Task force on revival of CCS under

chairmanship of A. Vidyanathan to propose as action plan for reviving and
suggest appropriate regulatory framework for these institution. “Co-
operation has failed but Co-operation must succeed”

Some of the recommendations are:

 Revival and restructure of CCS.

The cooperative credit structure is impaired in governance

managerial and financial fronts hence need to be revived and
restructured.

 Financial restructuring.

Financial restructuring shall be contingent on commitment to and

implementation of legal and institutional reforms by state governments.

 Financial assistance

Financial assistance is made available for wiping out accumulated

losses, covering unpaid guarantee, increasing capital to minimum level
and technical assistance. (Govt announced package of 13,596 crore)

 To make co-operatives truly democratic & member driven.

Availability of financial assistance made available subject to legal

and reforms in cooperatives to ensure cooperatives become truly
democratic and member driven. Removal of sate intervention freedom to
take loans from any institutions. Timely election of boards of banks.

 Regulatory control of the RBI

Certain major amendments in banking regulation act enabling

removal of dual control. Cooperatives are at par with commercial banks.
CEOs are appointed by banks themselves RBI provide the criteria for
Board of directors.

 NABARD-as implementing & Pass through agency.

NABARD is designed as implementing & pass through agency to

coordinate and monitor the progress of the programme representing
Govt. of India. NABARD will prepare model MOUs, model balance sheet
proforma for PACS & CCBs

1. COMMERCIAL BANKS.
For long period of time the share of commercial banks in rural
credit was meagre. For instance it was only 0.9 % in 1951-52 and 0.7 %
in 1961-62. The insignificant participation is partly explained by
subsistence nature of agriculture and its unorganized, Individualistic
functioning. Moreover heavy dependence on monsoon makes it risky and
uncertain venture. As against this Industrial sector is organized and less
dependent on natural factors. Therefore commercial banks tended to
concentrate on industrial sector and diverted funds mobilized from rural
areas to meet demand of credit of the industrial sector.

To remedy these 14 major banks were nationalized followed by 6

more banks. After this banks opened large no. of branches in rural area
and have increased their advances to these areas.

During 2005-06 commercial banks provided rural credit of 1,25,859

crore. This was 69.7% of total Rs. 1,80,486 crore institutional credit to
agriculture provided in that year.

EVALUATION:
 Rapid Expansion and Diversification.

The fast increase of commercial banks has created strains in the

system. Due to this there has been deterioration in quality of scheme
preparation. Decreasing quality of lending is also due to heavy workload
of day to day house keeping without increase in supporting staff.

 Large no. of small advances.

The commercial banks have found sanctioning and monitoring of

large no. of small advances in their rural branches, time consuming and
manpower intensive and high cost proposition. Because of this banks
have been found reluctant in posting sufficient supervisory and other
staff in rural branches.

 Reduction of margin available.

Opening large no. of branches in rural area which do not have

adequate business potential, raise in establishment expenses, increasing
nonperforming advances affected profitability of banks adversely
reducing margin available to company.

 Bad recovery position.

The recovery position of banks is bad. The level of Overdues has

been 30% or even more. Therefore banking system is unable to provide
more credit to meet the growing needs of the farmers.

 Multi-alternative credit system.

Commercial bank failed to serve those areas which are not covered
by Co-operatives. They tend to serve those areas which are served by
cooperatives. States with deficient rural credit system have not
benefitted much. The real need was to make available only one
alternative source of credit whereas in reality the multiagency system
has tended to become multi alternative credit system.

 Decline in credit deposit ratio.

It is important indicator of degree of involvement of banks in

lending. Rural credit deposit ratio has declined from 1.58% to 0.73%
which shows that deposits mobilized from rural India to elsewhere. In
other words, rural India is financing the other sectors of the economy.

 Reduction of loan to small farmers.

 Loan disbursal to small and marginal farmers has decelerated
sharply in the 90s. The option of investing in rural infrastructure fund and
in SIDBI has reduced rate of growth of direct finance to small farmers.
The growth rate of direct finance to small farmers is declined from 15.1%
to 11.0%.

1. REGIONAL RURAL BANKS.

The working group on rural banks recommended establishment of

Regional Rural Banks to supplement the efforts of the commercial banks
and cooperatives in extending their credit to weaker sections of rural
community.

The intention of having new banks that there should be an device

which combined the local feel and familiarity with the rural problems
which the cooperatives possessed and he degree of business organization
and modernized look which commercial banks have.

Also the rural credit is to be provided at lower cost. The rural poor
needed low cost low profile institution into which they should walk freely.
The staff of RRBs was to be recruited from the neighboring area and such
would have a better understanding of local problems and local people
their needs and their constraints.

2005-06, RRBs provided 15,223 crore as credit to Agriculture

sector.8.5% of total institutional credit to agriculture.

EVALUATION:

 Organizational Problem.

Each RRB is sponsored by Commercial bank. The central

government and state govt. also contribute to its capital. Thus there is
multiagency control. This has contributed to lack of conformity of its
functions. Also lack of proper monitoring of by sponsor bank, specific area
of operation, lack of proper system and procedures within banks, lack of
adequate staff. Organizational problems compounded by unplanned and
unwieldy growth of banks and branches opened under pressure from
Govt.

 Problems of recovery

Recovery position of RRBs is bad. There recovery varied between

51% to 61%. Thus Overdues varied from 39% to 49%. This is due to
defective loaning policy, apathy towards recovering, political
interference, willful default etc.

 Mounting losses leading to Non-Viability.

150 out of 196 RRBs had shown losses in 2005-06. Many had
completely wiped out there equity and reserves. This is indeed
unsustainable situation. RRBs serve those sections where the interest
earned is lowest. Low margins coupled with high cost of service. Opening
of too much RRBs added high overhead costs without increase in income.
Non availability of competent staff.

 Management Problems.

Since RRBs are district level small institution, the sponsor banks
have been deputing only middle management staff to run them. Such
staff finds it difficult to take decision in new environment. Meeting of
board of directors are not held regularly and large no. of official members
does not show much interest in the working of banks. Multiagency control
creates many problems.

REFORMS

To solve problems of RRBs, and improve their viability, efforts have

been made in recent years such as

 Efforts have been made to restructure the operations of RRBs.

 Reduction of RRBs from 196 to 96 to get advantage of economies of

scale.

 Infuse fresh capital in them.

 Greater flexibility in their operations.

 Allowance to target only 40% to advances to priority sector. Placing

RRBs at par with commercial banks.

RRBs ARE NOT JUST RURAL CREDIT AGENCIES. THEY ARE MORE
THAN THAT: THEY ARE A FRUITFUL EXERCISE IN BANK LED RURAL
GROWH

1. NABARD.

The most important development in the field of rural credit has

been setting up NABARD. It took over from RBI all functions of rural
credit.
 NABARD is “Organizational device for providing undivided attention
forceful direction and pointed focus to the credit problems of the rural
sector”.

Functions of NABARD

 It works as an apex body to look after credit requirements of the

rural sector.

 Provides short term credit (up to 18 months) to state

cooperatives bank for agricultural operations.

 Provides medium term credit (18 months to 7 years) to StCB and

RRBs for approved agriculture purposes.

 It provides long term assistance in the form of loans to state

governments for contribution to share capital of cooperative
credit institutions.

 It is entrusted with responsibility of inspecting District and state

cooperatives RRBs.

 It maintains R&D funds to be used to promote research in

agriculture and rural development so project and programmes
are formulated and designed to suit different areas.

NABARD INITIATIVES:

 Rural Infrastructure Development Fund (RIDF)

RIDF-1 was established with corpus of 2000 crore with objective of

providing funds to state govt. and state owned corporations to enable
them complete various types of rural infrastructure projects. Loans under
RIDF are given for various purposes like irrigation projects, watershed
management etc.

As on 31 January 2007 through the RIDF Rs,59,795.35 crore have

been sanctioned for 2,31,702 projects covering irrigation, rural roads and
bridges, health and education, soil conservation, drinking water schemes,
etc.

 Microfinance Innovation.

The access of credit to the poor through commercial banks is

constrained. Microfinance has emerged a viable alternative. It involved
credit and financial services and products of very small amounts to poor
enabling them to raise their income level.

In operational terms, Micro credit involves small loans up to Rs.

25000 extended to the poor without any collateral for undertaking self
employment projects. Such loans are provided through micro finance
institutions.

One of popular models of MFI has been Grameen Bank model

developed originaly in Bangladesh and replicated over the world. Under
his model NGOs form and develop self help groups (SHGs) and provide
credit to them

 Kisan Credit card scheme.

KCC scheme was introduced to facilitate short term credit to

farmers. Commercial banks, Cooperative banks and RRBs are
implementing this scheme. Each farmer is provided with a KCC and a
pass book for providing revolving cash credit facilities. It is implemented
by 27 commercial banks 378 District cooperatives 196 RRBs. As on
31.08.2007 a total of approximately 6.79 crore KCCs have been issued by
Commercial Banks, Cooperative Banks and Regional Rural Banks with the
sanctioned amount of Rs.2,37,880 crore.

 Credit monitoring arrangement.

In order to provide cooperatives more freedom, NABARD had

replaced Credit Authorization scheme (CAS) with Credit Monitoring
Arrangement (CMA). The bank however has to follow prudence and
exposure norms.

 Refinance under SGSY.

NABARD has issued operational instructions to RRBs and

cooperatives to implement Swarnajayanti Gram Swarojgar Yojana.

 Co-operative development fund (CDF)

NABARD set up CDF with objective of strengthening the cooperative

credit institutions in areas of organizational structure, HRD, recovery
position etc. The assistance is provided for banks by way of grants or soft
loans.

 Supervision
 NABARD is the supervisory authority for StCBs, CCBs and certain
other state level cooperative institutions. NABARD undertakes periodic
onsite inspection of the organization.

9. TRENDS

The Government on June 18, 2004 had announced a package for

doubling the flow of credit to agriculture and allied activities in a period of
three years commencing from 2004-05 over the amount disbursed during
the year 2003-04. The target and achievement of agricultural credit flow
during 2004-05, 2005-06 and 2006-07 is indicated below

Year Target Achievement

2004-05 1,05,000 1,25,309

2005-06 1,41,000 1,80,486

2006-07 1,75,000 2,03,296

2007-08 2,25,000 88,981*

* Provisional figures up to August, 2007

The graph shows relative share of institutional credit to agriculture.

The share of co-operative has decreased from 100% in 1970-71 to 21.8%
in 2005-06. While Commercial banks has gained from nothing to 69.7% of
share in the same period. RRBs are steady at 8.5% over the period.

Agricultural Risk Management Can Improve Access to Finance.

Ground breaking weather risk and price risk transactions, market based
risk management can enhances access to rural finance.

10. BIBILOGRAPHY
➢ “INDIAN ECONOMY” by S.K. Mishra & V. K. Puri.

➢ RBI.com REPORT ON TREND AND PROGRESS OF BANKING IN INDIA

2006-07

➢ Ministry of Finance : Outcome of the review of the trends in receipts

and expenditure in relation to the budget at the end of the second
quarter of the financial year 2007-2008