Rural Finance in An Indian Economy

Rural Finance In Indian Economy
o To revise the financial capability of the lending agencies in rural ares to

analysis the drawbacks & advantage of flow of credit in rural areas.
o The rural credit system should be strengthen
o To study the role of rural finance in Indian Economy.
Assigned project task is completed by going through various books, committee

reports regarding Indian agriculture & non-farming sector, also role of various
financial institutions in this grassland.
The project report entitled here is purely study project and does not include any
predictions or forecast regarding the future trends in the rural sector.
The project is based on various references taken from book & reports
mentioned in the bibliography at the end of the assign project.
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1.0 Meaning of an Underdeveloped Economy:
There is a big difference between underdeveloped and developed countries.

The United Nations group of experts states, “We have had some difficulty in
interpreting the term ‘underdeveloped countries’. We frankly consider that, per capita
real income is low when compared with the per capita real incomes of the United
States of America, Canada, Australia & Western europe. Briefly a poor country.
The term ‘underdeveloped countries’ is relative. In practical, those countries
which have real per capita incomes less than a quarter of the per capita income of the
United States, are underdeveloped countries. But recently UN publication prefer to
describe them as ‘Developing economies’. The term ‘developing economies’ signifies
that though still underdeveloped, the process of development has been initiated in
these countries. Thus, we have two economies ‘developing economies’ & ‘developed
economies’. The World Bank issued in its World Development Report (1991)
classified the various countries on the basis of Gross National Product (GNP) per
capita. Developing countries are divided into: (a) Low income countries with GNP per
capita of $580 and below in 1989; and Middle income countries with GNP per capita
ranging between $ 580 and $ 6,000. As against them, the High-income Countries
which are mostly members of the Organisation for Economic Co-operation and
development (OECD) and some others have GNP per capita of more than $ 6,000.
The above data given in the table noted that in 1989 low income countries
comprise nearly 57 percent of the world population (2,948 million), but account for
only 5 percent of total world GNP. The middle income countries, which are less
developed than the highly developed than the low income countries comprise about 21
percent of world population but account for 11 percent of world GNP. Taking these
two groups which are popularly described as developing economies or
‘underdeveloped economies’, it may be stated that they comprise over three-fourths of
the world population but account for about one-sixth of the world GNP. Most
countries of Asia, Africa, Latin America and some countries of Europe are included in
them.
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Distribution of World Population & World GNP among various groups of

Countries in 1989
GNP Total GNP Per

(Billion Population Capita
US $) (million) (US $)
1. Low Income Economies 981 (4.7) 2,948 330
(56.6)
2. Middle Income 2,253 1,105 2,040
Economies (10.9) (21.2)
3. High Income Economies 15,230 831 (16.0) 18,330
(73,4)
4. Other Economies ___ 323 (6.2) ___
World 20,736 5,206 3,980

(100.0) (100)
India 283 (1.4) 832 (15.9) 340
India with its population of 832 million in 1989 and with its per capita income of $340
is among poorest of the economies of the world. It had a share of 15.9 per cent in
world population, but a little more than 1 percent of world GNP.
Three observation made here regarding the U.N. classification of developed
and developing countries on the basis of per capita income. First, there is gross
inequality of incomes between the rich and the poor countries. Second, the gap in per
capita income (and naturally in the level of living) between the rich and poor countries
is even widening over the years—the annual rate of growth of per capita income of the
rich countries was higher during 1965-89 as compared with the poor countries. More
recently, the growth rate among low-income countries has also shown an increase and
if this is sustained, the gap may show a decline over a period. Third, all the high
income countries are not necessarily developed countries. For instance, the high
income oil-exporting countries have high per capita income but this is mainly due to
their exports of oil; really speaking, they are not developed economies. Recently, with
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a decline in world oil prices, the GNP per capita has started showing a decline in this
group.
Definition:
“A country which has good potential prospects for using more capital or more
labour or more available natural resources, or all of these, to support its present
population on a higher level of living or if its per capita income level is already fairly
high, to support a large population on a not lower level of living.” As per this
definitions the problem of development is mainly the problem of development is
mainly the problem of poverty and prosperity. The basic criterion then becomes
whether the country has good potential prospects of raising per capita income, or of
maintaining an existing high level of per capita income for an increased population.”
1.1 Basic Characteristics Of The Indian Economy As An Underdeveloped

Economy:
India is an underdeveloped economy. Its is a vast country having an area of
3.3 million sq. km. It has almost 5,76,000 villages. The population of India is widely
scattered over villages and towns. Nearly 75% of the population lives in rural & semi
urban areas, while the rest lives in towns. There is doubt that the bulk of its
population lives in conditions of misery. Poverty is not only acute but is also a
chronic malady in India. At the same time, there exist unutilized natural resources. It
is, therefore, quite important to understand the basic characteristics of the Indian
economy, treating it as one of the underdeveloped but developing economies of the
world.
1. Low per capita income:- Underdeveloped economies are marked by the
existence of low per capita income. The per capita income of an India is
lowest in the world. The per capita income in Switzerland in 1989 was about
88 times, in West Germany about 60 times, in U.S.A. 61 times and in Japan 70
times of the per capita income in India. It is also important that developed
economies are growing at a faster rate than the Indian economy and as a
consequence, the disparity in the levels of income has become wider during
period 1960-89.
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2. Occupational pattern:- Primary producing. One of the basic characteristics of

an underdeveloped economy is that it is primary producing. A very high
proportion of working population is engaged in agriculture, which contributes
a very large share in the national income. In India, in 1981, about 71 per cent
of the working population was engaged in agriculture and its contribution to
national income was 36 per cent. In Asia, Africa and Middle East countries
countries from two-thirds to more than four-fifths of the population earn their
livelihood from agriculture, and in most Latin American countries from two-
thirds to three-fourths of population engaged in agriculture in developed
countries is much less than the proportion of population engaged in agriculture
in underdeveloped countries.
3. Heavy Population pressure:- The main problem in India is the high level of
birth rates coupled with a falling level of death rates. The rate of growth of
population which was about 1.31 per cent per annum during 1941-50 has risen
to 2.11 per cent during 1981-91. The chief cause of this rapid spurt to
population growth is the steep fall in death rate from 49 per thousand during
1911-20 to 9.6 per thousand in 1990; as compared to this, the birth rate has
declined from about 49 per thousand during 1911-20 to 29.9 per thousand in
1990. The fast rate of growth of population necessitates a higher rate of
economic growth in order to maintain the same standard of living of the
population. To maintain a rapidly growing population, the requirements of
food, clothing, shelter, medicine, schooling, etc. all rise. Thus, a rising
population imposes greater economic burdens and, consequently, society has to
make a much greater effort to initiate the process of growth.
4. Prevalence of chronic unemployment and underemployment: In India labour is

an abundant factor and, consequently, it is very difficult to provide gainful
employment to the entire working population. In developed countries,
unemployment is of a cyclical nature and occurs due to lack of effective
demand. In India unemployment is structural and is the result of a deficiency
of capital. The Indian economy does not find sufficient capital to expand its
industries to such an capacity that the entire labour force is absorbed.
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5. Low rate of capital formation: Another basic characteristic of the Indian

economy is the existence of capital deficiency which is reflected in two ways
— first, the amount of capital per head available is low; and secondly, the
current rate of capital formation is also low. Following table reveals that gross
capital formation in India is less than that of developed countries.
Gross Domestic Investment and Saving (As per cent of Gross Domestic Product)
Gross Domestic Gross Domestic

Investment Saving
1965 1989 1965 1989

Japan 28 33 30 34
Australia 26 26 23 23
Germany 23 22 23 27
U.S.A. 12 15 12 13
U.K. 13 21 12 18
India 17 24 15 21
As per Colin Clark to maintain the same level of living a country requires an
additional investment of 4 percent per annum if its population increases at the rate of 1
percent per annum. In a country like India where the rate of population growth is 2.11
percent (during 1981-91), about 8 percent investment is needed to offset the additional
burdens imposed by a rising population. Thus, India required as high as 14 percent
level of gross capital formation in order that it may cover depreciation and maintain
same level of living. A still higher rate of gross capital formation alone can give a
way for economic growth to improve living standard of the population.
2.0 History Of The Rural Economic Structure Of India
2.1 Indian Economy in the Pre-British period:-
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The Indian economy in the pre-British period consisted of isolated and self-
sustaining villages on the one hand, and towns, which were the seats of administration,
pilgrimage, commerce and handicrafts, on the other. Means transport &
communication were highly underdeveloped and so the size of the market was very
small..
a. The structure and organization of villages: The village community was based
on a simple division of labour. The farmers cultivated the soil and tended
cattle. Similarly, there existed classes people called weavers, goldsmiths,
carpenters, potters, oil pressers, washer men, cobblers, barber-surgeons, etc.
All these occupations were hereditary and passed by tradition from father to
son. Most of the food produced in the village was consumed by the village
population itself. The raw materials produced from primary industries were
the feed for the handicrafts. Thus interdependence of agriculture and hand
industry provided the basis of the small village republics to function
independently. The villages of India were isolated and self-sufficient units
which formed an enduring organization. But this should not lead us to the
conclusion that they were unaffected by wars or political decisions. They did
suffer the aggressors and were forced to submit to exactions, plunder and
extortion, but the absence of the means of transport and communications and a
centralized government helped their survival.
b. Classes of Village India: There were three distinct classes in village India: (i)
the agriculturists, (ii) the village artisans and menials, and (iii) the village
officials. The agriculturists could be further divided into the land-owning and
the tenants. Labour and capital needed was either supplied by the producers
themselves out of their supplied by the producers themselves out of their
savings or by the village moneylender. These credit agencies supplied finance
at exorbitant rates of interest but since the moneylender and the landlord were
the only sources of credit, the peasants and even the artisans were forced to
depend on them. The village artisans and menials were the servants of the
village. Most of the villages had their panchayats or bodies of village elders to
settle local disputes. The panchayats were the court of justice.
2.2 Industries & handicrafts in Pre-British India:
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The popular belief that India had never been an industrial country, is incorrect. It
was true that agriculture was the dominant occupation of its people but the products of
Indian industries enjoyed a worldwide reputation. The muslim of Dacca, the calicos
of Bengal, the sarees of Banaras and other cotton fabrics were known to the
foreigners. The chief industry spread over the whole country was textile handicrafts.
The textile handicrafts includes chintzes of Lucknow, dhotis and dopattas of
Ahmedabad, silk, bordered cloth of Nagpur and Murshidabad. In addition to cotton
fabrics, the shawls of Kashmir, Amritsar and Ludhiana were very famous. India was
also quite well-known for her artistic industries like marble-work, stone-carving,
jewellery, brass, copper and bell-metal wares, wood-carving, etc. The cast-iron pillar
near Delhi is a testament to the high level of metallurgy that existed in India. In this
way Indian industries, “Not only supplied all local wants but also enabled India to
export its finished products to foreign countries”.
Decline Of Indian Handicrafts And Progressive Ruralisation Of The

Indian Economy:
Before the beginning of Industrial Revolution in England, the East India Company
concentrated on the export of Indian manufactured goods, textiles, spices, etc., to
Europe where these articles were in great demand. But the Industrial Revolution
reversed the face of Indian’s foreign trade. Tremendous expansion of productive
capacity of manufactures resulted in increased demand of raw materials for British
industry and the need to capture foreign markets. Following principal causes that led
to the decay of handicrafts were as follows:-
a. Disappearance of Princely courts: The growth of industries is only possible
due to patronage of nawabs, princes, rajas & emperors who ruled in India. The
British rule meant the disappearance of this patronage enjoyed by the
handicrafts. Cotton and silk manufactures suffered especially.
b. Competition of machine-made goods: The large-scale production that grew as a
result of Industrial Revolution meant a heavy reduction in costs. It also created
a gigantic industrial organization and, consequently, the machine-made goods
began to compete with the products of Indian industries nad handicrafts. This
led to the decline of textile handicrafts. Whereas the British emphasized the
free import of machine-made manufactured goods they did not allow the
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import of machinery as such. The decline of Indian handicrafts created a

vaccum which could be filled by the import of British manufactures only.
c. The development of new forms and patterns of demand as a result of foreign
influence: With the spread of education, a new classs grew in India which was
keen to imitate western dress, manners, fashions and customs so as to identify
itself with the British officials. This led to a change in the pattern of demand.
Indigenous goods went out of fashion and the demand for European
commodities got a fillip. Besides, there was a loss of demand resulting from
the disappearance of princely courts and nobility. Thus, the British rule,
silently but surely, alienated the Indians not only from Indian culture but also
diverted in its favour their form and pattern of demand for goods.
2.3 Indian Population an Overview:-

India is one of the most populated countries in the world, next only to China.
Although India occupies only 2.4% of the total area of the world it supports over 15%
of the world population, as revealed by statistics. India is land of diversity, spread
across its cultures, landscape, languages and religion. India has been invaded from the
Iranian plateau, Central Asia, Arabia, Afghanistan, and the West. The Indian people
have absorbed these influences producing a remarkable racial and cultural synthesis.
Religion, caste, and language are major determinants of social and political
organization in India today. The government has recognized 16 languages as official;
Hindi is the most widely spoken.
Although Hinduism is the popular religion, comprising 83% of the population,
India is also home to one of the largest population of Muslims in the world--- more
than 120 million. The population also includes Christians, Sikhs, Jains, Buddhists, and
Parsis. The caste system reflects Indian historical occupation and religiously defined
hierarchies. Traditionally, there are four castes identified, plus a category of outcastes,
earlier called "untouchables" but now commonly referred to as "dalits," the oppressed.
In reality, however, there are thousands of sub-castes and it is with these sub-castes
that the majority of Hindus identify. Despite economic modernization and laws
countering discrimination against the lower end of the class structure, the caste system
remains an important factor in Indian society. Poverty is one of the major problems
facing India. An estimated 30-40 percent of the population lives in poverty. Four out
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of five of India's poor live in rural areas. About 70% of the people live in more than
550,000 villages, and the remainder in more than 200 towns and cities.
Statistics
Population: 966,783,171 (July 1997 est.)
Age structure: 0-14 years: 35% (male 173,420,822; female 163,433,648)
15-64 years: 61% (male 304,048,569; female 281,625,342)
65 years and over: 4% (male 22,536,104; female 21,718,686) (July 1997est.)
Population growth rate: 1.72% (1997 est.)
Birth rate: 26.19 births/1,000 population (1997 est.)
Death rate: 8.87 deaths/1,000 population (1997 est.)
Net migration rate: -0.08 migrant(s)/1,000 population (1997 est.)
Sex ratio: at birth: 1.05 male(s)/female
under 15 years: 1.06 male(s)/female
15-64 years: 1.08 male(s)/female
65 years and over: 1.04 male(s)/female
total population : 1.07 male(s)/female (1997 est.)
Infant mortality rate: 65.5 deaths/1,000 live births (1997 est.)
Life expectancy at birth: total population: 62.41 years male: 61.68 years female: 63.18
years (1997 est.)
Total fertility rate: 3.29 children born/woman (1997 est.)
3.0 Natural Resources In Process Of Economic Development In Rural

India:
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To ahieve the development in national output, it is essential to combine natural

resources, human resources & capital. The existence or the absence of favourable
natural resources can facilitate or retard the process of economic development. Natural
resources include land, water resources, fisheries, mineral resources, forests, marine
resources, climate, rainfall and topography.
1. Land Resources: The total geographical area of India is about 329 million
hectares, but statistical information regarding land classification is available
for only about 305 million hectares; this information is based partly on village
papers and partly on estimates. We can explain land utilization pattern from the
following table:-
Land utilization pattern, 1986-87 (million hectares)
Particulars Area Percent

1. Total geographical area 329 --
2. Total reporting area 305 100
3. Barren land not available for cultivation 41 13
4. Area under forests 67 22
5. Permanent pastures and grazing land 12 4
6. Culturable waste lands, etc. 19 6
7. Fallow lands 26 9
8. Net area sown 140 46
9. Area sown more than once 37 12
10. Total cropped area (8+9) 177 58
2. Forest Resources: Forest are an important natural resource of India. They

have a moderating influence against floods and thus they protect the soil
against erosion. They provide raw materials to a number of important
industries, namely, furniture, matches, paper, rayon, construction, tanning, etc.
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The total area under forests was 67 million hectares in 1986-87 which was
about 22 percent of the total geographical area, a recent estimate has put it at
75 million hectares or 23 percent of the total geographical area. Forests in
India are mostly owned by states (95%); a small portion is under the ownership
of corporate bodies and private individuals.
3. Water Resources: India is one of the wettest countries in the world, with
average annual rainfall of 1100 m.m. India’s water policy, since
Independence, has mainly concentrated on highly visible large dams, reservoirs
and canal systems, but has ignored minor water works such as tanks, dugwells
and tubewells.
4. Fisheries: Broadly speaking, fishery resources of India are either inland or

marine. The principal rivers and their tributaries, canals, ponds, lakes,
reservoirs comprise the inland fisheries. The rivers extend over about 17,000
miles, and other subsidiary water channels comprise 70,000 miles. The marine
resources comprise the two wide arms of the Indian Ocean and a large number
of gulf and bays along the coast. About 1.8 million fishermen draw their
livelihood from fisheries, though they generally live on the verge of extreme
poverty. Out of a total catch of 3 million tones of fish in 1988-89, over 1
million tones came from inland fisheries and nearly 2 million tones from
marine sources. India is the seventh largest producer of fish in the world and is
second in inland fish production, which contributes 45 per cent of total
production in the country. Fish production reached the level of 5.4 million
tonnes in 1997-98, comprising 3.0 million tonnes of marine fishery and 2.4
million tonnes of inland fishery and is expected to reach 5.6 million tonnes in
1998-99 with 3.0 million tonnes of marine fishery and 2.6 million tonnes of
inland fishery, respectively. During 1998-99, the export of marine products
came down to US$ 1,038 million from US$ 1,208 million during 1997-98
3.1 Infrastructure In Process Of Economic Development In Rural India:

The prosperity of a Rural India depends directly upon the development of
agriculture and industry. Agricultural production, however, requires power, credit,
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transport facilities, etc. Industrial production requires not only machinery &
equipment but also skilled man-power, management, energy, banking facilities,
marketing facilities, transport services which include railways, roads, shipping,
communication facilities, etc. All these facilities and services constitute collectively
the infrastructure of an economy and the development and expansion of these facilities
are an essential pre-condition for increasing agricultural & industrial production in a
rural area.
Types of Infrastructural facilities—often referred towards economic and social

development of rural India:
1. Energy: The most important single factor which can act constraint on economic
growth of a country is the availability of energy. There is a direct correlation
between the degree of economic growth, the size of per capita income and per
capita consumption of energy. Since energy is an essential input of all
productive economic activity, the process of economic development inevitably
demands increasing higher levels of energy consumption. There are broadly
two sources of energy commercial energy & non-commercial energy.
Following are the various commercial energy:- coal & lignite, Oil & gas,
Hydro-electric resource, Uranium. & non-commercial energy are Fuelwood,
Agricultural wastes, Animal dung.
2. Power: Electric power, which is one form of energy, is an essential ingredient

of economic development and, it is required for commercial and non-
commercial uses. Commercial uses of power refer to the use of electric power
in industries, agriculture and transport. Non-commercial uses include electric
power required for domestic lighting, cooking, use of mechanical gadgets like
the refrigerators, air conditioners, etc. With the growth of population and with
the increase in the use of modern gadgets in daily life, it is quite natural that
the demand for electricity for domestic use should grow at a fast rate.
3. Transport: If agriculture and industry are regarded as the body and the bones of
the economy, which help the circulation of men and materials. The transport
system helps to broaden the market for goods and by doing so, it makes
possible large-scale production through division of labour. It is also essential
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for the movement of raw materials, fuel, machinery etc., to the places of
production. The more extensive and continuous the production in any branch
of activity the greater will be the need for transport facilities. Transport
development helps to open up remote regions and resources for production.
Regions may have abundant agricultural, forest and mineral resources but they
cannot be developed if they continue to be remote and inaccessible.
Modes of transport & communication facilities:

Indian Railways: The most important form of transport system in India is the
Indian railways, which is also the country’s largest single undertaking with a
capital investment of around Rs. 15,000 crores. In 1950-51, railway route
length was 53,600 kms but by 1990-91 it had increased to nearly 62,400 kms-
an increase at the rate of 0.4 percent per annum.
Roads & Road Transport: Road transport plays an important role in rural
economy of country, since it is most suitable for short distances. It has also the
advantage of door-to-door service, flexibility, speed and reliability. The utility
of other modes of transport such as railways, internal waterways, ports, etc.
increase when linked to the road transport system. Road construction and
maintenance generate sizeable employment opportunities—factor of great
importance in the context of growing population and growing unemployment
in the country. The rural road network now connects about 70 percent of our
villages.
Inland water transport: Inland water transport is the cheapest mode of

transport, for both long and short distances, so far as the points of origin and
destination of traffic are concerned. It is cheap as energy consumption is low.
India has over 14,500 kms. Of navigable inland waterways comprising a
variety of river systems, canals, backwaters, creeks, etc.
4. Communications: The communication system comprises posts and telegraphs,

telecommunication system, broad casting, television and information services.
By providing necessary information about the markets and also supplying
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necessary motivation, the communication system helps to bring buyers and

sellers together effectively and helps to accelerate the growth of the economy.
4.0 Microfinance In An Indian Context:-
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Microfinance institutions (MFIs), specialised financial institutions that serve

the poor, derive from the success of some micro enterprise credit programmes
performed mainly by practitioners in developing countries. microFinance (mF) is
being practiced as a tool to attack poverty the world over. During the last two decades,
substantial work has been done in developing and experimenting with different
concepts and approaches to reach financial services to the poor, thanks mainly to the
initiatives of the Non-Governmental Organisations (NGOs) and banks in various parts
of the country.
Despite having a wide network of rural bank branches in the country and
implementation of many credit linked poverty alleviation programmes, a large number
of the very poor continue to remain outside the fold of the formal banking system.
Various studies suggested that the existing policies, systems and procedures and the
savings and loan products often did not meet the needs of the hardcore and assetless
poor. Experiences of many anti-poverty and other welfare programmes of the state as
well as of international organisations have also shown that the key to success lies in
the evolution and participation of community based organizations at the grassroots
level.
Micro-finance and Poverty Alleviation:
Most poor people manage to mobilize resources to develop their enterprises

and their dwellings slowly over time. Financial services could enable the poor to
leverage their initiative, accelerating the process of building incomes, assets and
economic security. However, conventional finance institutions seldom lend down-
market to serve the needs of low-income families and women-headed households.
They are very often denied access to credit for any purpose, making the discussion of
the level of interest rate and other terms of finance irrelevant. Therefore the
fundamental problem is not so much of unaffordable terms of loan as the lack of
access to credit itself.
The lack of access to credit for the poor is attributable to practical difficulties
arising from the discrepancy between the mode of operation followed by financial
institutions and the economic characteristics and financing needs of low-income
households. For example, commercial lending institutions require that borrowers have
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a stable source of income out of which principal and interest can be paid back
according to the agreed terms. However, the income of many self employed
households is not stable, regardless of its size. A large number of small loans are
needed to serve the poor, but lenders prefer dealing with large loans in small numbers
to minimize administration costs. They also look for collateral with a clear title -
which many low-income households do not have. In addition bankers tend to consider
low income households a bad risk imposing exceedingly high information monitoring
costs on operation.
In other words, although microfinance offers a promising institutional structure

to provide access to credit to the poor, the scale problem needs to be resolved so that it
can reach the vast majority of potential customers who demand access to credit at
market rates. To be successful, financial intermediaries that provide services and
generate domestic resources must have the capacity to meet high performance
standards. They must achieve excellent repayments and provide access to clients. And
they must build toward operating and financial self-sufficiency and expanding client
reach. In order to do so, microfinance institutions need to find ways to cut down on
their administrative costs and also to broaden their resource base. Cost reductions can
be achieved through simplified and decentralized loan application, approval and
collection processes, for instance, through group loans which give borrowers
responsibilities for much of the loan application process, allow the loan officers to
handle many more clients and hence reduce costs.
Savings facilities make large scale lending operations possible. On the other
hand, studies also show that the poor operating in the informal sector do save,
although not in financial assets, and hence value access to client-friendly savings
service at least as much access to credit. Savings mobilization also makes financial
instituttions accontable to local shareholders. Therefore, adequate savings facilities
both serve the demand for financial services by the customers and fulfill an important
requirement of financial sustainability to the lenders. Microfinance institutions can
either provide savings services directly through deposit taking or make arrangements
with other financial institutions to provide savings facilities to tap small savings in a
flexible manner.
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Convenience of location, positive real rate of return, liquidity, and security of

savings are essential ingredients of successful savings mobilization. Once
microfinance institutions are engaged in deposit taking in order to mobilize household
savings, they become financial intermediaries. Consequently, prudential financial
regulations become necessary to ensure the solvency and financial soundness of the
institution and to protect the depositors.
Governments should provide an enabling legal and regulatory framework

which encourages the development of a range of institutions and allows them to
operate as recognized financial intermediaries subject to simple supervisory and
reporting requirements.
One way of expanding the successful operation of microfinance institutions in

the informal sector is through strengthened linkages with their formal sector
counterparts. A mutually beneficial partnership should be based on comparative
strengths of each sectors. Informal sector microfinance institutions have comparative
advantage in terms of small transaction costs achieved through adaptability and
flexibility of operations. They are better equipped to deal with credit assessment of the
urban poor and hence to absorb the transaction costs associated with loan processing.
On the other hand, formal sector institutions have access to broader resource-base and
high leverage through deposit mobilization.
Therefore, formal sector finance institutions could form a joint venture with
informal sector institutions in which the former provide funds in the form of equity
and the later extends savings and loan facilities to the urban poor. Another form of
partnership can involve the formal sector institutions refinancing loans made by the
informal sector lenders. Under these settings, the informal sector institutions are able
to tap additional resources as well as having an incentive to exercise greater financial
discipline in their management. Microfinance institutions could also serve as
intermediaries between borrowers and the formal financial sector and on-lend funds
backed by a public sector guarantee.
Weaknesses of Existing Microfinance Models
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One of the most successful models discussed around the world is the Grameen
type. The bank has successfully served the rural poor in Bangladesh with no physical
collateral relying on group responsibility to replace the collateral requirements. The
brief idea about Grameen is given in the next part of this report. This model, however,
has some weaknessed. It involves too much of external subsidy which is not replicable
Grameen bank has not oriented itself towards mobilising peoples' resources. The
repayment system of 50 weekly equal instalments is not practical because poor do not
have a stable job and have to migrate to other places for jobs. If the communities are
agrarian during lean seasons it becomes impossible for them to repay the loan.
Pressure for high repayment drives members to money lenders. Credit alone cannot
alleviate poverty and the Grameen model is based only on credit. Micro-finance is
time taking process. Haste can lead to wrong selection of activities and beneficiaries.
Another model is Kerala model (Shreyas). The rules make it difficult to give
adequate credit {only 40-50 percent of amount available for lending). In Nari
Nidhi/Pradan system perhaps not reaching the very poor. Most of the existing
microfinance institutions are facing problems regarding skilled labour which is not
available for local level accounting. Drop out of trained staff is very high. One
alternative is automation which is not looked at as yet. Most of the models do not lend
for agriculture. Agriculture lending has not been experimented.
• Risk Management : yield risk and price risk

• Insurance & Commodity Future Exchange could be explored
All the models lack in appropriate legal and financial structure. There is a need
to have a sub-group to brainstorm on statutory structure/ ownership control/
management/ taxation aspects/ financial sector prudential norms. A forum/ network of
micro-financier (self regulating organization) is desired.
5.0 Rural Market Contribution In Total Indian Economy
19
When you consider a rural market then the measure part of the rural buiness directly or
indirectly connected with agriculture. In this condition,whenever you study about rural
market you have to consider the impact of agriculture towards Indian Economy.
5.1 Profile of Rural people:-If we classify the rural people by their occupation, we
find cultivators as the predominant occupation group who account 72% of rural
households.
Distribution of rural households by their profession or business activity
Occupation Percentage of Households

Cultivators 72
Agricultural labourers 15
Other non-cultivators 11
Artisans 2
All house holds 100
However this group of cultivators contain both prosperous and well as marginal
cultivators within itself. This is rural India’s picture where 20% of rural households
(mostly cultivators) control about 66% of assets in rural India. In this way rural
population broadly divided into 6 categories:
1. Proprietors of land includes feudal tribute gatherers like zamindars, rich

moneylenders and traders who acquire large tracts of land and companies or
persons who own large populations.
2. Rich farmers who belong to dominant caste of the area.
3. Small peasants or marginal farmers owning uneconomic land holdings.
4. Tenant farmers operating on rented lands belonging to large land holders and
working on small uneconomic land holdings.
5. Agricultural labourers who work on lands of landlords and rich farmers.
6. Artisans and others, which include the unemployed also.
5.2 Stastitical Profile Of The Rural Business in India
20
TABLE: VILLAGE & SMALL INDUSTRIES (Production)

Industry Unit # <-------------------- Production --------------->
1973-74 1979-80 1984-85 1985-86 1990-91 1995-96!
Traditional
Industries:
Khadi M.Sq.Mtres 56.00 82.00 103.98 108.58 1088.8 1052.63
Value
33.00 92.00 157.62 186.30 285.95 353.49
(Rs. crores)
Village Value 122.00 348.00 807.06 900.38 1994.06 356216
Industries (Rs. crores)
Handlooms Mill Meters 2100.00 2900.00 3600.00 3692.00 4888 7020
Value
840.00 1740.00 2880.00 2953.60 3633
(Rs. crores)
Lakh Kgs. of
Sericulture 29.00 48.00 76.70 78.97 12836 13909
raw
silk
(value
63.00 131.00 345.69 310.14 868
Rs.crores)
Handicrafts Value 1065.00 2050.00 3500.00 3800.00 11325 25200
(Rs. crores)
Lakh tonnes
Coir 1.50 1.85 1.49 1.83 2.11 2.63
of
fibre
Value
60.00 86.00 100.50 139.51 161.00
(Rs. crores)
Value
Sub-total (A) 21.83 4447.00 7790.87 8289.93 16272.95 25553.489
(Rs. crores)
Modern
Industries:
Small Scale Value
7200.00 21635.00 50520.00 61228.00 155340 219968
Powerlooms Mill Meters 2400.00 3450.00 4930.00 5886** 10988 17201
Value
1980.00 3250.00 6423.00 7668.51 12337
(Rs. crores)
Value
Sub-total (B) 9180.00 24885.00 56943.00 64768.51 167677 219968
(Rs. crores)
(Rs.
Total (VSI) 11353.00 29332.00 64733.87 73058.44 183949.95 245521.48
crores)
TABLE: VILLAGE & SMALL INDUSTRIES (Employment)
21
Industry Unit # <-------------- Employment (Lakh persons) -------->

1973-74 1979-80 1984-85 1985-86 1990-91 1995-96
Traditional
Industries:
Khadi M.Sq.Mtres 8.84 11.20 13.05 15.00 14.15
Value
N.A.
(Rs. crores)
Village Value 9.27 16.13 24.84 25.50 34.42
Handlooms Mill Meters 52.40 61.50 76.80 73.70 96.87 128.00
Value
(Rs. crores)
Lakh Kgs. of
Sericulture 12.00 16.00 20.43 53.60 52.00 59.50
raw
silk
(value
Rs.crores)
Handicrafts Value 15.00 20.30 27.40 28.00 43.84 65.50
(Rs. crores)
Coir Lakh tonnes of 5.00 5.59 5.89 8.00 5.46
fibre N.A.
Value
(Rs. crores)
Value
Sub-total (A) 102.21 130.72 168.41 203.80 246.74 253.00
(Rs. crores)
Modern Industries: 39.65 67.00 90.00 96.00 124.3 152.61
Small Scale Value
Powerlooms Mill Meters 10.00 11.00 32.19 35.32 55.00 N.A.
Value
(Rs. crores)
5.3 Agricultural Impact on National Economy:
Agriculture is a backbone of the Indian Economy. It is important to note that

importance is given to industrialization in last four decades, agriculture is largest
industry in the country.
5.4 Agricultural Production
The agricultural sector as a whole is estimated to record a

real growth rate of 6.6 per cent during 1998-99. The overall
growth in agricultural production during 1998-99 has been
provisionally estimated at 6.8 per cent, as against a negative
22
growth rate of (-) 5.4 per cent during 1997-98. In spite of the damage caused to the
cotton crop in Punjab by excessive rains and unexpected cyclonic storms in Andhra
Pradesh in October 1998, cotton production was estimated to be higher at 13.3 million
bales in 1998-99, as against 11.1 million bales produced in 1997-98. Similarly, the
sugarcane output is expected to touch 282.7 million tonnes during 1998-99, compared
to 276.3 million tonnes during 1997-98. The production of oilseeds is also likely to be
higher at 25.3 million tonnes during 1998-99, as against 22.0 million tonnes during
1997-98.
Foodgrains Production
The production of kharif foodgrains estimated at 102.5

million tonnes during 1998 showed a marginal growth of
1.4 per cent over the production achieved (101.1 million
tonnes) in 1997. The rabi foodgrains production for 1998-
99 is expected to go up to 98.4 million tonnes compared to
91.3 million tonnes in 1997-98. The foodgrains production is estimated to be 200.9
million tonnes in 1998-99 compared to 192.4 million tonnes during 1997-98,
recording an impressive increase by 4.4 per cent (Advance Estimates). During 1998-
99, efforts have also been initiated by various government agencies to double the food
production in the next decade.
During 1998-99 rice production is estimated to increase to 84.5 million tonnes from
82.3 million tonnes produced in 1997-98, while the wheat production during 1998-99
is estimated at 70.6 million tonnes, compared to the previous year's level of 65.9
million tonnes, an increase by 7.1 per cent. Production of pulses in 1998-99 is
expected to be around 15.2 million tonnes, as against 13.1 million tonnes during 1997-
98.
Agricultural Production-Major crops (in million tonnes)
Year 1995-96 1996-97 1997-98 1998-99
23
Crops Achiev- Target Achiev % Target Achiev % Target Produ- %

ement ement change -ement change ction change
over over over
(Adv.
1995- 1996- Est.) 1997-98
96 97
Rice 77.0 81.0 81.7 6.1 83.0 82.3 0.7 84.2 84.5 2.7
Wheat 62.1 65.0 69.4 11.8 68.5 65.9 (-) 5.0 70.0 70.6 7.1
Coarse 29.0 29.0 32.5 34.1 17.6 33.5 31.1 (-) 8.8 34.3 30.6
Cereals
Pulses 12.3 15.0 14.2 15.4 15.0 13.1 (-) 7.7 15.5 15.2 16.0
Total 180.4 193.5 199.4 10.5 200.0 192.4 (- 3.5 204.0 200.9 4.4
Foodgr-
ains
Oilseeds 22.1 23.0 24.4 10.4 25.5 22.0 (-) 9.8 27.0 25.3 15.0
Sugarca 281.1 270.0 277.6 (-) 1.2 280.0 276.3 (-) 10.5 300.0 282.7 2.3
-ne
Cotton* 12.9 13.0 14.2 10.0 14.8 11.1 (-) 21.8 14.8 13.3 19.8
* Million bales of 170 kg. each.
Agricultural Exports and Imports
The share of exports of agriculture and allied products in the total exports
had declined marginally, from 18.9 per cent during 1997-98 to 17.8 per cent during
1998-99. During the same period, the value of exports of agriculture and allied
products amounted to US$ 5,994 million, showing a decline of 9.6 per cent from a
level of US$ 6,634 million in 1997-98. Major items of agricultural exports were
basmati and non-basmati rice, raw cotton, meat, oilmeals, tea, coffee, unmanufactured
tobacco, cashew, spices, fresh and processed fruits and juices, vegetables and marine
products, etc.
24
Agricultural imports related to food and other items constituted 5.8 per cent of
the total imports during 1998-99, as against 4.0 per cent during corresponding period
of the previous year. Important agricultural items imported during the year were
vegetable oils (edible), sugar, wheat and fruits & nuts. During 1998-99, the volume of
agricultural imports aggregated US$ 2,409 million, as against US$ 1,678 million
during the corresponding period of the previous year, recording a growth of 43.6 per
cent.
Agricultural markets:
There were 7,062 agricultural regulated markets operating in India, 162

agricultural commodities considered for grading standards and 3,253 cold storage with
capacity of 8.73 million tonnes as on end March 1998. With the introduction of
economic reforms, futures trading was permitted in coffee, cotton, castor oil and jute
goods during 1997-98. Earlier futures trading were permitted in gur, potato, castor
seed, pepper, turmeric, etc. Further, during 1998-99, futures trading was introduced in
oilseeds, oil cakes and edible oils. A network of co-operatives at the national, state and
primary level operates to help farm producers with access and further reach for sale of
produce. As per the Annual Report (1998-99) of Ministry of Agriculture, Government
of India, the value of agricultural produce marketed through co-operatives has
registered a remarkable growth of 21.6 per cent, from Rs.9,500 crore in 1994-95 to
about Rs.11,551 crore in 1995-96.
5.5 Agriculture role in Indian Economy
Agriculture for Industrial Development:
Indian agriculture has been the source of supply of raw materials to our leading
industries. Cotton and jute, textiles, sugar, plantations— all these directly depend on
25
agricultural output. There are many industries, which depend on agriculture

indirectly. Many of our small scale and cottage industries like handlooms, oil
crushing, etc depend on agriculture for their raw materials.
But then, in recent years, agriculture is losing its significance to industries such
as iron and steel, engineering, chemicals, etc. However in recent years, the
importance of food processing industries is being increasing recognized both for
generation of income and generation of employment.
Agriculture in economic planning:
Importance of agriculture in the national economy is indicated by many facts.

For example, agriculture is main support for transport sector as railways and roadways
secure bulk of their business from the movement of agricultural goods. Further it is
seen that good crops implying large purchasing power with the farmers lead to greater
demand for manufactures and therefore better prices. In other words prosperity of
farmers is also the prosperity of the industries and vice-versa. Agriculture is backbone
of the Indian economy and the prosperity of agriculture can also stand for the
prosperity of the economy. At the same time it is true that per capita productivity in
agriculture is less than in the industry. Many scholars think that so long as the Indian
Economy is dominated by agricultural activity, per capita income will not rise to an
extent, which is necessary and desirable.
5.4 Capital Formation in Agriculture
The Gross Capital Formation in agriculture, at 1993-94 prices, increased from

Rs.18,214 crore in 1994-95 to Rs.20,995 crore in 1997-98. The share of private sector
investment in agriculture has been registering an increasing trend over the last four
years. It increased from Rs.13,244 crore in 1994-95 to Rs.15,555 crore in 1996-97 and
further to Rs.16,579 crore in 1997-98. The rising trend in the private investment in
26
agriculture is attributable mainly to accelerated flow of institutional credit. It is explain

graphically as follows:
The public sector capital investment in agriculture which has been declining from Rs.
4,970 crore in 1994-95 to Rs.4,776 crore in 1995-96 and further to Rs.4,347 crore in
1996-97 showed an increase from Rs.4,347 crore in 1996-97 to Rs.4,416 crore (at
1993-94 prices) in 1997-98.
6.0 Changing Scenario Of Rural Credit
Indian rural credit structure is regarded all over the world as quite unique and
innovative. It required a careful feasibility study to understand rural structure.
Evolved over a period of last eight decades, it can perhaps claim the honour of being a
very important constituent of the most complex rural economy in the third world
countries. In India there is different caste, religion of people living together, the
27
language of every state, caste is different than each other. The land, weather, water
availability is different in different area, which give lots of problem in applying
various policies. One of the distinguishing features has been its ability to adapt itself,
without much turmoil and stress, to the socio-economic dynamics of the rural
scenario. Over the years it has developed into a multi faceted structure to service
almost the entire cross-section of rural population spread thoughtout the length and
breadth of our country.
In rural areas the indigenous moneylenders continued to be the banker in need.

Since these money-lenders had virtual monopoly in supplying credit in rural areas, the
poor were often subjected to exploitation. With the overriding monopoly the money-
lenders often resorted to usurious practices--- levying the exobirant rate of interest,
demanding gift/contribution to the temple funds out of the amount of credit,
demanding advance interest, etc. Besides, often the money-lenders resorted to
unethical practices like taking thumb impression on a blank paper for inserting some
arbitrary amount, manipulation of account to inflate the balance due. The poor
villager could not escape the clutches of these indigenous bankers as they had to keep
on borrowing from them under distress since they were the only source of credit for all
type of requirements--- production and consumption. The conditions of the poor
peasantry were perpetually so pathetic that an adage—“they are born in debt, they live
in debt & die in debt” was the usual description of their plight.
To mitigate the sufferings of the poor farmers the infrastructure of co-operative

credit was brought into being in the matter of agricultural finance. The Co-operatives
Societies Act of 1904 provided the formation of primary agricultural co-operatives
credit societies. Later in 1912, the co-operative movement was extended to formation
of non-agricultural co-operative credit societies also.
The commercial banks on the other hand were participating in rural banking
only as an alien since they were programmed for meeting the financial requirements of
trade and commerce. In a view of the huge gap in rural credit from institutional
sources and in a bid to meet the growing needs of financial assistance to modernizing
farming, the government adopted the multi-agency approach. This was intended to
increase the farm productivity and thus raise the living standards of the poor farmers.
The formation of State Bank Of India which was formed my taking over the Imperial
28
Bank of India by the Government was with a objective of “extension of banking

facilities on a large scale more particularly in the rural and semi-urban areas and for
other diverse purposes.” This was an important milestone in the banking of rural India.
Momentum was gained more prominently after the concept of “Social control” over
commercial banks was propagated in 1967. With the setting up of National Credit
Council in 1968 to asses the demand for bank credit for various sectors of economy
and to determine priorities for the grant of loans, etc. it came to be felt increasingly
that banks should become instruments of economic and social development.
To this effect nationalization of 14 major Indian commercial banks in July

1969 can be described as a major landmark in the history of Indian financial system
and a big leap towards rural banking. With emphasis on lending to priority sector—
agriculture, rural artisans and handicrafts, small scale industries, small business and
retail trade and other weaker sections of the society— rural banking came to the fore.
The step was initiated to utilize effectively the professional skills and acumen
developed by the banking system for achieving the basic objective of balanced socio-
economic development.
Both the Co-operative and Commercial banks made substantial development in

providing credit to agricultural and rural economy. The total share of co-operatives in
total borrowing of the rural household grew from 5,204 in july 1964 to 12,065 in Dec
1974. But still it was noticed that two-thirds of the total credit was taken from non-
institutional sources. The demand for rural credit was on the increase owing to
adoption of modern agriculture, which increasingly required larger amounts of capital
both short term & long term.
6.1 Structure of Rural Credit In India
“In the village itself no form of credit organization will be suitable except the Co-
operative Society—Co-operation has failed, but co-operation must succeed.”
--All-India Rural Credit Survey
29
National Policy & Its’s Aim:
Agricultural credit is one of the most crucial inputs in all agricultural development
programmes. From olden days private money-lenders are main sources of credit
towards agricultural or rural products. After independence multi-agency approach
consisting of co-operatives, commercial banks and regional rural banks are adopted
due to its cheaper and adequate credit to farmers. The major policy in the sphere of
agricultural credit has been its progressive institutionalization for supplying
agriculture and rural development programmes with adequate and timely flow of
credit to assist weaker sections and less developed regions.
The basic aim of this Policy are as follows:-
a. To ensure timely & sufficient flow of credit to the farming sector;
b. To avoid money-lender chain from rural scene.
c. To reduce regional imbalance through their credit facilities.
d. To provide larger credit support to areas covered by special programmes. e.g.
National Oilseeds Development Project.
Need of Credit for Farmers:-
Farmers need finance mainly for the following things—to pay current expenses
of cultivation such as the purchase of seed, manures, etc.; the purchase of cattle,
implements and raw materials; acquire new land; or improve land by irrigation,
drainage, wedding and planting; pay up old debts to build and repair houses, to
purchase food stuffs and other personal necessaries; pay land revenue to the
Government; meet expenses connected with marriage and other social events in the
family, but jewellery and conduct law suits. The credit need of agriculturists can,
30
therefore, be broadly divided into directly productive & indirectly unproductive

expenses. Unfortunately fact is that underdeveloped and old countries are in need of
both the types of credit.
7.0 Sources Of Rural Credit
There are mainly two sources available to the farmers private agencies &
institutional. Private agencies means relatives, landlords, agricultural moneylenders,
professional private moneylenders, traders & commission agents, others. Where
institutional agencies are a. commercial banks, b. the state bank, c. co-operative
societies & land mortgage banks d. agricultural finance Corporation.
31
Private agencies giving 93% of the total credit requirements in 1951-52 and
institutional sources including government giving for only 7% of the total credit needs.
But in 1960-61, the share of private agencies came down to 81.3 which was as
follows:- Relatives 8.8%, Landlords 0.6%, Agricultural moneylenders 36.0,
Professional private moneylenders 13.2%, traders & commission agents 8.8%, other
sources 13.9. that time institutionals sources were 18.7 and the break up was
government 2.6%, Co-operative 15.5%, Commercial banks 0.6%. As per the All India
Debt and Investment Survey (1981), estimated that the share of private agencies had
further slumped to about 37% & share of institutional credit jumped to 63% break up
was 30% of co-operative & 29% of commercial banks. Government & Reserve Bank
of India is supporting commercial bank & co-operatives to meet the growing demand
for agricultural credit.
8.0 Private Agencies Sources:
 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. 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: I. 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, II. 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.
 Traders & commission agents: Traders & commsiion 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.
32
 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. Interests rates are exorbitant. Often the small farmers are
cheated and their lands are appropriated. What is worse, this source of finance is
becoming more important—from 3.3 percent in 1951-52 to 14.5 percent in 1961-
62 but declined to 8.8 percent in 1981.
9.0 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. Private credit is defective because:-
I. It is based on profit motive &, therefore, it is always exploitative.

II. It is very expensive and is not related to the productivity of land.
III. It does not flow into most desirable channels and to most needy persons.
IV. It is not available for making agricultural improvements—and much of the
necessary improvements are not undertaken as funds are not available for long
periods at low rates of interest
V. It is not properly integrated with the agriculturists other needs.
Problems in Institutional sources:
The government was of the view that multi-agency approach to rural credit was the
real solution to the emancipation of small farmers from the clutches of the money-
lenders. But withing a short period, number of problems have surfaced such as:
a) There was no coordination between different agencies operating in the same

area and, as a result, there was multiple financing, over-financing in some
areas and under-financing in others.
b) Despite the adoption of lead bank scheme and district credit plans, the
different agencies often failed to formulate and develop meaningful
agricultural credit programmes in given blocks and districts.
33
c) Despite guidelines issued by RBI, different agencies adopted different

procedures and policies in the matter of providing loans and their recover.
The result was unnecessary competition among the different agencies.
d) There were practical problems in the recovery of loans when different
agencies had lent to the same person against the same securities. Ultimatlely,
there were heavy overdues.
The major problem faced by lending institutions, particularly co-operatives, is

the most unsatisfactory level of overdues. The ration of overdues to that of demand is
around 40 to 42 percent in the case of co-operatives and 47 percent in the case of
Regional rural banks. Accordingly, health of rural credit institutions, both co-
operative and commercial banks, is in a very sad state in several parts of the country.
1. Co-operative credit societies [9.1]
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.
Primary Agricultural Credit Society:
The co-operative movement was started in India largely with a view to providing
agriculturists funds for agricultural operations at low rates of interest and protect them
from the clutches of moneylenders. The organization of the co-operative credit for
short period may be briefly outlined as follows:
A co-operative credit society, commonly known as the primary agricultural

credit society (PACS) may be started with ten or more persons, normaly belonging to
a village. The value of each share is generally nominal so as to enable even the
poorest farmer to become a member. The members have unlimited liability, that is
each member is fully responsible for the entire loss of the society in the event of
failure. This will mean that all the members should know each other intimately. The
management of the society is under an elected body consisting of President, Secretary
34
& Treasurer. The management is honorary, the only paid member being normally.
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 well,
or maintenance of a school, and so on. The usefulness of the primary credit societies
has been rising steadily. In 1950-51, it advanced loans worth Rs.23 crores; this rose to
Rs. 200 crores in 1960-61, and to Rs. 4200 crores in 1988-89.
Financial Strength of PAC’s.: To make all primary agricultural societies viable and
ensure adequate and timely flow of co-operative credit to the rural areas the Reverse
Bank of India, in collaboration with State governments, had been taking a series of
steps to strengthen weak co-operative banks and to correct regional imbalances in co-
operatives development. Steps were taken to reorganize viable PACs and for
amalgamation of non-viable societies with farmer’s service societies or large sized
multipurpose societies. These efforts are being intensified by providing larger funds
to weak societies to write off their losses, bad debts and overdues.
PAC’s and Weaker Sections: The major objective of the co-operative development
programmes is to ensure that the benefits of co-operative activities flow increasingly
to weaker sections including scheduled castes and scheduled tribes. The government
seeks to achieve this through expanding the membership of the weaker sections in the
existing PACs and ensuring larger flow of funds and services to them. In the tribal
areas, large sized multipurpose societies are being organized mainly for the benefit of
the tribals.
 Co-operative Central Banks: These are federations of primary credit societies in

specified areas normally extending to the whole district meance 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.
35
 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
NABARDhas 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.
Problem of overdues to Co-operative credit
A highly distressing fact of co-operative credit is the heavy overdues of co-

operative credit institutions, now estimated between Rs.9,000 crores to Rs.10,000
crores. According to the RBI study team on overdues “lack of will and discipline
among cultivators to repay loans was the principal factor responsible for the
prevalence of overdues of co-operatives. Defective lending policy pursued by co-
operatives, the apathy of management in taking quick action against recalcitrant
members and absence of favourable climate were other contributing factors.”
Apart from these commonly factors normally responsible for a high level of
overdues, intervention of external forces such as loan waivers, concession in various
forms towards repayment of principal and interest has also affected the recovery
performance of credit institutions to a significant extent. The problem is further
aggravated on the account of the state governments in ability to meet the financial
commitments to co-operative banks.
In recent years, the farmers are getting organized and one of their chief demands
of the farmer union is to cancel their debts to the co-operative societies and banks.
States have meekly surrended to such demands to write off the debts in a matter of
extreme concern, as it hampers the recovery of dues from the farmers. The problem of
loan overdues is a matter of serious concern, as it affects the recycling of funds and
36
credit expansion on one hand and economic viability of the lending institutions,
specially the co-operatives and RRBs, on the other.
2. Land development banks[9.2]: The need for long-term loan is being satisfied
by land development banks (formerly the were called land mortgage banks).
The objective of such banks is to provide long-term credit to the cultivators
against the mortgage of their lands. The loans from the land development banks
are quite cheap and are spread over a long period of 15 to 20 years. It is,
therefore, convenient ot borrow from these banks if previous debts have to be
cancelled or if additional land is to be purchased or if improvements have to be
made. Though land development banks have been making considerable progress
in recent years in this country, they have not really contributed much to the
financial need of the farmers. Most farmer are not even aware about this bank &
70% of the land development banks are located in the three South Indian States
of Tamil Nadu, Andhra Pradesh & Karnataka. The loan sanction by this bank
has been increase annually from Rs. 3 crores to Rs. 770 crores between 1950-51
and 1989-90. major drawback of this bank is they lend against the security of
land, and big landlords have taken advantage of them and, by and large, small
peasants have not benefited from them.
 The Structure of LDBs:- The long term credit structure consists of the central
land development banks (generally one for each State) and primary land
development banks. In some States, there are no primary land developments
banks but in their place, there are branches of central land development banks.
 Problems of LDBs:- Land development banking is yet to take strong roots in

India barring few States. However, LDBs have contributed in large measure to
agricultural development by lending specially for minor irrigation. All their
loans are for productive purposes benefiting mostly the small farm holders.
Though land development banking has made considerable progress in recent
years, it has not really contributed much to the improvement of the financial
position of the farmers. A large number of factors are responsible for the
relative ineffectiveness of LDBs.
37
 Overdues Problems:- mounting overdues in most of the LDBs have crippled

the structure badly, in recent years. Overdues at the level of primary land
development banks have been put between 42 to 44 percent. Overdues have
caused innumerable financial problems besides limiting the capacity of LDBs to
lend and operate as viable units. The financial discipline imposed on the banks in
the matter of eligibility to undertake fresh lending based on recovery
performance has been the main limiting factor quantitative growth of credit
operations. To some extent, the banks themselves are to be blamed for this
predicament due to faulty loaning policies, inadequate supervision, over-
utilisation of loans, ineffective measures for recovery etc. Which have
contributed to the deterioration in recovering the loans.
3. Commercial Banks[9.3]: 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 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.
 Direct Finance by Commercial Banks:- At the time of bank nationalization, it

was clearly conceded that the commercial banks did not have the necessary
experience or the personnel to deal with the farmers directly. While the co-
operative had been specializing in rural credit since the beginning of the century.
Even then the nationalized banks were expected to go vigorously in the support
of the farmers in general and the small cultivators in particular. In the initial
stages, for obvious reasons the nationalized banks concentrated their attention on
large cultivators and other special category farmers such as those engaged in
raising high-yielding varieties of food-grains. At present short term crop loans
38
accounted for nearly 40 to 45% of the total loans disbursed by the commercial
banks to the farmers.
Term loans for varying periods for purchasing pump-sets, tractors and
other agricultural machinery, for construction of wells and tube-wells, for the
development of fruit and garden crops, or leveling and development of land, etc.
are provided. These term loans accounted for about 35 to 37% of the total loans
disbursed by commercial banks. Finally, commercial banks extend loans for
such activities such as dairying, poultry farming, piggery, bee keeping, fisheries
and others— these loansaccount for 15 to16%. Region wise, southern region
accounts for the bulk of credit disbursed by commercial banks viz. 52% of the
total credit extended.
 Indirect Finance by Copmmercial Banks: Even though the scope for direct
financing by commercial banks would be limited for some years to come, there
is a considerable scope for indirect financing by commercial banks. For
instance, commercial banks are financing co-operative societies to enable them
to expand their production credit to the farmers. More especially they
increasingly finance co-operatives engaged in marketing and processing of
agricultural produce or in the activities ancillary to agriculture such as dairy
farming, poultry farming, etc. In this connection, the Stated Bank of India and
its subsidiaries are already playing an active role in financing co-operative
marketing and processing. Commercial banks are providing indirect finance for
the distribution of fertilizers and other inputs.
Commercial banks extend credit to manufacturing or distribution firms

and agencies and co-operatives engaged in the supply of pump-sets and other
agricultural machinery on the hire-purchase basis. They finance the operations
of the Food Corporation of India, the state governments and others in the
procurement, storage and distribution of food grains.
Finally, commercial banks increasingly subscribe to the debentures of

the central land development banks and also extend advances to the latter. This
enables land development banks to expand their medium and long-term advances
to farmers for the purpose of land improvement and land development.
39
 Commercial Banks & Small Farmers: It has been estimated that nearly 70
percent of farmers owning less than 2 hectares of land are not getting bank
credit; only large landowners have been found creditworthy and suitable for
banks advances. But such a situation cannot continue for long. Under the
direction of the Planning Commission, Small farmers Development Agencies
have been set up to identify small farmers and work out economically viable
schemes of agricultural development. Commercial banks have to group them
into various categories for credit support so as to enable them to become viable
cultivators. For instance, in areas where the subsoil water table is high, the small
cultivator has to be helped by banks to convert his dry holding into wet holding.
With pump set loan, the cultivator can change the cropping pattern into double or
even multiple cropping activity. As regards small cultivators near urban areas
and with irrigation facilities, commercial banks can help them to go in for
poultry farming and maintaining one or two vegetable cultivation or combine it
with small milch cattle.
 Problems of Commercial Banks in Agricultural Credit:- The credit needs of

the agricultural sector in the next few years are estimated to rise to Rs.50,000 to
Rs.60,000 crores. To meet the needs is an enormous task, and responsibility will
have to be borne by co-operatives and commercial banks. As resources available
to commercial banks in the agricultural sector will naturally be limited, it is
important that every commercial bank attempts to make optimum use of its
limited resources in this sector. In the field of financing of agriculture, the
problem is not merely quantitative but also of coverage vis-à-vis the organization
and the personnel available to the nationalized banks. The majority of the rural
population consists of small farmers. Further, there are 5,50,000 villages spread
throughout the country. To reach all of them with only about 47,000 banking
offices is, no doubt, a stupendous task. Even with the completion of branch
extension programmes of the commercial banks now in hand or those which may
be undertaken during the next 5 to 10 years, commercial bank may not be in a
position to cover many of the villages. Moreover in recent years, the rural
branches of commercial banks in general and branches of RRB in particular,
have been under severe financial strain on account of higher transaction cost
involved in handling of large number of small size loan accounts and somewhat
40
lower interest income as a result of concessional rate of interest on small size

loans.
The lower proportion of current deposits in total deposits of rural

branches has also placed them at a disadvantage with regards to cost of
resources. Finally, the presence of overdues, particularly after the
implementation of Agricultural and Rural Credit Debt Relief Schemes, 1990 has
further adversely affected the viability of rural branches of commercial banks.
Under these conditions, if the development of agriculture is not to

suffer for want of credit and if there has to be some improvement in the lot of
innumerable small farmers, new dimensions will have to be given to schemes of
financing agriculture.
4. Regional Rural Banks [9.4]: 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:
 The area of regional rural banks is limited to a specified region comprising

one or more districts of a State.
 The regional rural banks grant direct loans and advances only to small and
marginal farmers, rural artisans and agricultural labourers and other of small
means for productive purposes.
 The lending rates of the regional rural banks should not be higer than the
prevailing lending rates of co-operatives societies in any particular State. The
sponsoring banks and the Reserve Bank of India provide many subsidies and
concessions to RRBs to enable the latter to function effectively
41
 Concessions to RRBs: From the beginning, the sponsor banks have continued
to provide managerial and financial assistance to RRBs and also other
concessions such as lower rate of interest on the latter’s borrowing from sponsor
banks. Further, the cost of staff deputed to RRBs and training expenses of RRB
staff are borne by the sponsor banks. The Reserve Bank of India has been
granting many concessions to RRBs.
 Progress of RRBs: There are now 196 regional rural banks in 23 States with
14,500 branches. As at the end of September 1990 the regional rural banks had
advanced Rs.3,560 crores by way of short-term crop loans, term loans for
agricultural activities, for rural artisans, village and cottage industries, retail
trade and self employed, consumption loans etc. Nearly 90 percent of the loans
of RRBs, were provided to the weaker sections. State wise Uttar Pradesh found
large number of offices.
 Objectives of RRBs:
 RRBs had followed instructions given by RBI and Government of India

regarding loan policies, procedures, etc.
 The basic aim of setting up RRBs viz, developing the rural economy by
providing credit for the development of agriculture, trade, commerce industry
and other productive activities in rural areas, was being fulfilled and
 RRBs had successfully maintained their image as a small man’s bank by

confining their credit facilities to the target groups viz, small marginal farmers,
agricultural labourers, artisans and small enterprises for productive activities.
 The recovery position on the whole was not satisfactory.
 Problems in functioning of RRBs:
42
a. On account of the many restrictions place on the business they can

undertake, RRBs have lowearning capacity.
b. The wage and salary scales of RRBs have been rising and, in fact, with the
recent award of a tribunal, their scales would approximate those of
commercial banks; with the increase in salary scales, an important rationale
for the setting up of RRBs has ceased to exist.
c. The sponsoring banks are also running their own rural branches in the very
area of operations of the RRBs; this has given rise to certain anamolies and
to avoidable expenditure on controls and administration.
5. Reserve Bank of India [9.5]:
RBI had shown keen interest in agricultural credit and maintained a separate
department for this purpose. RBI extended short-term seasonal credit as well
as medium-term and long-term credit to agriculture through State level co-
operative banks and land developments banks. 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 propo9sed 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.
9.5.a N A B A R D: an Overview-
43
 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.
 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.
 It is an apex refinancing agency for the institutions providing
investment and production credit for promoting the various developmental
activities in rural areas.
 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.
 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.
 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
o It undertakes monitoring and evaluation of projects refinanced by it.

o It promotes research in the fields of rural banking, agriculture
and rural development.
44
10.0 Schemes & Facilities from the various banks
10.1 NABARD:-
RURAL NON-FARM SECTOR FINANCE SCHEME
Rural Non Farm Sector (RNFS) holds the key to faster

economic development of the country. It has potential and
promise for generating employment and increased income in
the rural areas. Hence, NABARD has identified financing,
development and promotion of RNFS as one of its thrust
areas.
Schemes from NABARD for non-farming sector:
1. COMPOSITE LOAN SCHEME (CLS) - under ARF
Borrowers: Rural artisans, handicraftsmen, small entrepreneurs, groups of individuals,

partnership firms, co-operative societies, NGOs, etc.
Refinance ceiling -Maximum of Rs. 10 lakh per borrower.
Repayment period -3 to 10 years with suitable need based moratorium not exceeding
18 months.
Eligible activities -All manufacturing, processing, and approved service activities.
2. INTEGRATED LOAN SCHEME (ILS) - under ARF
Borrowers: Individuals, artisans, groups of individuals, associations (formal and

informal), proprietary/ partnership firms/ co-operative societies, registered institutions/
trusts, voluntary agencies, private and public limited companies, etc.
Refinance Repayment period 3 to 10 years with suitable need based moratorium not
exceeding 18 months.
45
Eligible activities Manufacturing, processing and approved service activities in the

cottage, village and tiny industry sector and modernization/ renovation/ expansion/
diversification of existing units.
3. Small Road and water Transport Operators SCHEME (SRWTO) - Under

ARF
Borrowers Individuals, groups of individuals, including partnership/ proprietary firms

and co-operative enterprises. The borrowers should be from the rural areas and should
utilise the vehicle mainly for transportation of Rural Farm and Non-Farm Products and
inputs and passengers to/ from marketing centres. The borrower or his employee
should possess a valid driving licence and the vehicle should be duly registered with
the Regional Transport Authority as public transport vehicle.
Refinance ceiling Maximum of Rs.15 lakh per borrower
Repayment period 5 years with moratorium of 6 months.
Eligible vehicles Transport vehicles including Light Motor vehicles, Jeeps,

Autorickshaws, Water transport units (boats, launches etc.)
4. Schemes under pre - sanction procedure
(i) Term Loan to SSI units (through CBs & Scheduled PCBs)
Borrowers : Individuals, Proprietary / Partnership concerns, Private/ Public Limited

Companies, Promotional/ Developmental Organisations, State Level Federations/
Corporations, Joint Sector Undertakings.
(ii) Term Loan to Industrial Co-operatives (through SCBs)
Borrowers : Industrial Co-operative Societies identified as viable/ potentially viable

by the State Government.
iii) Project Finance for Agro-Industries (through CBs, Scheduled PCBs and
SCBs)
Borrowers
46
1. State level corporations such as agro-industries corporations, forest/ tribal

development corporations, KVIC/ KVIB, state level cooperative societies/
federations, co-operative marketing/ processing and industrial societies, joint
sector undertakings, registered societies in KVIC/ KVIB fold.
2. Public/ private limited companies, partnership firms and proprietary concerns.
Repayment period: 3 to 10 years with moratorium of 12 months.
5. Soft Loan Assistance Scheme for Margin Money
Beneficiaries and purpose: Entrepreneurs having necessary talent/ skills, but who
lack monetary resources to meet the margin requirements stipulated under the relevant
schemes covering both ARF and prior sanction.
Purpose To set up new units as well as for modernisation/ renovation/ expansion/

diversification of existing units even if the units were not initially refinanced by the
Bank.
Eligibility criteria Refinance will be available on the banks' satisfying the eligibility
criteria based on recovery performance/the position of NPAs, as prescribed by
NABARD from time to time.
FARM SECTOR FINANCE SCHEME:
A) Refinance Assistance for financing farm mechanization
i) Tractors:
(a) The quantum of refinance in respect of financing for acquisition of second tractor
has been enhanced from existing level of 40% to 90% ( 95% in case of SCARDBs) of
the loan amount as in the case of first tractor.
(b) Though the minimum land holding required for financing tractors is 8 acre
perennially irrigated land, necessary discretion has been given to banks to evolve their
own area specific norms, if need be, and report such norms evolved by them to the
concerned RO of NABARD.
47
(c) Refinance facility for financing purchase of second hand tractors has been
extended to Gujarat in addition to Punjab, Haryana and Rajasthan.
ii) Power Tillers:
(a) Though the minimum land holding required for financing power
tillers is 6 acres of perennially irrigated land, necessary discretion
has been given to banks to evolve their own area specific norms, if
need be, and report such norms evolved by them to the concerned
RO of NABARD.
(b) Banks have also been advised to give focused attention on

financing power tillers by preparing a three year banking plan for a
compact area for the benefit of the small farmers.
C) 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
D) 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 Centres 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.
E) Scheme for financing farmers for purchase of land for Agricultural purposes
48
In response to the Hon'ble Union Finance Minister'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 a 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.
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.
F) Central Sector Capital Subsidy scheme for Investment Promotion (IPS)
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 upto 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.
G) Refinance Scheme for financing Farmers Service Center (FSC)
NABARD has decided to extend 100% refinance facility to banks for financing
Farmers Service Centres (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
49
productivity through private sector participation in technology transfer and extension

services.
Scheme for Rural Finance [10.2]:
SBI Caters to the needs of agriculturists and landless agricultural labourers through
a network of 6600 rural and semi-urban branches.There are 972 specialized branches
which have been set up in different parts of the country exclusively for the
development of agriculture through credit deployment.These branches include 427
Agricultural Development Branches (ADBs) and 547 branches with Agricultural
Banking Divisions (ADBs) and 2 Agricultural Business Branches at Chennai and
Hyderabad catering to the needs of hitech commercial agricultural projects.
The Bank has achieved tremendous growth in agricultural credit.As on March

2001 ,it has covered 48 lakh farmers with loan outstanding of Rs. 14962 crores ,
accounting for 28% of total agricultural advances of Public Sector Banks (PSBs)
 Crop Loan
SBI offers financial assistance to meet cultivation expenses for various crops as
short Term Loan. With a repayment period not exceeding 18 months, the Crop Loan is
extended in the form of direct finance to cultivators.
Eligibility-Agriculturists, Tenant farmers and Share Croppers who actually cultivate

the lands are eligible for these loans. All categories of farmers - Small/Marginal
(SF/MF) and others are included.
 Produce marketing loan scheme
The Bank extends financial assistance to help farmers store produce on their own
to avoid distress sale. The repayment period of the produce marketing loan (PML)
does not exceed 6 months. Further, this facilitates immediate renewal of crop loans for
next crop.
50
Eligiblity-All categories of farmers - Small/Marginal (SF/MF) and others - are

eligible.
The Bank verifies the following aspects before granting the loan:
1) Service Area Approach.
2) Stocks at the borrowers' residence/godown.
3) Stock statement for valuation.
Loan Amount Security to be furnished

Upto Rs.25,000 DPN, DPN take delivery letter Hypothecation of
stocks.
Above Rs.25,000 Hypothecation of stocks.Mortgage of properties.
 Kisan credit card scheme
The SBI offers the Kisan Credit Card for farmers under short-term credit
introduced as per RBI/NABARD guidelines, providing a running account facility
tofarmers to meet their production credit need and contingency needs.
Eligibility-All agricultural clients having good track record for the last two years are
eligible for the Kisan Credit Card. Minimum credit limit: Rs.3000/- New borrowers
requiring crop loans can also avail this product.
Credit limit is based on operational land holding, cropping pattern and scale of
finance. Withdrawals can be made using easy and convenient withdrawal slips. The
Kisan Credit Card is valid for 3 years, subject to annual review.
 Agriculture term loans
SBI gives agricultural term loans in the form of direct finance to cultivators to
create assets facilitating crop production/income generation. Repayments span not less
than 3 years and not exceeding 15 years. Activities broadly covered are land
development, minor irrigation, farm mechanization, plantation and horticulture,
dairying, poultry, sericulture, dry land, waste land development schemes, etc.
51
Eligibility-All categories of farmers-small/medium-and agricultural labourers are

eligible for agricultural term loans, provided they have necessary experience in the
activity and the required land area.
 Land Development Schemes
The SBI gives credit solutions for land development programmes in the form of
direct finance to cultivators aimed at better productivity. Loans under this head cover
various activities like land clearance (removal bushes, trees, etc.), land leveling and
shaping, contour/graded bunding, bench terracing for hilly areas, contour stone walls,
staggered contour trenches, disposal drains, reclamation of saline/alkaline soils and
fencing.
Eligibility:Loans cover various activities like digging of new wells (open/bore wells),
deepening of existing wells (traditional/inwell bore), energisation of wells (oil
engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation
system and lift irrigation system.
 Minor Irrigation Schemes
SBI provides credit for creating new source of irrigation by exploiting

underground water, energisation of wells, conveyance of water, judicious use of
available water, etc.
Loans cover various activities like digging of new wells (open/bore wells), deepening
of existing wells (traditional/inwell bore), energisation of wells (oil engine/electrical
pump set), laying of pipe lines, installing drip/sprinkler irrigation system and lift
irrigation system.
 Farm Mechanisation Schemes
52
SBI provides credit for purchase of farm equipment and machinery for
agricultural operations.
This mode of finance covers activities ranging from: Purchase of tractors, trailers,
cultivators, cage wheels, power tillers, combine harvesters, power sprayers, dusters,
etc.
Eligibility- is ascertained on the basis of minimum area requirements: Tractors - 8

acres of irrigated area Power tiller - 5 -6 acres Combine harvester - 20 acres
 Financing of Combine Harvesters:
o A farmer should own minimum 8 acres of irrigated land.
o Non-farmer entrepreneurs capable of utilizing combine harvester for custom

hiring work are also eligible.
o Combine harvester should be utilised for a minimum of 1000 hours of

productive work in a year.
o Unit cost will include cost of combine harvester and accessories, if any.
 Kisan Gold Card Scheme:
Eligibility-Farmers with excellent repayment record for at least past 5 years. New
farmers are not eligible for the product.
Purpose-Investment credit for which term loans are ordinarily sanctioned. The
scheme also includes major family expenditures like marriages and education of
children.
 Land Purchase Scheme:
Eligibility-Small/marginal farmers, tenants, share-croppers owning less than 5

acres of unirrigated / 2.5 acres irrigated land in their own name and landless
agricultural labourers are eligible to avail loan under the scheme, provided they
are our existing borrowers with record of prompt repayment of loans. Own land
before and after purchase should not exceed 5 acres irrigated / 2.5 acres irrigated.
53
Security-Land to be purchased with Bank finance will be mortgaged as security.

No other security will be insisted upon.
Repayment-Entire loan will be repayable in 10 years in half-yearly instalments.

Adequate gestation period will be allowed for development of land for
cultivation.
Self Help Groups (SHGs)
SHGs are self managed homogeneous groups of economically backward people that
promote savings among themselves and pool the savings. These pooled resources are
supplemented by external resources i.e. bank credit when these groups gain
experience. The Self Help Groups Linkage Programme of SBI is under
implementation since 1992. At the end of March 2001, the Bank has financed 25,000
self-help groups with aggregate credit limit of Rs 46 crore.
10.3 Various Finance Scheme Offered From Government:
Maharashtra Rural Credit Project (MRCP) - India - Out line of the project
features and Impact
General: Access to credit has long been considered a major poverty alleviation
strategy in India. A variety of credit-linked programmes supplemented by subsidies
have been implemented. The Integrated Rural Development Programme (IRDP)
operating since 1978-79 has been a major national rural poverty alleviation
programme with a large credit component. Under this programme, nearly 53 million
families below poverty line were assisted with bank credit of Rs.31 billion and subsidy
of Rs. 10.5 billion upto 31st March 1998, but its impact had not matched the resources
spent. This was due to reasons like provision of supply rather than demand-led credit,
loans not tailored to meet needs of individual enterprises, lack of aftercare support,
weak linkages lack of supervision over loan utilisation etc. Further, there was no
effective involvement of the people at any stage of implementation of the programme.
As a result, the incidence of high overdues and high transaction cost for the banks in
financing the rural poor became a matter of concern for the policy-makers.
54
Maharashtra Rural Credit Project (MRCP)
Against this backdrop the MRCP supported by IFAD was evolved as an innovative
approach to poverty reduction with people’s participation. The strategy for
implementation of this project has been devised in such a manner that the rural poor
assume centre-stage and their participation ensured at all stages of the project viz.
planning, implementation and monitoring. The experience gained shows that once the
people’s participation is invoked at the planning stage itself a strong sense of
ownership of the project develops among the people which stimulates them to actively
involve in the subsequent phases of the project.
The MRCP being implemented with an outlay of US$ 48.35 million is financed by an
IFAD loan of US$ 29.2 million supplemented by a contribution of US$ 14.97 million
from Government of India/Government of Maharashtra and US$ 1.65 million from
participating banks. The Project which is implemented by a number of banking
institutions, Government agencies and Non Governmental Organisation (NGOs) since
1994-95 was designed with the principal goal .
Credit-Cum-Subsidy Scheme for Rural Housing.
Introduction:- The Credit-Cum-Subsidy Scheme for Rural Housing has been

conceived for rural households having annual income upto Rs.32,000/-.
Objective- To enable/facilitate construction of houses for all rural households who

have some repayment capacity.
Target Group- The target group under the scheme will be the rural households having
an annual income of Rs. 32000/- only. However preference will be given to rural
households who are below poverty line.
Salient Features:-
• Subsidy upto Rs.10,000/- per eligible household in plain areas and Rs.11,000/-
in hilly/difficult areas.
• Loan upto Rs."2"0,000/- per household.
55
• Sanitary latrine and smokeless chulha are integral part of the house.
Achievement
The scheme has been launched with effect from 1 April, 1999 and is in the process of
implementation.
Funding Pattern
Funds are shared by the Centre and State in the ratio of 75:25.
Implementing Agency
The Implementing Agency for the Credit Cum Subsidy Scheme for Rural Housing
may be the State Housing Board,State Housing Corporation, specified Scheduled
Commercial Bank, Housing Finance Institution or the DRDA/ZP.
Council for Advancement of People’s Action & Rural Technology (CAPART)
Recognising the need for an organisation that would coordinate and catalyse
the development work of voluntary agencies in the country, particularly to ensure
smooth flow of benefits to the underprivileged and socio-economically weaker
sections of society, Government of India, in September, 1986 set up the Council for
Advancement of People’s Action and Rural Technology (CAPART), a registered
society under the aegis of the Department of Rural Development, by merging two
autonomous bodies, namely, People’s Action for Development of India (PADI) and
Council for Advancement of Rural Technology (CAPART).
The main objectives of the CAPART are :-
• To encourage, promote and assist voluntary action for the implementation of

projects intending enhancement of rural prosperity.
• To Strengthen and promote voluntary efforts in rural development with focus
on injecting new technological inputs;
56
• To act as a catalyst for the development of technology appropriate for rural

areas.
• To promote, plan, undertake, develop, maintain and support projects/schemes
aimed at all-round development, creation of employment opportunities,
promotion of self-reliance, generation of awareness, organisation and
improvement in the quality of life of the people in rural areas through
voluntary action.
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
57
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. In this context the
significance of extending non-farm sector becomes only alternative but it also required
finance assistance for its development.
Means a lot of hard work & government awareness is required to flow the
finance assistance in Rural Economy. But various scheme 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 is in need of finance.
As per the above evaluation of the major problems and issues relating to the
rural financial system I can submit the following observations & recommendations:
 Interest rates: Interest rates must be different for different categories. First it
should be concessional rate exclusively for small and marginal farmers at 1.5%
58
to 11.5% & Secondly, there should be a higher rate of interest applicable to the
rest of the agricultural borrowers upper limit for it is15.5%
 Infrastructure Development: tempo of agricultural lending has been low in the
eastern regional states like Bihar, Orissa and West Bengal & in the North
Eastern States. So Agricultural and Rural Infrastructure Development
Corporation should be setup in these area which will concentrate on building
up necessary backward and forward linkages and supporting services as well as
formulate location specific schemes for accelerating the transformation of
agriculture and to arrange for funding of the schemes.
 Insurance scheme: Crop insurance scheme which was introduced in India from
Kharif 1985 covering major cereal crops, oilseeds and pulses. The sum
insured was limited to Rs.10,000 per farmer irrespective of quantum of crop
loan and the total sum insured would be limited to 100 percent of the crop loan
disbursed. Proper research should be done by statutory crop insurance
corporation.
 Recovery of dues: Recovery is important for survival of the banks, it is
important that a common legal framework covering cooperatives and
commercial banks for recovery of dues for the country as a whole should be
formulated. & The government should setup State level tribunals for
adjudication.
 Rationalisation: In present scenario each village is allotted to a commercial
bank branch under the Service Area approach. As per the analysis each block
should be allotted to a bank which has the largest presence in the block through
its branches. Which will reduce the cost of supervision, improve quality of
monitoring and be beneficial to the customers.
Bibliography
Sr.No. Name Author

1. Indian Economy Ruddar Datt.
K.P.M. Sundharam.
2. State Bank of India journals
3. Agricultural Financing In S.N.Ghosal
59
India
4. Economic Survey, 1998-99. Monthly Review of the Indian
Economy, CMIE, March-April 1999
5. Rural Marketing Romeo S. Mascarenhas
Webliography
www.nabard.org
www.rbi.gov
www.sbi.co.in
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Rural Finance in An Indian Economy

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Rural Finance In Indian Economy

o To revise the financial capability of the lending agencies in rural ares to

Assigned project task is completed by going through various books, committee

1.0 Meaning of an Underdeveloped Economy:

There is a big difference between underdeveloped and developed countries.

Distribution of World Population & World GNP among various groups of

GNP Total GNP Per

World 20,736 5,206 3,980

1.1 Basic Characteristics Of The Indian Economy As An Underdeveloped

2. Occupational pattern:- Primary producing. One of the basic characteristics of

4. Prevalence of chronic unemployment and underemployment: In India labour is

5. Low rate of capital formation: Another basic characteristic of the Indian

Gross Domestic Gross Domestic

1965 1989 1965 1989

2.0 History Of The Rural Economic Structure Of India

2.1 Indian Economy in the Pre-British period:-

2.2 Industries & handicrafts in Pre-British India:

Decline Of Indian Handicrafts And Progressive Ruralisation Of The

import of machinery as such. The decline of Indian handicrafts created a

2.3 Indian Population an Overview:-

3.0 Natural Resources In Process Of Economic Development In Rural

To ahieve the development in national output, it is essential to combine natural

Particulars Area Percent

2. Total reporting area 305 100

3. Barren land not available for cultivation 41 13

4. Area under forests 67 22

5. Permanent pastures and grazing land 12 4

6. Culturable waste lands, etc. 19 6

8. Net area sown 140 46

9. Area sown more than once 37 12

10. Total cropped area (8+9) 177 58

2. Forest Resources: Forest are an important natural resource of India. They

4. Fisheries: Broadly speaking, fishery resources of India are either inland or

3.1 Infrastructure In Process Of Economic Development In Rural India:

Types of Infrastructural facilities—often referred towards economic and social

2. Power: Electric power, which is one form of energy, is an essential ingredient

Modes of transport & communication facilities:

Inland water transport: Inland water transport is the cheapest mode of

4. Communications: The communication system comprises posts and telegraphs,

necessary motivation, the communication system helps to bring buyers and

4.0 Microfinance In An Indian Context:-

Microfinance institutions (MFIs), specialised financial institutions that serve

Micro-finance and Poverty Alleviation:

Most poor people manage to mobilize resources to develop their enterprises

In other words, although microfinance offers a promising institutional structure

Convenience of location, positive real rate of return, liquidity, and security of

Governments should provide an enabling legal and regulatory framework

One way of expanding the successful operation of microfinance institutions in

Weaknesses of Existing Microfinance Models

• Risk Management : yield risk and price risk

5.0 Rural Market Contribution In Total Indian Economy

Distribution of rural households by their profession or business activity

Occupation Percentage of Households

1. Proprietors of land includes feudal tribute gatherers like zamindars, rich

2. Rich farmers who belong to dominant caste of the area.

3. Small peasants or marginal farmers owning uneconomic land holdings.

5. Agricultural labourers who work on lands of landlords and rich farmers.

6. Artisans and others, which include the unemployed also.

5.2 Stastitical Profile Of The Rural Business in India

TABLE: VILLAGE & SMALL INDUSTRIES (Production)

TABLE: VILLAGE & SMALL INDUSTRIES (Employment)

Industry Unit # <-------------- Employment (Lakh persons) -------->