Agricultural Credit Management 1

5. AGRICULTURAL CREDIT MANAGEMENT

Capital accumulation plays a pivotal role in almost all the models of growth and
development because it raises the productive capacity of the sector where it takes
place. The capital accumulation depends on the rate of investment, which in turn
depends on the rate of savings. The financial institutions play a dominant role in
mobilizing savings and then channelizing those savings into productive economic
activities. Therefore, role of financial institutions is crucial in the development of any
sector and agriculture is no exception to it. Rather, the development of agriculture
sector is more dependent on banking sector because 80 percent of farmers are small
and marginal, who are unable to save and invest due to their low levels of income.
Further, about 70 percent of the population of India lives in rural areas contributing
about 24.2 per cent to gross domestic product (GDP) and forms the largest consuming
market leading to income and employment generation through multiplier effects.
Banking sector helps in the monetization of the economy. Agriculture is the most
crucial sector of the country because the main policies of output growth, poverty
alleviation, social justice and equity are best served in this sector. Thus there is a need
to increase the credit flow to agriculture, raise productive capacity of land and
enhance the potential of water resources as well as its use efficiency for agricultural
production.

When the country faced the problem of food shortages in the early sixties, agricultural
public policy aimed at increasing productivity and production of food grains to meet
this challenge. The cultivation of dwarf wheat and rice varieties which were highly
responsive to purchased inputs like fertilizers, agro-chemicals and irrigation required
capital at the farm level. Agricultural credit scenario was largely dominated by private
informal sources of credit i.e. professional money lenders and traders. The
participation of commercial banks was negligible in agricultural loans. Farmers level
of income was low and they were hesitant to use modern technology. Therefore,
agricultural credit policy aimed at increasing the flow of institutional credit at
reasonable rates of interest to agriculture sector. The cooperative credit structure was
strengthened by reorganizing and merging weak societies with strong societies. The
number of village level co-operative societies also increased. Presently, more than

92,000 primary agricultural cooperative credit societies are working in villages.

Commercial banks (CBs) were nationalized in 1969 and mandated to increase their
geographical and functional presence in the rural areas. Consequently, the number of
rural branches of CBs increased from just 1833 in 1969 to 32,121 in 2004. Another
credit institution lending exclusively to the weaker sectors of the rural areas, known as
Regional Rural Banks (RRBs), was set up in 1975. To meet the challenges of
institutional credit and refinance needs, an apex institution called National Bank for
Agricultural and rural Development (NABARD) was setup in 1982. In order to
increase the flow of credit new approaches such as Service Area approach, Microfinance and Kisan Credit Cards were also initiated. There is now a very strong
network of rural and semi-urban branches catering to requirements of agriculture
sector and rural areas. The growth of agricultural advances has also been significant
over the years. The direct agricultural advances has increased form Rs. 4,361 crores in
1980-81 to Rs. 17,762 crores in 2000-01 at an annual growth rate of 6.6 per cent at
1990-91 prices. If we compare the growth of agricultural credit in real terms since
1980s, it was noted that growth was very high in the period of 1980-81 through 198990, when Green Revolution technology was in full bloom. The new technology was
widely adopted and capital investments on developing irrigation structures, farm
mechanization and land reclamation were made to realize the full potential of new
high yielding technology. However, during the period of deceleration in growth of
agricultural productivity, the growth of institutional credit also slowed down
significantly from around 10.6 per cent in the earlier period (1980-81 through 198990) to 6.8 per cent in the later period (1989-90 through 2000-01). A target of 18
percent of net bank credit has been set for advancing credit to agriculture by
scheduled commercial banks (SCBs). Despite significant growth in agricultural
advances, only 5 SCBs have achieved this target showing that still greater effort for
increasing agricultural credit is required from SCBs.

SOURCES OF AGRICULTURAL CREDIT

The sources of agricultural finance are broadly classified into two categories:
(A) Non institutional Credit Agencies or informal sources, and

(B) Institutional Credit Agencies or Formal Sources.

A. Non-institutional Credit Agencies

i) Traders and Commission Agents: Traders and commission agents advance loans to
agriculturists for productive purposes against their crop without completing legal
formalities. It often becomes obligatory for farmers to buy inputs and sell output
through them. They charge a very heavy rate of interest on the loan and a commission
on all the sales and purchases, making it exploitative in nature. It an important source
of finance in case of cash crops like cotton, tobacco and groundnut.

ii)Landlords: Mostly small farmers and tenants depend on landlords for meeting their
financial requirements.

iii)

Money lenders: Despite rapid development in rural branches of different

institutional credit agencies, village money lenders still dominate the scene. Money
lenders are of two types- agriculturist money lenders who combine their money
lending job with farming and professional money lenders whose sole job is money
lending. A number of reasons have been attributed for the popularity of moneylenders
such as: (a) they meet demand for productive as well as unproductive requirement; (b)
they are easily approachable at odd hours; and (c) they require very low paper work
and advances are given against promissory notes or land. Money lenders charge a
very high rate of interest as they take advantage of the urgency of the situation. Over
the years a need for regulation of money lending has been felt. But lack of
institutional credit access to certain sections and areas had facilitated unhindered
operation of money lending. Cooperative credit and self-help groups can play a major
role in control of money lending.

B. Institutional Credit Agencies

i) Government: These are both short term as well as long-term loans. These loans are
popularly known as Taccavi loans which are generally advanced in times of natural

calamities. The rate of interest is low. But it is not a major source of agricultural
finance.

ii)

Cooperative Credit Societies: The history of cooperative movement in India dates

back to 1904 when first Cooperative Credit Societies Act was passed by the
Government. The scope of the Act was restricted to establishment of primary credit
societies and non-credit societies were left out of its purview. The shortcomings of the
Act were rectified through passing another Act called Cooperative Societies Act 1912.
The Act gave provision for registration of all types of Cooperative Societies. This
made the emergence of rural cooperatives both in the credit and noncredit areas,
though with uneven spatial growth. In subsequent years a number of Committees
were appointed and recommendations implemented to improve the functioning of the
cooperatives.

Soon

after

the

independence,

the

Government

of

India

following

the

recommendations of All India Rural Credit Survey Committee (1951) felt that
cooperatives were the only alternative to promote agricultural credit and development
of rural areas. Accordingly, cooperatives received substantial help in the provision of
credit from Reserve Bank of India as a part of loan policy and large scale assistance
from Central and State Governments for their development and strengthening. Many
schemes involving subsidies and concessions for the weaker sections were routed
through cooperatives. As a result cooperative institutions registered a remarkable
growth in the post-independence India.

iii)

Commercial Banks:

Previously commercial banks (CBs) were confined only to urban areas serving mainly
to trade, commerce and industry. Their role in rural credit was meager i.e., 0.9 per
cent in 1951- 52 and 0.7 per cent in 1961-61. The insignificant participation of CBs in
rural lending was explained by the risky nature of agriculture due to its heavy
dependence on monsoon, unorganized nature and subsistence approach. A major
change took place in the form of nationalization of CBs in 1969 and CBs

were made

to play an active role in agricultural credit. At present, they are the largest source of
institutional credit to agriculture.
Box 5.1: Lead Bank Scheme
The National Credit Council (NCC) had appointed a Study Group in 1969 under the
Chairmanship of Prof. D. R. Gadgil to suggest an appropriate organizational
framework for effective implementation of social objectives. The Study Group
recommended an Area Approach for the development of financial structure through
intensive efforts. The same year, RBI appointed Nariman Committee to study this
recommendation. The Committee endorsed the views of the Study Group on Area
Approach and recommended the formulation of Lead Bank Scheme. The RBI
accepted the recommendation and Lead Bank Scheme came into force from 1969.
As per this scheme a particular district is allotted to a specific bank which takes a lead
role in identifying the potential areas for banking and banking development and in
expanding credit facilities in the district. Functions of Lead Banks are:
(i)

Surveying of potential areas for development of banking in the district

(ii)

identifying business establishments which were hitherto dependent on non

institutional agencies and financing them so as to enable them to raise their
resources and surpluses from the advances made by the bank.;

(iii)

examining the marketing facilities available for disposal of agricultural

and industrial commodities and linking credit with marketing;

(iv)

assisting other lending agencies;

(v)

developing contracts and maintaining liaison with Government and other

agencies;

(vi)

Preparing district credit plans much ahead of the season with the help of
technical committee.

The lead bank is not a monopolist in banking business in the district but acts as a
consortium leader for coordinating the efforts of all financial institutions operating in
the district. By June 1992, all the districts of the country were covered under this
scheme.

iv)

Regional Rural Banks (RRBs): RRBs were set up in those regions where

availability of institutional credit was found to be inadequate but potential for

agricultural development was very high. However, the main thrust of the RRBs is to
provide loans to small and marginal farmers, landless laborers and village artisans.
These loans are advanced for productive purposes. At present 196 RRBs are
functioning in the country lending around Rs 9,000 crores to rural people, particularly
to weaker sections. Table 1 shows the relative share of different agencies in
institutional credit flow to agriculture:

Table5. 1: Share of different agencies in flow of institutional credit for

agriculture
(Rs. Crores)

Institution

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05*

Cooperative Banks

18,363

20,801

23,604

24,296

26,959

24,471

Share (%)

40

39

38

34

31

28

Regional Rural Banks

3,172

4,219

4,854

5,467

7,581

9,176

Share (%)

11

Commercial Banks

24,733

27,807

33,587

41,047

52,441

52,038

Share (%)

53

53

54

58

60

61

Total

46,268

52,827

62,045

70,810

86,981

85,686

Note: * upto Dec 2004

Source: Government of India (2005) Agricultural Statistics at a Glance, Directorate

of Economics and Statistics, Ministry of Agriculture

Box 5.2: Kisan Credit Card Scheme

In spite of various measures to rejuvenate farm credit, the flow of credit remained
quantitatively and qualitatively poor. The institutional sources of credit meet only 51
per cent of the credit requirements of farm sector. The non-institutional sources were
mainly reached by farmers due to lack of collaterals, frequent needs, undue delays,
complicated procedures and malpractices adopted by institutional lending agencies.
With a view to inquire into the reasons for the problems of the farm credit and suggest
measure for improving the delivering system, RBI set up a one man Committee of
Shri R. V. Gupta to in December 1997. The Committee submitted its report in April
1998. It was against this background that RBI directed all Public Sector Banks
(PSBs), RRBs and cooperative banks to introduce Kisan Credit Card Scheme
(KCCS) on the lines of the model scheme formulated by NABARD and in due
course of time the KCCS was adopted by all the directed agencies.
The KCCS aims at adequate and timely support from banking system to the farmer for
crop production and ancillary activities. The credit limit (loan) is sanctioned in
proportion to the size of the owned land but some flexibility is provided for leased-in
land in addition to owned land. The borrowing limit is fixed on the basis of proposed
cropping pattern. Most of the banks are adhering to Scales of Finance (SOF) decided
by the State Level Bankers Committee (SLBC) but some banks have fixed their own
SOF. The nature of credit extended under KCCS is revolving cash credit i.e., it
provides for any number of withdrawals and repayments within the limit. This feature
would provide flexibility and reduce the interest burden upon KCCS beneficiary.
Security and margin norms would be in conformity with the guidelines issued by RBI
and NABARD from time to time. With effect from 2001-2002, it was made
obligatory for the implementing agencies to operate the KCCS with an in-built
component of life-insurance for KCCS beneficiary. The KCCS as envisaged has
substituted all other existing institutional modes of short term credit delivery.

v)Micro financing: Micro financing through Self Help Groups (SHG) has assumed
prominence in recent years. SHG is group of rural poor who volunteer to organize
themselves into a group for eradication of poverty of the members. They agree to save
regularly and convert their savings into a common fund known as the Group corpus.
The members of the group agree to use this common fund and such other funds that
they may receive as a group through a common management.

Generally, a self-help group consists of 10 to 20 persons. However, in difficult areas

like deserts, hills and areas with scattered and sparse population and in case of minor
irrigation and disabled persons, this number may range from 5-20. As soon as the
SHG is formed and a couple of group meetings are held, an SHG can open a Savings
Bank account with the nearest Commercial or Regional Rural Bank or a Cooperative
Bank. This is essential to keep the thrift and other earnings of the SHG safely and also
to improve the transparency levels of SHG's transactions. Opening of SB account, in
fact, is the beginning of a relationship between the bank and the SHG. The Reserve
Bank of India has issued instructions to all banks permitting them to open SB
accounts in the name of registered or unregistered SHGs.

By initially managing their own common fund for some time, SHG members not only
take care of the financing needs of each other, but develop their skills of financial
management and intermediation as well. Lending to members also enhances the
knowledge of SHG members in setting the interest rate and periodic loan installments,
recovering the loan, etc.

The SHG- bank linkages programme has emerged as the major micro-finance
programme in the country. NABARD has played a major role in development of
SHG-Bank linkages with involvement of Non Governmental Organizations (NGOs)
in the process. There are three models of SHG-bank linkages that have evolved over
time:

Model I. SHGs formed and financed by banks: In this model, the bank itself takes up
the work of forming and nurturing the groups, opening their bank accounts and

providing them with bank loans after satisfying itself as to their maturity to absorb
credit. In case the bank is also the programme implementing agency.

Model II. SHGs formed by NGOs and formal organizations but directly financed by
the banks: In this model, groups are formed by NGOs (in most cases) or by
government agencies. The groups are nurtured and trained by the agencies. The bank
then provides credit directly to the SHGs after observing their operations and maturity
to absorb credit. While the bank provides loans to the groups directly, the facilitating
agencies continue their interactions with the SHGs. Most linkage experiences begin
with this model, where NGOs play a major role. The model has also been popular
with and more acceptable to banks, since some of the difficult functions of social
dynamics are externalized. Around 75 percent of the total number of SHGs is
financed under this model.

Model III. SHGs financed by banks using NGOs and other agencies as financial
intermediaries: For various reasons, banks in some areas are not in a position even to
finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act
as both facilitators and microfinance intermediaries. First, they promote the groups,
nurture and train them and then they approach banks for bulk loans for on lending to
SHGs.

While 563 districts in all the States/UTs have been covered under this programme,
560 banks including 48 commercial banks, 196 RRBs and 316 cooperative banks
along with 3024 NGOs are now associated with this initiative. The number of SHGs
linked to the banks aggregated 1,276,035 as on December 30, 2004. Cumulative
disbursement of bank loan to these SHGs stood at Rs. 5,038 crore as on the same date.

Figure 5,1 Cooperative Credit System

Cooperative Credit Organization

Short term and Medium term

loans (three- tier system)

Long term (two- tier system)

State Co-operative Bank (SCBs)

Central Land Development

Banks (at state level)

District Central Co-operative

Banks (at district level)

Primary Land Development

Bank (at Taluka level)

Primary Agricultural Cooperative Credit Societies

1. Primary Agricultural Cooperative Societies (PACS)

Following the Raiffeisen Model, PACS came to existence after the enactment of
Cooperative Credit Societies Act 1904. PACS functions on the basis of cooperative
principles of voluntary participation, democratic control, limited area of operation and
limited liability. These societies work at the village level and are meant for the
farmers regarding provision of requisite short term and medium term loans. Supply of
agricultural inputs and other essential commodities is also taken up by these societies.
In addition to these PACS also helps in formulation and implementation of
agricultural development plans for the welfare of its members. The PACS are
associated with following functions:

(i)

They borrow adequate and timely funds from DCCBs and help the
members in financial matters;

(ii)

they attract local savings in the form of share capital and deposits from the
villagers, thereby inculcating the habit of thrift;

(iii)

they supervise the end use of credit;

(iv)

they make available fertilizers and insecticides etc. to the needy farmers;

(v)

they provide machinery on hire basis to the farmers;

(vi)

they associate with the programmes and plans meant for the socioeconomic development of the village;

(vii)

they are also involved in the marketing of farm produce on behalf of the
farmer-borrowers;

(viii)

they provide storage facilities and marketing finance; and

(ix)

they supply certain consumer goods like rice, wheat, sugar, kerosene,
cloth etc. at fair prices.

2. District Central Cooperative Banks (DCCBs)

DCCBs function as a link between the PACS and State Cooperative Banks (SCBs).
They are basically meant for meeting the credit requirement of PACS. They also
undertake banking business such as accepting deposits from public, collecting bills,
cheques, drafts etc. and providing credit to the needy persons. The area of operation
varies from taluka to district but in most of the states their operations are confined to
the taluka level. Membership of the DCCBs is open to individuals and societies
working in its area of operation. Marketing societies, consumer societies, farming
societies, urban banks and PACS are usually enrolled as members of this bank. The
specific functions of the bank are:

(i)

to supervise and inspect the activities of PACS and help the credit societies
run smoothly;

(ii)

to maintain close and constant contact and guide the primary societies and
provide leadership to them;

(iii)

to undertake non-credit activities like supply of seeds, fertilizers besides

sugar, kerosene and other consumer goods;

(iv)

to provide requisite funds to societies under their control; and

(v)

to accept deposits from the member societies as well as from public.

3. State Cooperative Bank (SCB)

SCBs are at the apex of the cooperative credit organization present at the state
capitals. They perform the same functions for the DCCBs as the latter does for the
PACS. The membership comprises of DCCBs and individuals. Being at the apex
level, this bank mobilizes and deploys financial resources among the various sectors.
It finances and controls the working of the DCCBs in the state. It also serves as a link
between the RBI and DCCBs. The Specific functions of SCBs:

(i)

SCBs perform as the bankers bank for the DCCBs;

(ii)

SCBs banks facilitate the respective Sate Governments to draw up

cooperative and other development plans as well as their implementation;

(iii)

they act as a link between the DCCBs and the RBI;

(iv)

they supervise, control and guide the activities of DCCBs;

(v)

these banks also perform normal banking operations;

(vi)

they grant subsidies to DCCBs for development of cooperative activities;

(vii)

they formulate and implement uniform credit policies; and

(viii)

these banks coordinate their own policies with those of the cooperative
movement of the government.

4. Primary Land Development Banks (PLDBs)

The establishment of the Land Mortgage Bank (LMBs) on cooperative lines dates
back to the year 1920 in Punjab. Later during the period 1920-29, a number of LMBs
were established in the states of Punjab, Madras, Mysore, Assam and Bengal. After
that not much growth was observed in the number of LMBs till 1945. However,
during 1945-53 a rapid growth was observed in the number of these banks. During

this period only rich and affluent farmers derived benefits of these banks and small
and marginal farmers remained untouched of the developments. LMBs got massive
support from the RBI, SBI, LIC and Agricultural Refinance Corporation. As a result
LMBs had to reorient its lending policies in favour of marginal and small farmers.
LMBs were renamed as Land Development Banks (LDBs) in 1974. Primary LDBs
are generally organized to serve the farmers at Taluka level. Its specific functions are:

(i)

to provide long term finance to the needy farmers for the development of
land, increasing production and productivity of land;

(ii)

to provide long term loan for minor irrigation and for redemption of old
debts and purchase of land;

(iii)

to provide long term finance for purchase of tractors, machinery and

equipments and construction of farm structures; and

(iv)

to mobilize rural savings.

5. Central Land Development Bank (CLDBs)

In many states PLDBs are federated into CLDBs. Branches of CLDBs, PLDBs and
individual entrepreneurs are the members of the CLDB. NABARD and LIC subscribe
for its debentures in large amounts. In fact, NABARD is the refinance agency of
CLDBs. It acts as a link between NABARD and the Government in long-term
business transactions. It supervises and guides the PLDBs. It inculcates the practice of
thrift among member banks by mobilizing savings and stimulating capital formation.
The CLDBs provides loans to member banks for the redemption of old debts,
improvement, reclamation and development of land, purchase of agricultural
machinery and equipment and development of minor irrigation.

6. Large-sized Adivasi Multi-purpose Cooperative Societies (LAMPS)

LAMPS were organized for the first time in December 1971 on the lines of FSS on
the recommendation of Bawa team appointed by the Government of India to look into
the credit problems of tribal areas. According to its framed objectives, these societies

are expected to provide all types of credit including consumption credit through a
single window. Intensification and modernization of agriculture with appropriate
technical guidance and improving the marketing of agricultural and forest products in
the tribal areas, are their other objectives.

Membership and Area of Operation: All tribes can become members of this society
on voluntary basis. It can cover an area of a block to a taluka.

Sources of Capital: Share capital of members and state governments, entrance fee,
reserve fund, deposits collected from members and non-members and loans taken
from cooperative institutions, Government are the various sources of capital.

Management: These are managed by a Board of Directors comprising 11 members.

Five directors come from tribal members, two from non-tribal members, two
nominated by the Registrar of cooperatives and two nominees from the lead bank of
the district. One of the nominees acts as the Managing Director of LAMPS.

Box 5.3: Farmers Service Societies (FSS)

Farmers Service societies are registered cooperative bodies based on the principles of cooperation
The specific function of the FSS is:

iv)

to make arrangements for bringing about improvements in agricultural

markets; and

v)

to mobilize deposits and small savings from weaker sections through

incentives.

Area of operation: The societies have been launched in selected districts. Each
society has a jurisdiction of a block or a portion thereof. A district union of these
societies is there at the district level to suggest ways and means for improving and
organizing these societies for executing specific activities. The membership of these
societies is open to those who are eligible to get assistance under Small Farmers
Development Agency (SFDA) and Marginal and Small Farmers Development
Agency (MFAL) programmes. Others may be associate members without any voting
rights.
Sponsorship: The lead bank of the district generally sponsors the FSS in financial
matters
Capital Structure: The various sources for funds are: share capital, loans, funds
contributed by commercial banks, cooperative societies, subsidies from SFDA and
MFAL and commissions accrued to the society through supply of essential inputs and
interest on advances. Share capital is contributed by its members, lead bank and the
State Government.
Management: The number of the members of the Board of Directors varies from 9 to
13 depending upon the size of the society. One full-time managing director is deputed
by the lead bank. Five directors will be elected from the members of the society of
which three are from small and marginal categories and two from other farmers. The
remaining directors are representatives of financial institutions. Block Development
Office, Department of Agriculture and Cooperative societies.

REGIONAL RURAL BANKS

The establishment of Regional Rural Banks (RRBs) has been a landmark in the
history of rural banking. Till 1968, the official policy was in favour of developing
cooperative credit system. In 1969, All India Rural Credit Review Committee found
that over large parts of the country small farmers had been lacking access to
cooperative credit. Further, the quantum of credit from the cooperative system was
too little to meet the credit requirements of agriculture. In 1969 a major effort was
made to improve rural credit delivery system through nationalization of 14
commercial banks which emphasized on opening of rural branches. But rural branches
of commercial banks (CBs) proved to be a source of channelizing savings from rural
areas to urban areas. They also lacked trained personnel to handle rural issues and
acted more as a competitor to the cooperative credit system rather than supplementing
it. As CBs worked more for profit earning, they failed to include the disadvantaged
sections of the society in their banking domain.

Thus keeping these shortcomings in view, Banking Commission 1972 recommended

that a chain of rural banks be set up in addition to the regular branches of commercial
banks. A Working Group was set up under the chairmanship of Mr. M. Narasimham
to give suggestions to improve the rural credit delivery system. The Group suggested
institution of Regional Rural Banks as a means to provide low cost credit to rural
artisans, landless laborers and small and marginal farmers. The 20 point programme
of the Government also envisaged making credit available to weaker sections of the
society. Thus the Regional Rural Banks ordinance was promulgated by the president
on 26th September, 1975 which came into force with immediate effect. On October 2,
1975 five RRBs were set up at Moradabad and Gorakhpur in Uttar Pradesh, Bhiwani
in Haryana, Jaipur in Rajasthan and Malda in West Bengal.These banks were
sponsored by the Syndicate Bank, State Bank of India, Punjab National Bank, United
Commercial Bank and United Bank of India. The Ordinance of 1975 was replaced by
the Regional Rural bank Act 1976.

RRBs were expected to play a vital role in mobilizing the savings of the small and
marginal farmers, artisans, agricultural laborers and small entrepreneurs and inculcate
banking habit among the rural people. These institutions were also expected to plug
the gap created in extending the credit to rural areas by largely urban-oriented
commercial banks and the rural cooperatives, which have close contact with rural
areas but fall short in terms of funds.

a. Objectives

The RRBs have following objectives:

1. to develop rural economy;

2. provide credit for agriculture and allied activities;
3. to encourage village industries, artisans, carpenters, craftsmen, etc.;
4. to reduce dependence of weaker sections on money-lenders;
5. to identify a specific and functional gap in the present institutional structure;
6. to supplement the other institutional agencies in credit delivery to rural areas,
and
7. to make backward and tribal areas economically better by opening
new branches.

b. Characteristic features of Regional Rural Banks

1. Sponsorship: Every RRBs is sponsored by a commercial bank, usually the

lead bank of the district. In some areas State Cooperative Banks and Private
Banks are allowed to sponsor RRBs.

2. Jurisdiction: The operational area to be covered by each RRB varies from one
to two districts for efficient functioning. The number of branches in the area
covered by each RRB may range from 50 to 60 keeping in view the
operational and financial efficiency. Each branch of a RRB is expected to

serve a population of approximately 20,000. However, these are subject to

change as per the direction of the Central Bank of the country.

3. Management: The management of the bank is in the hands of a Board of

Directors numbering eight, headed by a Chairman, who is an Officer of the
sponsoring bank. Of the eight Directors, three are nominees of the sponsoring
bank, two from State Government dealing with district development
programmes and three from the Central Government. The sponsoring bank
provides assistance to RRBs for the first five years in recruitment and
operational matters.

4. Share Capital: The authorized share capital of a RRB has been fixed at Rs 1
Crore and issued capital at Rs 25 lakhs. This is contributed by the Central
Government, State Government and the sponsoring Bank in the ratio of 50, 15
and 35, respectively. On the recommendation of working group of 1986, the
Government has increased the authorized capital to Rs 5 Crores and issued
capital to Rs 1 Crore to improve their viability.

5. Functions: The main functions of RRBs are to grant loans and advances
particularly to small and marginal farmers, agricultural laborers, cooperative
societies, artisans and small entrepreneurs within its operational area. They
extend other banking facilities also such as issuing of drafts, collection of
cheques etc. They also play a vital role in the rural developmental programmes
of the Government.

6. Rate of Interest: The rate of interest on the loans charged is the same as
collected by PACS. They have been allowed to offer 0.50 per cent higher
interest on deposits than offered by CBs.
i)

Special Concessions to RRBs:

a. Statutory Liquidity Ratio(SLR) to be maintained is fixed at 25 per cent

as against 38 per cent by CBs;

b. RRBs are allowed to pay 0.5 per cent higher interest rate to its depositors
over the interest rates paid by CBs;
c. Cash Reserve Requirement (CRR) of 3 per cent to be maintained with RBI
as against 10 per cent by CBs;

d. They are allowed to draw refinance from NABARD to the extent of 50 per
cent or more depending upon the type of advance of the eligible outstanding
loans at a concessional interest rate of 7 per cent per annum; and

e. The RRBs are registered as insured banks with Deposit Insurance and Credit
Guarantee Corporation of India (DICGC). All deposits up to 30,000 in each
bank are accordingly insured with the DICGC thus providing protection to
the depositors.

c. Performance of RRBs

The Narasimham Committee (1991) made a number of observations on the

functioning of RRBs. According to him RRBs had low earning capacity. They had not
been able to earn much profit in view of their policy of restricting their operations to
target groups. The recovery position of RRBs was not satisfactory. There were a large
number of defaulters. Their cost of operation was high on account of the increase in
the salary scales of the employees in line with the salary structure of the employees of
commercial banks. In most cases, these banks followed the same methods of
operation and procedures as followed by commercial banks. Therefore, these
procedures did not found favour with the rural masses. In many cases, banks were not
located at the right place. For instance, the sponsoring banks were also running their
branches in the same areas where RRBs were operating. The Committee also made
remedial measures for better performance of these banks. The Committee also
suggested ways and means to improve the functioning of RRBs. It included
streamlining if interest rates at par with CBs and alternative to merge with the sponsor
banks in case of non-viable RRBs.

However, in period following this report RRBs made impressive strides on various
business indicators. For instance, deposits of RRBs have grown by 18 times and
advances by 13 times between 1980 and 1990. Between 1990 and 2004, deposits and
advances grew by 14 times and 7 times, respectively (Table 2). Between the year
2000 and 2004, loans disbursed by RRBs more than doubled reflecting the efforts
taken by the banks to improve credit flow to the rural sector. The average per branch
advances also increased from Rs.25 lakh in March 1990 to Rs.154 lakh in March
2003. When one considers the deployment of credit relative to the mobilization of
resources, the credit-deposit (C-D) ratio of RRBs were more than 100 per cent during
the first decade of their operations up to 1987. Though the C-D ratio subsequently
became lower, of late, it has shown an improvement and went up from around 39 per
cent in March 2000 to 44.5 per cent in March 2004.

Table 5.2: Evolution of RRBs: Select Indicators

(Rs. Crores)
Parameter

1980

1985

1990

1995

2000

2004

No. of RRBs

85

188

196

196

196

196

Capital

21

46

91

166

1959

2221

Deposits

222

1315

4023

11141

32226

56295

Advances

262

1405

3384

5987

12427

25038

Interest Earned

NA

NA

480

1158

3938

5535

Total Income

NA

NA

53

1230

4145

6231

Operating Profit

NA

NA

12

-280

524

1044

Source: Mishra (2006)

TABLE5.3: Direct Institutional Credit For Agriculture And Allied Activities Total (Short-Term And Long-Term)
(Rs. crore)
Loan Issued
Year

Coop.

S.G.

SCBs

RRBs

Loan Outstanding
Total

Coop.

SCBs

RRBs

(2 to 5)

Total
(7 to 9)

10

1972-73

958

177

21

1156

1837

342

2179

1980-81

2479

153

1496

168

4296

4821

3541

273

8635

1990-91

4819

359

4676

335

10188

10531

17032

1753

29316

2000-01

27295

487

16440

3966

48187

46135

38270

7249

91654

2009-10

58787

160690

26499

245976

64045

256119

37367

357531

2010-11

74938

34640

76480

46282

Coop.- Cooperatives, S.G.- State Government, SCBs : Scheduled Commercial Banks.

RRBs : Regional Rural Banks.
Note: 1. Data up to 1990-91 pertain to the period July-June and April-March
thereafter. In case of SCBs, data for all the years pertain to July-June period.
2. RRBs came into existence in 1975-76.
3. The data since 1999-2000 are strictly not comparable with the earlier years as it
covers not only PACS but also SCARDBs and PCARDBs, while the earlier period
covers PACS only.

Source: 1. Reserve Bank of India.

2. National Bank for Agriculture and Rural Development.

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

I.

Genesis

Prior to independence, long term credit requirement for agriculture were met by
money lenders and to a small extent by state governments. Considering this, All India
Rural Credit Survey Committee (1951) and Committee on Cooperative Credit (1960)
emphasized the need for arrangements for long-term finance for investment in
agriculture and suggested the establishment of an institution at the apex level. The
Standing Advisory Committee of RBI on Agriculture Credit had also supported the
recommendations. Consequent to their recommendations, Parliament through an Act
of 1963 provided for the establishment of Agriculture Refinance Corporation (ARC)
form July 1, 1963. It was basically a refinancing agency, meant for promotion and
development of agriculture through long-term financial assistance. Considering its
developmental and promotional role, it was renamed as Agricultural Refinance and
Development Corporation (ARDC). Ever since its inception, it financed term finance
which included medium term and long term loans for major agricultural development
projects, which were so far neglected by existing financial institutions.

ARDC could not make much headway in the field of direct financing and delivery of
rural credit against the massive credit demand for rural development. Its role to meet
the challenges in integrated rural credit through institution building, training, research,
policy making, planning and providing expertise in the diverse disciplines of finance
was inadequate and insufficient. As a result many committees and commissions viz.
Banking Commission (1972), National Commission on Agriculture (1976) and
Committee to Review Arrangements for Institutional Credit for Agriculture and Rural
Development (CRAFICARD) in 1979 under the chairmanship of B. Shivaraman,
former member of planning Commission recommended the setting up of a National
Level Institution called National Bank for Agricultural and Rural Development
(NABARD) for providing all types of production and investment credit for agriculture
and rural development. In pursuance to their recommendations, NABARD came into

existence in July 1982. The erstwhile ARDC, the Agricultural Credit Department
(ACD) and Rural Planning and Credit Cell (RPCC) of RBI were merged with
NABARD.

II.

Objectives

As an apex refinancing institution NABARD purveys all types of credit needed for
the farm sector and rural development. It is also vested with the responsibility of
promoting and integrating rural development activities through refinance. The bank is
also providing direct credit to an institution or agency or an individual subject to the
approval of the Central Government. It has close links with RBI for guidance and
assistance in financial matters. As an effective catalytic agent for rural development
and in formulation of appropriate rural development plans and policy, its role is
remarkable.

III.

i)

Functions

It helps in planning and operational matters related to credit for agriculture

and allied activities, rural artisans, village industries and other rural
development activities;

ii)

It extends refinance to commercial banks for term loans in relation to

agriculture and rural development;

iii)

It provides short term credit to state cooperative banks, RRBs, and any
other financial institution notified by RBI for a period not exceeding 18
months by way of refinance for agricultural operations, marketing of crops
and marketing and distribution of agricultural inputs.

iv)

It makes direct loan by way of refinance to all eligible institutions for a

period not exceeding 25 years.

v)

It provides finance for production and marketing activities of rural

artisans, cottage industries, small-scale industries, handicrafts etc. in the
rural areas.

vi)

It facilitates all eligible financial institutions for conversion of production

loans into term loans in the times of natural calamities,

vii)

It contributes to share capital and securities of eligible institutions and

State Governments concerned with agriculture and rural development. It
also helps State Governments to contribute to the share capital of eligible
institutions working for rural development.

viii)

It offers advice and guidance to State Governments, co-operative

federations and National Cooperative Development Corporation (NCDC)
and functions in close contact with Central Government in matters related
to agriculture and rural development.

ix)

It coordinates and monitors all agricultural and rural lending activities with
a view to tie up with extension and planned development activities in rural
areas; and

x)

It conducts training, consultancy and research relating to agricultural

finance and agricultural and rural development.

IV.

Management

The management of NABARD is vested in the Board of Directors which consists of a

Chairman, two directors from amongst experts in rural economics, three directors out
of whom two be persons with experience in cooperative banking and one with
experience in commercial banking, three directors from among the officials of the
State Governments, and a Managing Director. Directors of the Board of Management

are appointed by the Central Government in consultation with the Reserve Bank of
India (RBI).

V.

Sources of Funds

Authorized share capital of NABARD is Rs 500 crores and issues and paid up capital
is Rs 100 crores. NABARD accrues additional funds from borrowings from the
Government of India and any institution approved by the Government of India, issue
and sale of bonds i.e. Rural Infrastructural Development Bond, borrowings from RBI,
deposits from State Governments and local authorities and gifts and grants received.

VI.

Performance of NABARD

In the last two decades of its existence NABARD has taken many initiatives to meet
the credit requirement for the development of agriculture and rural areas. The
Government has established Rural Infrastructural Development Fund within
NABARD from April 1995. The fund will provide loans to State Governments and
State Owned Corporations for completing on-going projects relating to medium and
minor irrigation, soil conservation, watershed management and other forms and rural
infrastructure. NABARD has also implemented a Partnership Model of linking of
self-help groups to CBs along with involvement of a NGO. The model has been
largely successful in delivering financial services to rural poor. NABARD has also
introduced a rehabilitation programme for the weak DCCBs and SCBs.

Table 5.4: National Bank for Agriculture and Rural Development - Financial
Assistance
(Rs. crore)
Year

No. of

Total Financial

NABARD's

Schemes

Assistance

Commitment

Sanctioned

Sanctioned

Disbursements

1976-77

4487

1713

1465

815

1980-81

16574

4629

3860

2223

1990-91

89513

23164

18299

14310

2000-01

121097

71241

56032

50882

(724)

(7096)

(6415)

(6158)

130595

156706

135773

130173

(3)

(12308)

(12009)

(12009)

130598

171444

149259

143659

(3)

(14738)

(13486)

(13486)

2009-10
2010-11

Note: 1. Data for 2010-11 are provisional.

2. Data on disbursements exclude short-term disbursements made for Integrated Cotton
Development Project in the States of Haryana,Punjab and Maharashtra for the period
1977-78 to 1981-82.
3. Data for the period 1980-81 to 1987-88 are on July-June basis.
4. Data relate to financial assistance on a cummulative basis at the end of each year
and data in parentheses indicate financial assistance during the year.
Source: National Bank for Agriculture and Rural Development.

AGRICULTURAL FINANCE CORPORATION (AFC)

Agricultural Finance Corporation (AFC) was incorporated on April 10, 1968 by the
Indian Banks Association in order to provide advisory services to commercial banks
in matters related to financing agriculture. Basically, AFC is a consortium of
commercial banks established under the Indian Companies Act 1956 to provide

consultancy services to member banks in matters related to projects for agriculture

and rural development. Scheduled commercial banks numbering 37, notified under
RBI Act of 1934 had subscribed to the share capital of the corporation. The
authorized share capital of AFC was Rs 100 crores and the issued share capital was
Rs 10 Crores.

The

Corporation

has

two

distinct

institutions/organizations/individuals

roles:

involving

financing

agricultural

the

individual

development

and

promoting commercial bank advances for agricultural development. The financing

roles included (a) sinking, deepening and energizing of irrigation wells;
(b)production, distribution and marketing of agricultural inputs such as seeds,
fertilizers, insecticides, machinery and implements; (c) construction of storage
structures for food grains and fertilizers ; and (d) establishments of agricultural
service

units.

The

promotional

role

included

(a)commercialization

and

industrialization of agriculture (b) formulation of potential projects to be financed by

banks and removal of various handicaps and difficulties experienced by commercial
banks and farmer-borrowers; and (c) development of cooperation, coordination and
consortium arrangement among different lending agencies and co-operatives involved
in agricultural financing.

In recent years AFC has assumed only consultancy roles extending project
consultancy services to banks, Central/State Governments, NABARD, cooperatives,
private sector and international funding agencies. It also undertakes surveys and
research studies including, socio-economic, market, baseline, concurrent and impact
evaluation surveys, credit demand studies, farm management studies, MIS studies and
resource management studies both at national and international levels

PROBLEMS IN AGRICULTURAL CREDIT SYSTEM

Agricultural credit system in the country is faced with many problems, which restrict
its outreach to different areas and sections of farming classes as well as

hindering its

growth and contribution towards agricultural growth to the optimum level. These
problems can be discussed under following heads:

(i)

Transaction Costs of Agricultural Credit

Two issues are involved in agricultural lending in India. The banking sector has to
cater a very large number of small borrowers spread over a very large area. Secondly,
size of the loan is very small. The small and marginal farmers constitute more than 80
per cent of the farmers and some of the areas are remotely located. Catering to their
requirements of farmers of such areas becomes very difficult and costly. From
borrowers point of view, access to intuitional credit especially for small, resource
poor and illiterate farmers gets inhibited as the procedural and documentation
requirements are cumbersome, time consuming and increase the cost of borrowing for
the farmers. On the other hand, access to non-institutional credit is regarded to be very
simple where transaction cost is negligible and involve no procedural complications.
Empirical studies show that transaction cost in case of non-institutional loans was
negligible whereas it ranged from 3 to 5 per cent in case of CBs, 1.4 to 3 per cent in
case of cooperatives and more than 8 per cent in case of RRBs.

(ii)

Loan Overdue

Recovery of loans is an important aspect in the economic viability of rural financial

institutions as the range of services provided by them is limited and focused on
advancing of loans only. Some empirical studies have suggested poor recovery
performance of agricultural loans. Major reasons for high level of loan default are low level of income generation, particularly on small farms, diversion of loans for
unproductive purposes, inadequacy of loans leading to their diversion and willful
default under the hope that they will be waived in future. Though the average rate of
loan default in agriculture is 37 per cent, the recovery performance varies greatly
across states/regions and financial institutions. The recovery performance has been
more than 80 per cent in relatively developed states like Punjab, Kerela, Haryana and
Tamil Nadu, It has been 60-80 per cent in case of Andhra Pradesh,

Gujarat,

Karnataka, Maharashtra, Rajasthan, Madhya Pradesh and Uttar Pradesh. The recovery
performance is poor in eastern and north-eastern states except West Bengal. There is
one good feature that where the use of institutional credit was higher, the recovery
performance was also better.

(iii)

Economic Viability of rural Credit Institutions

Agricultural loans were considered to be unviable by rural financial institutions due to

low rates of interest and high risk and transaction cost in the pre-reform period. The
interest rate structure started undergoing changes after the financial sector reforms of
1991 in order to improve the economic viability of rural credit and provide more
flexibility to banking institutions to decide the interest rate structure for agriculture
and other sectors. The interest rates were further rationalized after the exchange rate
mechanism was made more flexible and foreign capital was allowed in the Indian
economy. Recently, agricultural loans up to Rs. 50,000 have been made available at a
rate of 9 per cent. However, sharp rise in interest rates for different sectors of
economy has put a pressure for upward revision in the interest rates of agricultural
loans as well. Still the economic viability of rural financial institutions is not good due
to high transaction and risk cost. It was noted that the net margins (as per cent of
working capital) in the case of DCCBs was negative at All-India level while the
economic position of RRBs has improved. The cooperative loans have become more
costly due to some margins getting added at every level of its three-tier structure.

(iv)

Access to Institutional Credit of Small Farmers

The small and marginal farmers constitute 80 per cent of operational holdings and
cultivate around 36 per cent of area in India. Their number is expected to grow in
future due to subdivision of holdings and lack of employment opportunities in the
non-farm sector. Due to their small holding they are disadvantageously placed with
respect to access to technology, credit and other institutional supports. The
information on distribution of institutional agricultural credit shows that their

access

to credit to meet their short term and long term capital requirements has not improved
over the years.

There are some disquieting features of lending to small borrowers. The number of
small borrower accounts in case of commercial banks has come down over time
indicating shifting of their focus to large borrowers. The rate of growth in agricultural
advances to small and marginal farmers (less than 2 ha) by scheduled commercial
banks in the 1990s has come down as compared to other farm size categories due to
which their share declined from 54 percent in TE 1993 to 51 per cent in total
agricultural credit in TE 2002. The All India Debt and Investment Survey (AIDIS)
showed that rural households with assets less than Rs 20,000 had access to
institutional loans for their credit needs only up to 35 to 37 per cent while the share of
non-institutional agencies in the outstanding debt was as high as 52 to 62 per cent. In
case of higher asset households, 70 per cent of the outstanding debt came from
institutional sources. Therefore, in spite of strong network of rural branches and
strong emphasis on target lending under poverty alleviation programmes, creating
self-employment opportunities, etc, a large number of rural poor remain outside the
fold of formal banking system for their credit needs. The important factors impeding
the access of disadvantaged sections to institutional credit are higher transaction costs
due to large numbers and small borrowings, higher risk cost, complicated procedures
and large documentation required, inability of small borrowers to provide tangible
collaterals, non-availability of tenancy agreements, loan waivers affecting recovery
performance, poor risk mitigation mechanism for farmers in the wake of natural
calamities and crop failure and mind set of bankers against small loans viewing them
as unprofitable.

(v)

Indebtedness among the Farmers

Indebtedness of Indian farmers has a long history. The Deccan Riots Commission of
1875 reported that one third of the occupants of government land were under debt.
The Famine Commission of 1880 reported that one third of the land holders of the
country were under deep debt and another one third were also under debt but in

position to redeem it. The Famine Commission of 1901 estimated that more than 80
per cent of farmers were under debt. The Great Depression of 1929-30 also worsened
the debt situation. The problem of indebtedness of Indian farmers in the postindependent India continues (Table 5.5) with varying degrees. After 1981,
indebtedness has shown an increasing trend over the years with 57.2 per cent of
cultivators indebted in 2003. According to the 50th round of the National Sample
Survey Organization (NSSO) in 2005, if farmers engaged in allied agricultural
activities (going by principal source of income) are added to the cultivators then the
proportion of indebted farmers at all India level is 48.6 per cent. Deceleration in
agricultural growth in the 1990s is regarded as one of the most important factors
responsible for increasing indebtedness.

There is a wide variation in the number and proportion of indebted farmers across the
states and union territories (UTs) of India. At all India-level 48.6 per cent of the total
farmers are reported to be indebted. The incidence of indebtedness is the highest in
Andhra Pradesh (82.0) percent followed by Tamil Nadu (74.5 per cent), Punjab (65.4
per cent), Karnataka (61.6 per cent) and Maharashtra (54.8 per cent). The states of
Haryana, Rajasthan, Gujarat, Madhya Pradesh and west Bengal and group of UTs
have reported indebtedness among the farmers to the extent of 50-53 per cent. The
states of Meghalaya (4.1 per cent), Arunachal Pradesh (5.9 per cent) and Uttaranchal
(7.2 per cent) have reported very low incidence of indebtedness among farmers The
rest of the states have reported indebtedness in the range of 18.1 per cent in Assam to
49.2 per cent in Tripura. The states with high level of agricultural development are
reported to be home of a higher proportion of indebted farmers. The outstanding debt
also varies considerably according to the amount across states and farm sizes.
Table 5.5: Indebtedness among Cultivators in India
Year

Percentage Indebted Cultivators

1971

46.1

1981

22.3

1991

25.9

2003

57.2

Source: NSSO (2005)

The states with high level of agricultural development and with commercial farming
report high level of per farmer debt. Crop failure due to droughts/floods, pest attacks
and use of spurious insecticides and productive loans also add to high incidence of
indebtedness.

The prevalence of informal loans generates interlinked transactions in the market. The
farmers borrowing from informal sources generally use their crop as collateral and
commit to sell the output to the lender. The loans are also used to acquire modern
inputs like herbicides, insecticides, seeds, fertilizers and also consumer goods from
the lenders. In some of the cases farmers buy inputs as well as sell output via lenders.
The interlinked transactions take place because lenders are engaged in marketing of
agricultural inputs, consumer goods and agricultural output along with money
lending. The professional money lenders/commission agents charge high interest rates
generally between 18-36 per cent per annum and also exploit the farmers in supply of
inputs and marketing of agricultural output. This has negative implications for
agricultural development and cripples the farmers capacity to return loans and come
out of debt trap.

Farmers suicide in India has been reported regularly for period of a decade and half.
The states of Andhra Pradesh , Karnataka, Maharashtra, Kerala and Punjab are the
major states where such incidents have been experienced. The emergence of this
phenomenon has also become a subject of debate among the scholars, social
organizations and policy makers. Studies have shown that mainly economic and in
scattered cases non-economic factors have been responsible for farmers suicide.
Among economic factors, the failure of crop (mainly cotton) and failure of investment
in bore wells are responsible for involvement of farmers in debt trap. Stagnant
agricultural yields among Punjab farmers have been found to a cause of their stress. In
the wake of limited access to institutional credit, the small farmers are forced to
borrow from non-institutional sources. At times they rotate credit from noninstitutional to institutional sources and vice versa leading to their exploitation by
multiple agencies. There are a large number of factors which operate simultaneously

and cause unbearable distress to the farmer. The resource poor farmers in all the
major states reporting suicides constitute the largest proportion of suicide victims.
Thus it can be concluded that farmers suicides are more common in states which are
forerunner of commercial agriculture. They are Andhra Pradesh, Karnataka, Keral ,
Maharashtra and Punjab. These are the states which show high proportion of the
farmers under outstanding debt. With the exception of Kerala and Maharashtra, these
are the states where farmers dependence on informal sources of credit is very high.
In majority of the cases, the suicide victim farmers have used loans for investment in
agriculture and they belong to the category of small and marginal farmers. The
resource poor farmers suicides indicate that there is breakdown of the community
sense and social support mechanism in areas of highly commercialized and
competitive agriculture.

ISSUES IN RURAL CREDIT

Broadly speaking, there are three major issues before the rural financial institutions
which need attention for making the agriculture sector make a significant contribution
to the economic growth of the country (1) The quantum of flow of institutional
credit to agriculture has to be increased; (2) The access to formal credit for the rural
poor and disadvantaged and agriculturally less developed regions has to be improved;
and (3) the economic viability of rural banking system has to be ensured over time.

First, the flow of credit to agriculture sector has to be increased. Productive

agriculture requires investment in complementary assets like irrigation, farm
machinery, and livestock. However, irrigation development is pivot to all aspects of
agricultural development. Sixty per cent of the net area sown in the country is rain fed
and un irrigated. Further, exploitation of irrigation potential through investments in
watershed development, developing minor irrigation sources like tanks and wells and
development and promotion of technology for efficient water management should
receive priority in formal lending.

The credit delivery system has been found wanting with respect to meeting adequately
credit requirements of high-tech and high-value agriculture, value addition,
processing and marketing activities of the farmers. Apart from crop sub-sector, the
financing of activities like animal husbandry, fisheries, agricultural services will
require vast credit support. New loan products such as pledge financing, marketing
credit, loan against warehouse receipts, export credit and venture capital for
agricultural entrepreneurship shall have to be promoted to meet the challenges posed
by globalization. The present credit delivery system only emphasizes production
credit. Thus the imbalance between production and post-production credit needs to be
rectified.

Secondly, the outreach of formal agricultural credit is not adequate to rural poor,
small and marginal farmers and agriculturally less developed areas. Linking of selfhelp groups (SHGs) with financial institutions with the help of non-governmental
organization (NGOs) has yielded positive results in the form of asset creation,
increased income and greater employment for these disadvantaged sections of the
society. Such successful examples of forming SHGs encouraging them to save and
provide micro-finance have to be replicated. The consumption requirements of the
poor s need to be integrated with production requirements. Crop insurance
programmes need to be more effective for taking care of risks arising out of crop
failure. Tenants lack access to credit because tenancy agreement is not in written
form. If the land-lease market is made free, it would help such farmers in procuring
formal credit.

Finally, the cost of borrowings to the farmers is also an important issue affecting the
flow of credit to agriculture sector. The rate of interest to agriculture has been recently
brought down to 9 per cent for loans less than Rs 50,000 and 10.5-12.5 per cent on
loans above Rs 50,000. The cost of credit from cooperative institutions is still high
because at every tier of the three tier structure some costs and margins are added and
secondly, cooperatives offer higher interests on deposits. The NABARD has amended
its 1981 act to provide refinance directly to DCCBs. Yet the transaction cost is high,
which need to be reduced by introducing new products like group lending,

strengthening of SHGs-Bank linkages and improving efficiency of the staff through

information technology (IT) tools and increasing the volume of business and
providing multi-purpose credit facility. Kisan Credit Card scheme has helped
reducing transaction costs by providing access to all types of short term credits. Some
procedural modifications are also required to reduce the cost of transaction cost, such
as simplification of forms, delegation of more powers to branch managers,
introduction of composite cash credit limit, cash disbursements of loans without tying
it with kind components, dispensation of No Due Certificate, lending through nonbank financial companies etc. Flexibility in the loans with regard to use and
repayment can also increase the flow of agricultural credit and reduce transaction
costs.

The globalization of agriculture is underway with a number of changes such as

changes in livelihood pattern, pattern of holdings, high-value agriculture, agribusiness
development and food retailing. The rural credit institutions must shed their
inhibitions

to

support

the

process

of

agricultural

diversification

and

commercialization. A progressive integration of financial markets with emphasis on

self regulation, accountability and autonomy of the institutions with social
responsibility will be required.

Box 5.4: Mahatma Gandhi National Rural Employment Guarantee Act

(Mahatma Gandhi NREGA)
VISION
Mahatma Gandhi NREGA seeks to enhance the livelihood security of the households
in rural areas of the country by providing at least 100 days of guaranteed wage
employment in every financial year to every household whose adult members
volunteer to do unskilled manual work.
MISSION
To augment wage employment opportunities by providing employment on demand
and thereby extend a security net to the people and simultaneously create durable
assets to alleviate some aspects of poverty and address the issue of development in the
rural areas.
Brief History
Mahatma Gandhi NREGA was launched in 200 select districts on 2.2.2006 and was
extended to 130 additional districts during 2007-08. All the remaining rural areas in
the country have been covered under the Act w.e.f. 1.4.2008. Presently, Mahatma
Gandhi NREGA is being implemented in all the notified rural areas of the country.
Duties/Main activities /functions and List of services being provided
The Ministry of Rural Development is the nodal Ministry for the implementation of
Mahatama Gandhi NREGA. It is responsible for ensuring timely and adequate
resource support to the States and to the Central Council. It has to undertake regular
review, monitoring and evaluation of processes and outcomes. It is responsible for
maintaining and operating the MIS to capture and track data on critical aspects of
implementation, and assess the utilization of resources through a set of performance
indicators. MORD will support innovations that help in improving processes towards
the achievement of the objectives of the Act. It will support the use of Information
Technology (IT) to increase the efficiency and transparency of the processes as well
as improve interface with the public. It will also ensure that the implementation of
Mahatama Gandhi NREGA at all levels is sought to be made transparent and
accountable to the public.
A Central Employment Guarantee Council (or Central Council) has been set up
under the chairmanship of the Minister of Rural development. The Central Council is

responsible for advising the Central Government on Mahatama Gandhi NREGArelated matters, and for monitoring and evaluating the implementation of the Act. It
will prepare Annual Reports on the implementation of Mahatama Gandhi NREGA for
submission to Parliament.
Organizational Structure Diagram at various levels namely State, directorate,
region, district, block etc
The Panchayats at district, intermediate and village levels are the principal authorities
for planning and implementation of the Schemes made under this Act. Key stake
holders are:- wage seekers, Gram Sabha, PRIs specially the Gram Panchayats,
Programme Officer at the block level, District programme Coordinator, State
Governments and Ministry of Rural Development.
Expectations from the public for enhancing the effectiveness and efficiency
To be aware of their rights enshrined under the Act and actively exercise them
Arrangements and methods made for seeking public participation /contribution
Awareness generation through intensive IEC activities using electronic media, print,
press advertisements, workshops, outdoor through DAVP

and interpersonal

communication through DFP and S&DD have been taken up.

Mechanism available for monitoring the service delivery and public grievance
resolution
Periodic reviews in the Performance Review Committee (PRC) meetings are held on
quarterly basis. State specific reviews are also undertaken. Independent Monitoring
and verification is done by National Level monitors and eminent citizens. Visit by
members of Central Employment Guarantee Council. State and district level Vigilance
and Monitoring Committees have been set up. Ministry also sends Area Officers to
monitor the progress.
In order to have an effective and speedy grievance redressal mechanism, instructions
dated 7.9.2009 have been issued to all States for setting up of district level
Ombudsman. National HELPLINE has also been setup in the Ministry and
instructions have been issued to all the States for opening their states HELPLINES.