Role of RBI in Rural Credit

RBI (Reserve bank of India) is the central bank of India, The origin of the
Reserve bank can be traced to 1926, when the royal commission on Indian
currency and finance. Also known as the Hilton-Young commission
recommended the creation of a central bank to separate the central of currency
and credit from the government of augment banking facilities throughout the
country. The reserve bank of India act of 1934 established the reserve bank as
the banker to the central government and set in nation a series of action
culminating in the start of operations in 1935. Since then the Reserve bank roll
and function have undergone numerous changes as the nature of Indian
economy has changed. Reserve bank of India was nationalized in the year 1949.
The Reserve Banks affairs are governed by a central board of directors. The
board is appointed by the government of India in keeping with the reserve bank
of India act. The central board of directors has twenty one members, the
governor and four deputy governor, Two Finance Ministry representatives, ten
government nominated directors to represent important elements from India’s
economy and four directors to represent local boards headquartered at Mumbai,
Kolkata, Chennai and New Delhi. India has four zonal offices. It has nineteen
regional offices at most state capitals and at a few major cities in India. The
bank has also two training colleges for its officers and four zonal training
Centre’s.

Main Objectives of RBI

 To manage the monetary and credit system of the country.

 To stabilize internal and external value of rupee.
 For balanced and systematic development of banking in the country.
 For the development of organized money market in the country.
 For proper arrangement of agriculture and industrial finance.
 For proper management of public depts.
 To establish monetary relations with other countries of the world and
international financial institutions.
 For centralization of cash reserves of commercial banks.
 To maintain balance between the demand and supply of currency
Role of RBI in Agricultural Development Agricultural development is regarded
as a prerequisite of economic development of the country because seventy
present of population in the country are engaged in agriculture sector and the
total share of agriculture and allied sectors in terms of percentage of GDP is
13.9 % during 2013-2014 at 2004-05 prices. Agricultural exports constitute a
fifth of the total exports of the country. The RBI realizes the basis contributions
of the agricultural sector in the overall economic development.

This is the sector which:-

1. Provide raw material for industrial sector.

2. Provide the market for producer goods and consumer goods produced in
the non-agricultural sector.
3. Provide labour and capital to non-agricultural sector.
4. Provide foreign exchange.

On recognizing the fact that agricultural is the foundation on which the

entire super structure of the growth of industrial and other sectors of the
economy has to stand, the RBI Develops the agricultural sector. Agricultural
is the heartbeat of the Indian economy. Agricultural sector remains
dominant despite remark able progress made in the realm of the industrial
development, especially in the field of science and technology. The RBI
always wanted an apex institute to be set up to help the growth of this sector
in India. RBI has a separate for agricultural credit. According to section 54
of the RBI act, it is required to set up a separate agricultural credit
department. The department initiates different measures to development a
healthy ruler credit structure and provided guidance to state government and
cooperative credit structure. The ACD of the bank, however, primarily
confines itself to research rather than financing of agriculture. RBI also
established the Agricultural Refinance Corporation (ARC) in 1963 to
support investment credit needs for agricultural development. Consequent to
undertaking of development and promotional function, ARC was renamed
as Agricultural Refinance and Development Corporation (ARDC). With the
formation of NABARD in 1982, all the activities of ACD and ARDC have
been transferred to NABARD.

Agricultural credit

Agriculture credit is the key factor to accelerate agricultural development in

India the credit needs of the farmers are of three kinds. Firstly – short –term
credit –to finance agricultural operations like purchase of seeds, pesticides
and fertilizers. Secondly- medium – term credit – for purchase of ploughs,
agricultural equipment’s, tractors and other implements to cultivate their
lands with the help of modern implements. Thirdly, long-term credit-for
agricultural development such as improvement of land, construction of
boundaries and horticulture. And the main source of agri-credit to the farmer
were the money-lenders, traders and commission agents who charged hive
rate of interest and purchased the agricultural product at low price. So it was
necessary to provide institutional credit to the farmers. It was a 1935 that the
Reserve Bank was founded: the Reserve Bank of India act is unusual among
central to have specific provision for attention and to agricultural credit.
Section 54 of the act enjoined the Reserve Bank to set up an agricultural
credit department, which was to have an expert staff to advise the central
government, state government, state cooperative banks and other banks and
to co-ordinate RBI function for agricultural credit. Section 17 of the act
empowered it to provide agricultural credit through state co-operative banks
or any other banks engaged in the business of agricultural credit. The RBI
being the central bank of the country does not provide finance directly to the
farmers, it provide in direct facility of agricultural through State Co-
operative banks. Through the media of Co-operative credit system, the RBI
thus provides three type of loans to the agriculturists, as under:-

1. Short- term credit.

2. Medium- term credit.

3. Long-term credit.

Short and medium term loans to the agricultural sector are made available
through the state Co-operative banks and long term credit is provided
through the State Land Development Bank by purchasing their debentures.
The RBI purchase or rediscounts the bill of exchange of SCB’s, hereby
providing refinance facilities. The bank has also made provision of long
term loans to state government through the National Agricultural Credit
Fund. The RBI also undertakes research investigations and surveys relating
to rural finance. The bank has been giving very valuable advice to central
and state government and to the state co-operative bank on matters relating
to rural finance.
RBI the RBI was assigned a crucial role in the scheme of integrated credit
and in the building up of the co-operative credit organization. The RBI’s
role was not only a conventional central banker but it was an active agency
that takes all necessary measures for enabling the cooperative system to
provide a growingly larger share of rural credit. The adoption of special
programs for increasing agricultural production and the spread of green
revolution based largely on intensive use of fertilizers, water, better seeds
and machine power have enhanced the RBI’s responsibilities further. The
RBI had also started offering greater financial assistance to co-operatives for
credit facilities to small farmers and other weaker sections and four
minimizing disparities in flow of credit to various regions. With the setting
up of the national bank of agricultural and rural development (NABARD) in
July 1982, The RBI’s functions relating to the co-operative movement have
been taken over by the NABARD. Besides, the RBI still offers loans and
advances to SCB’s.

NABARD NABARD was established in July 1982 to oversee and develop

the entire rural credit system including agricultural credit. Consequent, the
major of the agricultural credit Department of the RBI and the entire
undertaking of the ARDC, was taken over by it. Also it took over from the
RBI the refinance, development and statutory inspection of co-operative
banks and RRB’s. The NABARD provides rural credit by way of refinance
and loans and advances to state co-operative banks, land development
banks, RRB’s and other approved financial institutions for financing
production, marketing and investment activities relating to agriculture and
other allied economic activities in rural areas.

Co-Operative credit societies an agricultural co-operative, also known as a

farmer’s coop, is a co-operative where farmers pool there recourses in
certain areas of activity. Co-operative credit societies acts of 1904 and 1912
was the first important land mark in the agricultural credit policy in India. In
the subsequent period, the co-operative credit becomes more and more
significant. It becomes the most important sources of farm credit in the
country. Organizationally, the rural cooperative credit system has a unique
structure with some specializing in short –term credit and some other in long
term credit. In the field of short-term and medium –term rural credit, the
cooperative have three-tire structure with primary agricultural credit
societies (PACAs) at the base, District Central cooperative Banks (DCCBs)
at the middle level and State Cooperative Banks (SCBs) at the apex. The
PACs are affiliated to DCCBs and the later to SCBs with the super tire
functioning as a balancing institution of funds for the lower tire. In the
sphere of the long term credit, the cooperatives have a two-tier setup with
Primary Land Development Banks at the base and State Land Development
Banks at the apex level. The organizational structure of the rural cooperative
credit system, shown in the following diagram:-

Short-medium term loans the short term credit structure consists as

following:-

1. Primary Agricultural Credit Societies at the base level.

2. Central Cooperative Banks at district level.

3. State Cooperative Bank at State level.

1. Primary Agricultural Credit Societies (PACS):- PACS occupy a

predominant position in the cooperative credit system structure and form its
base. It is the basic unit which deals directly with the rural borrowers, gives
those loans and collects repayments of loans given. It serves as the final link
between the ultimate borrower on the one hand and higher financing
agencies, namely the SCBs and the RBI/NABARD on the other hand.

2. Central Cooperative Banks: - The district CCB being the middle tier of
the cooperative credit structure, it is functionally positioned to deal with the
concerns of both the upper and lower tiers. While the SCB may wish the
DCCB to prioritize its task in a particular manner, the PACS may have their
own demands on the DCCB. Balancing these competing concerns could
often be a dilemma for the DCCBs.

3. State Cooperative Banks: - The SCBs provide finance, coordinate and

control the working of the central cooperative banks in each state. They
serve as the link between the Reserve Bank and the journal money market
on the one side and the central cooperative and primary societies on the
other hand. They obtain their funds mainly from the journal public by way
of deposits, loans and advances from the Reserve Bank and they are own
share capital and reserves.

Long-term loans Land Development Banks were constituted for meeting the
long term financial requirement of farmers for purchase and improvement of
land, repaying old debits etc. LDBs mortgage the fired assets of the farmers
and grant loans up to 50% of the mortgages value. The LDBs functions at
two levels. Long-term credit structure consists as following:-

1. Primary Cooperative Agriculture& Rural Development Bank at the base

level.

2. State Cooperative Agriculture& Rural Development Bank at state level.

1. Primary Cooperative Agriculture& Rural Development Bank - These

banks work originally organized to cover one or a few talks in the district.
At present they are eligible to cover one development block. All land
owners are eligible to become members and borrow funds by mortgaging
their land. The principal borrower is enrolled as A’ class member and other
who have interest in the mortgage property are admitted as B’ class
members

2. State Cooperative Agriculture& Rural Development Bank: - The

members of the SCARDBs are the PCARDBs and a few individual
promoters. It grants long-term loans to agriculturists through the PCARDBs
and branches of SCARDBs. It raises funds through floating debentures,
which are guaranteed by the state government. When PCARDBs obtains
loan from the SCARDBs, it assigns the mortgage deeds obtained from the
borrowers to the SCARDB. The SCARDB floats debentures and raises
funds against the security of these properties. The NABARD and LIC
subscribe for the debentures in large amounts and the former also extends
refinance assistance to CARDBs

Regional Rural Bank:-The Regional Rural Bank was established on

October 2nd 1975. The main objectives of these banks are to provide credit
and other facilities particularly to small and marginal farmers, agricultural
labourers, rural artisans and small entrepreneurs, so as to develop
agriculture, trade, commerce, industry and other productive activates in rural
areas. The aim of the rural banks is to bridge the credit gaps existing in the
rural areas and they are supposed to be effective instruments of economy
development in rural area. The equities of rural banks were divided in a
proportion of 50:35:15 among the central government, the sponsor bank and
the concerned state government.
Commercial Banks:- Commercial bank have a vital role to play in the
progress of en economy irrespective of its status as developed or
underdeveloped. The all India rural credit review committee under the
chairmanship of B. Ventkatappah (1966) examined the rural credit system. It
observed that the cooperative credit frequently fell short of standards of the
timeliness, adequacy and dependability. The nationalization of commercial
banks in 1969 was, therefore, a land mark in the history of Indian banking
and sees as an opportunity to bring these banks in a big way in the areas of
agricultural finance to provide a strong background for economic
development. They are providing short, medium and long term loans to
agriculturists directly and indirectly. They have been opening branches in
hitherto little areas and have also liberalized their lending procedures to
bring a larger population within their ambit. They provided a major thrust to
rural development with a number of schemes like SAA, DIR, LBS,
Consortium approach for development of credit, formulation of DCPs,
Review of credit plans etc. These schemes implemented gave a tremendous
boost to the government sponsored programs in poverty alleviation, self-
employment generation, crop production etc.

Conclusion The performance of the agricultural credit in India reveals that

though the overall flow of Institutional credit has increased over the years,
but there are several gaps in the system which include inadequate provision
of credit to small and marginal farmers, paucity of medium and long term
lending, limited deposit mobilization and heavy dependence on borrowed
funds by the major agricultural credit purveyors. The no institutional sources
of agricultural credit still remain and they offer credit at higher rate of
interest. To overcome this, the farmers should be made more bankable. The
loans to farmers need to be adequate without any stringent rules and
regulations. Special packages have to be designed to ensure timely recovery
of loans.