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RURAL CREDIT

Contents
CERTIFICATE DECLARATION PREFACE ACKNOWLEDGEMENT RESEARCH METHODOLOGY
Contents....................................................................................................................1 INTRODUCTION TO CREDIT........................................................................................2 INTROUCTION TO RURAL ECONOMY..........................................................................4 2.1 INDUSTRIES...................................................................................................8 2.2 ORGANIC FARMING...........................................................................................9 INTRODUCTION TO RURAL CREDIT..........................................................................11 3.1 ISSUES AND CONCERNS..................................................................................12 Organization of Rural Credit in India........................................................................13 4.1 SOURCES OF CREDIT FOR INDIAN FARMERS..................................................13 SOURCES OF RURAL CREDIT....................................................................................14 5.1 NON-INSTITUTIONAL SOURCES.......................................................................14 5.2 Need for Institutional Finance:-.......................................................................16 5.3 National Policy and Objectives........................................................................17 5.4 Rural Co-operative Credit Societies..............................................................17 5.5 Long term Rural Credit..................................................................................18 5.6 Small-scale credit and rural banks................................................................18 5.7 Magnitude of rural credit..............................................................................19 PROBLEMS OF RURAL CREDIT..................................................................................20 CHALLENGES IN RURAL CREDIT...............................................................................22 DEREGULATING RURAL CREDIT................................................................................25 8.1 DEMAND FOR RURAL CREDIT........................................................................26 8.2 SUPPLY OF RURAL CREDIT: ..........................................................................27 STRUCTURE OF THE CREDIT SYSTEM IN INDIA.........................................................27 THE RESERVE BANK OF INDIA..................................................................................28 NABARD AND ITS ROLE............................................................................................34

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11.1 NABARD TODAY.........................................................................................36 11.2 THE CO-OPERATIVE STRUCTURE................................................................37 COMMERCIAL BANKS................................................................................................38 12.2 REGIONAL RURAL BANKS (RRBs): ................................................................40 MICRO FINANCE.......................................................................................................41 13.1 The Terms & Conditions for Accessing Micro Credit......................................42 13.2 Self Help Group (SHG).................................................................................43 13.3 Role Played by Non-Governmental organizations (NGO ) in Provision of Micro Credit.................................................................................................................... 43 13.4 LATEST MICRO CREDIT DISBURSEMENT INDICATORs....................................44 13.5 FOREIGN INVESTMENT IN MICRO CREDIT PROJECTS ....................................45 13.6 MICRO FINANCE INSTITUTIONS (MFIS)..........................................................46 SMALL SCALE INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)..........................50 14.1 Various innovative Schemes / Card products were introduced:....................51 14.2 KISAN CREDIT CARD.....................................................................................52 CASE STUDY.............................................................................................................53 15.1 TWO POSITIVES...........................................................................................59 15.2 CENTRE FINALISES Rs. 4000 CRORE PACKAGES FOR VIDHARBHA FARMERS. .............................................................................................................................60 CURRENT POSITION OF FARMERS............................................................................62 BIBLIOGRAPHY....................................................................................................66 ANNEXURE...............................................................................................................67

INTRODUCTION TO CREDIT
Credit is a crucial input helping the poor in raising their incomes. As most farmers are small they tend to borrow substantial finance from different sources to improve their agricultural output. The problem of Indebtness makes it worse when loans are not put to productive uses. Providing adequate credit to rural poor has become a problem because of the complex nature of the rural society. Moreover, it is not the
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borrowing that affects productivity but indebt ness which lowers productivity by eliminating the will to change and by creating a despondent outlook. Credit is a `pure service' transaction between two points of time rather than a spot market transaction in `pure goods'. Because of the time gap involved between sanction and realization of credit, the players in the market confront several kinds of risks, many of which are not independent of the socio-economic environment. Against the backdrop of the institutional changes in the form of establishment and strengthening of the Panchayats in rural West Bengal over the last two decades, the present study is an attempt to capture the attendant changes in rural credit market between mid-1980s and mid-1990s from the experiences of two villages in the district of Birbhum. In doing so, it compared the profile and mode of operation of prevailing moneylenders and lending institutions with those documented in an earlier study carried out in the same two villages and made an endeavor to find out as to whether the changes in the functioning of both formal and informal rural credit have led to greater accessibility to credit of the rural masses, a larger base for agricultural production through productive use of assets and ensuring better prices for farmers.

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INTROUCTION TO RURAL ECONOMY

The Rural Economy in India is wholly agriculture based and it is of tremendous importance because it has vital supply and demand links with the other Indian industries. Agriculture is the main stay of the Indian economy, as it constitutes the backbone of rural India which inhabitants more than 70% of total Indian population. The fertility of the soil has augmented the success of agriculture in India. Further, Rural economy in India has been playing an important role towards the overall economic growth and social growth of India. India has been predominantly an agriculture- based country and it was the only source of livelihood in ancient time. During pre historic time when there was no currency system the Indian economy system followed barter system for trading i.e. the excess of agricultural produce was exchanged against other items. The agriculture produce and system in India are varied and thus offers a wide agricultural product portfolio. Today the rural economy in India and its subsequent productivity growth is predicated to a large extent upon the development of its 700 million strong rural populations. The agricultural economy of India is drafted according to the needs of
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rural India since majority of the population lives in about 600,000 small villages. In India, agriculture accounts for almost 19 % of Indian gross domestic product. (GDP). The rural section of Indian population is primarily engaged with agriculture, directly or indirectly. The Ministry Of Agriculture, the Ministry of Rural Infrastructure, and the planning commission of India are the main governing bodies that formulate and implements the policy related to rural economy in India and its subsequent development for the overall growth of the rural economy. The main agricultural products that control the fate of the rural economy in India are as follows: Food Grains Fruits and nuts Vegetables Seeds, Buds & Plantation Spices Tea and Coffee Tobacco and Tobacco products The development of the Indian rural economy can be credited to the liberal policy of the Ministry of Rural development, Government of India and the Planning commission of India. India is still an agrarian economy and the sector contributes substantially to the GDP of India.

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GLIMPSES OF THE RURAL ECONOMY OF INDIA A TARGET OF Rs. 225,000 crores for farm credit has been set for the financial year 2007-08 50 Lac new farmers have been brought under the banking system. Agricultural Insurance to facilitate agricultural loans to the farmers. Allocation for the Rural Infrastructure Development Fund to be increased substantially. In the financial year 2006-07, 35 projects were successfully completed. Additional irrigation of 900,000 hectares has been targeted in the financial year 07-08 For better farm yields modern farming techniques has been set up.

Direct disbursement of subsidy to rural Indian farmers has been arranged through pilot program.

Various activities or occupations allied to agriculture or the farm sector assumes great importance in the rural economy of India. These factors assume great importance because of increasing pressure of population on land and need for removing a substantial percentage of working population from agricultural proper. The allied activities or occupations provide almost unlimited scope for rural people from the point of view of employment opportunities and earning income.

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The significance of allied activities can be explained as:

The allied activities or occupations like Animal husbandry, poultry, fishery and forestry will help you diversify rural economy which for long has come to depend only on agriculture proper with all its precarious nature.

Many of the above, mentioned activities have either a small land- based or use lands such as fallow lands, marshy places, etc. , which are not under regular cultivations. This means that most of the allied activities will not be at the cost of the agricultural land and agricultural production but would be supplementary to regular and agricultural activities. The allied activities would thus be an important source or main or supplementary for all types of rural people- those with substantial lands and those with small or no lands at all as also to the members of rural families with little or even no technical skills. One estimate is that in case of the Indian agricultural, there is a disguised unemployment to the extent of nearly 20- 30 % of the rural work force. The allied activities will be in position to provide employment opportunities and income for them practically in their own places or even homes. Further, I would like to focus on some of the rural allied economic activities:

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2.1

INDUSTRIES

Handicraft Industries:
The role of Handicraft Industries in rural India Economy is very important. The Ministry of Rural Development and the Ministry of Rural Economy, under govt. of India are the two main governing authorities, which drafts and implements policies for the handicraft industries in the rural India eco. The Handicraft Industry of India comes under the unorganized sector of village economy of India. The main products that are manufactured by Rural Handicrafts industry are as follows: Art metal wares. Wood wares Hand printed and textiles and scarves Embroidered and crotched goods. Shawls as art wares Zari and zari goods Imitation jewellery Miscellaneous handicrafts. Presently, the global market of handicraft is valued at US $ 400 billion and Indians share in the global market stands at 2%. However, the Handicrafts industries in rural India economy registered an annual growth rate of 15 % consistently over the last decade and it is estimated to grow at the rate of 42% over the next 5 years annually industries in rural India economy registered an annual growth rate of 15
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% consistently over the last decade and it is estimated to grow at the rate of 42% over the next 5 years annually industries in rural India economy registered an annual growth rate of 15 % consistently over the last decade and it is estimated to grow at the rate of 42% over the next 5 years annually.

2.2 ORGANIC FARMING


The role of Organic farming in India Rural Economy can be leveraged to mitigate the ever increasing problem of food security in India. With rapid industrialization of rural areas of India, there has been a crunch for farm lands, further, with the exponential growth of India; the need for food sufficiency has become the need of the hour. The proposition of Organic farming in India rural economy holds good, as an alternative to arrest this problem. The interaction of the process of organic farming in Indian Rural Economy is a very new concept.

The main advantages of Organic farming:


Organic fertilizers are completely safe and doesnt produces harmful compounds The consumption of chemical fertilizers in comparison is always more, especially in unused cultivable lands India has around 1426 certified organic farms India produces approx. 14000 tones of output annually

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Rural industries in Indian EconomyThe Ministry of Agro and rural industries in India was established in September, 2001 with the aim to develop the rural industries in the Indian Economy. The main objectives of this initiative were to ameliorate the supply chain management, upgrade skills, introduce innovative technologies and expand markets of the entrepreneurs and artisans. Also, the Govt. of India has also ensured employment generation programmes in the rural regions under Rural Employment generation program and the Prime ministers Rozgar Yojana (PMRY) in association with RBI and other banks. Some of the major sectors in rural economy of India have been listed below: Rubber Business in India Fisheries in Rural India Poultry business in India Tobacco business in India Jute business in India Horticulture business in India

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INTRODUCTION TO RURAL CREDIT


Describing India, the AIRSC had said, India is essentially Rural India and Rural India is virtually the cultivator, the village craftsman and the agricultural laborer. Rural India, where 70% of all Indians live, still depends heavily on agriculture. , However it is increasingly becoming diversified market with a strong demand for credit for agriculture and non- agricultural purposes, savings, insurance and money transfers. Given an understanding of the seasonal credit requirements of farm operations, institutional credit was perceived fairly early in the development process as a powerful tool for enhancing the production and productivity and for poverty alleviation. The debates surrounding these issues, as also the suggested policy directions were clearly spelt out in the report of the All India Credit Survey Committee 1952. To achieve the objectives of production and productivity, the stance of policy towards rural credit was to ensure provision of sufficient and timely credit at reasonable rates of interest as to a large extent a segment of the rural population as possible. The chosen institutional vehicles for the task were Co-operatives, Commercial banks and Regional Rural Banks (RRBs). Between1950-69, the emphasis was on the promotion of co-operatives, followed by a concerted push by commercial banks during the post nationalization period to establish branches in the rural areas and the creation of new institutional structures- RRBs in 1970s. NABARD in 1980s and Local Area Banks in late 1990s.

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The Central Banks policy response consisted of social control and nationalization, expansion of branch network into unbanked and under banked areas, evolution of Lead Bank Scheme and area approach, enunciation of concept of targets for priority sectors and weaker sections lending and special credit cum subsidy programmes for the poorer sections of rural and urban areas. Reaching credit at concessional rates was one of the most important elements of the strategy for the deployment of rural credit. The justification for offering credit at low rates to certain categories of borrowers was based on the argument that farm based investment activity in the short run does not always yield a return which enables regular servicing of loans and at the same time meet the minimum consumption requirements. Since concessional lending impacted the profitability of rural financial institutions (RFIs), a policy of cross subsidization and refinance from the RBI and later NABARD was put in place simultaneously.

3.1 ISSUES AND CONCERNS


Overall concerns in relation to rural credit- other than those relating to structural issues- are generally expressed in terms of Inadequacy of credit Constraints on timely availability of credit High interest rates Neglect of small and marginal farmers Low credit deposit rates in several states Continued presence of informal markets
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Organization of Rural Credit in India


In the village itself no form of credit organization will be suitable except the Cooperative Society Co-operation has failed, but co-operation must succeed.

4.1 SOURCES OF CREDIT FOR INDIAN FARMERS


The financial requirement of the Indian farmers can be classified into three types depending upon the period and the purpose for which they are required: a) Farmers need funds for short periods of less than 15 months for the purpose of cultivation or for meeting domestic expenses. For example, they want to buy seeds, fertilizers; fodder for cattle, etc. b) The farmers require finance for medium period ranging between 15 months and 5 years for the purpose of making some improvement on land, buying cattle, agricultural implements, etc. c) The farmers need finance for the purpose of buying additional land, to make permanent on land, to pay of old debts and to purchase costly on agricultural machinery. These loans are for long periods of more than 5 years. We can further classify the credit requirements of farmers into two types productive and unproductive loans. The former include loans to buy seeds, fertilizers, implements, etc. to pay taxes to the government and to make permanent improvement on land, such as digging and deepening of wells, fencing of land, etc.

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SOURCES OF RURAL CREDIT


Broadly, there are two sources of credit available to the customers- institutional and private. Non-institutional or private sources include money-lenders, traders, and commission agents, relatives and landlords; institutional sources consist of the Government and co-operatives, commercial banks including the Regional Rural Banks (RRBs). Non-institutional sources- money lenders, landlords, traders etc. accounted for 93% of the total credit requirements in 1951-52 and institutional sources including the Government accounted for only 7% of the total credit needs in that year. The All India Debt and Investment Survey (1981), estimated that the share of noninstitutional sources had slumped to about 37% in 1981, money lenders accounting for barely 16% ; the share of institutional credit, however, had jumped to 63% cooperatives contributing 30% and commercial banks about 29%

5.1 NON-INSTITUTIONAL SOURCES A) Money Lenders:


There are two types of money lenders in the rural areas. There are rich farmers or landlords who combine farming with money-lending. There are also professional money-lenders whose only occupation or profession is money lending.. The Government and the Reserve Bank of India have been propagating that the importance of the money lenders as suppliers of loans to the farmers has been declining rapidly. However, there are many reasons for the preponderance of the village money lenders in the rural areas even now.

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a) The money lender freely supplies credit for productive and non productive purposes, and also for short-term and long-term requirements of the farmers. b) He is easily accessible and maintains a close and personal contact with the borrower, often having relations with family extending over generations. c) He has local knowledge and experience and, therefore, can lend against land as well as against promissory notes. He knows how to protect himself against default. Malpractices of the Money-lenders There are various malpractices which are associated with the village money lenders. They obtain bonds and promissory notes from their debtor on false pretences, and enter in them sums larger than actually lent. They deduct exorbitant premium. They give no receipts for repayment and often they deny such repayments. They charge high rate of interest often 36%, 3%, per month and over. They commit many other rogueries which are so well know. Unless their activities are controlled and alternative sources of credit provided to the farmers, it would be difficult to improve the condition of the peasants and prevent extensive suicides of small and marginal farmers. B) Landlords and others:Traders and commission agents supply funds to farmers for productive purpose much before the crops mature. They force the farmers to sell their produce at a low price and they charge a heavy commission for themselves. This source of finance is particularly important in the case of cash crop like cotton, groundnut, tobacco, etc. and in the case of fruit orchards like mangoes. Traders

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and commission agents may be bracketed with money lenders, as their lending to farmers is also exorbitant rates and has other undesirable effect too. Farmers often borrow from their own relatives in cash or kind in order to tide over temporary difficulties. These loans are generally contracted in an informal manner; they carry low or no interest and they are returned soon after the harvest. Farmers, particularly small farmers and tenants, depend upon landlords and other to meet their financial requirements. This source of finance has all the defects associated with money-lenders, traders and commission agents. Interest rates are exorbitant. Often the small farmers are cheated and their lands are appropriated. The landless laborers are forced to become bonded slaves.

5.2 Need for Institutional Finance: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:1) It is based on profit motive and, therefore, it is always exploitative. 2) It is very expensive and is not related to the productivity of land. 3) It does not flow into most desirable channel and to the neediest persons; 4) 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; and Institutional credit is not exploitative and the basic motive is always to help the farmer to raise his productivity and maximize his income. The rate of interest is not only relatively low but can be different for different group of farmers and for
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different purpose. Agricultural credit and agricultural improvement should be taught improved farming methods and also be provided adequate and cheap credit.

5.3 National Policy and Objectives


Since independence, a multi- agency approach consisting of co-operatives, commercial banks and regional rural banks known as institutional credit has been adopted to provide cheaper and adequate credit to farmers. The major policy in the sphere of agricultural credit has been its progressive institutionalization for supplying agricultural and rural development programmes with adequate and timely flow of credit to assist weaker sections and less developed regions. The basic objectives of this policy are:a) To ensure timely and increased flow of credit to the farming sector; b) To reduce and gradually eliminate the money lender from the rural scene; c) To make available credit facilities to all the regions of the country, i.e. reduce regional imbalances; and d) To provide larger credit support to areas covered by special programmes like Pulses Development Programmes, Special Rice Production Programme and the National Oilseeds Development Project. Institutional credit, as mentioned earlier, refers to the funds made available by cooperative societies, commercial banks, and Regional Rural Banks.

5.4

Rural Co-operative Credit Societies

Indian planners considered co-operation as an instrument of economic development of the disadvantaged particularly the rural areas. They saw in village panchayats, a village cooperative and a village school as trinity of institutions on
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which a self reliant and just economic and social order was to be built. The cooperative movement was started in India largely with a view to providing agriculture funds for agriculture operations at low rates of interests and protects them from clutches of money lenders.

5.5

Long term Rural Credit

The Long term requirements of the farmers were traditionally met by the moneylenders but later by other agencies also such as State Governments and the co-operative credit banks. But these banks were found defective for one reason or another. Taking this guard in consideration the banks named as Land developmental banks was established with purpose of providing long term credit to farmers. In recent times these banks are known as CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANKS. (CARDBs)

5.6

Small-scale credit and rural banks

While small-scale, short-term loans or micro credit constitute only one among the many services that the public authority should provide, schemes that provide such loans to rural working households do nevertheless serve as a kind of palliative reform in the countryside. For all the weaknesses in its implementation, IRDP played an important role in the 1980s in that it gave new access to millions of rural households to the formal banking system and increased levels of purchasing power in rural India significantly. Small-scale credit schemes have also been the basis for useful and socially progressive experiments in social mobilization.

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5.7

Magnitude of rural credit

The All-India Rural Credit Survey (1951-1952) collected data on the socioeconomic conditions of farmers so that it would be of help to the Reserve Bank of India, the government of India and the state Government on the formulation of an integrated scheme of rural credit. Another survey, the All-India Rural Debt and Investment Survey (1962-62) was conducted to arrive at statistically valid and reliable estimate of debts, investment and other related features of rural households both at national and state levels. After the nationalized of 14 major commercial banks in 1969, commercial banks started increasingly their levels of interest on financing of priority sectors. Therefore, it was thought that a fresh look at financial conditions of farmers was needed .During 1971-72, the All-India Debt and investment Survey was conducted, covering the rural and urban household sectors of the economy. The results of the survey relating to rural households were released in April 1975. The 1971_72 survey has thrown useful light on the extent of concentration of economic power and rural indebtness. Out of the total assets of rs.88, 409 Cr, cultivator households, which constituted 72.3 per cent of the rural household, claimed 93.6 percent, with an average of rs.14, 694 per household. The proportion of agriculture laborers household to the rural households may be taken as an index of inequality and poverty in rural areas.

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PROBLEMS OF RURAL CREDIT

The burden of indebtedness in rural India is great, and falls mainly on the households of rural working people. The exploitation of this group in the credit market is one of the most pervasive and persistent features of rural life in India, and despite major structural changes in credit institutions and forms of rural credit in the post-Independence period, Darlings statement (1925) that the Indian peasant is born in debt, lives in debt and dies in debt, still remains true for the great majority of working households in the countryside. Rural households need credit for a variety of reasons. They need it to meet short-term requirements for working capital and for long-term investment in agriculture and other incomebearing activities. Agricultural and non-agricultural activities in rural areas are typically seasonal, and households need credit to smooth out seasonal fluctuations in earnings and expenditure. Rural households, particularly those vulnerable to what appear to others to be minor shocks with respect to income and expenditure, need credit as an insurance against risk. In a society that has no free, compulsory and universal education or health care, and very few general social security programmes; rural households need credit for different types of consumption.
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These include expenditure on food, housing, health and education. In the Indian context, another important purpose of borrowing is to meet expenses for a variety of social obligations and rituals. If these credit needs of the poor are to be met, rural households need access to credit institutions that provide them a range of financial services, provide credit at reasonable rates of interest and provide loans that are unencumbered by extraeconomic provisions. Historically, there have been four major problems with respect to providing credit to the Indian countryside. First, the supply of formal sector credit to the countryside as a whole has been inadequate. Secondly, rural credit markets in India themselves have been very imperfect and fragmented. Thirdly, as the foregoing suggests, the distribution of formal sector credit has been unequal, particularly with respect to region and class, caste and gender. Fourthly, the major source of credit to rural households, particularly income- poor working households, has been informal sector loans which are usually advanced at very high rates of interest. Further, the terms and conditions attached to these loans have The institutions in this sector include commercial banks, cooperative banks and credit societies, and other registered financial institutions. The informal sector of credit is not regulated by public authorities, and the terms and conditions attached to each loan are personalized, and therefore vary according to the bargaining power of borrowers and lenders in each case.

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CHALLENGES IN RURAL CREDIT


The economy recorded 3.7 per cent growth in 2002-03 (5.6 per cent) against the previous year. The deceleration in the performance was largely attributed to the negative growth of 4.4 per cent in the agriculture sector. This steep downfall of GDP brought to the surface the vulnerability of the economy to agricultural sector growth despite its strengths on other macro-economic indicators/sectors. When the economy achieved 5.6 per cent GDP growth in 2001-2002, the contribution of agriculture and allied sectors was 5.7 per cent vis--vis 2.6 per cent of the industrial sector. At the same time, the Tenth Plan (2002-2007) has set an ambitious average GDP growth rate of 8 per cent per annum. To achieve this, all the energies of the country need to be focused for the total revitalization and revamping of the farm sector and the rural financial institutions to ensure average 7 per cent sustainable growth per annum from this sector in the next five years. Otherwise, the target of 8 per cent GDP growth for the economy would remain a dream. The farm sector, to a large extent, was excluded from general economic reforms initiated in 1991. However, the reforms introduced in industry, finance, banking and other sectors over the last decade have had a considerable impact on the farm sector. The financial sector reforms have created a level-playing field between rural financial institutions (RRBs and cooperatives) and other scheduled commercial banks in treatment and in compliance of regulatory norms, but without any concomitant reforms in agricultural sector which is more than three times (320 per cent) the credit flow (Rs 2,29,853 crore) during the Ninth Plan (1997-2002).

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The Rural Non-Farm Sector (RNFS) has emerged an area of focus for creating employment in the rural sector and to enable migration from the over-stretched farm sector. The future strategy of rural credit institutions would have to include strengthening the credit delivery system for increasing RNFS employment. Development of entrepreneurs' skills, enhanced credit flow to women and other weaker sections, supporting tiny, cottage and village industries, and coverage of wide variety of service sector activities would require larger and wider role of rural financial institutions in RNFS sector. The growing role of microfinance through self-help groups (SHGs), especially of women, in the unique process of socio-economic engineering has assumed a critical challenge. The SHG movement has so far been mostly South-centric (constituting 64 per cent share) but is yet to take off in other regions. Nabard's goal of reaching microfinance services to onethird of the rural poor about 100 million through one million SHGs by 20062007 poses many challenges for rural financial institutions. The socio-economic condition of a majority of the rural population continues to be the cause of concern for policy-makers in this era of reforms and the WTO. There are still more than 200 million people in rural areas who live below the poverty line and for whom banking access is still not a reality and, despite a large bank network, the critical gap in rural credit still exists. Therefore, the requirement for strong and flexible structure of rural financial institutions in rural and semi-urban segment need not be overemphasized. The financial sector reforms without social and rural sensitivity would only aggravate the complexities of agrarian sector reforms, which are yet to take shape. Therefore, it is hoped that the Advisory Committee, being constituted by the RBI, will be a High-Powered one (on the lines of the All India Rural Credit Survey Committee of 1954) and take a comprehensive review of the current rural credit
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structure and suggest innovative measures with a definite roadmap to meet the emerging needs/challenges in rural credit. Some major problems facing the rural credit system are: (a) It has not produced the desired results in terms of the direction, quantum and quantity of flow of credit; (b) It is afflicted by alarmingly high over dues, bad debts, loan defaults, low profitability, over-burdening of staff, declining control and deteriorating customer services; (c) Information imperfections have contributed to inefficiencies like high transactions costs and low recycling of credit; (d)Motivation to perform has not been given due importance; (e) Directed credit programmes and subsidized lending have badly affected viable functioning of credit disbursing units.

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DEREGULATING RURAL CREDIT


MONEYLENDERS in India are as old as its villages, agricultural credit cooperatives go back a century, commercial banks have been involved in agricultural loans for nearly 50 years, the regional rural bank network is over 25 years old, and reforms in the banking system were triggered a decade back. Yet, credit flow to small farmers has remained far below needs, both for crop cultivation and for long term requirements such as land development, irrigation and farm equipment as compared to the potential demand. The widespread discontent among farmers has manifested itself in the form of mass voting against incumbent governments as also individual acts of despair such as farmers committing suicide, particularly in Andhra Pradesh. Partly in response to this situation, the finance minister announced certain measures required to be implemented by all scheduled commercial banks in July 2004 for improving the flow of credit to agriculture. Accordingly, banks have been advised to reschedule the debts of farmers who have suffered losses on account of drought, flood or other calamities. The principal and interest outstanding in the accounts of such crop loan and agriculture term loan borrowers up to 31 March 2004 would now be repayable over a period of five years at current interest rates, including an initial moratorium of two years. On restructuring their existing loans, the farmers would become eligible for fresh loans. Banks have also been advised to formulate guidelines on one-time settlement (OTS) for small and marginal farmers declared as defaulters as on 24 June 2004 and thus ineligible for fresh credit. Banks should complete the exercise of notifying defaulters.

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Banks have been told that all applications for OTS received from defaulters should be processed within one month of their receipt. Further, in order to mitigate the acute distress that farmers might be facing due to debt from non-institutional lenders (e.g. moneylenders) and to provide them relief from such indebtedness, banks have been asked to advance loans to such farmers against appropriate collateral or group security. In an effort to ameliorate the suffering of debt-ridden farmers, the Andhra Pradesh Legislative Assembly passed the A.P. Farmers Agricultural Debts (Moratorium) Act 2004 on 21 June 2004, which provides for declaring a six-month moratorium on repayment of loans from private moneylenders. The move comes in the backdrop of a continued spate of suicides by farmers even after the new Congress government unveiled a series of steps, including free power, to the agriculture sector and a comprehensive package for farmers

8.1

DEMAND FOR RURAL CREDIT

In a study carried out for the World Bank between 1994 and 1995, Mahajan and Ramola1 (1996) estimated the average annual credit usage by rural households in the survey area based on their credit usage for the previous three years. Accordingly, the annual average credit usage per household from all sources worked out to Rs 14,549. Of this, 65% was for productive purposes. Long term productive purpose, viz. purchase of livestock, farm machinery, etc. accounted for 16% of the total usage while the remaining 49% was for short term purposes like agricultural crop loan. Of the total usage, 35% was for consumption purposes 15% being on account of long term purposes like house building, marriage, etc. and 20% was for short term purposes like household expenses, clothes, consumer durables, and so on.
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We can try to estimate the annualized credit usage in rural India from the above data. The above-cited study was carried out in Raichur district of Karnataka, which though a dry land region, has a higher credit usage compared to the poverty belt in Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh, Orissa, and the North East. In view of the above, if we assume the average annual credit usage in 2004 to be only Rs 9000 per house-hold per annum, the total usage comes to Rs 117,000 crore by rural households. This is an extremely conservative estimate. It should be noted that the demand for credit is not the same as credit usage, since the latter is constrained by supply. The Xth Five Year Plan Working Group on Agricultural Credit estimated the requirement of credit at Rs 720,000 crore in five years ending 2007, or Rs 144,000 crore per annum on an average. This has to be compared with Rs 60,000 crore that was actually disbursed in 2001, the terminal year of the IX th Plan.

8.2

SUPPLY OF RURAL CREDIT:

The present structure of the rural credit system has emerged after a series of interventions by the government and Reserve Bank of India. In the formal sector, a multi-agency approach has been followed to provide the necessary financial services in the rural areas. The various institutions are the commercial banks, regional rural banks and the cooperative credit structure (CCS).

STRUCTURE OF THE CREDIT SYSTEM IN INDIA


GOVERNMENT OF INDIA RESERVE BANK OF INDIA SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS
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NABARD

RURAL CO-OPERATIVES CREDIT STRUCTURE

LONG TERM CREDIT STRUCTURE


STATE CO-OPERATIVE AGRI & RURAL DEVPT BANKS

SHORT TERM CREDIT STRUCTURE STATE COOPERATIVES BANKS


PRIMARY AGRI CREDIT SOCIETIES (PACS)

PRIMARY COOPERATIVE AGRI & RURAL DEVPT BANKS

DEPOSITORS AND BORROWERS

THE RESERVE BANK OF INDIA

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REGI ONA L RUR AL BAN KS


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RURAL CREDIT

THE Reserve Bank of India is perhaps the first central bank that has the statutory provisions to maintain a team of experts to advise and impart guidance on rural credit. Since Independence, the RBI has initiated a number of measures to augment the flow of rural credit. It has a unique system of extending General Line of Credit-I for seasonal agricultural operations and General Line of Credit-II for the handloom sector, out of the created money. In the realm of micro finance, the RBI is again the pioneer to take up the measures for up scaling and mainstreaming micro credit. The RBI has contributed significantly to the Micro Credit Development Fund for developing micro finance sector. Another noteworthy feature of the RBI initiatives is the introduction of Kisan Credit Card Scheme to provide hassle-free credit to farmers. Despite proactive and impressive track record of the RBI in policy interventions, the flow of rural credit is not very satisfactory. As rural credit deals with millions of small borrowers, it requires the constant attention of the policy-makers of Mint Street. There are a number of irritants to the free flow of the rural credit.

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At times, these become the major cause for the failure of appropriate policy intervention and need to be addressed immediately. With mid-term Monitory Policy for 2003-04 round the comer, it is time to identify these irritants. What really plagues the rural credit system is partial de-regulation of interest rates. While interest rates of scheduled banks for advances over Rs 2 lakh have been completely deregulated, loans up to Rs 2 lakh are subject to maximum of prime lending rate (PLR). As a result of partial de-regulation, banks generally charge high rate of interest on loans over Rs 2 lakh to make good the opportunity lost on financing of the small advances up to Rs 2 lakh. An analysis of the sector-wise weighted interest rates of de-regulated advances reveals that in 2001-2002 the weighted interest rate for regulated direct agricultural advances was 14.6 per cent compared to 13.8 per cent for the non-agricultural advances and 13.6 per cent for indirect agricultural advances. Incidentally, the share of the de-regulated advances was as low as 23 per cent in the case of direct agricultural advances, 85.7 per cent for non-agricultural advances and 93.8 per cent for indirect agricultural advances. This indicates that higher the proportion of the deregulated advances, lower the weighted interest, suggesting that banks try to cross-subsidies the small loans by charging higher rates on larger advances. There is a clear-cut case for complete deregulation of interest rates to allow banks to prescribe interest rate as per the risk perception. However, when it is not possible to deregulate interest rates at one go, it is imperative to downsize the existing threshold limit of Rs 2 lakh in a phased manner.
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A person borrowing loan, aggregating Rs 2 lakh, is by no means poor and deserves to be financed at a prime-lending rate, (rate for risk free lending). Recently, the Government has advised banks to extend crop loans up to Rs 50,000 at 9 per cent interest. The RBI may perhaps like to follow this benchmark and regulate interest rate only up to Rs 50,000. This will go a long way in reducing the interest burden of the large borrowers who will then get loans at slightly lower rate of interest. Another major reason for higher interest rate on rural advances is the present system of service area approach. This restricts the choice of the rural borrowers to select a bank of their choice, whereas urban borrowers have a wide range of banks to borrow from. Seemingly, the competition among the banks in the urban areas is an important factor for lower rate of interest on housing and personal loans. Precisely due to the service area approach, a rural borrower for tractor loan pays higher interest compared to his counterpart in urban area borrowing for a car loan. It is not implausible to say that service area approach is a relic of past and has outlived its utility. It is time the service area approach was scraped for at least nonSwamajayanti Gram Swarozgar Yojana (SGSY) borrowers. They are the poor and there is hardly any competition among the banks for financing them; it would be better to fix responsibility on the service area branch as a lender of last resort for financing poverty alleviation programme. Nonetheless, SGSY borrowers should also have the freedom to borrow from any other branch if they are able to manage. Though the RBI has already relaxed service area approach to a great extent, there are some irritants and a formal
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scrapping of the approach is necessary to induce competition in rural banking. Second, under the present dispensation, banks are required to deposit with the Rural Infrastructure Development Fund (RIDF) amount equivalent to shortfall in stipulated sub target of 13.5 per cent for direct agricultural lending at a fixed interest rate. As the annual corpus of the RIDF depends on the requirements of

funds, its size is mostly lower than the shortfalls. The share of each bank in the RIDF corpus is, therefore, determined in proportion to the deposits mobilized by them. Quite often, deposits with the RIDF do not cover total shortfall. To accommodate total shortfalls and to give banks an alternative to RIDF at marketdetermined interest rates, it is imperative to develop market for priority sector inter-bank participatory certificates (IBPC), whereby banks exceeding their target in priority sector may be allowed to sell excess lending at market-determined interest rates to other banks having shortfalls. Thirdly, Automated Teller Machines (ATMs) have the potential to rationalize the cash delivery system in a cost-effective manner. As a result, banks are increasingly using non branch/standalone ATMs to provide a range of cost-effective and timely services to their customers. However, the benefits of ATMs have not reached the rural areas mainly because the customers are not in a position to handle ATM operations independently and more often than not need to be assisted by a facilitator. As of now, only a security guard is posted at stand-alone ATM. Needless to say, ATMs in the rural areas would be more suitable for providing basic services of deposits and withdrawal in a cost-effective manner as setting up

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of ATMs is far cheaper than a bank branch. (Incidentally, in South Africa, ATM centers in the rural areas provide the services of a facilitator to its customers.) Further, they will help the farmers in making full use of the Kisan Credit Card facility. Also, there is a need to broaden the definition of the priority sector to accommodate the emerging items of importance such as: Lending for dairy development should include activities such as

chilling/processing plants, milk van and other collection and transport equipment; Financing of godowns for storing the produce of others may also qualify for priority sector category; Similarly, the financing construction of education institutions and hospitals should also be considered as priority sector lending; the quantum of consumption credit should be enhanced to Rs 10,000 to take care of genuine consumption needs; and there is a need to change the present criteria of classification of direct and indirect agricultural advances. The funds ultimately reaching the farmer should be treated as direct agriculture advance. Loans provided by non-bank finance companies, commission agents, and other agencies such as Scheduled Castes and Scheduled Tribes Development Corporation(s), etc., or on-lending to farmers are treated as indirect finance. As these loans ultimately reach the farmers, they should be treated as direct agricultural advances. There is no strong and regular institutional framework in place for appraising and providing feedback on policy interventions. The complete deregulation of interest rates, scrapping of service area approach, development of priority sector inter-bank participatory certificates, posting of facilitator-cum-security guard at rural ATM centers and broadening of the
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definitions of priority sector advances will go a long way in augmenting the flow of credit in rural areas. In 1969 the fourteen largest Indian commercial banks were nationalized, at which point they came under the direct control of the Indian central bank A central aim was to reduce and equalize the average population per bank branch across Indian states. The Indian central bank, however, still needed to coerce commercial banks to expand into unbanked, rural locations. Much more debated, is the question of whether commercial banks in rural India affected the extent and type of economic activity in rural areas, and whether they affected poverty and inequality. The extent to which credit disbursements by the banking sector were based on need rather than political power is also debated. Default rates were very similar across types of borrower a finding consistent with poor monitoring of borrowers at all levels, and the fact that large scale loan defaults were very often politically condoned. The share of rural banks in total banks has fallen from 58 percent in 1990 to under 50 percent by 2000 and the share of total bank credit that went to rural areas declined, from 15.3 per cent in 1988 to 10.6 per cent in 2000. The policy recommendation is that this reduction in formal sector lending be filled by micro-credit institutions. Despite impressive advances by the Indian micro-credit sector it is still unclear whether they will be able to achieve a mobilization of rural savings and a credit outreach which equaled the achievements of the Indian social banking experiment in the 1970s and 1980s.

NABARD AND ITS ROLE

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NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. With a capital base of Rs. 2,000 crore provided by the Government of India and Reserve bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts. The National Bank for agricultural And Rural Development (NABARD) was set up on July 12, 1982, as a development bank under an act of parliament. The bank began its journey by taking over the agriculture credit functions of the Reserve Bank of India and the refinance functions of the then agricultural refinance and development corp. (ARDC). NABARDs mission is to promote sustainable and equitable prosperity in rural India through effective credit support, related services, institution development and other innovative initiatives. Its prime function continues to be that of refinancing, supplementing the resources of co-operative banks, regional rural banks (RRBs) and commercial banks against the amounts lent at the grassroots level for agriculture and rural development. Apart from its developmental role, NABARD has also been entrusted with certain supervisory functions in respect of co-operative banks and RRBs under the
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Banking Regulation act, 1949. It may be noted that co-operative banks and RRBs have been in existence much before NABARD. In the 1990s gross capital formation (GCF) in agriculture witnessed a declining trend. This apart, commercial banks, which were assigned the task of channeling at least 18 % of their total lending to agriculture, were not able to fulfill their commitment. It was therefore, considered desirable to create the Rural Infrastructure Development fund (RIDF) out of the shortfall in commercial banks lending to agriculture to be managed and operated by NABARD. The fund was set up in 1995-96 with an initial corpus of Rs, 2000 crore for providing loans to state governments and state- owned corporations for projects relating to minor and medium irrigation , soil conservation, watershed management and rural infrastructure ( such as roads, bridges and market yards.) Investment projects under social infrastructure, such as construction of primary health centers/ schools, providing drinking water, and so on, were also supported under the RIDF financial scorecard. Through its main refinance portfolio to rural financial institutions (RFIs) and mobilization and disbursements under the (RIDF) NABARD has over the past two decades built up a strong financial base.

11.1

NABARD TODAY

It Initiates measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel etc.

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Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India, state governments, the Reserve Bank of India and other national level institutions concerned with policy formulation. It prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions. It undertakes monitoring and evaluation of projects refinanced by it. It promotes research in the field of rural banking, agriculture and rural development. It functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and Regional Rural banks.

11.2

THE CO-OPERATIVE STRUCTURE

It caters to both the short term and long term credit need of the rural consumers. The short term credit need of the rural consumers is fulfilled by three institutions, namely, the State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and the large network of the Primary Agricultural Credit Societies (PACS) in the villages. On the other hand, the State Cooperative Agriculture and Rural Development Banks (SCARDBs) provide long term credit in the rural economy through Primary Land Development Banks, now renamed Primary
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Cooperative Agriculture and Rural Development Banks (PCARDBs). In Andhra Pradesh and Jharkhand the long term structure has been merged with the short term structure. The CCS is refinanced by the National Bank of Agricultural and Rural Development (NABARD). These institutions are, however, beset with problems like low recovery percentage (40-60%), inefficient management systems and politicization of the cooperatives due to inadequate laws prevalent in the system. In 2001-02, there were over 98,000 primary agricultural cooperatives and the loan outstanding was Rs 32712 crore. In addition, the cooperative sector also had Rs 14,172 crore of long term loans given for land and water development, tractors, etc.

COMMERCIAL BANKS
The involvement of commercial banks in credit to agriculture began after the Gorawala Committee Report in 1954. The State Bank of India was asked to open 400 branches in semi-urban areas and start agricultural lending. The issue became urgent with the onset of the Green Revolution, as the package of high yielding variety seeds and fertilizers required access to credit. The government responded by first directing banks to lend to agriculture, then imposing social control and eventually nationalizing the major banks in 1971. This was followed by a major expansion in rural branches and introduction of the Lead Bank scheme and district credit plans. Within the overall quota of 40% priority sector lending, banks were asked to lend 18% of their total advances to agriculture. The number of
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commercial bank branches as also the share of commercial banks in agricultural credit kept rising, particularly as cooperative credit structure in many states was not working well. This trend remained till the late 1980s, when the Agriculture and Rural Debt Relief Scheme, 1989 was announced by the then government resulting in a waiving of all loans below Rs 10,000. This created repayment problems for banks and generally discouraged them from further lending. The circle turned completely with the Narasimhan Committee report in 1993 recommending that banks should focus on profitability and adopt prudential norms. This meant much more stringent provisioning for non-performing loans than earlier and de-recognition of interest on overdue loans. Expectedly, banks became even more averse to lending to smaller, rural and agricultural borrowers. The proportion of bank credit to small borrowers (below Rs 25,000) came down steadily from 18.3% of total commercial scheduled bank credit in 1994 to 5.3% by March 2002. The declining trend by commercial banks is continuing. The new generation private sector banks hardly have any branches in district towns, leave alone rural areas and are generally averse to agricultural lending, even though they have an obligation that 18% of their total lending will be to agriculture. Some of them are trying to meet this by offering bulk credit to corporate in agriculture such as sugar mills and plantations, while most others simply deposit the shortfall with NABARD at low interest rates, from where it goes into the Rural Infrastructure Development Fund. To incentivize banks to lend to small farmers, interest rates must be deregulated and use of traditional (such as arhatiyas or commission agents in market yards) and innovative channels (such as e-kiosks) must be permitted, indeed encouraged.

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12.2 REGIONAL RURAL BANKS (RRBs):


These were set up in 1975 under an act of parliament to exclusively cater to the credit needs of the rural population, especially small and marginal farmers. The ownership structure of RRBs is the central government (50%), the state government concerned (15%) and the sponsor commercial bank (35%). The sponsor bank manages the RRB concerned. There are 196 RRBs spread over 516 districts with a branch network of 14433. In 1972, the Banking Commission observed that despite massive expansion of the network of commercial banks consequent to nationalization, there was still a need for having a specialized network of bank branches to cater to the needs of the rural poor. With this premise, RRBs were established in India under the RRB Act, 1976. The thinking was to set up RRBs as rural-oriented commercial banks with the low cost profile of cooperatives but the professional discipline and modern outlook of commercial banks. In the very first decade of the setting up of RRBs, 152 out of 188 RRBs had accumulated losses of Rs 340 crore. This demands policy autonomy and strategic
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attention, not micro-management by a plethora of actors. They must also be allowed to charge higher interest rates to small farmers in turn for timely credit.

MICRO FINANCE

Micro finance clients are typically self- employed micro entrepreneurs. In rural areas they are usually small farmers and people who are engaged in small income generating activities such as food processing and petty trade. In urban areas clients of microfinance may be shopkeepers, service providers, artisans and street vendors. A Self- Help Group (SHG) is a small voluntary association of poor people of comparable socio- economic background. It promotes small savings among its
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members. The savings are kept with a bank. This common fund is in the name of the SHG. Usually, the number of members in one SHG does not exceed twenty and are usually very poor people who are not creditworthy enough to access credit from formal credit institutions. SHGs can open a Savings Bank account with the nearest Commercial or Regional Rural Bank or a Co-operative Bank. This is essential to keep the thrift and other money of SHG safely and also to improve the transparency levels of SHGs transactions. Opening of an SB account, in fact, is the beginning of 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. Micro credit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those which provide these facilities.

Applicable Interest Rates


The reform of the interest rate regime as constituted an integral part of the financial sector reform initiated in our country in 1991. In consonance with this reform process, interest rate applicable to loans given by banks to micro credit organizations or by the micro credit organizations to Self Help Groups/membersbeneficiaries has been left to their discretion. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues to remain in force.

13.1 The Terms & Conditions for Accessing Micro Credit.


Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and saving products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins etc. Such credit covers not only consumption and production loans for various farm and non-farm activities of the poor but also include their credit needs such as housing and shelter improvements.

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13.2 Self Help Group (SHG)

A self help group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily coming together to save money regularly, to mutually agree to a common fund and to meet their emergency needs on mutual help basis. The group members use collective wisdom and peer pressure to ensure proper end use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals. THE Advantages of financing through SHGS Economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle on a single SHG account instead of a large number of small sized individual accounts, borrowers as part of a SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.

13.3 Role Played by Non-Governmental organizations (NGO ) in Provision of Micro Credit.

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A Non Governmental Organization (NGO) is a voluntary organization established to undertake social intermediation like organizing SHGs of micro entrepreneurs and entrusting them to banks for credit linkage or financial intermediation like borrowing bulk funds from banks for on lending to SHGs.

13.4 LATEST MICRO CREDIT DISBURSEMENT INDICATORs.


With a view to facilitating smoother and more meaningful banking with the poor, a Pilot Project for purveying micro credit by linking Self- Help groups with banks was launched by NABARD in 1991-92 with a view to facilitating smoother and more meaningful banking with the poor. RBI had then advised commercial banks to actively participate in this linkage programme. The scheme has since been extended to RRBs and co-operative banks. The number of SHGs linked to banks aggregated 461478 as on March 31, 2002. This translates into an estimated 7.87 million very poor families brought within the fold of formal banking services as on March 31, 2002. More than 90% of the groups linked with banks are exclusive women groups. Cumulative disbursement of bank loans to these SHGs stood at Rs. 1026.34 crores as on March 31, 02 with an average loan of Rs. 22240 per SHG and Rs. 1316 per family. As regards model wise linkage , while Model 1 , viz. directly to SHGS without intervention of any NGO now accounts for 16% , Model 2, viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to 75% and Model 3, viz. through NGO as facilitator and financing agency represents 9 % of the total linkage. While 488 districts in all the states have
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been covered under this programme, 444 banks including 44 commercial banks , 17 in the pvt sector, 191 RRBs and 209 co-operative banks along with 2155 NGOs are now associated with the SHG bank linkage programme. While the SHG bank linkage programme has surely emerged as the dominant micro finance dispensation model in India, other models have evolved as significant micro finance purveying channels. The other successful models that have emerged are as follows: (a) An Intermediate Model that works on banking principles with focus on both savings and credit activities and where banking services are provided to the clients either directly or through SHGs.
(b) There

is also a Wholesale Banking model where the clients comprise NGOS, MFIs and SHG federations. This Model involves a unique package of providing both loans and capacity building support to its partners. Further, there is an Individual Banking model that has its clients as individuals or joint liability groups. While programme management and client appraisal in this model may be an challenge, it is best suited to lending to enterprises.

(c)

Keeping these models for delivery of credit to the poor and the unorganized sector in view RBI is moving towards a systems perspective for providing effective policy support not only because a no. of different institutions are involved but also because these institutions have very different institutional goals. With this in view, a series of initiatives is being planned in the coming months for putting in place a more vibrant micro finance dispensation and competitive models of micro finance delivery would be encouraged to co-exist.

13.5 FOREIGN INVESTMENT IN MICRO CREDIT PROJECTS

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Government of India with their notification dated August 29, 2000 have included Micro Credit/ Rural credit in the list of permitted non banking financial company (NBFC) Activities for being considered for foreign direct investments (FDB) / Overseas co-operate bodies(OCB) / Non- Resident Indians (NRI) Investment to encourage foreign participation in micro- Credit Projects. This covers credit facility at micro level for providing to small producers and small micro enterprises in rural and urban areas.

13.6 MICRO FINANCE INSTITUTIONS (MFIS)

Even as banks are physically present in rural areas and offer concessional interest rates, small farmers are unable to access them because of borrower-unfriendly products and procedures, inflexibility and delay, and high transaction costs, both legitimate and illegal. It was in this context that NGOs began to examine alternative ways to enhance access to credit by the poor since the mid-1970s. After pioneering efforts by organizations like SEWA, MYRADA, PRADAN and CDF, in 1992 the RBI and NABARD encouraged commercial banks to link up with NGOs to establish and finance self-help groups of the poor. Despite this impressive growth, there are still a number of problems with microcredit. For a start, the average loan size through SHGs is only about Rs 1600. This is too little to even alleviate poverty, leave alone lift a family out of poverty.
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Second, the distribution of the SHG loans is highly skewed regionally, with nearly 75% coming to the four southern states, while less than 0.6% went to all the eight northeastern states. The geographical distribution of MFIs is not much better. There are also problems of banks and MFIs being forced by vote-seeking political leaders to lend at unrealistically low interest rates, which does not cover costs, and thus eventually makes the whole effort financially unsustainable.

INFORMAL SOURCES:
RBI data reveals that informal sources provide a significant part of the total credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be seen from the findings of the successive All India Debt and Investment Surveys (AIDIS). These show that the share of noninstitutional agencies (informal sector) in the outstanding cash dues of rural households has reduced from 83.7% in 1961 to 36% in 1991. As per the latest AIDIS, 1992, formal institutional sources, banks and cooperatives provided credit support to almost 64% of the rural households, while professional and agricultural moneylenders extend credit to about one sixth of the rural households. From the point of view of a small farmer, the important informal sources of credit are large farmers, input suppliers (seed, fertilizer and pesticide dealers), commission agents or arhatiyas who arrange the sale of a farmers produce in a mandi or market yard, and occasionally professional moneylenders. The interest rates from these sources vary from 3% per month in the southern states to over 10% per month in the eastern states. Moreover, such credit is often tied such as the obligation to work in the large farmers land as needed, and selling their produce through the same arhatiyas who advanced a loan for the sowing season. The relationship varies from

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being mildly unfavorable to the farmer to being highly exploitative, depending on the place. To increase access to credit for small farmers, use must be made of the informal sector players and the best way is to make them compete with each other. Thus in locations where there are only few input dealers or arhatiyas, an effort should be made to help set up others in the same business. Bank loans, for instance, should be provided to set up seed/fertiliser shops and licenses given to more arahtiyas in regulated market yards. Once they are forced to compete, they will end up serving the small farmer better and on more reasonable terms.

INTEREST RATES:
One of the abiding questions related to extension of credit to small farmers revolves around interest rates. Both emotive as well as intellectual arguments tend to suggest that smaller borrowers, including farmers, should be charged a lower rate of interest than larger borrowers. Policies and directives based on this thinking have been dominant in India since over a hundred years. This was partly justified on the grounds of the usurious practices of traditional moneylenders, often aimed at dispossessing borrowers of their main collateral security land. This led to the enactment of anti-usury laws, known in most states as the Moneylenders Acts. However, the result has been perverse, reducing the supply of credit and increasing the interest rate of the little that is given. The discomforting fact is that interest rates of informal lenders are difficult to control, whereas formal institutions which are under public scrutiny have to keep their interest rates low. Thus formal institutions tend to ration credit to small farmers since they are not able to meet their full costs. Transaction costs on small loans are necessarily higher than for
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large loans, when expressed as a percentage of the loan amount. The pricing should cover the cost of funds, the transaction costs and the risk costs (likelihood of bad debts). Most arguments in favor of lower interest rates for small farmers do not take this into account. As a result, banks find it unprofitable to lend to small farmers and effectively cut their losses by lending as little as they can get by without incurring regulatory wrath. In India, though interest rates on small loans by RRBs and cooperative banks were deregulated in 1996, the amount of credit by these banks has not gone up significantly. This is because the regulatory cap was never removed for the largest channel of rural credit, the commercial banks, thus ensuring that RRBs and cooperatives could never significantly increase their interest rates. More recently, the government has been asking (though it has refrained from getting the RBI to direct) banks to reduce interest rates to farmers to 9%, on the grounds that interest rates on housing loans to the urban middle class were down to 7-8%. Though it is acceptable to compare these rates, what is not discussed is that the transaction cost of an urban housing loan is much lower because of high volumes per branch and much lower risk levels. Bad debts for housing loans are a fraction of one percent while those for agricultural loans are anywhere from 3-5%, even without the risk of politically motivated loan waivers, and with those included, the bad debt costs are much too high to be built into any reasonable interest rates. Politicians, intellectuals and farmers all need to accept that small loans are more expensive and must be priced accordingly. Thus an answer to the credit needs of small farmers in India is to free up interest rates, not just in terms of regulation but in terms of acceptability. At the same time, the government should permit a whole spectrum of credit providers, formal and informal, to enter the field and compete with each other so that they can enhance the total credit flow and eventually bring
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down costs. No regulation can control supply and price simultaneously. So if more credit has to flow to farmers, the price (interest rate) must be deregulated. Initially it may go up, attract more players and then they will compete and bring down the rates. Ironically, this lesson from the housing and consumer finance market has been missed by our policy-makers.

SMALL SCALE INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)


The SIDBI was established on April 02, 1990 by government of India, as a wholly owned subsidiary of IDBI. It was delinked from IDBI w.e.f. March 27, 2000. SIDBI is headed by the chairman and the managing director. The SIDBI is operating different programmes and schemes through 5 regional offices and 33 branch offices. SIDBI s charter includes Financing, promotion, development and co-ordination for orderly growth of small and medium term enterprises. The activities of SIDBI as they have evolved over the period of time, now meet almost all the requirements
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of SMEs which fall into a wide spectrum constituting modern and technologically superior units at one end and traditional units at the other. It is committed to developing a strong, vibrant and responsive small scale sector. The main objective of SIDBI is to strengthen the existing institutional arrangement to meet the requirements of SSI and tiny industries. Functions of SIDBI: Administration of SIDF and NEF for development and equity support to small and tiny industry. Providing working capital through single window scheme. Undertaking direct financing of SSI units. Providing refinance support to various institutions engaged in finance of SSI and tiny units.

14.1 Various innovative Schemes / Card products were introduced:


Star Composite Cash Credit (CCC) Kisan Credit Card ( KCC) Kisan Gold Card ( KGC) Star Kisan Samadhan Card (KSC)

The Philosophy, concepts and various issues behind launch of various new cards are as under:

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To maintain continued relationship with our existing borrowers by providing credit packages which take care of both the present as well as future aspirations of the borrowers in pursuing their various productive ventures. Providing credit for the diversified needs of the borrowers family for farm, off-farm as well as consumption needs like housing, education, conveyance, marriages and health etc. Focused attention for development of crops being grown in the given area like cotton, sugarcane, potato etc. Offering credit against stored farm produce to sell in a buyers market.

14.2 KISAN CREDIT CARD


The Kisan Credit Card (KCC) scheme introduced in 1998-99 has made rapid progress with the banking. It is a system issuing more than 556 lakh cards. The scheme has helped in augmenting the flow of short term crop loans for seasonal agricultural operations to farmers. The scope of KCC has enlarged to include term loans for agriculture and allied activities along with consumption needs. Further to provide adequate and timely credit support from the banking system to the farmers for their cultivation needs and to improve their accessibility to bank credit.

CONTENTS OF CREDIT CARDS

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Beneficiaries covered under the Scheme are issued with a credit card and a pass book or a credit card cum pass book incorporating the name, address, particulars of land holding, borrowing limit, validity period, a passport size photo of holder etc. which may serve both as an identity card and facilitate recording of transactions on an ongoing basis. Borrower is required to produce the card cum pass book whenever he operates. ADVANTAGES OF THE KCC: Access to adequate and timely credit to farmers. Full years credit requirement of the borrower is taken care of. Flexibility to draw cash and buy inputs. Assured availability of credit at any time enabling reduced interest burden for the farmer. Improvement in recycling of funds and better recovery of loans.

CASE STUDY VIDHARBHA FARMERS DEBT TRAP

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Amravati: In Maharashtras Vidharbha region, where the word suicide has long lost its sting, the centres loan write-off should ideally have brought some cheer to farmers, some of whose relatives or friends killed themselves because they could no longer service their debts it hasnt. Cheerless melody: A group of people in Balegaon, Yavatmal, sing for heavy rains. The governments populist loan waiver that will write off debts of around 43 million farmers is not meant for big farmers. That is because the governments ambitious and populist loan waiver that will write-off debts of around 43 million farmers aggregating to Rs 71800 crore, is not meant for big farmers- owning 5 acres or more even if all they have is land. With just a few days to go for the implementation of the governments loan waiver package, Vijay Vasantrao Thavale, 40, who belongs to Kondhali village in the region, is preparing to sell-off his land- all 18 acres of it to repay his five year old debt. Under the debt waiver, the dues of small and marginal farmers (around 37 million of them) owning up to 2 hectares of land (nearly 5 acres). And whose loans were overdue at the end of December, will be entirely written-off. Other farmers who have overdue loans are expected to get a 25% if they promise to pay up the rest of the loan by June 2009. Banks in some parts of the country started putting up lists of beneficiaries on Thursday evening. However, banks here are expected to put up the lists only on 30th June, the deadline for doing so. Bankers here expect the lists to generate some amount of ire among farmers whose names do not figure on them. I have been unable to repay the bank loan for the past five years and now I owe Rs 3 lakh (jointly to Bank of India and a co-operative bank). Selling the land is the only way out, before the situation goes completely out of control, said Thavale, who at least has land to sell to pay up his loan. Bankers term farmers such as him as asset rich but cash poor. At least one tenth of the farmers at Kondhali, 50km from Nagpur, are asset rich, according to data available with the Bank of India branch in the village. Untouched by government
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waivers and relief, these farmers with land holdings of 5 acres or more say they are likely to remain in debt for the rest of their lives. According to a Bank of India official who asked not to be named, there are 200 farmers in this village who have availed of loans (and not repaid them) and who own more than 5 acres of land. That is a story that repeats itself across Vidharbha. All across Vidharbha, defaults among big farmers are compared with the rest of Maharashtra, said a State Bank of India officer in Amravati who did not wish to be identified. The total number of those farmers considered big in the Vidharbha region, which compares two of the six administrative divisions of Maharashtra - Nagpur and Amravati couldnt be ascertained. The 11 districts that come under the area are Akola, Amravati, Bhandara, Buldana, Chandrapur, Gadchiroli, Gondia, Nagpur, Wardha, Washim and Yavatmal. Like Thavale, 60% of farmers in Kondhali grow soya bean. Most big farmers need tractor to till their land and have taken loans to buy the machines that cost at least Rs 5.5 lakh. Most default and barely mange to pay the interest back, said the State Bank of India official. Thavale said agriculture is becoming unviable by the day and the loan waiver is not going to solve the problem. : The government doesnt realize that this year you may have given the defaulters relief but they will have the same problem next year as well. Farmers need to be cash rich to invest in the crop to buy seeds and fertilizers. Input costs are rising by the day, he added. Chandrabhan Nathu Hingwe of Thane gaon, a village in Wardha district, has a deadpan expression on his face instead of a smile as he walks out of a Bank of India branch, which has just sanctioned him a loan for a tractor. Hingwe, who owns 11 acres of land, has been servicing an Rs 25,000 crop loan for the past 10 years. He said he would not service his loan this year. I was paying to maintain a credit record with the bank, but now I feel cheated, because defaulters have suddenly had their loans waived and their credit records have become clean, he added.
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Meanwhile, some bankers said that some big farmers have begun to divide their plots in areas of less than 5 acres each. The big farmers now know how to avail of subsidies and waivers, said S.H Shrote, a district co-coordinator at the State Bank of India branch in Amravati. For them, it is the only way out of the debt cycle, he added.

Give us a price not a package


Vidharbha farmers are unhappy with the relief packages announced by the State and the centre. Debt relief and access to credit are certainly important to them, but they want the larger issues driving the suicides addressed first.

09, August2006- Dump the packages, give us a price. Its the price of cotton were worried about, says Kaka Manohar Motiramji Tadas. With a fair deal on that, we can mange for now. Tadas knows something about farming. He has been at it for close to 45 years. Hes does have other demands. Like a debt waiver and access to credit. But the price of cotton tops his list just now. That is a month after Prime Minister Manmohan Singh concluded his visit to Vidharbha. Kaka Tadas speaks to us in Kavita village, Amravati district in the house of Sri Krishna Rahate. We could not speak to Rahate. He had killed himself less than a 100 hrs before he arrived which makes him no 700 in the list of farmers who have taken their lives in Vidharbha since June.1, 2005.

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Kaka Tadas , in Sri Krishna Rahates house , says the first priority is a fair price for cotton growers. Rahate is No. 700 in the list of Vidharbha farmers who have committed suicide since June1, 2005. The streets are deserted- because Kavita and many villages like it are badly hit by chickengunya. Large numbers have it. says Dilip Choudhary, who leads to Rahates house and not many can afford medicinal help. With floods and excess rainfall ravaging farm lands in parts of Vidharbha things are getting worse. Kaka Tadas and Mr. Choudhary see no connection between the Relief Package. The prime minister announced here and the huge spurt in suicides since then. Nor do any of the other farmers who gather to meet us. Then they are clear that larger issues are driving the farm deaths than those addressed by short term Packages. They are also clear that lacs of households that have seen no suicides are almost as badly off as the thousands that have in the past few years. If anything, they see the sharp rise in the number of farmers killing themselves as proof of who irrelevant the immediate measures have been. The number of suicides since the Prime Minister left Vidharbha on July 1 is now well passed the 100 mark. Before his visit, 101 farmers took their lives in 49 days. The same no. killed themselves in 33 days after the visit ended. That is, the rate of suicides rose from around two a day to over three each day, or 1 every eight hours. This means July saw an eight-fold increase in such deaths as compared to the same period last year. July 2005 saw 11 suicides according to the Vidharbha Jan Andolan Samiti. ( VJAS). This July there were 92. ( 1 official count, accessed by the Hindu, puts the nos for the same period at 15 and 80. So though different, both confirm a disastrous trend for that month. However, these official figures have only recently come into existence and are shaky. The VJAS has been more diligent). What explains the July surge? since not a single mayor demand has been met in years things could only get worse, says Kishor Tiwari of the VJAS. Even though those who sowed felt trapped, having no funds to follow up with the next steps, He is hopeful the trend will decline in August but knows the excess rains could make things worse. And, like everyone else, he fears the coming of the spraying
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season after that. That is usually when the worst no. comes in .It is during the spraying period that the farmers hold pesticides in his hands. For the very desperate, that is the time when a deadly discussion is most easily taken. Swallowing pesticides has been the chosen route out in four fifths of all farm suicides here. The process of rising debts and falling hope also continues. What new credit? asks Mr. Choudhary.I own three acres and needed Rs. 18,000 as a crop loan. The bank gave me Rs. 5,000. How am I supposed to anything with that? There are cases of farmers with 25 acres getting just Rs. 12,000. All this in a month after the announcement of fresh crop loans. Of the record, bank managers admit not much have happened much on the credit front: We have no money to pay staff salaries, claim some. Also, the sowing season was almost over by the time any little money began flowing. Some did benefit from fresh crop loans. But mostly in the way that Mr. Choudhary did pushing them once again to money lenders. For the remaining sum they need. Kaka Tadas insist: There has to be a fair price for what the farmers grow. Last year the cotton prices fell sharply when the state government withdrew its Advance bonus of Rs. 500 a quintal. The price now is Rs. 1700, but some have sold their cotton in distress for less. Big firms are among the gainers in the distress sales. Farmers point out that neither State nor central packages touch the issue of price. Cotton prices have been devastated by both the State policy and worldwide by American and European Union subsidies to their producers running to billions of dollars each year. Many have switched to soyabean, says Mohan Rahate, son of the farmer who took his life, but soyabean too, has fallen from Rs. 1100 to Rs. 1000 a quintal. It could fall to Rs.800. Meanwhile since neither central nor State packages promote foodcrops. Particularly jowar progress on that front is nil.

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15.1

TWO POSITIVES

Just two moves appear to have clicked to some extent. The Rs. 50 lakh each directly given by the Prime Minister to Six Districts Collectors is being utilized. Close to a third Rs. 300 lac has been used within a week of the money coming in. Since this is not just for the suicides- hit, immediate relief has reached some thousands of people this includes a few of those unable to pay crushing health expenses- now the second fastest growing component of rural family debt. District Collector hope this fund will be replenished when it runs out. Thousands of couples have also used the Rs. 6 crore set aside, for mass marriages under the States package and Chief Minister Vilas Rao Deshmukh has announced he will be back with this more money. This has seen over 6,000 households lower their expenses in a time of dire need. It has also importantly, lent social legitimacy to the notion of cheap weddings. Both moves have been positive. Yet the numbers have been quite marginal to the lakh of households in crisis. On almost all other fronts lag badly. The credibility of the Government machinery at the village level seems at its lowest ever. And farmers assert that their central issues have in no way been addressed by either the State or the Centre. The rest of the season could get bleaker. Unless, says Kaka Tadas, You give us a price. A Fair Price.

P. Sainath 09 August 2006.


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(Courtesy: The Hindu.)

15.2 CENTRE FINALISES Rs. 4000 CRORE PACKAGES FOR VIDHARBHA FARMERS.
Efforts on to work out complete interest waiver on loans.

Liberalized rescheduling of loans and fresh credit flow. Assured irrigation for 1.5 lakh hectares. Substantial allocation for diversification. Packages also for 25 districts in three other states.

NEW DELHI: The centre has finalized an over Rs. 4,000 crore rehabilitation package for farmers in six districts of Vidharbha in Maharashtra, where the prevalence of suicide is high. Till Thursday night efforts were on to work out complete interest waiver on loans taken by farmers in the districts of Wardha, Amravati, Akola, Washim, Buldana and Yavatmal. If this proposal comes through, the package will run into nearly Rs. 5000 crore. It will be implemented over three years. Prime Minister Manmohan Singh will announce the package, prepared by the Agriculture Ministry, during his two day visit to Vidharbha villages. Between 2001 and 2006 nearly 1000 farmers killed themselves in the drought prone areas.

Rs. 2,000 crore. Outstanding

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A major component of the package will be liberalized rescheduling of loans and fresh credit flow to farmers in distress and those in arrears, the cut-off date being June 30, 2006. Sources said that over Rs. 2000 crore was the total outstanding farm loans on March 31, 2006 in the six districts. Guidelines would be issued on this. About 1.5 lakh hectares would be brought under assured irrigation by completing all major, medium and minor irrigation techniques in the 6 districts at a cost of Rs. 2500 crore. A grant would be given for water harvesting structures and participatory water shed development. Subsidy would be given for rainwater harvesting schemes and drip and sprinkler irrigation. A substantial component of the package would be allocated towards higher subsidy for diversification into horticulture, livestock, dairying and fisheries and creation of fodder bank. Support up to Rs. 200 crore would also be provided for 50 % Seed Replacement Ratio. The proposal was to provide quality seeds of jowar, soybean, tur, black gram, moong, sunflower and cotton. Extension services would be strengthened through Agriculture Technology and Management Agencies. A technology mission on citrus would be launched in this orange growing belt. This would address the problem of production, protection, post- harvest technology and processing under the supervision of the National Research Centre on Citrus at an estimated cost of Rs. 225 crore. The rehabilitation package would be implemented and monitored by a state level committee with representation from the centre and at the micro level through district panels and panchayats. Packages would also be worked out for 25 districts in Andhra Pradesh, Karnataka and Kerala where too the suicide rate is very high.

FOR VIDHARBHAS FARMERS, THE MOST IMPORTANT QUESTION IS: WHEN TO SOW?
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CURRENT POSITION OF FARMERS


FARMERS ARE KILLING THEMSELVES BECAUSE THE GOVERNMENT HAS DENIED THEM ECONOMIC FREEDOM.

Scores of farmers in Maharashtras Vidharbha region have been driven to suicide over the last few years, mostly on account of their inability to pay their creditors. Commentators have been quick to blame everything from bad monsoons to multinational corporations to President Bushs subsidies to American cotton farmers to WTO driven lowering of import tariffs and even to the surge in the export of raw cotton as a result of the end of quota regime in the international textile trade. Directing the needle of suspicion on these peripheral actors has generally diverted attention from the real culprit- the Government. By their sins of omission and commission the central and the Maharashtra State Governments have caused those scores of farmers to take their own lives. Consider, firstly farmers can only sell their produce through a state controlled monopoly which sets the purchase price through bureaucratic fiat. Often, this is below or near the cost of production. Framers also have to bear the cost and risk of
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transporting their harvest to purchasing centers. Vidharbhas cotton farmers thus rely on Mother Nature, and especially on the monsoons. They have no means to manage the risk. Secondly to manage the dominance in the financial sector and its inability to create an adequate banking and financial market infrastructure in rural areas has driven up interest rates and hamstrung sources of credit. Clamping down on private money lenders designed to prevent exploitation has both driven the business underground and choked the supply of credit. Combined with vitiating factors like corruption, red-tape, and legal delays and the cumulative effects of these government policies over the years has been to cause farmers to kill themselves- usually by ingesting pesticides. Vidharbha calls for both fundamental reforms as well as emergency relief measures that maximize the economic freedom of the farmers, traders, banks and other businesses in the value chain.

The Government hates competition


The government stranglehold on cotton procurement should be the first to go and make for a free market in agricultural commodities. Instead of being the sole buyer, the government can play an important role as buyer of last resort. It should set its support price a rung below the market price to serve as a safety net during the transition to the market. In the market based system, the role of the government will then be to exercise regulatory oversight and ensure fair play. Agricultural markets have evolved in other countries with a range of features like crop insurance, price protection and futures markets that helps ordinary farmers manage their risks.

No Water is free:
Political stunts and economic lunacies like free power often serve as a mask for the governments chronic failure to invest in irrigation treated with fatalism that it is considered acceptable for GDP growth figures to be cited subject to monsoon. Those who suggest that farmers will be unwilling to pay for guaranteed supply of electricity and water need only to look at some of the things Vidharbhas farmers borrowing money for. For if they borrow thousands of rupees for digging a
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borewell they should be more than willing to pay a few tens of rupees each month for their water supply. Public private partnerships can close the gap between the supply and demand for irrigation if the govt. is willing to help take the politically difficult step of telling the farmers that the free lunch is not only free but that is killing them too.

From risky transfers to transferring risks:


A majority of Vidharbhas farmers borrow money from either co-operative banks or private money lenders. These institutions are unable to properly manage the risk of borrowers defaulting lending the former to deny further loans to farmers with poor credit histories and the latter to charge extremely high rates of interests. Further, the use of land as collateral is considered risky because suicides can lead to cancellation of such contracts. Financial institutions in analogous situationslike American banks in the student loan business can manage risk by selling the loan portfolio to other investors. Rural co-operatives and money lenders in Vidharbha cant. Though challenging, the government must provide incentives for financial institutions and other investors to pick up the risks from rural creditors. And it is an area that emergency relief measures will be most effective. The temptation to provide relief to the farmers through promises of heaper loans is likely to be powerful. More effective though is the purchase of agricultural debt from the rural co-operatives and money lenders. This will free them to do what they know the best- lend money to farmers. Money lenders can charge high interest rates if they want because they can. They cant if rural banks dont turn away borrowers. Govt. intervention should therefore be targeted at allowing rural banks to lend by underwriting or absorbing their existing outstanding loans.

Is this crisis an opportunity:


After visiting some villages in the region, Prime Minister Manmohan Singh has announced emergency measures that look suspiciously like same old. It is difficult to understand why he thinks restructuring loans and interest waivers will work now, when the farmers themselves have told him that the loans under the previous package announced by the state government have yet to be disturbed.
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He has another chance if he does not settle for mere political palliatives. Moments of crisis are moments of opportunity for Indian reformers so a theory goes. Whether or not there is any truth to this theory Dr. Singh would do well to tackle the problem at its roots. After all , it is the Indian government that is responsible for the suicides.

CONCLUSION
In this project I have focused on various sectors of Indian rural economy, its importance and contribution to our economy. In the beginning of the project I have given a summarized idea of what credit is, how the rural economy functions, what are the problems faced by the farmers while getting credit, how to deregulate credit, the challenges faced and what an ideal credit system should be. I have also mentioned more or less everything that covers rural areas and their transactions, which banks and co-operatives are essential for providing rural credit, the RBI, the NABARD , SHGs, NGOs and Regional rural banks. This sector though helped from all sides, but still needs to be done in case of providing a proper credit facility to the farmers. In the absence of a proper credit structure and delivery facility the rural sector will have an unfavorable impact on its development. The banks and other financial institutions should not hesitate to invest in this sector after all agriculture is the backbone of the Indian economy and a major contributor to our national income. The credit system should be designed in such a way that it encourages farmers to cultivate and not drive them to suicide as we can see in the case of the Vidharbha situation. The farmers who make sure that the rest of the country does not go hungry are starving themselves. If this is the situation of the farmers of the country there are some serious questions and a grim future ahead of our country aspiring to be the world super economy.

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Finally I would like to conclude by focusing on the fact there are many institutions like NABARD, RRBs and other financial institutions who have implemented various schemes to achieve proper credit facility to the farmers. This is a positive development for the rural sector.

BIBLIOGRAPHY
1. Challenges to Indian Banking- By Narendra Jadhav 2. Rural Marketing. 3. Rural Banking.

WIBLIOGRAPHY
www.google.com

1.

2.

www.rbi.org.co

3.

www.pnb.com

4.

www.obc.com

5.

www.sbi.com
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NEWSPAPER
1.DAILY NEWS AND ANALYSIS 2. ECONOMIC TIMES

ANNEXURE Questionnaire:

Following were the questions asked during interview with the chief manager of Oriental Bank of Commerce:

1. How does your bank provide rural credit? 2. Which are the sectors in which your banks provide rural credit? 3. What is the credit limit?
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4. What are the various schemes provided by your bank to provide credit in rural sector? 5. What is the interest rate charged?

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