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CONTENT Sources of Rural Finance Credit Delivery Mechanism in Rural Finance The Role of Commercial Bank
Regional Rural Banks (RRBS) Service Area Approach (SAA)


WHAT IS FINANCIAL EXCLUSION? Financial Exclusion No Savings No Insurance No assets No bank account No
access to money advice No affordable credit

Who are Financially Excluded :

Who are Financially Excluded Poor Socially under-privileged Disabled Old as well as children Women Uneducated
Ethnic Minorities Un-employed

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Financial Inclusion - Definition “The process of ensuring access to financial services and timely and adequate credit
where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.” -

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Financial Inclusion Credit Cards Bank A/Cs - Savings Empowerment of SHGs Insurance Lack of Assets (for
Collateral) Affordable Credit Financial Advice Payments + Remittances

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1904 - Cooperative Societies Act 1954 - Rural Credit Survey Committee 1955 - State Bank fo India created for rural
penetration 1969 - 19 Commercial Bank Nationalized, All India Rural Credit Review Committee 1970 - Lead Bank
Scheme - States/Districts 1975 - Regional Rural Bank - Hybrid banks 1981 - 6 more Commercial Banks nationalized
1992 - SHG - Bank Linkage Programme 2001 - Kisan Credit Card / Swarojgar Credit Card / Gramin Tatkal Card -
Committee on Financial Inclusion Set up Financial Inclusion – Institutionalization milestones since early 1900’s

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Rural finance comprises credit, savings and insurance (or insurance substitutes) in rural areas, whether provided
through formal or informal mechanisms. The word 'credit' tends to be associated with enterprise development,
whereas rural finance also includes savings and insurance mechanisms used by the poor to protect and stabilize their
families and livelihoods (not just their businesses).

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An understanding of rural finance helps explain the livelihood strategies and priorities of the rural poor. Rural finance
is important to the poor.

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The poorest groups spend the highest proportion of their income on food – typically more than 60% and sometimes
as much as 90%. Under these circumstances, any drop in earnings, or any additional expenditure (health or funeral
costs, for instance) has immediate consequences for family welfare – unless savings or loans can be accessed.

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Financial transactions are therefore an integral part of the livelihood system of the poor. Rural finance consists of
informal and formal sectors. Examples of formal sources of credit include: banks; projects; and contract farmer
schemes. Reference is often made to micro-credit.

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Micro underlines the small loan size normally associated with the borrowing requirements of poor rural populations,
and micro-credit schemes use specially developed pro-poor lending methodologies. Rural populations, however, are
much more dependent on informal sources of finance (including loans from family and friends, the local moneylender,
and rotating or accumulating savings and credit associations).

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Rural Finance is a set of financial services that are not limited to credit only. Financial services in rural finance
include: loans, savings, investment, guarantee funds, remittance services, inventory credit, trader finance and
SOURCES OF RURAL FINANCE Depending upon the requirement and purpose, the funds needed by the Indian
farmers can be categorized into three types: Short term loans - 12 to 15 months Medium term loan – 3 to 5 years
Long term loans – 15 to 20 years

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SHOT TERM LOANS are issued to farmers for the purpose of cultivation or domestic expenses such buying seeds,
manure and fodder for cattle, etc. MEDIUM TERM LOANS are given to farmers to purchase cattle, agricultural
implement and to make improvements on land.

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LONG TERM LOANS are given to farmers to purchase land, make improvements on land, pay-off old debts and
purchase useful machinery for long-term usage. These loans are for comparatively long periods since the farmers
can repay them gradually over a number of years.

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The two credit sources available to the farmers are institutional and private. Institutional sources consist of the co-
operatives and commercial banks including Regional Rural Banks (RRBS). Non-Institutional or private sources
include money lenders, traders, commission agents and landlords.

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Non-institutional sources or private sources of farm credit refer to credit supplied by moneylender, landlords and
traders. Money lending is often combined with farming by the village money lenders as they lend to farmers for both
the productive and non-productive purposes charging high rate of interest.

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They enter larger than actually borrowed sums through false pretences by obtaining promissory notes and give no
receipts for repayments and often deny such repayments. They commit many other rogueries and have been
responsible for many of the ills of Indian agriculture.

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Their main interest has been to exploit the farmers and grab their lands. Institutional credit has been introduced to
stop such activities of the money lenders


development programs agricultural credit is one of the most crucial inputs. Private money lenders are the major
source for agricultural finance, which is inadequate and highly expensive and exploitative. Since Independence, a
multi-agency approach consisting of co-operatives, commercial banks and Regional Rural Banks (RRBS) has been
adopted to provide timely, adequate and relatively cheap credit to farmers; this is known as institutional credit.

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The major objective of the credit policy of the Government of India is to provide increasingly institutional credit to
small and marginal farmers to enable them to adopt modern technology and improved agricultural practices and thus
increase agricultural production and productivity.

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INSTITUTIONAL SOURCES OF FINANCE At present three agencies supply institutional finance to farmers. They are
Co-operatives, Commercial banks, and RRBs

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Bank network for rural credit Reserve Bank of India Government of India NABARD Public Sector Banks (27) RRBs
(196) June 2002 Private Banks (31) Rural Semi-urban Urban Metro Total 19,275 10,903 8,737 7,203 46,118 12,060
2,037 359 17 14,473 1,138 1,761 1,322 1,155 5,376 Foreign Banks (41) 0 2 20 180 202 + the cooperative banks

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The Primary Agricultural Credit Societies (PACSs) provide mainly short-term loans, and Land Development Banks
(LDBs)- these are now called Co-operative Agricultural and Rural Development Banks (CARDBs)- provide long term
and medium term loans to the agricultural sector.

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Agricultural credit to farmers and refinancing to above-mentioned banks is provided by the National Bank for
Agricultural and Rural Development (NABARD), which is the apex institution for agricultural credit at the national
level. RBI as the central bank of the country plays a crucial role by giving over-all direction to rural credit and financial
support to NABARD for its operations.

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SUPERIORITY OF INSTITUTIONAL FINANCE Weakness and inadequacy of private agencies to supply credit to
farmers aroused the need of institutional credit. Private finance, for example, is defective because: It is based on
profit motive and, therefore, it is always unfair; It is very expensive, moneylenders charge very high rates of interest,
and it is not related to productivity of land; and It does not flow into the most desirable channels and is not available to
the most needy persons.

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The motive of the institutional credit is always maximize the farmer’s income and raise his productivity. The rate of
interest is relatively low compared to moneylenders and can be different for different purposes. Institutions also make
a clear distinction between short term credit and long term requirements and give loans accordingly.

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EVOLUTION OF MULTI-AGENCY APPROACH IN INDIA Much was expected of the co-operative credit movement.
As the movement was led by and was for farmers, it was expected to cover all the needs of the farmers. The Co-
operatives were expected to protect the farmers from the clutches of the moneylender. A survey for the year 1950-51
shows that the co-operative met only 3.3% of the total requirement of the farmers.

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Then, State Bank of India (SBI) was set-up in 1955 after taking over the Imperial Bank of India to show special
concern for agricultural credit. The All-India Rural Credit Review Committee (1969) recommended that the adoption
of “Multi-Agency Approach” was necessary to the rural sector, as banks and societies alone could not meet the needs
of farmers.

SBI’s e-Gram Project in Gujarat :

SBI’s e-Gram Project in Gujarat To provide all banking products / services Customers not to visit branches personally
Target more than 5,000 rural ICT kiosks Villagers to start a bank a/c with Rs. 50 Zero balance accounts also
permitted MOU with Indian Postal Dept to act as a facilitator for 50 Post Offices at Surendra nagar, Anand and
Bharuch districts Also signed with Gujarat Agro Ind Corp to market bank’s products in 700 out of its 1200 outlets

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So commercial banks have to play an important role in the rural sector also. This is one of the main reason for the
Nationalization of the 14 top commercial banks in 1969. Later in 1976, the commercial banks were asked to set-up
RRBs to helps the small and marginal farmers and the rural artisans.

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Thus the multi-agency approach to institutional credit to agriculture- co-operative societies and cooperative banks,
commercial banks and RRBs- evolved over a number of years.

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PROBLEMS OF MULTI-AGENCY APPROACH The problem were: There was multiple financing, over-financing in
some areas and under financing due to lack of co-ordination between the agencies in the same areas. Despite the
adoption of lead bank scheme and district credit plans, the different agencies often failed to formulate and develop
meaningful agricultural programs in given blocks and districts.

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Despite guidelines issued by RBI, different agencies adopted different procedures and policies in the matter of
providing loans and their recovery. When different agencies had lent loans to the same persons there were some
practical problems in the recovery of loans.

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ROLE OF RBI IN RURAL CREDIT Since it was set up in 1934, RBI has been taking keen interest in expanding credit
to the rural sector. After NABARD was set up as the apex bank for agriculture and rural development, RBI has been
taking a series of steps for providing timely and adequate credit through NABARD.

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Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the
stipulation that 40percent of net bank credit should go to the priority sector, out of which at least 18 percent of net
bank credit should flow to agriculture.

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Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percent sub-target would have to
go to the corpus Rural Infrastructure Development Fund (RIDF).RBI has also taken steps in recent years to
strengthen institutional mechanisms such as recapitalization of Regional Rural Banks (RRBs) and setting up of local
area banks (LABs).

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MICRO-FINANCE Micro-finance is a novel approach to "banking with poor” as they attempt to combine lower
transaction costs and high degree of repayments. The major thrust of these micro-finance initiatives is through the
setting up of Self Help Groups (SHGs), Non-Governmental organizations (NGOs), Credit Unions etc.

Post Offices (for savings, the figure is small) :

Post Offices (for savings, the figure is small)

Indian MFIs in the Top 50 List in the World – 2007 :

Indian MFIs in the Top 50 List in the World – 2007

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KISAN(FARMERS') CREDIT CARD Another notable development in recent years is the introduction of Kisan Credit
Cards (KCC) in 1998-99.The purpose of the Kisan Credit Cards (KCC) scheme is to facilities short term credit to
farmers. The scheme has gained popularity and its implementation has been taken up by 27 commercial banks, 187
RRBs and 334 Central cooperative banks.

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AGRICULTURAL INSURANCE As Agricultural is highly susceptible to risks such as drought, flood, pests etc. It is
necessary to protect the farmers from natural calamities and ensure their credit eligibility from the next season.
Towards this purpose, the Government of India introduced a comprehensive crop insurance scheme through the
country in 1985 covering major cereal crops, oilseeds and pulses. Among commercial crops, seven crops viz.,
sugarcane potato, cotton, ginger, onion, turmeric and chilies are presently covered.

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for development of fruit and garden crops, for leveling and development of land, for purchase of ploughs, animals,
etc. Commercial banks also extend loans for allied activities viz., for dairying, poultry, piggery, bee keeping, fisheries
and others. These loans come to 15 to 16%.

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Outstanding Credit to Priority Sector from Banking Sector (Rs in Crore)

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COMMERCIAL BANKS AND SMALL FARMERS The commercial banks identifying the small farmers through Small
Farmers Development Agencies (SFDA) set up in various districts and group them into various categories for credit
support so as to enable them to become bible cultivators. As regard small cultivators near urban areas and irrigation
facilities, commercial banks can help them to go in for vegetable cultivation or combine it with small poultry farming
and maintaining of one or two milk cattle.

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IRDP AND COMMERCIAL BANKS Since October 1980, the Integrated Rural Development Programme (IRDP) has
been extended to all the blocks in the country and the commercial banks have been asked by the government of
India to finance IRDP.

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The lead banks have to prepare banking plans and allocate the responsibility of financing the identified beneficiaries
among the participating banks. Commercial banks have been asked to finance all economically backward people
identified by government agencies.

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COMMERCIAL BANKS AND RURAL CREDIT The commercial banks at present provide short term crop loans
account for nearly 45 to 47% of the total loans given and disbursed by the commercial banks. Term loans for varying
periods are given for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and
tube well,

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DIRECT FINANCING BY COMMERCIAL BANKS Commercial banks were expected to vigorously support the
farmers in general and small cultivators in particular. For obvious reasons the nationalized banks concentrated their
attention on cultivators and other special category farmers such as those engaged in raising high-yielding verities of
food grain.

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Term loans for varying periods are given for purchasing pump-sets, tractors and other agricultural machinery, for
construction of wells and tube wells, for development of fruit and garden crops, for leveling and development of land,
for the purchase of ploughs, animals etc.

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INDIRECT FINANCING BY COMMERCIAL BANKS Even though the scope for direct financing by commercial banks
would be limited for some tears to come, there is a considerable scope for indirect financing by them: Commercial
banks finance co-operative societies to enable them to extend their production credit to the farmers. More especially,
they provide finance increasingly to co-operatives engaged in the marketing and processing of agricultural produce or
in activities ancillary to agriculture such as dairy, poultry, etc.

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Commercial banks are undertaking indirect provision of production credit through agencies engaged in the supply of
inputs for the marketing or processing of agricultural produce. They extend credit to manufacturing or distribution
firms and agencies and co-operatives engaged in the supply of pump-sets and other agricultural machinery on a hire-
purchase basis or otherwise.

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They finance the operations of the Food Corporation of India, the state governments and others in the procurement,
storage, and distribution of food grains. Commercial banks increasingly subscribing to the debentures of the central
and development banks and also extend advances to the latter. This enables land development banks to expand
their medium and long term advances to farmers for the purpose of land improvement and land development.

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PROBLEMS OF COMMERCIAL BANKS IN RURAL CREDIT In the field of financing agriculture, the problems
concern quantitative and coverage aspects. The RRBs have been under severe financial strain on account of higher
transaction costs involved in handling of a large number of small-sized loan accounts; and somewhat lower interest
income as a result of confessional rates of interest on small-sized loans.


REGIONAL RURAL BANKS Rural banking in India started since the establishment of banking sector in India. Rural
Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of
the country and extended a helping hand in the growth process of the country

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SERVICE AREA APPROACH(SAA) Public sector banks adopted a new strategy for lending on the basis of a study
on the impact of bank credit in the rural sector viz., “Service Area Approach” under which each semi-urban and rural
branch of commercial banks was assigned a specific area comprising a cluster of villages within which it would
operate, adopting a planned approach. It was to avoid duplication of efforts and scattered lending over wider areas.

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The implementation was: Identification of service area, Survey of the service area for assessing the potential for
lending, Preparation of credit plans on annual basis, Coordination on a continuing basis, and A continuous system of
monitoring the implementation plans.

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Some of the advantages claimed of SAA are as follows; Attention to the development of the service area for each
branch Avoidance of duplication of efforts Organized and planned lending Easier and effective monitoring of the end-
use of credit Assessment of its impact on production levels.
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The problems during implementation of the SAA were with respect to: Allocation of villages Organizational issues

Summary :
Summary Sources of Rural Finance Credit Delivery Mechanism in Rural Finance The Role of Commercial Bank
Regional Rural Banks (RRBS) Service Area Approach (SAA)

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Article in paper about SMEs

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