Unit 5
Indian economics
The following points will highlight the five major sources of rural credit in India. They are:
1. Co-Operative Credit Societies
2. Land Development Banks
3. Commercial Banks
4. Regional Rural Banks
5. The Government.
1. Co-Operative Credit Societies:
The cooperative societies are supposed to be the cheapest and most important source of rural credit. When co-operatives were first set up it was thought that they would be able to meet almost the entire credit needs of numerous small and medium farmers.
As a result, the moneylenders would recede to the background. But this has not really happened. Till 1950-51 they played a passive role in the area of rural credit.
However, during the plan period the co-operative societies have made steady progress and have succeeded to some extent in promoting thriftiness and self-help among farmers. They have started helping the farmers in a big way. Short-term loans issued by Primary Agricultural Credit Societies (PACs) increased from Rs. 305 crores in 1965-66 to Rs. 5,200 crores in 1999-00. During the same period term loans issued increased from Rs. 37 crores to Rs. 2,100 crores.
Increasing reliance has also been placed by the Government on co-operatives as the most important set of institutions for meeting the credit needs of the farmers. Due to the encouragement and assistance provided by the Government as also by the NABARD, notable progress has been made by co-operatives in some States such as Tamil Nadu, Andhra Pradesh, Karnataka, Punjab and Himachal Pradesh. Whereas the co-operatives managed to meet hardly 3% of the credit needs of the farmers in 1950-51, they succeeded in meeting about 39% of the total credit needs of the farmers in 1999-00.
However, since co-operatives have not been able to meet, the entire credit needs of the farmers the moneylenders continue to dominate the rural financial markets. Moreover, the large farmers have derived the maximum benefits from the co-operative societies. The small farmers, for whom the cooperative movement was originally initiated, found it increasingly difficult to meet all their credit needs through these institutions.
Moreover, the movement is yet to take deep roots in most eastern States like Bihar, Orissa and West Bengal, as also in Rajasthan. In most areas the unscrupulous moneylenders, rich farmers and land-owners have worked against the movement. Consequently, the really needy and deserving farmers have been deprived of the benefits of co-operatives.
2. Land Development Banks:
Land development bank (formerly known as land mortgage banks) mainly provide long-term loans to farmers against the mortgage of their lands at low rates of interest over a period of 15 to 20 years. Farmers find borrowing from such banks attractive if costly land improvement programmes (such as digging or deepening of wells) are to be undertaken, or if additional land is to be acquired through outright purchase, or if previous debts have to be repaid.
Some progress has, of course, been made by land development banks in recent years, but their contribution is still insignificant. Hence they have not been able to touch the root of the rural credit problem. In fact, most farmers are not even aware of the existence or the usefulness of such banks. But the total number of such banks set up by the State Governments and primary banks increased steadily over the entire plan period.
The amount of term credit distributed by LDBs was much higher, compared to the credit disbursed by commercial banks in the initial years, but in the later years the picture became mixed. The total amount of loan sanctioned by such banks was only Rs. 3 crores in 1950-51. The figure crossed Rs. 1,500 crores in 1999-00. Moreover, rich farmers were able to obtain the maximum amount of loan from such banks because of large land holdings. Thus, small and marginal farmers have not derived much benefit from such banks.
3. Nationalized Banks:
Before nationalization of top 14 commercial banks in June 1969, they had an urban bias. They were mainly accepting deposits from the urban people and making loans to trade and industry. Agriculture and rural industries were neglected by them. Since agriculture by its very nature was a risky venture, private commercial banks turned away from rural areas.
Other factors obstructing flow of bank credit to agriculture were :
i. Inability of farmers to provide security,
Ii. Difficulties in recovering loans,
Iii. Lack of clear-cut and up-to-date accounting of agricultural transactions,
Iv. The small amount of loan and.
v. The consequent high transaction cost.
However, one of the objectives of nationalisation of commercial banks was to ensure a smooth flow of credit to agriculture and small-scale industries—the two top priority sectors of Indian economy.
Since the nationalisation of commercial banks in 1969 the stress has been on expanding and strengthening the institutional structure of rural credit. However, even today the rural areas in India are yet not properly served by banking institutions. Most commercial banks feel shy to block their funds in risky agricultural operations.
There is very little chance of loan recovery in most cases due to high risks associated with natural calamities. Of course, commercial banks finance the marketing of crops by advancing funds to traders. But sometimes loan is made directly to rural borrowers. However, the quantum of such loans is very small. Of course, there has been a distinct change in the attitudes and lending policies of commercial banks after nationalization.
Commercial banks now provide both direct and indirect finance to agriculture. Direct finance is provided for short and medium terms to enable farmers carry out agricultural operations smoothly. Indirect finance is provided in the form of advances for the purchase of inputs like seeds and fertilizers. Such loan is also provided through PACs.
Commercial banks not only provide assistance for agricultural operations but also for extending credit to service units which provide infrastructural facilities such as storing and warehousing of agricultural produce, marketing, transporting and repairing of agricultural implements.
Since the nationalization of commercial banks, there has occurred a rapid expansion of their rural branches. The number of rural branches has increased from 1,832 in June 1969 to 37,500 in March 1999, constituting 56.8% of the total branches of commercial banks. During this period the amount of outstanding advances to agriculture increased from Rs. 162 crores to Rs. 31,167 crores. However, despite the vast increase in short- term loans by commercial banks, the PACs continued to dominate the scene
Commercial banks also provide finance to the FCI, and the State Government agencies for food procurement operations. Banks also provide credit for storing and distribution of agricultural inputs. They are implementing the ‘village adoption scheme’, originally initiated by the SBI, to look into credit and other needs of the farmers.
Farmers also get commercial bank assistance under various schemes as Small Farmers Development Agencies (SFDAs) and Marginal Farmers and Agricultural Laborers (MFAL). Commercial banks have also sponsored regional rural banks as per the 20-point Programme with a view to extending credit to small and marginal farmers and protect them from the exploitation of moneylenders.
4. Regional Rural Banks:
In 1975, the Government set up a network of regional rural banks to look into the special needs of small and marginal farmers, landless workers, rural artisans and the rural poor in general. The unique feature of the 196 RRBs operating since September 1990 is that they cater exclusively to the weaker sections of the rural community through nearly 14,800 branches spread over India.
Almost all the tribal districts are covered. The RRBs have been lending around Rs. 400 per annum on an average. As much as 90% of the branches of RRBs have been opened in hitherto unbanked areas and most of the advances (about 92%) are granted to weaker sections, the average size of the advance per account being just Rs. 2,000. However, the amount of credit disbursed by RRBs was very small compared to the loans issued by other institutional agencies.
5. The Government:
The Government has also provided short-term and long-term loans to farmers in times of emergency such as floods or famine. Such loans are known as Taccavi loans. Such loans are offered at a concessional rate of interest (6%) and the mode of repayment is also very convenient. It can be repaid in several installments at the time of payment of land tax. However, such loans have not assumed significance over the years.
In fact, the contribution of the Government in total agricultural loan had fallen from 3.3% in 1951-52 to 2.6% in 1961-62. The total amount of short-term loans to agriculture by State Governments exceeded Rs. 1,000 crores in March 1999. Various factors have accounted for this unsatisfactory state of such loans, viz., delays involved in getting loans sanctioned and disbursed, time wasted in making frequent trips to government offices, itching palms of the officials who sanction the loans and so on. These and other reasons explain why such loans have not become much popular over the years.
A credit union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, arranging credit at competitive rates, and providing so many other financial services to its members.
The Co-operative Credit Institutions in India can be classified as under a three-tier structure.
(i) Primary Credit Societies at the bottom
(ii) Central Co-operative Bank at the middle
(iii) State Co-operative Bank at the top
The primary societies are functioning in the various towns and villages, the Central Banks at the district headquarters and the State Co-operative Banks at the state capitals forming the apex of the system.
The Reserve Bank of India assists the co-operative structure by providing concessional finance through NABARD in the form of General Lines of Credit for lending to agricultural & allied activities. Thus, the whole system is integrated with the Banking structure of the country.
Let us have a discussion about these institutions one by one.
(i) The Primary Agricultural Credit Societies:
A primary society is an association of borrowers and non-borrowers residing in a particular locality and taking interest in the business affairs of one another. As membership is practically open to all inhabitants of a locality, people of different status are brought together into the common organization.
(ii) Central Co-operative Banks:
A Central Co-operative Bank is a federation of primary societies in a specified area. Where membership of a Central Co-operative Bank is restricted to primary societies only, it is known as a 'banking union'. Nowadays, individuals are also admitted as members of almost all Central Co-operative Banks.
(iii) State Co-operative Banks:
At the top of the co-operative banking, there are State Co¬operative Banks, organized with the object of attracting deposits from the rich urban classes. These Banks are also more suitably equipped to serve as channel between the co-operative movement and the joint stock banks.
Role of Nationalized Commercial Banks in Rural Credit in India.
The introduction of rural finance in Indian commercial banks was started mainly after nationalization of 14 commercial banks in 1969. The commercial banks have been playing an active role in the development of rural India through banking infrastructure performance.
This performance has been examined by the deposit mobilization of the 155 rural branches of the commercial banks and loans and advances provided by rural branches of commercial banks. 5.1.1. Deposit Mobilization by the Nationalizes Commercial Banks in India: With the rapid expansion of number of rural branches of nationalized commercial banks the emphasis was focused on the mobilization of deposit locally in rural areas by rural branches.
The share of rural branches of nationalized commercial banks in the total deposit mobilization increased from 3.1 per cent in 1969 to 13.5 per cent in 2013
There is a steady increase in the amount of deposit mobilized by the rural branches of nationalized commercial banks in India during the period under study. The amount of deposit mobilized by rural branches which stood at Rs.49,331crores in 2004 has steadily increased to Rs.1,76,502 crores in 2013 resulting in more than 3 fold increase.
The percentage of rural deposits to total deposits shows a fluctuating trend during the study period ranging from 13.5 to 15.2. The percentage of rural deposits to total deposit which stood at 15.2 in 200 4 got reduced to 13.5 in 2013. 5.1.2.
Credit Disbursement of Nationalized Commercial Banks in Rural Areas: Performance of nationalized banks in rural areas with regard to the advancements of credit in India during the period under study has been presented
Before nationalization of top 14 commercial banks in June 1969, they had an urban bias. They were mainly accepting deposits from the urban people and making loans to trade and industry. Agriculture and rural industries were neglected by them. Since agriculture by its very nature was a risky venture, private commercial banks turned away from rural areas.
Other factors obstructing flow of bank credit to agriculture were :
i. Inability of farmers to provide security,
Ii. Difficulties in recovering loans,
Iii. Lack of clear-cut and up-to-date accounting of agricultural transactions,
Iv. The small amount of loan and.
v. The consequent high transaction cost.
However, one of the objectives of nationalisation of commercial banks was to ensure a smooth flow of credit to agriculture and small-scale industries—the two top priority sectors of Indian economy.
Since the nationalisation of commercial banks in 1969 the stress has been on expanding and strengthening the institutional structure of rural credit. However, even today the rural areas in India are yet not properly served by banking institutions. Most commercial banks feel shy to block their funds in risky agricultural operations.
There is very little chance of loan recovery in most cases due to high risks associated with natural calamities. Of course, commercial banks finance the marketing of crops by advancing funds to traders. But sometimes loan is made directly to rural borrowers. However, the quantum of such loans is very small. Of course, there has been a distinct change in the attitudes and lending policies of commercial banks after nationalization.
Commercial banks now provide both direct and indirect finance to agriculture. Direct finance is provided for short and medium terms to enable farmers carry out agricultural operations smoothly. Indirect finance is provided in the form of advances for the purchase of inputs like seeds and fertilizers. Such loan is also provided through PACs.
Commercial banks not only provide assistance for agricultural operations but also for extending credit to service units which provide infrastructural facilities such as storing and warehousing of agricultural produce, marketing, transporting and repairing of agricultural implements.
Since the nationalization of commercial banks, there has occurred a rapid expansion of their rural branches. The number of rural branches has increased from 1,832 in June 1969 to 37,500 in March 1999, constituting 56.8% of the total branches of commercial banks. During this period the amount of outstanding advances to agriculture increased from Rs. 162 crores to Rs. 31,167 crores. However, despite the vast increase in short- term loans by commercial banks, the PACs continued to dominate the scene
Commercial banks also provide finance to the FCI, and the State Government agencies for food procurement operations. Banks also provide credit for storing and distribution of agricultural inputs. They are implementing the ‘village adoption scheme’, originally initiated by the SBI, to look into credit and other needs of the farmers.
Farmers also get commercial bank assistance under various schemes as Small Farmers Development Agencies (SFDAs) and Marginal Farmers and Agricultural Laborers (MFAL). Commercial banks have also sponsored regional rural banks as per the 20-point Programme with a view to extending credit to small and marginal farmers and protect them from the exploitation of moneylenders.
Rural finance is a matter of credit concern in a developing economy
Like India where 70 percent of the total population depends upon agriculture for its livelihood. 40 percent of the GDP in India is contributed by the rural sector.
The economic development of our country can be achieved only through uplift of the folk consisting of farmers, agricultural labourers, artisans etc.
Finance being the lifeblood of every commercial venture, the
Availability of adequate funds at reasonable terms is a must to ensure speedy economic development of a village.
From the First- Five Year Plan (1951-56) to the Tenth Five-Year Plan
(2002-2007), the agricultural development has been given due importance.
Marginal farmers, rural artisans and agricultural labourers are deprived of the crucial input of timely and adequate credit from the institutional sources. The government has been taking elaborate and extensive initiatives (both policy and administrative) to augment the outreach of formal channel to rural masses.
Financial institutions especially in rural areas play a very significant role in the economic as well as rural development. It has a special role to play in removing the poverty. The overall development of the economy depends to a large extent on the banking sector, as financial institutions act as suppliers of capital for production of goods and services v\/hich in turn raises income and standard of living of the people. In India, the banking sector has received from time to time definite orientations, and this sector has come to occupy a prominent position among the infrastructural factors of economic development. Prior to nationalization of banks their role and activities attracted a lot of criticism. The failure of the banking sector in performing its expected role in a planned economy led to their nationalization first in 1969 and again in 1980.
The informal sector for rural finance is age-old. It consists primarily of rural money lenders, traders, merchants etc. It proved to be avaricious and ruinous for rural India. As a deterrent to the indigenous moneylenders, a three tier cooperative banking structure was set up by a cooperative movement, which established the efficacy of cooperation. Growing sporadically, the cooperative societies alone are now the bastions of rural finance in a number of states in India. The formal sector was set up only in the planning era and banks were nationalized to extend support to the rural financial institutions like cooperatives. Indeed, the present formal sector is based on a multi-agency approach consisting of public sector banks,cooperatives and Regional Rural Banks. According to the All India Rural Credit Survey Report, 1954, the sources of the credit in the rural area can be divided into nine categories, viz. Government cooperatives, relatives, landlords, agriculturists, money lenders, professional money lenders, traders and commission agents, commercial banks and others.The problem of inequality and inequity became serious day by day despite the popular slogan 'Garibi Hatao' and good intention of the government to better the lot of masses, the rural poor remained neglected and kept striving hard for their subsistence. Therefore, the need was felt for establishing financial institutions, specialized to cater to the needs of the rural 35 poor in order to fill up the regional and functional gap in the financial credit available to rural areas. Among various institutional agencies engaged in rural finance, Regional Rural Banks play a significant role in financing the target group in the rural sector. They are specially designed financial institutions working under the guidance of the NABARD and the parent commercial banks, spread in rural areas with a close network of branches serving a particular district or region.
Functions of RRBs The main function of the RRBs is to provide credit and banking facility to the rural people. It also provides some non- banking facility to the rural people. It also provides some non-banking facility to the rural population such as constructing and maintaining goo down on their own, supplying agricultural inputs and acquiring agricultural and other equipments for leasing it out, providing assistance in the marketing of agricultural and other products.
The various functions of the RRBs may be listed
a) To provide short-term and medium-term credit for agriculture and other purposes to rural producers and long-term loans to agriculturists as agent of the land development bank.
b) To mobilize local savings.
c) To implement programmes of the supervised credit, tailored to meet the needs of individual farmers.
d) To provide ancillary banking services to local people.
e) To set up and maintain godowns.
f) To undertake supply of inputs for agricultural and other products through marketing organization.
g) Generally help in the overall development of the villages in its areas.
National Bank for Agriculture and Rural Development (NABARD)
As the name suggests NABARD is a development bank focusing primarily on the rural sector of the country. It is, in fact, India‘s apex development bank. It is one of the most important institutions in the country. NABARD is responsible for the development of the small industries, cottage industries, and any other such village or rural projects.
Established on 12th July 1982, it had an initial capital of 100 crores. The bank is under the supervision of a Board of Directors which the Government of India will appoint. The headquarters of NABARD is in Mumbai but it has many branches and regional divisions.
NABARD is instrumental in the development and efficiency of the current rural credit system. Over half the credit in the rural region comes from Co-operative banks and Regional Rural Banks. NABARD is responsible for regulating and supervising the functioning of such banks. Over the years NABARD has been pushing for development in the credit schemes for rural populations to meet their new credit requirements.
Other than meeting credit requirements of the rural sector NABARD is also instrumental in social innovations and projects. It partners with various organizations for many innovative projects such as SHG-Bank linking, innovative schemes for water and soil conservation. Over the last three decades, the institution has gained goodwill and trust in the farmers and rural communities.
Browse more Topics under Organizations Facilitating Business
- Government as a Business Facilitator
- RBI
- SEBI
- Competition Commision of India (CCI)
- IRDAI
- IFCI
- SIDBI
- EXIM Bank
Functions of NABARD
Let us take a look at some of the main functions of this organisation. It basically performs three kinds of roles, i.e. credit functions, development functions, and supervisory functions.
- Frames the policy for rural credit in the country for all financing institutions
- National Bank for Agriculture and Rural Development will itself provide finance and refinancing facilities to the banks and rural regional banks
- Identification of credit potential and preparation of the credit plans for all districts
- It also helps all regional banks and institutes under its governance with the preparation of their own credit plans and policies
- Helps Regional Rural Banks establish an agreement with State Governments and other Co-op Banks and institutions
- It will also monitor the implementation of such plans and track their progress
- Helps banks improve their MIS system, modernize their technology, develop human resources etc
- As per theBanking Regulation Act 1949, NABARD has to conduct the inspection of Regional Rural Banks and other Co-op banks
- It communicates and consults the RBI in matters such as issuing of licenses for new banks, the opening of branches of Rural Banks etc.
- From time to time it will also inspect the investment portfolios of Regional Rural Banks and other State Co-op Banks
References
1. Indian Economy - Rudra Dutt & Sundarram
2. Bhartiya Arthashastra – L. M. Roy
3. Indian Economy – Uma & Kapila
