UNIT-II
AGRICULTURAL FINANCE
Financial institution: An institution which provides monetary services and engaged in monetary transactions (loans, investment, currency exchange and deposits) to needy people.
Types of Financial Institution:
1) Investment bank
2) Commercial bank
3) Brokerages
4) Investment companies
Financial Establishments.
The economic development of any country depends on the expansion of the sector. The well-developed financial set-up helps the business to realize growth by creating funds out there to them. For which, the Govt. has established monetary establishments everywhere the country to produce finance to businesses.
These establishments aim at promoting the commercial development of a rustic and area unit referred to as ‘development banks’ The, most role of an establishment is to transfer monetary resources from those that reserve it to those that area unit in want of economic resources for economic activity.
Central and state governments came upon monetary establishments. They supply each owned capital and loan capital for long and medium-term and supplement the standard monetary agencies like industrial banks. Monetary establishments provide technical help and social control services to organizations. These establishments provide giant funds for an extended period.
Merits of economic establishments
The deserves of raising funds from monetary establishments area unit as follows:
• here, finance is accessible even in periods of depression, once no alternative supply of finance is accessible within the market.
• Besides providing funds, several of those establishments give monetary, social control and technical recommendation and practice to business companies.
• For semi-permanent business fund’s needs, monetary establishment’s area unit desirable as they supply semi-permanent finance, that isn't provided by industrial banks.
Limitations of economic establishments.
The limitations of raising funds from monetary establishment’s area unit as follows:
• Restriction on dividend payment obligatory on the powers of the borrowing company by the monetary establishments.
• As these establishments return below government criteria, they follow rigid rules for granting loans. Too several formalities build the procedure long
• It has their nominees on the Board of administrators of the borrowing company thereby prescribing the powers of the corporate.
Special monetary establishments
1. Industrial Finance Corporation of India (IFCI)
IFCI came upon as a statutory organization below the commercial Finance Corporation Act 1948. Its main objectives were to produce facilitate towards supporting the native advancement and urging new business visionaries to travel into the imperative and necessary sectors of the economy.
2. State monetary companies (SFC)
The State monetary companies Act, 1951 created the State Governments build up State monetary companies in their specific area unites for giving medium and short funds to businesses that are outside the extent of the IFCI.
3. Industrial Credit and Investment Corporation of India (ICICI)
This foundation shaped in 1955 as a public organization below the businesses Act. ICICI helps the creation, development and modernization of business endeavors exclusively within the personal sector.
4. Industrial Development Bank of India (IDBI).
In 1964, it has been came upon below the commercial Development Bank of India Act, 1964 with a target to facilitate the operating of alternative monetary establishments together with industrial banks.
5. Industrial Investment Bank of India Ltd.
It was came upon as a vital establishment for the restoration of sick units and was referred to as Industrial Reconstruction Corporation of India.
Banks have huge financial assets and after area unit dominant players all told sectors of economic markets like credit, cash, securities, interchange and derivatives. Banks facilitate enterprises by providing loans to supply product and contribute towards industrial growth and generate employment opportunities.
Technically, loans given by banks can not be a permanent supply of funds for the organizations because it has associate rate and loan should be repaid among a particular amount assigned. Before a loan is sanctioned by a bank, the borrowing party should give some security. Banks additionally give alternative services like businessperson banking, company consolatory services, portfolio management services etc.
Merits of Banks
Every coin has 2 sides, equally raising a loan from a bank incorporates a sunny aspect as follows:
• Banks area unit versatile sources of finance because the quantity to be received is determined by the borrowing party and may be increased and reduced per business desires. Loans may be repaid before once funds aren't needed.
• Banks keep the borrower’s info confidential and secure.
• Banks give help in time of ought to businesses by providing funds.
Limitations of Banks
Certain limitations occur whereas raising funds from industrial banks. The constraints of raising funds from industrial banks area unit as follows:
• Banks area unit disreputable for creating a close investigation of the company’s background and affairs, monetary structure, plan etc., and additionally to kindle the protection of assets and private sureties. This makes the procedure of obtaining funds difficult;
• Funds area unit usually out there for brief periods and renewal is unsure and difficult;
• Banks place forth tough terms and conditions before providing a loan.
National Bank for Agricultural and Rural Development (NABARD)
Established: 12 july 1988
Headquarter: Mumbai (Maharshtra)
Chairperson: Harshkumar Bhanwala
Function:
Kisan Credit scheme:
It as at timely and adequate support to farmers for short term credit needs.
Under this scheme, banks issue credit card to farmers who are eligible for credit for allied activities, crop production and non-farming activities.
Importance of Institutional finance:
• Financial Institution provides kinds of Financial services to their customer as well as to the companies in need of fund.
• They provide higher rate of returns to investor.
• Directly promotes investment and help investor to understand the risk and market strategy.
• Helps in maintenance of liquidity of stocks.
• Maintains cashflow in market and helps in rotation of money.
• Helps in upliftment of economy.
• Assist with transferring of money from investor (individual and companies) to the companies in need of money.
Financial Institution helps to funnel funds to most of the successful business which helps them grow and helps them to increase their supply. In this way Financial Institution contributes in efficient allocation of economical resources, which is essential for the development of a country.
Financial Institution plays an important role by providing funds and by helping in expansion of economy through directing funds from savers to borrowers.
Establishment of Institutions like Reserve bank of India (1935), National bank for
Agriculture and rural development (NABARD, 1982), State bank of India (SBI,1955) and Nationalization of 14 largest banks in 1969 and 6 more banks in 1980 were enough to make people aware about credit and loan facilities in India. This slightly led to decline in source of credit from non-Institutional Financial sources in Post independence era.
Sources of Agricultural credit can also be non-Institutional including. Traders and commission agents, Moneylenders, Relatives and Landlords.
1) Traders and Commission Agents: Those who Advances loan to farmers and Agriculturist for production motives. They usually advance loan before the maturity period of crops and after harvesting creditors, they force farmers to sell their crops at lower price in comparison to market price and also charges heavy commission. This type of loan is mostly advanced for cash crops.
2) Moneylenders: There are two types of Moneylenders -
a) Agricultural Moneylenders
b) Professional Moneylenders
Moneylenders supplied major portion of Agricultural credit and also charged exorbitant rate if interest on loans (often 24% or more)
Share of moneylenders in Farm credit
Year | Percentage of share |
1951-52 | 69.7% |
1971-72 | 36.1% |
1981-82 | 16.1% |
1995-96 | 7.0% |
Share of moneylenders in overall farm credit has declined
3)Relatives: Farmers mostly borrowing funds from their relatives in time of crisis. These are kinds of informal loans and charges no interest.
Share of relatives in Agricultural credit
Year | Percentage of share |
1951-52 | 14.2% |
1981-82 | 8.7% |
1995-96 | 3.0% |
This source of fund credit has also declined in post independence era.
4)Landlords: In pre independence era, landlords were most important source of credit, from whom small as well as marginal farmers and even tenants took loans.
Share of landlords in Agricultural credit
Year | Percentage of share |
1951-52 | 3.3% |
1961-62 | 14.5% |
1981-82 | 18.8% |
1995-96 | 10.0% |
This source has been most dynamic and fluctuating source, which changed according to the economic conditions.
Microfinance: Banking service which provides easy access of small loans to unemployed, low income individual and street vendors.
Marginal farmers: Small farmers who cultivates Agricultural land upto 2.5 acres (1 hectare)
Supply of Financial services to farmers is still limited. These days main causes of farmer’s suicide are high debt. Since, these farmers don’t have proper information and protection any laws, they loose their lands in debt and pass on their liability to helpless children which result in increase of poverty, unemployment, illiteracy, malnutrition etc.
Only way to empower farmers in India is to provide a source of farming finance which is easy and affordable. Microfinance fulfills farmers finance requirement. It also bridges gap between distribution with acceptance of credit.
It also prevents exploitation of farmers and extortion of excess interest from farmers by non-institutional finance sources (landlords, moneylenders, amr traders).
It provides service of stress free and easy repayment of loan through installments and at lesser rate of interests. It helps small farmers to adopt Agricultural technology by purchasing heavy machinery and implements which make farmer’s work easy and time saving.
It provides funds to farmers to buy improved seeds and fertilizer. It acts as a safety net to help farmers to cope up with risk in Agricultural production.
Participation in Microfinance groups leads to encourage farmer to share information about new farming technology.
