Unit-8
Agricultural credit cooperative , commercial bands, Rural Banks ,NABARD
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.
(i) Commercial Banking
Meaning:
A commercial bank is an institution that operates for profit. It accepts deposits from the general public and extends loans to the households, the firms and the Government. The essential characteristics of commercial banking include
(1) Acceptance of deposits from the public.
(2) For the purpose of lending or investment.
(3) Withdrawal by means of an instrument whether a cheque, draft, order, etc.
Definition:
According to Cairns Cross, “A bank is an institution which deals in money and credit.”
According to Sayers, “Banks are institutions whose debts are usually referred to as ‘bank deposits’ and commonly accepted in final settlement of other people debts.”
FUNCTIONS OF COMMERCIAL BANKS
Modern commercial banks perform a variety of functions and help the industrialists, businessmen and traders. They keep the wheels of commerce, trade and industry always revolving. Modern commercial banks perform mainly two types of functions i.e. primary or banking functions and secondary or subsidiary functions.
Functions of commercial bank
Primary Function Secondary Functions
(Banking Function) (Non Banking Function)
Accepting Deposits Granting Advance Agency Functions General Utility Functions
(A) Primary Functions:
The primary functions of a bank are also known as banking functions. They are the main functions of a bank. They are as follows –
Accepting Deposits: Accepting Deposits from the public is the most important function of a modern commercial bank offering various types of deposit accounts; banks mobilize the savings of the community. People who have surplus money deposit it with a bank for safety. The commercial banks protect the deposits and give interest on such deposits. There are four types of accounts:
Saving Deposits Accounts: It is a deposit account which is operated by individuals for the purpose of saving a part of their income. Its main objective is to promote savings. It encourages saving habits among the salary earners and others. There is no restriction on the number and amount of deposits. But withdrawals are subject to certain restrictions. Banks pay a certain percentage of interest on this deposit. At present it is 4 % p.a. The money can be withdrawn either by cheque or withdrawal slip.
Fixed Deposits Accounts: Fixed deposits are kept in a bank for fixed period varying from 30 days to several years. A certain sum of money is deposited for a fixed period. A higher rate of interest is paid. The rate may vary from bank to bank Withdrawals are not allowed before the maturity of period. In case of emergency, if the depositor wants to withdraw money before the maturity date, he will have to lose some interest. The depositor is given a fixed deposit receipt which he has to produce at the time of maturity. The deposit can be renewed for further period. Fixed deposit account is also known as time deposit.
Current Deposits Accounts: These accounts are also known as demand deposits because the amount can be withdrawn on demand. This type of account is opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawals. There, is no restriction on the number and amount of deposits. There are also no restrictions on the withdrawals. Bank does not pay any rate of interest on such accounts. The bank provides overdraft facility to current account holder. Banks charge incidental commissions on such accounts. It facilitates the industrial progress.
Recurring Deposits Account: Under this account, regular income earners deposit a certain amount of money at regular intervals for a certain period of time. For example, an individual can deposit, say Rs 500 every month for a certain period say, 2 years. Its main objective is to develop regular savings habits among the public. The period of deposit is minimum 6 months and maximum 10 years. The rate of interest is higher. At the end of the maturity period, the account holder can get substantial amount, which can be utilized for the purchase of consumer durables or some other investment such as land, machinery, etc.
Granting Advances (Loans):
The second important function of a commercial bank is to extend loans and advances. The money which is received by banks by way of deposits is utilized for granting loans and advances to worthy borrowers. The profit earning capacity of a bank mainly depends upon the performance of the function. This function is also important in the context of economic development in general and development of trade, industry and commerce.
Overdraft Facility: An overdraft facility is granted by the bank only to those persons who have their current accounts in the bank. To meet the temporary needs of the customer, the bank may permit the customer to overdraw the amount from the bank in excess of his balance. The bank may grant such advance on the personal security. The interest is charged only on the actual amount used. The overdraft is granted only occasionally and for short periods. A certain amount is sanctioned as overdrafts which can be withdrawn within a certain period of time say three months or so. It is sanctioned to traders, partnership firms and joint stock companies. The overdraft facility can be renewed from time to time.
Cash Credit: It is a short-term credit given by the bank to any businessman to meet regular working capital needs. The bank opens a separate account in respect of cash credit. The borrower is allowed to draw from that account upto a certain ‘limit against a bond signed by securities or any other eligible securities. Interest is charged only on the actual amount withdrawn by the customer. It can be availed by current account holders as well as other businessmen. Most industrial concerns and business houses borrow money in this form.
Loans: When a banker makes a lump-sum advance to the customers, it is called 'loan'. Interest is charged on the entire amount sanctioned irrespective of whether the complete amount is used or not by the customer. Loans are of various types i.e. Term loans, participation loans, personal loans, call loans, collateral loans etc.
Call Loans or Money at call: are loans repayable at short notice. They are called call loans, as they can be called back at any time. These loans are given to for a period of 7 to 15 days for investment in stock market. The rate of interest is the lowest.
Short term Loans: are provided by commercial bank for a period not more than two years. The rate of interest is higher. They are given to businessmen to satisfy their working capital requirement.
Medium term Loans: The loans are sanctioned for a period of two to five years period. The rate of interest charged for this type of loan is more than the short term loans. Such loans are useful to industries to introduce innovations or for introduction of new method of production.
Long term Loans: Loans which are sanctioned for five years are known as long term loans. The rate of interest charged is higher than other loans. Such loans help businessmen to introduce permanent changes in the methods of production.
Discounting Bills of exchange: Another important function that the modern banks perform is the discounting of bills of exchange. Advances are made by discounting the bills of exchange. These advances are given for short periods only. When the holder of the bill is not in a position to wait till the maturity of the bill and requires the cash urgently, he sells the bill of exchange to the bank. The bank purchases the instrument at a discount. This type of business is very common in advanced countries.
(B) Secondary Functions:
Secondary functions are also known as non-banking functions or subsidiary functions or subsidiary functions. They are classified into two main categories
Agency functions General utility Functions
Agency Functions: Bank also act as agents for their customers and in that capacity perform certain functions, which are known as agency functions. For these services, the bank charges certain commission from the customers. Some of the agency functions are as follows:
Collection: The commercial banks collect cheque, bills, draft interest, dividends on behalf of their customers and credit them into their accounts. This service is provided on the standing instructions from customers.
Payments: Banks also pay bills, insurance premium interest, loan installments, electricity bills, telephone bills, etc. on behalf of their customers as per their direction.
Purchase and Sale of Securities: Banks purchase or sell shares, bonds and securities of private companies on behalf of their clients.
Acts as Trustee: Banks acts as the trustee and the executor of the wills of their customers after their death.
E-Banking (Electronic Banking): A customer can operate his bank account through internet. Money can be transferred from one place to another for their customers. E-banking helps businessmen, traders, merchants in transacting business.
Dematerialization Account (De-mat Account): Some banks provide De-mat facility. De-mat account is useful to investors who deal in shares. The transactions related to buying and selling of shares are recorded in a separate De-mat account. Periodically statements regarding shares transactions are given to each investor.
General Utility Functions:
Safe Deposit Vault (Lockers): This facility is available to the general public to enable them to keep their valuables and securities like ornaments, jewels, documents, deeds, etc. There is a separate section in banks where lockers are provided in various sizes on payment of fixed rates.
Remittance of Funds: Banks remit money from one place to another or even from one country to another. Remittance of fund is done by telegraphic transfer, mail transfer, demand draft, etc.
Letter of credit: Commercial banks also issue letters of credit, to enable the traders to buy goods from foreign countries on credit. Through this letter of credit, the bank in one country authorizes another bank in foreign country to honour the draft or cheque of the person named in the document. The payment is limited to the amount shown in the letter and the amount is chargeable to the bank which issues the letter.
Referee: As a referee a bank authenticates the credit worthiness of its customers. This enables the customers to run their business smoothly and also obtain goods and services on credit.
Underwriter: Banks provide underwriting facility to the joint stock companies especially new business enterprises and also to the government in order to help them in raising funds. It guarantees the purchase of certain portion of shares if not sold in the market. Later they are free to sell these shares in the market whenever they want to do so. This is all done by the banks on a small commission from the company.
Dealings in Foreign Exchange: By keeping separate foreign exchange department, commercial banks offer services for converting one currency into another.
ATM facility (Automated Teller machine): Now-a-day banks also provide ATM facility to their customers. AS a result they can withdraw money at any time of the day, at their convenience, whenever they need it.
Collects statistics: The modern banks also collect statistics about money, banking, trade, commerce and publish them in form of pamphlets and hand outs. This helps their customers in acquiring knowledge about the latest economic situation.
Travellers’ Cheques: Banks help customers by issuing internal or international travellers’ cheques. When people travel within the country or between countries traveller’s cheques are used as most convenient method of carrying funds.
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 which 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.
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.
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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
BOOKS
1. Indian Economy – Rudra Dutt & Sundarram
