INTRODUCTION

Finance in agriculture is as important as development of technologies. Technical

inputs can be purchased and used by farmer only if he has money (funds). But his own

money is always inadequate and he needs outside finance or credit.

Professional money lenders were the only source of credit to agriculture till 1935.

They use to charge unduly high rates of interest and follow serious practices while giving

loans and recovering them. As a result, farmers were heavily burdened with debts and

many of them perpetuated debts.

With the passing of Reserve Bank of India Act 1934, District Central Co-op.

Banks Act and Land Development Banks Act, agricultural credit received impetons and

there were improvements in agricultural credit. A powerful alternative agency came into

being.

14 major commercial banks were nationalized in 1969, co-operative banks were

the main institutional agencies providing finance to agriculture. After nationalization, it

was made mandatory for these banks to provide finance to agriculture as a priority sector.

These banks undertook special programs of branch expansion and created a network of

banking services throughout the country and started financing agriculture on large scale.

Thus agriculture credit acquired multi-agency dimension.

The key problem of those dependent on agriculture, specially the poor, small and

marginal farmers and weaker sections of the society, is finance. Therefore, in each Plan

period, there has been a continued emphasis on rapid and progressive institutionalization

for supply of timely and adequate credit-support to enable those engaged in agriculture to

adopt modern agricultural technology and improved agricultural practices for enhanced

growth, production and productivity. The traditional concern about accessibility of

agricultural credit to the needy rural inhabitants is still alive even after increasing bank

branch network, improving Co-operative Banking structure, evolving specialized rural

banking institutions (i.e., Regional Rural Banks) and the setting up of various financial

agencies like the National Bank for Agriculture and Rural Development (NABARD).

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OBJECTIVES:

To study the emerging trends in agricultural finance.

To study the changing role of agricultural officers in commercial bank.

To study the changing needs of agricultural finance in India.

To know what is the role of Self Help Groups in providing Micro Credit.

SCOPE OF THE STUDY:

The study was conducted on the following:

Types of financing

Criteria for financing

Growth rate in the agriculture

Changes in the agricultural finance

RESEARCH METHODOLOGY:

The methodology used in this study is Exploratory research method. A pilot

survey is done to know the condition of Indian agricultural finance since nationalization

of the banks.

DATA SOURCE:

PRIMARY DATA:

It includes data collection from the discussion through questionnaire with

concerned bank representative

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SECONDARY SOURCES:

It includes information from

1. Websites

2. Journal and Magazines

SAMPLE SIZE:

As a pilot study is done to collect the information the sample size is 5 which

include 4 public sector banks and 1 co-operative bank.

LIMITATIONS:

The study is restricted to only academic purpose.

The inexperience makes this research less precise when compared with a

professional research work.

Conclusion has been arrived based on the information given by the sources.

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1.1 AGRICULTURE & FINANCE IN RURAL SECTOR

Indian economy is basically agrarian. Nearly 50% to 60% of the Indian population depends

upon agriculture for its livelihood. Agriculture plays a crucial role in the Indian economy and is

pivotal for ensuring food security, employment generation and social transformation of the nation.

With 67 per cent of our population and 54 per cent of the total workforce depending on agriculture

and other allied activities, agriculture not only meets the basic needs of India’s growing population,

but its direct linkages with the industry is on the increase owing to the increased demand for

processed agricultural commodities and goods by consumers.

Agriculture in India is the means of livelihood of almost two thirds of the work force in the

country. It has always been INDIA'S most important economic sector. The 1970s saw a huge increase

in India's wheat production that heralded the Green Revolution in the country. The increase in post -

independence agricultural production has been brought about by bringing additional area under

cultivation, extension of irrigation facilities, use of better seeds, better techniques, water management,

and plant protection. Dependence on India agricultural imports in the early 1960s convinced planners

that India's growing population, as well as concerns about national independence, security, and

political stability, required self-sufficiency in food production. This perception led to a program of

agricultural improvement called the Green Revolution, to a public distribution system, and to price

supports for farmers. The growth in food-grain production is a result of concentrated efforts to

increase all the Green Revolution inputs needed for higher yields: better seed, more fertilizer,

improved irrigation, and education of farmers. Although increased irrigation has helped to lessen

year-to-year fluctuations in farm production resulting from the vagaries of the monsoons, it has not

eliminated those fluctuations. Non-traditional crops of India, such as summer mung (a variety of

lentil, part of the pulse family), soya beans, peanuts, and sunflowers, were gradually gaining

importance. Steps have been taken to ensure an increase in the supply of non-chemical fertilizers at

reasonable prices. There are 53 fertilizer quality control laboratories in the country. Realizing the

importance of Indian agricultural production for economic development, the central Government of

India has played an active role in all aspects of agricultural development.

Planning is centralized, and plan priorities, policies, and resource allocations are decided at

the central level. Food and price policy also are decided by the central government. Thus, although

agriculture in India is constitutionally the responsibility of the states rather than the central

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government, the latter plays a key role in formulating policy and providing financial resources for

agriculture. Expansion in crop production, therefore, has to come almost entirely from increasing

yields on lands already in some kind of agricultural use.

India's agriculture is composed of many crops, with the foremost food staples being rice and

wheat. Indian farmers also grow pulses, potatoes, sugarcane, oilseeds, and such non-food items as

cotton, tea, coffee, rubber, and jute (a glossy fiber used to make burlap and twine). India is a fisheries

giant as well. A total catch of about 3 million metric tons annually ranks India among the world's top

10 fishing nations. Despite the overwhelming size of the agricultural sector, however, yields per

hectare of crops in India are generally low compared to international standards. Improper water

management is another problem affecting India's agriculture.

At a time of increasing water shortages and environmental crises, for example, the rice crop

in India is allocated disproportionately high amounts of water. One result of the inefficient use of

water is that water tables in regions of rice cultivation, such as Punjab, are on the rise, while soil

fertility is on the decline. Aggravating the agricultural situation is an ongoing Asian drought and

inclement weather. This has partially been due to relatively unfavorable distribution of rainfall,

leading to floods in certain parts of the country and droughts in some others.

Despite the fact that agriculture accounts for as much as a quarter of the Indian economy and

employs an estimated 60 percent of the labor force, it is considered highly inefficient, wasteful, and

incapable of solving the hunger and malnutrition problems. Despite progress in this area, these

problems have continued to frustrate India for decades. It is estimated that as much as one-fifth of the

total agricultural output is lost due to inefficiencies in harvesting, transport, and storage of

government-subsidized crops.

The monsoons, however, play a critical role in Indian agriculture in determining whether the

harvest will be bountiful, average, or poor in any given year. One of the objectives of government

policy in the early 1990s was to find methods of reducing this dependence on the monsoons

Problems faced by Indian Agriculturist

1. Lack of education and awareness about opportunities.

2. Lack of Market Knowledge and Marketing skills.

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3. Lack of professionalism and small land holding.

4. Absence of innovative financing for agriculture.

5. Agriculture has become un-viable due to oversupply because new hybrids are giving excellent

yield but due to oversupply, the price realization is very low.

6. Cost of transport to market, electricity for water pump, cost of fertilizers, cost of living is going up

several times but the selling price of agriculture produce is stagnating due to oversupply and record

productions.

7. Lack of reliable Agriculture publication and media to provide latest and reliable localized data.

Economic Evolution of Indian Agriculture:

Indian agriculture is undergoing a rapid change particularly since mid-sixties i.e. from

the on-set of ‘Green Revolution’. Therefore, we have witnessed a ‘white Revolution’ marking a

tremendous increase in the milk production. Our horticulture, which includes fruit production,

floriculture and vegetable production, is also making a tremendous heading and it is said that ‘yellow

Revolution’ is in the sight.

If we analyze this changing scene in agriculture, we can notice that the traditional

agriculture. Which was a ‘way of life’ for our farmers is now becoming a ‘business proposition’. In

the traditional farming there was no much change in the cropping pattern, cultivation practices etc. It

was based on the experiences transmitted from father to the son. However, with the developments

taking place due to five-year plans and technologies developments in agriculture, traditional farming

is changing into modern farming. Traditional farming is slowly becoming absolute and uneconomic.

Traditional farming was more or less self-sufficient. No, farming is becoming market oriented. The

needs of the farmers are increasing. He has to purchase many things such as high yielding seeds,

fertilizers, pesticides, machinery etc. from the market. As a result, his investment and financial needs

are increasing. Naturally, he has to produce and get income to meet the costs and also to make some

profit. This, the costs, returns, markets; profits of the enterprise become significantly important. This

is nothing but ‘Agri-economics’.

With increasing population, rapid urbanization and growing export markets, the demand

for farm products is increasing and is likely to increase in the near future. However, the competition is

also likely to increase. The consideration of economic aspects in the production process is inevitable.

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As indicated above, there has been a technological break-through in agriculture in recent

years. New non-traditional crops, new varieties of crops, new methods of cultivation are coming in

very fast and farmers are adopting the same. A large number of farm products are being produced for

exports. However there are specifications about the size, color, quantity, taste, packaging etc. Which

farmers should know. Farmer has to consider all these aspects and consider the costs and returns

before entering into the venture.

Farmer has several enterprises (such as crops, dairy, and poultry) on the farm. He has to

consider the economics of each enterprise separately also of the farm as a whole. It helps in decision

making and proper planning of the farm. Now, the time has come that every activity on the farm has

to be viewed from the perspective of economics.

Along with the adoption of new technology in farming, the problems faced by the

farmer’s fare also increasing. There are problems of soil and water management, choice of crops,

technical know-how, pests and diseases, natural hazards, marketing, finance, surplus production, price

fluctuations and so on. In finding the solutions for these problems, economic criteria are to be applied.

India is a vast country with varied climate, soils, and ecological conditions. In addition

to this, individual farmer is having his own set up of resources and socio-economic situation. In

solving the problems of individual farmers all these situational factors are to be taken into account.

An important ray of hope, which one can notice in this complex changing scenario of

agriculture, is that a new generation of farmers who are more educated, young and energetic have

taken up to this enterprise. In addition, many non-farming community entrepreneurs are also attracted

towards agriculture. They are very keen on getting more knowledge about the new technology. Many

of them are innovative and experimenting of their own. Naturally, they are more economics oriented.

1.2 RESERVE BANK OF INDIA & AGRICULTURE FINANCE

In India, the Reserve Bank contributes to a great extent in the economic development in various

ways. It assumes special responsibility in the development of agriculture & industry. The RBI

concentrates more on these two vital sectors of the economy. RBI does not presently provide these

finances directly.

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Agriculture development is regarded as a prerequisite of economic development of the

country. The Reserve Bank of India realizes the following basic contributions of the Agricultural

sector in the overall economic development.

Product contribution – making available food & raw materials.

Market contribution – providing the market for producer goods and consumers goods

produced in the non-agricultural sector.

Factor contribution – making available labour & capital to non-agricultural sector, and

Foreign exchange contribution.

Being the largest industry in the country agriculture is the source of livelihood for over 70%

of population in the country. On recognizing the fact that Agriculture is the foundation on which the

entire super structure of the growth of industrial and other sectors of the economy has to stand, the

RBI develops the Agricultural sector in the following ways:

Agriculture Credit Department

According to section 54 of the RBI Act, it is required to set up a separate Agricultural

Credit Department. With the formation of NABARD in 1982, all the activities of this Department

have been transferred to NABARD. However, the Rural Planning and Credit Department in the

Reserve Bank deals with the following agriculture related matters.

Funds for Agricultural Development

Financial Assistance to Co-operative Sector

Establishment of agricultural Credit Board

Establishment of NABARD

Credit Functions

A. Short-term Credit

B. Medium-term Credit

C. Long-term Credit

D. Conversion & Rescheduling Facilities

E. Financing Cottage/Village/Small Scale Industries, etc.

Assistance to Co-operative Banks in SFDA and MFAL

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Reform Measures for RRBs

Promotion of Warehouse Facilities

Other Facilities to Agriculture

National Agricultural Insurance Scheme

Rural Credit

The successive five year plans embarked upon the green revolution and white revolution for

which modernization and mechanization of agriculture and allied activities was a must and that

needed financial support. As one of the measures to develop the economy and to provide support for

nation building, Bank of India commenced rural lending way back in 1968 even before the

nationalization of banks. During the post nationalization period, spanning more than 3 decades, the

Bank has grown in size and stature with more than 2592 branches (1723 rural and semi-urban

branches) spread across the length and breadth of the country. The Bank has been supporting the

task of nation building by implementing varied polices/guidelines of the Government with clear

objectives. As against the benchmark of 40% prescribed by Reserve Bank of India under Priority

Sector to Net Adjusted Credit, the Bank’s achievement is consistently over 45% for the last 5 years.

The Bank has achieved business level of Rs. 16,800 crores as on February 2005, under

priority sector. Presently, the Bank has more than 13.80 lakh borrowal accounts under Priority Sector

credit fold and there are innumerable satisfied borrowers who have come up in life with our timely

financial assistance.

Keeping in view the rich past experience and in tune with the Government of India/Reserve

Bank of India guidelines, the Bank is adopting innovative and growth oriented administrative policy

measures.

Focused attention is given to build a loyal band of customers in Rural & Semi-urban areas

where the Bank has more than 67% of its Branch Network. This has enabled development of

individuals, a village or even the given area by increased production and productivity, through

smooth flow of credit.

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Organization of Rural Credit (Fig 1.1)

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The Bank has, of late, launched innovative schemes/card products with defined objectives and

refined methodology. The Philosophy, concepts and various issues behind launch of our various new

card products/schemes are as under:-

i) Intensive financing in service area with package of services to optimally utilize the

resources at the command of the borrowers, particularly farmers and rural entrepreneurs;

ii) To maintain continued relationship with 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;

iii) Providing credit for the diversified needs of the borrower’s family for farm, off-farm as

well as consumption needs like housing, education, conveyance, marriages, health etc;

iv) Recognizing good borrowers and rewarding their loyalty by offering concessional rates of

interest, better operational flexibility in the operation of their accounts.

v) Focused attention for development of crops being grown in the given area like Cotton,

Sugarcane, Potato, Chilies, Mangoes, Grapes, and Oranges etc. Building up infrastructure for

preservation and processing these crops. Offering credit against stored farm produce so that farmers

are not forced to sell in a buyer’s market.

vi) Building up infrastructures at farm level through irrigation, farm mechanization and

supportive allied activities like Dairy etc.

vii) To promote growth of industries including small artisans, services and business sectors.

For borrowers with established credentials, the package of assistance is redefined to take care of

growth as well as seasonal credit needs without any hassles.

viii) In pursuit of achieving national objectives like better education and housing to all, the

products are re-modeled to make them attractive with longer gestation period and lowered EMI at

affordable interest cost.

ix) The process of submission of applications for loans, sanction, documentation and

disbursements has been further simplified.

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The various innovative schemes/card products are:

Star Composite Cash Credit (CCC):

Kisan Credit Card (KCC)

Kisan Gold Card (KGC)

Star Kisan Samadhan Card (KSC)

Star Bhoomiheen Kisan Card (BKC);

Star Artisan Credit Card (ACC);

(CCC, KCC & KGC are now subsumed into KSC)

1.3 FUNCTIONS OF COMMERCIAL BANKS

The function of the commercial banks towards the agriculture finance is almost

similar to that of the common functions carried on by the banks. But the functions towards

agriculture are given more importance as about more than 50% of the population depend upon

agriculture directly or indirectly

The functions of the commercial banks towards agriculture are as follows:

1) Receiving deposits from the public

2) Making loans & advances

3) Restructuring of loans in case of calamities

4) Customize Loans.

Banks play as facilitator between the government and the farmers. Banks main function

also includes the implementing of the schemes that are announced by the government in line

with the existing schemes.

1.4 Making-agriculture-attractive

With the 2003-04 budget giving agriculture the go-by, Devinder Sharma outlines five criteria

that nation's finance minister must keep in mind while crafting budgetary policy for agriculture.

March 2003 - Successive Finance Ministers have spared no effort in eulogizing agriculture.

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Presenting the Budget 2003-2004, Finance Minister Jaswant Singh had remarked that agriculture is

the life blood of our economy. A year earlier, his predecessor, Yashwant Sinha had romanticized

agriculture, saying that his Budget was aimed at ensuring freedom of the farmer -- "KISAN KI

AZADI".

It all began with the former Finance Minister Mr. Manmohan Singh, the chief architect of the

new economic policy. In his famous 1992-93 Budget speech, Singh had said "Agriculture is the

foundation of national prosperity and no strategy of economic development can succeed in our

country if it does not ensure rapid growth of production and employment in agriculture. Nor can we

hope to provide sufficient jobs for our growing rural labour force unless we can transform the

economy of our rural areas." And yet, he concluded by saying that agriculture being in the concurrent

list, he was expecting the States to accord top priority to the farm sector.

This unfailing lip service glorifying farmers continues unabated. And in the bargain, Indian

agriculture has been pushed into an era of unforeseen crisis - increasing suicides among farmers,

mounting rural indebtedness, unmanageable glut at the time of harvest, swelling rural to urban

migration - clear pointers of the gathering storm clouds over the farm sector. In fact, ever since

liberalization became the economic mantra, and the impetus shifted to business and industry, the

persistent neglect of agriculture has cast an ominous shadow.

Since the dawn of economic liberalization in June 1991, the annual Budget has become a

political instrument to provide sops and tax holidays to the corporate sector, trade and industry. In

essence, Budget too is targeted at Indian urban centers. What happens to the masses - comprising the

Bharat where more than 80 per cent population lives - has never been the concern of the successive

Finance Ministers. It never was for a country, where nearly 85-90 per cent of the 110 million farming

families, somehow make out a living from less than 2 hectares of land holding.

Resurrecting agriculture should, therefore, be the obvious challenge for any Finance Minister.

Successive budgets showed emphasis, through the use of clichés like strengthening marketing

infrastructure, scientific management of scarce water resources, empowering farmers to take informed

decisions and so on. A growing volume of evidence now clearly suggests that such jugglery in

presentation has not helped. What is needed is a fresh approach that takes the ground realities into

consideration before embarking upon any policy imperatives.

All budgetary allocation for agriculture should be made keeping these criteria for sustainable

growth in mind:

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1. Sustainable-farming

Indian agriculture faces an unprecedented crisis in sustainability. Food grain productivity in the

food bowl, comprising Punjab, Haryana, and western Uttar Pradesh, is on the decline. The green

revolution areas are encountering serious bottlenecks to growth and productivity. Excessive mining of

soil nutrients and groundwater have already brought in soil sickness. Introducing new Centrally

Sponsored Schemes to improve production in these areas is going to be counter-productive. Banking

upon genetically engineered crops to take care of the second-generation environmental impacts is sure

to worsen the existing crisis. Monocultures breed pests and waste resources.

2. Farm-incomes

Growing indebtedness in agriculture is forcing an increasing numbers of farmers to end their lives.

This unsavory phenomenon is a manifestation of the declining farm incomes and lack of farm credit.

Institutional finance and credit has almost disappeared over the years. Banks are no longer treating

agriculture for priority sector lending.

Bank loans for cars are available at a much cheaper rate of interest than tractors. The more the

poverty level, the more is the rate of interest. Some tribals in Kalahandi in Orissa who pay 460 per

cent interest to moneylenders. In neighbouring parts of Madhya Pradesh, the rate of interest is a little

lower at 360 per cent. And in Jharkhand State, tribals pay something around 160 per cent rate of

interest. Even in the frontline agricultural States of Punjab and Haryana, 50-60 per cent rate of

interest by private moneylenders is not very uncommon.

Agriculture credit has to be revived. Finance Minister must spell out schemes that encourage

banks to provide easy credit facilities to farmers. Cosmetic innovations like Kisan Cards and the likes

are not much helpful unless banks have the willingness to provide support to the agrarian sector.

Asking private banks to go rural is merely an approach that may satisfy the galleries. Similarly,

budget allocation must be made for assured food procurement at remunerative prices. In addition,

procurement needs to be extended to coarse cereals, pulses and oilseeds to provide farmers an

incentive to produce more.

In short, agriculture has to be made attractive. Finance Minister must ensure that the Budget

allocations are made in such a way that it helps bring back the shine on the golden grain.

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3. Drought-proofing

Recurring drought continues to engulf vast tracts of central and north western India. The

importance of drought proofing should have been obvious considering that food grain output had

slumped by over 13% as a result of the severe drought that swept through the almost the entire

country. The increased emphasis on water harvesting notwithstanding, the reduced availability of

water is emerging as a major social and economic crisis. This is because much of the investment is

going into a faulty technology of rain water harvesting, called the "Ridge to valley" system, a

technology imported from the United States.

Investments in rain water harvesting needs to be immediately shifted to the revival of the

traditional forms of water conservation - ponds and tanks. Subsidies for drip irrigation and sprinkler

irrigation need to be discontinued as it helps only the rich farmers and corporates. Fodder cultivation,

crop planning according to the water needs and availability and the emphasis on the local breed of

cattle (and improving its productivity, rather than importing exotic breeds) need to be encouraged.

Farmers in the rain fed areas also need to be insured against drought. This can be ensured by

making it mandatory for the foreign insurance companies to invest at least 40 per cent of their funds

for farm insurance.

4. Sugar-mills

The unprecedented addition of new sugar mills by successive governments has created a

major crisis on the agriculture front. Requiring good fertile and irrigated land for cultivation, its

growth is at the cost of staple foods like wheat and rice. With the per hectare productivity of food

grains on the decline in the frontline agricultural states, diversion of good fertile land to sugarcane is

not without accompanying hiccups. What makes the switchover to sugarcane a pernicious trend is its

enormous water requirement. Sugarcane, in fact, is the biggest threat to India's food security.

Sugarcane farmers need to be encouraged to divert to other crops. But before diversification becomes

the new mantra, it is important to first lay out the structures that would help in taking the produce to

the consumers.

5. Marketing

Providing an assured and remunerative market for agricultural producers cannot be left to the

market forces. The food policy imperatives of public distribution system and announcing the

procurement prices before the crop season have to be further strengthened. Agricultural-processing 15

too needs to be strengthened, but not at the cost of the domestic producers. The Finance Minister must

ensure that food-processing sector uses the abundant raw material available within the country. The

'rainbow' revolution that everyone talks about is actually aimed at helping the industry to exploit the

farm sector. Already a number of manufacturing units, for instance, have begun to source the

agricultural raw material, including oranges, grapes, popcorn, peas etc, from America and Europe.

Although, India is following the WTO dictates of doing away with the food procurement

system, any tinkering with what is generally regarded as the "famine-avoidance" strategy can be

catastrophic. The Finance Minister needs to take corrective measures to reduce inefficiency in the

system while at the same time making it broad-based and widespread. PDS also needs to be extended

to upcoming agricultural areas in Bihar, Orissa, West Bengal and the northeast.

The post liberalization era has witnessed a high degree of correlation between India’s GDP

growth and its agriculture growth, wherein it has been estimated that for achieving the desired GDP

growth of around 8 per cent, agricultural growth in excess of 10 per cent is required.

The impact of agricultural growth on farmer empowerment is apparent. It has been estimated

that one incremental percentage growth in agriculture leads to an additional income generation of Rs

10,000 crores in the hands of the farmers thereby increasing their disposable income and ultimately,

their purchasing power.

Owing to diverse and favourable agro-climatic conditions, India has a significant comparative

advantage in agricultural production and the potential to be globally competitive by producing a

wide-variety of high quality produce. These advantages if leveraged optimally, can translate into

India becoming a leading food supplier to the world. Further, with a population of 1.08 billion,

growing at about 1.6 per cent per annum and with favourable demographics, India is a large

consumption hub for food products.

While agricultural production in the country is significant, the agro processing industry is still

at a nascent stage with less than 2 per cent of the fruit and vegetables production being processed as

compared to about 80 per cent in Malaysia, 30 per cent in Thailand and 60-70 per cent in United

Kingdom and United States of America.

The growth of the Indian food processing industry has been sub-optimal due to the prevalence

of several aspects that have hindered fullest realization of the immense potential. In terms of

agricultural trade, India has a 1.3 per cent (Rs 33,000 crores in 2002-03) share of global food &

agricultural trade ($460 billion), despite its production leadership in agriculture. India’s exports still

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constitute the low-value commodity and primary processed items where price realizations are low. In

addition, many products are showing single digit or negative growth.

The reasons for India’s insignificant share in global trade include supply side factors such as

lack of consistency in supply and quality, lack of cost competitiveness, and demand side factors such

as non-tariff barriers and poor perception of Indian food products in the international markets.

1.5 Issues and challenges

Indian agriculture sector has the potential to transform India into the leading agro economy of

the world. However, a holistic and integrated approach is required to achieve sustainable

development of the sector. Such efforts so far have largely remained fragmented and confined to

limited areas.

One of the major constraints hindering the progress of Indian agribusiness is lack of supply

chain integration wherein different stakeholders (viz., farmers, Agri-input players, processors and

retailers) have been operating in isolation. This lack of integration has created bottlenecks at each

stage thereby creating mismatches in the demand-supply situation. Farmers suffer from lack of

linkages to the demand side as they are unaware on the kind of crop varieties which have high

demand potential. Similarly, the Agri-input players such as seed companies, agrochemical suppliers

are not linked to the demand side to understand the processable or marketable varieties of seeds and

inputs to be supplied.

From the demand side the agro-processing industry also suffers due to the lack of backward

integration. Interaction between agro-processing industry and input players and farmers on the

precise nature of inputs required for processing commodities is limited. This has deprived the agro

processing industry from capitalizing on potential economies of scale and from achieving a degree of

procurement comfort based on produce quality.

The problem of isolated operation of stakeholders which is further compounded by the lack of

adequate infrastructure (such as silos, warehousing and storage facilities) and ad-mixture problems as

well as non-existence of value-added service provision are ultimately leading to the erosion of the

competitive edge of Indian agribusiness.

Integrated supply chain solutions are the key to achieving sustainable development of the food

processing sector in India. Specialized financial institutions with domiciled expertise in agribusiness

are fully equipped to provide these solutions with orientation towards their technical and financial

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sustainability. Moreover, although the technological (IT) and managerial revolutions in India have

transformed the face of the urban and industrial India, the benefits of the same have continually

eluded the Indian agriculture sector.

Non availability and untimely availability of quality inputs like seed, fertilizers, and plant

protection chemicals is often felt by farmers and is critical for successful production of value added

crops. Poor infrastructure like roads, power, supply, port, storage, processing, marketing and the

value addition problems are significant. Yet another hindrance relates to unfavorable farm policies on

farm size, customized technologies, subsidies, domestic marketing, international trade, credit

insurance, food laws, entry of private sector, co-operatives etc.

1.6 Future of Agriculture Finance

Over the years, the role of the banking community in fueling agriculture growth has been

limited. Till date, banks have largely ventured into the agriculture sector only to fulfill their priority

sector obligations. In fact, many banks have taken softer options such as investing in the Rural

Infrastructure Development Fund (RIDF) instead of directly lending to the farmers. Bankers’

reluctance to finance the agriculture sector stems from the fact that there is a dearth of bankable

projects in the sector presently. The resultant lack of institutional financing options has forced the

farmers to avail funding from money lenders at exorbitant rates of interest. Structured project

development in the micro/rural sector is the key factors that can help India realize its true food and

agribusiness potential and also sustainable farmer empowerment and rural entrepreneurship. In fact,

adopting a projectable approach in the micro sector will lead to the development of agribusiness in

the country.

A paradigm shift is required in the outlook to agriculture; production to marketing orientation

and from a quantity to quality focus. A scientific and innovative agricultural approach to agriculture

will enable us to compete globally in cost and quality with respect to global benchmarking and our

core competitive strengths in various agriculture produces.

Finally, the need imposed and expressed by agriculture and rural sector through recent

electoral mandate clearly reflect need for urgent intervention in the sector. While immediate efforts

by government towards increasing financial assistance in the sector are necessary, there is a pressing

need for the banking community to ensure that government support to rural and agriculture sector gets

leveraged multifold, and ensures empowerment of rural India by enabling entrepreneurship in them,

leading to our country emerging as a sustainable economic superpower. Adopting a knowledge-based

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approach to develop risk mitigating and innovative project financing structures is a key requirement

for enhanced financing of the sector which will ultimately result in increased commercial viability

and ensure sustainable development of Indian agriculture.

Rural banking in India started since the establishment of banking sector in India. Rural Banks

in those days mainly focused upon the agricultural sector. Regional rural banks in India penetrated

every corner of the country and extended a helping hand in the growth process of the country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread

in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total

number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in

India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural

areas.

Apart from SBI, there are other few banks which functions for the development of the rural

areas in India. Few of them are as follows.

NABARD

National Bank for Agriculture and Rural Development (NABARD) is a development

bank in the sector of Regional Rural Banks in India. It provides and regulates credit and gives service

for the promotion and development of rural sectors mainly agriculture, small scale industries, cottage

and village industries, handicrafts. It also finances rural crafts and other allied rural economic

activities to promote integrated rural development. It helps in securing rural prosperity and its

connected matters.

Karnataka Bank

Karnataka Bank Limited is a leading private sector bank in India. It was incorporated on

18th February 1924 at Mangalore, a town located in the Kannada district of Karnataka. The bank

emerged as a major player during the freedom movement of 20th Century India. During its process of

expansion, the Karnataka Bank merged with other banks like Sringeri Sharada Bank Ltd.,

Chitradurga Bank Ltd. and Bank of Karnataka. Today, Karnataka Bank has emerged as one of the top

financial service institutions in India.

Canara Bank

19

Canara Bank is one of the most prominent commercial banks of India. The bank was

established in the year 1906 at Mangalore, Karnataka by a well-known personality Mr. Ammembal

Subba Rao Pai. Initially, it was founded with the name Canara Bank Hindu Permanent Fund, but later

on the name was changed to Canara Bank Limited.

Syndicate Bank

Syndicate Bank was firmly rooted in rural India as rural banking and has a clear vision

of future India by understanding the grass root realities. Its progress has been abreast of the phase of

progressive banking in India especially in rural bank

Union Bank of India

Facilities provided to farmers include Kisan ATM Cards and special Kisan ATM

Machines. These ATM's are easy to operate and do not require farmers to have a high level of

literacy. They are voice enabled in the local language, have a touch screen monitor and work on a

bio-metric authentication system like finger print verification.

1.7 Fiscal Administration

Historically, the Indian government has pursued a cautious policy with regard to financing

budgets, allowing only small amounts of deficit spending. Budget deficits increased in the late 1980s,

and the necessity of financing these deficits from foreign borrowing contributed to the 1990 balance

of payments crisis. The central government budget deficit reached 8.4 percent of GDP in FY 1990, up

from 2.6 percent in FY 1970, 5.9 percent in FY 1980, and 7.8 percent in FY 1989. The deficit was cut

to 5.9 percent in FY 1991 and 5.2 percent in FY 1992, but widened to 7.4 percent in FY 1993. It was

expected to recede to 6.2 percent in FY 1995.

The central government's budget deficits during the 1980s increased the total public debt

rapidly until in FY 1991 it stood at Rs3.9 trillion. The bulk of this debt was owed to citizens and

domestic institutions and firms, particularly the central bank

1.8 Indian Monetary Process

The basic elements of the financial system were established during British rule (1757-1947).

The national currency, the Rupee, had long been used domestically before independence and even

circulated abroad, for example, in the Persian Gulf region. Foreign banks, mainly British and

20

including some from such other parts of the empire as Hong Kong, provided banking and other

services. The Reserve Bank of India was formed in 1935 as a private bank, but it also carried out

some central bank functions. This colonial banking system, however, was geared to foreign trade and

short-term loans. Banking was concentrated in the major port cities.

The Reserve Bank was nationalized on January 1, 1949, and given broader powers. It was the

bank of issue for all rupee notes higher than the one-rupee denomination; the agent of the Ministry of

Finance in controlling foreign exchange; and the banker to the central and state governments,

commercial banks, state cooperative banks, and other financial institutions. The Reserve Bank

formulated and administered monetary policy to promote stable prices and higher production. It was

given increasing responsibilities for the development of banking and credit and to coordinate banking

and credit with the five-year plans. The Reserve Bank had a number of tools with which to affect

commercial bank credit.

After independence the government sought to adapt the banking system to promote

development and formed a number of specialized institutions to provide credit to industry,

agriculture, and small businesses. Banking penetrated rural areas, and agricultural and industrial

credit cooperatives were promoted. Deposit insurance and a system of postal savings banks and

offices fostered use by small savers. Subsidized credit was provided to particular groups or activities

considered in need and which deserved such help. A credit guarantee corporation covered loans by

commercial banks to small traders, transport operators, self-employed persons, and other borrowers

not otherwise effectively covered by major institutions. The system effectively reached all kinds of

savers and provided credit to many different customers.

The government nationalized fourteen major private commercial banks in 1969 and six more

in 1980. Nationalization forced commercial banks increasingly to meet the credit requirements of the

weaker sections of the nation and to eliminate monopolization by vested interests of large industry,

trade, and agriculture.

The banking system in India expanded rapidly after nationalization. The number of bank

branches, for instance, increased from about 7,000 in 1969 to more than 60,000 in 1994, two-thirds of

which were in rural areas. The deposit base rose from Rs50 billion in 1969 to around Rs3.5 trillion in

1994. Nevertheless, currency accounted for well over 50 percent of all the money supply circulating

among the public. In 1992 the nationalized banks held 93 percent of all deposits.

21

In FY 1990, twenty-three foreign banks operated in India. The most important were ANZ

Grindlays Bank, Citibank, the Hongkong and Shanghai Banking Corporation, and Standard Chartered

Bank.

Public-sector banks in India are required to reserve their lending based on 40 percent of their

deposits for priority sectors, especially agriculture, at favorable rates. In addition, 35 percent of their

deposits have to be held in liquid form to satisfy statutory liquidity requirements, and 15 percent are

needed to meet the cash reserve requirements of the Reserve Bank. Both these percentages represent

an easing of earlier requirements, but only a small proportion of public-sector banks' resources can be

deployed freely.

More than 50 percent of bank lending is to the government sector. With the onset of economic

reform, India's banks were experiencing major financial losses as the result of low productivity, bad

loans, and poor capitalization. Seeking to stabilize the banking industry, the Reserve Bank of India

developed new reporting formats and has initiated takeovers and mergers of smaller banks that were

operating with financial losses.

Three factors lay behind India's relative price stability.

1. First, the government has intervened, either directly or indirectly, to keep stable the price of

certain staples, including wheat, rice, cloth, and sugar.

2. Second, monetary regulation has restricted growth in the money supply.

3. Third, the overall influence of the labor unions on wages has been small because of the

weakness of the unions in India's labor surplus economy.

1.9 Growth rate in all sectors:

The Central Government has revised the GDP growth estimates for both, the previous fiscal as

well as for the current year. The FY10 estimate was raised from an already impressive 6.5% to an

even better 7.9%, and GDP is expected to grow at 8.5% during fiscal 2010-11, plus or minus 0.25%.

The improved performance for the previous fiscal is not surprising, as it was on a low base, and a

bumper harvest. But, to have an economy grow at nearly 7% on an extremely high base is just superb.

What makes the upward revision in the current fiscal’s growth projection even better is that the farm

output this year will be much lower than last year’s production. Agriculture grew by 2.6 per cent this

year, compared to 4.9 per cent in the previous year. Still, the overall impact on the economy will be

much lower, thanks largely to the robustness in industrial and services sectors. This is quite a

22

departure from the past, when a significant drop in farm output invariably led to an equally big

decline in the manufacturing growth in that year and in the following one. In the decades before the

1990s, total GDP would actually fall on account of poor agricultural growth. That this negative trend

has been reversed is definitely a welcome sign for the Indian economy.

The last time the Indian economy went through such a purple patch was in the investment-led

boom of the mid-1990s. The latest data too suggests that the ongoing buoyancy in the Indian

economy is driven by greater investment. One statistic that puts this in perspective is the growth in

the manufacturing sector. Industrial growth nearly dropped to half slipping to 4.8 per cent from last

year's 8.1 per cent. Whatever slowdown is being witnessed in the IIP is due to lower growth in mining

and construction sectors. What this data indicates is that domestic demand is now less dependent on

agriculture, whose fortunes are still tied with the southwest monsoon. The Indian economy has

become considerably resilient, and can sustain a growth rate of at least 7% without much help from

the rain gods.

Another side of the Indian economy that looks to be on a roll is the services industry. It now

accounts for over 50% of the GDP, and has emerged as the major source of employment generation.

The role of services has assumed a lot of significance even as that of the agriculture has diminished

considerably. Together with the industrial sector, the services have become a major driving force for

the Indian economy. With both of them doing extremely well and no signs of any big hiccups on the

horizon, one can concur that India can maintain a growth rate of around 7%.

That is not to suggest that agriculture is not important for the economy. Though agriculture

now comprises just about a quarter of India’s GDP, it provides employment to some 70% of its

population. All the more reason for the Government to come up with sound policies that will ensure

stable and sustainable growth in the farm sector, irrespective of how bad the monsoons are. In light of

this, the National Common Minimum Programme (NCMP) devised by the Congress-led regime

seems to have its heart at the right place. It calls for large-scale investment in the rural sector and has

already committed to boosting credit to the farm sector. Due to time constraint, Finance Minister P.

Chidambaram could not implement the NCMP agenda for the rural sector in its entirety. But, he is

expected to announce a series of measures in the upcoming budget to give a major fillip to the rural

sector. The success of these steps will be crucial for achieving a higher GDP growth rate over a

sustainable period of time. That's when India will be really shining.

23

1.10 Crop Insurance & History:

In our country crop production has been subjected to the vagaries of the climate. Some of the

other problems that the Indian agriculture is constantly tackling with are the large-scale damages that

are caused as a result of the attack of pests and diseases. It is in a scenario such as this in India that

the issue of crop insurance assumes a vital role in the stable growth of the agricultural sector. Tracing

the Crop Insurance History in India we see that it was started with the introduction of the All-Risk

Comprehensive Crop Insurance Scheme (CCIS) that covered the major crops. This scheme was

introduced in 1985. In fact this period of introduction also coincided with the introduction of the

Seventh-Five-year plan. This initial scheme was of course later substituted and replaced by the

National Agricultural Insurance Scheme. This substitution came into effect from 1999. These

Schemes that have been introduced throughout the crop insurance history have been preceded by

years of preparation, studies, planning, experiments and trials on a pilot basis.

In the crop insurance history, the question of introducing a crop insurance scheme was taken

up for examination soon after the Indian independence. The first aspect that was examined related to

the modalities of crop insurance. The issue under consideration was about whether the crop insurance

should be offered under an Individual approach or on Homogenous area approach.

The Individual approach of the scheme indemnifies the farmer to the full extent of the losses. Also the

premium that is to be paid by him is determined with reference to his own past yield and loss

experience. The Individual approach for these schemes necessitates reliable and accurate data of crop

yields of individual farmers for a sufficiently long period, for fixation of premium on actuarially

sound basis.

The Homogenous area approach on the other hand was aimed at envisaging a homogeneous

area from the point of view of crop production and similarity of annual variability of crop production.

The homogenous area approach was found to be more favorable. This is because it would facilitate

the provision of a single unit treatment to various agro-climatically homogenous areas and the

individual farmers and allow them to pay the same rate of premium and receive the same benefits,

irrespective of their individual fortunes.

1.10.1 Crop Insurance Risks covered:

The Crop insurance schemes aim at providing comprehensive risk insurance which covers the yield

losses that occur to the agricultural output of small and marginal farmers due to non-preventable

risks.

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The crop insurance risks covered under the non-preventable category are listed below:

a) Natural Fire and Lightning

b) Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado etc.

c) Flood, Inundation and Landslide

d) Drought, Dry spells

The crops insurance risk does not cover any of the losses that arise out of war and nuclear

risks, malicious damage and other risks which are preventable risks.

The sum insured under the crop insurance risks covered usually extends to the value of the

threshold yield of the insured crop. This is usually subject to the option of the insured farmers.

Nevertheless, a farmer may also choose to insure his crop beyond value of the threshold yield

level up to 150% of average yield of the notified area on payment of premium at commercial

rates.

Apart from the risks covered in the crop insurance scheme, what is important is the sum

insured. In case of Loanee farmers the sum insured would be at least equal to the amount of

crop loan advanced. Further, in the case of the Loanee farmers, the insurance charges that will

be levied will be additional to the Scale of Finance for the purpose of obtaining loan.

Apart from the above mentioned issues, the matters of Crop Loan disbursement

procedures, which have been outlined by the RBI / NABARD, are binding. The insurance

premium issues still stand at an undecided state as the transition to the actuarial regime in case

of cereals, millets, pulses & oilseeds is expected to be made in a period of five years.

1.10.2 Crop Insurance Schemes in India:

In order to provide a boost to the agriculture in India, a number of experimental crop insurance schemes

have been introduced in the country. The first ones of the experimental crop insurance schemes has been a

Pilot Crop Insurance scheme. This was introduced by GIC from the year 1979.

Some of the important features of the scheme were that the scheme was based on "Area

Approach". This scheme covered crops such as Cereals, Millets, Oilseeds, Cotton, Potato and Gram. The

scheme was confined to loanee farmers only and on voluntary basis. The risk was shared between General

Insurance Corporation of India and State Governments in the ratio of 2:1. The maximum sum that could

25

be insured under the scheme was 100% of the crop loan, which was later increased to 150%. Under this

scheme, 50% of the subsidy was provided for insurance charges which was payable to the small / marginal

farmers by the State Government & the Government of India on 50:50 basis.

Among the earlier crop insurance schemes that were introduced was a comprehensive Crop

Insurance Scheme. The Government of India introduced the Comprehensive Crop Insurance Scheme with

effect from 1st April 1985. This scheme was introduced with the active participation of State

Governments. The Scheme was optional for the State Governments.

This Scheme was linked to the short-term crop credit that was extended to the farmers and was

implemented using the Homogeneous Area approach. The number of states that were covered under the

scheme was 15 States and the number of UTs that were included were 2. This Scheme was implemented

until Kharif 1999. Some of the important features of this scheme allowed a cover to the farmers availing

crop loans from Financial Institutions for growing food crops & oilseeds on compulsory basis. The

coverage under this scheme was restricted to 100% of crop loan subject to a maximum of Rs. 10,000/- per

farmer. The premium rates for Cereals and Millets were 2% and for Pulses and Oil seeds 5%. The

premium and risk claims were shared in a ratio of 2:1 by the central and state Government. The Scheme

was optional to State Governments.

26

Immediately after the country’s independence, the central bank and Government

authorities focused on the prevention of bank failures and restoration of public confidence

in the formal banking system. While the amended Banking Regulation Act of 1949 tried

to consolidate the Indian banking network in the pre-bank nationalization era, the attempt

of bank-nationalization in India in 1964 gave a new direction to the structure, operations,

policies and practices of commercial banks in the country through features like social

control and directed bank credit to priority sectors. Implementation of the service area

approach and the lead bank scheme during 1969 envisaged to bring in a consortium of

bank leaders for ensuring a co-ordination between the co-operative banks, the commercial

banks and the other financial institutions in their geographic jurisdictions for the

development of credit-starved regions to its fullest. Although the post-nationalization

period in the Indian banking yielded significant changes in the operational policies and

practices of the formal financial agencies in the rural areas, yet it failed to make a

significant dent in the age-old attitude of the rural bankers towards financing the so-called

less creditworthy but productive poor farmers. The increased outreach and access to

agricultural credit in the post bank-nationalization period coupled with augmented

demand due to the Green Revolution of 1960s and enhanced focus on directed priority

sector lending could not correct the weaknesses in the rural financial delivery system over

the years which adversely affected the viability and sustainability of these institutions.

The commercial banks form the core of the organized banking system and

constitute quantitatively the most important group of financial intermediaries in the

country, compressing both scheduled and non-scheduled banks. Deposits paid up capital

and borrowings from the Reserve Bank of India form the resources of the commercial

banks. Commercial banks are the most important intermediaries for promoting and

mobilizing the savings and for allocating investment among the different productive

sectors.

The short term and medium term credit needs of both industry and agriculture are

met by the commercial banks and they also help finance developmental plans by

investing funds in the government securities. Initially, the commercial banks were

concentrating only on the financing of the trade and industry.

27

However, with the nationalization of the banks, they are now actively involved in

the disbursement of agricultural credit. On account of the branch licensing policy adopted

by the RBI, the rural branches of the commercial banks account for a large percentage of

the total network and the Agricultural Development Branches, Gram Vikas Kendras and

Rural Service Centers were set up to cater exclusively to the needs of agriculture and the

allied activities. Under the ‘Lead Bank Scheme’ all districts were allotted to commercial

banks that were entrusted with the responsibility of preparing credit plans for their lead

districts. The ‘Village Adoption Scheme’ was formulated by commercial banks to carry

out leading operations in contributing significantly to the development of agriculture.

The procedures and amount of loans for various purposes have been standardized.

Among the various purposes "Crop loans" (Short-term loan) has the major share. In

addition, farmers get loans for purchase of electric motor with pump, tractor and other

machinery, digging wells or boring wells, installation of pipe lines, drip irrigation,

planting fruit orchards, purchase of dairy animals and feeds/fodder for them, poultry,

sheep/goat keeping and for many other allied enterprises.

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STRENGTHS

Rich Bio-diversityArable landClimateStrong and well dispersed research and extension system

OPPORTUNITIESBridgeable yield cropsExportsAgro-based IndustryHorticultureUntapped potential in the N.E.Indian Agriculture Scenario

THREATSUnsustainable Resource Use

Unsustainable Regional Development

Imports

WEAKNESSFragmentation of landLow Technology InputsUnsustainable Water ManagementPoor Infrastructure Low value addition

SWOT Analysis of Indian Agriculture

Fig 2.1

The outreach and access to total bank credit has undoubtedly been improved by

bank nationalization. However, the delivery of agricultural credit remains wrought with

weaknesses, negating equitable and efficient distribution, thereby affecting the viability

and sustainability of formal institutions.

Structure of Agricultural Credit System in India (Fig 2.2)

2.1 TYPES OF CREDITS

The Credit requirements of agriculture are of three types viz.

29

A. Short -Term

B. Medium - Term

C. Long- Term (LT)

A. Short -Term Credit:

Short term credit is provided by the banks for a period of 12 months to 15 months.

Short term finance is the most needed form finance by the farmers. And farmers turn

towards professional money lenders (unorganized sector) for fulfilling their needs. This is

because of the hectic paper involved in getting an institutional loan and the time involved

in securing the funds. But due to latest reforms in baking sector the share of the

unorganized sector’s lending has declined over the years. And innovative types of

financing are being introduced.

This type of loan is mainly provided to marginal and small farmers who own

small plots of land. Farmers need this type of loan to procure fertilizers, pesticides, seeds,

small equipments transportation and for the maintenance of the crop. And for needs like

education, food, housing, household functions, etc. Rural households need access to

financial institutions that can provide them with credit at lower rates and at reasonable

terms than the traditional money-lender

Types of Short Term Loans:

i. Kisan Credit Card (KCC)

ii. Produce Marketing Loan

iii. Agriculture Gold Loan

iv. Other type of Short-term Loans are

a. Consumption Loan

b. Expenditure Loan

c. Maintenance Loan

i. KISAN CREDIT CARD SCHEME

ELIGIBILITY

30

All agriculturists who are in need of short term production requirements.

ATM facility and Personal Accident Insurance Scheme for life up to Rs.50000/-

and permanent disability cover up to Rs.25000/- is available on request.

PURPOSE

To provide hassle free short-term credit to farmers on the basis of their

land holdings for purchase of inputs and draw cash to meet their production needs.

i.e. Cultivation expenses including allied activities with a consumption

component.

AMOUNT OF LOAN

To be fixed on the basis of operational holdings and scale of finance with

consumption component 15% (maximum Ra.10000/-) of production credit. The

scale of finance to farmers who own cultivated land below one acre will be at the

rate of Rs.40000/- (on pro rata basis) and farmers who own more than one acre

with intensive farming of land be given at the rate of Rs.37500/- per acre and part

thereof.

RATE OF INTEREST

Interest rate ranges from 2.50% below to 1.50% above BPLR for various limits.

REPAYMENT

Running Cash Credit account for 15 months subject to annual review and total

annual credit should exceed annual debit

ii. PRODUCE MARKETING LOAN (Advance against Warehouse

Receipt)

ELIGIBILITY

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a. Farmers / traders depositing farm produce in the warehouses of the

central / state warehousing corporations.

b. Scheme will be operative in Karnataka, Andhra Pradesh, Tamilnadu

& Kerala.

PURPOSE

a. To protect the farmers from the compulsion to sell their produce

immediately after harvest of produce despite an adverse market.

b. To finance farmers and traders against warehouse receipt.

AMOUNT OF LOAN

70% of the value of the warehouse receipt, valued at the market value or

70% of the market price advised by Agri. Dept, HO whichever is less.

RATE OF INTEREST

Farmers

Up to Rs.3 lakh - 3.50% below PLR 9.50%

Above Rs.3 lakh - 2.50% below PLR 10.50%

Traders

2.50% below PLR 10.50% (Irrespective of the limit)

REPAYMENT

On demand / 6 months which can be extended up to 12 months subject to

satisfactory shelf life / market condition. 

iii. AGRICULTURE GOLD LOAN

ELIGIBILITY

All individual farmers undertaking cultivation or other activities including

allied activities are eligible for short-term finance.

PURPOSE

To meet genuine credit requirements of farming including allied activities,

repairing of equipments and consumption needs etc.

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AMOUNT OF LOAN

The eligible loan amount should be assessed based on the area under

cultivation, crops(s) raised, scale of finance and not in relation to the value of gold

offered as security.

RATE OF INTEREST

Interest rate ranges from 2.50% below to 1.50% above BPLR for various

limits. For working capital loans like ACC/KCC/AGL up to Rs.3 lakh interest at

the rate of 7% is extended as per RBI guidelines subject to the periods stipulated

by RBI and beyond that normal rate will apply.

REPAYMENT

As applicable to Agri. Cash Credit accounts depending on the duration of

crops raised and harvesting period and income generation, subject to a maximum

period of 12 months. The account has to be closed at the end of the repayment

period

B. Medium - Term

Short term credit is provided by the banks for a period of 15 months to 36

months.

i. SCHEME FOR DEVELOPMENT / STRENGTHENING OF AGRI.

MARKETING INFRASTRUCTURE, GRADING AND

STANDARDISATION.

ELIGIBILITY  

Scheme shall be available to individuals, groups of farmers / growers /

consumers, partnership / partnership firms, NGO’s, SHG, Companies,

Corporations, Cooperatives, Co-marketing Federations, Local Bodies etc.

PURPOSE:

For development of agricultural marketing operations including

strengthening of infrastructure, techniques of preservation, storage etc.

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REPAYMENT  

Adequate medium-term repayment period according to the project.

ii. HOMESTEAD FARMING

PURPOSE

A scheme for financing farmers practicing mixed cropping / inter

cropping along with allied activities to enable them to undertake

cultivation of various crops in a more integrated way. The scheme

provides the farmers with sufficient working capital required for their

homestead farming (Mixed cropping along with allied activities) by fixing

scale of finance based on land holding to meet the cost of entire farming

activities.

AMOUNT OF LOAN

The farmers who own cultivated land below one acre be given the

scale of finance on pro rata basis at the rate of Rs.40000/- and farmers who

own more than one acre of land be given at the rate of Rs.37500/- per acre

and part thereof.

RATE OF INTEREST

Interest rate ranges from 2.50% below to 1.50% above BPLR for

various limits.

REPAYMENT

The facility will be sanctioned as an Agriculture Cash Credit limit

(In case of Kisan Credit Card running cash credit). 

iii. SCHEME FOR CULTIVATION OF MEDICINAL PLANTS

ELIGIBILITY

All agriculturists are eligible.

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PURPOSE

Scheme for financing cultivation of 22 medicinal plants cultivated

extensively and also in great demand in the local as well as foreign market.

RATE OF INTEREST

Interest rate ranges from 1.75% below to 2.00% above BPLR for

various limits.

REPAYMENT

Repayment should coincide with harvesting and marketing or at the

time generation of income from the scheme. 

iv. RAIN WATER HARVESTING SCHEME

ELIGIBILITY

Farmers having land holding of 0.50 acre or more are eligible to be

considered for finance under this scheme.

PURPOSE

Scheme envisages construction of low cost tanks for collecting and

storing rainwater and using it for irrigation, by siphon arrangement,

utilizing gravitation flow or by installing motor pump.

AMOUNT OF LOAN

Maximum amount of finance will be Rs.88000/- per acre. Scheme

can be adopted in smaller areas also by reducing the cost proportionately.

RATE OF INTEREST

Interest rate ranges from 1.75% below to 2.00% above BPLR for

various limits.

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REPAYMENT

Repayment based on the income generated from the crops raised

and and cropping pattern.

C. Long Term Credit:

The period of long-term credit is generally 5 to 20 years or even more in

some special cases. In any industry, long-term investment is necessary, to create

permanent assets which give returns over a period of time. The permanent

investment is not only necessary for a particular industry but even for the country.

Because for continuity of production and progress of the country. This applies to

agriculture also. In Agriculture, long-term investment comprises of sinking well,

land leveling, fencing and permanent improvements on land purchase of big

machinery like tractor with its attachments including trolleys, establishment of

fruit orchard of mango, cashew, coconut, sapota (chiku), orange, pomegranate,

fig, guava, etc. There are many other items of long-term capital investment.

Investment once made in the beginning continuous to give returns over a long

period. Fruit orchards particularly do not give any income in the first 4 - 5 years as

in case of other seasonal crops. So the expenditure incurred in the first 4-5 years

becomes a capital cost.

All the long-term investments mentioned above require large amounts of

funds. Although they have good potential to give returns in future, individual

farmers have no financial capacity to make such costly investments from their

own funds because they have no savings or very little savings. Therefore, they

have to resort to bank borrowing to meet their needs.

The financial criteria terms and conditions procedures of granting Long

Term loans are altogether different from short-term loans.

Types of Long Term Loans:

i. Land Development Loan

ii. Investment Loans

iii. Farm Mechanization

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iv. Estate Purchase Loan

v. Minor Irrigation

I. LAND DEVELOPMENT LOAN

Land development loans are provided by the banks mainly for the

development of agricultural land i.e. increasing the productivity of agricultural

land using scientific, building of tanks in the agricultural land etc.

II. INVESTMENT LOANS:

Investment loans are provided by the banks to make Long Term

investments i.e. building of Warehouses, building of Cold Storages. These

‘Investment Loans’ are aimed at improving the capacity of the farmer in

marketing his produce and get a fair value for his produce.

Interest Rate:

The rates of interest for Long Term Loans are generally low and within the

paying capacity of farmers. They are around 11 to 12%.

Loan Procedure:

The Branch offices receive applications from the prospective borrower.

Then Agricultural Finance Officer or Inspector scrutinizes these applications, they

visit places of the application and ascertain the purpose of borrowing, verify the

genuineness of the proposal and it economic viability, repaying ability of the

farmers, adequacy of security etc. After completing those formalities, the loan is

granted by the appropriate authority at appropriate level depending upon the

delegation of powers by the Banks.

III. FARM MECHANIZATION

Loan for Farm Mechanization includes Purchase of tractors, Power Tillers,

etc.

ELIGIBILITY

37

a. Tractors with engine capacity up to 35 HP – The applicant should own /

cultivate six acres of perennially irrigated land.

b. Tractors with engine capacity above 35 HP – The applicant should own /

cultivate eight acres of perennially irrigated land.

c. Power Tillers – the applicant should own / cultivate four acres of

perennially irrigated land.

PURPOSE:

To purchase tractor/power tillers for agricultural activities.

AMOUNT OF LOAN

Amount of advance will be the investment cost of tractor / power tiller and

implements less margin @15%.

RATE OF INTEREST

Interest rate ranges from 1.75% below to 2.00% above BPLR for various

limits.

REPAYMENT

The period of repayment shall be 9 years for tractors and 7 years for power

tillers. 

IV. ESTATE PURCHASE LOAN

ELIGIBILITY:

The estate should be either in yielding stage with the crops in its prime

yield age or capable of being developed in to a viable unit. The yield / net income

of the estate should be sufficient to liquidate the proposed loan and interest

accrued with in a period of 7 to 10 years. The proposed estate should be free from

encumbrance and entire property should be offered as security to the loan.

38

To encourage those who prefer to settle down in agriculture and are in the

look out of good / viable estates for purchase and also to improve production in

agriculture.

AMOUNT OF LOAN:

The quantum of loan that will be considered for sanction will be 75% of

the registered value or 50% of the market value whichever is low. In exceptional

cases 80% of the registered value or 50% of the market share whichever is low is

also considered. The loan for the development of the estate like land development

including working capital can also be sanctioned.

REPAYMENT

Repayment of loan will be in quarterly/half yearly / yearly installments

depending on the harvest of the crops and the loan shall be repaid within a

maximum period of 7 to 10 years. 

V. MINOR IRRIGATION

Projects with cumulative command area of less than 2000 ha are called minor

irrigation projects. Scheme for developing irrigation potential, Minor Irrigation,

Installation of Pump set Drip Irrigation etc.

RATE OF INTEREST

Interest rate ranges from 1.75% below to 2.00% above BPLR for various limits.

REPAYMENT

The loan shall be repaid within a period of 9 years, in yearly installments.

39

Distribution of Credit Since 1951 to 2001(Fig 2.3)

Sources of

Credit1951 1961 1971 1981 1991 2001

Non-

Institutional92.70% 81.30% 68.30% 36.80% 30.60% 42.40%

Institutional 7.30% 18.70% 31.70% 63.20% 66.30% 57.60%

Sources of Credit 1951 1961 1971 1981 1991 2001

Non-Institutional

Of which:92.70% 81.30% 68.30% 36.80% 30.60% 42.40%

Money Lenders 69.70% 49.20% 36.10% 16.10% 17.50% 25.70%

Institutional

Of which:7.30% 18.70% 31.70% 63.20% 66.30% 57.60%

Co-op. Societies /

Banks3.30% 2.60% 22.00% 29.80% 35.20% 19.60%

Commercial Bank 0.90% 0.60% 2.40% 28.80% 35.20% 35.60%

(Table 2.1)

The rural population in India suffered from a great deal of indebtedness and was

subject to exploitation in the credit market due to high interest rates and the lack of

40

convenient access to credit. Rural households needed credit for investing in agriculture

and smoothening out seasonal fluctuations in earnings. Since cash flows and savings in

rural areas for the majority of households was small, rural households typically tend to

rely on credit for other consumption needs like education, food, housing, household

functions, etc. Rural households needed access to financial institutions that can provide

them with credit at lower rates and at reasonable terms than the traditional money-lender

and thereby help them avoid debt-traps that are common in rural India.

Debt profile of rural households (in %) (Fig. 2.4)

41

(Fig 2.5)

Even though institutional lending has over taken the non-institutional lending, the

debt profile of rural households indicates that the major source of credit to rural

households, particularly poor income working households, has been informal sector loans

like money-lenders, which are usually at very high rates of interest. The terms and

conditions attached to these loans impact the poor adversely.

But because of the banking sector reforms and with the help Five Years plans

which gave priority to agricultural sector the trend has shifted from unorganized sector to

organized sector. Government has taken adequate measure to see that the agriculturists

get their requirements of funds are fulfilled by giving additional subsidies on the funds

provided by the financial institution.

2.2 Measures Taken to Improve Institutional Credit Flow to Agriculture

Procedural simplification for credit delivery through rationalization of internal

returns of banks.

42

Delegation of more powers to branch managers. l Introduction of composite cash

credit limit to farmers, introduction of new loan products with saving components,

cash disbursement of loans, dispensation of ‘no due certificate’ and discretion to

banks on matters relating to margin security requirements for agricultural loans

above Rs. 10,000.

Introduction of at least one specialized agricultural bank in each state to cater to

the needs of high tech agriculture. l Introduction of cash credit facility.

Issue of Kisan Credit Cards to farmers to draw cash for their production needs on

the basis of the model scheme prepared by NABARD.

Hassle-free settlement of disputed cases of over dues.

Augmenting Rural Infrastructure Development Fund (RIDF) with a corpus of Rs.

10,000 crore with NABARD to finance rural infrastructure development projects

by States.

2.3 Criteria& Documents for financing:

Indian banking sector has undergone numerous reforms and changes over the past

decades to enhance its performance to the international level. Rural banking

in India started since the establishment of banking sector in India. Rural Banks in those

days mainly focused upon the agro sector. Today, commercial banks and Regional rural

banks in India are penetrating every corner of the country are extending a helping hand in

the growth process of the rural sector in the country.

Term loans which are provided by the banks are well known and easily

understood by farmers and may be used to finance a range of purposes by adjusting loan

sizes and disbursement and repayment schedules.

Banks provide these term loans on the following criteria:

A good repayment track record

A satisfactory opinion by local enquiries in case of “New Customer”

Know Your Customer (KYC)

Agriculturist should have Savings Bank Account

He/she has to prove that he/she is an agriculturist

Repayment ability of the customer

Cost of cultivation

43

Economic and Technical feasibility

When a bank receives the application for a loan the agricultural officer in the

banks goes through the above criteria and if the agriculturist meets all the criteria then

loan will be sanctioned. The above criteria’s are periodically revised in order to keep

track of the changes that are taking place.

Apart from the above criteria the agricultural officer has to go through records that

certify the ownership or the title of the land and the records which are to be kept as

collateral security against the loan.

Documents which the agricultural officer goes through when he receives an

application for the loan are:

Record of Tax

Coffee registration certificate (CRC)

Land holding certificate

Revenue records

Ration cards

Sale deed of the land

When the bank is satisfied by the collateral security provided by the applicant then

bank will sanction the loan.

There are two methods in which the bank will assess the amount of loan that can

be given on the collateral security provided by the applicant they are:

Bonding System

Scale of Finance

1. Bonding System:

44

In this system as a first step the property on which the applicant wishes to

borrow the loan is pledged in the name of the bank and is registered in the Office

of the Sub-registrar of the district.

And then Lean marking is be made of the documents so as to restrict the

applicant from selling/transferring the property to other person until the repayment

of the loan was made fully. The loan was based on the value of collateral security

provided.

2. Scale of Finance:

In this system scale of finance for each of the crops are fixed on the basis

of the cost that is involved in raising the crop and marketing it.

A district level meeting is held and the scale of finance is fixed by taking

the average of the cost that will accrue in the due course of raising the crop. The

member who attend this meeting are DC of the district, Lead bank Manager, All

the representatives of Co-operative banks and farmers representative. The

applicant is eligible to get 90% of the scale of finance and the rest 10% he has to

bear himself.

This type of financing is also called as “Seed to Seed” financing, as the

cost from buying the seed till harvesting the crop is taken into consideration while

fixing the scale of finance.

2.4 Three ‘R’s Of Credit

There are three basic considerations, which must be taken into account before a

lending agency decides to agency decides to advance a loan and the borrower decides to

borrow:

Returns from the Proposed Investment,

Repaying capacity, it will generate and

The Risk bearing ability of the borrower.

These are known as the Three R’s of credit.

45

2.4.1 Returns: The First Test

Emphasis here should be on additional returns and additional costs involved in

utilizing the borrowed funds. It involves working out the optimum combination of farm

enterprises and the returns thereof, resulting from the additional availability of resources

made possible through borrowed funds.

The following points

Estimates of returns should be made on the basis of resources including borrowed

funds.

Estimates of returns and costs should be made at the margin, not on an average.

Not only the MR=MC principles be kept in view while deciding the amount of

credit but the law of equi-marginal returns must be fully exploited.

The level of other resources should be considered before deciding upon the

amount of working capital tobe used. The possibilities of enhancing the level of

other most limiting resources to farm production should also be examined.

Due care should be taken that more than the required amount of money is not

advanced or obtained. At the same time, an inadequate amount of funds would not

serve the purpose. Funds should, therefore, be advanced neither inadequately or

excessively, but just the amount that can be profitably used.

Money needed for consumption purposes should also be considered for their

marginal value to the farm-family satisfaction against the marginal productivity of

the production loans.

2.4.2 Repaying Capacity-The Second Test

Although necessary, it is not sufficient to only analyse the productivity or the

additional returns that will accrue due to the borrowed funds. A loan may be productive

but still it may not generate sufficient income to leave funds sufficient enough to repay

the loan. Repaying capacity is the portion of the amount that a farm family will earn from

a year’s operation, which shall be available for the repayment of the loan. It should be

based on an estimate of anticipated income from all sources of the borrower during the

year. Repaying capacity, is therefore, worked out as a residual after meeting the

46

requirements of the family consumption and payment of other dues, debts and

repayments.

There can be two types of loans

Self liquidating,

Non-liquidating or partially self-liquidating loans.

The repaying capacity should be determined separately for self-liquidating and non-

liquidating loans.

In case of the self-liquidating loans the amount gets absorbed in the production

process in one year or production period and the formula here is:

Repaying capacity= Gross Income- [Living expenses+Working expenses (not including

loan) + taxes + other loans and payments].

In case of non-liquidating or partially liquidating loans, the resources acquired

with the funds are not directly consumer or are consumed over a number of years. They

do not become completely a part of the first year’s costs and the returns from the

investment are spread over a period of several years. For non-liquidating or partially

liquidating loans, the repaying capacity is worked out as

Repaying capacity= gross cash income- (all working expenses+ other loans+taxes

and payments due).

2.4.3 Risk Bearing Ability-The Third Test

It is necessary but again not sufficient that the credit should be productive and

generate sufficient repaying capacity. It is also essential that the borrower should be able

to withstand the shocks of probable financial losses. This is known as the risk-bearing

ability of the borrower. Assessment of risk-bearing ability is necessary because the

returns and repaying capacity analysis are made on the basis of averages. i.e., estimated

production, prices and costs etc. but these averages seldom hold true. Agricultural

business is subject to the vagaries of nature ad is exposed to many other hazards such as

pest attacks, diseases and price fluctuations. Variations in income occur as a rule rather

than an exception. The variability in income has, therefore, to be counted for in order to

arrive at a fairly stable and reliable estimate of the repaying capacity.

The overall variability in returns has been estimated to be 21% in Ludhiana

district. Such variability coefficients are needed especially by the financial organizations

in all parts of the country where they wish to operate. The gross income should be

47

deflated by this coefficient and the analysis should the follow the same pattern as for

repaying capacity.

2.5 Quantum of Finance:

The Quantum of finance that was available for the agriculturists was very less in

the earlier days. The quantum of finance now a day is fairly high. The amount of loan that

is fixed on the basis of the requirements and can also be customized to an extent. In

earlier days the amount of loan was fixed. At present the quantum of finance is arrived at

on the basis of the scale of finance or on the basis of collateral security provided by the

applicant.

2.6 Response of the Agriculturists:

Response of the agriculturists for the loans provided by the banks is good. A

better growth in the loans is observed. The progress of agricultural credit in India has

depended crucially on government intervention over the years i.e. package of incentives

and policy measures, which the RBI and the Centre formulate and implement.

The Government on June 18, 2004 had announced a package for doubling the

flow of credit to agriculture and allied activities in a period of three years commencing

from 2004-05 over the amount disbursed during the year 2003-04. The target and

achievement of agricultural credit flow during 2004-2010 is indicated below.

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Target 105,000 141,000 175,000 225,000 250,000 325,000

Achievement 125,309 180,486 203,296 254,657 287,147 -

*Amounts in crores

48

Table 2.2

(Fig 2.6)

It can be seen from the chart that the amount of the agricultural loan in 2008-09

raised to Rs.2,87,147 crores from Rs. 1,25,309 in 2004-05. Farmers are responing to the

new innovative types of laons that the commercial banks are inroducing year after. There

is a steep growth in the agricultural loans. The target for the 2009-10 has be set to Rs.

3,25,000.

The increase in bank credit in the last few years has been a heartening

phenomenon in India’s banking sector which reflects the economic reform policies

followed since 1990’s. The financial sector reform measures have yielded desired results

and strengthened financial positions of the banks.

2.7 Repayment period:

The Repayment period on agricultural loans are fixed by taking into consideration

the following aspect that effect the earnings of the borrower.

Cropping pattern

Duration of the crop

Farming system

Crop harvesting

49

Frequency of income generation

The repayments on the agricultural advances are affected by a number of factors

in India. Banks take into consideration of all the possible conditions that affect the

repayment by agriculturists. They are:

Weather factor affecting the yield of the crop

Price fluctuation

International demand

Expecting relief from the government

Diseases to the crops

Even after considering all the factors that affect repayment of the repayment of the

loans lent there will be default by the borrowers.

1. Default in case of Natural calamities:

Whenever a natural calamity occurs the banks seek permission of the

higher authorities for the extension of the repayment period or the banks

restructure the loan as per the Norms set by the RBI.

2. Default in case of Fraud:

Fraud in agricultural loans means using the agricultural loans given by the

banks to other purpose than agriculture. Whenever bank comes across this case

bank authorities take legal actions against the borrower.

3. Default in Normal course:

Default in the normal course is handled by issuing notices to the borrower.

3 notices are sent to the borrower. If the borrower does not respond to the notices

the banks will deal the case through court.

50

2.8 Interest Rates on the Loans:

Because of the high risk inherent in traditional farming activity, the prevalence of

high interest rates was the norm rather than an exception, and the concomitant

exploitation and misery that often resulted. Development of rural credit systems has

therefore, been found to be intrinsically very difficult. Interest rate is the main factor

which affects the borrowings of the loan.

Before 1991 banks used to charge different rates of interest according to their

level of business. After 1991 when financial reforms took place in India RBI took over

control on interest rates on agricultural loans. From 1991 the interest rates on agriculture

advances have been more or less stable.

2.8.1Changes in Interest Rates:

Usually floating rate of interest system is followed as per the RBI norms. But in

case of Crop Loans 7% rate of interest if fixed up to 3 lakhs. Interest rates on these

agricultural loans are linked to Prime Lending Rate fixed by the RBI.

The interest rates are also fixed on the basis of lead bank’s interest rates. Lead

bank is a bank which NABARD fixes as leader for each district. It is fixed by taking into

consideration the following:

Seniority

Customer Base

Infrastructure of the bank

Areas of service etc.

Each of the districts will have different lead banks on the basis of the above

criteria.

51

2.9 Growth in Agricultural Finance over the years:

Year Amount of Credit Growth Rate

1985-86 6805 0%

1986-87 7711 13%

1987-88 8471 10%

1988-89 8853 5%

1989-90 12328 39%

1990-91 10368 -16%

1991-92 11506 11%

1992-93 13800 20%

1993-94 16500 20%

1994-95 21113 28%

1995-96 24849 18%

1996-97 28653 15%

1997-98 34274 20%

1998-99 38054 11%

*Source Agriculture and co-operative department of India (www.agricoop.co.in)

52

(Fig 2.7)

(Table 2.3)

Agricultural finance has grown enormously over the years. It can be seen from

the above chart agriculture credit has received good response by the borrowers.

Agricultural credit which was are around 6805 crores in 1985-86 increased to 11506

crores in 1991-92 and it has further increased to 38054 crores by the end of 1998-99.

2.9.1 Different kinds of Loan to same Borrower:

After 1991 financial reforms an individual borrower is entitled to different kinds

of loans according to his needs. But before 1991 an individual was restricted to borrow

only one type of loan at a time. And he was not permitted to borrow another loan until he

repays the borrowed loan.

This provision has enabled the borrower to borrow loans for different purposes

like Building tanks, land development loan, farm mechanization loans with traditional

crop loans. This is the main reason for the improvement in the borrowings of agricultural

credit.

53

(Fig 2.8)

Agriculture credit has been growing since the independence of the country. It can

be seen from the above data that agricultural credit is growing at a rate of 14% at an

average over the years. Agriculture advances are expected to grow at 15% to 20% in the

present fiscal year of 2010-11.

Agricultural credit registered the growth of 39% in the year 1989-90 where the

amount of loan provided was Rs. 12328 crores. But in 1990-91 it registered a negative

growth of -16%. After 1991 financial reforms agricultural credit has grown at rate of 14%

whereas it was growing at 13% before 1991.

Agriculture is given more importance now a day to attain the self sufficiency in

food production. So government of India is planning to deploy new schemes of financing

for agriculture which enables the agriculturists to raise the crops without any fear of

losing the money which they have invested in the crops.

Agriculture has undergone lot of changes in the past few decades. Especially after

green revolution need for finance increased and the banks have come up with the new

54

type of financing for agriculturists. The new types of agriculture finance which came up

after the green revolution and white revolution are:

Union Green Cards

Union White Cards

Agriculture/weather insurance scheme

2.10 Share of Institutional Financing:

The institutional finance market for agriculture is generally shared by three

institutions they are:

1. Co-operative banks

2. Commercial banks

3. Regional Rural banks

These three institutions play a very important role in providing agricultural

finance to the farmers.

It can be seen from the below chart that share of commercial banks has

increased by 35% to 68% in 2007 which was at 33% during 1992-93. This is because of

the attractive schemes introduced by the banks during the decade.

The share of co-operative banks has declined by 40% to 22% in 2007 against

62% in 1992-93. The reason behind this are:

Poor management of co-operative societies

Mismanagement of funds

Frauds

The share of regional rural banks’ increased marginally by 5% to 10% in 2007 against 5%

in 1992-93.

55

2.11 Agriculture Officer:

Agriculture Officer is a officer who is responsible for all the loans and advances

which are provided by the banks. He plays a very key role in providing assistance to the

agriculturists with regards to following:

Sanction of loans

Recovery of loans

Providing information about various schemes

The role of agricultural officer was restricted to above function before the

financial reforms were announced. Since the announcement of financial reforms the role

of agriculture officer has become an important one.

56

(Fig 2.9)

Now the role of the agriculture officer is not just confined to the above said

functions. His role has changed from just providing loans to the agriculturists to “Rural

developer”. New age agriculture officers roles are more demanding. They are:

Financial education

Timely delivery of credit

Technological education

Debt Restructuring

Cropping education

About Debt Relief

o Removing the wrong notion

o Regenerating income to the bank

Agriculture officer has become the bridge between the banks and agriculturists.

His increased role has helped the growth of innovative techniques of financing the

agriculture.

2.12 Micro-Finance - an Alternative Rural Credit Delivery Mechanism

Concentration of monopolistic power, higher interest rates on loans, insistence on

collaterals and exploitation through under-valuation of collaterals has been the trademarks

of the informal financial sector. The inherent limitations of the formal and informal

financial sectors in providing financial services to the needy and poor have led to the

emergence and extension of micro-credit programs in the developing world. The micro-

credit program was initiated with the objective of providing poor people with credit

removed collaterals.

Thus, micro credit has been defined as the extension of small loans to be given in

multiple doses based on the absorption capacity of the needy beneficiaries, who are too

poor to qualify for formal bank loans, as they have no assets to offer as collateral security

against loans.

57

2.12. 1 Self Help Group (SHG) and Micro-credit:

Micro-credit has worked largely through SHGs in general and women groups in

particular. Since the SHG is a small group of 10 to 20 persons drawn from relatively

homogenous backgrounds, the members, who join the group, know what benefit they

would attain from the group through micro-credit. Micro-credit has to be utilized in such

a way that it benefits the SHGs to improve the quality of life of their members and their

productivity to earn a sustainable income. The SHGs need to firm up their financial and

economic norms meant for selection of appropriate beneficiaries and subsequent

disbursement of credit to the needy.

The borrowing member chooses economic activities for income-generation

purposes and knows clearly the goals or objectives he has to attain for his own sustenance

and stability of the group which he/she belongs to. Here, the members through

participative decision-making process prioritize their goals in terms of their urgency. All

the members are aware of their individual needs so as to converge their needs with the

group objective. They can utilize team effort in addressing their problems and issues

while approaching their target. Unity, group effort and team-work help them in achieving

their goals

2.12.2 Models of Micro-Finance

There are several models of micro-finance prevalent in India. Out of these, the

most important ones are –

1. Model I where SHGs are financed directly without the intervention/facilitation

of any Non-Government Organization (NGO).

2. Model II, wherein SHGs are financed directly with the facilitation extended by

formal or informal agencies Self-Help Promoting Institutions8 (SHPIs) viz.,

Government, Commercial Banks and Micro Finance Institutions (MFIs) like

NGOs, Non Bank Financial Intermediaries (NBFIs) and Co-operative

Societies.

58

3. Model III financing takes place through NGOs and MFIs as facilitators and

financing agencies.

4. Model IV is the Grameen Bank Model, similar to the model followed in

Bangladesh.

In India, Model II of micro-finance constitutes as much as three-fourths of the

total micro-financing where SHGs are formed and nurtured by facilitating agencies like

the Government and NGOs and are linked directly with banks for the purpose of

receiving credit.

The SGSY of delivering micro-finance is based on this linkage approach which is

quite unique to India. The linkage is vital for securing the SHGs timely micro-finance.

The following chart indicates that micro-credit adds to the group corpus and is

sourced from Government, NGOs, Banks etc. While funds from the Government enrich

the group corpus by way of subsidy, the NGOs and Banks supply credit as per the needs

of the group. The group is then involved in inter-loaning activities for consumption and

production purposes. By pursuing productive economic activities, the group enhances its

income, repays the loan amount to the bank and spends on basic health, education etc so

as to drive himself out of the poverty trap.

The Mechanism of Credit provided by Self Help Groups (Fig 2.10)

59

Agriculture loans

SGSY Model of Micro-finance:

A Committee of the Planning Commission on poverty alleviation and employment

generation programs of the GOVERNMENT OF INDIA recommended to restructure the

earlier self-employment programs and redesign the credit delivery system in the rural

areas. This led to the introduction of a micro-finance driven self-employment program

called Swarnjayanti Gram Swarozgar Yojana (SGSY) on April 1, 1999 in all the rural

areas of the country.

SGSY being a micro-finance driven rural employment generation program seeks

to bring the needy rural poor families above the poverty line through an integrated action

of various district and village level agencies – District Rural Development Agencies

(DRDAs), banks and other Self-Help Promoting Institutions (SHPI) like Non

Government Organizations (NGOs), Panchayati Raj Institutions, Rural Branches of

Commercial Banks, Regional Rural Banks, Co-operatives, Corporate bodies, private

60

sector companies and individuals. The program design of SGSY emphasizes the linkage

between banks and SHG and envisages enhancement of self-employment avenues for

rural poor. While provision of credit at multiple doses is an important focus of the

program, subsidy is treated as an enabling element.

The micro-finance component of the program is referred to as a small-scale

financial intermediation, inclusive of savings, credit, insurance, business services and

technical support.

The SGSY envisages increasing outreach of micro-finance through small and

informal SHGs formed with the support of 5 to 20 persons from relatively homogenous

economic backgrounds. Micro-finance is extended under the program to only those SHGs

which have passed a subjective grading test and are involved in regular thrift and credit

activities for not less than six months. To assess whether SHGs can be considered for

financial assistance, grading tests are done in phases considering the maturity of the

groups, member composition, regularity and participation in meetings, regularity and

quantum of savings, utilization of loans, etc. These activities are mandatory for

inculcating banking habits in unaccustomed members of the SHGs.

To improve the productivity of the SHGs, the program tries to firm up the

financial and economic norms meant for selection of appropriate beneficiaries and

subsequent disbursement of credit to them. The borrowing member under SGSY chooses

economic activities for income-generation purposes which are already notified by the

State Governments concerned to be considered for finance by the formal banking

institution. Here, the members are expected to prioritize their goals in terms of their

urgency through participative decision-making process. Individual needs of all the

members of an SHG are expected to converge with the objectives of their group.

The corpus of a group consists of its cash balances, all outstanding loans, interest

on loans, its savings with the bank and interest on balance in the savings bank account.

While funds from the Government enrich the group corpus by way of subsidy, the NGOs

and Banks supply credit as per the needs of the group. The group is then involved in inter-

loaning activities for consumption and production purposes. By pursuing productive

economic activities, the group enhances its income, repays the loan amount to the bank

and spends on basic health, education etc. so as to drive itself out of the poverty trap.

61

2.12.3 SGSY in India: Performance and Outreach

An analysis of the trend of SHG formation under SGSY between 2000-01 and

2006-07 in the country indicates that the number of SHGs formed in 2006-07 (228,290)

was only about 44 per cent that of the number of SHGs formed during 2001-02

(5,15,691). However, the number of SHGs assisted increased more than four-fold from

26,317 in 2001-02 to 128,417 during 2006-07. Accordingly, from being merely 5.1 per

cent in 2001-02, the number of SHGs assisted as a percentage of number of SHGs formed

increased to about 56.25 per cent during 2006-07.

SHG Formed SHG Assisted % SHG Assisted to Formed

2001-02 2006-07 2001-02 2006-07 2001-02 2006-07

515691 228290 26317 128417 5.10% 56.25%

62

(Table 2.4)

(Fig 2.11)

The distribution of SHGs formed and assisted under the programme across the

various States of the country, however, is quite uneven. The number of SHGs formed

during the two financial years, 2001-02 and 2006-07, declined in 13 out of 18 States

which are under review. The States of Andhra Pradesh, Uttar Pradesh, Maharashtra,

Kerala, Orissa and Madhya Pradesh recorded substantial decline in the number of SHGs

formed between 2001-02 and 2006-07.

The decline is quite conceivably due to the setting up of alternate micro-finance

bodies run by steadily evolving NGOs and NBFIs which stress on financing credit to the

poor without any subsidy component attached to it. Indeed, the emergence of alternate

micro-finance delivery models may have overshadowed the importance of the subsidy-led

credit supply model under SGSY. Contrary to this, in States like Orissa, NGOs are yet to

become vibrant and as of now, SGSY has no alternatives.

2.13 Debt Waiver & Relief Scheme:

The Finance Minister, in his Budget Speech for 2008-2009, announced a Debt

Waiver and Debt Relief Scheme for farmers.

The Scheme covered direct agricultural loans extended to ‘marginal and small

farmers’ and ‘other farmers’ by Scheduled Commercial Banks, Regional Rural Banks,

Cooperative Credit Institutions (including Urban Cooperative Banks) and Local Area

Banks.

‘Direct Agricultural Loans’ means Short Term Production Loans and Investment

Loans provided directly to farmers for agricultural purposes. This also included such

loans provided directly to groups of individual farmers (for example Self Help Groups

and Joint Liability Groups), provided banks maintain disaggregated data of the loan

extended to each farmer belonging to that group.

63

(Fig 2.12)

‘Short Term Production Loan’ means a loan given in connection with the raising

of crops which is to be repaid within 18 months.

‘Investment Loan’ means

(a) investment credit for direct agricultural activities extended for meeting outlays

relating to the replacement and maintenance of wasting assets and for capital

investment designed to increase the output from the land, e.g. deepening of wells,

sinking of new wells, installation of pump sets, purchase of tractor / pair of

bullocks, land development and term loan for traditional and non-traditional

plantations and horticulture; and

(b) Investment credit for allied activities extended for acquiring assets in respect

of activities allied to agriculture e.g. dairy, poultry farming, goatery, sheep

rearing, piggery, fisheries, beekeeping, green houses and biogas.

These debt waiver and relief scheme was extensively appraised by the farmers

who were in trouble because of the unfavorable monsoon and crop failure etc. These

schemes relieved many of the farmers from the loans that they were unable to pay back.

However these debt relief schemes have some adverse effect on the agriculture

lending from the financial institutions and on the farmers also. They are:

1. The mindset of the farmers has completely changed. Even a borrower with

excess of income is not willing to repay the debt he has borrowed from the

financial institution.

2. It will change the thinking process of the prompt borrowers. And in future

they also tend to default in expectation of such schemes.

3. The average repayment on agricultural advances has fallen down on an

average by 10% to 15%.

4. The financial institutions are facing liquidity crunch in short term as the

advances they made are not repaid by the farmers.

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5. Even though the demands for agricultural advances increase banks will face

shortage of funds to lend.

6. The amount debt waived or relieved will be paid by the government to the

banks but these payments take a long duration.

7. Farmers have come to conclusion that they should have some amount of debt

in the bank and if they default the government will waive their loans.

2.14 Capital formation in Agriculture:

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(Table 2.5)

Capital

formation in Indian

agriculture is undertaken by

both government

and the private sector.

However, there is an

economic distinction

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Rs. in Crores

Year Public Sector Private Sector Total

1980-81 12,521 14,929 27,450

1981-82 12,078 11,153 23,231

1982-83 11,928 12,996 24,924

1983-84 11,944 14,215 26,159

1984-85 11,562 12,367 23,929

1985-86 10,509 12,346 22,855

1986-87 9,848 12,339 22,187

1987-88 10,193 16,700 26,893

1988-89 9,488 14,535 24,023

1989-90 7,968 15,929 23,897

1990-91 7,882 27,691 35,573

1991-92 6,998 15,340 22,338

1992-93 7,333 21,136 28,469

1993-94 8,096 17,460 25,556

1994-95 8,949 15,428 24,377

1995-96 8,731 15,854 24,585

1996-97 8,373 18,324 26,697

1997-98 6,872 21,778 28,650

1998-99 6,926 21,440 28,366

1999-2000 7,716 35,757 43,473

2000-01 7,155 31,580 38,735

2001-02 8,746 38,297 47,043

2002-03 7,962 38,861 46,823

2003-04 9,374 35,758 45,132

2004-05 10,267 38,309 48,576

between these. Almost all of the public investment is in the nature of a public good, i.e., it

is non-excludable, and for that reason unlikely to be undertaken by the private sector.

Including roads, embankments and irrigation networks, public investment is a vital input

into agricultural production. Recognition of its importance had made it central to planning

for agricultural growth in the past.

The capital formation in agriculture has gained importance after nationalization of

the banks. After the financial reforms took place the amount of capital formation took

place in the private sector is very large compared to public capital formation. However

the public investment in the agriculture is more volatile compare to the public investment.

This is because private capital formation can be surmised from the very fact that it is

undertaken by profit-oriented agents.

3. FINDINGS:

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(Fig 2.13)

Both the commercial banks and co-operative banks advance credit to agriculture.

First bank advances short-term and medium term loans while the second bank advances

long-term loans. The Reserve Bank of India as the Central bank of the country took lead

in making credit available to agriculture through these banks by laying down suitable

policies.

Agriculture advances have improved over the years by the effort of Government

and the by Innovative credit facilities given the banks. Agricultural financing is under

priority sector for lending purpose.

By the study of “Emerging Trends in Agricultural Finance” we can find the

agriculture advances or credit has come a long way from independence. The changes we

can find are as follows:

Types of Loans available:

In olden days agriculture credit of loan meant only traditional crop loans

and short term loans but the concept of loan has changed to advances. Loans or advances

available now days are as follows:

Traditional crop loans

Term loans

Project appraisal loans (long term)

Lift Irrigation Schemes

Warehouse financing

Finance for building Cold Storages

Rural Electrification

Floriculture

Ornamental Plant loans

Agri-clinics

Self Help Groups

Organic Farming

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Precession Farming

Drip Irrigation

Land Development loans

These are the various schemes available for agriculture now.

New Plans for agriculture advances:

Even though the overall share of institutional finance has increased more

than the non-institutional finance, the debt profile of rural population indicates that even

today unorganized sector is their main source of finance.

So banks are now aiming at reducing the share of unorganized sector in the

rural population’s debt profile. Banks have a new plan to reduce the dependence of rural

population on unorganized sector by providing loans to agriculturists.

In this type of loan banks provide loan to applicants at a lower rate than

professional money lenders to pay off the loan which the applicant has borrowed from

money lender. And banks provide more time duration to pay back that loan. By this way

banks are aiming to reduce the unorganized sectors share in the debt profile of rural

population.

Criteria for Financing:

Banks used to follow Bonding system for providing the loans in the

amount of loan to be given was decided on the value of collateral security provided by the

applicant.

Now banks are following Scale of Finance as a criterion for financing

which takes into account the cost of cultivation to decide the amount of loan to be given.

90% of the cost is given as loan to the applicant.

Multiple loans:

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Banks provide multiple loans to the same borrower for different purposes.

But this loan depends upon the credit worthiness and the track record of the applicant.

Role of Agriculture Officer:

The role of agriculture officer has changed a lot. From mere sanctioning of

loan his role has been changed to “Rural Developer”. Agriculture officer role was

limited in the olden days to just processing of application for loans, sanctioning of

agriculture loans and recovering those loans.

But now a day the role has evolved into a more complex one. His modern roles

are as follows:

Educating the applicants about

Technological advancement

New cropping techniques

New schemes of finance

Debt restructuring in case of natural calamities

Timely delivery of credit

The introduction of debt waiver schemes has also changed his role. Now he has to:

Remove the wrong notion about these schemes

Regenerate repayments

See that eligible borrowers get the advantage of the scheme

Corporate farming:

The national agricultural policy envisages that "private sector participation will be

promoted through contract farming and land leasing arrangements to allow accelerated

technology transfer, capital inflow and an assured market for crop production, especially

of oilseeds, cotton and horticultural crops." Contract farming is defined as a system for

producing and supplying agricultural/horticultural produce under forward contract

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between producers/suppliers and buyers. The essence of such an arrangement is the

commitment of the producer/seller to provide an agricultural commodity of a certain type,

at a time and price and in the quantity required by a known and committed buyer.

Debt Waiver/Relief Schemes:

Debt Waiver/Relief Schemes was introduced by the Government of India

to help the poor Farmers who were unable to the loan that they borrowed because of

failure of the monsoon and in turn failure the crops.

This scheme was introduced for helping poor but this scheme has

adversely effected the financial institutions in the following ways:

Repayment of agricultural loans has fallen down by 10%-15%.

It will change the mindset of the prompt payers also further resulting in the fall of

repayment.

Even though the demands for agricultural and other advances increase banks will

face shortage of funds to lend.

The amount debt waived or relieved will be paid by the government to the banks

but these payments take a long duration.

Banks may not be willing to lend to agriculture as they are not so attractive.

Especially private sector banks will turn away from agricultural lending.

Agriculture finance in India is growing at an average of 14% per year. This is a

healthy sign for the economy of India because in India about 50% to 60% of the

population depends upon agriculture for their livelihood.

In the fiscal year 2010-11 the agricultural advances are expected to grow by 15%

to 20%.

4. SUGGESTIONS AND CONCLUSION:

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4.1 SUGGESTIONS:

Though the outreach and the amount of agricultural credit have increased over the

years, several weaknesses have crept in which have affected the viability and

sustainability of these institutions. Furthermore, antiquated legal framework and the

outdated tenancy laws have hampered flow of credit and development of strong and

efficient agricultural credit institutions.

A study of performance of agricultural credit in India reveals that though the

overall flow of institutional credit has increased over the years, there are several gaps in

the system like inadequate provision of credit to small and marginal farmers, paucity of

medium and long-term lending and limited deposit mobilization and heavy dependence

on borrowed funds by major agricultural credit purveyors. These have major implications

for agricultural development as also the well being of the farming community. Efforts are

therefore required to address and rectify these issues. Although investments in rural

infrastructure and other key public services are crucial, it is equally critical to develop

suitable institutional arrangements for their delivery.

Rural financial institutions are not well integrated with agriculture support

systems like R&D, Extension, supply chain and processing, and their credit policy is too

crop centric. So non-crops and other high value activities are not taken care of. Only

traditional crops have credit access; most banks give out only 15% or less of their total

portfolio to the Agri-sector as against the mandatory 18%.

A key difference in approach would have to be the much greater involvement of

region specific market participants, and of private sector suppliers in all these activities,

and credit suppliers ranging from public sector banks, cooperative banks, the new private

sector banks and micro-credit suppliers, specially self help groups.

According to the Confederation of Indian Industry, Indian agriculture suffers mainly

because of:

expensive credit,

a distorted market,

intermediaries (who increase cost rather than add value),

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controlled prices and poor infrastructure,

poor irrigation facilities,

use of traditional technology and practices,

farmers’ poor economic status,

fragmented landholdings,

lack of post harvest infrastructure and

lack of farm extension

The following are the list of suggestion to improve the credit flow to the agriculture and

in turn improve the condition of Indian agriculture:

The banks are very old organizations they do not require much of advertisement

but the banks should think to improve the customer relationship, which will help

them to retain old customers and build some good customers in the future.

Banks and Government need to re-evaluate their pre-conceived notions about the

commercial opportunities in serving the rural and agricultural sector.

Banks must also strengthen their credit delivery systems for Rural India. Today,

finance and banking systems are very strong. It is time to focus on people at the

bottom of the pyramid and align all sections with the systems that have been put

in place.

The banks should try and increase the efficiency of the employees as still some of

customers are not happy with the efficiency of the banks. In view of various

changes in the Indian rural canvas over the past few years, there is need for a shift

in the thrust areas for investment credit to agriculture.

Apart from the traditional investments such as land development and irrigation,

increased focus needs to be accorded to the entire supply chain management of

agriculture products, reform of agriculture markets and public management in

agricultural infrastructure.

The bank has got good set customers as they are doing good in their businesses

and does not face any problem in the repayment of loan; hence the bank may be a

bit lenient towards who are genuinely facing losses and are unable to pay back the

loan amount by reducing the amount or reducing the interest on the amount etc.

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State Governments need to lay emphasis on legal provisions/computerization of

land records, legal support for recovery, reforms in agricultural marketing,

improving credit absorptive capacity through supporting infrastructure,

strengthening infrastructure, improving extension network and developing

marketing links.

Water management policies and investment in water conservation be designed

jointly by the State Governments and banks for improving productivity in

agriculture.

The banks have the rates of interest which are acceptable by the customers but the

banks can be more competitive in this case. This move would make the old

customers happy, and attract new customers.

With a view to strengthening the institutional credit mechanism, short-term credit

should be integrated with term credit and efforts be made to reach the ‘unreached’

areas, promote supplementary credit delivery channels, outsource monitoring

services, and provide loan support for diversified agriculture.

The instant financing service needs more attention from the banks as it’s not been

satisfying customers as it should.

The State Governments and NABARD should make investments in participatory

community projects and in soil treatment to make wasteland and fallow land

cultivable.

The highest number of sale in the lending sector are of short term, the banks

should try and make it more simple and attractive.

Government of India/State Governments and organizations engaged in agricultural

research and development (R&D) to reorient R&D activities.

One other important area is the strengthening of the network of support services

for small farmers related to information, credit, and extension.

Since cooperative banks play a very crucial role in delivering farm credit, the

health of these institutions is very important to be able to reach out to the needy

farmers.

Reforms needed in co-operative societies

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Revival and restructure of CCS.

Financial restructuring & assistance.

To make co-operatives truly democratic & member driven.

4.2 CONCLUSION:

The study made on “Emerging Trend in Agricultural Finance has shown that there

is an upward trend in Indian agricultural scenario. Agricultural finance was suffering in

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India in the pre-nationalization era. After the nationalization of banks the agricultural

finance gained importance. Reserve Bank of India brought agricultural finance under

priority sector lending to improve the condition of agriculturists. And the change made by

the Reserve Bank of India has yielded return in terms of increased agricultural lending

and assistance.

Agricultural credit has played a vital role in supporting agricultural production in

India. The Green Revolution characterized by a greater use of inputs like fertilizers, seeds

and other inputs, increased credit requirements which were provided by the agricultural

financial institutions.

Agriculture credit has much more wide scope now than the pre-nationalization

era. Agriculture now includes

Floriculture

Horticulture

Medical Plants

Animal Husbandry.

Many allied activities which are related to agriculture and are necessary for

agriculture have also been brought under the scope of agriculture credit. For example,

Lift irrigation schemes

Building of Warehouses

Building of Cold storages,

Land development etc.

Agriculture finance gained more attention after financial reforms that took place

in 1991. These reforms helped agriculture to get the advantage of new technology,

innovative type of financing and scientific methods of cropping. These reforms in 1991

helped agriculture in getting funds from foreign countries and they also helped in

exporting of the agricultural produce to other countries enabling them get good returns on

the investment. Most agricultural products can be freely imported and exported, except

for a limited list of items falling under the negative list and free import of capital goods,

including used ones in food processing.

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Two innovations, viz., Micro-finance and the Kisan Credit Card (KCC) Scheme

have emerged as the major policy tools in addressing the problems associated with the

distributional aspects of rural credit in recent years.

Micro finance:

Micro finance is the latest trend in agricultural finance. In India micro finance

linked with the both Self Help Groups and with financial institutions. Micro finance has

helped small and marginal farmers to full fill their needs of micro credit, which need for

different purposes. Micro finance has enabled many of the agriculturists to make us of

new technology for the sowing and harvesting of the crops.

Another important aspect of the micro credit is Self Help Groups. These groups

are formed by people with the same interest and similar background. These groups

involve in collecting deposits from the members and internal loaning of those deposit

with a very marginal rate of interest. These groups can also obtain group loan from

commercial banks. This has enabled the farmers to raise money for their needs at a very

little cost.

We can also conclude that there are a lot of untouched and unexplored areas for

fulfilling social and professional commitments. While commercial banks’ overall

financial position is, by and large, sound, the financial viability of their rural branches and

also the rural operations of RRBs and rural cooperative banks are weak. Adequate

attention to revamping urgently the operations and financial position of these institutions

is critical. Given the large physical branch presence of RRBs and cooperative banks in

rural India, their poor performance on capital adequacy, profitability, and asset quality

indicate serious issues across critical financial parameters. Systematic and drastic changes

in the way RFIs are operating need to be made urgently if these institutions are to play an

effective role in the provision of rural finance services.

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