CHAPTER-1 1.

1 INTRODUCTION
National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India based in Mumbai, Maharashtra. It has been accredited with "matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India". NABARD was established on the recommendations of Shivaraman Committee, by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agencies to provide credit in rural areas. NABARD operates through its Head Office at Mumbai,28 Regional Offices located in the State Capitals, a Sub Office at Port Blair and 1 special cell located at Srinagar and 360 District Offices. NABARD has on its roll around 2968 professionals supported adequately by a number of other staff. y State Co-operative Banks (SCBs): The SCBs are a link between the cooperative organizations with the RBI, NABARD and the state governments. They have to co-ordinate, control and regulate the working of Central Co-operative Banks (CCBs) and also provide financial and other resources and investment channels to the CCBs. y District Central Co-operative Banks (DCCBs): The DCCBs are responsible to finance the Primary Agriculture Credit Societies (PACS) and other regional cooperative societies. Membership of DCCBs is open to all types of co-operative societies and individuals. DCCBs are governed by a board of 12-15 in number, elected by members generally for a period of 3 years.
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y Primary Agriculture Credit Societies (PACS): PACS are the societies which provide credit to the borrowers for short and medium term credit for agriculture and allied activities. They cover generally a small area of 200 hectares. PACS also provide backward and forward integration

Rural Innovation: NABARD's role in rural development in India is phenomenal.National Bank For Agriculture & Rural Development (NABARD) is set up as an apex Development Bank by the Government of India with a mandate for facilitating credit flow for promotion and development of agriculture, cottage and village industries.  The credit flow to agriculture activities sanctioned by NABARD reached Rs 1,574,800 million in 2005-2006. The overall GDP is estimated to grow at 8.4 per cent.  The Indian economy as a whole is poised for higher growth in the coming years. Role of NABARD in overall development of India in general and rural & agricultural in specific is highly pivotal.  Through assistance of Swiss Agency for Development and Cooperation, NABARD set up the Rural Infrastructure Development Fund.  Under the RIDF scheme Rs. 512830 million have been sanctioned for 2,44,651 projects covering irrigation, rural roads and bridges, health and education, soil conservation, water schemes etc.

Classification of Agriculture Credit:Agriculture credit may be further classified into the following ways. 1) Short-term credit 2) Medium-term credit 3) Long-term credit
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NABARD and its Role in Training:There are different training center of NABARD Bank National Bank Staff College, Lucknow National Bank Training Centre, Lucknow Zonal Training Centre, Hyderabad Bankers Institute of Rural Development (BIRD), Mangalore Bankers Institute of Rural Development (BIRD), Bolpur Bankers Institute of Rural Development (BIRD), Lucknow

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1.2 LITERATURE REVIEW

Nilakantha Rath:NABARD has crossed a disbursement of Rs. one lakh crore for the creation of rural infrastructure in the country from out of its Rural Infrastructure Development Fund (RIDF), a statement issued here said. The disbursal includes loans to 28 states and the union territory of Puducherry as well as to the National Rural Roads Development Agency to support the rural roads component of Bharat Nirman, the release said.

Dr.Swaminathan:NABARD's support is being provided to various forms of microfinance institutions covering mFIs, second tier mF lending institutions, Grameen bank replicators, NGO-mFIs, SHG Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA) to NGO-mFIs on a very selective basis. The RFA is generally provided for a period of 5 to 6 years and is necessarily to be used for on lending to mF clients (SHGs or individuals). In addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for partly meeting the salary of field level staff, infrastructure development and operational deficits during the initial years.

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1.3 HYPOTHESIS
y Identifying the emerging supervisory issues in the functioning of cooperative banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system, management practices, frauds, etc y maintain expert staff to study all problems relating to agriculture and rural development and be available for consultation to the Central Government, the Reserve Bank, the State Governments and the other institutions engaged in the field of rural development.

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1.4 OBJECTIVES

NABARD was established in terms of the Preamble to the Act, "for providing credit for the promotion of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting IRDP and securing prosperity of rural areas and for matters connected therewith in incidental thereto". The main objectives of the NABARD as stated in the statement of objectives while placing the bill before the Lok Sabha were categorized as under : 1. The National Bank will be an apex organisation in respect of all matters relating to policy, planning operational aspects in the field of credit for promotion of Agriculture, Small Scale Industries, Cottage and Village Industries, Handicrafts and other rural crafts and other allied economic activities in rural areas 2. The Bank will serve as a refinancing institution for institutional credit such as long-term, short-term for the promotion of activities in the rural areas 3. The Bank will also provide direct lending to any institution as may approved by the Central Government. 4. The Bank will have organic links with the Reserve Bank and maintain a close link with in. 5. To study details about the functions of NABARD. 6. To study the benefits of NABARD towards agriculture sector. 7. To analysis the role of NABARD in overall development of INDIA

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1.5 METHODOLOGY
y The study of Service Marketing in Banks requires technical & conceptual understanding of term service marketing for which a good deal of information need to collected. y Researcher collects secondary data through various books and also from websites (Internet). y Secondary Data are those, which have already been collected by data is collected from the following sources. a) Reports of NABARD BANK b) Magazines c) Journals d) Newspapers someone

else and which have already been passed through the statistical process. This

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1.6 SWOT ANALYSIS

1. STRENGTHS Its subscribed and paid-up Capital was Rs.100crore which was enhanced to Rs.500crore, contributed by the Government of India (GOI) and RBI in equal proportions. Currently it is Rs.2000crore, contributed by GoI (Rs.550crore) and RBI (Rs.1450crore. The credit flow to agriculture activities sanctioned by NABARD reached Rs 1,574,800 million in 2005-2006. The overall GDP is estimated to grow at 8.4 per cent. 2. WEAKNESSES There are 13 attributes in which the SHGs asses themselves to be weak or deficient. Topping the list is the weakness lack of interest among some members, presumably regarding participating in meetings or other activities of the groups with 99 of the SHGs stating this. 52 SHGs have stated that members lack time to participate in activities, 62 groups have the problem of some members lacking responsibility.

3. OPPORTUNITIES
Nabard has effectively brought in a number of innovations in the rural creditdomain. To quote a few: SELF HELP GROUPS, FARMER CLUBS, RURAL INFRASTRUCTURE DEVELOPMENT FUND, WATERSHED DEVELOPMENT, KISSAN CREDIT CARD, DISTRICT RURAL INDUSTRIES PROJECT CLUSTER DEVELOPMENT PROGRAMME AND RURAL INNOVATION FUND
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4. THREATS
For any collective entity or organization to survive, it is necessary for the members of the collective or organization to have the capacity to identify threat factors and take steps to ensure that these threats do not affect sustainability. In the SWOT exercise, the SHGs have identified about 14 threat factors which they perceive as worthy of their attention.

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CHAPTER-2

2.1 INTRODUCTION
National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India based in Mumbai, Maharashtra. It has been accredited with "matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India". NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with: 1. Providing refinance to lending institutions in rural areas 2. Bringing about or promoting institutional development and 3. Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also: y Acts as a coordinator in the operations of rural credit institutions y Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development y Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development y Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development y Acts as regulator for cooperative banks and RRBs y Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development
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2.2 HISTORY OF NABARD BANK

NABARD was established on the recommendations of Shivaraman Committee, by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agencies to provide credit in rural areas. The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD) set up by the RBI under the Chairmanship of Shri B Sivaraman in its report submitted to Governor, Reserve Bank of India on November 28, 1979 recommended the establishment of NABARD. The Parliament through the Act 61 of 81 approved its setting up. The Committee after reviewing the arrangements came to the conclusion that a new arrangement would be necessary at the national level for achieving the desired focus and thrust towards integration of credit activities in the context of the strategy for Integrated Rural Development. Against the backdrop of the massive credit needs of rural development and the need to uplift the weaker sections in the rural areas within a given time horizon the arrangement called for a separate institutional set-up. Similarly. The Reserve Bank had onerous responsibilities to discharge in respect of its many basic functions of central banking in monetary and credit regulations and was not therefore in a position to devote undivided attention to the operational details of the emerging complex credit problems. This paved the way for the establishment of NABARD. CRAFICARD also found it prudent to integrate short term, medium term and long-term credit structure for the agriculture sector by establishing a new bank. NABARD is the result of this recommendation. It was set up with an initial capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the Government of India and the RBI.

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2.3 ABOUT NABARD

The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD), set up by the Reserve Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman, conceived and recommended the establishment of the National Bank for Agriculture and Rural Development (NABARD). The Indian Parliament through the Act 61 of 1981 approved the setting up of NABARD. The Bank which came into existence on 12 July, 1982 was dedicated to the service of the Nation by the Humble Prime Minister, Smt Indira Gandhi on 5 November, 1982 NABARD is set up by the Government of India (GoI) as a development bank with the mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas, as also for matters connected therewith and incidental thereto. Its subscribed and paid-up Capital was Rs.100crore which was enhanced to Rs.500crore, contributed by the Government of India (GOI) and RBI in equal proportions. Currently it is Rs.2000crore, contributed by GoI (Rs.550crore) and RBI (Rs.1450crore). The Management of NABARD vests with the Board of Directors. The Board of Directors of NABARD comprises the Chairperson, Managing Director, representatives of RBI, GoI, State Governments and Directors nominated by the GoI. NABARD is a specialized financial institution in the field of agriculture and rural development. It has been designed specifically as an organizational device for providing undivided attention, forceful direction and pointed focus, to the credit problems of rural sector. Half of NABARDs capital was contributed by RBI and other half by the government. It has enough financial resources to support agricultural and rural development programs.

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NABARD operates through its Head Office at Mumbai,28 Regional Offices located in the State Capitals, a Sub Office at Port Blair and 1 special cell located at Srinagar and 360 District Offices. NABARD has on its roll around 2968 professionals supported adequately by a number of other staff. y State Co-operative Banks (SCBs): The SCBs are a link between the cooperative organizations with the RBI, NABARD and the state governments. They have to co-ordinate, control and regulate the working of Central Co-operative Banks (CCBs) and also provide financial and other resources and investment channels to the CCBs. y District Central Co-operative Banks (DCCBs): The DCCBs are responsible to finance the Primary Agriculture Credit Societies (PACS) and other regional cooperative societies. Membership of DCCBs is open to all types of co-operative societies and individuals. DCCBs are governed by a board of 12-15 in number, elected by members generally for a period of 3 years. y Primary Agriculture Credit Societies (PACS): PACS are the societies which provide credit to the borrowers for short and medium term credit for agriculture and allied activities. They cover generally a small area of 200 hectares. PACS also provide backward and forward integration

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2.4 STRUCTURE OF NABARD

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2.5 RURAL INNOVATION

 NABARD's role in rural development in India is phenomenal.National Bank For Agriculture & Rural Development (NABARD) is set up as an apex Development Bank by the Government of India with a mandate for facilitating credit flow for promotion and development of agriculture, cottage and village industries.  The credit flow to agriculture activities sanctioned by NABARD reached Rs 1,574,800 million in 2005-2006. The overall GDP is estimated to grow at 8.4 per cent.  The Indian economy as a whole is poised for higher growth in the coming years. Role of NABARD in overall development of India in general and rural & agricultural in specific is highly pivotal.  Through assistance of Swiss Agency for Development and Cooperation, NABARD set up the Rural Infrastructure Development Fund.  Under the RIDF scheme Rs. 512830 million have been sanctioned for 2,44,651 projects covering irrigation, rural roads and bridges, health and education, soil conservation, water schemes etc.  Rural Innovation Fund is a fund designed to support innovative, risk friendly, unconventional experiments in these sectors that would have the potential to promote livelihood opportunities and employment in rural areas.  The assistance is extended to Individuals, NGOs, Cooperatives, Self Help Group, and Panchayati Raj Institutions who have the expertise and willingness to implement innovative ideas for improving the quality of life in rural areas.  Through member base of 250 million, 600000 cooperatives are working in India at grass root level in almost every sector of economy. There are linkages between SHG and other type institutes with that of cooperatives.  The purpose of RIDF is to promote innovation in rural & agricultural sector through viable means.  Effectiveness of the program depends upon many factors, but the type of organization to which the assistance is extended is crucial one in generating, executing ideas in optimum commercial way.  Cooperative is member driven formal organization for socio-economic purpose, while SHG is informal one.

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 NGO have more of social color while that of PRI is political one. Does the legal status of an institute influences effectiveness of the program? How & to what an extent?  Cooperative type of organization is better (Financial efficiency & effectiveness) in functioning (agriculture & rural sector) compared to NGO, SHG & PRIs.  Recently in 2007-08, NABARD has started a new direct lending facility under 'Umbrella Programme for Natural Resource Management' (UPNRM).  Under this facility financial support for natural resource management activities can be provided as a loan at reasonable rate of interest. Already 35 projects have been sanctioned involving loan amount of about Rs 1000 million.  The sanctioned projects include honey collection by tribals in Maharashtra, tussar value chain by a women producer company ('MASUTA'), eco-tourism in Karnataka etc.

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2.6 Classification of Agriculture Credit

Generally agriculture credit may be classified into two types, namely direct & indirect. In direct type, credit is provided directly to farmers for productive purpose, such as land improvement, irrigation, crop production, purchase of machinery, equipment, development of dairy, sheep rearing poultry, fishers etc. development of plantation, tea, coffee, rubber, coconut, cashew net etc. In Indirect type of agriculture credit is credit provided to the institution involved in the supply of production inputs. The indirect credit is given for financing distribution of farm inputs like co-operative marketing societies, financial regional rural bank [RRBs], financing state electricity board for energisation of pump sets, financing for services institution that provide storage facilities such as, godowns cold storage & warehouse, financing for establishment of regulated market, financing for agro-industries corporation, food corporation of India, jute corporate of India, state warehousing corporation etc. most of the indirect finance is referred to as refinance. Agriculture credit may be further classified into the following ways. 4) Short-term credit 5) Medium-term credit 6) Long-term credit

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CHAPTER-3

ROLE & FUNCTION OF NABARD

3.1 MEANING

NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development and ushering in prosperity in the rural areas.

With a capital base of Rs 2,000 crore provided by the Government of India and Reserve Bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts.

It is an apex institution handling matters concerning policy, planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural areas. Essentially, it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas. y Initiates measures toward institution-building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc y Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India , State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation
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y Prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions y Undertakes monitoring and evaluation of projects refinanced by it y Promotes research in the fields of rural banking, agriculture and rural development y Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks

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3.2 NABARD'S ROLES AND FUNCTIONS

1) Credit Function:NABARD's credit functions cover planning, dispensation and monitoring of credit. This activity involves: Framing policy and guidelines for rural financial institutions Providing credit facilities to issuing organizations Preparation of potential-linked credit plans annually for all districts for identification of credit potential Monitoring the flow of ground level rural credit

2) Development functions:Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation. Hence strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy. In order to reinforce the credit functions and to make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as: Help cooperative banks and Regional Rural Banks to prepare development actions plans for them selves Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe
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 Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated timeframe Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells Provide organization development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD), National Bank Staff College, Lucknow and College of Agriculture Banking, Pune, etc. Provide financial support for the training institutes of cooperative banks Provide training for senior and middle level executives of commercial banks, Regional Rural Banks and cooperative banks Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmers clubs 3) Supervisory function:As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs).

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As part of these functions, it y Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949 y Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis y Undertakes portfolio inspections, systems study, besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs) y Provides recommendations to Reserve Bank of India on opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) y Administering the Credit Monitoring Arrangements in SCBs and CCBs.

4) Core Functions:NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on a voluntary basis.

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3.3 Objectives of Inspection

y To protect the interest of the present and future depositors y To ensure that the business conducted by these banks is in conformity with the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc

y To ensure observance of rules, guidelines, etc. formulated and issued by NABARD/RBI/Government y To examine the financial soundness of the banks y To suggest ways and means for strengthening the institutions so as to enable them to play more efficient role in rural credit

Instruments of Supervision
y Periodic on-site inspection of 31 SCBs , 371 DCCBs, 20 SCARDBs and 82 RRBs and other Apex level Cooperative institutions y Supplementary Appraisal y Off-site Surveillance System ( OSS ) y Portfolio inspection/System study y CMA returns

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3.4 BOARD OF SUPERVISION(FOR SCBS,DCCBS AND RRBS):Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal Committee to the Board of Directors of NABARD.

The broad powers and functions of the Board of Supervision are:y Giving directions and guidance in respect of policies and on matters relating to supervision and inspection, reviewing the inspection findings, suggesting appropriate measures y Reviewing the follow-up action taken by Department of Supervision (DoS) on matters of frauds and internal checks and control y Identifying the emerging supervisory issues in the functioning of cooperative banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system, management practices, frauds, etc y Suggesting necessary follow-up measures y Recommending appropriate training for Inspecting Officers of NABARD for imparting necessary skills and knowledge y Suggest measures for strengthening of DoS y Recommend issue of directions by RBI y Oversee the quality of inspections carried out and the reports issued y Review the information generated through off-site surveillance and other supplementary vehicles, action taken thereon y Undertake any other functions entrusted from time to time by the Board of Directors of NABARD The Board of Supervision, since its formation on 20 November 1999 , has held 45 meetings till 21 September 2010 and reviewed the financial position of Cooperative Banks and RRBs. Based on the observations of BoS, authorities concerned have been apprised of the weaknesses.
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3.5 NABARD AND ITS ROLE IN TRAINING

There are different training center of NABARD Bank National Bank Staff College, Lucknow National Bank Training Centre, Lucknow Zonal Training Centre, Hyderabad Bankers Institute of Rural Development (BIRD), Mangalore Bankers Institute of Rural Development (BIRD), Bolpur Bankers Institute of Rural Development (BIRD), Lucknow The provisions of the Act as stated below very clearly indicate the nature and scope of the developmental mandate of the Bank and its role in training and capacity building with the underlying belief that the process of development cannot be accomplished by credit/refinance alone. Section 38 of the NABARD Act provides that the Bank shall: maintain expert staff to study all problems relating to agriculture and rural development and be available for consultation to the Central Government, the Reserve Bank, the State Governments and the other institutions engaged in the field of rural development. provide facilities for training, for dissemination of information and the promotion of research including the undertaking of studies, researches, techno-economic and other surveys in the field of rural banking, agriculture and rural development. provide technical, legal, financial, marketing and administrative assistance to any person engaged in agriculture and rural development activities; may provide consultancy services in the field of agriculture and rural development and other related matters in or outside India, on such terms and against such remuneration, as may be agreed upon;
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In this context, the role of training in NABARD and the role played by it for capacity building in client institutions, partner agencies and other developmental agencies are important. For maintaining 'Expert Staff', the bank needs to provide continuous exposure to its officers and staff for up scaling their knowledge and skills in core areas. However, in the initial years the Bank had recruited expert staff from various technical disciplines and created a separate cadre of officers.. These officers, irrespective of their academic background, were imparted similar type of training as all other officers. Their placements and the regular job rotations helped in grooming them to take up assorted assignments get involved in a variety of roles and functions including credit, developmental, promotional, supervisory and necessary support and information for decision making. In pursuance of the Bank's mandate as stated in the Act, the Bank provides training facilities for the RFIs and agencies involved in rural development through BIRD and the two RTCs. With a view to broad base the training and capacity building efforts, the Bank encourages the RFIs to set up their own training systems and provides these training institutes the necessary support to conduct meaningful and quality training. Options and avenues for strengthening the training interventions at the client level are continuously examined so that the human resources in these institutions are developed to take on the challenges, reckon with the competition, improve customer service, expand outreach, develop suitable products and thereby contribute to rural development. As NABARD primarily functions through other agencies, the needs of the client institutions largely determine the knowledge and skill requirements of NABARD officers. NABARD Endeavours to blend the experiences of client bank training with the training for NABARD officers so as to make training meaningful and relevant to their roles. Efforts are also made to blend the study findings with the outcome from training to periodically measure the overall impact of the investments made in the training efforts.
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3.6 DEVELOPMENT AND PROMOTIONAL FUNCTIONS

Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation. Hence strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy. In order to reinforce the credit functions and to make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as:y Help cooperative banks and Regional Rural Banks to prepare development actionsplans for themselves y Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe y Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated timeframe y Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs y Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells y Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells
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y Provide organisation development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD), Lucknow, National Bank Staff College, Lucknow and College of Agriculture Banking, Pune, etc. y Provide financial support for the training institutes of cooperative banks y Provide trianing for senior and middle level executives of commercial banks, Regional Rural Banks and cooperative banks y Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmers clubs y Provide financial assistance to cooperative banks for building improved management information system, computerisation of operations and development of human resources

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3.7 Types of Services Provided By NABARD

In order to achieve this mission, NABARD undertakes a number of inter-related activities/ services which fall under three broad categories

A. Credit Dispensation B. Developmental & Promotional C. Supervisory

A. Credit Dispensation:Prepares for each district annually a potential linked credit plan which forms the basis for district credit plans Participates in finalisation of Annual Action Plan at block, district and state levels Monitors implementation of credit plans at above levels. Provides guidance in evolving the credit discipline to be followed by the credit institutions in financing production, marketing and investment activities of rural farm and non farm sectors Provides refinance facilities to the institution as under

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TYPES OF REFINANCE FACILITIES AGENCY Commercial Banks CREDIT FACILITIES Long Term credit for investment purposes, financing the working capital requirements of Weavers' Cooperative Societies and State Handloom/Handicraft Development Corporations Short Term Cooperative structure Short Term (crop and other loans), (State Cooperative Banks, District medium term (conversion) loans, term Central Cooperative Banks, Primary loans for investment purposes, financing Agricultural Credit Societies) weavers' cooperatives - State Handloom Development Corporations for working capital by State Cooperative Banks Long Term Cooperative structure (State Term loans for investment purposes Cooperative Agriculture and Rural Development Banks, Primary Cooperative Agriculture and Rural Development Banks) Regional Rural Banks (RRBs) Short Term (crop and other loans) and term loans for investment purposes Urban Cooperative Banks (Scheduled) Long term investment activities both in farm and non-farm sectors in rural areas. State Governments Long Term loans for equity participation in Co-operatives, Rural Infrastructure Development Fund (RIDF) loans for rural infrastructure projects Non - Governmental Organisations Revolving Fund Assistance for Micro (NGOs) - Informal Credit Delivery Credit Delivery Innovations & System Promotional Projects

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B. Developmental & Promotional:The developmental role of NABARD can be broadly classified as:Nurturing and strengthening of - the Rural Financial Institutions (RFIs) like SCBs/SCARDBs, CCBs, RRBs etc. by various institutional strengthening initiatives. Fostering the growth of the SHG Bank linkage programme and extending essential support to SHPIs NGOs/VAs/ Development Agencies and client banks. Development and promotional initiatives in farm and nonfarm sector. Extending assistance for Research and Development. Acting as a catalyst for Agriculture and rural development in rural areas.

C.

Supervisory Activities:Supervisory Activities As the Apex Development Bank, NABARD shares with the Central Bank of the country (Reserve Bank of India) some of the supervisory functions in respect of Cooperative Banks and RRBs. Special Focus Removal of regional/sectoral imbalances Poverty Alleviation and Employment Generation Development of rural micro-enterprises Strengthening Rural Financial Institutions (RFIs) Encouraging prudential financial standards in RFIs Encouraging capital formation in agriculture Promotion of micro-finance/ development Rural Infrastructure Development Hi-tech and export oriented projects Creating policy environment for flow of rural credit Experimenting with new models, products and innovative practices in rural credit Thrust on rural awareness and financial services.

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CHAPTER-4

KISAN CREDIT CARD

4.1 GENESIS
y Honorable Union Finance Minister announced in his budget speech for 1998-99 that NABARD would formulate a Model scheme for issue of Kisan Credit Cards to farmers, on the basis of their land holdings, for uniform adoption by banks, so that the farmers may use them to readily purchase agricultural inputs such as seeds, fertilisers, pesticides, etc. and also draw cash for their production needs y NABARD formulated a Model Kisan Credit Card Scheme in consultation with major banks. y Model Scheme circulated by RBI to commercial banks and by NABARD to Cooperative. y Banks and RRBs in August 1998, with instructions to introduce the same in their respective area of operation. y OBJECTIVES

As a pioneering credit delivery innovation, Kisan Credit Card Scheme aims at provision of adequate and timely support from the banking system to the farmers for their cultivation needs including purchase of inputs in a flexible and cost effective manner.

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4.2 CONTENTS OF CREDIT CARD

y Beneficiaries covered under the Scheme are issued with a credit card and a pass book or a credit card cum pass book incorporating the name, address, particulars of land holding, borrowing limit, validity period, a passport size photograph of holder etc., which may serve both as an identity card and facilitate recording of transactions on an ongoing basis.

y Borrower is required to produce the card cum pass book whenever he/she operates the account.

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4.3 SALIENT FEATURES OF THE KISAN CREDIT CARD (KCC) SCHEME

y Eligible farmers to be provided with a Kisan Credit Card and a pass book or card-cum-pass book. y Revolving cash credit facility involving any number of drawals and repayments within the limit. y Limit to be fixed on the basis of operational land holding, cropping pattern and scale of finance. y Entire production credit needs for full year plus ancillary activities related to crop production to be considered while fixing limit. y Sub-limits may be fixed at the discretion of banks. y Card valid for 3 years subject to annual review. As incentive for good performance, credit limits could be enhanced to take care of increase in costs, change in cropping pattern, etc.

y Each drawal to be repaid within a maximum period of 12 months. y Conversion/reschedulement of loans also permissible in case of damage to crops due to natural calamities. y Security, margin, rate of interest, etc. as per RBI norms. y Operations may be through issuing branch (and also PACS in the case of Cooperative Banks) through other designated branches at the discretion of bank. y Withdrawals through slips/cheques accompanied by card and passbook.

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4.4 ADVANTAGES & BENEFITS OF THE KISAN CREDIT CARD SCHEME

1. Advantages:y y y y

Advantages to farmers Access to adequate and timely credit to farmers Full year's credit requirement of the borrower taken care of. Minimum paper work and simplification of documentation for drawal of funds from the bank. Flexibility to draw cash and buy inputs. Assured availability of credit at any time enabling reduced interest burden for the farmer. Sanction of the facility for 3 years subject to annual review and satisfactory operations and provision for enhancement. Flexibility of drawals from a branch other than the issuing branch at the discretion of the bank.

y y

2. Benefits:y

Reduction in work load for branch staff by avoidance of repeat appraisal and processing of loan papers under Kisan Credit Card Scheme. Minimum paper work and simplification of documentation for drawal of funds from the bank. Improvement in recycling of funds and better recovery of loans. Reduction in transaction cost to the banks. Better Banker - Client relationships.
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y y y

4.5 COVERAGE OF CROP LOANS DISBURSED UNDER KCC

Under the Reshtriya Krishi Bima Yojna (RKBY) GIC has agreed that the crop loans disbursed for eligible crops under the Crop Insurance Scheme will be covered under the CCIS, now under Rashtriya Krishi Bima Yojna. However, the banks are expected to maintain all back up records relating to compliance with "RKBY" and its seasonality discipline, cut-off date for submitting declarations and end use, etc. as in the case of normal crop loans. Objectives of the Scheme:y

To provide insurance coverage and financial support to the farmers in the event of failure of crops as a result of natural calamities, pests and diseases. To encourage farmers to adopt progressive farming practices, high value inputs and higher technology in agriculture. To help stabilise farm incomes, particularly in disaster years. To support and stimulate primarily production of food crops and oilseeds. Farmers to be covered : All farmers (both loanee and non-loanee irrespective of their size of holdings) including sharecroppers, tenant farmers growing insurable crops covered. Sum insured : The sum insured extends upto the value of threshold yield of the crop, with an option to cover upto 150% of average yield of the crop on payment of extra premium. Premium subsidy : 50% subsidy in premium allowed to Small and Marginal Farmers, to be shared equally by the Government of India and State Government/Union Territory. Premium subsidy to be phased out over a period of 5 years.

y y y

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4.6 MAJOR STEPS TAKEN BY NABARD

y

A Brochure on KCC Scheme highlighting the salient features, advantages and other relevant information about the Scheme was brought out by Head Office and ROs were asked to circulate the brochure to State govt. departments, Commercial Banks, Cooperative Banks, RRBs and other concerned agencies/officers so as to generate wider awareness about the Scheme. Floor limit of Rs.5000/- for issue of KC Cards stands withdrawn. Studies on KCC Scheme have been entrusted to BIRD and NABARD Staff College to facilitate feedback on the ground level issues/problems so that changes, where necessary, could be considered. Studies on the implementation of the Scheme undertaken by NABARD periodically. On the lines of instructions of RBI to Commercial Banks, Cooperative Banks and RRBs have been advised that they may, at their discretion, pay interest at a rate based on their perception and other relevant factors on the minimum credit balances in the cash credit accounts under the Kisan Credit Cards of farmers during the period from 10th to the last day of each calendar month. Regional Rural Banks (RRBs) were advised to initiate innovative publicity campaign in each area of operation in order to cater all eligible farmers under KCC.

y y

Progress in implementation of the Scheme :y

Since launching in August 1998, around 2.38 crore Kisan Credit Cards issued upto 31 March 2002 by Cooperative Banks, Regional Rural Banks and Commercial Banks put together. Scheme implemented in all States and Union Territories (except Chandigarh, Daman & Diu and Dadra & Nagar Haveli) with all Cooperative Banks, RRBs and Commercial Banks participating. Agency-wise/State-wise progress in issue of cards by all banks during 200102 and since inception of Scheme.
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4.7 IMPORTANT INITIATIVES BY NABARD

1) Institutional Strengthening Initiatives:Preparing Institution Specific Development Action Plans (DAPs) and entering into MoUs with Cooperative Banks and RRBs Facilitating State-specific reform packages for Cooperative Banks ODI Intervention and Training and capacity building in RFIs Support for improvement of business, system, HRD, etc. of cooperatives Social Re-engineering through Vikas Volunteer Vahini (VVV) Institution of Awards for good performing Cooperative Banks Assistance for Business Development Cells (BDC) in Cooperative and RRBs 2) micro Finance Innovations and Strategies:Grant support to Self Help Promoting Institutions (SHPIs) to improve access to credit for rural poor Capacity Building of partner institutions in micro Finance Supporting and upscaling of SHG-bank linkage programme 3) Research and Development Initiatives:Support to Research activities in areas of agriculture and rural development Support for seminars, conferences & workshops Conducting institution/area/sector/project-specific studies Dissemination of findings of studies and research and innovative models and practices

4) Supervision:On-site inspection and off-site surveillance of RFIs Issue of warning signals to banks showing deterioration in financial position and adverse features Taking preventive and revival measures for weak banks
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5) Institution of purpose-specific funds in NABARD:Watershed Development Funds (WDF) Co-operative Development Funds (CDF) Rural Promotion Corpus Fund (RPCF) Credit and Financial Services Fund (CFSF) Micro-Finance Development Fund Soft Loan Assistance for Margin Money Fund National Rural Credit Operation Fund National Rural Credit Stabilisation Fund Agriculture and Rural Enterprises Incubation Fund

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CHAPTER-5 SELF-HELP GROUP (FINANCE)

5.1 MEANING
A self-help group (SHG) is a village-based financial intermediary usually composed of between 10-20 local women. Most self-help groups are located in India, though SHGs can also be found in other countries, especially in South Asia and Southeast Asia. Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds may then be lent back to the members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery of microcredit. SHGs are member-based microfinance intermediaries inspired by external technical support that lie between informal financial market actors like moneylenders, collectors, and ROSCAs on the one hand, and formal actors like microfinance institutions and banks on the other. Other organizations in this transitional zone in financial market development include CVECAs and ASCAs. A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic backgrounds, voluntarily coming together to save regular small sums of money, mutually agreeing to contribute to a common fund and to meet their emergency needs on the basis of mutual help.Also it is a group of people who pool in their resources to become financially stable by taking loans from the money collected by that group and by making everybody of that group self-employed. The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment. This system eliminates the need for collateral and is closely related to that of solidarity lending, widely used by microfinance institutions.To make the bookkeeping simple enough to be handled by the members, flat interest rates are used for most loan calculations.

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5.2 GOALS
Self-help groups are started by non-profit organizations (NGOs) that generally have broad anti-poverty agendas. Self-help groups are seen as instruments for a variety of goals including empowering women, developing leadership abilities among poor people, increasing school enrolments, and improving nutrition and the use of birth control. Financial intermediation is generally seen more as an entry point to these other goals, rather than as a primary objective.This can hinder their development as sources of village capital, as well as their efforts to aggregate locally controlled pools of capital through federation, as was historically accomplished by credit unions.

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5.3 NABARD's 'SHG Bank Linkage' program

Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program, borrow from banks once they have accumulated a base of their own capital and have established a track record of regular repayments. This model has attracted attention as a possible way of delivery microfinance services to poor populations that have been difficult to reach directly through banks or other institutions. "By aggregating their individual savings into a single deposit, self-help groups minimize the bank's transaction costs and generate an attractive volume of deposits. Through self-help groups the bank can serve small rural depositors while paying them a market rate of interest. NABARD estimates that there are 2.2 million SHGs in India, representing 33 million members, that have taken loans from banks under its linkage program to date. This does not include SHGs that have not borrowed. "The SHG Banking Linkage Programme since its beginning has been predominant in certain states, showing spatial preferences especially for the southern region Andhra Pradesh, Tamil Nadu, Kerala and Karnataka. These states accounted for 57 % of the SHG credits linked during the financial year 2005-2006."

Advantages of financing through SHGs

An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of an SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans

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5.4 DESIGN FEATURES

Decision making

Members make decisions collectively. SHG concept offers opportunity for participative decision making on conduct of meetings, thrift and credit decisions. The participative process makes the group a responsible borrower. SHGs provide the needed financial services to the members at their doorstep. The rural poor needs different types of financial services, viz. Savings, consumption credit, production credit, insurance, remittance facilities etc. The platform of SHG provides the possibility to converge these services. SHG linkage does not supplant the existing banking system, but it supplements it thus taking full advantage of the resources and other advantages of the banking system. SHG linkage cuts costs for both banks and borrowers. In a study sponsored by FDC, Australia, it was observed that the reduction in costs for the bankers is around 40 % as compared to IRDP loans. The poor have a net advantage of 85 % as compared to individual borrowing. Similar finding was also observed in a NABARD study. The Linkage mechanism has proved that the repayments are as high as 95% - 100 % The SHG linkage emphasises peer pressure within the group as collateral substitute. The SHGs are turning out to be quality clients in view of better credit management, mobilisation of thrift, low transaction costs and near full repayments. The members of the SHGs could over a period of time, very selectively graduate to the stage of micro entrepreneurship
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Financial services

Supplementary to formal banking Cutting costs

NPA Savvy Peer pressure as collateral Quality clients

Client preparation

and have been prepared with requisite credit discipline.

Social agenda

Available statistics indicate dependency of 35%-40% of rural households on non-institutional sources for credit needs. SHG Linkage offers a better way of dealing with the magnitude of social agenda. Many NGOs/ Governments have recognised the SHG as a vehicle for carrying and deepening of their developmental agenda/ delivery of services. SHGs have exclusive focus on absolute have-nots, who have been bypassed by the banking system. Social banking does not have any meaning if the lowest strata and the unreached are not focused. The programme does not envisage any subsidy support from the government in the matter of credit. The issue is to build capabilities and enterprise of the individual members, blending with group cohesion and solidarity through training provided by a SHPI to set the ball rolling for the SHG.

Exclusive poor focus

No-subsidydependence syndrome

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5.5 DESIGN FEATURES OF THE PRODUCT

The product design features combine the collective wisdom of the poor, the organizational capabilities of the social intermediary and the financial strength of the Banks. Its features are... 1. Small and fixed savings at frequent intervals: Small and fixed savings made at regular intervals coupled with conditions like compulsory attendance, penal provisions to ensure timely attendance, saving, repayment etc forms a deterrent for the rich to join the SHG system- thereby enables exclusion of the rich 2. Self-selection: The members select their own members to form groups. The members residing in the same neighborhood ensure better character screening and tend to exclude deviant behaved ones. 3. Focus on women: As regular meetings and savings are compulsory ingredients in the product design, it becomes more suitable for the women clients- as group formation and participatory meetings is a natural ally for the women to follow. 4. Savings first and credit later: The saving first concept enables the poor to gradually understand the importance of saving, appreciate the nuances of credit concept using their own money before seeking external support (credit) for fulfilling future needs. The poor tend to understand and respect the terms of credit better. 5. Market rates of interest: Self-determined interest rates are normally market related. Sub-market interest rates could spell doom; distort the use and direction of credit.
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6. Intra group appraisal systems and prioritization: Essentials of good credit management like (peer) appraisal for credit needs (checking the antecedents and needs before sanction), (peer) monitoring- end use of credit; (peer sympathy) reschedulement in case of crisis and (peer pressure) collateral in case of wilful non-payment etc all seems to coexist in the system making its one of the best approaches for providing financial services to the poor. 7. Credit rationing: The approach of prioritization i.e.: meeting critical needs first serves as a useful tool for intra group lending. This ensures the potential credit takers/users to meticulously follow up credit already dispensed, as future credit disbursals rely on repayments by the existing credit users. 8. Shorter repayment terms: Smaller and shorter repayment schedule ensures faster recycling of funds, greater fiscal prudence in the poor and drives away the slackness and complacency that tends to set-in, in long duration credit cycles.

9. Progressive lending: The practice of repeat loans and often-higher doses - is followed by SHGs in their intra-group loaning, thereby enticing prompt repayments. 10. A multiple-eyed operation: The operations of the SHG are transacted in group meetings thus enabling high trust levels and openness in the SHG system. SHG members facilitating openness and freedom from unfair practices also generally conduct the banking transactions.

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CHAPTER-6

Micro Finance mF Institutions 6.1 Introduction:A range of institutions in public sector as well as private sector offers the micro finance services in India. They can be broadly categorized in to two categories namely, formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide micro finance services in addition to their general banking activities and are referred to as micro finance service providers. On the other hand, the informal institutions that undertake micro finance services as their main activity are generally referred to as micro Finance Institutions (mFIs). While both private and public ownership are found in the case of formal financial institutions offering micro finance services, the mFIs are mainly in the private sector.

micro Finance Service Providers:The micro finance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000 cooperatives credit societies at the village level.

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6.2 The Emergence of Private Micro finance Industry:The micro finance initiative in private sector can be traced to the initiative undertaken by Ms.Ela Bhat for providing banking services to the poor women employed in the unorganised sector in Ahmedabad City of Gujarat State. Shri Mahila SEWA (Self Employed Womens Association) Sahakari Bank was set up in 1974 by registering it as a Urban Cooperative Bank. Since then, the bank is providing banking services to the poor self-employed women working as hawkers, vendors, domestic servant etc. As on March 2003, the mFI had a membership of 30,000, seventy per cent of whom are from urban area. The deposit and loan portfolio stood at Rs 623.9 million ($ 13.86 million) and Rs133.6 million ($2.97 million) respectively. Though the mFI is making profit, yet the SEWA bank model of mFI has not been replicated elsewhere in the country. In the midst of the apparent inadequacies of the formal financial system to cater to the financial needs of the rural poor, NABARD sponsored an action research project in 1987 through an NGO called MYRADA. For this purpose a grant of Rs. 1 million ($22,222) was provided to MYRADA for an R&D programme related to credit groups. Encouraged by the results of field level experiments in group based approach for lending to the poor, NABARD launched a Pilot Project in 1991-92 in partnership with Non-governmental Organisations (NGOs) for promoting and grooming self help groups (SHGs) of homogeneous members and making savings from existing banks and within the existing legal framework. Steady progress of the pilot project led to the mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal banking activity of the banks with widespread acceptance. The RBI set the right policy environment by allowing savings bank accounts of informal groups to be opened by the formal banking system. Launched at a time when regulated interest rates were in vogue, the banks were expected to lend to SHGs at the prescribed rates, but the RBI advised the banks not to interfere with the management of affairs of SHGs, particularly on the terms and conditions on which the SHGs disbursed loans to their members.

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The uniqueness of the micro finance through SHG is that it is a partnership based approach and encouraged NGOs to undertake not only social engineering but also financial intermediation especially in areas where banking network was not satisfactory.

mFIs and Legal Forms:With the current phase of expansion of the SHG Bank linkage programme and other mF initiatives in the country, the informal micro finance sector in India is now beginning to evolve. The mFIs in India can be broadly sub-divided into three categories of organizational forms as given in Table 1. While there is no published data on private mFIs operating in the country, the number of mFIs is estimated to be around 800. However, not more than 10 mFIs are reported to have an outreach of 100,000 micro finance clients. An overwhelming majority of mFIs are operating on a smaller scale with clients ranging between 500 to 1500 per mFI. The geographical distribution of mFIs is very much lopsided with concentration in the southern India where the rural branch network of formal banks is excellent. It is estimated that the share of mFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent.

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6.3 Legal Forms of mFIs in India

Estimated Legal Acts under which Registered Number* 1. Not for Profit mFIs 400 to 500 Societies Registration Act, 1860 or similar Provincial Acts Indian Trust Act, 1882 a.) NGO - mFIs b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956 2. Mutual Benefit mFIs 200 to 250 Mutually Aided Cooperative Societies a.) Mutually Aided Cooperative Act enacted by State Government Societies (MACS) and similarly set up institutions 3. For Profit mFIs 6 Indian Companies Act, 1956 a.) Non-Banking Financial Companies (NBFCs) Total Reserve Bank of India Act, 1934 700 - 800 Types of mFIs

y NGO mFIs:There are a large number of NGOs that have undertaken the task of financial intermediation. Majority of these NGOs are registered as Trust or Society. Many NGOs have also helped SHGs to organise themselves into federations and these federations are registered as Trusts or Societies. Many of these federations are performing non-financial and financial functions like social and capacity building activities, facilitate training of SHGs, undertake internal audit, promote new groups, and some of these federations are engaged in financial intermediation. The NGO mFIs vary significantly in their size, philosophy and approach. Therefore these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions are generally restrictive in allowing any commercial operations. These organisations by their charter are non-profit organisations and as a result face several problems in borrowing funds from higher financial institutions. The NGO mFIs, which are large in number, are still outside the purview of any financial regulation. These are the institutions for which policy and regulatory framework would need to be established.
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y Non-Profit Companies as mFIs:Many NGOs felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. It was felt that a financial institution including a company set up for this purpose better does banking function. Further, if mFIs are to demonstrate that banking with the poor is indeed profitable and sustainable, it has to function as a distinct institution so that cross subsidisation can be avoided. On account of these factors, NGO mFIs are of late setting up a separate Non-Profit Companies for their micro finance operations. The mFI is prohibited from paying any dividend to its members. In terms of Reserve Bank of Indias Notification dated 13 January 2000, relevant provisions of RBI Act, 1934 as applicable to NBFCs will not apply for NBFCs (i) licensed under Section 25 of Companies Act, 1956, (ii) providing credit not exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1,25,000 ($2778) for meeting the cost of a dwelling unit to any poor person, and, (iii) not accepting public deposits.

y Mutual Benefit mFIs:The State Cooperative Acts did not provide for an enabling framework for emergence of business enterprises owned, managed and controlled by the members for their own development. Several State Governments therefore enacted the Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of self-reliant and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the advantages of operational freedom and virtually no interference from government because of the provision in the Act that societies under the Act cannot accept share capital or loan from the State Government. Many of the SHG federations, promoted by NGOs and development agencies of the State Government, have been registered as MACS. Reserve Bank of India, even though they may be providing financial service to its members, does not regulate MACS.

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6.4 For Profit mFIs:Non Banking Financial Companies (NBFC) are companies registered under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were not regulated by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a certificate of registration and for this certificate NBFCs were to have minimum Net Owned funds of Rs 25 lakhs and this amount has been gradually increased. RBI introduced a new regulatory framework for those NBFCs who want to accept public deposits. There are only a few mFIs in the country that are registered as NBFCs. Many mFIs view NBFCs more preferred legal form and are aspiring to be NBFCs but they are finding it difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive focus on mF is negligible.

1 Capital Requirements:NGO-mFIs, non-profit companies mFIs, and mutual benefit mFIs are regulated by the specific act in which they are registered and not by the Reserve Bank of India. These are therefore not subjected to minimum capital requirements, prudential norms etc. NGO mFIs to become NBFCs are required to have a minimum entry capital requirement of Rs. 20 million ($ 0.5 million). As regards prudential norms, NBFCs are required to achieve capital adequacy of 12% and to maintain liquid assets of 15% on public deposits.

2 Foreign Investment:Foreign investment by way of equity is permitted in NBFC mFIs subject to a minimum investment of $500,000. In view of the minimum level of investment, only two NBFCs are reported to have been able to raise the foreign investment. However, a large number of NGOs in the development - empowerment are receiving foreign fund by way of grants. At present, over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a whole range of activities including micro finance.

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3. Deposit Mobilisation:Not for profit mFIs are barred, by the Reserve Bank of India, from mobilising any type of savings. Mutual benefit mFIs can accept savings from their members. Only rated NBFC mFIs rated by approved credit rating agencies are permitted to accept deposits. The quantum of deposits that could be raised is linked to their net owned funds.

4. Borrowings:Initially, bulk of the funds required by mFIs for onlending to their clients were met by apex institutions like National Bank for Agriculture and Rural Development, Small Industries Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of lending institutions to mFIs, the Reserve Bank of India has roped in Commercial Banks and Regional Rural Banks to extend credit facilities to mFIs since February 2000. Both public and private banks in the commercial sector have extended sizeable loans to mFIs at interest rate ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. The current policy effective from 31 January 2004, allows only corporates registered under the Companies Act to access ECB for permitted end use in order to enable them to become globally competitive players.

5. Interest Rates:The interest rates are deregulated not only for private mFIs but also for formal baking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged by the mFIs has become a contentious issue. The high interest rate collected by the mFIs from their poor clients is perceived as exploitative. It is argued that raising interest rates too high could undermine the social and economic impact on poor clients. Since most mFIs have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of mFIs would affect their sustainability in the long run.

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6.5 Regulation & Supervision

India has a large number of mFIs varying significantly in size, outreach and credit delivery methodologies. Presently, there is no regulatory mechanism in place for mFIs except for those that are registered as NBFCs. As a result, mFIs are not required to follow standard rule and it has allowed many mFIs to be innovative in its approach particularly in designing new products and processes. But the flip side is that the management and governance of mFIs generally remains weak, as there is no compulsion to adopt widely accepted systems, procedures and standards. Because the sector is unregulated, not much is known about their internal health. Following Committees have examined the road map for regulation and supervision of mFIs
y

Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for mFIs, 1999. (Kindly see publications Section for a complete report Working Group (constituted by Government of India) on Legal & Regulation of mFIs, 2002 Informal Groups (appointed by RBI) on Micro Finance which studied issues relating to (i) Structure & Sustainabilty, ii) Funding (iii) Regulations and (iv) Capacity Building, 2003 Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities from the Banking System, 2004

To address the issue of need for a differential regulatory framework, the latest committee sought answers to the following questions and concerns facing private mFIs in the Country: (i) Is non-existence of a separate differential regulatory framework a critical bottleneck hindering the growth of the sector? (ii) Will MFIs be sustainable in medium term? If so, will they continue to focus on the poor? (iii) Is access to public / member deposit the key issue for their sustainability?
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(iv) Can MFIs finance loans for income generation at interest rates, which are sustainable by the rural poor? (v) Is it possible to evolve commonly agreed standards for MFI sector covering performance, accounting and governance issues, (vi) Has the sector reached a critical mass where regulation becomes important?

The Committee observed that while a few of the MFIs have reached significant scales of outreach, the MFI sector as a whole is still in evolving phase as is reflected in wide debates ranging around (i) (ii) (iii) (iv) (v) desirability of NGOs taking up financial intermediation unproven financial and organizational sustainability of the model, high transaction costs leading to higher rates of interest being charged to the poor clients, absence of commonly agreed performance, accounting and governance standards, heavy expectations of low cost funds, including equity and the start up costs, etc.

The current debate on development of a regulatory system for the MFIs focuses on three stages. Stage one - to make the MFIs appreciate the need for certain common performance standards, stage two - making it mandatory for the MFIs to get registered with identified or designated institutions and stage three - to encourage development of network of MFIs which could function as quasi Self-Regulatory Organisations (SROs) at a later date or identifying a suitable organisation to handle the regulatory arrangements. The Committee recommended that while the MFIs may continue to work as wholesalers of microCredit by entering into tie-ups with banks and apex development institutions, more experimentation have to be done to satisfy about the sustainability of the MFI model. Such experimentation needs to be encouraged in areas where banks are still not meeting adequate credit demand of the rural poor.

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6.6 NABARD's Support to microFinance Institutions (mFIs)

Realizing the importance of mFIs in the delivery of financial services to the poor and their potential for expansion of services in remote and lesser-banked areas, NABARD has been extending technical and fund support to this sector. Some of the concerns that necessitated NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the poor in under banked regions and ii) to further improve the outreach of rural credit delivery system through alternate credit delivery mechanisms. NABARD's support is being provided to various forms of microFinance institutions covering mFIs, second tier mF lending institutions, Grameen bank replicators, NGO-mFIs, SHG Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA) to NGO-mFIs on a very selective basis. The RFA is generally provided for a period of 5 to 6 years and is necessarily to be used for on lending to mF clients (SHGs or individuals). In addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for partly meeting the salary of field level staff, infrastructure development and operational deficits during the initial years. Cumulatively, as at the end of June 2004, Rs 26.98 crore (Rs 269.80 million) has been sanctioned as RFA to 31 NGO-mFIs and Rs. 0.58 crore (Rs 5.8 million) has been sanctioned as grant to various NGOs. The amount excludes Rs 3.4 million sanctioned under SHG Post Office linkage programme in Tamilnadu. . During the year 2003-04, loan support of Rs. 84 million was sanctioned to two agencies viz. 1) Friends of World Women Banking, India (Rs. 74 million) for on-lending to small NGOs & 2) Kalanjiam Development Financial Services-a section 25 company promoted by DHAN Foundation (Rs 10 million) for on lending to SHGs.

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CHAPTER-7 CONCLUSION
Reserve Bank of India (RBI) entrusted NABARD (National Bank for Agriculture and Rural Development) in 1981 to look after agriculture and rural development through all the Cooperative and other Nationalized banks of India. NABARD will observe 25th eventful journey on 12th July 2006 for advancement of Indian agriculture, economy and social structure. Animal husbandry programmes with Rs.2000 crores have been approved. Indian agriculture is dominated by a vast multitude of landless, sub marginal, marginal and small farmers, who are at the bottom of pyramid; consisting 80% of total cultivators having only little above one hector of land. For this NABARD has given stress on animal resources productivity. From the beginning ,NABARD has grown into a unique kind of apex hybrid organization combining best of central and development bank practices like planning, regulation of credit and supervision of rural financial institution like agriculture cooperative banks(both short and long term structures),Regional Rural Banks(RRB) etc. It also plays a unique institution building role that was instrumental in safe guard of many a loss making RRBs and Cooperative Banks in various parts of the country. During 2005-06,the balance sheet of NABARD grew by 11.3 percent from around Rs.60,000+ crore in 2004-05 toRs.67,645 crore in 2005-06.

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SUGGESTION

Only finance or subsidy can not be sustainable to achieve result. A loan is not an asset: it is a liability that must be reimbursed through wise investment, and effective management. Taking out a loan therefore increases risks, albeit against a reasonable expectation of profit. Savings on the other hand, are not a liability; they are an asset. They enable people to withstand unexpected or even anticipated shocks to their livelihoods, and need not be reimbursed. If, when they are sufficient, they are applied to productive investment, and the investment fails, the household is more likely to absorb the shock without fear of desolution.The poverty is never reduced by loaning people resources that they cannot afford to repay with interest As principal agriculture development of the country, has to come out with a clear strategy to dovetail its goal with the five-point programme of action suggested by the National Commission on Farmers(NCF).These area programme of soil health enhancement, promoting water harvesting, conservation,equitable use by empowering gram sabhas to function as Pani Panchayats;initiation of immediate credit National Bank for Agriculture & Rural Development reforms coupled with credit and insurance literacy with intensive coverage of crops and livestocks for insurance coverage with village level farm land as the unit, provision of farm credit at 4 percent with firm support from both RBI and government of India, gender sensitiveness in credit dispensation; bridging the growing gap between scientific know-how and field do-how for both production and post-harvest phases of farming; crop-livestock-fish integrated production system are ideal for small farmers since this can also facilitate organic farming; finally, the gap between what the urban consumer pays must be made as narrow as possible, as has been done in the case of milk under Dr.V Kurien. Additionally, executing its advisory role to the Planning Commission of the country. Should strive for balance measure on import of agricultural crops and dairy products; and enhance export of fruits and flowers. is needed to create a conducive environment and legal framework for the Microfinance sector to flourish in India to achieve Millenium Development Goal.

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However, each goal will need a well-defined package of technologies and services for success at the field level. Of the eight Millennium Development Goals, the first goal is the one whose attainment most clearly involves the agricultural sector: The poor around the globe are disproportionately farmers and herders, and, perversely, the hungry also most commonly find their livelihoods through agriculture. By increasing food availability and incomes and contributing to asset diversity and economic growth, higher agricultural productivity and supportive pro-poor policies allow people to break out of the poverty-hunger-malnutrition trap. As the country-level model simulations revealed, broad based agricultural growth is the key for decreasing poverty and increasing growth in Sub-Saharan Africa. A global assessment of Target 2 of MDG 1 (halving child malnutrition levels) shows that the combination of agricultural and economic growth together with larger investments in social sectors, including health and education, can substantially narrow the gap between the business-as-usual outcomes for 2015--24 percent of developing-country preschool children malnourished--and the target indicator--15 percent children malnourished--to reach 17 percent. However, the outcome varies significantly by country and region. Latin America, West Asia and North Africa, and China will, on average, likely get close to the target indicator by 2015, even under business-as-usual; however, the likelihood that Sub-Saharan Africa and South Asia will come close to their respective target rates is much smaller. The total increase in investments estimated is $161 billion in agricultural and supporting sectors during 19952015. In addition to these investments, significant policy and governance reform is required. To achieve faster agriculturebased growth rates, there must be in place favorable macroeconomic and trade policies, good infrastructure, and access to credit, land, and markets. These conditions create level playing fields and give farmers incentives to adopt new and sustainable technologies and diversify production into higher-value crops, actions that raise incomes and lift households out of poverty.

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CHAPTER-8 BIBLIOGRAPHY

NABARD (Micro finance & Rural Development)-By T. Balakrishnan

www.nabard.org www.wikipedia.com www.scribd.com Annual Report Statement of NABARD

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