A Brief Sketch of Credit Delivery in Rural India

Credit Requirement of Rural/Agriculture in India may be classified into following: 1. On the basis of purpose 2. On the basis of time.

Purpose as the Basis for Credit availability

Productive purpose: It comprises of all such activities which help in the facilitates Improvement in production & productivity. Unproductive purpose: Unproductive needs Comprises credit for social and religious Obligations.

Time as the Basis for Credit availability Finance required for the

productive purpose may be divided into the following categories taking time as the basis; 1. Short-term (for a period up to 15 months). 2. Medium-term from 15 months up to 5 years) 3. Long-term (above 5 years)
In rural scenario: Short-term loans are required for the purchase of seeds, manures and fertilizers or for meeting the labor charges. They are expected to be repaid after the harvest.

 Medium-term loans are granted for the purpose such as sinking of wells, purchase of bullocks, pumping sets and other improved etc. Long-term loans are to be utilized for the payments of old debts, purchase of the heavier machines, making Permanent improvements and increasing the size of the holding.

Sources of Finances/Credit
Sources of Finance/Credit may broadly be classified into the following: 1. Institutional sources; & 2. Non-institutional sources

Institutional Sources
Institutional Sources comprises of: Commercial Banks;

Regional Rural Banks (RRBs); Government agencies; Reserve Bank of India (RBI); National Bank for Agriculture & Rural Development (NABARD); Co-operative Societies etc

Non-institutional Sources
Non-institutional sources may broadly be put into the following heads: Money lenders: a) Those who lend money along with their own farming and other economic activities; b) Those whose primary occupation is lending money

 Family, relatives; & Friends Till independence and before the nationalization of the banks the private players had enjoyed monopoly

A Brief Historical Review

The Reserve Bank of India Act, 1934 has specific provisions relating to agricultural credit. Section 54 of the RBI Act specifically authorized the creation of the Agricultural Credit Department within the RBI to deal not only with the rural credit but also with the long-term finance including refinance.

Section 17 of the Act empowered it to provide agricultural credit through state cooperative banks or any other banks engaged in the business of agricultural credit. The foundation for building a broader credit infrastructure was laid down by the All India Rural Credit Survey (1954). The Committee of Direction that conducted the survey recommended the creation of National Agricultural Credit Fund, which was subsequently created by the RBI. In 1963 the RBI set up Agricultural Refinance Corporation (ARC) to provide funds by way of refinance.

 Decentralized credit planning through the Lead Bank Scheme was also introduced to spearhead the credit allocation for, inter alia, agricultural lending. With the view to emphasize the developmental and Promotional role assigned to the ARC in addition to refinancing, the ARC was renamed as Agricultural Refinance and Development Corporation (ARDC) in 1975. Regional Rural Banks (RRBs) were set in 1975. In order to strengthen the institutional credit for agricultural and rural development National Bank for

Agriculture and Rural Development (NABARD) was set up in July, 1982. On its establishment NABARD took over the entire functions of the ARDC & the refinancing functions of the RBI in relation to the cooperatives & the RRBs. Cooperative Banks in India are more than 100 years old. They came into existence with the enactment of Agricultural Credit Co-operative Societies Act in 1904. Since the introduction of reforms, there
has been very little perceptible improvement in either stability or efficiency of cooperative

banks. In particular, the asset quality and profitability of scheduled Urban Cooperative Banks (UCBs) showed some deterioration in the reform period. Positive impact of reforms, as has been witnessed in the case commercial banking sector, may take longer to get manifested for cooperative banks given the late start of the reform process in this sector.
[Reserve Ban of India, Report on Currency and Finance,2001-02]

Task Force on Revival of Rural Cooperative Credit Institutions

The Government of India Constituted a Task Force under the Chairmanship of A Vaidyanathan in 2005 to propose an action plan for reviving the rural co-operative banking

institutions and suggest an appropriate regulatory framework for these institutions. Few of the major recommendations of the Task Force are : The co-operative credit structure is
impaired in governance, managerial and financial fronts and hence needs to be revived and restructured. The financial restructuring shall be contingent on commitment to and implementation of legal and institutional reforms by the state governments. NABARD be designated as the Nodal Implementing and Pass through Agency to coordinate and monitor the progress of the programme representing the GOI. NABARD

will prepare model MoUs, model balance proforma for PACS and CCBs . The financial assistance be made available for : a) wiping out accumulated losses; b) Covering invoked but unpaid guarantees given by the State Governments; c) Increasing the capital to specified minimum level; d) Retiring Government share capital; & e) technical assitance.

Advisory Committee on the Flow of Credit to Agriculture & Related Activities from the Banking System Constituted under the Chairmanship of V S Vyas in 2004. Few of the main recommendations of the Committee are as follows;

1. A review of mandatory lending to agriculture by commercial banks to direct lending programmes; 2. Banks to increase their disbursements to small and marginal farmers under Special Agricultural Credit Plan (SACP) to 40%.. 3. Reduction in the cost of agricultural credit by enhancing the cost effectiveness of agricultural loans. 4. NPA norms for agricultural credit to be aligned with crop seasons. Loans for the allied activities to be classified as NPA after 180 days of default. Credit flow to small borrowers to be improved through reduction in cost of borrowing, revolving credit packages, procedural simplification, involvement of PRIs and micro-finance.

Thanks