RURAL FINANCE

RURAL FINANCE
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER V
(2010-11)

RURAL FINANCE

RURAL FINANCE
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER V
(2010-11)

Submitted
In Partial Fulfillment of the requirements
For the Award of the Degree of
Bachelor of Commerce Banking & Insurance

RURAL FINANCE

C E R T I F I C A T E

This is to certify that Shri/Miss

of

B.Com Banking & Insurance Semester V (2010-11) has

successfully completed the project on
Under the guidance of
.

Course Coordinator

Principal

Project Guide/ Internal Examiner

External Examiner

RURAL FINANCE

DECLARATION

I,

, the student of B.Com Banking &

Insurance Semester V (2010-11) hereby declare that I have

completed this project on
.

The information submitted is true & original to the best of my

knowledge.

Name
ROLL NO.

RURAL FINANCE

ACKNOWLEDGEMENT

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RESEARCH DESIGN
Purpose of the study
To study in detail the concept of rural finance.
To study in detail the implications in Indian context.

Objectives of the study

To study the concept of Rural finance.
To study the Indian Economic Scenario.
To study the Need of Rural Finance.
To study the Sources of Rural Finance.
To study the Challenges of Rural Finance.

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RESEARCH METHODOLOGY

PRIMARY
DATA

BANK

DATA
COLLECTION

BOOKS

SECONDARY
DATA

WEBSITE

LIMITATION
This project is limited to Rural Sector of India as it is a vast
topic.
This project content data from various banks but the field visit
Has been conducted only from one bank i.e SBI.

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EXECUTIVE SUMMARY
Rural Finance consist of Informal & Formal sector.For eg.Of formal sector of
finance include banks: Project, & contract Farmer schemes Reference is often
made to micro-finance. RuralFinance is a set of financial services that are
not limited to financeOnly. There is a big difference between underdeveloped &
Developed countries. The countries which have real perCapita income less
than

quarter

of the

per capita

income

Of the

united

states are

underdeveloped countries.There are different features like low per capita

income occupational pattern, heavy population pressure , low rate of capital
formation.there are different

natural

resources in process of economic

development in rural india. Like for eg. Land, water resources, fisheries,
mineral resources, forests, marine resources , climate, rainfall & topography.
Thjere are different types of

infrastructure facilities often referred towards

economic & social development of rural india.Like energy, power, transport.

Agriculture helps for the export-import agriculture playing a very important
role in Indian economy.There are different sources of Rural Finance as well
as some Private agencies Sources also. There are some Institutions which
provide the finance sources. There are different different schemes which is
provided by government As well as bank. There is a need for rural finance.
There are key challenges for rural financial services provisions like systemic
risk, market risk, finance risk , etc.

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INDEX
Sr. No.

Particulars

Page No.

11.

Meaning of an Rural Finance.

Meaning of an Underdeveloped Economy.

12-13

Characteristic of the Indian Economy an on

underdeveloped
Economy

14-16

Natural Resources in Process of Economic Development in

Rural India.

18-24

Rural Market Countries in Total Indian Economy.

25-31

Schemes & Facilities from the Various Banks.

31-43

Various Finance Schemes Offered from Government.

44-47

Need For Rural Finance .

49-55

Sources Of Rural Finance.

57

10

Private Agencies Sources.

58-59

11

Institutional Sources Of Finance.

60-74

12

Challenges Of Rural Finance .

76-81

13

Conclusion.

82

14

Annexure.

83

15

Recommendation

16

Bibliography.

84-85
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CHAPTER -1
INTRODUCTION

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MEANING OF AN RURAL FINANCE :

Rural finance comprises finance, savings and insurance (or insurance substitutes)
in rural areas, whether provided through formal or informal mechanisms. The word
'finance' tends to be associated with enterprise development, whereas rural finance
also includes savings and insurance mechanisms used by the poor to protect and
stabilize their families and livelihoods (not just their businesses).
An understanding of rural finance helps explain the livelihood strategies and
priorities of the rural poor. Rural finance is important to the poor. The poorest
groups spend the highest proportion of their income on food typically more than
60% and sometimes as much as 90%. Under these circumstances, any drop in
earnings, or any additional expenditure (health or funeral costs, for instance) has
immediate consequences for family welfare unless savings or loans can be
accessed. Financial transactions are therefore an integral part of the livelihood
system of the poor.

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RURAL FINANCE
Rural finance consists of informal and formal sectors. Examples of formal sources
of finance include: banks; projects; and contract farmer schemes. Reference is
often made to micro-finance. Micro underlines the small loan size normally
associated with the borrowing requirements of poor rural populations, and microfinance schemes use specially developed pro-poor lending methodologies. Rural
populations, however, are much more dependent on informal sources of finance
(including loans from family and friends, the local moneylender, and rotating or
accumulating savings and finance associations).
Rural Finance is a set of financial services that are not limited to finance only.

Meaning of an Underdeveloped Economy:

There is a big difference between underdeveloped and developed countries.
The United Nations group of experts states, We have had some difficulty in
interpreting the term underdeveloped countries. We frankly consider that, per
capita real income is low when compared with the per capita real incomes of the
United States of America, Canada, and Australia & Western Europe. Briefly a poor
country.
The term underdeveloped countries is relative. In practical, those countries
which have real per capita incomes less than a quarter of the per capita income of
the United States are underdeveloped countries. But recently UN publication
prefers to describe them as Developing economies. The term developing
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economies signifies that though still underdeveloped, the process of development
has been initiated in these countries. Thus, we have two economies developing
economies & developed economies.

The World Bank issued in its World

Development Report (1991) classified the various countries on the basis of Gross
National Product (GNP) per capita. Developing countries are divided into: (a) Low
income countries with GNP per capita of $580 and below in 1989; and Middle
income countries with GNP per capita ranging between $ 580 and $ 6,000. As
against them, the High-income Countries which are mostly members of the
Organization for Economic Co-operation and development (OECD) and some
others have GNP per capita of more than $ 6,000.

Definition:
A country which has good potential prospects for using more capital or more
labour or more available natural resources, or all of these, to support its present
population on a higher level of living or if its per capita income level is already
fairly high, to support a large population on a not lower level of living. As per this
definition the problem of development is mainly the problem of development is
mainly the problem of poverty and prosperity. The basic criterion then becomes
whether the country has good potential
Prospects of raising per capita income, or of maintaining an existing high level of
per capita income for an increased population.

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Characteristics

of

the

Indian

Economy

as

an

Underdeveloped Economy:
India is an underdeveloped economy. Its is a vast country having an
area of 3.3 million sq. km. It has almost 5, 76,000 villages. The population
of India is widely scattered over villages and towns. Nearly 75% of the
population lives in rural & semi urban areas, while the rest lives in towns.
There is doubt that the bulk of its population lives in conditions of misery.
Poverty is not only acute but is also a chronic malady in India. At the same
time, there exist unutilized natural resources. It is, therefore, quite important
to understand the basic characteristics of the Indian economy, treating it as
one of the underdeveloped but developing economies of the world.
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Low per capita income: Underdeveloped economies are marked by the existence of low per capita
income. The per capita income of an India is lowest in the world. The per
capita income in Switzerland in 1989 was about 88 times, in West Germany
about 60 times, in U.S.A. 61 times and in Japan 70 times of the per capita
income in India. It is also important that developed economies are growing
at a faster rate than the Indian economy and as a consequence, the disparity
in the levels of income has become wider during period 1960-89.
Occupational pattern:
o Primary producing. One of the basic characteristics of an
underdeveloped economy is that it is primary producing. A very high
proportion of working population is engaged in agriculture, which
contributes a very large share in the national Income. In India, in
1981, about 71 per cent of the working population was engaged in
agriculture and its contribution to national income was 36 per cent. In
Asia, Africa and Middle East countries countries from two-thirds to
more than four-fifths of the population earn their livelihood from
agriculture and in most Latin American countries from two-thirds to
three-fourths of population engaged in agriculture in developed
countries is much less than the proportion of population engaged in
agriculture in underdeveloped countries.

Heavy Population pressure:

The main problem in India is the high level of birth rates coupled with a
falling level of death rates. The rate of growth of population which was
about 1.31 per cent per annum during 1941-50 has risen to 2.11 per cent
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during 1981-91. The chief cause of this rapid spurt to population growth
is the steep fall in death rate from 49 per thousand during 1911-20 to 9.6
per thousand in 1990; as compared to this, the birth rate has declined
from about 49 per thousand during 1911-20 to 29.9 per thousand in 1990.
The fast rate of growth of population necessitates a higher rate of
economic growth in order to maintain the same standard of living of the
population. To maintain a rapidly growing population, the requirements
of food, clothing, shelter, medicine, schooling, etc. all rise. Thus, a rising
population imposes greater economic burdens and, consequently, society
has to make a much greater effort to initiate the process of growth.

Prevalence of chronic unemployment and underemployment:

In India labour is an abundant factor and, consequently, it is very difficult
to provide gainful employment to the entire working population. In
developed countries, unemployment is of a cyclical nature and occurs
due to lack of effective demand. In India unemployment is structural and
is the result of a deficiency of capital. The Indian economy does not find
sufficient capital to expand its industries to such a capacity that the entire
labour force is absorbed.
Low rate of capital formation:
other basic characteristic of the Indian economy is the existence of
capital deficiency which is reflected in two ways first, the amount of
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capital per head available is low; and secondly, the current rate of capital
formation is also low.

Following table reveals that gross capital

formation in India is less than that of developed countries.

CHAPTER 2
INDIAN ECONOMIC SCENARIO
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Natural Resources In Process Of Economic

Development In Rural India:
To achieve the development in national output, it is essential to combine natural resources, human
resources & capital. The existence or the absence of favourable natural resources can facilitate or retard
the process of economic development. Natural resources include land, water resources, fisheries, mineral
resources, forests, marine resources, climate, rainfall and topography.
1.

Land Resources:
The total geographical area of India is about 329 million hectares, but statistical information
regarding land classification is available for only about 305 million hectares; this information is based
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partly on village papers and partly on estimates. We can explain land utilization pattern from the
following table:-

Land utilization pattern, 2004-05 (million hectares

Particulars

Area

Percent

1. Total geographical area

328.73

--

2. Total reporting area

304

100

3. Barren land not available for cultivation

41.56

13.63

4. Area under forests

68.86

22.6

5. Permanent pastures and grazing land

10.91

3.6

6. Cultivable waste lands, etc.

13.88

4.57

7. Fallow lands

9.76

3.2

8. Net area sown

142.02

46.6

9. Area sown more than once

48.74

10. Total cropped area (8+9)

190.76

2.Forest Resources:

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Forest is an important natural resource of India. They have a moderating
influence against floods and thus they protect the soil against erosion. They
provide raw materials to a number of important industries, namely, furniture,
matches, paper, rayon,
construction, tanning, etc. The total area under forests was 68.86 million hectares
in 1997-98 which was about 22.6 percent of the total geographical area; a recent
estimate has put it at 75 million hectares or 23 percent of the total geographical
area. Forests in India are mostly owned by states (95%); a small portion is under
the ownership of corporate bodies and private individuals.
3. Water Resources:
India is one of the wettest countries in the world, with average annual rainfall
of 1100 m.m. Indias water policy, since Independence, has mainly concentrated
on highly visible large dams, reservoirs and canal systems, but has ignored minor
water works such as tanks, dugwells and tubewells.
4.Fisheries:
Broadly speaking, fishery resources of India are either inland or marine. The
principal rivers and their tributaries, canals, ponds, lakes, reservoirs comprise the
inland fisheries. The rivers extend over about 17,000 miles, and other subsidiary
water channels comprise 70,000 miles. The marine resources comprise the two
wide arms of the Indian Ocean and a large number of gulf and bays along the
coast. About 1.8 million fishermen draw their livelihood from fisheries, though
they generally live on the verge of extreme poverty. Out of a total catch of 3
million tones of fish in 1988-89, over 1 million tones came from inland fisheries
and nearly 2 million tones from marine sources. India is the seventh largest
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producer of fish in the world and is second in inland fish production, which
contributes 45 per cent of total production in the country. Fish production reached
the level of 5.4 million tonnes in 1997-98, comprising 3.0 million tonnes of
marine fishery and 2.4 million tonnes of inland fishery and is expected to reach 5.6
million tonnes in 1998-99 with 3.0 million tonnes of marine fishery and 2.6 million
tonnes of inland fishery, respectively. During 1998-99, the export of marine
products came down to US$ 1,038 million from US$ 1,208 million .

Infrastructure In Process Of Economic Development In

Rural India:
The prosperity of a Rural India depends directly upon the development of
agriculture and industry.

Agricultural production, however requires power,

finance, transport facilities, etc. Industrial production requires not only machinery
& equipment but also skilled man-power, management, energy, banking facilities,
marketing facilities, transport services which include railways, roads, shipping,
communication facilities, etc. All these facilities and services constitute
collectively the infrastructure of an economy and the development and expansion

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of these facilities are an essential pre-condition for increasing agricultural &
industrial production in a rural area.
Types of Infrastructural facilitiesoften referred towards economic and
social development of rural India:
1.

Energy:
The most important single factor which can act constraint on economic growth of
a country is the availability of energy. There is a direct correlation between the
degree of economic growth, the size of per capita income and per capita
consumption of energy.

Since energy is an essential input of all productive

economic activity, the process of economic development inevitably demands

increasing higher levels of energy consumption. There are broadly two sources of
energy commercial energy & non-commercial energy. Following are the various
commercial energy:- coal & lignite, Oil & gas, Hydro-electric resource, Uranium.
& non-commercial energy is Fuelwood, Agricultural wastes, Animal dung.

2. Power:
Electric power, which is one form of energy, is an essential ingredient of
economic development and, it is required for commercial and non-commercial
uses. Commercial uses of powerrefer to the use of electric power in industries,
agriculture and transport. Non-commercial uses include electric power required
for domestic lighting, cooking, use of mechanical gadgets like the refrigerators, air
conditioners, etc. With the growth of population and with the increase in the use of

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modern gadgets in daily life, it is quite natural that the demand for electricity for
domestic use should grow at a fast rate.
2.

Transport:
If agriculture and industry are regarded as the body and the bones of the economy,
which help the circulation of men and materials. The transport system helps to
broaden the market for goods and by doing so; it makes possible large-scale
production through division of labour. It is also essential for the movement of raw
materials, fuel, machinery etc., to the places of production. The more extensive
and continuous the production in any branch of activity the greater will be the need
for transport facilities. Transport development helps to open up remote regions and
resources for production. Regions may have abundant agricultural, forest and
mineral resources but they cannot be developed if they continue to be remote and
inaccessible.

Modes of transport & communication facilities:

1) Indian Railways:
The most important form of transport system in India is the Indian railways, which
is also the countrys largest single undertaking with a capital investment of around
Rs. 15,000 crores. In 1950-51, railway route length was 53,600 kms but by 199091 it had increased to nearly 62,400 kms-an increase at the rate of 0.4 percent per
annum
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2) Roads & Road Transport:

Road transport plays an important role in rural economy of country, since it is
most suitable for short distances. It has also the advantage of door-to-door service,
flexibility, speed and reliability. The utility of other modes of transport such as
railways, internal waterways, ports, etc. increase when linked to the road .
Transport system. Road construction and maintenance generate sizeable
employment opportunitiesfactor of great importance in the context of growing
population and growing unemployment in the country. The rural road network
now connects about 70 percent of our villages.

3) Inland water transport:

Inland water transport is the cheapest mode of transport, for both long and short
distances, so far as the points of origin and destination of traffic are concerned. It is
cheap as energy consumption is low. India has over 14,500 kms. Of navigable
inland waterways comprising a variety of river systems, canals, backwaters,
creeks, etc.

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4) Communications:
The communication system comprises posts and telegraphs, telecommunication
system, broad casting, television and information services. By providing necessary
information about the markets and also supplying necessary motivation, the
communication system helps to bring buyers and sellers together effectively and
helps to accelerate the growth of the economy.

Rural

Market

Contribution

In

Total

Indian

Economy
When you consider a rural market then the measure part of the rural business
directly or indirectly connected with agriculture. In this condition, whenever you
study about rural market you have to consider the impact of agriculture towards
Indian Economy.
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Profile of Rural people:-If we classify the rural people by their occupation,
we find cultivators as the predominant occupation group who account 72%
of rural households.
Distribution of rural households by their profession or business activity

Occupation

Percentage

of

Households
Cultivators

72

Agricultural labourers

15

Other non-cultivators

11

Artisans

All house holds

100

However this group of cultivators contain both prosperous and well as marginal
cultivators within itself. This is rural Indias picture where 20% of rural households
(mostly cultivators) control about 66% of assets in rural India. In this way rural
population broadly divided into 6 categories:
1.

Proprietors of land includes feudal tribute gatherers like zamindars, rich

moneylenders and traders who acquire large tracts of land and companies or
persons who own large populations.

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2. Rich farmers who belong to dominant caste of the area.
3. Small peasants or marginal farmers owning uneconomic land holdings.

4. Tenant farmers operating on rented lands belonging to large land holders and
working on small uneconomic land holdings.
5. Agricultural labourers who work on lands of landlords and rich farmers.
6. Artisans and others, which include the unemployed also.
Agricultural Impact on National Economy:
Agriculture is a backbone of the Indian Economy. It is important to note that
importance is given to industrialization in last four decades, agriculture is largest
industry in the country.
Agricultural Production :
The agricultural sector as a whole is estimated to
record a real growth rate of 6.6 per cent during 1998-99. The
overall growth in agricultural production during 1998-99 has been provisionally
estimated at 6.8 per cent, as against a negative growth rate of (-) 5.4 per cent
during 1997-98. In spite of the damage caused to the cotton crop in Punjab by
excessive rains and unexpected cyclonic storms in Andhra Pradesh in October
1998, cotton production was estimated to be higher at 13.3 million bales in 199899, as against 11.1 million bales produced in 1997-98. Similarly, the sugarcane
output is expected to touch 282.7 million tonnes during 1998-99, compared to
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276.3 million tonnes during 1997-98. The production of oilseeds is also likely to be
higher at 25.3 million tonnes during 1998-99, as against 22.0 million tonnes during
1997-98.

Foodgrains Production:
The production of kharif foodgrains estimated at 102.5 million tonnes during 1998
showed a marginal growth of 1.4 per cent over the production achieved (101.1
million tonnes) in 1997. The rabi foodgrains production for 1998-99 is expected to
go up to 98.4 million tonnes compared to 91.3 million tonnes in 1997-98. The
foodgrains production is estimated to be 200.9 million tonnes in 1998-99 compared
to 192.4 million tonnes during 1997-98, recording an impressive increase by 4.4
per cent (Advance Estimates). During 1998-99, efforts have also been initiated by
various government agencies to double the food production
in the next decade.
During 1998-99 rice production is estimated to increase to
84.5 million tonnes from 82.3 million tonnes produced in
1997-98, while the wheat production during 1998-99 is estimated at 70.6 million
tonnes, compared to the previous year's level of 65.9 million tonnes, an increase by
7.1 per cent. Production of pulses in 1998-99 is expected to be around 15.2 million
tonnes, as against 13.1 million tonnes during 1997-98.
Growth Rate

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Crop
Rice
Coarse cereals
Pulses
Food Grains

2005-06
8.4
1.4%
8.2%
6.3%

2006-07
-4.0%
-4.0%
-2.7%
-0.6%

2007-08
5.6%
8.4%
10.9%
6.7%

* Million bales of 170 kg. Each.

Agricultural Exports and Imports

Agriculture

Exports:

The share of exports of agriculture and allied products in the total

exports had declined marginally, from 18.9 per cent during 1997-98 to 17.8
per cent during 1998-99. During the same period, the value of exports of
agriculture and allied products amounted to US$ 5,994 million, showing a
decline of 9.6 per cent from a level of US$ 6,634 million in 1997-98. Major
items of agricultural exports were basmati and non-basmati rice, raw cotton,
meat, oil meals, tea, coffee, unmanufactured tobacco, cashew, spices, fresh
and processed fruits and juices, vegetables and marine products, etc.

Agriculture Imports:
Agricultural imports related to food and other items constituted 5.8 per cent of the
total imports during 1998-99, as against 4.0 per cent during corresponding period
of the previous year. Important agricultural items imported during the year were
vegetable oils (edible), sugar, wheat and fruits & nuts. During 1998-99, the volume
of agricultural imports aggregated US$ 2,409 million, as against US$ 1,678 million

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during the corresponding period of the previous year, recording a growth of 43.6
per cent.

Agricultural markets:
There were 7,062 agricultural regulated markets operating in India, 162
agricultural commodities considered for grading standards and 3,253 cold storage
with capacity of 8.73 million tonnes as on end March 1998. With the introduction
of economic reforms, futures trading was permitted in coffee, cotton, castor oil and
jute goods during 1997-98. Earlier futures trading were permitted in gur, potato,
castor seed, pepper, turmeric, etc. Further, during 1998-99, futures trading were
introduced in oilseeds, oil cakes and edible oils. A network of co-operatives at the
national, state and primary level operates to help farm producers with access and
further reach for sale of produce. As per the Annual Report (1998-99) of Ministry
of Agriculture, Government of India, the value of agricultural produce marketed
through co-operatives has registered a remarkable growth of 21.6 per cent, from
Rs.9, 500 crore in 1994-95 to about Rs.11,551 crore in 1995-96.

Agriculture role in Indian Economy:

Agriculture for Industrial Development:

Indian agriculture has been the source of supply of raw materials to our

leading industries. Cotton and jute, textiles, sugar, plantations all these directly
depend on agricultural output.
agriculture indirectly.

There are many industries, which depend on

Many of our small scale and cottage industries like

handlooms, oil crushing, etc depend on agriculture for their raw materials.
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But then, in recent years, agriculture is losing its significance to industries
such as iron and steel, engineering, chemicals, etc. However in recent years, the
importance of food processing industries is being increasing recognized both for
generation of income and generation of employment.

Agriculture in economic planning:

Importance of agriculture in the national economy is indicated by many
facts. For example, agriculture is main support for transport sector as railways and
roadways secure bulk of their business from the movement of agricultural goods.
Further it is seen that good crops implying large purchasing power with the farmers
lead to greater demand for manufactures and therefore better prices. In other
words prosperity of farmers is also the prosperity of the industries and vice-versa.
Agriculture is backbone of the Indian economy and the prosperity of agriculture
can also stand for the prosperity of the economy. At the same time it is true that
per capita productivity in agriculture is less than in the industry. Many scholars
think that so long as the Indian Economy is dominated by agricultural activity, per
capita income will not rise to an extent, which is necessary and desirable.

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Capital Formation in Agriculture

The falling public investment in agriculture has been a cause for concern
because it is crucial for the development of infrastructure like irrigation, electricity,
agriculture research, roads, markets and communications. Investment in agriculture
declined from 1.6 percent of GDP in 1993-94 to 1.3 per cent in 1998-99 (Table
8.24). This decline was due to a fall in public investment in agriculture from Rs
4,467 crore in 1993-94 to Rs 3,869 crore in 1998-99. There has, in fact, been a
continuous decline in public investment in agriculture from 1994-95 till 1998-99.
Although, the declining trend in public investment was halted in 1999-2000, with
the public sector capital formation rising to Rs 4122 crore from a level of Rs 3869
crore in preceding year, there has not been any improvement in
the share of investment in agriculture in GDP from the preceding years level of 1.3
percent. This calls for a review of our policies which have led to diversion of scare
resources in the form of subsidies for fertilizers, rural electricity, irrigation, finance
and other agricultural inputs, away from the creation of productive assets.

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Schemes & Facilities from the various banks

NABARD:-

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RURAL NON-FARM SECTOR FINANCE

SCHEME
Rural Non Farm Sector (RNFS) holds the key to faster
economic development of the country. It has potential and
promise for generating employment and increased income in
the rural areas. Hence, NABARD has identified financing, development and
promotion of RNFS as one of its thrust areas.
Schemes from NABARD for non-farming sector:
1. COMPOSITE LOAN SCHEME (CLS) - under ARF
Borrowers: Rural artisans, handicraftsmen, small entrepreneurs, groups of
individuals, partnership firms, co-operative societies, NGOs, etc.
Refinance ceiling -Maximum of Rs. 10 lakh per borrower.
Repayment period -3 to 10 years with suitable need based moratorium not
exceeding 18 months.
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Eligible activities -All manufacturing, processing, and approved service activities.

2. INTEGRATED LOAN SCHEME (ILS) - under ARF

Borrowers: Individuals, artisans, groups of individuals, associations (formal and
informal), proprietary/ partnership firms/ co-operative societies, registered
institutions/ trusts, voluntary agencies, private and public limited companies, etc.
Refinance Repayment period 3 to 10 years with suitable need based moratorium
not exceeding 18 months.
Eligible activities Manufacturing, processing and approved service activities in the
cottage, village and tiny industry sector and modernization/ renovation/ expansion/
diversification of existing units.
3. Small Road and water Transport Operators SCHEME (SRWTO) - Under
ARF
Borrowers Individuals, groups of individuals, including partnership/ proprietary
firms and co-operative enterprises. The borrowers should be from the rural areas
and should utilize the vehicle mainly for transportation of Rural Farm and NonFarm Products and inputs and passengers to/ from marketing centres. The borrower
or his employee should possess a valid driving licence and the vehicle should be
duly registered with the Regional Transport Authority as public transport vehicle.
Refinance ceiling Maximum of Rs.15 lakh per borrower
Repayment period 5 years with moratorium of 6 months.

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Eligible vehicles Transport vehicles including Light Motor vehicles, Jeeps, Auto
rickshaws, Water transport units (boats, launches etc.)
4. Schemes under pre - sanction procedure
(i) Term Loan to SSI units (through CBs & Scheduled PCBs)
Borrowers : Individuals, Proprietary / Partnership concerns, Private/ Public
Limited Companies, Promotional/ Developmental Organizations, State Level
Federations/ Corporations, Joint Sector Undertakings.
(ii) Term Loan to Industrial Co-operatives (through SCBs)
Borrowers : Industrial Co-operative Societies identified as viable/ potentially
viable by the State Government.
Iii) Project Finance for Agro-Industries (through CBs, Scheduled PCBs and
SCBs)
Borrowers
1.

State level corporations such as agro-industries corporations, forest/ tribal

development corporations, KVIC/ KVIB, state level cooperative societies/
federations, co-operative marketing/ processing and industrial societies, joint
sector undertakings, registered societies in KVIC/ KVIB fold.

2. Public/ private limited companies, partnership firms and proprietary concerns.

Repayment period: 3 to 10 years with moratorium of 12 months.
5. Soft Loan Assistance Scheme for Margin Money

36

RURAL FINANCE
Beneficiaries and purpose: Entrepreneurs having necessary talent/ skills, but who
lack monetary resources to meet the margin requirements stipulated under the
relevant schemes covering both ARF and prior sanction.
Purpose To set up new units as well as for modernisation/ renovation/ expansion/
diversification of existing units even if the units were not initially refinanced by the
Bank.
Eligibility criteria Refinance will be available on the banks' satisfying the
eligibility criteria based on recovery performance/the position of NPAs, as
prescribed by NABARD from time to time.

FARM SECTOR FINANCE SCHEME:

A) Refinance Assistance for financing farm mechanization
Tractors:
(a) The quantum of refinance in respect of financing for acquisition of second
tractor has been enhanced from existing level of 40% to 90% (95% in case of
SCARDBs) of the loan amount as in the case of first tractor.
(b) Though the minimum land holding required for financing tractors is 8 acre
perennially irrigated land, necessary discretion has been given to banks to evolve
their own area specific norms, if need be, and report such norms evolved by them
to the concerned RO of NABARD.

37

RURAL FINANCE
(c) Refinance facility for financing purchase of second hand tractors has been
extended to Gujarat in addition to Punjab, Haryana and Rajasthan.

Power Tillers:
(a) Though the minimum land holding required for financing power tillers is 6
acres of perennially irrigated land, necessary discretion has been given to banks to
evolve their own area specific norms, if need be, and report such norms evolved by
them to the concerned RO of NABARD.
(b) Banks have also been advised to give focused attention on financing power
tillers by preparing a three year banking plan for a compact area for the benefit of
the small farmers.

Swarnajayanti Gram Swarozgar Yojana (SGSY)

SGSY, formed by restructuring ongoing self employment programmes, viz. IRDP,
TRYSEM, DWCRA, etc., is under implementation from 01 April 1999. The
programme envisages formation of SGSY Groups and their linkage with the banks.
Individuals as also SGSY group members, below poverty line are assisted under
the programme.

Scheme for setting up of Agriclinic and Agribusiness centers

38

RURAL FINANCE
In pursuance of the announcement made by the Union Finance Minister in the
budget speech for the year 2001-02, National Bank in consultation with the
Ministry of Agriculture, GOI and select banks formulated a scheme for financing
Agriculture Graduates for setting up Agriclinics and Agribusiness Centres The
scheme aims at supplementing the existing Extension Network to accelerate the
process of technology transfer to agriculture and supplement the efforts of State
Agencies in providing inputs and other services to the farmers.

Scheme for financing farmers for purchase of land for

Agricultural purposes
In response to the Honorable Union Finance Minister's emphasis on the need to
step up priority sector lending and to examine financing farmers for purchase of
land for agricultural purposes, the Working Group constituted by Indian Banks
Association formulated a above scheme in consultation with the Government of
India, RBI and NABARD.
The objective of the Scheme is to finance the farmers to purchase, develop and
cultivate agricultural as well as fallow and waste lands as also consider financing
purchase of land for establishing or diversifying into other allied activities.
Eligibility (i) Small and marginal farmers i.e... Those who would own maximum
of 5 acres of non- irrigated land or 2.5 acres of irrigated land including purchase of
land under the scheme and (ii) Share croppers / Tenant farmers are eligible.

Central Sector Capital Subsidy scheme for Investment

Promotion (IPS)

39

RURAL FINANCE
A Central Sector Capital Subsidy scheme (Investment Promotion Scheme)
launched by the Government of India in collaboration with NABARD for
development of privately owned non-forest wastelands in the country is under
implementation since 1998. Of the 40 schemes covering about 1500 ha sanctioned
till date, the coverage is mostly confined to the States of Tamil Nadu, Andhra
Pradesh and Maharashtra, with Tamil Nadu accounting for more than 20 schemes.
The scheme provides for subsidy upto 25% of bank loan with a ceiling of Rs. 25
lakh for taking up plantation and other on-farm developments in private
wastelands. In view of the availability of substantial area under non-forest
wasteland in all States and the need to develop them, a nationwide awareness and
publicity campaign was launched by the Government of India in association with
NABARD for popularizing the Investment Promotion Scheme (IPS). As a part of
this effort, workshops are being organized by NABARD in different States/
regions.
Refinance Scheme for financing Farmers Service Center (FSC)
NABARD has decided to extend 100% refinance facility to banks for financing
Farmers Service Centres (FSC) set up in collaboration with Mahindra Shubhlabh
Services Ltd (MSSL) for providing various extension services to farmers including
supply of agri-inputs. FSC is intended to benefit farmers by way of higher yields
and productivity through private sector participation in technology transfer and
extension services.

Scheme for Rural Finance :

40

RURAL FINANCE
SBI Caters to the needs of agriculturists and landless agricultural labourers through
a network of 6600 rural and semi-urban branches. There are 972 specialized
branches which have been set up in different parts of the country exclusively for
the development of agriculture through finance deployment. These branches
include 427 Agricultural Development Branches (ADBs) and 547 branches with
Agricultural Banking Divisions (ADBs) and 2 Agricultural Business Branches at
Chennai and Hyderabad catering to the needs of hitech commercial agricultural
projects.
The Bank has achieved tremendous growth in agricultural finance. As on March
2001, it has covered 48 lakh farmers with loan outstanding of Rs. 14962 crores,
accounting for 28% of total agricultural advances of Public Sector Banks (PSBs)

Crop Loan
SBI offers financial assistance to meet cultivation expenses for various crops as
short Term Loan. With a repayment period not exceeding 18 months, the Crop
Loan is extended in the form of direct finance to cultivators.
Eligibility-Agriculturists, Tenant farmers and Share Croppers who actually
cultivate the lands are eligible for these loans. All categories of farmers Small/Marginal (SF/MF) and others are included.

Produce marketing loan scheme

41

RURAL FINANCE
The Bank extends financial assistance to help farmers store produce on their
own to avoid distress sale. The repayment period of the produce marketing loan
(PML) does not exceed 6 months. Further, this facilitates immediate renewal of
crop loans for next crop.
Eligibility-All categories of farmers - Small/Marginal (SF/MF) and others - are
eligible.
The

Bank

verifies

1)
2)

the

following

Service
Stocks

at

aspects

before

Area
the

granting

the

loan:

Approach.

borrowers'

residence/godown.

3) Stock statement for valuation.

Loan Amount

Security to be furnished

Upto Rs.25,000

DPN, DPN take delivery letter Hypothecation of

stocks.

Above Rs.25,000

Hypothecation of stocks.Mortgage of properties.

Kisan finance card scheme

The SBI offers the Kisan Finance Card for farmers under short-term finance
introduced as per RBI/NABARD guidelines, providing a running account facility
to farmers to meet their production finance need and contingency needs.
Eligibility-All agricultural clients having good track record for the last two years
are eligible for the Kisan Finance Card. Minimum finance limit: Rs.3000/- New
borrowers

requiring

crop

loans

can

also

avail

this

product.

Finance limit is based on operational land holding, cropping pattern and scale of
42

RURAL FINANCE
finance. Withdrawals can be made using easy and convenient withdrawal slips. The
Kisan Finance Card is valid for 3 years, subject to annual review.

Agriculture term loans

SBI gives agricultural term loans in the form of direct finance to cultivators to
create assets facilitating crop production/income generation. Repayments span not
less than 3 years and not exceeding 15 years. Activities broadly covered are land
development, minor irrigation, farm mechanization, plantation and horticulture,
dairying, poultry, sericulture, dry land, waste land development schemes, etc.
Eligibility-All categories of farmers-small/medium-and agricultural labourers are
eligible for agricultural term loans, provided they have necessary experience in the
activity and the required land area.

Land Development Schemes

The SBI gives finance solutions for land development programmes in the form
of direct finance to cultivators aimed at better productivity. Loans under this head
cover various activities like land clearance (removal bushes, trees, etc.), land
leveling and shaping, contour/graded bunding, bench terracing for hilly areas,
contour stone walls, staggered contour trenches, disposal drains, reclamation of
saline/alkaline soils and fencing.
Eligibility: Loans cover various activities like digging of new wells (open/bore
wells), deepening of existing wells (traditional/inwell bore), energisation of wells
43

RURAL FINANCE
(oil engine/electrical pump set), laying of pipe lines, installing drip/sprinkler
irrigation system and lift irrigation system.

Minor Irrigation Schemes

SBI provides finance for creating new source of irrigation by exploiting
underground water, energisation of wells, conveyance of water, judicious use of
available water, etc.
Loans cover various activities like digging of new wells (open/bore wells),
deepening of existing wells (traditional/inwell bore), energisation of wells (oil
engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation
system and lift irrigation system.

Farm Mechanisation Schemes

SBI provides finance for purchase of farm equipment and machinery for
agricultural operations.
This mode of finance covers activities ranging from: Purchase of tractors, trailers,
cultivators, cage wheels, power tillers, combine harvesters, power sprayers,
dusters, etc.
44

RURAL FINANCE
Eligibility- is ascertained on the basis of minimum area requirements: Tractors - 8
acres of irrigated area Power tiller - 5 -6 acres Combine harvester - 20 acres

Financing of Combine Harvesters:

A farmer should own minimum 8 acres of irrigated land.

Non-farmer entrepreneurs capable of utilizing combine harvester for custom

hiring work are also eligible.

Combine harvester should be utilized for a minimum of 1000 hours of

productive work in a year.

Unit cost will include cost of combine harvester and accessories, if any.

Kisan Gold Card Scheme:

Eligibility-Farmers with excellent repayment record for at least past 5 years. New
farmers

are

not

eligible

for

the

product.

Purpose-Investment finance for which term loans are ordinarily sanctioned. The
scheme also includes major family expenditures like marriages and education of
children.

Land Purchase Scheme:

45

RURAL FINANCE
Eligibility-Small/marginal farmers, tenants, share-croppers owning less than 5
acres of unirrigated / 2.5 acres irrigated land in their own name and landless
agricultural labourers are eligible to avail loan under the scheme, provided they are
our existing borrowers with record of prompt repayment of loans. Own land before
and after purchase should not exceed 5 acres irrigated / 2.5 acres irrigated.
Security-Land to be purchased with Bank finance will be mortgaged as security.
No

other security will be insisted upon.

Repayment-Entire loan will be repayable in 10 years in half-yearly installments.

Adequate gestation period will be allowed for development of land for cultivation.

Self Help Groups (SHGs) :

SHGs are self managed homogeneous groups of economically backward people
that promote savings among themselves and pool the savings. These pooled
resources are supplemented by external resources i.e. bank finance when these
groups gain experience. The Self Help Groups Linkage Programme of SBI is under
implementation since 1992. At the end of March 2001, the Bank has financed
25,000 self-help groups with aggregate finance limit of Rs 46 crore.

46

RURAL FINANCE

Various

Finance

Scheme

Offered

From

Government:
Maharashtra Rural Finance Project (MRCP) - India - out line
of the project features and Impact :
General: Access to finance has long been considered a major poverty alleviation
strategy in India. A variety of finance-linked programmes supplemented by
subsidies have been implemented. The Integrated Rural Development Programme
(IRDP) operating since 1978-79 has been a major national rural poverty alleviation
programme with a large finance component. Under this programme, nearly 53
million families below poverty line were assisted with bank finance of Rs.31
billion and subsidy of Rs. 10.5 billion upto 31st March 1998, but its impact had not
matched the resources spent. This was due to reasons like provision of supply
rather than demand-led finance, loans not tailored to meet needs of individual
enterprises, lack of aftercare support, and weak linkages lack of supervision over
loan utilization etc. Further, there was no effective involvement of the people at
any stage of implementation of the programme. As a result, the incidence of high
overdue and high transaction cost for the banks in financing the rural poor became
a matter of concern for the policy-makers.

Maharashtra Rural Finance Project (MRCP) :

Against this backdrop the MRCP supported by IFAD was evolved as an innovative
approach to poverty reduction with peoples participation. The strategy for
implementation of this project has been devised in such a manner that the rural
47

RURAL FINANCE
poor assume centre-stage and their participation ensured at all stages of the project
viz. planning, implementation and monitoring. The experience gained shows that
once the peoples participation is invoked at the planning stage itself a strong sense
of ownership of the project develops among the people which stimulates them to
actively involve in the subsequent phases of the project.
The MRCP being implemented with an outlay of US$ 48.35 million is
financed by an IFAD loan of US$ 29.2 million supplemented by a contribution of
US$ 14.97 million from Government of India/Government of Maharashtra and
US$ 1.65 million from participating banks. The Project which is implemented by a
number of banking institutions, Government agencies and Non Governmental
Organisation (NGOs) since 1994-95 was designed with the principal goal.

Finance-Cum-Subsidy Scheme for Rural Housing.

Introduction:- The Finance-Cum-Subsidy Scheme for Rural Housing has been
conceived for rural households having annual income upto Rs.32,000/-.
Objective- To enable/facilitate construction of houses for all rural households who
have some repayment capacity.
Target Group- The target group under the scheme will be the rural households
having an annual income of Rs. 32000/- only. However preference will be given to
rural households who are below poverty line.

Salient Features:
Subsidy upto Rs.10, 000/- per eligible household in plain areas and Rs.11,
000/- in hilly/difficult areas.
Loan upto Rs."2"0,000/- per household.
Sanitary latrine and smokeless chulha are integral part of the house.

48

RURAL FINANCE

Achievement:
The scheme has been launched with effect from 1 April, 1999 and is in the process
of implementation.
Funding Pattern:
Funds are shared by the Centre and State in the ratio of 75:25.

Implementing Agency:
The Implementing Agency for the Finance Cum Subsidy Scheme for Rural
Housing may be the State Housing Board, State Housing Corporation, specified
Scheduled Commercial Bank, Housing Finance Institution or the DRDA/ZP.

Council for Advancement of Peoples Action & Rural

Technology (CAPART):
Recognising the need for an organisation that would coordinate and catalyse the
development work of voluntary agencies in the country, particularly to ensure
smooth flow of benefits to the underprivileged and socio-economically weaker
sections of society, Government of India, in September, 1986 set up the Council for
Advancement of Peoples Action and Rural Technology (CAPART), a registered
society under the aegis of the Department of Rural Development, by merging two
autonomous bodies,
Namely, Peoples Action for Development of India (PADI) and Council for
Advancement of Rural Technology (CAPART).
The main objectives of the CAPART are:-

49

RURAL FINANCE

To encourage, promote and assist voluntary action for the implementation of

projects intending enhancement of rural prosperity.

To Strengthen and promote voluntary efforts in rural development with focus

on injecting new technological inputs;

To act as a catalyst for the development of technology appropriate for rural

areas.

50

RURAL FINANCE

CHAPTER-3

NEED FOR RURAL FINANCE

RURAL FINANCE: NEED & IMPORTANCE

51

RURAL FINANCE
Rural finance is important to the poor. The poorest groups spend the highest
proportion of their income on food typically more than 60% and sometimes as
much as 90%. Under these circumstances, any drop in earnings, or any additional
Expenditure (health or funeral costs, for instance) has immediate consequences for
family welfare unless savings or loans can be accessed. Financial transactions are
therefore an integral part of the livelihood system of the poor.
Rural finance consists of informal and formal sectors. Examples of formal sources
of finance include: banks; projects; and contract farmer schemes. Reference is
often made to micro-finance. Micro underlines the small loan size normally
associated with the borrowing requirements of poor rural populations, and microfinance schemes use specially developed pro-poor lending methodologies. Rural
populations, however, are much more dependent on informal sources of finance
(including loans from family and friends, the local moneylender, and rotating or
accumulating savings and Finance associations).

52

RURAL FINANCE

LENDING TO THE RURAL POOR: THE

ISSUE

At the 1997 Micro-Finance Summit, James Wolfensohn, President of the

World Bank, said that micro-finance is not the single answer to poverty, but an
important One. This widely held belief underpins much of the interest in rural
finance, although it has some important shortcomings some researchers argue that
the better-off of the poor are usually those served by micro-finance, since the ultrapoor seldom join micro enterprise loan programmes. The poorest benefit more
from small savings schemes, consumption loans, or emergency funds. Rural
finance would not be the focus of so much development effort was it not for
widespread market failure (i.e. failure to provide the services people want) in rural
financial services in developing countries. Reasons for market failure include:
The lender does not know the default risk of each potential borrower and to
Collect this information is costly;
It is costly to ensure that the potential borrowers take those actions which make
loan repayment more likely;
It is difficult and costly to enforce repayment; and Rural Finance and Natural
Resources
the cost of providing services to the rural poor is high because the rural poor are
located in remote areas, want to borrow small amounts, are often illiterate, lack
experience of banks, and lack collateral, all of which necessitate the development
of tailored approaches.

53

RURAL FINANCE

IMPLICATIONS

OF

THIS

FOR

AGRICULTURAL ACTIVITIES
All these types of market failure apply to lending to the agricultural and
other natural resource-based sectors in developing countries. Lack of information
on the risk of default is particularly germane to agricultural enterprise. Farmers do
not keep records, so it is difficult for them to produce the information that might
convince a bank of their financeworthiness. Rural market transactions are largely
informal, so it is difficult for the bank to collect independent information on prices.
Farming is clearly a risky business because of weather, pests and market
fluctuations and it is difficult for a bank to assess the degree of risk associated
with particular activities. The rural poor do not have track records, or referees who
will vouch for their competence and reliability. Making sure that farmers stick to
their business plan, using loans as intended, and carrying out tasks to schedule, is
also costly, although this might make loan repayment more likely. Enforcing
repayment is also difficult this requires monitors who know when crops are sold,
or agreements with merchants to pay the farmer net of what s/he owes the bank, or
effective penalties such as seizure of assessor prosecution. Farmers rarely have
collateral acceptable to banks.
They may not have clear title to the land they farm, or even if they do, rural land
markets may not function well enough for land to be considered a bankable asset.
Poor farmers, moreover, rarely have other bankable assets. They might own a
bicycle, and have a store half full of grain, but were a bank to seize such assets the
cost of doing so would probably exceed their sale value. The poorer the farmer, the
less are his/her chances of borrowing from the formal sector. Women, particularly
54

RURAL FINANCE
poor women, face even more problems in obtaining finance. Land title, where it
exists, is usually held by men. Women often have little control over other factors of
production, particularly for the bankable cash cropping activities. In some
countries women may only borrow in the names of their husbands, if at all, and
literacy rates for poor women are almost always lower than those for men. The
irony is that numerous studies show that women tend to repay loans more reliably
than men. Numerous projects, government schemes and NGOs engage in loan
programmes targeted at the poor. Some of these work well, but the majority are
unsustainable because of high and subsidized costs, and high rates of default. The
poor depend overwhelmingly on the informal sector.

55

RURAL FINANCE

FINANCIAL MECHANISMS USED BY

RURAL POOR
The poor borrow from family and friends. This is an extremely important
source of finance, but is inadequate in situations where everyones need arises at
the same time (purchasing seasonal inputs, or replanting late because the rains have
failed).Moreover, locally obtained funds are very vulnerable to covariate risk, i.e.
risk that affects everyone, such as crop failure.
The poor borrow from moneylenders, shopkeepers, pawnbrokers and merchants.
Interest rates are usually high and loans are taken out for short periods. Such
lenders Rural Finance are usually based within the community they know their
clients; they know their clients businesses; and they can apply pressure from
within the community to ensure that loans are repaid. Sometimes the loan will be
guaranteed (loans from pawnbrokers for instance), or linked to crop sales. The
latter may be on extremely poor terms for the farmer. Green loans are made in
Zimbabwe, for instance, against a standing crop. The farmer takes such a loan
because s/he is desperate for cash before the harvest (when there is a general
shortage of cash in the farming community), but in return relinquishes all his/her
right to the crop on a specified plot. In India, fish Merchants lock fishermen into
lifelong indebtedness, by making loans that are repaid through fish sales at prearranged (below market) prices. For many rural people, borrowing from these
sources is a last resort, but even though the cost of borrowing may be high, such
lenders provide an important source of cash in rural communities where there are
few, if any, alternatives. Where finance is not available, households may have to
deplete their asset base (spend savings, or sell jewels or livestock) or go without
essential items, including food. The discussion of finance tends to direct attention
56

RURAL FINANCE
towards productive finance, i.e. finance for the purpose of generating income.
However, poor people often need mechanisms to protect their livelihoods: they
need finance to overcome consumption shortfall, or to smooth consumption
patterns; and they need insurance or insurance substitutes to protect fragile and
high-risk livelihoods. Multi-peril crop insurance schemes targeted at the poor have
generally been expensive failures. This is largely because of high administrative
costs and political difficulty in charging fair premiums and enforcing impartial loss
adjustments. Rural populations use insurance Substitutes, such as:
Savings (money or assets, including livestock, which can be accessed at times of
Need);
Risk-reducing behavior (for example, low-yielding but drought-tolerant crop
choices); and
Investment in social capital (for example, developing ties with peers or relatives
to increase access to potential assistance in times of need).
The demands that can be made on extended family simultaneously help poor
people protect their livelihoods and make them less reliable in repaying formal
loans, because family demands on cash resources may be unpredictable, but
socially unacceptable to resist. Savings mechanisms are very important to the poor.
By foregoing current consumption, future options are preserved for consumption
or investment. Savings a type of insurance and the poor may prefer to save rather
than to invest. Precautionary savings increase household resilience and the capacity
to absorb risks. So strong is the need for safe-keeping of income (from their own
personal consumption, consumption by others, or from theft), that in some
countries people will actually pay money-guards to look after their savings (which
do not accumulate interest). Rotating and accumulating savings and finance
associations are another mechanism used by poor people to establish a savings
habit (regular contributions are made by all members to a common fund, and the
57

RURAL FINANCE
pooled resources are then disbursed to each member in turn). Yet once again, the
ultra-poor are excluded from such associations because they cannot commit to
regular payments. Rural Finance and Natural Resources These mechanisms are
important and provide insight into why farmers pursue certain strategies. Reducing
risk may be more important than increasing yields; accumulating savings may be
more important than investment; and farmers may keep cattle as savings, rather
than as an income-generating venture in their own right.

58

RURAL FINANCE

CHAPTER-4
SOURCES OF RURAL FINANCE

59

RURAL FINANCE

Sources

of Rural Finance

There are mainly two sources available to the farmers private agencies &
institutional.

Private

agencies

means

relatives,

landlords,

agricultural

moneylenders, professional private moneylenders, traders & commission agents,

others. Where institutional agencies are a. commercial banks, b. the state bank, c.
co-operative societies & land mortgage banks d. agricultural finance Corporation.
Private agencies giving 93% of the total finance requirements in 1951-52 and
institutional sources including government giving for only 7% of the total finance
needs. But in 1960-61, the share of private agencies came down to 81.3 which
was as follows:- Relatives 8.8%, Landlords 0.6%, Agricultural moneylenders 36.0,
Professional private moneylenders 13.2%, traders & commission agents 8.8%,
other sources 13.9. That time institutional sources were 18.7 and the break up was
government 2.6%, Co-operative 15.5%, Commercial banks 0.6%. As per the All
India Debt and Investment Survey (1981), estimated that the share of private
agencies had further slumped to about 37% & share of institutional finance jumped
to 63% break up was 30% of co-operative & 29% of commercial banks.
Government & Reserve Bank of India is supporting commercial bank & cooperatives to meet the growing demand for agricultural finance

60

RURAL FINANCE

Private Agencies Sources

Money lenders:
Though there are drawbacks, moneylenders are by far the most important source
of agricultural finance in India. That we have already seen before, it is therefore,
clear that the basic problem of the agricultural economy of India is the huge
indebtedness of farmers and their exploitation by private moneylenders. For that
government of India make provisions in act as follows a. maintenance of accounts
in prescribed forms, b. furnishing of the receipts and periodical statements, c.
fixing of maximum rates of interest, d. Protection of the debtors from molestations
and intimidations, e. licensing of moneylenders, and f. penalties for infringement
of the provisions. The basic objectives of such legislative enactments can be stated
as: I. to bring about an improvement in the terms on which private finance was
available to agriculturists and to place legal restrictions on the unreasonable
exactions of moneylenders, II. To enable civil courts to do greater justice as

61

RURAL FINANCE
between lenders and borrowers than was possible in the prevailing circumstances
under the ordinary Code of Civil Procedure.

Traders & commission agents:

Traders & commission agents supply funds to farmers for productive purposes
much before the crops mature. They force the farmers to sell their produce at low
prices and they charge a heavy commission for themselves.

Landlords & others:

Farmers, predominantly small farmers & tenants, depend upon landlords and
others to meet their financial requirements. This source of finance has all the
defects associated with moneylenders, traders and commission agents. Interests
rates are exorbitant. Often the small farmers are cheated and their lands are
appropriated. What is worse, this source of finance is becoming more important
from 3.3 percent in 1951-52 to 14.5 percent in 1961-62 but declined to 8.8 percent
in 1981.

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RURAL FINANCE

Institutional sources of finance

These are the funds made available by co-operative societies, commercial banks, &
regional rural banks & state governments also. The need for institutional finance
arises because of the weakness or inadequacy of private agencies to supply finance
to farmers. Private finance is defective because:I.

It is based on profit motive &, therefore, it is always exploitative.

II.

It is very expensive and is not related to the productivity of land.

III.

It does not flow into most desirable channels and to most needy persons.

IV.

It is not available for making agricultural improvementsand much of the

necessary improvements are not undertaken as funds are not available for long
periods at low rates of interest

V.

It is not properly integrated with the agriculturists other needs.

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RURAL FINANCE
Problems in Institutional sources:
The government was of the view that multi-agency approach to rural finance was
the real solution to the emancipation of small farmers from the clutches of the
money-lenders. But within a short period, number of problems has surfaced such
as:
a)

There was no coordination between different agencies operating in the

same area and, as a result, there was multiple financing, over-financing in some
areas and under-financing in others.

b)

Despite the adoption of lead bank scheme and district finance plans, the
different agencies often failed to formulate and develop meaningful agricultural
finance programmes in given blocks and districts.

c)

Despite guidelines issued by RBI, different agencies adopted different

procedures and policies in the matter of providing loans and their recover. The
result was unnecessary competition among the different agencies.

d)

There were practical problems in the recovery of loans when different

agencies had lent to the same person against the same securities. Ultimately, there
were heavy overdue.
The major problem faced by lending institutions, particularly co-operatives, is the
most unsatisfactory level of overdue. The ration of overdue to that of demand is
around 40 to 42 percent in the case of co-operatives and 47 percent in the case of
Regional rural banks. Accordingly, health of rural finance institutions, both cooperative and commercial banks, is in a very sad state in several parts of the
country.
64

RURAL FINANCE
1. Co-operative finance societies It is the cheapest and the best source of rural
finance.

The rate of interest is low. Since 1951, the co-operative finance

movement has started helping the farmers in a big manner. During 1989-90 there
were about 88,000 primary agricultural finance societies. The stranglehold of the
moneylenders on the peasants is not met by the co-operatives. Besides, the small
farmers find it difficult to meet all their finance requirements from the cooperatives.
Primary Agricultural Finance Society:
The co-operative movement was started in India largely with a view to providing
agriculturists funds for agricultural operations at low rates of interest and protect
them from the clutches of moneylenders. The organization of the co-operative
finance for short period may be briefly outlined as follows:
A co-operative finance society, commonly known as the primary agricultural
finance society (PACS) may be started with ten or more persons, normaly belongs
to a village. The value of each share is generally nominal so as to enable even the
poorest farmer to become a member. The members have unlimited liability, that is
each member is fully responsible for the entire loss of the society in the event of
failure. This will mean that all the members should know each other intimately.
The management of the society is under an elected body consisting of President,
Secretary & Treasurer. The management is honorary, the only paid member being
normally. Loans are given for short periods, normally for one year, for carrying
out agricultural operations, and the rate of interest is low.

Profits are not

distributed as dividend to shareholders but are used for the welfare of the village.
In the construction of a well, or maintenance of a school, and so on. The usefulness
of the primary finance societies has been rising steadily. In 1950-51, it advanced
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RURAL FINANCE
loans worth Rs.23 crores; this rose to Rs. 200 crores in 1960-61, and to Rs. 4200
crores in 1988-89.
Financial Strength of PACs.:
To make all primary agricultural societies viable and ensure adequate and timely
flow of co-operative finance to the rural areas the Reverse Bank of India, in
collaboration with State governments, had been taking a series of steps to
strengthen weak co-operative banks and to correct regional imbalances in cooperatives development. Steps were taken to reorganize viable PACs and for
amalgamation of non-viable societies with farmers service societies or large sized
multipurpose societies. These efforts are being intensified by providing larger
funds to weak societies to write off their losses, bad debts and overdue.

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RURAL FINANCE

PACs and Weaker Sections:

The major objective of the co-operative development programmes is to ensure that
the benefits of co-operative activities flow increasingly to weaker sections
including scheduled castes and scheduled tribes. The government seeks to achieve
this through expanding the membership of the weaker sections in the existing
PACs and ensuring larger flow of funds and services to them. In the tribal areas,
large sized multipurpose societies are being organized mainly for the benefit of the
tribals.

Co-operative Central Banks:

These are federations of primary finance societies

in specified areas normally

extending to the whole district menace they are sometimes called as district cooperative banks. These banks have a few private individuals as shareholders who
provide both finance of management. Their main task is to lend to village primary
societies, but they were expected to attract deposits from the general public. But
the expectation has not been fulfilled and many of the co-operative central banks
act as intermediaries between the State Co-operative Bank on the one hand and the
village primary finance societies on the other.

State Co-operative Bank:

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RURAL FINANCE
This bank forms the apex of the co-operative finance structure in each state. It
finances and controls the working of the central co-operative banks in the State. It
serves as a link between the Reserve Bank of India from which it borrows and the
co-operative central banks and village primary societies. The State Co-operative
Bank obtain its working funds from its own share capital and reserves, deposits
from the general public and loans and advances from the Reserve Bank now
NABARD has formulated a scheme for the rehabilitation of weak central cooperative banks.

NABARD is providing liberal assistance to the State

Governments for contributing to the share capital of the weak central co-operative
banks selected for the purpose. The State Co-operative bank is not only interested
in helping the co-operative finance movement but also in promoting other cooperative ventures and in extending the principles of co-operation.

Problem of overdues to Co-operative finance :

A highly distressing fact of co-operative finance is the heavy overdues of cooperative finance institutions, now estimated between Rs.9, 000 crores to Rs.10,
000 crores. According to the RBI study team on overdues lack of will and
discipline among cultivators to repay loans was the principal factor responsible for
the prevalence of overdues of co-operatives. Defective lending policy pursued by
co-operatives, the apathy of management in taking quick action against recalcitrant
members and absence of favorable climate were other contributing factors.
Apart from these commonly factors normally responsible for a high level of
overdues, intervention of external forces such as loan waivers, concession in
various forms towards repayment of principal and interest has also affected the
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RURAL FINANCE
recovery performance of finance institutions to a significant extent. The problem
is further aggravated on the account of the state governments in ability to meet the
financial commitments to co-operative banks.
In recent years, the farmers are getting organized and one of their chief demands of
the farmer union is to cancel their debts to the co-operative societies and banks.
States have meekly surrended to such demands to write off the debts in a matter of
extreme concern, as it hampers the recovery of dues from the farmers.

The

problem of loan overdues is a matter of serious concern, as it affects the recycling

of funds and finance expansion on one hand and economic viability of the lending
institutions, specially the co-operatives and RRBs, on the other.
Land development banks The need for long-term loan is being satisfied by
land development banks (formerly the were called land mortgage banks).
The objective of such banks is to provide long-term finance to the cultivators
against the mortgage of their lands. The loans from the land development
banks are quite cheap and are spread over a long period of 15 to 20 years. It
is, therefore, convenient to borrow from these banks if previous debts have
to be cancelled or if additional land is to be purchased or if improvements
have to be made.

Though land development banks have been making

considerable progress in recent years in this country, they have not really
contributed much to the financial need of the farmers. Most farmers are not
even aware about this bank & 70% of the land development banks are
located in the three South Indian States of Tamil Nadu, Andhra Pradesh &
Karnataka. The loan sanction by this bank has been increase annually from
Rs. 3 crores to Rs. 770 crores between 1950-51 and 1989-90. Major
drawback of this bank is they lend against the security of land, and big
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RURAL FINANCE
landlords have taken advantage of them and, by and large, small peasants
have not benefited from them.

The Structure of LDBs:The long term finance structure consists of the central land development banks
(generally one for each State) and primary land development banks. In some
States, there are no primary land developments banks but in their place, there are
branches of central land development banks.

Problems of LDBs:Land development banking is yet to take strong roots in India barring few States.
However, LDBs have contributed in large measure to agricultural development by
lending specially for minor irrigation. All their loans are for productive purposes
benefiting mostly the small farm holders. Though land development banking has
made considerable progress in recent years, it has not really contributed much to
the improvement of the financial position of the farmers. A large number of factors
are responsible for the relative ineffectiveness of LDBs.

Overdues Problems:Mounting overdue in most of the LDBs have crippled the structure badly, in recent
years. Overdues at the level of primary land development banks have been put
between 42 to 44 percent. Overdues have caused innumerable financial problems
besides limiting the capacity of LDBs to lend and operate as viable units. The
financial discipline imposed on the banks in the matter of eligibility to undertake
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RURAL FINANCE
fresh lending based on recovery performance has been the main limiting factor
quantitative growth of finance operations. To some extent, the banks themselves
are to be blamed for this predicament due to faulty loaning policies, inadequate
supervision, over-utilization of loans, ineffective measures for recovery etc. Which
have contributed to the deterioration in recovering the loans.

Commercial Banks
The commercial banks in India have long confined their operations to urban areas,
receiving deposits from the urban public and financing trade and industry in urban
public and financing trade and industry in urban areas. Commercial banks are
extending financial support to agriculture both directly and indirectly direct finance
is extended for agricultural operations for short and medium period. Indirect
finance to farmers is made through providing advances for the distribution of
fertilizers, other inputs, etc, and also through financing primary agricultural finance
societies. Financing of investment in agriculture is a major aspect of the farm
finance activities of banks Finance needs of service units providing services for
warehousing, processing, marketing, transporting, and repairing of tractors etc.

Direct Finance by Commercial Banks:-

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RURAL FINANCE
At the time of bank nationalization, it was clearly conceded that the commercial
banks did not have the necessary experience or the personnel to deal with the
farmers directly. While the co-operative had been specializing in rural finance
since the beginning of the century.

Even then the nationalized banks were

expected to go vigorously in the support of the farmers in general and the small
cultivators in particular. In the initial stages, for obvious reasons the nationalized
banks concentrated their attention on large cultivators and other special category
farmers such as those engaged in raising high-yielding varieties of food-grains. At
present short term crop loans accounted for nearly 40 to 45% of the total loans
disbursed by the commercial banks to the farmers.
Term loans for varying periods for purchasing pump-sets, tractors and other
agricultural machinery, for construction of wells and tube-wells, for the
development of fruit and garden crops, or leveling and development of land, etc.
are provided. These term loans accounted for about 35 to 37% of the total loans
disbursed by commercial banks. Finally, commercial banks extend loans for such
activities such as dairying, poultry farming, piggery, bee keeping, fisheries and
others these loans account for 15 to16%. Region wise, southern region accounts
for the bulk of finance disbursed by commercial banks viz. 52% of the total
finance extended.

Indirect Finance by Commercial Banks:

Even though the scope for direct financing by commercial banks would be limited
for some years to come, there is a considerable scope for indirect financing by
commercial banks. For instance, commercial banks are financing co-operative
societies to enable them to expand their production finance to the farmers. More
especially they increasingly finance co-operatives engaged in marketing and
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RURAL FINANCE
processing of agricultural produce or in the activities ancillary to agriculture such
as dairy farming, poultry farming, etc. In this connection, the Stated Bank of India
and its subsidiaries are already playing an active role in financing co-operative
marketing and processing. Commercial banks are providing indirect finance for
the distribution of fertilizers and other inputs.
Commercial banks extend finance to manufacturing or distribution firms and
agencies and co-operatives engaged in the supply of pump-sets and other
agricultural machinery on the hire-purchase basis. They finance the operations of
the Food Corporation of India, the state governments and others in the
procurement, storage and distribution of food grains.
Finally, commercial banks increasingly subscribe to the debentures of the central
land development banks and also extend advances to the latter. This enables land
development banks to expand their medium and long-term advances to farmers for
the purpose of land improvement and land development.

Commercial Banks & Small Farmers:

It has been estimated that nearly 70 percent of farmers owning less than 2 hectares
of land are not getting bank finance; only large landowners have been found
financeworthy and suitable for banks advances.

But such a situation cannot

continue for long. Under the direction of the Planning Commission, Small farmers
Development Agencies have been set up to identify small farmers and work out
economically viable schemes of agricultural development.

Commercial banks

have to group them into various categories for finance support so as to enable them
to become viable cultivators. For instance, in areas where the subsoil water table is
high, the small cultivator has to be helped by banks to convert his dry holding into
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RURAL FINANCE
wet holding. With pump set loan, the cultivator can change the cropping pattern
into double or even multiple cropping activity. As regards small cultivators near
urban areas and with irrigation facilities, commercial banks can help them to go in
for poultry farming and maintaining one or two vegetable cultivation or combine it
with small milch cattle.

Problems of Commercial Banks in Agricultural Finance : The finance needs of the agricultural sector in the next few years are estimated to
rise to Rs.50,000 to Rs.60,000 crores. To meet the needs is an enormous task, and
responsibility will have to be borne by co-operatives and commercial banks. As
resources available to commercial banks in the agricultural sector will naturally be
limited, it is important that every commercial bank attempts to make optimum use
of its limited resources in this sector. In the field of financing of agriculture, the
problem is not merely quantitative but also of coverage vis--vis the organization
and the personnel available to the nationalized banks. The majority of the rural
population consists of small farmers. Further, there are 5, 50,000 villages spread
throughout the country. To reach all of them with only about 47,000 banking
offices is, no doubt, a stupendous task. Even with the completion of branch
extension programmes of the commercial banks now in hand or those which may
be undertaken during the next 5 to 10 years, commercial bank may not be in a
position to cover many of the villages.

Moreover in recent years, the rural

branches of commercial banks in general and branches of RRB in particular, have

been under severe financial strain on account of higher transaction cost involved in
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RURAL FINANCE
handling of large number of small size loan accounts and somewhat lower interest
income as a result of concessional rate of interest on small size loans.
The lower proportion of current deposits in total deposits of rural branches has also
placed them at a disadvantage with regards to cost of resources. Finally, the
presence of overdues, particularly after the implementation of Agricultural and
Rural Finance Debt Relief Schemes, 1990 has further adversely affected the
viability of rural branches of commercial banks.
Under these conditions, if the development of agriculture is not to suffer for want
of finance and if there has to be some improvement in the lot of innumerable small
farmers, new dimensions will have to be given to schemes of financing agriculture.

Regional Rural Banks:

These banks were first set up in 1975 specifically to give direct loans and
advances to small and marginal farmers, agricultural labourers, rural artisans and
other of small means. The loans are given for productive purposes. There were
196 RRBs which have been lending around Rs. 3600 crores annually by way of
loans to rural people. Over 90 percent of the loans of RPBs are given to the
weaker sections in rural areas. The regional banks, though basically scheduled
commercial banks, differ from the latter in certain respects:
The area of regional rural banks is limited to a specified region comprising one
or more districts of a State.

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RURAL FINANCE
The regional rural banks grant direct loans and advances only to small and
marginal farmers, rural artisans and agricultural labourers and other of small means
for productive purposes.
The lending rates of the regional rural banks should not be higher than the
prevailing lending rates of co-operatives societies in any particular State. The
sponsoring banks and the Reserve Bank of India provide many subsidies and
concessions to RRBs to enable the latter to function effectively

Concessions to RRBs:
From the beginning, the sponsor banks have continued to
provide managerial and financial assistance to RRBs and also other concessions
such as lower rate of interest on the latters borrowing from sponsor banks.
Further, the cost of staff deputed to RRBs and training expenses of RRB staff are
borne by the sponsor banks. The Reserve Bank of India has been granting many
concessions to RRBs.

Progress of RRBs:
There are now 196 regional rural banks in 23 States with
14,500 branches. As at the end of September 1990 the regional rural banks had
advanced Rs.3,560 crores by way of short-term crop loans, term loans for
agricultural activities, for rural artisans, village and cottage industries, retail trade
and self employed, consumption loans etc. Nearly 90 percent of the loans of RRBs
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RURAL FINANCE
were provided to the weaker sections.

State wise Uttar Pradesh found large

number of offices.

Objectives of RRBs:
RRBs had followed instructions given by RBI and Government of India
regarding loan policies, procedures, etc.
The basic aim of setting up RRBs viz, developing the rural economy by
providing finance for the development of agriculture, trade, commerce industry
and other productive activities in rural areas, was being fulfilled and
RRBs had successfully maintained their image as a small mans bank by
confining their finance facilities to the target groups viz, small marginal farmers,
agricultural labourers, artisans and small enterprises for productive activities.
The recovery position on the whole was not satisfactory.

Problems in functioning of RRBs:

a.

On account of the many restrictions place on the business they can

undertake,

b.

RRBs have low earning capacity.

The wage and salary scales of RRBs have been rising and, in fact, with the
recent award of a tribunal, their scales would approximate those of commercial
banks; with the increase in salary scales, an important rationale for the setting up of
RRBs has ceased to exist.

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RURAL FINANCE
c.

The sponsoring banks are also running their own rural branches in the very
area of operations of the RRBs; this has given rise to certain anomalies and to
avoidable expenditure on controls and administration.

Reserve Bank of India :

RBI had shown keen interest in agricultural finance and maintained a
separate department for this purpose. RBI extended short-term seasonal
finance as well as medium-term and long-term finance to agriculture through
State level co-operative banks and land developments banks. RBI had also
set up the Agricultural Refinance Development Corporation (ARDC) to
provide refinance support to the banks to promote programmes of
agricultural development, particularly those requiring term finance. With the
widening of the role of bank finance from agricultural development to
rural development the Government propo9sed to have a more broad-based
organization at the apex level to extend support and give guidance to finance
institutions in matter relating to the formulation and implementation of rural
development programmes.

A National Bank for Agriculture and Rural

Development (NABARD) or National Bank was, therefore, set up to take

over the agricultural finance functions of RBI on the on hand and the
refinance functions of ARDC on the other.

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RURAL FINANCE
NABARD: An Overview NABARD is an apex institution acfinanceed with all matters
concerning policy, planning and operations in the field of
finance for agriculture and other economic activities in rural
areas.
NABARD operates throughout the country through its Head
Office at Mumbai, 25 Regional Offices and on Sub-Office,
located in the capitals of all the states/union territories. It also
has 4 training establishments.
It is an apex refinancing agency for the institutions providing
investment and production finance for promoting the various
developmental activities in rural areas.
It takes measures towards institution building for improving
absorptive capacity of the finance delivery system, including
monitoring,

formulation

of

rehabilitation

schemes,

restructuring of finance institution, training of personnel, etc.

It co-ordinates the rural financing activities of all the
institutions engaged in developmental work at the field level
and maintains liaison with Government of India, State
Governments, Reserve Bank of India and other national level
institutions concerned with policy formulation.

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RURAL FINANCE
It prepares, on annual basis, rural finance plans for all districts
in the country; these plans form the base for annual finance
plans of all rural financial institutions
It undertakes monitoring and evaluation of projects refinanced
by it.

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Chapter-5

CHALLENGES OF RURAL FINANCE

CHALLENGES IN RURAL FINANCE

Twelve Key Challenges in Rural Finance

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RURAL FINANCE

Rural finance has been recognized as an important element and catalyst to

rural development. Millions of dollars have poured into rural finance, especially
agricultural finance, in the past and yet rural communities have little to show for it.
Donors, governments and bankers became disillusioned with the results. Today
there is renewed interest in learning from the past and experiment for the future to
meet the seemingly illusive goal of increasing rural farm and non-farm investment
and assets through the ready access to appropriate and sustainable financial
services by all households.

In addition, rural finance has begun to be seen in a

broader spectrum than just agricultural and farm finance alone, but is rightly now
being defined as farm finance and non-farm finance, savings, insurance, transfers,
clearing, equity finance, and other services, and is not restricted to institutional
lines of finance.
Twelve key challenges for achieving this goal are laid out below, as foreseen by
rural finance specialists. While these are recognized obstacles to overcome, are
they the most important questions? What are the root causes and with which ones
can we have the most impact? What is missing? What is not important? Should
the focus be more on adapting products to fit the constraints or on addressing the
constraints? How must the responses to the key issues fit together in order to be
effective.
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Key challenges for rural financial service provision

Vulnerability Constraints
1.

Systemic Risk rural incomes, especially among the agriculturalists, are highly
susceptible to similar risks at the same time. Weather is the most uncontrollable
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RURAL FINANCE
and often devastating risk but disease and plagues are similarly important. Failures
in agriculture affect not only the farmer households and the production and
marketing linkages but also the rural non-farm economies that revolve around and
depend upon those income flows. The most problematic by far is farm finance
because of higher risk.
2.

Market Risk especially in developing countries, there both cyclical and

seasonal price fluctuations of agricultural commodities, not only due to local
production variation but also affected by outside forces such as political price
and exchange controls, subsidies and globalization.

3.

Finance Risk collateral, especially mortgage, is a missing element in most

rural finance, thus increasing the risk of the lender. Similarly, collateral substitutes
may be costly in both financial terms as well as social stigma risk terms as can be
the case with peer lending. Other support services and information networks such
as finance bureaus are often not available to help lower the risk. For term lending,
a financial gap risk between sources and uses of funds poses another risk
constraint.

Operational Constraints

4.

Investment Returns rural capital revolves slowly, with often one or less
frequently two crops per year. For investment capital, the returns are even lower
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and in spite of that are often faced with very low profit margins. Hence the
margins for error are much less than for example in commerce or most
microfinance, which tend to have high returns per unit of funds invested and higher
profit levels.
5.

Low Investment and Assets the relative poverty in rural areas causes
common crises to become major crises due to the lack of asset cushion. Any loss
of expected income through sickness or production losses cause significant impact.
In compensation, traditional networks and production risk minimization become
more important than profit maximization.

The small asset base also reduces

savings and borrowing capacity, thus constraining economies of scale in the use or
provision of services.
6.

Geographical Dispersion rural areas in many countries are characterized by

a low population density and high dispersion, which is coupled with a relatively
low market potential. The low market potential is usually accompanied by poor
services, making access and communication difficult, and hence causes high
operating costs for both production and marketing, as well as for access and
delivery of services.

Capacity Constraints

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7.

Infrastructural Capacity poor communication, pitiful roads, unequipped

schools and missing social and health services decrease efficiency of operations,
discourage new services and increase the outflow of the most talented and
resourceful persons and a reluctance of educated families to live in rural
communities.

8.

Technical Capacity and Training a relatively unskilled rural population

reduces opportunity for ready access and adaptation to new technologies and
employment.

The lack of capacity affects not only the productivity and

competitiveness in the changing marketplace, but also the ability to find trained
staff for service provision.
9.

Social Exclusion cultural, linguistic, gender, racial, religious and educational

constraints affect market and financial integration.

Such barriers reduce

production and marketing efficiencies. These are required in order to compete

effectively in the marketplace and thereby generate income and levels of assets
needed to reduce poverty and vulnerability. HIV/AIDS makes this even worse in
many countries.
10.

Institutional Capacity while there is an abundance of organizations in rural

areas, the relative capacity is lacking. This includes management and technical
capacity, size/economies of scale, competitive viability, economic integration and
often risk-bearing capacity. Even when urban based institutions have the capacity
to reach into rural areas, there is little incentive to do so. An exception to the
capacity constraint is at the micro level where the social fabric is often strong. It
can be sufficient for the low level of operations typically undertaken.

With

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sufficient organization and experience, these groups may also form linkages with
intermediaries of higher institutional capacity.

Political and Regulatory Constraints

11.

Political and Social Interference loans can be forgiven, savings can be

withheld, interest rates can be capped, mortgages can be rendered useless and
payments can be suspended due to decree. Even danger is not uncommon; hence
uncertainty can become an insurmountable hurdle.

12.

Regulatory regulations and/or a lack of enforcement of them hinder rural as

well as urban environments. Land tenure regulations, banking laws, exchange rate
manipulation and tax considerations are examples of such constraints that
destabilize and/or hinder viability of business and financial operations in rural
areas.

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Agriculture and its associated activities are found constituting the economic base
and the main source of livelihood and employment for the people in the state.
However, unprecedented growth of population on one hand and decreasing rate of
available agriculture land along with degradation of supporting natural resources as
required for sustaining crop productivity on the other have been seriously forcing
the problems of sustaining livelihood for farming communities. It is becoming
difficult to do the farming activity without external or internal sources. In this
context the significance of extending finance to non-farm sector becomes only
alternative but it also required finance assistance for its development.
Means a lot of hard work & government awareness is required to flow the finance
assistance in Rural Economy. But various schemes which are provided by the
various banks & government should be specific in its eligibility criteria to stop the
misuse of these funds by large farmers and to ensure that the finance reaches the
farmers who are in need of finance.

ANNEXURE
QUESTIONARE
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RURAL FINANCE

NAME OF THE BANK : SBI BANK.

How much loan is provided by the bank?

What is the rate of interest charged?
Do you have any branches in rural areas?
What are the various services provided by your bank?
What are the various schemes provided by the bank to the rural
poor?
What are the penalty charged by the bank, if the loan is not
repaid on time?
What are the terms & conditions for accessing rural finance?
Do you provide any special schemes to rural poor?

After the observation following suggestions can be made

Interest rates: Interest rates must be different for different
categories. First it should be concessional rate exclusively for
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RURAL FINANCE
small and marginal farmers at 1.5% to 11.5% & Secondly, there
should be a higher rate of interest applicable to the rest of the
agricultural borrowers upper limit for it is15.5%
Infrastructure Development: tempo of agricultural lending
has been low in the eastern regional states like Bihar, Orissa
and West Bengal & in the North Eastern States. So Agricultural
and Rural Infrastructure Development Corporation should be
setup in these areas which will concentrate on building up
necessary backward and forward linkages and supporting
services as well as formulate location specific schemes for
accelerating the transformation of agriculture and to arrange for
funding of the schemes.
Insurance scheme: Crop insurance scheme which was
introduced in India from Kharif 1985 covering major cereal
crops, oilseeds and pulses. The sum insured was limited to
Rs.10, 000 per farmer irrespective of quantum of crop loan and
the total sum insured would be limited to 100 percent of the
crop loan disbursed. Proper research should be done by
statutory crop Insurance Corporation.
Rationalisation: In present scenario each village is allotted to a
commercial bank branch under the Service Area approach. As
per the analysis each block should be allotted to a bank which
has the largest presence in the block through its branches.
Which will reduce the cost of supervision, improve quality of
monitoring and be beneficial to the customers

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Bibliography
Sr.No.
1.

Name
Indian Economy

Author
Ruddar Datt.
K.P.M. Sundharam.

2.

State Bank of India

3.

journals
Agricultural

Financing S.N.Ghosal
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In India
4.

Economic
1998-99.

5.

Rural Marketing

Survey,

Monthly Review of the Indian

Economy, CMIE, March-April
1999
Romeo S. Mascarenhas

Webliography
www.nabard.org
www.rbi.gov
www.sbi.co.in

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