CHAPTER-1

COMMERCIAL BANKS AND

AGRICULTURAL DEVELOPMENT
 Banking as a profession has been very old in India and indigenous bankers were the

established Institutions until the eighteenth century. Realising the need for banking concerns,

first attempts to start banks were made during the last quater of eighteenth Century. However,

the establishment of modem banking Institutions took place in the beginning of nineteenth

century. Government played a significant role in the establishment of modem banking

institutions and the Imperial Bank of India was formed in 1921. The beginning of the twentieth

century proved a turning point in the development of Indian Banking Institutions. However, the

role of commercial banks in promoting economic development was lower due to the fact that

they had no good security to offer. After 1950s the banking functions were diversified and an

important feature of this act has been the banks' increasing participation in medium and long

term financing In the form of subscription to the equity capital of specialised institutions. All

these developments had a remarkable impact on Indian Banking.

Gradually an awareness was growing that the development of branch banking in the

country has been lopsided with some areas enjoying more than adequate banking facilities while

the others were sadly lacking in them. The pace of branch expansion slackened in 1960,

although there has been a continuously rising tempo in the proceeding six years. The annual

report on Trend and Progress of Banking for 1962 notes that the growth has not been

commensurate with the needs of the situation of undertaking branch expansion in a properly

coordinated manner1. Two expansion programmes, one from August 1965 to July 1967 and the

other from August 1967 to December 1970 were adopted. Meanwhile, the Reserve Bank further

liberalised its licensing policy.

Commercial banks were asked to draw up another expansion programme and open at

least one third more branches. At least 50 per cent of the total branches were to be in the rural

and semi- urban areas. Again 50 per cent of the total were to be at unbanked centres^. As a

result of these policies, during the period 1950-69, scheduled banks have increased by 6779.

From the year 1955 onwards scheduled banks were given more licences than the other non-
 2

scheduled banks. This Is due to the liberalised attitude in branch licencing policies of Reserve

Bank of India. Further, the nationalisation of Imperial Bank of India also gave an impetus to the

commercial banking In the field of branch expansion. The total number of offices increased by

scheduled commercial banks during the period 1955-68 was 4605, of which 1231 (27 per cent)

were in the rural areas, 1649 (39 per cent) in semi-urban centres and 1725 ( 37 per cent) in

urban centres3.

Recognising the persistent lacunae in banking development and its investment pattern

between states and regions, the Government of India has nationalised the 14 major commercial

banks in 1969 and 6 more banks in 1980 with the avowed objective of achieving the balanced

regional development by extending their activities to rural areas. In order to reduce the

imbalance in the bank credit-deposit (C-D) ratios, RBI advised all scheduled commercial banks

to achieve a C-D ratio of atleast 60 per cent In respect of their rural and semi-urban branches by

1979 and subsequently to 70 per cent by 1989. The branch licensing policy announced by the

Reserve Bank of India In December, 1981 provides a programme to ensure that all community

development blocks are served by the commercial banks by the end of dune, 1981.

The Reserve Bank advised various bankers in the country to select unbanked centres in

deficit districts while taking up the implementation part of the programme announced by the

Reserve Bank of India. The new branch licencing policy, From January 1982 to March, 1985

continued to be strongly in favour of opening offices in rural and seml-urban centres. Special

attention was paid to the covering of unbanked pockets in less accessible areas of different

states. While selecting such centres for branch expansion, potential for mobilisation of deposits

and grant of advances, availability of banking facilities nearby and their special features of the

region were considered. The State Governments were consulted regarding the location of

branch offices in rural and semi-urban areas a well as the types of bank offices, Commercial,

rural or co-operative suited for the centres. Regional Rural Banks (RRBs) were given priority for

opening branches in districts where they have been set-up or are proposed to be set-up.
 3
According to the banking policy adopted during 1985 - 90, hilly trades, sparsely populated

regions and tribal areas were given special consideration and expansion in such areas was

allowed on a comparatively liberal basis. Priority was continued to be given to Regional Rural

Banks in allotment of identified centres in districts covered by them.

Commercial banks adopted a coordinated approach for brand) expansion so as to avoid

unnecessary concentration of various branches at one place and the consequent wasteful

competition among them too. Thus, they tried to help themselves in getting equally the benefits

of different potential centres particularly under the "Lead Bank Scheme". These banks darted

conducting Impressionistic surveys for planning their future branch expansion in accordance with

the needs of the economy. In order to provide commercial banking service to rural and smaller

areas where fullfiedged brand) offices were not economically desirable for the time being, some

sort of Innovative schemes of one man Office, Mobile banking office, Satellite office, etc.,

have also been started by some of these banks. Besides, some banks Induding the State Bank

of India group, opened Agricultural Development branches and other banks also started rural

branches in areas where fullfiedged branch offices were economically undesirable for providing

banking service to the rural people and for promoting economic adivities in such areas/centers.

These branches were opened with a view to eroding the infrastrudure of Institutional credit for

supplementing the efforts of co- operative credit societies in finandng the agriculture sedor.

Banks and aconomlc development:

The key to economic growth and development is the transfer and better utilisation of

resources from consumption to capital investment. In other words, the central fad of economic

development is mobilisation of resources for capital investment. The source of resources

mobilisation, In the main, are domestic savings and foreign capital. The Commercial Banks play

a crucial role in effeding the transfer of funds from savers to investors and thereby fatilitate the

process of economic development through capacity creation and income generation. Infad,

Banks provide the basic financial infrastrudure necessary for eliminating the marled
 4
imperfections for better utilisation of scarce resources. Commercial Banks Provide both saving

intermediation and money market intermediation.

Savings intermediation is a process by which the flow of savings of the community is

allocated to finance investment In the economy. This process brings about consistency between

the asset preferences of the households, the ultimate savings units and the liability preferences

of business firms, the fundamental investing units. "Money- market intermediation" includes the

provision of standby financing of large scale non-finandal organisations that do not have direct

access to ?he Central Bank of a country. The development of commercial banking helps the

money market to grow, for Its progress would be the progressive expansion of the money

market, as it constitutes Itself a major part of the latter.

Accumulation of capital is one of the important requisites for economic development. It

requires the real savings of the community to be invested in the production of capital goods. It is

here that commercial banks can play a pivotal role as intermediaries by bridging the gap

between savings and investment. Banks, as depositories of people's savings, mobilise small and

scattered savings of the community and channelise the savings so mobilised into the production

of capital goods and thereby facilitate capital formation. Thus, commercial banks provide

lucrative opportunities of investment to the savers, funds for investment to the entrepreneurs and

capital formation to the country.

It is realised In the modem context, that economic development depends on adequate

and flexible amount of credit4. The basic function of credit is to enable business firms and

individuals to purchase goods and services ahead of their ability of their desire to pay.

Commercial banka, the major suppliers of credit act as residual suppliers. They act as primary

suppliers of credit when they meet all the credit needs of individuals as well as business firms

when the latter have little saving of their own. A well established commercial banking system

provides more credit than its primary resources through the process of credit creation,of course,

within the limits set by the volume of primary deposits, the necessary liquidity requirements and
 5

the size of the money market. Commercial banks, through this process of creation of credit,

bridge the gap between actual savings and desired savings warranted for a rapid rate of

economic development.

The absence of desired savings otherwise would have limited the productive activities in

the economy to the extent that the savings are actually available for investment. Apart from this,

the gap is also bridged by mobilising savings of the community which would otherwise be

reduced due to imperfections in the financial markets and the consequent immobility of funds

including small and scattered savings lying either idle or spent on luxury goods, Jewelry, etc5.,

and hence remaining uprodutive. The banks, as suppliers of credit, monetise credit by granting

loans, buying investment securities, discounting bills, etc. More so, they bring about the

maximum use of actual savings of the community with the minimum idle balances without

sacrificing very much the liquidity of funds of individuals, firms and institutions. Through these

functions the economic process of production, distribution and consumption of goods and

services is smooihened by them.

Mobilisation of resources for capital formation results in the increase in production when

the entrepreneurs utilise the capital investment productively. In other words, the productivity of

resources depends upon the ability of the entrepreneurs to take calculated risks with confidence

so as to make an enterprise a success. Commercial banks play an important role in this field by

providing timely and adequate amount of credit to those with technical skills and entreprenurial

talents who are not coming forward on a higher economic plane for want of sufficient capital; and

by absorbing risk in arranging capital needed for their plans to be implemented. The availability

of bank credit enables entrepreneurs to harness innovations by bringing about new combination

of productive resources, drawing resources away from their existing comparatively low yielding

employment and employing unemployed resources. Thus, by encouraging entreprenurial ability,

commercial banks in a way help to generate more employment opportunities and ensure better

and fuller utilisation of productive resources including human ones. Besides, by employing many
educated unemployed In their offices, they further help to mitigate the problem of

unemployment.

Economic growth demands stability of prices of goods and services. Commercial banks,

through their decisions to provide or not to provide credit, play an important role in the

stabilization of prices, it is a fact that the direction of the flow of credit has an important bearing

on price stability. Credit, which stimulates production has one type of impact and credit, which

raises the levels of consumption has another. Even the credit whit* goes to production

purposes can have different repercussions depending on the time lag between the increase in

demand and the Increase In supply which the credit generate. If too much credit goes to longer

generation uses, it can have an adverse effect on the price level.

One of the important considerations for stabilising prices is the supply of cheap and

timely credit. Availability of cheap credit helps producers in getting things produced at lower

cost, which is one of the important considerations for stabilising prices. Besides, it also helps to

balance demand and supply conditions and reduces disequilibrium in these conditions, thereby

reducing price fluctuations. A growing economy needs increasing supply of money but its supply

should be elastic to the extent that is geared to the seasonal demands of business; otherwise it

would have adverse effects on the general price line. Thus, commercial bank serve as shock

absorbers and effective feelers of the money market.

Banks provide credit to the Government through various methods like direct credit to the

government and various government undertakings; and through subscribing to public debt and

investing money in various government securities. This process of credit supply enables the

government to Implement various schemes of development. By inculcating the banking habit

and popularising the use of credit instruments by the public, they help the government in

reducing the social cost of supplying credit to the people.

 7
Banks and Agricultural development:

Agriculture is the primary sector in Indian economy and hence the prosperity of

Agriculture determines the development of Indian economy. Agricultural sector, along with Its

allied activities provides livelihood to 66 per cent of Indian population, contributes to nearly 45.00

per cent of foreign exchange earnings. Further, industrial inputs like cotton, Jute, sugar, tobacco

etc. are supplied by Agriculture sector. Proper utilisation of agricultural resources, allied

activities, agro-services, agrarian relationship and agro-industrialization are the determining

factors to augment agriculture leading to industrialization. The All India Rural Credit Review

Committee observed that The agricultural sector alone would act as a catalyst in breaking the

vicious circle of poverty.6. The development of infrastructure facilities like banking, marketing,

storing, water channels, manpower and transportation covering all the potential villages call for a

total approach with collaborative, coordinative and cooperative efforts.

In an agriculture dominated economy, for raising agricultural production, among the

several Inputs needed, the important input that enable the farmers to use the other inputs is the

capital or credit. It is not only a primary and paramount factor but all the other factors are being

utilissed properly with the help of it. The problems or hindrances, if any, of the agricultural sector

would be solved easily provided adequate and timely credit is available. Credit is a key input in

adopting new technology and also in achieving expected production result. "Rural India will,

remain poor so long as new techniques of farm production are not adopted widely, adequate

capital in the form of loans for adoption of the new techniques is not provided, and efficient

marketing arrangements for the produce are not made. All these will have to be provided

simultaneously in a package7.

Agriculturist in India needs credit for a variety of reasons and the most important among

them are : 1) farmer's capital is locked up in his land and stock, 2) nearly two-thirds of his

average income is used for consumption, 3) the interest of both the borrower and lender sets the
 8

cycle of borrowing who Is to follow the repayment and 4) the emergence of new agricultural

technology which calls for combined and optional application of several inputs. Along with

agriculturists, people engaged In allied sectors and the agricultural labourers also need credit and

infact, the credit needs of these classes are immense as they try to supplement their meagre

earnings by taking up the activities like dairy, sheep- rearing, poultry etc. Equally are the

Immense needs of rural artisans like the workers that thrive on the copper and other metal work,

pottery, glass ceramic work, carpentry, painting, printing on textiles, engraving, block-making,

dyeing, basket making, brick-laying, plastering, cement finishing, toys, sports goods, weaving,

bamboo-making etc.

The sources of credit in an economy are a) Institutional agencies and b) non-institutional

agencies. According to the Banking Company's Act the institutional agencies are amenable to

control but not the non-institutional agencies. The cooperatives, the commercial banks and the

regional rural banks form the former, whereas money lenders, rich land-lords, commission

agents, etc., form the latter. Among the non-institutional agencies, the money lenders occupy a

prime place in lending credit to rural people by charging exorbitant rate of interest and have a

complete control over them in the villages. The Agricultural Finance Sub-Committee has stated;

"The money lender often resorts to and takes the advantage of helplessness, ignorance and

necessity of rural borrowers".

Considering the strength and weakness of the rural credit system dominated by the non-

institutional agencies, the Government of India took steps for institutionaiistion of rural credit.

The institutional agencies have to take up the services in rural areas with the spirit of social aim.

The cooperative banks came into being at the turn of the present century (1904) to meet the

credit needs of the agriculturists. Another institutional agency that entered the area of rural

sphere was the commercial banks.

The 1005 Swadesi movement gave a philip to Indian banking and many banks were

started by Indian businessmen and capitalists. Among the prominent banks started were Bank of
 9

India (1905), Indian Bank (1907), Bank of Baroda (1908), Central Bank (1911) and Bank of

Mysore (1913). However, Indian Banks were of the opinion that agricultural finance was not

within their purview and hence they had no responsibility in this regard. Inspite of introducing

innovations in practice in commercial Banking after 1950s, the pattern and direction of bank

branch expansion was unsatisfactory. Unfortunately, commercial banks opened brandies in

urban centres without proper planning, with the result, even during the period of prosperity many

banks failed. The Rural Banking Enquiry Committee noted, "Although from the point of view of

numbers, there has been substantial advancement But the expansion that has taken place in

recent years has not been of a healthy type.9 Besides, banks did not go to rural areas for the

fear of unremunerativeness of rural branches.

After nationalisation of commercial banks, Reserve Bank of India issued directions in

1971 for opening new bank branches in the ratio of one office per urban centre, one office per

metropolitan area and two offices in rural and semi- urban areas. Commercial banks have

opened a number of branches in rural areas to cater the credit needs of agriculture. However, in

their new task of providing agricultural credit, commercial banks In rural areas suffered from high

cost structure and inadequate staff with proper approach and training to deal with the problems

of rural finance.

In 1975 under the chairmanship of M. Narasimham, the working group recommended the

setting up state sponsored, regionally based, and rural oriented financial institutions called

"Regional Rural Banks". The Government of India accepted the recommendations of the

working group and promulgated an ordinance on 26th September, 1975 to facilitate the setting

up of RRBs. Subsequently on 2nd October, 1975 five Regional Rural Bank were established'*0.

The study group of the National Credit Council on Organisational Framework for the

Implementation of Social Objectives set-up in 1968 under the Chairmanship of D.R. Gadgil

identified the gap in the supply of credit to the economy and suggested the manner in which they

might be bridged. The Gadgil group pointed out the uneven development of banking and
 10

distribution of credit not only among different regions but also among different sectors of the

economy. The study group recommended, therefore, the adoption of area approach to evolve

plans and programmes for the development of the banking and credit structure11. The Group

further suggested that the commercial banks should undertake this onerous responsibility by their

being allotted particular districts in which they can act as pace -setters providing integrated

banking facilities, more specifically, agriculture finance.

The period commencing from 1975 marks the awareness among banks that their own

efforts would not suffice. They realised the magnitude of the task and were convinced that the

co-operation of other agencies was essential. This was a period when they experimented with

agricultural financing through organisations like Farmer service Co-operative Societies, Primary

Agricultural Finance Corporation and National Bank for Agriculture and Rural Development at

the top. Specially devised set -up of rural branches was also evolved during this period like the

Agricultural Development Branch of the State Bank of India and the Grameena vikas Kendra of

Bank of Baroda. They have adopted various innovations like adoption of specific villages,

Differential Rate of Interest Scheme, Group loan system, crop loans and simplification of loan

application procedures.12

REVIEW OF LITERATURE

The All India Rural Debt and Investment Survey 1961-62 studied the role of commercial

Banks and estimated asset group-wise loans per rural household taken from commercial banks

for all states and all India13 It was found that the contribution of commercial banks was

comparatively more significant in Tamilnadu and Kerala States.

In its Report, the All India Rural Credit Review Committee 1969 observed that, even

after the commercial banks had overcome their earlier reluctance to carry banking facilities to

small centres and had derived deposits from these centres which grew steadily, they had not, till
 11
recently, made any significant progress in fulfilling the complementary responsibility of meeting

the credit needs of the semi-urban and rural areas.

A Committee (1969) appointed by the Reserve Bank of India to review the working of

Lead Bank Scheme14 in the States of Gujarat and Maharashtra, has critically reviewed and

come to the conclusion as "besides offering suggestions for effective functioning of the- lead

bank forming district consultative committees, it advocated a standing committee to be formed in

the Reserve Bank of India to critically examine the overall progress of the scheme." The Study

group (1969) on organisational frame-work concludes that "the hitherto working as watertight

compartments without any understanding the relationship even In common areas and activities,

the onus of bringing together and their operations lies with lead bank."

The Study Group (1969) observed on the basis of important indicators of commercial

banking development such as population per bank office, per capita deposits, per capita

advances, credit-deposit ratio and ratio of deposits and advances to state income, that the

banking facilities were generally more developed in those states which were economically and

socially advanced and less developed in those states which were relatively backward.

The Reserve Bank of India sponsored International Seminar15 on 'Banking and

Development (Feb.9 to 12, 1970) discussed the theme of 'Banking and Development in terms

of commercial banking and development, specialised financial agencies and central banking and

development. The seminar provided a forum for an exchange of views and a comparison of

mutual experiences on problems that arose in the process of adaptation and orientation of the

banking and financial system in developing countries to the new and varied needs of

development.

The Banking commission 1972 In its Report examined the inter- state variations in the

growth of co-operative and commercial banking in the country and suggested the scheme of co-
 12

ordination between the two in the sphere of geographical coverage, loan polices and procedures,

resources and organisational aspects.

The Banking Commission (1972) has observed16 that: The objective of coordination

between cooperative and commercial banks should be (1) creation of widespread and

progressive Institutional base at the primary level in direct touch with the rural producers, (11)

consolidation, strengthening and expansion of the framework of the banking for mobilisation of

resources and (111) programmes of training and equipping the personnel in the banks to carry

out their task in an efficient waySharma (1979) has observed: The most intractable problem

in the financing of agriculture is that of coordination among various agencies. This problem is

multi-dimensional in nature comprising within its fold coordination between commercial banks

and state Government, the commercial banks and the cooperatives, and coordination among

themselves. So far as coordination between commercial banks and cooperative banks are

concerned, much is to be done in this direction."

Since involvement of various sectors or sections of people in the economy, a need to

direct' guide and supervise has arisen. A sincere efforts to this end was the establishment of the

credit banking cell In Reserve Bank of India in April, 1970. This facilitated the macro-level

planning giving direction to the banks for credit planning at grass root level. In such a need, the

lead bank comes into picture for controlling the economic activities of the district. It has a

strategic role to play.

In his article on "Credit planning" (1972) S.K. Datta1^ points out that "where this has

been haphazardly tried, it has helped the reallocation of credit to a marginal extent, but the

impact on removal of economic imbalance proved insignificant.

The committee appointed by Reserve Bank of India in 1975, to examine the progress of

the Lead Bank Scheme, observed that The Lead banks, however, at the initial stages could not

visualise the need for organisation setup for implementing the scheme in coordination with other
 D

banks. In the minds of bankers, the lead bank scheme has obviously not taken a distinct

operational shape".

The National Commission on Agriculture (1976) examined the requirements of

institutional credit18 for covering the new agricultural strategy of agricultural development and all

aspects of rural development including production, marketing, transport and processing. The

Commission stressed greater involvement of commercial banks in financing agricultural

development. It was suggested that the share of commercial banks in agricultural advances

should Increase from 8.8 per cent in 1974 to 15 per cent in 1988 and a greater weightage must

be given to the needs of small and marginal farmers and provision of credit to them on

preferential terms in respect of both interest charges and quantum of advances to enable them

to modernise agriculture. The commission also made suggestions for improvements in farmers'

services socieitles in the ligh of their record of performance.

In his paper on commercial Banks - The tasks ahead (1977) Ashakanth observed, that

"since credit plan Is not fully appreciated, the lead band scheme is limping. The lead bank by

Identifying credit gaps, preparing district credit plan and financing the planned schemes and

projects in consortium with other banks and institutions as in fact expected to bring about a silent

revolution in the country- side,"

Raj committee (1978) studied in detail the problem of regional imbalances in commercial

banking and made an effort to measure these imbalances by constructing the index numbers of

each state by dividing the share of offices, deposits and advances by the share of population in

each state for 1977.

Basu Subhas, In his book edited in 1979 on The study on commercial Banks and

Agricultural Credit1: A study of Regional Disparity in India', examined the political economy of

banking He describes how the the banking system of the country acts as a siphon for

transferring economic surplus from one sector to another and one region to another. Further,
 14
suitable regression models used in the study explain inter- district variations in bank credit and

bank deposit on the basis of observations of 283 districts. An attempt has been made to

distinguish land concentration and rural asset concentration and the patterns of influence they

exert on bank lending to agriculture. It observes that agricultural credit of commercial banks is

influenced by many factors especially in agriculture. Those include factors affecting growth of

commercial banking in general, socio-economic factors and also those reflecting variations in

agricultural productivity in the country. The study suggested the scheme of co-ordination

between the two in the sphere of geographical coverage, loan policies and procedures, resources

and organisational aspects.

Raghupathi (1979) has conducted a survey on the lead bank programme and policies

and concluded thus: Unless the State or Central Government takes up the task of building up of

Infrastructure, very little would probably be done by the lead bank and the banking institutions in

developing the district. It would be discordant if lead bank responds to the social and economic

impulses on an adhoc basis without proper planned strategy in tune with the overall planning in

an Integrated regional development^0.

The study of von Plscheke on "Rural credit project, Design implementation and Loan

Collection Performance" states that poor loan collection performance by formal agricultural

lenders in developing countries is often attributed to general conditions of low levels of

economic development^. Frequently cited causes of loan arrears include small farmers'

poverty, large farmers' Political influence, low returns and lack of profitable innovations in

tropical and subtropical agriculture. A variety of problems arising from inadequate farm credit

and project design tend to result in poor loan collection performance by agricultural lenders.

Separation of the internal from the external causes of poor loan collection performance

constitutes a starting point for realistic use of farm credit as a development tool in agricultural

and financial policy.

 15

In his study Qopal (1979) finds that "The paucity of suitable staff in the rural branches is

a major constraint. The rural branch is often manned by inexperienced personnel. The situation

is worse, where no technical support is available22.

in his paper on Travails of India's Lead Bank 1980' Naveen Chandra Joshi has studied

the lead bank scheme functioning and its experiences in providing credit for all-round

development of the district. He remarked; "The task of overall monitoring the progress of the

scheme should effectively be handled. This would provide collective supervision which is

important since a feeling of domination from the lead bank or the Government would have

adverse effects on the psychology of participating banks."

The rationale of public sector banking is dealt with in the book edited by K.N.

Subrahmanya on "Modem Banking in India 1980. The major achievements highlighted by the

authors include the breathtaking expansion of branches with its concomittant reduction in the

bank office population ratio, the change in the credit priorities with an emphasis on helping the

hitherto neglected sectors, the impetus given to deposit mobilisation as reflected in the ratio of

bank deposits to GNP going to 35 per cent or more and the change in the basic approach of

Indian banker from security-orientation to production-orientation.

Beliraya and Pramod (1980) have observed that there is lack of interaction at the

scheme formulation stage among various commercial and cooperative banks operating in the

region; and between the agencies such as input dealers and organisations of marketing of

agricultural output. Dealing among them is crucial and it would lead to realistic assumption in

scheme formulation and avoidance of areas in functional as well as geographical sense".

The Report of the Committee to Review Arrangements for Institutional Credit for

Agriculture and Rural Development (CRAFICARD) 1981 suggested that a beginning may be

made at the primary level for integration of credit on a selective basis with the support and

guidance of the Reserve Bank of india/Nationai Bank for Agriculture and Rural Development.
 16
In her book on "Centre State Financial Relations" (1981) Hemalata Rao computed

composite Index of banking development to measure the level of economic development for the

years 1958, 1961 and 1965. On the basis of six indicators, she concluded that industrially

developed states like Maharastra, West Bangal, Madras and Gujarat shared among themselves

the top four places while the industrially backward states recorded low index of banking

development.

In his paper on "The nature of Credit markets in developing countries" Aravind Virmani

(1982) analysed various forms of Government23. One of the implications of the paper is that the

credit market differs fundamentally from the market for ordinary goods and services. Another

important highlight of the paper is the vital role of collateral in the loan market. The paper

focuses its attention exclusively on one of the underlying reasons for government intervention

namely market failure in the credit market. It examines the causes and consequences of market

Imperfections or failures in the rural credit structure and the effects of different types of

intervention and their implications for different policies for correcting market imperfections on the

loan side of the market.

"Rural financial markets in developing countries : Their use and Abuse", edited by Von

Pischke and others felt that the institutional programmes of developing countries on account of

its anti exploitative, easy accessibility and low cost characteristics have established their

superiority over various agencies in the unorganised sector. They also advocate that efficiency

and viability of rural financial markets improve an environment of flexible interest rate policies

rather than administrated ones.

National Bank for Agriculture and Rural Development (NABARD) launched field studies

in 1984 In nine states to gain perception into the problems of delinquency in loan repayment

from the demand side. The demand side studies were carried out in two states (Punjab and

Kerala) with good recovery performance and six states (Bihar, Gujarat, Karnataka, Madhya
 17

Pradeah, Maharastra, Tamil Nadu) with poor recoveries. The magnitude of ovendues was higher

in the case of Investment credit (term loans) than in the case of crop loans. A considerable

proportion (30 to 40 per cent) of the default in the case of investment credit extended by Primary

Land Development Banks (PLDs) was over five years old, whereas in respect of crop loans

borrowed from Primary Agricultural Credit Societies (PACS) was less than two years old. The

supply side studies carried out examined the impact of faulty lending and recovery procedures

followed by land development.

Sukhamoy Chakravarthi Committee to Review the working of the Monetary system

(1984) envisaged a strong supportive role for interest rate policy in monetary regulation based on

monetary targeting. It also pointed out an important role for interest rate policy in regard to

promoting the effective use of credit and in short-term monetary management. The committee

emphasised that the credit budgeting to achieve desired sectorial credit allocations in line with

plan priorities should continue. It recommended that no more than two concessional interest

rates should apply to bank credit made available to specified priority sector borrowers, (me of

which should be equivalent to the basic (minimum) lending rate and the other some what lower

than the basic credit prescribed for target groups under the priority sector reflect societal

concerns which need to be respected and accordingly this aspect should be taken into account

while rataionalising the array of concessional interest rates. It also suggested that Regional

Rural Banks (RRBs) which are extensively involved in lending to the priority sector at

concessional interest rates should receive special assistance from the State Governments and

the Central Government.

Balakrtshnan, S, in his study on "Lead Bank scheme-Problems and prospects (1984)

observed that performance of the lead banks have been far below targets. To achieve the

targets In industrial sector is not always easy and It is quite surprising to see shortfalls even in

agricultural and allied activities. Seshaiah and Krishna Swam! (1965) did efforts to study the

problems and difficulties experienced by the banks under the lead bank scheme by conducting
 18
an empirical survey in Andhra Pradesh. Their study analysed that an impressive progress has

been achieved in respect of deposit mobilisation and credit advancement by the commercial

banks fulfilling the norm of credit provision to priority sector. This performance is accompanied

by a significant variation in the target and performance between the sector and the districts.

In his comprehensive study of regional disparities of commercial banking in 18 major

states of the country Dr. Chhipa has used the techniques of modified factor analysis to measure

disparities In various aspects of banking development. The study also attempts to analyse the

factors influencing the growth of commercial banking and to test the validity of the observed

relationship between banking and economic variables 24

In his study on the "social obligations of commercial banks after nationalisation", H.N.

Agarwal covered such aspects like the social objectives of commercial banks and the steps

taken by these banks. An effort has been made to evaluate the performance of these banks in

discharging various social obligations on the basis of comparison made with the performance of

other bank- groups viz., the SBI group and the private scheduled commercial banks and

sometimes with the scheduled commercial banks.

According to the world Bank study, the need of short-term credit among small farmers

must be met adequately if they were to produce marketable surplus and thereby contribute to the

development process.26

The study of Robert, C. Vogal identified that subsidised credit policies in costa Rica have

made income distribution more unequal2. It is argued that small farmers are unable to borrow

at high rates of Interest. Loans to small farmers are rationed continuously than loans to big

farmers because of the lower returns and higher costs of lending to small formers.

Based on sample survey, an in-depth study conducted by National Council of Applied

Economic Research observed27 that a major gap existed In the area of investment credit and a
 19
considerable progress has been made in respect of long term credit to agriculture through

institutional agencies and cooperative land development banks.

In his paper on development of commercial banks and other Institutional credit, S.l.
Shetty2 identified the need for increased development of credit to facilitate farmers to achieve

further commercialisation and modernisation of their agricultural operations. Further, he draw

attention to the need for redistribution of existing Institutional credit in favour of the small and

marginal farmers and agricultural labourers.

The Report on the flow of credit by National Institute of Rural Development29 pointed

out that the cooperative credit Institutions have to be more actively involved in financing

Integrated Rural Development Programmes with the wider network they have in rural areas

Cooperative credit instltutionas can more effectively mobilise credit for disbursement of loans

under Integrated Rural Development Programme. K.C. Padhy9 in his work on commercial

banks and Rural Development made a critical study of the rural development experiment of the

Indian commercial banks.

Credit is the input that enables farmers to use the agricultural inputs for the development

of agriculture. Commercial banks emerged as the important Institutional Sources of agricultural

credit. After nationalisation commercial banks opened many branches in rural areas to cater to

the credit needs of agriculturists. Realising the magnitude of credit requirements commercial

banks sought the cooperation of other agencies. Since 1975 agricultural credit has been

provided through organisations like farmer service cooperatives, primary Agricultural Finance

Corporation and National Bank for Agricultural and Rural Development. With the creation of

Regional Rural Banks, commercial banks adopted various innovations like adoption of specific

villages, group loan system, crop loan system etc. Thus, the commercial banks have been

concentrating their efforts on the agricultural development of rural areas.

 20

REFERENCES

1. Reserve Bank of India. Report on Trend and Progress of Banking in Inda. 1962, P. 29.
2. Reserve Bank of India. Report on Trend and Progress of Banking in India, 1967, P. 75.
3. Reserve Bank of India. Report on Trend and Progress of Banking in India, 1969, P. 32.
4. Edward, W. Reed, Commercial Bank Management, Harper and Row Publishers, New York,
P. 167.
5. Ghose, S.N and Sharma, M.D., Economic Growth and Commercial Banking in a Developing
Economy, Scientific Book Agency. Calcutta, 1965, p : 75.
6. Reserve Bank of India, Report of All India Rural Credit Review Committee, Bombay, 1972,
p: 55.
7. Bhanu Pratag Singh, "Backward farming to blame'. The Hindu (daily) Bangalore, May 23,
1995, P. 12.
8. Government of India, Report of the Agricultural Finance Sub- Committee, New Delhi, 1945,
P. 59.
9. Government of India, The Rural Banking Enquiry Committee, 1969, Delhi, p: 23.
10. Reserve Bank of India, Reserve Bank of India Bulletin, March 1981, pp : 200-241
11. Report of the Study Group of National Credit Council, October, 1969, p: 87.
12. Bank of Baroda, Commercial Banks and Agricultural Advances, Bank of Baroda Weekly
Review, November, 1977.
13. Reserve Bank of India, Report of All India Renal Credit Survey, 1961-62, Bombay, 1963.
14. Reserve Bank of India, Report of the committee on the working of Lead Bank Scheme,
1969, Bombay.
15. International Seminor on Banking and Development, Feb 9-12, 1970, Reserve Bank of
India, Bombay.
18 Reserve Bank of India, Report of the Banking Commission, 1972, Bombay.
17. S.K. Datta, Credit Planning, Economic and Political weekly, 1972, Bombay.
18. Govt, of India, National Commission on Agriculture, New Delhi, 1972.
19. Basu Subash, "Commercial Banks and Agricultural Credit" Allied Publishes, New Delhi,
1979.
20. Raghupathi, R. "Lead Bank Functions-some Policy Issues", Pigmy Economic Review,
March. 1979, P : 7
21. Von Pischeke, J.D. Rural Credit Project, Design, implementation and Loan collection
performance" Savings and Development, No ; 2 (1980). The World Bank, Washington.
22. Reserve Bank of India, "The Proceedings of the International Seminar on Banking and
Development, Feb, 12,1970. Bombay.
 21
23. Arvind, Vlr*ni, Evaluation of Financial Policy Credit Allocation In Bangladesh, Washington,

D.C., (1984).

24. Chlppa, M L. Commercial Banking Development in India, Print Well Publishers, Jaipur,

1087.

25. World Bank, The Assault on Wolrd Poverty; Problems of Rural Development, John Hopkins

Press, London, 1975. P : 105.

28. Robert, C. Vogel, "The effects of subsidised Agricultural Credit and income distribution in

costa Rica" In D.W. Adams, Douglas H. Graham and J.D. Von Plschke (ed)., Undermining
Rural Development Wit cheap credit (Boulder: West view Press). USA 1984).

27. National Council of Applied Economic Research, Credit requirements for Agriculture, New
Delhi, National Council of Applied Economic Research, 1974.
28. Shetty, Development of Commercial Banks and other Institutional Credit-A note on
structural Change; Economic and politial weekly Vol. XX, No. 19,1976, PP: 896-705.

29 National Institute of Rural Development, Flow of Credit and subsidy under IRDP; A study

across five states, NIRD, Hyderabad, 1984.

30. padhy. Commercial Banks and Rural Development, Asian Publications, New-Delhi, 1979