Term paper

Of
Microfinance
Topic: Micro finance for agro, agriculture & allied
industry.

Submitted to: submitted by:

Ms. Neha Sandilya Amit Kumar

RR1709B34

3020070044

BBA-MBA (INT)
 Acknowledgement

I hereby take this opportunity to thank Lovely School of business for providing me
an opportunity to do a Minor Project on “microfinance for agriculture, agro & allied
sector”.

I express my sincere gratitude to my mentor and guide, Miss. Neha shandilya who
always provided me with necessary inputs, guidance and direction to carry out this
project. He provided me access to different domains of knowledge from where I
collected inputs for this project.

Last but not the least, my million thanks to all the people including my friends
whom I have conversed with and taken inputs from to move ahead and complete this
project.

Amit Kumar
 Micro finance
Introduction

Microfinance offers poor people access to basic financial services such as loans, savings,
money transfer services and micro insurance. People living in poverty, like everyone else,
need a diverse range of financial services to run their businesses, build assets, smooth
consumption, and manage risks.

Poor people usually address their need for financial services through a variety of financial
relationships, mostly informal. Credit is available from informal moneylenders, but usually at
a very high cost to borrowers. Savings services are available through a variety of informal
relationships like savings clubs, rotating savings and credit associations, and other mutual
savings societies. But these tend to be erratic and somewhat insecure. Traditionally, banks
have not considered poor people to be a viable market.

Different types of financial services providers for poor people have emerged - non-
government organizations (NGOs); cooperatives; community-based development institutions
like self-help groups and credit unions; commercial and state banks; insurance and credit card
companies; telecommunications and wire services; post offices; and other points of sale -
offering new possibilities.

These providers have increased their product offerings and improved their methodologies and
services over time, as poor people proved their ability to repay loans, and their desire to save.
In many institutions, there are multiple loan products providing working capital for small
businesses, larger loans for durable goods, loans for children’s education and to cover
emergencies. Safe, secure deposit services have been particularly well received by poor
clients, but in some countries NGO microfinance institutions are not permitted to collect
deposits.

Remittances and money transfers are used by many poor people as a safe way to send money
home. Banking through mobile phones (mobile banking) makes financial services even more
convenient, and safer, and enables greater outreach to more people living in isolated areas.
Financial services for poor people have proven to be a powerful instrument for reducing
poverty, enabling them to build assets, increase incomes, and reduce their vulnerability to
economic stress.

Agro industry in India

Overview of the industry

The Indian Agriculture Industry is on the brink of a revolution that will modernize the entire
food chain, as the total food production in India is likely to double in the next ten years.

As per recent studies the turnover of the total food market is approximately Rs.250000 crores
(US $ 69.4 billion) out of which value-added food products comprise Rs.80000 crores (US $
22.2 billion). The Government of India has also approved proposals for joint ventures,
foreign collaborations, industrial licenses and 100% export oriented units envisaging an
investment of Rs.19100 crores (US $ 4.80 billion) out of which foreign investment is over Rs.
9100 crores (US $ 18.2 Billion). The agricultural food industry also assumes significance
owing to India's sizable agrarian economy, which accounts for over 35% of GDP and
employs around 65 per cent of the population. Both in terms of foreign investment and
number of joint- ventures / foreign collaborations, the consumer food segment has the top
priority. The other attractive features of the Indian agro industry that have the capacity to lure
foreigners with promising benefits are the deep sea fishing, aqua culture, milk and milk
products, meat and poultry segments.

Excellent export prospects, competitive pricing of agricultural products and standards that are
internationally comparable has created trade opportunities in the agro industry. This further
has enabled the Indian Agriculture Industry Portal to serve as a means by which every
exporter and importer of India and abroad, can fulfil their requirements and avail the benefits
of agro related buy sell trade leads and other business opportunities.

This Indian agro industry revolution brings along the opportunities of profitable investment
and agriculture-industry-india.com provides you the B2B platform with agro related trade
leads, exporters & importers directory etc. that help you make your way to profit easy.

To lead yourself to the destination of profit through the Indian Agriculture Industry, know
maximum about the EXIM policy, programs & schemes, price policy, seed policy and
statistics at the Indian agro portal and harvest benefits from India, world's second largest
producer of food and a country with a billion people. From canned, dairy, processed, frozen
food to fisheries, meat, poultry, food grains, alcoholic beverages & soft drinks, the Indian
agro industry has dainty areas to choose for business.

Agriculture & Allied sector

Agriculture is the key to the overall development of the State economy which contributed as
much as 24.5 (Q) % to Gross State Domestic Product at constant prices (1993-94) during
2004-05. As per 2001 census around 39.0 % of the working population of the State is
employed in this Sector.

Scope of increase in area under agriculture has reached at a saturation level as 98.8 % of
cultivable land in the State is already under plough. The agriculture production can only be
increased to some extent through enhanced cropping intensity, change in cropping pattern,
improvement in seeds of high yielding varieties, cultivation practices and with the availability
of better post-harvest technology etc. State Govt. is trying to re-orient agriculture through
diversification policy and other measures.

Allied sector in India involved in business like animal husbandry, dairy development & so
many other business.

Animal husbandry

Due to the limited scope of further addition to the net area sown in the state, diversification of
state agriculture through allied activities comprising animal husbandry, commercial dairying,
fisheries has acquired added significance in the reduction of income disparities between rural
and urban population. Livestock keeping along with marketing  services , manufacture of
livestock products, inputs and  other subsidiary and supporting  industries offer a great scope
for gainful employment to the expanding  labour force, small and marginal farmers and
agricultural labour and thus helps to raise the standard of living of rural population especially
of weaker sections  of  the society. Thus, livestock enterprises like dairy and poultry farming
and rearing of meat producing animals are also contemplated as an important constituent of
diversification of agriculture in Punjab. The growing pressure of human population on
limited land resume has resulted in fragmentation in the size of holdings. Besides, the green
revolution initiated in Punjab State during the late sixties has reached a saturation point with
only marginal increase in the agricultural production being achieved during the last few
years. Livestock production by the rural poor could supplement income and provide a large
scope of self- employment in rural areas.

The whole subject of animal husbandry revolves around the following programs:- 

 Animal health

 Animal production

 Fodder production


Dairy development

Milk is the perfect feed for human beings but compared to other developed countries, India is
lagging far behind in availability of milk for human consumption. However, Punjab's average
per capita milk consumption, which is 887 Gms. Against the national average of 214 Gms, is
comparatively better than that of other states. The Dairy Development program launched in
the state aims at meeting the nutritional requirements of the growing population in the state as
well as in the country. The Program can also be viewed as an effective instrument of social
change through supplementing the income and providing employment to the small and
marginal farmers and land-less agricultural labourers of the state by supplying the surplus
milk to the urban people at a price which is remunerative for the milk producers and
reasonable for the consumers. Commercial Dairy farming on scientific lines provides the
educated unemployed some avenues of gainful self-employment. Development of dairy
industry on self-sustaining and self-supporting basis can go a long way in checking the
migration of people from rural to urban areas.

Punjab has a suitable climate and good agriculture base for milk production. Besides, there is
a network of 86 chilling centres for milk collection and for transferring the milk in bulk to the
milk plants. At present there are 43 milk plants, 11 under the control of MILKFED and 32 in
the private sector, in Punjab.

An allocation of Rs. 2756.56 lakh has been provided for the 10th plan under this sub-head.
Rs.413.60 lakhs has been incurred against the approved outlay of Rs.3105.00 lakh during the
9th plan (1997-2002).  An amount of Rs. 300.00 lakhs has been provided Annual Plan 2007-
08 against the anticipated expenditure of 300.00 lakhs during 2006-07

Micro finance in India

The business of micro finance in India is a new concept in India and it is on the rise. The post
1990 era witnessed opening up of Indian markets to Foreign Direct Investments (FDI) and
Foreign Institutional Investors (FII). The Indian micro finance industry offers small quantum
of finance in the form of loan to the individual or any organization. The industry of micro
finance in India facilitates micro finance for the development of the social standard of the
rural mass of India. Further, these micro finances are also offered for the development of the
semi-urban and urban areas.

The industry of micro finance in India offers these micro finances through different tailor
made financial instruments. These micro finances of India are structured with low rate of
interest and with easy repayment options.

RESPONDING TO AGRICULTURE FINANCE NEED THROUGH MICRO

FINANCE

Financing family farms and producer organizations involves many particularities: unreliable
harvests, low profitability of activities financed, climactic risks, epidemics and unstable
selling conditions (“imperfect” market conditions, price variations that depend on local
economic agents and international markets).

The financing required for agricultural activities is highly diversified in terms of amounts and
terms. Seasonality of activities and income flows makes financing even more difficult, since
the monetary income for reimbursement is sporadic. This requires financial agents to adapt
their credit procedures to the agricultural calendar. Finally, assessing repayment capacity of a
borrower is often challenging, given lack of separation between the farm and household
finances.

In light of these difficulties, the microfinance and agriculture sectors are innovating to better
respond to the specific needs of agriculture. This seeks to demonstrate microfinance’s
creativity and will address the potential for different forms of innovation to better fit farmer’s
needs, including:

 Products and procedures;

 Non-financial tools such as: marketing, communication, information systems, etc.

HOW CAN MICROFINANCE RESPOND TO THE NEEDS OF FARMERS?

Three out of four poor people live in rural areas, and the majority of rural inhabitants depend
on agriculture. Access to appropriate financial services is a critical factor for agricultural
development in the South. Yet, due to the specific constraints that come with financing
agriculture (reaching isolated rural areas, working with highly seasonal activities, agro-
climatic risks, price variations, etc.), developing an adequate supply of appropriate financial
services remains a challenge in most southern countries.

In the wake of post-colonial independences, many southern countries adopted an agricultural

finance paradigm based on government intervention in the form of state development banks
and highly subsidized credit, considered an “input” to production. By the 1980’s, the failure
of subsidized credit and bankruptcy was sufficiently widespread to justify the closure of
public banks, financial sector liberalization and the development of microfinance. Some
twenty years later, despite considerable progress made in rural areas, microfinance
institutions (MFIs) are still most present in urban zones. Moreover, when they do have rural
outreach, focus is primarily on agricultural rural activities.
A recent report by the World Bank emphasized the relevance of financing agriculture. The
lessons learned from past errors (from “100% government-led” to “100% market-led”) have
led to more pragmatic approaches that focus on innovation and encourage the financial sector
to seek out complementarities with the private sector, civil society and governments. The
financial sector seeks to increase impact on agricultural finance by adapting microfinance
“models” (cooperatives, village banks, self-help groups and solidarity guarantees) to the
specificities of agriculture, by developing innovative products and methodologies that help
reduce vulnerability of rural households, improve the management of agricultural risks and
encourage agricultural investment. New synergies among a variety of actors (microfinance,
banks, professional agricultural organizations, donors and public policies, etc.) appear
promising for developing rural finance.

MICROFINANCE ACTIVITIES BY NABARD

The microfinance Linkage Banking Programme (LBP) in India was launched by the National Bank
for Agricultural and Rural Development (NABARD) at a national level in 1996. It links Self-Help
Groups (SHG) with financial institutions with the aim of providing about one third of the rural
agriculturist with improved access to financial services by 2008. Despite the existence of a relatively
deep and diversified infrastructure of financial institutions the majority of the rural population in
India, especially poor agriculturists, do not have an appropriate access to financial services offered
through the formal banking sector. This contributes to a low utilisation of the potential for income and
employment generating activities with negative consequences for economic growth and the reduction
of poverty, which is especially high in rural areas with about 27% of the population (nearly 200
million people). Most Indian banks used to be of the opinion that there was a serious obstacle to
linking the poor to the formal banking system, mainly due to the high costs involved in managing
small credit amounts without the usual collateral.

Besides this linkage banking programme, NABARD has introduced various products & services for
development of agriculture & allied sectors.
 Crop insurance scheme “Rashtrya Krishi Bima Yojana (RKBY)”.
 Watershed Development Fund (WDF).
 Technology Mission on Cotton (TMC),
 Kisan Credit Cards,
 New Credit Linked Capital Subsidy Scheme for the development of cold storage and onion
storage facilities
 World Bank aided National Agriculture Technology Project (NATP).
 On-farm Water Management Scheme for Eastern India.
 Technology Mission on Horticulture Development for North Eastern States.

ROLE OF COMMERCIAL BANKS FOR AGRICULTURE SECTORS AS

MICROFINANCE

In a changing environment, banks are diversifying their role in the agriculture sector in order to get
revenue from their significant contribution to agriculture. Some of the new roles that banks have
adopted are: Marketing, training and consultancy, insurance and financing for infrastructure via
private-public participation.
KISAN CREDIT CARD SCHEME

The Kisan credit card scheme was first introduced in India by Andhra Bank in 1998. The
scheme aims to facilitate access to short-term credit to farmers and to simplify the credit
mechanism, so that farmers can receive credit on time. The different commercial banks,
Regional Rural Banks (RRBs) and cooperative banks issue the Kisan credit card. By
September 2002, 271.81 lakh Kisan credit cards had been issued, which is considered a
significant achievement. Rural financial institutions are not well integrated with agriculture
support systems like R&D, Extension, supply chain and processing, and their credit policy is
too cropcentric. So non-crops and other high value activities are not taken care of. Only
traditional crops have credit access; most banks give out only 15% or less of their total
portfolio to the agri-sector as against the mandatory 18%.

INSURANCE

Indian agriculture depends heavily on the monsoon. Crops often get damaged because of
abrupt changes in the weather. The suicide cases of cotton growing farmers in Andhra
Pradesh and Maharashtra are an everyday thing now. To overcome all these problems,
microfinance and general insurance companies have come up with crop and weather policies
which can be helpful to poor farmers. Example: Basix, one of the largest microfinance
companies in India at Hyderabad, announced India’s first rainfall insurance program in July
2003 with Krishna Bhima Samruddi Local Area Bank.

AGRI-CLINICS

The Government of India has formulated a scheme to help agriculture graduates establish
“agri-clinics” to provide assistance to farmers regarding soil testing, post-harvest
management and technology. NABARD has come forward in this regard and will facilitate
bank credit on priority sector lending terms. NABARD acts as the facilitator in providing the
loans based on the appraisal of the projects. The loan amount varies from Rs. 5 lakhs (in case
of individual) to Rs. 50 lakhs (in case of group projects).

As per RBI guidelines, there will not be any collateral security on the loan amount of Rs. 5
lakhs. Several banks, like Indian Bank, have come up with a scheme to provide loans for
establishing agri-clinics and agribusiness centers. The loan amount varies from the interest
rate of 9.5% to 11.0%. However, the rate of interest is so high that it makes farmers think
twice before availing the loan facility. This high rate of interest must be reduced. However,
the agri-clinic model attempts to involve agriculture graduates and it is a win-win situation
for everyone: The Government of India, the agriculture graduates and the farmers.
 BANKS PROVIDING MICROFINANCE TO AGRICULTURE & ALLIED
INDUSTRY

IDBI BANK

AGRICULTURE FINANCE
 
 Crop Loan With Kisan Credit Card
 PSL Gold Loan Scheme
 Warehouse Receipt Finance
 Loan Against Crop Receivables
 Farm mechanization.
 Financing wells
 Financing minor irrigation scheme
 Lift irrigation scheme
 Loan for purchase of land
 Loan for horticulture & forestry development

LOAN FOR ALLIED ACTIVITIES

 Dairy loans
 Poultry farming loans
 Loan for sheep & goats rearing
 Fisheries loans
 Financing piggery unit
 Loan for silk production
 Bee keeping madhu makshika palan

UNION BANK OF INDIA

 Agriculture finance
 Crop loan
 Union green card
 Loan against receipt of cold storage & ware house

CONCLUSION

 Microfinance in India is growing day by day.

 The main focus of Indian microfinance is women empowerment as well as
agriculture, allied & agro industry.
 Indian commercial banks are also involved in providing microfinance to agriculture,
allied, & agro sectors.
 The rural agriculture is influenced by these schemes provided by NGOs, MFIs &
commercial banks.
REFERENCES

http://en.wikipedia.org/wiki/microfinance

http://www.and.nic.in/know%20andaman/economic%20survey%20ANI/chapter%20-%06.pdf

http://www.iba.org.in/events/flowefcreditcover.pdf

http:// www.syngentafoundation.org/db/1/54.pdf

http://129.3.20.41/eps/fin/papers/0505/0505016.pdf

http:// www.ficci-b2b.com/sector-overview-pdf/Sector-agri.pdf

http://www.uncdf.org/mfdl/readings/CommBanks.pdf

http://www.microfinancegateway.org/gm/document

http://www.unionbankofindia.co.in/sb_Agriculture.aspx