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Submitted By .

In Partial Fulfillment of the requirements For the award of the Degree of MBA FINANCE FINAL PROJECT


This is to certify that Miss. of MBA FINANCE FINAL PROJECT has successfully completed the project on Rural Banking In India under the guidance of A.C. VANJANI.

Project guide

I .. student of MBA Banking & Insurance Semester V (2008-2009) hereby declare that I have completed the Project on Rural Banking In India

The information submitted is true and original to the best if my knowledge.

Signature of the student

Name of the student

I would like to thank a lot of people without whom this project would not have been complete. First DR A. C. VANJANI he was of utmost help in guiding me structures this project. He helped me throughout and was always present to help me whenever I had a doubt. Expert opinion is always required to complete the project so it was Mr. DARIRA who has the experience of working in PUNJAB NATIONAL BANK, explained me the concept and helped me structure the project. It wouldnt have been easy for me to tackle such a topic without his practical guidance

A research can never be over without access to a good library and in this case I was blessed as our college library, is very well stocked with books. And the lending policy made life a lot easier. Also not to forget the library of INDIAN MERCHANT CHAMBER which made it easier to get through to matter that helped me understand concepts well And not to forget the unconditional support provided by my parents and friends.



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The Indian national planners have taken up the banking sector as an instrument for accelerating the process of rural development. After nationalization both the Cooperatives and Commercial banks played a significant role in providing credit for the development of agriculture which is classified as a priority sector by the RBI in its credit policy. Due to rapid growth and development of rural areas of the country both the cooperatives and commercial banks could not meet the credit needs of the weaker section of the community. After the introduction of modern technology in agriculture the small marginal


income-bearing activities. Agricultural and non-agricultural activities in rural areas typically are seasonal, and households need credit to smoothen out seasonal fluctuations in earnings and expenditure. In the Indian context, another important purpose of borrowing is to meet expenses on a variety of social obligations and rituals. Similarly, there is tremendous inequality in the distribution of income too. There are a few individuals who have very high incomes and there are people with low incomes, such as the labourers and marginal farmers. Thus, different people or sections of the population have different credit needs.

ural people have to borrow for a variety of needs. They need credit to meet short-term requirements of working capital and for long-term investment in agriculture and other

If these credit needs of the poor are to be met, rural households need access to credit institutions that provide them a range of financial services, provide credit at reasonable rates of interest and provide loans that are unencumbered by extra-economic provisions and obligations. To satisfy these needs in a timely fashion, the state has taken policy initiatives to provide institutional credit.

The declared objectives of public policy with regard to rural credit in the post-Independence period were, to ensure that sufficient and timely credit, at reasonable rates of interest, is made available to as large a segment of the rural population as possible". The policy instruments to achieve these objectives were to be, first, the expansion of the institutional structure of formal-sector lending institutions; secondly, directed lending; and thirdly, concessional or subsidized credit. Thus, development of the rural areas has been the major focus of growth in since long and India is no exception to this. However, owing to varied development approaches the aim of achieving a speedier growth in rural sector has been beset with many a bottleneck. Rural development is basically a micro approach, which has to be entwined with macro objective depending on the micro perspectives. This study dwells on a micro region, how different rural development programmes are being financed by the commercial and cooperative banks, by considering region-wise and sector-wise total deposits, advances, recovery and loan outstanding. Besides, the macro analysis of commercial banks provides their various levels of performance in terms of several indicators. While the contribution of private banks and foreign banks has been showing a slow growth in this liberalization era, the public sector banks dominate the current banking scenario in the country. However, their performance is subject to fluctuations as and when policy changes are being made and a steady growth pattern in term is yet to be realized in full.



Agriculture accounts for about 37% of the national income. The development of the rural areas and of agriculture and its allied activities thus becomes vital for the rapid development of the economy as a whole. In this regard India has succeeded in developing one of the largest rural banking systems in the world. The National Bank for Agricultural and Rural Development (NABARD) is the apex institution charged with looking after all matters concerning policy, planning and operation in the field of credit for agriculture and other economic activity in rural areas. Public policy was aimed not only at meeting rural credit needs but also at pushing out the informal sector and the exploitation to which it subjected borrowers. Rural credit policy in India envisaged the provision of a range of credit services, including long-term and short-term credit and large-scale and small-scale loans to rural households. Initially, the co-operative form of banking was considered to be most suitable in the Indian context. However now India has adopted a multi agency approach for providing credit in the field of agriculture and allied sectors, the four sets of institutions viz. Commercial banks both

bout 75% of the Indian population lives in rural areas and about on 80% of this for population its is





in public and private sector with a large network of rural branches, Regional Rural Banks (RRBs) and Cooperative credit structure with State Cooperative Banks (SCBs) at state level, the affiliated District Cooperative Banks (DCCBs) at district level and Primary Agriculture Credit Societies (PACSs) at village level, the long term credit through State Cooperative Agriculture and Rural Development Banks at State level (SCARDBs) with branches or affiliated Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) at grassroots level.


major initiative in pursuance of this mandate was taken with sponsoring of All-India Rural Credit Survey in 1951-52. This committee had found that cultivators depended on private

he Reserve Bank of India has a mandate to be closely involved in matters relating to rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. The

moneylenders for about 94% of their credit needs. The All India Rural Credit Survey Committee (1954) proposed an integrated scheme for rural credit. It suggested that the RBI should take steps to strengthen the cooperative movement. An important step towards gearing the banking system for rural credit was the formation of the State Bank of


India by amalgamating the Imperial Bank of India with other stateassociated banks. It was felt that with the assistance of the RBI, the State Bank would play a crucial role in providing rural credit.

Adoption of a policy of social control over banks in 1967 and the nationalization of 14 major scheduled commercial banks in 1969 have proved to be two major turning-points in the history of commercial banks in India. The period from 1969 to the present can be characterized as representing, broadly speaking, three phases in banking policy vis--vis the Indian countryside.

The first was the period following the nationalization of Indias 14 major commercial banks in 1969. This was also the early phase of the green revolution in rural India, and one of the objectives of the nationalization of banks was for the state to gain access to new liquidity, particularly among rich farmers, in the countryside. The declared objectives of the new policy with respect to rural bankingwhat came to be known as social and development banking were (i) to provide banking services in previously unbanked or underbanked rural areas; (ii) to provide substantial credit to specific activities, including agriculture and cottage industries; and (iii) to provide credit to certain disadvantaged groups such as, for example, Dalit and Scheduled Tribe households. (iv) the agricultural sector be included in the category of priority sectors

The introduction of social and development banking policy entailed a radical shift from prevalent practice in respect of the objective and functioning of commercial banks. An important feature of the policy of social and development banking was that it recast completely the role of commercial banks in rural banking. The government thought that it was necessary to control the heights of the economy and to meet progressively, and serve better, the needs of development of the economy in conformity with national policy and objectives.

It was only after 1969 that a multi-institutional approach to credit provision in the countryside became policy, with commercial banks, Regional Rural Banks and cooperative institutions establishing wide geographical and functional reach in the Indian countryside.

The Reserve Bank of India (RBI) issued specific directives with respect to social and development banking. These included setting targets for the expansion of rural branches, imposing ceilings on interest rates, and setting guidelines for the sectoral allocation of credit. Rural credit was an important component of the green revolution package; the first post-nationalization phase of expansion in rural banking saw a substantial growth in credit advances for agriculture. Specifically, a target of 40 per cent of advances for the priority sectors, namely agriculture and allied activities, and smallscale and cottage industries, was set for commercial banks. Advances to the countryside increased substantially, although they

were, as was the green revolution itself, biased in respect of regions, crops and classes.

The Reserve Bank hived off a part of its role in agricultural credit to a separate national level institution, viz, Agriculture Refinance and Development Corporation (ARDC) in 1975. Soon thereafter, the Government established by ordinance and then legislation a new network of rural financial institutions called the Regional Rural Banks (RRBs), which were promoted by the Government of India, State governments and commercial banks. These were created on the basis of recommendations by a working group on commercial credit, also called the Narasimham Committee. Subsequently, the ARDC was converted into NABARD.

Where a bank fails to fulfill its commitment towards priority sector lending, it is currently required to contribute to Rural Infrastructure Development Fund set up by NABARD. NABARD in turn provides these funds to State Governments and state owned corporations to enable them to complete various types of rural infrastructure projects.

It was felt that with the establishment of large network of branches, a system could be adopted to assign specific areas to each bank branch in which it can concentrate on focused lending and contribute to the development of the area. With a view to implementing this approach, RBI introduced a scheme of "Service Area Approach" for commercial banks. To further supplement the institutional


mechanism, the concept of Local Area Banks was taken up in 199697.

The second phase, which began in the late 1970s and early 1980s, was a period when two strategies for employment generation were envisaged, namely wage- employment through state-sponsored rural employment schemes and self-employment generation by means of loans-cum-subsidy schemes targeted at the rural poor. Thus began a period of directed credit, during which credit was directed towards the weaker sections. The most important new scheme of this phase was, of course, the Integrated Rural Development Programme or IRDP, a scheme for the creation of productive income-bearing assets among the poor through the allocation of subsidized credit. The IRDP was initiated in 1978-79 as a pilot project and extended to all rural blocks of the country in 1980.

The second phase also involved an expansion and consolidation of the institutional infrastructure of rural banking. After bank

nationalization, there was an unprecedented growth of commercial banking in terms of both geographical spread and functional reach.

The third and current phase, which began in 1991, is that of liberalization. The policy objectives of this phase are encapsulated in the Report of the Committee on the Financial System, which was chaired by M. Narasimham (RBI, 1991).


The directed credit programmes should cover a redefined priority sector consisting of small and marginal farmers, the tiny sector of industry, small business and transport operators, village and cottage industries, rural artisans and other weaker sections. Credit targets for this redefined priority sector should be fixed at 10 per cent of aggregate bank credit. Stipulations of concessional interest to the redefined priority sector should be reviewed with a view to its eventual elimination, in about three years. A review should be undertaken at the end of three years to see whether the directed credit programmes need to be continued.

The Reserve Bank of India had advised the public sector banks to prepare Special Agricultural Credit Plans (SACP) in 1994-95. The SACP mechanism was also made applicable to the private sector banks in 2005-06. The disbursements by the public sector banks to agriculture under SACP have increased from Rs 25,654 crores in 2000-01 to Rs 1, 22,215 crores in 2006-07.

More recently, since 2004, vigorous efforts have been made to more than double the credit flow to agriculture. Emphasis has been laid on sound credit culture, effective credit delivery and appropriate credit pricing. New instruments for financial inclusion such as General Credit Cards and no-frills accounts were initiated. Micro finance programme was intensified. Use of technology for rural banking is being encouraged. Special Area Plans for banking in several states

have been formulated to suit the local conditions. In terms of institutional development, consolidation of the RRBs, revamping of the urban co-operative banks as per the vision document, revival of rural co-operative credit structure, a plan for restructuring of long-term lending institutions for agriculture, and a revisit to the prescriptions relating to the priority sector lending are underway. While a Working Group to review the legislations of various States in regard to money lending has been formed, another Working Group is looking into the relief measures for the distressed farmers. Above all, as per the Government of India announcement in 2005, it has been decided to subsidize the commercial banks and NABARD to enable provision of short-term credit at 7% interest rate to the major segment of the farmers. In brief, there have been vigorous and determined efforts towards expansion of rural credit, especially through rural banking. Keeping the importance of agricultural credit in mind the Tenth Five Year Plan envisaged a substantial increase in credit flow to agriculture from a level of Rs 2,29,956 crores achieved during the Ninth Five Plan to a level of Rs 7,36,570 crores during the Tenth Five Year Plan.



n the period before the nationalization of banks, key sectors of the

economy including agriculture remained thoroughly neglected in terms of availability of institutional credit. Whereas the industrial

sector at that time accounted for about 15 per cent of national output, it appropriated two-thirds of commercial bank credit, whereas the agricultural sector contributing about half of national output was almost completely neglected by the commercial banks.

The rural population of India has been suffering from a great deal of indebtedness and is subject to exploitation in the credit market due to the high interest rates and lack of convenient access to credit. Rural household need credit for investing in agriculture and smoothening out of seasonal fluctuations in earnings .Rural household need access to financial institution that can provide them with credit at a lower rates moneylenders and at reasonable terms than the traditional and there by help them avoid debt traps that are

common in rural India But after the adoption of the New Economic Policy in 1991, the Indian economy is becoming more and more mature with the passage of time on account of structural changes undertaken in different sectors and areas. The GDP growth rate has been much higher and it has averaged over eight per cent during the past three

years. While there has been acceleration in the industrial sector, especially manufacturing and services sector, and the country is graduating from a low-income regime to a middle income regime, there has been deceleration in agricultural growth, which reflects as a broad-based slowdown in the productivity growth. While growth is important, it is also imperative that growth becomes more inclusive because if certain regions, sectors or groups of people are denied economic opportunities for long periods, the spread and sustainability of growth itself is threatened. Hence, growth, to be inclusive, must take into account the betterment of every section of society. Hence, it is imperative to ensure that higher growth is also more inclusive. In the Draft Approach Paper to the Eleventh Five Year Plan 2007 2012, the Planning Commission has emphasized the need for faster and greater inclusive growth during the Eleventh Plan period. The banking sector, as the most important financial intermediary to mobilize the savings leading to increased investments, facilitating growth would, thus, play the most crucial role in attaining the stipulated economic objectives through expansion of the coverage of banking services by reaching the vast unbanked and underbanked population of the country. Financial inclusion, or extending the benefits of banking to the havenots, is the latest buzzword among bankers. So much so, that it was the theme for annual top-level bankers meet, Bancon 2006. It is


integral to the government efforts to extend the benefits of growth to a broader section of the population. According to the Invest India Incomes and Savings Survey of 2007 by research firm IIMS Data works, just 44.9 per cent of Indian earners had bank accounts, with coverage rates varying widely in individual States. Just 38 per cent of paid workers in villages had accounts compared to 62 per cent of their counterparts in urban areas. This shows that financial inclusion needs an aggressive push. This can be achieved by taking banking to underserved areas, mobilization of household savings, diversification of lending targets, extension of loans to small farmers and artisans, greater use of technology to keep transaction costs down, and a bigger role for rural banks. As a result, a new model of rural banking is being developed with the help of intermediaries such as self-help groups and microfinance institutions, while banks are exploring new ways to use technology to lower the cost of delivering rural banking services.



ublic sector banks continue to have about 75% share in the banking system. Despite the rapid growth of the new private sector banks, the share of public sector banks will continue

to remain high. Hence the continued health of Indian banking system will depend on the performance of public sector banks. About half the branches of public sector banks (PSBs) are in the rural sector. These are often regarded as part of the rural community. Rural branches of PSBs have played a significant role in the past three decades. They came to the rescue of the agricultural sector in the wake of the Green Revolution, as the cooperative banks, on which the agricultural sector had been mainly dependent in the prenationalization period, were proving unequal to the job of meeting higher credit requirements. Emerging as the focal points for catering to the localized needs of the rural communities, they helped to significantly reduce the role of professional moneylenders and brought about a qualitative transformation in the savings and investments activities in the rural sector. PSBs have been able to percolate to the rural areas accompanied by an increase in priority sector lending, which private banks have not

been able to do. The probable reason is the low level of social responsibility of business on the part of private and foreign banks. Another notable thing is that by and large PSBs have been ethical as compared to their counterparts in private sector. PSBs are incorporating new technology, reducing manpower and extending the ambit of customer facilities. While these measures will reduce the cost overburden in the urban and metropolitan branches, the relief is not likely to be substantial enough to offset the heavy administrative and operational burden of running hundreds of rural branches.


anking System :

Historically, there have been four major problems with

respect to the supply of credit to the Indian countryside. The supply of formal sector credit to the countryside as a whole has been inadequate.


Rural credit markets in India themselves have been very imperfect and fragmented. The distribution of formal sector credit has been unequal, particularly with respect to region and class, caste and gender in the countryside. Formal sector credit needs specially to reach backward areas, income-poor households, people of the oppressed castes and tribes, and women. The major source of credit to rural households, particularly income-poor working households, has been the informal sector. The huge presence of informal credit has helped moneylenders charge high rates of interest with complicated terms and conditions, sometimes accompanied by an element of cruelty.

At the time of independence, the rural credit scenario was rife with these problems.

Since 1991, the policy environment has been dominated by the liberalization of the banking sector and greater concern for prudential norms for banks and risk management, most of these efforts have been concentrated in the urban and metropolitan centres and very little change has effectively come in the rural areas. Even today, majority of the rural branches are running in losses, the deposit mobilization is not up to the desired level, there are problems in granting advances etc. In their anxiety to reach the target of 40 per cent to the priority sectors, banks have gone in for indiscriminate


lending. There have been external pressures on the banking sector to lend to weaker sections. In addition, the priority sector lending has to be at a low concessional rate of interest. The deposits collected by banks from rural areas were not totally deployed there. This indicates that institutional sources of credit such as banks and co-operative societies are unable to meet the farmers needs. Inadequate branches: The spread of bank branches in rural areas is quite inadequate. In fact, the number of such branches has declined in the post-liberalization era. The number of rural bank branches in the country has come down from 35,000 in early 1990s to as low as 30,572 by March 2006 through mergers and swapping of rural branches. At one time, rural India accounted for 57 per cent of total bank branches in the country. This share has now come down to 47 per cent. What is more disappointing, they generate only 14 per cent of deposits and 12 per cent of advances. Financial exclusion: The main problem is the lack of access to banking. More than half of the Indian population suffers from financial exclusion, with a substantial portion of the households, especially in the rural areas, still outside the coverage of the formal banking system. Almost 40 per cent of the adult population of the country is unable to access mainstream financial products. Such a high level of financial exclusion obviously imposes social costs.


Poor Financial Viability: Banks may not find operations economical, as sometimes the transaction and follow up costs are more than the amount of credit. Rural banks and rural branches that are compelled to operate in this milieu do so unprofitably. Non consumption loans: Another problem is that banks generally do not give loans for consumption. In cases where day-to-day living itself is at question, banks, their strict conditions on the use of money borrowed and the numerous delays are avoided. Nature of transactions: Rural transactions are cash based. Majority of the rural populiace has the capacity to engage in micro-savings and would require depositions and withdrawals at their convenience. Moreover, the timing of the transaction does not necessarily coincide with the bank branch timings. Since most transactions are cash based, this increases the total cost of transactions because of the cost of idle cash, and the cost of handling infrastructure, that is branch setup, manpower and the cost of cash security. Education and Awareness level of the people: Rural India at 59 percent rate of literacy is behind urban India. It affects the acceptance of formal banking by villagers as they feel a natural hesitation towards a structured and rigid environment. They also find it difficult to fulfill the formalities required for carrying out banking transactions. Hence, they need a higher level of guidance and support which requires deploying more manpower; again a cost escalating factor. Lower education and awareness also act as an impediment in effective utilization of proposed and existing ATMs.


Tough competition from unorganized financers: Unorganized financers like village money-lenders, traders, shopkeepers and commission agents are a major source of finance for rural folks. These informal sources of finance have distinct advantages over the formal banking system in terms of location, service- delivery at the door-step, flexible working hours, customized terms of transactions, of element of familiarity and personal touch in services. Manpower problems: Rural banking has emerged as a niche wherein special skills and sensitivity are required. Since the education level is poor, it is difficult to find employees locally to man the rural branches while the urban employees are generally disinterested in working in these areas. It results in lesser number of employees per branch in rural areas, absenteeism among

employees, and disproportionate work load on existing employees, plummeting their morale, and deteriorating the quality of services offered. Difficulty in meeting demand: The credit-system in rural areas finds it difficult to cope with the rising demands of commercialized agriculture and in any case, there are few credible risk-mitigation measures for the borrowers resulting in greater distress to the farmers in areas with significant presence of commercial crops. In addition, while there has been significant growth in rural credit in the recent years, its medium-term sustainability is contingent upon growth in agriculture and improvements in the institutional settings.



Public sector banks follow government and RBI guidelines/directions by having branches in rural areas that are very expensive to maintain and service. These branches also lend to farmers, rural artisans and people involved in allied activities. They service segments that are commercially unviable but require banking most. The crux of the matter is that the bulk of the public sector bank branches across the length and breadth of the country undertake the massive task of financing areas that are of top priority for development. Further, as the priority sector loans have been of small amounts, the public sector banks not been able to adequately monitor the distribution, follow-up and recovery of loans, resulting in squeezing of profitability and increase in non-performing assets.

The official compulsions of keeping a high proportion of their deposits in liquid form and subsidization of credit added fuel to fire. Over the years, there has been growth in staff, resulting in increased operating expensesalthough in the recent past this ratio has gone down on account of compulsions of increased competition from private sector and foreign banks. Moreover, very few programmes focused on micro-enterprises or encouraged diversification away from

agriculture. This led to a focus merely on geographical expansion of the rural areas, where the banks branches offered credit in sizes


which were too large to be made use by the very poor. These practices led to a high default. The difficulty is that, faced with the demands made on them by the advocates of liberalization and the effects of competition from the private sector banks, banks in the public sector are also being forced to change. They are trying to trim operating expenses, by reducing the wage bill by reducing employment through retrenchment under the VRS scheme and computerization. They are also seeking to reduce costs by limiting branch expansion and reducing the number of bank branches. The latter, which affects the rural areas first, reduces access to credit in rural areas that were well-served by the post-nationalization branch expansion drive, and worsens the tendency towards reduced provision of credit to the agricultural sector.

What is however worrying the PSB management is the structural drag of these branches on the profitability of the banks. Costs had been no consideration when these branches were established at breakneck speed in the Seventies. But today the exact benchmarks for profitability and viability have put the PSBs in an unenviable position. The big challenge in promoting rural banking is to keep the costs low in view of the fact that while the number of transactions in such areas may be high, they are mostly small-value transactions. However, technology can play an important role in keeping the costs of such

transactions low. Unfortunately, public sector banks (PSBs), which account for 70 per cent of assets, have been slow in making use of modern technology to bring down transaction costs. While public sector banks have the potential, with their spread and reach, to enable financial inclusion, they also have to face difficult challenges in human resource development. Public sector banks need to invest significantly in skill enhancement at all levels, for delivering new service modes in the face of greater competition. They will also face new recruitment challenges in the face of adverse compensation structures in comparison with the private sector banks.


economies, the new realities in credit markets, the linkages between formal and informal markets, and the impact of financial as well as technological progress on the systems of financial intermediation. Consequently, public policy will have to address several issues to

he future of banking in rural areas depends on several factors, namely, how the current concerns are addressed taking into account the dynamics of transformation in rural


ensure a sound and efficient banking system in the service of rural areas.

The move towards inclusive growth is a big challenge for the financial system of the country, including Public sector banks. They need to adopt an innovative, customer-friendly approach to increase their effective reach so that the share of organized finance increases. A participatory and partnership-based model for financial inclusion, coupled with community-linked financial initiatives is the need of the hour. In the near future, customer-friendly products, delivery channels, relationship banking, dependency on IT systems and competitive pricing would be the driving forces. Public sector banks needs to move to high-tech banking. The Internet would be the engine of the banking revolution in the decades to come and e-commerce would be its fuel. Therefore, the key to survival of banks in future will be the retention of customer loyalty by providing value-added services tailored to their needs. It is against this background that we position a technology based solution for improving the speed efficiency and effectiveness of the credit delivery of the rural people through the application of information technology tools and systems. A model for using Information Technology for improving rural credit delivery system by reducing the cost, increasing the speed of delivery and also increasing the value addition in the service delivery and improving the


accountability is needed. E.g.: It is important to mention that the Union Bank has launched a New initiative called Village Knowledge Centres. Here, technology is used to help the farmer improve his productivity. The Banks staff at this village knowledge centres act as relationship managers, liaising between local authorities and farmers, facilitating the opening of accounts and ensuring that credit is provided to the needy. Public sector banks should mobilize deposits from the agricultural sector itself to finance its own credit requirements. Such a move will entail two stepscurtailment of unproductive expenditure and deposit of savings by the agriculturists in banks. Their outlook needs to be changed with the help of banking staff and utilizing the services of the mass media. Villagers must be convinced that they themselves would gain in the long run if they would save and invest. In order to mobilize the savings of the villagers, the services of the moneylendersboth professional and agriculturalmust be utilized by the public sector banks. The public sector banks may appoint them as their agents. The banks should then ask them to encourage the villagers to deposit their money in the banks and approach the banks for loans through them. The appointment of moneylenders as agents has an added advantage. These moneylenders have been living in villages for a long time and are, therefore, accustomed to the rural way of life. They know the local language and can, therefore, mix well with the villagers. Priority sector lendings should be restricted only to the core sector.


Public sector banks should provide credit not merely on the basis of collateral security such as land and buildings but they should also advance loans to the agriculturists after assessing the absorptive capacity and the increase in productivity that is feasible with the help of such loans. Crops should also be accepted on a loan of security. To assess the absorptive capacity of the farmers commercial banks should maintain a staff of agricultural experts. The public sector banks must also provide credit to the agriculturists on the basis of joint guarantee given by the village panchayat or by a few well-known farmers of the village. The acceptance of such a basis will greatly help the farmers, particularly small farmers, in securing loans. This will also result in more purposeful advent of the commercial banks in the rural sector and will bring them into relationship with cooperative institutions. It will also ensure a fair understanding between them and encourage commercial banks to operate on the principle of collective service for a collective need. The geographical and functional reach of public sector banking must be restored and extended, differential interest policies reinstated, and special loans-cum-subsidy schemes reintroduced on a large scale for all landless and poor and middle peasant households, scheduled caste and tribe households and other vulnerable sections of the rural population.

Public sector banks must open new branches/ extension counters in unbanked locations. These branches should focus on providing direct


banking services to the people living in the immediate neighborhood and the rural rich, besides they should also act as processing / coordinating centres for providing banking services to other smaller villages. The cost of operations in such branches can be reduced by deputing muti-skilled employees and adopting technology. Revenue generation can be enhanced by incorporating other activities into the branch like agricultural tension services, backward and forward agrilinkages, crop, live-stock, life and general insurance and other allied activities.

There are many non-banking entities that are operating in rural India and have a high reach, low cost and higher flexibility in terms of operations, for example- Non Banking Finance Companies, Non Government Organizations (NGO), agricultural cooperatives and SelfHelp Groups (SHGs). Apart from these, there are nearly 1,39,000 post offices in rural areas which mobilize small savings to the tune of thousands of crores. By collaborating with such partners for providing banking services in unbanked locations, the cost of services can be brought down significantly. Public sector banks can find a new productive and useful role if the institutional configuration for the channeling of savings and investment activities in the rural sector is reformed and redesigned. They can productively operate as a source of refinance for rural institutions while acting as a conduit for passing on the benefits of different kinds of financial services appropriate for the rural sector. Further, the public sector banks could provide a catalytic role for


extending modernizing influences and systems. In the performance of this newly-carried responsibility, they would not need to carry the heavy cost burden of maintaining an extensive network of branches. Public sector banks success must be able to forge partnerships and work for collective benefit from a long term perspective with innovative use of existing infrastructure. Rural Banking in Public sector banks should be a powerful business enabler to plug the gaps in information, communication, & transportation infrastructure. Hence one has to look at the holistic needs of customer and offer access to banking without time, place, and access limitations. Finally, it needs to be remembered that stray attempts would not solve the problem of agricultural credit. The credit system as a wholegovernment, commercial and cooperativemust be so knit together that it does not suffer either from a gap or an overlap. It is only then that the real fruits of credit facilities will be enjoyed by the country at large in the form of agricultural development which still is the key to Indias prosperity in future.



New Policy Directions:

The most recent policy directions are as follows: The National Development Council approved, An Approach to the 11th Five Year plan which contains extensive references to the future policy directions. Some extracts from the document are as follow: On objectives and challenges One of the major challenges of the 11th Plan will be to reverse the deceleration in agricultural growth from 3.2% observed between 1980 and 1996-97 to a trend average of around 2.0% subsequently.

To reverse this trend, corrective policies must not only focus on the small and marginal farmers who continue to deserve special attention, but also on middle and large farmers who suffer from productivity stagnation arising from a variety of constraints.

A second green revolution is urgently needed to raise the growth rate of agricultural GDP to around 4%


On financing development The 11th Plan must ensure that our policies are sufficiently flexible to support the development of micro finance. Interest rates in the micro finance sector have to be significantly higher than in the banking sector reflecting the much higher cost of doing business. It is important to remember that most micro-finance institutions charge rates which are much lower than rates charged by money lenders.

On agriculture sector policy The failure of the organized credit system in extending credit has led to excessive dependence on informal sources usually at exorbitant interest rates. This is at the root of farmer distress reflected in excessive indebtedness.

There is evidence that farm debt is increasing much faster than farm Incomes and the larger issue of the overhanging debt stock, as distinct from credit flow, have not even been on the agenda except

of a few State governments. Admittedly, there are limits to the extent that banks can be expected to play a purely social role in todays more competitive environment. However, too conservative an approach on settling debt that has turned bad, due to contingencies of poor weather or prices, is not even prudential banking if this serves only to show bank balance sheets to be better than they are, and prevents profitable new lending. There are several suggestions, ranging from a Stabilization Fund to be run by the Centre for automatic write-off under some specified conditions, to the setting up by States of standing professional Debt Commissions to examine

individual debt (including to non-institutional sources) on a case-bycase basis for one time settlement The 11th Plan will examine in detail the impediments which now stand in the way of social and developmental banking and suggest innovations that can improve access and speed up one-time settlements while maintaining credit discipline and financial prudence.

As farmers adopt new and untried technology, and increase input intensities, they also face larger risks. These and related issues of risk management are again largely non-plan areas but need to be addressed during the 11th Plan. This should ideally be done by concentrating on innovations in design which could help expand insurance in a manner that is financially viable without excessive subsidy. The 11th Plan gives top priority to redressing the weaknesses in the agricultural sector. Growth in the agricultural sector has been less than 2% per annum since the middle of the 1990s. With about half of the rural population still dependent on it for most of their income inclusive growth cannot be expected if agriculture is not revitalized. It is important to recognize that the problem is not distributional, with the better off farmers doing well while the small farmers and the landless face hardships. Though the weaker groups clearly face more difficulties and need special attention, agriculture as a whole is in crisis. Therefore, there should be focus on achieving higher


productivity and incomes for all farmers in both crop and non-crop agriculture.

The Approach Paper calls for corrective action in several dimensions of agriculture. Water is a critical input for agriculture and we need to re-examine all aspects of the water economy. We are not spending enough on irrigation and what we are is not being utilized efficiently.

In addition to investment in irrigation, steps to conserve water and promote artificial recharge in rain fed areas must be taken.

Other issues on the agriculture agenda identified in the Approach Paper relate to the need for focused research in specific crops, farming systems and dry land farming practices, improved extension work to close the knowledge deficit affecting farm productivity; better seeds and inputs; enhanced facilities for credit, including revamping the co-operative credit system; initiatives to support agricultural diversification with effective marketing solutions; and completing the unfinished agenda of land reforms etc.



For this to happen, the Government has directed that: Commercial Banks, cooperative banks and RRBs should double the credit to agriculture in the next three years. Periodic review and enhancement of credit delivery in rural areas should be undertaken. Stepping up of rural infrastructure for long term sustainable growth should be made. Innovative way of providing finance e.g. micro-finance, Kisan Credit Card should be evolved on an ongoing basis. Self-Helf-Group (SHG) micro-finance NABARD should be encouraged. programme through



Ninth Plan






agriculture/rural credit was to the extent of Rs. 229956 crore. This is sought to be increased to Rs. 736570 crore.


Banks should prepare and submit Special Agricultural Credit Plans (SACPS) every year with the focus on financing Small and Marginal Farmers. Banks should waive margin/ security requirements as under: For agricultural loans up to Rs.50,000/For loans for agribusiness and agriclinic up to Rs.5/lakhs. Allowing Private Banks in rural areas to service farm and nonfarm sector.

Besides the above specific policy directions in place, RBI had since constituted two expert groups for suggestions for increasing flow of credit to agriculture, rural finance, microfinance and other means of rural development. The group led by Mr. YSP Thorat submitted its report in June 2005 highlighting, inter alia For focus on entire supply chain management of agricultural products, management of agricultural infrastructure. To lay emphasis on computerization of land records, legal support for recovery, improving extension network and developing marketing banks. Water management policies and investment water conservation be appropriately designed. Short-term credit is integrated with term credit, outsourcing monitoring activities to be made and to provide loan support for diversified agriculture etc.


To initiate risk mitigation measures by developing suitable financial products and commodity exchange, allowing banks (on behalf of farmers) to participate in commodity futures, designing special risk mitigation packages for low asset-based borrowers, using warehousing receipts with price hedging instrument, adopting technology for dissemination of market intelligence, sharing borrower information, etc.

In July 2005, the other expert group headed by Mr. H. R. Khan submitted its report on rural credit and micro-finance. Their recommendations inter alia are as under were: Banks to use civil society organisations for support services such as (i) Borrower identification (ii) applications. (iii) Preliminary appraisals (iv) Post-sanction monitoring (v) Follow up for recovery. NGOs, farmer clubs, agriclinics etc. to function as business facilitators. Institutional agents/others may support banks extending financial services such as disbursement of small volume credit, recovery of loans, etc. Registered NBFCs with significant rural presence, NGOmicro finance institution (MFI) may act as Business Correspondents Collection, processing and submission of credit


(RBI has already allowed NGOs engaged in micro-finance activities to access External Commercial Borrowing up to approximately Rs. 23 crore during a financial year. Micro-credit portfolio of regulated MFIs to be eligible for direct finance from NABARD. NABARD to set up Rural Kiosks/Village Knowledge Centres.



strategic reasons of ensuring food security. The variety in farming activities ands farm management poses challenges and opportunities to agriculture and rural lenders. It is common that policy makers, particularly in developing countries, have been confronted with the task of resolving a number of issues in agriculture lending The basic challenge faced is that providing finance to agriculture and rural development is not seen as a commercial and business

griculture plays an essential role in developing economies, especially because the large proportion of the population is engaged in agriculture in developing countries as also for


opportunity by banks or for that matter by the formal financial systems. Unlike in the past, the present day agriculture has become increasingly capital intensive which require access to working capital and seasonal loans along with medium and long term credit for on farm investments and cannot modernise without the support of strong financial system. Significantly even small farmers generally have no access to formal credit because the financial system is not innovative or sufficiently efficiently to reduce transaction cost and to provide tailor made products to small clients at affordable cost. Two major factors that hamper the smooth flow of credit to agriculture are the absence of effective credit delivery systems and the lack adequate credit absorptive capacity of the rural populace.

In agriculture lending, the cost for delivering and monitoring of credit is found to very high and the banks have not yet found an easy solution to manage the cost of credit delivery and supervision in the agriculture sector within the discipline of balance sheet numbers. Distances between clients and financial intermediaries, transport and communication difficulties, and the risky nature of agriculture that is vulnerable to natural diasters, boost these cost. The challenge still is to design and deliver the provision of loan products to better suit the farming community. Weak land titling and cumbersome and cost court procedures also compound problems of providing conventional collateral for loan in rural areas, thereby further increasing the risk of rural lending. Another major issue confronting agriculture and rural credit is that standard credit programmes are not suited to the heterogenous need of small farmers. Subsidised interest rates

blocked these emergences of vigorous and competitive rural financial markets, fostered loan repayment indiscipline, prevented banks from covering cost, and discouraged local saving mobilization. Complexity of various out dated procedures and related paper work involved in provision of credit is another issue in agriculture lending

Rural financial markets cannot thrive and grow if their clients lack credit worthiness. The low absorption capacity of farmers, inability to repay loans, and the inability to save because their incomes are depressed, all results in low credit worthiness. Notwithstanding improvements in information technology, backs lack the essential information on the credit history of potential clients, the viability of onfarm investments, the self financing capacity of farmers and their repayment capacity. Lack of these vital pieces of information hampers the timely credit reach for agriculture and rural development As most of the farmers are either small or marginal in the developing countries, they lack the absorbtative capacity both in terms of cost and the size of loan and advances which are of cost effective size to be handled by the banks. Since many of the financial transaction in the rural areas are small both for loans and for deposits-the transaction cost per unit of money involved is necessarily high as compared to larger transactions. Most of the banks either lack risk management system or they feel it is not necessary to have one, especially when it comes to financing agriculture



ublic sector banks, entrenched as they are in rural banking for over three decades appear to be holding on their business. When the banking industry is surging ahead the

world over, they find that nearly one half of their branches generate less than 15 per cent of their business. About 17 per cent of their staff is deployed for handling this business.

Banking sector being on the threshold of major technological innovation, public sector banks are at the cross-roads: whether to shed the historical baggage and adopt sophisticated banking.

A plea is made for functional specialization and structural reorganization of rural banking business, with a view to strengthen the competitive edge of the banking sector to be in tune with the fast changing banking scenario. While the new banks prefer to flourish in cities, gramin banks are directed to operate in rural areas and public sector banks struggle to remain in both the worlds. They have done this balancing act for over three decades. Hiving of the rural business into a subsidiary and amalgamating the gramin banks into it is a radical suggestion made.


The process of partial privatization is changing drastically the perceptions of the state owned banks. The increasing stress on

transparency is pushing them towards reducing NPA and improving the bottom line. This shift in emphasis is slowly resulting in the They have virtually

elimination of less remunerative business.

stopped rural branch expansion. As a part of the rationalization of the branch network, some rural branches are being shifted the semi urban centre or closed, unlamented.

Reorganization of rural business, however, should not result in creating monolithic, impersonal banking giants. Rural India needs user-friendly, rural oriented banks, an amalgam of the rustic simplicity of gramin banks and business concentricity of commercial banks.

Finally, it can be said that rural India provides ample opportunities for profitable banking and the public sector banks should take advantage of these latent opportunities and expand rural credit by repositioning themselves and delivering better services in the financial system. Only then can PSBs meet the expectations of becoming vibrant rural financial institutions capable of meeting the growing requirements of rural India.


Books: Man & Development: June 2007 Restructuring of Indian Banks Falguni C. Shastri Nationalization of Banks G.S. Monga, R.K. Sinha Rural Banking and Economic DevelopmentRais Ahmad Report on Currency & Finance 2006-2007