26

CHAPTER t II

SOURCES OF AGRICULTURAL CREDIT

The main focus of this thesis has been to examine the

role of commercial banks in agricultural finance. However#

in order to fully appreciate this role of commercial banks#

it would be necessary to discuss the various sources of

agricultural finance in India. This would hopefully provide

a suitable background about the financial infrastructure

within which the commercial banks will have to funation.

Keeping this view point in mind# this chapteer has been

divided into four sections. Section I briefly discusses the

role of credit in agricultural development and suggests the

main features of a sound agricultural credit.systern*

Section II provides a broad idea about the estimates of

credit requirements for the agricultural sector. The major

sources of agricultural credit have been discussed in

Section III. Finally# the major conclusions emerging out of

this chapter have been indicated in Section IV.

 27

SECTION I

ROLE OF CREDIT IN AGRICULTURAL DEVELOPMENT

Agriculture till recently was more a means of livelihood

and a gamble in the monsoon rather than a commercial proposition*
But the 'Green Revolution' and the 'White Revolution' have
1
changed the picture. In the field of agricultural research#

in the past few years# many improved and advanced technologies

have been generated* It is now possible to grow two# three or

even four crops per year on the same piece of land* The farmers

have come forward to adopt new technology on their farms• This

technology demands heavy doses of inputs like fertilizers#

seeds of high yielding varieties# insecticides# electricity#

improved implements and machinery. These inputs are purchased

from the non-farm sector. 2

Inputs in agriculture can be usually classified into

three broad conventional categories# namely# land# labour and

capital* Any change in the combination of inputs may bring

about a change in the agricultural production* But in the

>&
Indian context it is evident that increase in capital^needed
3
to promote agriculture* The marginal value productivity
(MVP) of capital in agriculture having increased with the

1 Shukla# BrM.# 'A Commercial Bank Enters Agricultural

Finance'# Financing Agriculture# Vol .9, No.3# October-
December 1977# pp* 1.
2 Ghose# Shankar# ’Changing India*# Allied Publications
Private Limited# Madras# 1978# pp. 55*
3 Karma# M*L* and Narolla# R.K.# 'Agricultural Loans $
Rhetoric and Reality*# The Banker# Vol .26# No .6# August
1978# pp. 25#
 28

inception of new technology# the farmers are likely to depend

more and more on borrowed capital to be able to adopt the new

4
farm technology. If improved techniques of production are

adopted without adequate capital# it might lead to a fall in

results#1 unlike in traditional agriculture where technology

is adjusted at a low level of equilibrium on the basis of

availability of capital. 5 In this context; Rajagopalan rightly

pointed out that ‘farm technology without adequate capital to

facilitate its use is a high cost dam without field channels

for irrigation* *6 7 8Paucity of capital has been considered

to be the main reason for the small and marginal farmers

7
lagging behind in the adoption of new technologies. Georgescu**

Roegen has also noted in his paper that most underdeveloped

agrarian economies are poor not only because of the insufficiency
of land but also because of a chronic dearth of capital#* Thus,

the new technology is largely responsible for a big spurt

in demand for capital*

4 Dhawan# K*C* and Kahlon* A *S •# “Adequacy and Productivity

of Credit on the Small Parra in Pun jab-"# Indian Journal of
Agricultural Economics# Vol*33# No.4, October-Becember
1978S* PP* 91#
5 Singh# S.b. and Patel# A*D* “Progress and Performance of
Commercial Banks in Agricultural Finance4*#5 Financing
Agriculture# Vol .7# No*2# July-September 1975# pp. 10*
6 Rajagopalan# V*# "Farm Liquidity and Institutional Fina­
ncing for Agricultural Hevelopment"# Indian Journal of
Agricultural Economics# Vol .23, No .4, October-December
1968# pp* 25 •
7 Attari# B*R* and Joshi# P.K.# "Capital Requirements and
Small Farmers f A Case Study in the Union Territory of
Delhi"# Agricultural Situation in India# Vol .37, No .5,
August 1982# pp* 305*
8 N. Georgescu-Roegen# '"Economic Theory of Agrarian Economics",
Oxford Economic Papers, Vol .12, February 1960# pp* 1-40*
 29

As mentioned above# modern agriculture requires more

investment and this investment can be made either from

private saving of cultivator or cultivator has to depend upon

credit# Our farmers are essentially of two groups. Those who

are rich and those who are poor. The former who have ample

security to offer and enough own resources to deploy# are

least affected by the availability of Don-availability of

credit. The poorjWho form the bulk of our peasantry# are at

the subsistence level with virtually very little surplus left

for future investment or production. a Thus# with very little

marketable surplus# majority of the farmers are unable to meet

their farm financial requirements from their own savings. They

are found in a vicious circle of low income# low saving and

10
low investment. In this context it has been rightly stated#

"The farmers in the underdeveloped countries cannot expect

their capital needs to come from savings# because their income

from farm operations is barely sufficient to provide the

minimum necessities of life (food# clothing and shelter).

Therefore# credit is the only source for their additional

investment.

9 Natarajan# B.# "Agricultural Credit and Commercial Banks"#

Prajnan# Vol .5# No.4, Qctober-December 1976* pp^. 378#
10 Bane* A .A.# "Economics of Agrieul tare'*# Atlantic Publi­
shers and Distributors# New Delhi# 1983# pp. 5*
11 F.A.O.# "Documentation prepared for Centre of Land
Problems in Asia and Par East", 1955# pp. 9G.
 30

Credit is a vital factor of production. More so in

India's agriculture where the prospects of 'plough back' are
12
weak compared to trade and industry. According to
Rajagppfclan# agricultural credit may be defined as the amount

of investible funds made available for the purpose of develop-

13
merat and sustenance of farm productivity. Credit plays a

crucial role in oiling the wheels of agricultural production.

It is said to be the life blood of agriculture and# therefore**

the need for timely and adequate farm finance is obvious.

Mention may be made here that unless credit and other inputs

of agriculture are made available at the door step of farmers

at cheap cost and at suitable terms and conditions# the tempo

of agricultural revolution cannot be stepped up. 14 In shorty

credit has to play a very important role in achieving the

major objective of agricultural policy f establishment of

conditions under which increased agricultural production and

higher levels of living for the rural population can be

15
achieved•

(1) TYPES OF CREDIT

The credit needs of the farmers are of different types

and these may be broadly classified in two groups on the
basis of (i) the use of credit and (ii) the period of credit*

12 Natarajan# B., op.cit*# pp. 375*

13 Rajagopalan# V.# op.cit.# pp. 26.
14 Bhavani# K.# •Some Thoughts on Commercial Banks Lending
to Agriculture'"# Financing Agriculture# vol .3# No .4#
January 1972* pp. 7*
15 Wnited Nations Organisation# "Progress in Land Reform;11,
(Second Report)# 1956# pp. 1.
 31

(i) The Use of Credit

From the view point of use, an agricnlturists need

finance of two types t (a) Productive Loans and (b) Unproductive

Loans•

(a) Productive Loans

Most of the needs for finance are linked to production

processes* The processes relate to production# sale of output#

investment in land and development of agriculture# For fulfil­

ment of these objectives# several purchases have to be made

involving many payments* To carry on the activities of

production# an agriculturist has to make the expenses such as

purchase of implements# pesticides etc* He has to make payments

to the hired workers# government and land holder (in case the
land is taken on lease)* He has also to make provision for

water charges. Similarly, he has to find finance for such

permanent improvement on land as digging wells# fencing the

land# clearing marshy areas etc* The finance used for these

purposes are productive in character in the sense that they

/

are used for activities which are related to production* These

loans thus promote production and raise income of the farmers«

For these reasons these loans are economically justified*

(b) Unproductive Loans

There are# however#' expenses incurred by farmers which

cannot be economically justified* For example# money spent

for marriages# function relating to birth and death# for

 33

in the case of short term credit* Normally# purchase of

cattle and agricultural implements#1 repair of wells and

implements and for carrying out improvements in the ordinary

course of agriculture# such as levelling# deep ploughing#

irrigation# clearance# drainage and fencing etc* are financed

out of medium term credit*

(iii) Long Term Credit

In case of long term credii# the period involved is more)

five years and may be as long as fifteen to twenty years or

even more. These loans are used for purposes which contribute

to agricultural production for many years. For example# these

are used to reclaim new land# to make permanent improvements

on land# to dig wells# to purchase land or to by machines or

to make other investments# to pay off debts etc* The

explanation of agricultural credit# particularly with

reference to time period# has been shown in Fig. 2#

Mention may be made here that the two fold classifica­

tion of agricultural credit based on objects and period of

time is interdependent* Both are related to one another#

In factj the period of loan is of great importance to the

farmers from the point of view of security and convenience •

 34

£i£*_2« CLASSIFICATION OF AGRICULTURAL CREDIT

AGRICULTURAL CREDIT

SHORT MEDIUM LONG

TERM TERM TERM

CROP PURCHASE PLEDGE OF PLANTA- INTEGRATED

PRODU­ OF INPUTS WAREHOUSE TION DEVELOPMENT
CTION RECEIPTS OF LIVE­
STOCKS

LAND MINOR FARM

DEVELOP- IRRIGA MACHINERY, OTHERS
ME NT TION ANIMALS
 35

(2) FEATURES OF A SOUND AGRICULTURAL FINANCIAL SYSTEM

It is obvious that a suitable agency for agricultural

16* 17,
credit must fulfil several conditions. They are as followsS

( i ) It must operate in close proximity to the farmers and

understandihis needs*

(ii ) The quantum of credit should be related to the require­

ments of a good farm plan.

(iii) The kind of security should be such that the farmers

should be able to offer it*

(iv ) The period of repayment should be in tune with the

repaying capacity of the farmer* ,

( v ) It must keep a watch over the borrower*s activities

and see that the loan is used in a proper manner*

(vi ) It must keep its cost of lending and collection of

loans at the minimum possible level, so that it can

charge a comparatively low rate of interest.

(vii) It must try to recover the funds lent -out As

quickly as possible so that the same funds may be

•Useci |r03-\ c^. vnv\W>-> Koyi c4 -t»'srr*e^

16 Shenoi, P.V*, "Agricultural Development in Indian A

New Strategy in Management", Vikas publications.
New Delhi, 1975, pp. 20.
17 Bhattacharya, Dhiresh, "Understanding India's Economy t
A Course of Analysis", Progrdssive Publishers, Calcutta,
1959, pp. 63.
18 Sankaran, S., "Economic Development of India", Progressive
Corporation Private Limited, Bombay, 197 2, pp.185 .
 37

to estimate roughly the total needs for finance, it may not be

possible to calculate the proportion of the needed finance

that the agriculturist will meet from his own sources. As a

result, it is difficult to indicate what proportion of finance

is to be arranged from other sources*

C.h* Shah and S.d* Sawant have tried to estimate the

20
requirements of agricultural sector by 2000 A *D• These

estimates may not be hundred per cent correct# but they do

broadly indicate the amount of credit required by agriculture*

These estimates were prepared on the basis of combination of

component method and disaggregatic procedures* They have

estimated that for the year 2000 A.D*, the value of output of

agricultural produce (major crops only) would be Rs .1,06,046

it
crores and Rs* 1,29,396 crores for Scenarios V and VI respe­

ctively. The estimate of purchased inputs corresponding to

these production levels would be Rs*22,591 crores and

Rs • 35,712 crores* They have further estimated that while

crop production may increase by 3*98 to 4*35 times the present

level, farm credit requirement may increase by 12 times or

more, of the present requirements (which was about Rs *2,517 crores

20 Shafc, C.H. and Sawant, S *D*, ^Towards New Horizons •

Agricultural Production 2000 A.D.*. This article was
published in ’Agricultural Development of India * Policy
and Problems*, edited by Shah C.h. and Vakil, C.n. Orient
Longman Limited, New Delhi-2, 1979, pp* 595-656*
* They have began with seven Scenarios* These seven Scene­
ries represents the seven alternatives, each with different
implications following from it. The first tnree Sceneries
a*e in essence based on projections and remaining four
Seenerios are alternatives evolved on tbe basis of linear
programming exercises*
 39

agencies of agricultural finance, the moneylender? has been

discussed here as it occupies a dominant position.

(2) The institutional agencies discussed here include s

Government# Co-operative banks, the Reserve Bank of India#

Regional Rural Banks# the National Bank for Agriculture and

Rural Development and Commercial Banks are important sources

of agricultural finance.

NDN-INSTITOTIONAL AGENCIES

MONEYLENDERS

Of all the private agencies the Mahajan or Moneylender

is by far the most important source of agricultural finance

in India# both from the point of view of numbers and from

21
volume of business. Moneylenders have the virtual monopoly

over the rural finance in the country. The moneylender.1 has

been described as an oasis of thrift in the desert of

improvidence* They live among the common people# send their

children to local schools, speak the local language and

visit the local temple.22

The predominance of moneylenders in the sphere of

agricultural finance is due to many reasons • There is in the
first instance a great inadequacy of institutional agencies
for this purpose. Co-operative credit societies and modern

21 Bhargava# P*K* and Jain Anilkumar# "Changing the Structure

of Agricultural Finance in India*# Agricultural Situation
in India# Vol .25# No .8# November 1970# pp. 830*
22 Prabhu# K*P#J.# *0rga nlsational Problems of Rural Branches*#
The Journal of the Indian Institute of Bankers# Vol .42#
No.2# April-June 1971, pp* 189.
 40

banks could be the appropriate institutions for the proper

discharge of the functions of providing credit* But till

03
recently the number of these institutions has been very small.

It is also pointed out by several expert committees that many

villages have not a single institutional agency to supply

agricultural credit. In many parts of India# moneylender is the

only financial agency available to the agriculturists.

Moneylenders can be broadly classified into two

categories.

(i) Professional moneylenders and (ii) Non-professional

or agriculturist moneylenders. Professional moneylenders may

again be divided into resident and itinerant* The Mahajans or

Sahukars come under the category of resident moneylenders while
the Pathans from North West Frontier come under the category of

itinerant moneylenders.

A professional moneylenders is one whose main occupation

or profession is moneylending. He combines it with trading

in the village produce. The village shop keeper also acts as

a moneylender. On the other hand# a non-professional money­

lender or agriculturist moneylender is one whose main occupa­

tion is farming. They are owners of the producing more than

their requirements; and have enough funds with them. They

04
combine raoneylending business along with cultivation of land.

23 Agrawal# A.N.# op.cit., pp. 295#

24 Sharma# K.K.# "Reserve Bank of India and Rural Credit*#
S. Chand and Co.# Delhi# (Pub. year N.A.)# pp. 29.
 41

Mention may be made here that since the enactment of the

moneylenders' Act in most of the States# the distinction

between professional and non-professional moneylenders is not

of much importance since any person who wants to carry on the

business of moneylending has now to obtain a licence.

It may be mentioned here that moneylenders have some

special features which place them in a better position as

compared to alternative agencies# and enable them to provide

special services to the seekers of credit. The main reasons

for his overwhelming dominance over others are as follows* # *

(1) Being the residents of village moneylenders have an

intimate knowledge of local conditions and people. They have

a perfect knowledge of the character and the repaying capacity

of the borrowers and "there is little that escapes his eye

in the circumstances of his debtors or of those who may one

day be his debtors"• He has a hold on those whom he chooses

to lend.

(2) They are practical and realistic in tackling the

situation# i.e*, their methods of work are flexible. They can

easily adapt themselves to the changing requirements of

25 Shrivastave# S.K.# Jha Divakar# Agrawal* S.K.# Jagdish

Prakash and Kapuria# R.S.# "Agricutural Economics and
Co-operation (A Study in Agricultural Economy and Co­
operative Development) With Special Reference to India*#
S. Chand and Co.# New Delhi# 1970# pp. 75*
26 Agrawal# A.n.# op.cit.# pp* 296.
27 Jangir# G*C.# *Our Economic Problems"# National Publica­
tions# Delhi-6# 1965# pp* 137*
 42

agriculturists* Their rules are simple and flexible to suit

individual needs•

(3) They are free to follow flexible procedures as they

like in regard to the actual operations of lending. There is

no need for them to await some one else*s decision# which is

generally the case with institutional agencies.

(4) They have no fixed hours of working and so one can

go to them at any time.

(5) They also do not insist upon any particular type

of security for the grant of loans.

(6) They are able to handover money promptly and do

not insist on any time-consuming formalities.

(7) They fulfil all the financial needs of cultivators,

m$y be short-term or long-term or productive or unproductive.

They do not bother about the utilisation of borrowed money.

On account of these reasons, moneylenders have dominated

the agricultural sector for centuries. Darling has rightly

summed up the various services rendered by moneylenders in

these words s *lt is only fair to remember that in the Indian

village the moneylender is often the one thrifty person amongst

a thirftless people? and that his methods of business* through

demoralizing under modern conditions, suit the happy-go lucky

ways of the peasant. He is always accessible, even at night?

 43

dispenses with troublesome formalities# and if interest is

paid# does not press for repayment of principal. He keeps in

close personal touch with his clients, and in many villages

shares their occasions of weal or woe. With his intimate

knowledge of those around'him he is able, without serious risk,

to finance those who would otherwise get no loan at all. And

he not only finance his neighbours# but frequently keeps a

small shop to supply their peasant needs and is nearly always

_ 28
prepare to market their produce”.

In short# the services of the moneylenders in the absence

of any other agenc£ for fural finance cannot be ignored. It is

who have always come to the rescue. The need is there and they

fulfil it* if they charge a high rate of interest? it is not

their fault under the conditions in which no banker would lend

them.

Defects of Moneylending System

It is clear that moneylender has been an important

source of agricultural finance. However, this agency suffers

from several defects. The conditions under which the money­

lender works, the helplessness on the part of cultivators#

their illiteracy and grip of the moneylender on them enable

the former to be a virtual monopolist in the field of

agricultural finance# and he fully exploits the situation.

28 Darling# M.L., "The Punjab Peasant in Prosperity and

Debt”, Oxford university Press# Oxford# 1947ff pp. 194.
 44

The poor villagers are permanently trapped In the net of the

moneylender because of the Melons circle of poverty in which

29
their expenses exceed their income every year. Moneylender

has been responsible for many ills of Indian agriculture

because his main interest has been to exploit the farmer for

hlS benefits and grab their land. 30 He adopts different

tactics to take from cultivators as much as possible. Some of

the malpractices followed by a moneylender are mentioned below,

(l) The rate of interest charged by him is exorbitant.

As he is the only supplier of credit in neighbouring area# he

can charge almost any rate of interest. There are cases where

they have charged an interest as high as 50 per cent to 70 per

cent per year. These high rates of interest and dishonest
practices of moneylenders have been responsible for rural

indebtedness and irapovershment of cultivators. Prevalence

of usurious practices has meant large-scale transfer of land

from peasant proprietors to the moneylenders. Further# he

charges interest for the whole year even if the loan would

have been taken in the middle of the year. The high rates of

interest*;# besides placing heavy burden on the debtor# tend to

perpetuate him in debt# rather than enabling him to become

viable at least in the long run. 31

29 Wadhva Charan D,# "Rural Banks for Rural Development t An

Analysis of the Working of Regional Rural Banks in India
With Two Case Studies*# She Macmillan Company of India
Limited# Delhi# 1980# pp, 2#
30 Datt Ruddar and Sundhram# K.P.M.# "Indian Economy"#
Niraj Prakashan# New Delhi# 1969# pp, 378,
31 Rao# H»H•# "The Role of Commercial Banks in Financing
Agriculture*# Financing Agriculture# Vol,3, No,l# April
1971# pp* i5.
 45

(2) In addition to high interest* these people take

advantage of illiteracy of agriculturists and manipulate the

accounts regarding loans to their advantage.

(3) They do not bother about the purpose for which

loans are sought and advance credit very easily without any

inquiry. hs a result, agriculturists usually go in for some

more loan than necessary and use most of it for unproductive

consumption. This in fact has been the principal cause of

increasing rural indebtedness.

(4) The conditions of loan repayments are so designed

that the debtor is forced to sell his produce to the Mahajan

at low prices and to purchase goods for consumption and

production at high prices.

(5) He makes several illegal deduction from the amount

of loans given to cultivators. They may be for charity,

temple, salami, document writing, katautd, batawan or girah

khulia (purse opening) etc. These charges reduce the money

which goes into the hands of the borrower.

In many other ways Mahajans take advantage of the

poverty and helplessness of farmers and exploit them, ttaable

to pay high interest and the principal, farmers even lose

their land or live from generation to generation under heavy

debt, unless their activities are controlled and &&bernative

sources of credit provided to the farmers, it would be
difficult to improve the conditions of the peasants.
 46

INSTITUTIONAL CREDIT AGENCIES

Adequate agricultural credit facility is most essential

for progressive agriculture. It is also axiomatic# as stated

already# that the credit requirements in agriculture cannot be

met by private individual resources alone. Profit being the

sole guiding consideration of the private agency# credit rrora

the private agency cannot be canalized to uses which are

socially most desirable nor it can be made available to farmers

who are not credit-worthy under strict banking rules.

As the agriculturist needs credit at specially

favourable terms# an effective control over its use becomes

a social obligation* That is why the expert opinion now favour

an institutional agency for agricultural credit. The data

collected for the All India Rural Credit Survey X1951-5 2)#

All India Rural Debt and Investment Survey (1961-62) and

All India Debt and Investment Survey (1971-72) indicate that

the share of credit provided by institutional agencies.in

total cash debt owned by cultivator households increased from

7.3 per cent in 1951-52 to 18.4 per cent in 1961-62 and to

31.7 per cent in 1971-72. The total direct institutional

finance for agriculture was 56.5 crores in 1950-51 which

increased to 3510.5 crores in 1980-81.

The important institutional sources of agricultural

finance discussed in the present study are as tinder »-

32 Agrawal# G.D. and Bancil# P.C.# *Economic Problems of

Indian Agriculture*# Vikas Publications# New Delhi#
1969, pp. 2O2.
 47

(l) Governmental Sources# (2) Co-operative Banks, (3) Reserve

Bank of India# (4) Regional Rural Banks and (5) National Bank

for Agriculture' and Rural Development.

(l) GOVERNMENT AND AGRICULTURAL FINANCE

Government is an important source of credit to the

farmers. Since the end of the nineteenth century the govern­

ment has been taking active steps to provide credit to the

agriculturists •

Financial help to agriculturists provided both directly

and indirectly by the government. Indirectly this help is

extended through Co-operative Societies# Reserve Bank of

India# State Bank of India# Land Mortgage Banks# National Bank

for Agriculture and Rural Development etc. The government helps

these agencies in the initial stages to stand on their own

feet by purchasing their shares. Similarly# the government

incures expenditure on the training of personnel for these

agencies, it also helps financially the weaker agencies to

reorganize themselves. The finance thus provided does not go

into the pockets of agriculturists. But by incurring the

expenses on the promotion of these agencies# training of

personnel and strengthening the weak agencies# the government

does help the farmer: • 33

The government also provides financial assistance

directly by way of loans known as TACCAVI loans• IACCAVI Is

the ancient and traditional form of government assistance to

33 Agrawal* A.N.# op. cit.# pp. 293.

 48

the agriculturis tf and dates back to the Indian rules of the

pre-British era. It has been essentially distributed to

relieve distress caused by droughts, flood and other natural

calamities and assist the farmer to tide over emergencies and

restart his agricultural operations in the following years. 34

The advancing of loans by government to finance the

emergent needs of the agriculturist on a regular basis began

towards the end of the nineifete<wth century with the two

legislative measures (l) The Land Improvement Loans Act of

1883 and (2) The Agriculturists Loans Act of 1884. Both these

Acts were passed on the recommendations of the Famine Commission

of 1880.

(1) The Act of 1883 authorised the grant of long-term loans

by local officers for permanent improvements on land, which

add to its letting value such as construction of wells or

erecting of embankments, the preparation of lands for irriga­

tion, protection of lands from flood or from erosion. Such

loans were generally advanced for period extending over 25

years on the security of landed property at a rate of 6 to 10

per cent. The loan was repayable by the equal Instalments

discharging toy principal and interest.

(2) Under the Act of 1884, short-term and intermediate term

loans were granted for current agricultural needs such as the

purchase of seeds, cattle, manure, implements er for building

34 Nanavati, M.R. and Anjaria, J.J., ""The Indian Rural

Problems'1*, Indian Society of Agricultural Economics,
Bombay-1, 1970, pp. 336.
 49

of houses destroyed by floods. Such loans were repayable

after the harvest. The rate of interest charged on such loans

i
was usually around 6^ per cent.

For many reasons, including the fact that the

disbursement of Taccavi is undertaken by different departments

and is uncoordinated# data on Takkavi have always tended to be

both inadequate and out-of date. 35 However, the amount of

government loans directly disbursed to farmers have been

increasing. Between 1951-52 (All-India Rural Credit Survey)

and 1961-62 (All-India Rural Debt and Investment Survey), the

proportion of borrowings of cultivators from government declined

from 3.3 per cent to 2.6 per cent, but the estimated total

amount disbursed increased from Rs. 255 million to Rs. 360

million as also the proportion of outstanding owned by them

rose from 3.9 to 5 .5 per cent, partly due to the fact that the
arrears (overdues) in respect to Taccavi loans were very heavy.

The total direct advances of government to the agricultural

sector has more than doubled during each decade of sixties

and seventies (from Rs. 36 crores in 1960-61 to Rs. 74 crores
in 1970-71 and further to Rs. 144 crores in 1980-81). But the

relative share of government in total direct institutional

finance has declined during the last three decades. Out of the

total direct finances of various agencies to the agricultural

sector# about 45 per cent were provided by government in

1950-51 which decreased to 13.89 per cent in 1960-61 and

35 Kahlon, A .s . and Singh, Karam, "Managing Agricultural

Finance", Allied Publishing Private Limited, New Delhi,
1984, pp. 131.
 50

further to 7.89 per cent and 4.20 per cent during 1970-71
and 1980-81 respectively.36

Weaknesses of Government Financing

In view of the low interest charged and easy repayment

conditions, TACCAVI loans seem to be properly conceived. But

these loans from the government suffer from the following

defects•

1) It may be noted that agricultural finance provided by

the government is quite inadequate in relation to the needs of

cultivators. The Rural Credit Survey estimated that the All-

India average borrowings of cultivators from government as a

percentage of.their tfctal borrowings was as low as 3 per cent*

It observed t Tin practice, the TACCAVI is apt to be little

else than the ill-performed disbursement of inadequate montys

by an ill-suited agency. It would not be far from the truth
to say that the record of TACCAVI is a record of inadequacies* 37

2) The farmers find it very difficult to get the loans

sanctioned because of red-tapism and official procedures in

government departments. In many cases the farmers has to tip

the subordinate officials to get loan sanctioned. Considering

the delay in the sanction of loans, the time wasted in making

frequent trips to the nearest government office and expenditure

involved# farmers prefer to go to the moneylenders and get the

38 Kahlon# A.S. and Singh, Karam, op*cit*, pp* 132*

37 Reserve Bank of India, "The Report of the All-India Rural
Credit Survey*, Vol.11, Bombay# 1954# pp. 199.
 51

38
loan rather than applying for TACCAVI loans.

3) These loans have not proved helpful to the small

farmers. The major share of the loans disbursed go in the

hands of big cultivators* This fact has been brought out in

the Report of All-India Rural Credit Survey. According to this

report the average borrowing per family of big cultivators was

Rs. 24 while for small cultivators it averaged Rs. 3 only.

In other words* big cultivators who constituted about 30 per

cent of the total cultivators took away nearly 60 per cent

of the borrowings from the government. Thus, these loans have

mostly been cornered by rich farmers with big landed property. 39

4) Again# there is lack of adequate provision for super­

vision of the use of these loans. Even when such loans are

disbursed in the form of commodities* the distribution is not

done in a fair manner because of the l%ck of effective and

honest administration. The administration for the purpose

is inefficient? suffers from various weaknesses. Those who

are in charge of this# are overburdened with other works*

They do not have time# training or inclination to do the

whole-time job of supervision of credit.

5) The delay In sanction of loans has been a regular

feature of the government loans. The normal feature of the

loans to be sanctioned is at the end of the year# i.e. by

38 Sankaran# Sop.cit.# pp. 195.

39 Bhargava# P.K., and Jain Anil Kumar# op.cit.# pp. 832.

 52

31 March every year. This indicates the chronic and indiscri­

minate hurry in sanctioning the loans at the end of the year*

"Delay which was the normal draw back of TACCAVI in the oldest

days was replaced by the opposite evil of haste." 40

6) The total amount of these loans has been very small as

compared to the large financial requirements of the agricultu­

rists. The total amount lent under both the Acts is extremely

insignificant and amounts to a mere drop in the ocean•

Besides, these loans are given only during the period of

emergency and distress, following either a famine or flood or

some such natural calamities.

7) There is a general lack of co-ordination among the

various departments dealing with loans* ..1 The re is duplication

of finance and a variety of rates and terms of loans for

- different types of agricultural credit.

8) Loans are granted on the security of immovable property

or land alone which cannot be offered by the majority of

cultivators. Further, the facilities available, and especially

the procedure to be followed, are not widely known to the

public.

40 Lakhani, H.G., "Problems of Economic Development of

India", New Literature Publishing Company, Bombay-1,
1967, pp. 172.
41 Memoria, C.b., "Agricultural Problems of India",
Kitab Mahal Private Limited, Allahabad-3, 19 66,
pp. 503.
 53

(2) RESERVE BANK OF INDIA AND AGRICULTURAL FINANCE

Since its inception in 1935# the Reserve Bank of India

(RBI) has been playing an important role in providing credit

to agriculture* RBI has been making special efforts to

extend and co-ordinate credit facilities available to the

agricultural sector* 4 0 Under the RBI Act of 19 35# Section 54

provided that a Special Department stayled as Agricultural

Credit Department shall be created with the following broad

functions t

( i ) to maintain an expert staff to study all questions of

agricultural credit and be available for consultation by' the

Central Government# State Governments# State Co-operative

Banks and other banking organisations; and

(ii ) to co-ordinate the operations of the Bank in

connection with agricultural credit and its relations with

State Co-operative Banks and any other banks or organisations

engaged in the business of agricultural credit*

The activities of Agricultural Credit Department have

continuously expanded with the progressive expansion of the

A O
Bank’s activities in the field of agricultural credit. It may

be noted here that during the first phase of 20 years from

1935 to 1954# the attitude of the Agricultural Credit Department

towards provision of agricultural credit was one of reservation

42 Jangir# G.C., op.cit., pp. 146*

43 Reserve Bank of India# "Report of the Committee to Review
Institutional Credit for Agriculture and Rural Develop­
ment*# (CRAFICARD)# Bombay# 1981# pp. 233*
 54

and aloofness, as authorities of the Bank felt that as the

Central Bank of the country, it should not get itself involved

much in agricultural finance which meant greater risk, upto

1948-49 Agricultural Credit Department rarely sanctioned
loans for agricultural credit and that too under Sections 17(4)
(a) against government and trustee securities and backed by

agricultural paper. Only in 1948-49 finance under Section 17(2)

(b) or (4) (c) of the RBI Act was sanctioned against agricultu­

ral paper with two good signatures and that too for small

amounts•

With the enactment of the Agricultural Produce (Develop­

ment and Warehousing) Corporations Act, 1956, this Department

is collaborating in the countrywide processing and marketing

of agricultural produce. Further, the RBI through its

Agricultural Credit Department, has maintained close contact

with the co-operative movement which is the main organised

agency in the country for supplying finance to the agricultu­

rists. The Department has undertaken several studies the

results of which have been published in the form of bulletins.

Progress of RBI in the Direction of Agricultural financing

Prior to Independence, the role of RBI in the sphere

of rural credit was mainly confined to examining the lines on

which the co-operative movement could be reorganised. 44 The

bank acted mainly as the lender of last resort. It published

two reports - in 1936 and 1937 - and therein indicated the

44 Nanavati# M.b. and Anjaria, J ., op.cit*, pp. 373.

 55

lines of improvement in the structure of co-operative institu«

tions . It adopted a cautious and conservative policy* The

comparatively negligible role of RBI in agricultural finance

before 1949 was due to the absence of good rediscountable bills

(which was due to the absence of warehousing facilities in the
country) and limited borrowing capacity of co-operative banks*45

The post-Independence period saw a radical change in the Reserve

Bank*s conception of its own role and actual policies and

practices with regard to agricultural credit. In pursuance

of the Informal Conference (February 195l) the Bank arranged

for an All-India Rural Credit Survey the report of which was

presented in December 1954* After the publication of the Report,

the RBI was assigned a significant role in not only providing

adequate credit at concessional rate of interest but in

building up a strong credit structure in the country. 46 The

/■

RBI, under the able guidance of Dr# D.R* Gadgil, Prof* D*G. I -

Karve and Hr* B. Venkatappiah engaged itself seriously in

policy making and implementing various recommendations of the

Rural Credit Survey Committee* it all set up two separate
funds viz.. National Agricultural Credit (Long term operations)

Fund and National Agricultural Credit (Stabilization) **und in

1955.

(l) National Agricultural Credit (Long Term Operations)

Fundi This Fund was established with an initial contribution of

five crores of rupees. The amount at the disposal of the Fund

45 Sundhram, K.P.M, "Money, Banking, Trade and Finance1*,

Sultan Chand & Sons, Delhi-6, 1973, pp. 4 ♦ 111.
46 Nanav&JHJtf .B• and Anjaria, J «1T., op.cit., pp. 374.
 56

rose to Rs. 334 crores in June 1975• This Fund is used for

making loans and advances to the State Governments for

subscribing to the share capital of co-operatives and for

advancing medium-term loans to state co-operative banks for

periods not less than 15 months and not exceeding 5 years for

agricultural and allied purposes including animal husbandry,

pisiculture or such other purposes connected with agricultural

operations as the Bank may from time to time determine, and
against such securities as maybe specified in this behalf

by the Bank.-

(2) National Agricultural Credit (Stabilization) Fund

*

This Funci was established with a capital of Rs. 1 crore

for medium term purposes. The Bank has been contributing

Rs. 1 crore every year to this Fund since its inception. This

Fund is to be utilized for sanctioning medium-term loans to

the state co-operative banks to enable them to convert short­

term agricultural loans into medium-term loans whenever such

conversion becomes necessary on account of wide-spread crop

failure due to drought# flood or other natural calamities.

Provision of Finance

The Reserve Bank does not directly finance agricultural

operations on account of the great financial responsibility on

this Central institution and risky character of agriculture

as a business • Indirectly, however, the Bank is doing useful

work through Agricultural Credit Department, by creating

conditions favourable for the financing of agriculture, by

 57

giving expert advice and by publication of useful literature

relevant to the problem of agricultural finance.

Section 17 of the RBI Act provides for the extension

of agricultural credit by RBI through the Co-operative Banks

or through Commercial Banks and Regional Rural Banks. Provision

of agricultural finance through these agencies is discussed

below t

(l) The RBI and Co-operative Banks

The credit provided by the RBI for agriculture through

co-operative channels is of three kinds, i.e. Short-term,

Medium-term and Long-term.
*

(i) Short-Term credit

The Reserve Bank provides short-term loans for seasonal

agricultural operations and marketing of crops. The term
'agricultural operations* cover ploughing and preparation of

land for sowing, weeding, transplanting, applying agricultural

inputs, such as seeds, fertilizers, insecticides, etc., labour

in the field, mixed farming, i.e., animal husbandry and allied

activities. The ’marketing o£ crops * covers activities which

are necessary in the process of marketing agricultural produce

and includes collecting, pooling, grading, storing and

48
selling the agricultural produce in the market.

47 Dr. Maliram, ^Currency and Banking1*, Agra Book 3tores,

Agra, 1953, pp. 404.
4© Reserve Bank of India, "Role of the Reserve Bank of India
in the Sphere of Rural Credit*, Bombay# 1980, pp, 8.
 58

The Reserve Bank of India sanctions short-term credit

limits at 3 per cent below the Bank rate (which is 10 per cent
at present)* for financing seasonal agricultural operations.

It provides unsecured advances to the State Co-operative Banks

for financing short-term loans under Section 17 (2) (b) and

Section 17 (4) (c) and secured advances against Government

securities and land mortgage bank debentures under Section 17 (4)

(a) of the Act.

Under Section 17 (2) (b) of the RBI Act# the bank can

purchase or rediscount bills of exchange and promissory notes

drawn and payable in India and bearing two or more signatures#

one of which shall be that of a Scheduled Bank or State

Co-operative Bank and drawn or issued for the purpose of

financing agricultural operations or marketing of crops and

maturing within 15 months from the date of such purchase or

rediscount# exclusive of days or make loans and advances to

State Co-operative Banks repayable on demand or on the expir^

of fixed periods not exceeding .^ninety days# under Section

17 (4) (c) on the security of bills of exchange and promissory

notes as are eligible for purchase or rediscount under Section

17 (2) (b) . Section 17 (4) (a) of the Act# enables the Bank

to provide accommodation against government and other trustee

securities to State Co-operative Banks for financing

agricultural operations.

With the adoption of improved agricultural practices#

the demand for production credit has increased on a large scale.

* Bank rate was raised from 9.00 per cent to 10.00 per cent
with effect from July 11# 1981.
 59

Hence the short-term credit limits sanctioned by the Reserve

A

Bank to State Co-operative Banks for agricultural operations

and marketing of crops also have been rose from Rs.76 million
in 1950 to Rs. 1,118 million in 1960-61, Rs. 4,007 million in

1970-71, Rs. 7,278 million in 1976-77 and to Rs . 8,685 million

in 1978-79.49 Over the period 1972-73 to 1977-78 credit for

seasonal agricultural operations alone increased by 80 per cent.

Increase in irrigation, large scale adoption of improved

agricultural practices, liberalisation of procedures and

norms for credit# increase in the coverage and reorganisation

of co-operative credit societies at the primary level, are

some important reasons for this spectacular growth in credit

for agricultural operations and marketing of crops.

Of the remaining components of short-term credit, credit

for production and marketing of handloom products and short­

term accommodation to the Agricultural Refinance and Development

Corporation together account for about 9 per cent on an average

of the total short-term credit extended by the RBI in 1977-78.^®

(ii) Medium-Term Loans

The Bank provides facilities for medium-term loans

also. The provision of medium-term finance for agricultural

purposes is comparatively a recent development.

49 Reserve Bank of India, *Role of the Reserve Bank of India

in the Sphere of Rural Credit11, op.cit., pp. 10.
50 Reserve Bank of India, "CRAFICARD*, op.cit., pp. 239.
 60

Before 1953, the Bank had no power to provide medium-

term loans but after an amendment of the Act in 1953# it can

now grant such loans for agricultural purposes under Section 17

(4 AA) and for purchasing the shares of co-operative sugar

mills under Section 46A(2)(b).

Originally# medium-term loans were sanctioned by the

Reserve Bank out of its general resources. However# since

1955# following one of the important recommendations of the

All-India Rural Credit Survey Committee, such loans are provided

from the National Agricultural Credit (Long-term operations)

Fund and the National Agricultural Credit (Stabilisation)

Fund.51

The three components of medium-term credit are t (a)

loans for purchasing Shares in co-operative processing

societies# (b) loans for agricultural and other allied purposes

including animal husbandry and piscuculture and (c) conversion

of short-term agricultural loans into medium-term loans,

whenever such conversion becomes necessary due to wide-spread

crop failure. The first two are financed out of Agricultural
the
Credit (Long term Operations) Fund and the third out of/National
Agricultural Credit (Stabilization) Fund.52

The medium-term loans are generally given for a period

of 3 to 5 years* The rate of interest charged by the Reserve

Bank to State Co-operative Banks for financing agricultural

51 Reserve Bank of India# •Role of RBI in the Sphere of

Rural Credit*# op.cit., pp. 10.
52 Reserve Bank of India# "CRAfTCARD*# op.cit*# pp* 240*
 61

operations has been fixed at 3 per cent below the Bank Rate

i.e.* 7 per cent at present* and that for financing agricultu­

rists for purchase of shares in co-operative sugar factories

and other specified processing societies at the Bank Rate.

Further* in order to promote identifiable productive purposes*

the RBI has asked Central Co-operative Banks to advance at least

40 per cent of their total medium-term loans in a year for any

one or more of the four purposes viz** (a) construction of

wells and other minor irrigation works* (b) repairs to wells

and other irrigation schemes, (c) purchase of machinery such as

pumpsets and (d) purchase of agricultural implements.

Medium-term loans for agricultural purposes sanctioned

by the Reserve Bank for the calander year 1978 and 1979 were
of the order of Rs . 276 million and Rs. 322 million respecti­

vely. Almost 85 per cent of the medium-term credit is in the

form of conversion loans and only 14 per cent relates to

investment type medium-term credit for agricultural and other

allied purposes. However, the share of conversion loans

declined from 85 per cent in 1972-73 to 78 per cent in

1979-80. The relative share of pure medium-term credit* on

the other hand# increased from ll per cent in 1972-73 to 22

per cent in 1979-80.^ 3

(iii) Long-term Loans

As regards long-term finance* the Reserve Bank under­

took in 1948 to contribute up to 10 per cent of the debentures

53 Reserve Bank of India* "CRAFICARD*, op.cit., pp. 241.

 62

floated by Central Land Development Banks (or Central Land

Mortgage Banks as they were previously called) provided they

were guaranted,by the State Government concerned in respect

of repayment of principal and payment of interest. The Bank's

share of contributing to such debentures was raised to 20 per

cent in 1950. Mention may be made here that Bank agreed upon
a scheme of Joint Contribution (with Government of India) up to

40 per cent in 1953; but the scheme was given up from April *

1956 as no provision had been made for long-term agricultural

credit by the Government of India in the Second Plan.

With the increased need for long-ifeerm loans and

following the recommendations of the Rural Credit Review

Committee (1968)# a consortium arrangement was evolved to

support the debenture floatations. Under this arrangement#

the debenture floatations were always fully supported by the

financial institutions and agencies as these, being trustee

securities # are attractive and this in turn obviated the

need for RBI*s support.

At present# the RBI provides long-term finance to

co-operatives in the form of loans (out of Long-Term Opera­
tions Fund) to

(1) State Governments to enable them to contribute to the

share capital of co-operative credit institutions and

(2) the Agricultural Refinance and Development Corporation.

The former accounted for about 27 per cent of the long-term

 63

credit limits during 1972-73 to 1977-78 and the latter for

about 73 per cent. The share of loans to the Agricultural

Refinance and Development Corporation in the long-term

finance provided by the RBI rose from about 65 per cent in

1972-73 to 76 per cent in 1977-78 while that of loans to

State Governments declined from 35 per cent to 24 per cent.

However, in absolute terms the RBI assistance (credit limits
sanctioned) to both State Governments and Agricultural Refinance

and Development Corporation increased to Rs. 20 crores and

_ 54
to Rs. 65 crores respectively by the end of June 30, 1980.

(2) The Reserve Bank of India and Commercial Banks

It is a well known fact that commercial banks have

made considerable headway in financing agriculture. They are

participating in several agricultural credit projects. In

enabling banks to achieve this progress, the RBI has been

playing an active role. A close and constant watch is kept

on the progress made by the banks. Further, based on a study

of the Credit Planning Cell of the RBI with regard to the

financial operations of commercial banks, the Bank issued

instructions in December 1970 to these banks. These ‘Guidelines

for financing of agriculture by commercial banks* laid down

certain norms with regard to loans in cash and kind for some

time, the security for loans, etc. The Bank also directed

commercial banks to extend credit not only to already viable

cultivators, but also to marginal and potentially viable

54 Reserve Bank of India# “CRAFICARD*, op.cit., pp. 242.

 64

cultivators. 55 In view of the importance of general as well

as intensive development and training for the personnel of

commercial banks at all levels, the RBI has been actively-

following the schemes of the banks for manpower planning and

development# In order to provide intensive training for the

personnel at all levels in the co-operative banks and commercial

banks, the RBI has established a college of Agricultural Banking

at Puna in 1969# The RBI also examines the banks* advances to

agriculture through its inspecting officers#

As a part of its work, the RBI has been taking up

studies relating to the problems faced by commercial banks

in financing agriculture* Various Committees like (i) James

Raj Committee (the Committee to study functioning of Public

Sector Banks'), (ii) Kamath Group (working group on multi­

agency approach in agricultural financing), (iii) Dr* GUnvant

Desai Group (expert group on Agricultural Credit Schemes of

commercial banks), and (iv) Working Group to study the

problems of bank credit in North-Eastern States etc# were also

set up by RBI *

Mention may be made here that no separate refinance

facility from RBI is available to commercial banks in respect
of their agricultural advances as such, but under the "Small

Farmers Window" introduced in December 1977, in the case of

loans to small farmers - direct individual loans not exceeding

Rs• 2500 each (whether extended as short# medium and long term
facility) - Reserve Bank gave refinance facility at Bank Rate

55 Agrawal# A.N., op.cit., pp. 302.

 65

at 50 per cent of the advances under this category disbursed

from January 1, 1978. 56 According to the credit restrictions

imposed recently, with effect from last Friday of September

1979# such refinance is available at 50 per cent of the increase

over the level as on last Friday of December 1978. The out­

standing refinance under this facility as on 28 September 1979

was Rs* 26.3 crores • This facility has since been discontinued
by the RBI with effect from July 1# 1980.^

(3) The Reserve Bank of India and Regional Rural Banks

Following the recommendations of the Working Group

constituted by the Government of India in July 1975, Regional

Rural Banks were established in some districts in the same

year. The main objective for setting up of these banks is

to provide credit and other facilities mainly to the small

and marginal farmers, agricultural labourers and rural

artisans. The Regional Rural Banks are state sponsored,

regionally based and rural-oriented banks. 58

Since the formation of the banks, the RBI has extended

certain concessions to them similar to those given to those

given to the co-operatives# for which certain provisions of

the RBI Act 1934 have been amended* Thus# the Act was amended
to enable the Reserve Bank to grant assistance to these banks

by way of loans and advances from its National Agricultural

56 Reserve Bank of India# "CRAFlCARD", op.cit*# pp. 242*

57 Ibid., pp. 242.
58 Reserve Bank of India, "Role of the RBI in the Sphere of
Rural Credit1*, op.cit.# pp. 37.
 66

Credit (Long term operations) Fund and National Agricultural

Credit (stabilization) Fund* The Reserve Bank has been

providing refinance to the Regional Rural Banks since October 1,

1976, at a concessional rate of 3 per cent below the Bank Rate.

The credit limits sanctioned by the Reserve Sank in favour of

Regional Rural Banks amounted to Rs*110.14 crores as on September

1980 in respect of 44 Regional Rural Banks. 59

The Reserve Bank has also granted concessions, and

exemptions to Regional Rural Banks in maintenance of cash

reserves, etc* In their case, the cash reserve ratio continues

to be 3 per cent of the total demand and time liquidities as

against 6 per cent applicable to other scheduled commercial

banks. The liquid assets to be maintained by Regional Rural

Banks under Section 24 of the Banking Regulation Act, 1949,

continue to be 25 per cent as against 34 per cent applicable to

other banks. As these banks are in the initial stage of their

development and require nurturing, their working has been
entrusted to a separate cell in the RBI called the Rural

Planning and Credit Cell. Further, the Reserve Bank also

provides training facilities to the Chairman and branch

managers of the Regional Rural Banks at its college of

Agricultural Banking.

(3) CO-OPERATIVE BANKS

Historically, one of the purposes of establishing the

co-operative credit system was to bring together people of

small means for promoting thrift and mutual help for

59 Reserve Bank of India# "CRAFICARD*, op.cit., pp. 243.

 67

development. Co-operation may be defined as a voluntary

organisation of persons who associate on equal terms to

fulfil their economic needs and to promote thrift and self-

help among themselves. The co-operative credit societies

were started in our country in 1904 on German model with a

view to provide cheap and adequate finance to the farmers to

carry on their agricultural operations and to protect them

60
from exploitation of moneylenders.

The co-operative movement in India has passed through

many vicissitudes. In the beginning they were spreading
very slowly in rural areas. It was only after the Second

World War that the movement began to spread among the villages. 6

Since the commencement of planning in our country, considerable

stress has been laid on the role of co-operative societies

for providing agricultural credit. The co-operative credit

system was ,refurbished in the mid-fifties in the wake of the

recommendations of the All-India Rural Credit Survey Report.

Following it, the Government of India, the Reserve Bank of

India and State Governments made special efforts to foster

the growth of co-operative movement.

Credit is a potent instrument in the hands of co-opera­

tives which play a vital role in agricultural development. The

co-operatives are the agencies mainly for the supply of

60 Bansode, S.D. and Lohar, N.S ., ^Progress of Co-operative

Credit Structure in India", Rural India, Vol.46, No .9,
September 198 3, pp. 170.
61 Datt Ruddar and Sundharam, K.P.M., op.cit., pp. 38 0-81.
 68

requisite credit and the co-operative credit societies were

introduced as an alternative agency for providing cheapest and

best credit facilities to the farmers both in cash and kind

i.e* supply of improved seeds, fertilizers, pesticides,

insecticides and modern agricultural implements etc*

Many experts have suggested that the co-operative

societies should take the place of the moneylenders and provide

cheap loans to the farmers for productive purposes.

According to Darling * "My own view is that much the best

method of combating the moneylender and his system is

co-operation; and this is also the view of the Royal Commission

on Agriculture ----- we have seen how ruinous the moneylenders'

system can be with its high rates of interest, its indiscri­

minate advances, and its indifference to the repayment of

principal. The co-operative society avoids all these evils. go*

The importance and coverage of co-operative credit

societies have grown with the passage of years and their

share in the total agricultural credit has increased from

3.1 per cent in 1951-52 to 59.4 per cent at the end of June

1980. The importance of co-operatives cannot be over

emphasised. The Royal Commission on Indian Agriculture had

rightly pointed out that "If co-operation fails, there will

fail the best hope for Indian agriculture,M

62 Darling, M.L., op.cit., pp. 205 - 06.

\
V,
 69

There are two wings of the co-operative credit structure*

one supplying short-term and medium-term credit requirements

and other long-term investment credit. The co-operatives are

generally organised into three-tier structure tor short-term

amd medium-term credit and two-tier structure for long-term

credit. The three-tier short-term co-operative credit struetur

consists of the state-co-operative bank at the apex-level,

central co-operative banks at the intermediate level, i.e.,

district level and primary agricultural credit societies at

the base serving a village or group of villages. In the long­

term co-operative credit structure, the state/central co­

operative land development banks function^ at the apex level

and usually the primary land development banks at the primary

level. Though many types of co-operative societies are working

at different levels, we shall consider Primary Agricultural

Credit Societies and Primary Land Development Banks for our

discussion .

The structure of co-operative credit system in India

is given below.

CO-OPERATIVE BAMKb

STATE CO-OPERATIVE BANK STATE LAND DEVELOPMENT

BANK

CENTRAL CO-OPERATIVE BANKS DISTRICT LEVEL LAND

DEVELOPMENT BANKS

PRIMARY AGRI­ MULTI PURPOSE PRIMARY LAND DEVELOPMENT

CULTURAL CO-OPERATIVE BANKS
CREDIT SOCIETY SOCIETIES
 71

70

(1) Primary Agricultural Credit Societies (PACS)

On the foundation PACS the whole co-operative edifice

is built* From the point of view of rural areas, PACS are

the main sources of institutional finance# These societies

fulfil the short-term and medium-term loan requirements of

farmers. PACS is commended as an ideal credit institution

at the grass-root level for the following reasons l

(i) The rural community being involved in the operations of

co-operatives, it is in the best position to judge the

effectiveness of credit; (ii) deposit mobilization can be
prompted; and (ill) the cost of service will be minimum

compared to other credit delivery system.

A PACS can be started with ten or more persons;

normally belonging to a village# The working capital of

PACS is obtained from owned fund comprising capital,

entrance fees and reserve fund, deposit from members and

non-members and loans from central co-operative banks,

state co-operative banks and the Government. The value of

each share is generally nominal so as to enable even the

poorest farmer to become a member. The members have

unlimited liability, that is, each member is fully respo­

nsible for the entire loss of the society, in the event of

failure. This will mean that all the members should know

each other fully well. The management is honorary# the

only paid member normally being the secretary-treasurer•

63 Reserve Bank of India, *CRAPICARD*, op.cit., pp. 80.

 72

Table 1
General Progress of PACS
(Rs. in crores)
Co-operative Year (July-June)

Particulars 1970-71 1979-80 198 2-83

1. No .of societies 161 95 94

(in 000sJ

2 • No.of villages 5# 35# 242 5,71*986 N*A.

served
3, Coverage of rural 3,89,804 4,88,497 N .A •
population
4. Membership 30,963 54,836 63, 312
(in 000s>

5. Owned Funds 265 687 880

6. Deposits 69 250 381

7. Borrowings 675 2, 148 2,858

8. Total loans issued 578 1,629 2, 291

9# Loans for agricul­ N.A# 1# 506 1,617*

tural purposes
10. Total loans outsta­ 784 2, 374 3, 108
nding
11* Total loans N «A • 1,089 1,309
overdue

* Data relate to 1980-81. N.A* = Not Available

Sourcesi (l) Reserve Bank of India# Report on Trend and

Progress of Banking in India# Various issues#
(2) Reserve Bank of India# Statistical Statements
Relating to Co-operative Movement in India#
Various issues.
 74

Thus# these societies are playing an important role as

the principal agency for supplying credit to the farmers.

It is also observed that co-operatives were relatively better

generally in areas where the crop loan system is in vogue*

the number of large size societies is large and? sizeable

attempts were made at introducing the integrated rural credit

67
scheme. They are also better developed in districts which

had Ryotwari tenure and where there were no intermediary

right holders,68

The programme of reorganisation of PACS comes at

building up a strong and viable base level structure in the

co-operative credit system, in terms of this programme# to be

viable# a PACS should have# among other things# a minimum

short-term loan business of Rs, 2 lakhs# coverage of village

with a gross cropped area of 2#000 hectares to achieve this

level of business# and a suitable trained full-time secretary

to manage its affairs. This programme, which has been under

implementation for the past two decades, was more or less

completed on the basis of the above norms in all the states

69
exempting Gujarat# Jammu & Kashmir and Maharashtra,

Demerits of PACS

Inspite of the encouragement and concessions the

co-operative movement in India has received from governments#
67 Reserve Bank of India# "Rural Credit Follow Up Survey"#
General Report# Bombay# 1960, pp, 556,
68 Ibid.# pp. 535.
69 Reserve Bank of India# "Report on Currency and Finance1*#
198 2-8 3# op.cit., pp. 169,
 75

its progress has not been adequate. Impressive as its record

may seem in certain respect* the co-operative system still#

however# displays some prominent weakness. The major

deficiencies in the working of PACS have been t

(1) The rate of growth of credit provided by PACS has

slowed down in the last few years. The factor most responsible

for deaccelerating the rate of credit expansion is the mounting

overdues both in the short and medium-term credit. The over-

dues have been increasing. According to the findings of

special studies conducted by the Reserve Bank in selected

districts in 1978- to investigate the reasons for overdues#

the accumulation of arrears in members' dues was largely due

to willful default and partly due to irregular lendings#

slackness in supervision# indifference to recovery efforts#

inaction against defaulters and bans oh# as well as inter-

ference to recovery work of PACS by the State Governments. 70
According to the available data# overdues of PACS have

increased from 322*40 crores in 1970-71 to Rs. 809.62 crores

in 1977-78 constituting 43.3 per cent and 45.0 per cent of

the demand and outstanding loans respectively at the end of

June 1978. The overdues further rose from Rs • 1# 089 crores
in. 1979-80 to Rs. 1*309 crores in 1982-83.71

(2) The farmer is not sure of obtaining loan from PACS

because of a Part of the members default# the others will

have to go without credit. Further# it is strange that only

70 Reserve Bank of India# "CRAFICARD*# op.cit., pp. 136-137.

71 Reserve Bank of India# "Report on Trend and Progress of
Banking in India"# 198 3-84# pp. 149.
 76

a few mambers of ,PACS avail of loan facilities (Only 38 per

cent of total members at the end of June 1976). It appears

that larger credit is disbursed primarily to the same members

of the society year after year with very few new enteaants
en jdying th#se: facilities •

(3) - Besides this, credit is extended in some areas on

narrow considerations of caste and power. The Primaries in

some areas have become almost family enterprises. The society

might be active but it might be benefitfetoryg only a number of

closely knit families. Needless to say# in such case the

spirit of co-operative enterprise is wasted and twisted to suit

72
personal ends of a few.

(4) These societies have very little funds owned by them

for financing credit worthy members. This heavy reliance on

borrowed funds and mounting overdues makes the society dormant

and as such this important source of credit to the farmers is

chocked•

(5) There is lack of knowledge and proper understanding of

co-operative principles and essentials of rural credit among

the members. Very few of the members of the societies possess

the requisite knowledge of the principles of co-operation and

realise that the strength of the society rests on the honesty#

fair dealing and mutual trust of the members. This defect is

72 Rao# H.H.# Sp.cit.# pp. 15.

 77

largely due to poverty and illiteracy of the rural masses.73

(6) Co-operative credit societies have had a mixed record

of success. 'Co-operative credit societies have been

successful in some area## not so successful in some other

areas and have miserably failed in some other areas' • 74 Thus#

co-operatives have become strong only in a few states like

Gujarat# Maharashtra# Punjab and Tamil Nadu* They accounted

for over 53 per cent of the total volume of credit given

(in 1976-77). A number of co-operative societies in the
villages are dormant - the All-India average figure of dormant
PACS out of all PACS being 8.63 per cent at the end of June

1976. This percentage is as high as 60 per cent in Assam

75
and as low as 22 per cent in Orissa.

(7) One of the most disquienting features of the co-opera­

tive system in recent years has been excessive politisation.

It has become a common feature particularly at time of

elections for the politicians of the most hues to indulge

in adverse propaganda concerning repayment of co-operative

dues. Even more disheartening is the tendency of some of the

state governments to stall recovery of co-operative loans by

76
staying the recovery proceedings launched against defaulters.
Some of the state governments e.g.# Maharashtra and Tamil Nadu

73 Dr. Maliram# op.cit., pp. 397.

74 Government of India# "Report of the Committee (Working
Group) on Rural Banks*# New Delhi# 1975# pp. 1.
75 Wadhva# C.D.# op.cit.# pp. 7#
76 Reserve Bank of India# "CRAPICARD*, op. cit.# pp. 81.
 78

have even resorted to exempting the whole classes of defaulters

from payment of their dues to PACS and to pay the said amounts

to the institutions from the exchequer.

(8) The paradox of the situation is that co-operative credit

is not only short of the requirement, but it is not most

productively utilised* The success of co-operatives depend

mainly on the active participation of members and the adjust­

ment of their structure, policies and organisation in accordance

with the requirement of their members. Thus, the basic weakness

77
of the co-operative movement could be traded to human factor.

(9) Diversion and misuse of loan are a common practice

among borfowers. Nearly 28 per cent of the co-operative

credit was diverted to purposes other than those for which it

was given (in 1976-77). This percentage was 23 in case of

short-term loans and 35 in medium-term loans. This tendency

has been high in Rajasthan, Kerala# Bengal,* Tamil Nadu,

Punjab, U.P. and Assam.

The diversion and misuse of loans has been due to

(i) weak financial position of the borrowers; (ii) priority

to some other needs over agricultural needs; (ili) deficiency

of credit advanced and (iv) inadequate supervision and un­

satisfactory management.

(10) The weakness of the management and operations of PACS

have also been known for quite some time. The Committee on

77 Sundaram, I.S., *Antipoverty Rural Development in India*,

D.K. Publications, Delhi-2, 1984, pp. 101-02.
Integration of Go-operative Credit Institutions has observed *
"Even after a long period of existance, the PACS have not

been able to deliver the goods expected of them. A majority

of them have not become viable so far* Out of about 1.5 lakhs

societies, only one-third have full-time paid secretaries.

About 40 per cent of the societies function in loss. Many of

them are dormant or defunct. Most of PACS are financially and

managerially weak and suffer from inadequate business, heavy

overdues and faulty and inefficient management. 78

(ll) Finally, according to Dantwala, the co-operative

movement revealed the following weaknesses > (a) the availabi­

lity of short-term credit is more restricted in some areas?

(b) tenants and marginal cultivators do not enjoy their due

share? (c) credit for commercial crops is inadequate? and

(d) credit is uncertain in areas with high risks. 7Q

2)n Land Development Banks (LDBs)

In India, the long-term financial requirements of the

farmers were tradition ally met by moneylenders but later by

other agencies also such as the State Governments, the

co-operative societies and the commercial banks. All these

sources of long-term finance were found to be defective for

one reason or the other. There was, thus, a great need in

78 Reserve Bank of India, "Report of the Committee on

Integration of Co-operative Credit Institutions’1,
Bombay, 1976, pp.,26-7.
79 Dantwala* M.L., "Institutional Credit in Subsistence
Agriculture", International Journal of Agrarian Affairs,
December 1966, pp. 59.
 81

80

India for institution specially designed to cater to the long-

80
term credit needs of the agriculturists. The need to start
such banks arose because (l) the primary co-operative

societies cannot provide long-term loans to the farmers as

they themselves draw their resources from central co-operative

banks for short and medium period and (2) provision of loan

for long period against the security of land resources except

assistance for valuation title deed etc. which the primary

81
co-operative societies do not possess.

Towards the late twenties, separate long-term

institution under co-operative movement category, which was

named Co-operative Land Mortgage Bank and later changed to -

Co-operative Land Development Bank - came on the scene for

supply of long-term credit generally to those reasonably

substantial cultivators who did not find the co-operative

80
movement very attractive. The first Land Development Bank
was established in 19 20 at Jhang in the Punjab State. But it

did not make much progress. The real beginning may, therefore,

be said to have been made with the establishment of Central

Land Mortgage Bank in 1929 in Madras.

80 Sundharam, K.P.M., "Modern Banking (With Special Reference

to India^? Sultan Chand & Sons, Delhi-6, 1973, pp. 4.8 2*
81 S|jdhu, A.N., and Singh, Amarjit, "Fundamentals of Agri­
cultural Economics", Himalaya Publishing House, Bombay-4,
1985, pp. 274.
82 Vaishnaw, B.L., "Land Development Bank - Long-Term
Credit Institutions", Agricultural Banker, Vol.5, No.3,
July-September 1982, pp. 13.
 82

of LDBs. One of the important recommendations of the

Committee related to a shift in the emphasis in lending

policies of LDBs in favour of loans for productive purposes

instead of those for repayment of old debts and redemption

of mortgaged land.83

As a result of the efforts made in the last three

decades for improving their organisational competence and

operational capabilities, LDBs have come to play an important

role, both quantitatively and qualitatively in the provision

of investment credit for agriculture and allied activities.

By 1960, all the states in the country had a land development

banking structure meant exclusively to provide long-term

credit for various agricultural development purposes. From

and including 1968-69, the banks agreed that they would

advance not less than 90 per cent of the loans for productive

purposes of which 70 per cent would be for easily identifiable

productive purposes •

Finances of Land Development Banks

LDBs obtain their funds from share capital, reserves,

deposits and issue of bonds or debentures. However, the last

is the most important source of finance. The major source of

finance for these banks is derived through floatation of two

types of debentures viz., ordinary and special, which under

83 Reserve Bank of India, "All-India^Rural Credit Survey*,

op.eit., pp. 222.
 83

the provisions of law are required to be backed by unencum­

bered effective mortgages. The debentures floated by LDBs

are required to be unconditionally guaranteed by the state

governments as to the repayment of principal and payment of
interest. The debentures floated by the banks are treated as
trustee securities in terms of the proviso to section 20(a)

of the Indian Trusts Act# 188 2# and approved securities under

the Banking Regulation Act# 1949 and the Indian Insurance Act#
1938. With a aim to popularise these debentures, the Reserve

Bank has recognised them as eligible securities for advances

by it under Section 17(4) (a) of the Reserve Bank of India Act.84

Since 1957# the LDBs have been floating rural debentures for

periods upto 7 years which are subscribed by farmers and by

the Reserve Bank of India (upto 66 per cent of the value of the
rural debentures).

LDBs are also obtaining refinancing from the National

Bank for Agriculture and Rural Develppment ( or Agricultural

Refinance and Development Corporation as it was previously

called) by floatation of special debentures in regard to the

assistance provided by them under specific agricultural deve­

lopment schemes or projects which are approved by the Bank

(NABARD).

84 Reserve Bank of India# "Role of the RBI in the Sphere of

Rural Credit"# op.cit.# pp. 17.
 85

production# the banks also swtiched over gradually to

production-oriented lending. At the beginning of the First

Five-Year Plan# only 5 states had their central land develop­

ment banks* During 1950-51 the loans advanced by these banks

amounted to only Rs.1.38 crores and the total outstandings

87
at the end of the yeargnomted to Rs. 6*59 crores* The
present condition of LDBs is quite favourable. Some key

figures for the credit structure as a whole given below show

the growth over the period and the present position of LDBs.

Table 2......
General Progress of LDBj
(Rs. in lakhs)

Particulars 1955- 1965- 1975- 1978-

56 66 76 79

No .of CIDB 9 18 19 19
NO.of primary/ 302 678 2050 1171
branches
Membership (*000) 505 1451 7229 7800
Owned Funds (Share 130 1800 13950 22775
capital & Reserve)

Loans outstanding 1490 17840 14189 0 138 005

Advances during 280 5640 19490 34500

the year

Source* The Banker# Vo 1.28# No .6# July 1981, pp. 17.

87 Prabhu# P.V.# op. cit.# pp. 18.

 86

It is clear from the table that the performance of the

banks, particularly after 1960s, has been most spectacular.
The numberbf CLDB increased from 9 in 1955-56 to 19 in 1978-79.

Number of primary/branches, membership, owned funds have also

increased considerably during 1955-56 t<& 1978-79. The total

loan outstanding which was Rs. 1,490 lakhs in 1955-56 increased

to about Rs• 138005 lakhs in 1978-79. The advances during

the year 1955-56 were Rs, 280 lakhs which increased to

Rs.34,500 lakhs in 1978-79. During the year 198 2-8 3, there

had been a sharp increase in the loan disbursement of the

banks (SUDBs) which was of order of about Rs. 419 crores

compared with Rs. 408 crores lent during the p re ceding g year
88
1981-82. It may be noted here that in 6 states and Uhion

territories, where there was no separate &DB, the investment

credit needs of the farmers were met by the State Co-operative

Banks through a separate Land Development Banking Division.

Water being the basic requirement for production in

agriculture, over 60 per cent of the credit provided by banks

has been for various items of minor irrigation development.

Even during the VI Plan, a major portion of loans was provided

for minor irrigation works because of high priority accorded

for developing irrigation. In short, LDBs have played a very

useful role in promoting agricultural development in our

country and will be a leading institution in future also.

88 Reserve Bank of India, "Report on Currency and Finance",

Vol.I, 198 2-8 3, pp. 167.
 87

Blemishes of Land Development Banking System

It will be observed from the above discussion that the

long-term co-operative credit system has, to its credit#

several achievements and# at the same time# its working has

thrown up certain problems that need immediate attention .

The LDBs which are active in the sphere of long-term credit

are also not without blemish. Their functioning is beset with

lot of red tape and questionable dealings on account of

corrupt bureaucracy. Some of the prominent weaknesses are

mentioned below.

(1) Though land development banking has made considerable

progress in recent years in this country# it has not really

contributed much to the improvement of financial position of

the farmers,, through the provision of long-term credit. A petty

sum of a few crores of rupees advanced every year by them is

like a small drop in the ocean and does not touch even the
fringe of the problem. Some writers have gone to the extent of
stating that the LDBs have not "catered to the long-term credit
needs of the farmers and are not capable of doing so". 89 In

most areas farmers are not aware of the existence as well as

the usefulness of LDBs.

(2) Their number is small and they are to be found concent­

rated in a few places. About 65 per cent of these banks are

located in Tamil Nadu# Karnat^and Andhra Pradesh. They have

always suffered from inadequate resources# their working has

89 Prabhu* P.V.# op.cit., pp. 20.

 88

been defective and there are long delays in the grant of

loans .

(3) Since these banks advance loans against the security of

land* it is the big farmers who benefit from such facilities*

Big farmers are also able to take advantage of these banks

because they know fully the working of these institutions and

are on good terms with bank officials*

(4) The banks are constrained to provide loans against

ft
forms of securities other than mortgage of land which restrict

the scale of operations in financing certain non-land based

diversified development activities. Landless labourers* village

artisans and marginal farmers who would take up certain

productive activities are not able to secure credit from the

banks mainly because they do not possess land as adequate

90
security to offer against loans.

(5) Mounting overdues in most of the banks have crippled

the structure badly in the recent years. Overdues are rising

continuously crossing the containable limit. This has caused

innuntberable financial problems besides limiting their capacity

to lend and operate as viable units* According to available

information* 925 Primary Land Development Banks/ Branches of

State Land Development Banks had overdues not exceeding 25

per cent of demand for 1978-»79* while 360 PLDBs / branches of

90 Vishwanathan* B.S** "Future Role of LDBs"* The Banker*

Vol.28* No*9* November 1981* pp. 55*
 89

Ktt<$
SLDBs^overdues above 55 per cent. Another 452 units had

only restricted lending eligibility according to the range

of their overdues as on June 30, 1979. As per information

available in the RBI, the position had further deteriorated

by the end June 1980; the number of units having overdues

above the cut-off point had risen to 712 as on that date.91

(6) A few banks are facing certain administrative and

legal problems in extending their loaning operations parti­

cularly for diversified purposes. Their inability to diversify

the loans has narrowed down the scope for lending since other

agencies like commercial banks and regional rural banks are

also engaged in financing the traditional developmental

activities like minor irrigation, farm mechanisation and

horticultural development.

(7) One of the major drawbacks of the structure has been

that the banks do not have means to meet the short-term

Q O
production and working capital needs of their borrowers.
In the absence of a line of credit available for such lendings,

the banks neither finance certain types of development nor can

ensure optimum return to the farmers on investments.

(8> Political interference has vitiated the climate result­

ing in encouraging wilful defaults. The climate for recovery

is totally lacking in most of the states due to indifferent

and unhelpful attitude of state governments. The recent

91 6.S- Op.cit., PP-5~-4-

92 Prabhu# P.V., op.cit., pp. 20.
 92

aqc
therewith and incidental thereto.

Difference Between RRBs and Commercial Banks

The RRBs are basically scheduled commercial banks but

are different from existing commercial banks in the following

respects

(1) As the commercial banks at times do not cater to the

small and marginal farmers, RRBs serve the needs of the rural

masses as they are locally based, rural-oriented and commer­

cially organised.

(2) Their area of operation is limited to a particular

region comprising one or more districts in any state.

(3) They grant loans and advances particularly to small

and marginal farmers, agricultural labourers and rural

artisans, small entrepreneurs and persons of small means

engaged in trade and other productive activities in the area

of operation.

(4) The lending rate of the bank is not higher than the

prevailing lending rates of co-operative societies in any

particular state.

(5) The salary structure of the employees of the RRBs is

prescribed by the Central Government having regard to the

95 Government of India, "The Gazetee of India, Extraordinary*,

New Delhi, 9 February 1976, Part II, Section I, pp. 149.
96 Krishna# Ajitabh, op.cit., pp. 121.
97 Rajula Devi, A.K., "Role of Commercial Banks in Rural
Development s A Review", Rural Development Digest, Vol.3,
No.3, July 1980, pp. 19 0.
 93

salary structure of the employees of the state government

and local authorities of comparable level and status in that

area of operation of the bank.

(6) The areas where RRBs are set up are comparatively

backward or tribal areas or where coverage by the commercial

banks and co-operatives is relatively poor.

(7) The area has a real potential for development and should

be poised for break through once the flow of credit is assured.

Sponsorship and Capital Structure

Each RRB is sponsored by a scheduled commercial bank

(mainly by a public sector bank). It is to be set up at the

initiative taken by the sponsoring bank in consultation with

the concerned state government and central government and

under licence from the RBI. The sponsor bank provides assistance

to the RRB in several ways. These include subscription to its

share capital# provision of managerial and other staff# etc.

The authorised capital of each RRB is placed at Rs• 1 crore

and issued capital at Rs. 25 lakhs. The issued capital is

subscribed by the Government of India# the sponsoring bank and

concerned state government in the. proposition of 50 per cent#

35 per cent and 15 perecent respectively.

Special Concessions / Privileges Granted to RRBi.

In order to help the RRBs during the initial stages of

their Infancy# the KBi;-has granted a number of concessions to

them for conducting their banking business. The main features

 94

of these concessions and privileges are summarised below*

(1) The RRBs can pay rates of interest on deposits which are

uniformly higher by half a per cent over the rates payable by

the scheduled commercial banks for all periods of maturity upto

five years. It may be noted in this context that the rates

payable on deposits by RRBs are at par with those offered by

the district central co-operative banks operating in the area

of operation of the RRBs but half a per cent lower than the

rates on deposits payable by the village level primary agri­

cultural credit societies;

(2) The Government of India has also prescribed that the

rate of interest charged by the RRBs on its direct loans to the

persons belonging to the specified categories of rural society

would be on par with the rate charged by the primary co-opera­

tive societies to its clients. In May 1977, this rate was

14 per cent per anntSft;

(3) The Government of India permitted the RRBs to lend

Rs. 100 for every Rs. 15 of their own lendable resources

(paid-up capital and deposits mobilized)# the rest being

contributed by refinancing from the Government of India to

the extent of Rs.50 and from the sponsor bank to the tune

of Rs. 35?

(4) The RRBs can avail themselves of refinancing facilities

from the RBI. By appropriately amending the concerned

98 Wadhva# C.D., op.cit.# pp. 29-30

 95

sections of the relevant Act# the RBI has formulated a liberal

refinancing scheme for the RRBs with effect from 1 October 1976

which now puts RRBs on par with the refinancing facilities made

available to the co-operative banks, under this policy# refinanc

is provided to the RRBs at 2 per cent below the bank rate. The
RRBs have also# like commercial banks# been made eligible for

accommodation against a mere declaration of eligible loans and

advances by them. Pending the scrutiny of the applications by
the RRBs for regular limits# each RRB has been sanctioned an

ad hoc limit of Rs.lO lakhs for refinance which will later on

be subjected to regular conditions of the Refinance Scheme;

(5) The RBI has made appropriate amendments in the relevant

Act to enable the RRBs to be financed from the two special

funds of the Government of India# namely# from the National

Agricultural Credit (Long-Term Operations) Fund and the National

Agricultural Credit (Stabilization) Fund;

»

(6) The facilities offered by the Deposit Insurance Corpora­

tion of India have been extended to the RRBs providing their

depositors an insurance upto Rs.20#000 of deposits*

(7) Since January 1977# the RBI has sanctioned a special

scheme for the free transfer of funds between the head office
of an RRB and its different branches through the branches of

the public sector banks operating in the areas covered by the

RRBs; and
 05
oc
covered

281
13

13

43
10

35
11
27
Dist.
ro in CM CO co
* mh m ro o rH i0 CM
0 t" CO
i>
rH rH
00 rH
r- •
0
m 0<
X S3
Ci
uIt
Bran­

«« T

116
61
16

1804
477

8213
516
166

81
607

168

238

178
878
1325
ches

i-i

12
rH rH

591
122
o

622
GO
a o rH rH
• CM
S3
00
o\
No.of

r-

159
CM o rH rH rH rH rH rH in 00
CM rH in r- CM rH CO 00 r* 01 CO CO
m(Q
ft
rH rH CM rH CO

Reference* Report on Trend and Progress of Banking in India# Various Issues.

ft
covered

16
40
27

3I s
10
17
Dist.

CO CM CO
MH in in CO o CO •># rH 00 in
rH rH ro
CJ V0 G\
i r-> rH rH
f*
o CM
.
o
S3

o
m
Bran­
No.of

49 2

6416
650
176

51
64
123

432

358
108
225

117
80
135
1225
ches

449

0 I V in i I 1 o CM
rH rH
e CO
rH
b
CO
GO
?* CM <4 co rH CM
00 CO rH rH CO on rH rH CO
12

I in 00 CM i 01 00
o. CQm rH tH CO ■M*
0 OS rH
S3 os
covered
Dist.

m
11

0 CM rH CO CO
RRBs and Their Branches In Different States

. i I 1 1 1 i i 1 1 i 1 i i 1 1 1 CM i i
o
S3
Bran­

m
ches

CO CM V0 o
O'­ o.
in
l I i 1 1 i 1 1 1 i I i i 1 1 1 CM i i rH
er £

MH
RRBs

o. i I i rH » rH 1 i 1 1 1 i 1 i i 1 1 1 rH i i CM rH 10
o
S3
* Data are provisional.
2. Arunachal Pradesh

X
8. Jammu & Kashmir

m
1. Andhra Pradesh

Madhya Pradesh

0)
Uttar Pradesh

*6
re
Maharashtra

West Bengal

VI
Tamil Nadu

ft
Rajasthan

re &
Nagaland

«H M
Manipur
6. Haryana

Tripura

■P re ro ro £
Orissa
Kerala

Punjab

<0 X -P »—i ro
3. Assam

Total

M VIre o ro ro u
Table 3

States

(0 re fi 0
X •i— E & N
■H S3 •H re rH
(Q o w ft 2,
16.
12*
13.

19.
20.
10.

21.
17.

22.
23.
18.
11.

in r- 01 "d* in
rH rH
 9.9

Gujarat, Manipur, Meghalaya, Nagaland, Punjab, Arunachal

Pradesh and Mizoram. In Tamil Nadu, the RRBs were established

in 1977, in Gujarat in 1979, in Manipur in 1981, in Meghalaya

in 198 2, in Nagaland and Punjab in 198 3 and in Arunachal

Pradesh and Mizoram in 1984. From June 198 3 to March 1984,
17 new RRBs were established# covering additional 34 districts*

Out of the total 17 new banks, 3 were in Gujarat, 2 each in

Madhya Pradesh and Uttar Pradesh, 4 each in Maharashtra and

Rajasthan and one each in Arunachal Pradesh and Mizoram. Thus,

including Arunachal Pradesh and Mizoram, 23 states have RRBs*

As mentioned above, the total number of RRBs functioning in

the country at the end of March 31, 1984, was 159 covering
281 districts spread over 23 states as against 142 RRBs

covering 247 districts spread in 21 states at the end of

June 1983. Thus, the Sixth Five Year Plan target of covering

270 districts by March 1985 has been more than fulfilled.

As regards the target of setting up of 170 RRBs by 1985,
the current position was short only by 8 RRBs.^°

It can be seen from Table 4 that these RRBs catered

to the needs of extremely vulnerable sections of the society.

It is clear from the table that bulk of the loans had

gone to small farmers and marginal farmers and agricultural

labourers. In 1977, the number of accounts held by marginal

farmers and small farmers and agricultural labourers was

100 Reserve Bank of India, "Report on Trend and Progress of

Banking in India", Bombay, 1983-84, pp. 64*
 102

The RRBs also advance loans to weaker sections for

house construction and education. Further, with a view to

helping the RRBs in increasing their loan business and to

cater to the credit needs of the smallest among the small

borrowers such as landless agricultural labourers, rural

artisans, cottage and rural industries and beneficiaries of

schemes of SCs/STs, the RRBs have been permitted to grant

loans to eligible borrowers at four per cent under the

i 02
Differential Rates of Interest Scheme. The sponsor bank
would provide refinance to the RRBs on the basis of the

outstanding amount at two per cent per annum. The amount of

advance to be disbursed through the RRBs would be decided by

the sponsor bank and the RRBs at the beginning of the each

year.

Branch Expansion

It has been recognised that RRBs have a special role

to play in the context on Integrated Rural Development

Programme and the revised 20-point Economic Programme. In

line with this, and with a view to ensuring adequate spread

of branches in rural areas, the branch expansion policy
formulated by the RBI, in consultation with the Union Govern­
ment# gives preference to RRBs for opening branches in the

rural areas of districts covered by RRBs. At the same time,

in the districts identified for setting up of RRBs in the

rest of plan period pending their establishment in phases#

102 Reserve Bank of India# "Report on Trend and Progress

of Banking in India*, Bombay, 1980-81, pp. 42.

'V
 105

as many as 5 out of 8 selected oldest RRBs In India have

granted gold loans (to rich and affluent sections) for both

agricultural and non-agricultural purposes which accounted

for about 50 - 60 per cent of the outstanding loans. 103

(2) The opening of RRBs at an average rate of more than

two RRBs per month during the period 1975 to 1977 had been

done in great haste, Orc^nising new RRBs at this fast pace

in a relatively short period of time has generated problems

for the concerned RRBs and their sponsoring banks in planning

the opening of net work of 20 to 30 branches in the first

and second year of operations of the RRBs as expected by the

Government of India. The selection of locations for branches

in various districts has not been done in a co-ordinated

manner at the state level demarcating the areas of operations

of the existing institutional credit agencies as was suggested

by the Working Group on RRBs. It has not always been possible

to ensure that the branches of the RRBs are opened at

locations where neither a co-operative agency nor a branch

104
of any commercial bank exists,

(3) Most of the RRBs are not viable at present# The cost

of operating branches of RRBs, had gone up in 1977 compared

to the 1976 level. The average cost of operating branch of

bank is much lower than that of operating a branfch of rural

103 Joshi Navin Chandra# '"Regional Rural Banks.- An Analytical

Study*, Agricultural Banker, Vol .5, No.2, April-June 1982,
PP. 5.
104 Wadhva, C.D., op. cit., pp# 154-55.
 106

bank is much lower than that of opening a rural branch of a

public sector commercial bank, but it is much higher than

the cost of operating a branch of a co-operative bank,

especially at the village level*

(4) The orientation of the staff of the RRBs, educated in

the cities, is still an urban. The staff members at-officer

level or above look for a higher salary and more perquisites,

such as availability of a house and a motor-cycle* They have

not adapted themselves sufficiently to become an integral part

of the socio-economic milieu in which they function. They have

not completely identified themselves with the inhabitants of

the villages where their branches are situated. Given a

choice, many of them would prefer to shift to commercial banks

and settle down in cities.

(5) The RRBs have not been able to expand their direct

lendings to persons from the weaker sections of rural society

partly because of the strict and inflexible procedures adopted

105
by them for loaning. In the matter of procedures for

deposits as well as loaning, they operate very much like the

scheduled commercial banks. Despite efforts made by a Committee

set up by the RBI for simplification and standardization of the

loaning procedure of RRBS, this procedures still remain

complicated and time-consuming. Not all states have adopted

the system of issuing agricultural pass book to all cultivators

which vould also be used by the RRBs for verification of land

holdings and avoiding over-financing by different agencies on

105 Wadhva, C.D., op.cit., pp. 163.

 107

the basis of the same assets of the borrower. The RRBs have

not been given the facilities like exemption from stamp duties
on loan applications# procedure for 'out of court' settlement

of cases for recovery from the borrowers in chronic default#

etc.# which are available to the co-operative agencies.

(6) The RRBs have been conceived as an instrument and a

catalytic agent for ensuring the development of rural economy

by providing credit as well as other facilities. It is here

that inadequacy of the institutional set up becomes glaring.

The RRBs have become an extension for some period# a slightly

cheaper variation of commercial banks, cheaper to the sponsoring

banks# not to the ultimate borrowers. There is little evidence

to suggest that as stipulated in the Act# they are providing

any other facilities except credit. Because of their selective

clientele and well deserved through narrower small man appeal

the RRB cannot become an agent of all round rural development.
The narrower approach of RRBs in terms of coverage poorer rural

families# though very desirable on other considerations# and

their limitations to purvey only credit without providing

extension# inputs# advisory and marketing services', would put

these institutions in extremely precarious position vis-a-vis

1 06
the needs of rural growth and development.

(7) The heavy losses are due to poor in frastrueturetl faci­

lities in the areas they serve and the absence of farmers

106 Rajula Devi, A.K.# op.cit.# pp. 194.

 Ill

Thirdly# ARDC did not make a dent in direct financing as

distinguished from refinancing. SikftdLlarly, RBI# though it used

to perform the policy and guiding/controlling role at the

national level# the increasing requirements# quantitative as

well as qualitative# of the rural credit system depanded a

full time, separate and independent top management and policy-

109
making body.

The Committee to Review Arrangements for Institutional

Credit for Agriculture and Rural Development (CRAFiCARD) set up

by the RBI recommended in its interim report (submitted to the

Reserve Bank in November 1979)# the setting up of a national

level institution to be called the National Bank for Agriculture

and Rural Development (nabard) for providing all types of

production and investment credit for agriculture and rural

development and also to act as the agency for promoting integra­

nt)
ted rural development. The bill for establishment of • -

the NABARD was passed by the Parliament and received the assent

of the President on December 30# 1981. The NABARD came into

existence on July 12# 198 2.

NABARD is set up as an independent institution at the

national level but retains its close links with RBI.

Government of India and RBI are the joint owners of NABARD.

Conceived as an exercise in decentralisation of the Reserve

Bank’s functions in the sphere of rural credit# it has taken

109 Kahlon# A .Sand Singh Kgram# op.cit.# pp. 149.

110 Reserve Bank of India# *CRAFICARDW# op.c pp* 400

 112

over the entire undertaking of ARDC as well as the refinancing

functions from Reserve Bank in relation to State Co-operative

Banks (SCBs) and Regional Rural Banks (RRBs)•

Functions of the NABARD

(1) The NABARD serves as a refinancing institution for all

kinds of production and investment credit to agriculturists,

small scale industries, cottage and village industries,

artisans, handicrafts and rural crafts and other allied economic

activities with a view to promoting integrated rural develop­

ment* Agriculture includes horticulture, animal husbandry,

forestry, dairy and poultry farming, pisciculture and other

allied activities whether or not undertaken jointly with

agriculture*

(2) It provides short-term, medium-term and long-term

credits to State Co-operative Banks, RRBs, LDBs and other

financing institutions approved by RBI.

(3) It gives long-term loans (upto 20 years) to State

governments to enable them to subscribe to the share capital

of co-operative societies.

(4) It can give long-term loans to any institution approved

by the Central Government or contribute to the share capital

or invest in securities of any institution concerned with

agriculture and, rural development.

 113

(5) It has the responsibility of co-ordinating the acti­

vities of central and state governments,"; The Planning

commission and other all-India state-level institutions

entrusted with the development of small scale industries,

village industries, cottage industries and rural crafts

industries in the tiny and decentralized sectors, etc.

(6) It has the responsibility to inspect RRBs and co­

operative banks other than Primary Co-operative Bank,£.

(7) It maintains a Research and Development Fund; to

promote research in agriculture and rural development to

formulate and design projects and programmes to suit the

requirements of different areas to cover special activities.

Capital Structure

The capital of NABARD is of Rs. 100 crores ; ; (which can

be raised to • Rs. 500 crores) and is held by the Reserve

Bank of India and Government of India in equal proportion.

In terms of the provisions of the NABARD Act, the entire

assets and liabilities of the erstwhile ARDC have been taken

over by NABARD. For its short term operations, the NABARD

draws funds mainly from the Reserve Bank. For its term loan

operations, it draw funds from the Government of India, float

bonds in the market and also draw, to the extent needed# from
its National Rural Credit (Long-term Operations )' Fund and
National Rural Credit (stabilization ) Fund. The assets and

liabilities of the two funds maintained by the Reserve Bank

of India# viz., the NAC (LTO) Fund and NAC (stabilization) Fund
 114

have been transferred to the above funds of the NABARD. The

Bank is also authorised to accept deposits with maturity of

not less than 12 months from the Central and State Governments,

local authorities, scheduled banks, etc., and to borrow, with

the approval of the Central Government, foreign currency from

any bank or financial institution in India or elsewhere. The

outstandings in respect of short-term loans granted by RBI to

scheduled commercial banks and RRBs under Section 17 of the RBI

Act (except those under Sec. 17(4)(a) ) have been transferred

to NABARD, which in turn will repay them to RBI.

The total share capital of NABARD was Rs. 100 crores

during the year 198 3-84. The reserves and surplus of NABARD

increased from Rs. 122 crores in 1982-83 to Rs* 157 crores in

1983-84. The deposits of NABARD increased from Rs• 11 crores

in 1982-83 to Rs. 14 crores in 1983-84.111 The net resources

mobilized by NABARD during 1983-84 are indicated in Table 5.

It is clear from the table that the aggregate net

resources available to NABARD for financing its lending

programme and meeting its other commitments during 1983-84

(July-June) amounted to Rs. 842 crores as compared to Rs. 632

crores in 1982-83. The Reserve Bank provided to NABARD

Rs • 225 crores for its NRC (LTO) Fund and Rs. 75 crores for

NRC (Stabilization) Fund and released Rs. 100 crores out of

special deposit of Rs. 631 crores with the Reserve Bank in

respect of these funds. NABARD transferred out of its profits

111 Report of the National Bank for Agriculture and Rural

Development, BombayrB# 1983-84, pp. 6.
 115

Table 5
Resources (net) Mobilized by NABAKD*
(Rs . in crores)

198 2-8 3 198 3-84

NRC (LTO) FUnd 227.00 425.00*

NRC (Stabilization) Fund 83.00 85.00

Bonds & Debentures 30.00 30.25

Borrowings from GOI (External
assistance) 114.00 167.00
Borrowings from RBI 178.00 135.00

TOTAL* 632.00 842.25

* These are exclusive of reserves and surplus, deposits and

other liabilities.
T-nclusive of Rs • 100 crores released on September 30,
198 3, out of the fund and invested in long-term government
securities•

Source* Reserve Bank of India, Report on Trend and Progress

of Banking in India, 1983-84*

for the year 1983-84, Rs. 100 crores and Rs. 10 crores,

respectively to the above Funds. Borrowings from Government

of India by way of reimbursementsagainst amount disbursed

under the various projects sponsored by external aid, amounted

to Rs. 167 crores as against Rs. 114 crores in the previous

y^ar. Besides, NABARD raised resources from the open market
 116

through its second series of bonds for an aggregate amount of

Rs.38.5 crores. After redemption of erstwhile ARDC bonds
amounting to Rs. 8.25 crores during the year (in the previous
year bonds of Rs, 8.5 crores were redeemed)# the net resources

mobilised through market borrowings amounted to Rs.30.25 crores

during 1983-84 as against Rs, 30 crores in 1982-83. The

Reserve Bank provided financial accommodation (net) to NABARD

to the extent of Rs. 135 crores as against Rs. 178 crores in

the previous year. These loans were from the General Line of
Credit of Rs. 1#300 crores sanctioned for the year 1983-84
under Section 17 (4E) of the Reserve Bank of India Act# 1934.

As at the end of June 1984# the borrowings outstanding under

115
this line of credit stood at Rs. 1#039 crores.

Operations of NABARD

The SABARD is functioning as a refinancing agency in

the area of agriculture and rural development and is bearing

the responsibility of guiding and monitoring the availability

of institutional refinance in these areas. Short-term credit

repayable over periods not exceeding 18 months are provided

to State Co-operative Banks (SCBs), RRBs and other financial

institutions (as approved by Reserve Bank) for agricultural

operations or specified production/marketing activities.

Medium-term loans for periods not less than 18 months and

not exceeding seven; years are provided to SCBs and RRBs

for agricultural and rural development and other purposes as

112 Reserve Bank of India# "Report on Trend and Progress of

Banking in India**# 198 3-84# pp. 158.
 117

determined by the NABARD, J,png-term loans and advances by Way

of refinance are provided to land development banks, RRBg,

scheduled banks, SCBs and other financial institutions for

promoting agriculture and rural development as well as for

giving loans to specified categories of borrowers for periods

not exceeding twenty five years, The NABARD is also empowered

to make loans and advances to state governments for periods not

exceeding 20 years to enable them to subscribe directly or

indirectly to the share capital of co-operative credit societies

Besides, it is authorised to give long-term loans directly to

any institution approved by the Central Government and

contribute to the share capital or invest in the securities

of any institution concerned with agriculture and rural deve­

lopment which the Central Government may notify in consulta­

tion with the Reserve Bank of India

A brief account of the operations of NABARD during

the past three years has been set out in the following

paragraphs. It may be mentioned here that only the operations

regarding agricultural sector are discussed here.

(l) Term-wise/Purpose-wlse Finance

Data relating to NABARD credit to Co-operatives and

Governments during 1981-8 2, 198 2-8 3 and 198 3-84 have been

presented in Table 6. It is clear from the table that the

113 Reserve Bank of India, “Annual Report*, Bombay, 1981-8 2,

pp. 34-35.
114 Reserve Bank of India, "Report on Trend and Progress of
Banking in India", Bombay, 1981-82, pp. 104-105.
T a b le 6 i NABARP C r e d it to C o -o p e ra tiv e s and G o v ern m en ts D u rin g 1981-82* 1 9 8 2 -8 3 and 1983-84
(R upees c ro re s

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below
o p e r a tio n s ( a t 3% Ju n e
Bank R ate from M arch
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(ii) M a rk e tin g o f C rops
o th e r th an c o tto n and
K apas ( a t Bank R ate
from Ju n e 1978) 24 37 37 24 20 21 60 64
J u ly - 29
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and K apas in c lu d in g
m o n o p o ly p ro c u re m e n t
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(Iv ) P u rc h a se and d i s t r i ­ Jan-«ary- 12 12 25
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Table 6 Cpntd...

8 10 11 12 13 14

II Medium Term 111 72 82 123 202 108 71 159 87 74 75 158

(i Agricultural purposes January- 26 18 18 38 28 17 18 36 31 19 18 37
(at 3% below Bank Rate December
from January 1# 1979)
(ii )Conversion of short­
term loans into medium
term loans in scarcity July- 85 54 64 85 174 91 53 123 56 55 57 121
affected areas includ­ June
ing rephasemen t and
reschedulement (at 3 %
below Bank Rate from
January 1979)•
IIItLonq Term 13 12 16 123 13 13 8 128 11 8 21 115
Loans to State Govern­
ments for contribution April- 13 12 16 123 13 13 8 128 11 8 21 115
to share capital of
March
co-operative credit
Institutions (at 6 %
per annum)

Total Credit 1045 15 5 0 132 6 779 1369 209 5 200 3 8 68 1389 2141 2147 862
(I+II+III)
* Subject to recovery of an additional interest of “
1| per cent as per linking scheme.
$ By RBI -Nil or negligible.
Source* NABARD .
119
 121

120

limits sanctioned by NABARD for the total credit (short,

medium and long term) increased from Rs.l045 crores in 1981-82

to Rs. 1369 crores in 198 2-8 3 and further to Rs.1389 crores

in 1983-84. The total outstandings of NABARD increased from

Rs. 779 crores in 1981-8 2 to fcs. 8 68 crores in 198 2-8 3 and

marginally declined to Rs. 862 crores in 1983-84. Thus,

NABARD has been engaged in providing more and more credit to

co-operatives and governments for financing the agricultural

operations. The outstandings of NABARD for short-term

agricultural credit increased from Rs. 533 crores in 1981-82

to Rs. 581 crores in 1982-83 and further to Rs. 589 cr6res

in 1983-84. It may be observed from the table that the

NABARD provided more credit to co-operatives for seasonal

agricultural operations. The outstandings of NABARD for

seasonal agricultural operations increased from Rs. 5&8 crores

in 1981-82 to Rs. 573 crores in 1982-83 and further to

Rs. 584 crores in 1983-84. The outstanding of NABARD for

marketing of crops increased from Rs. 1 crore in 1981-82

to Rs. 4 crores in 1982-83. The outstandings of NABARD for

purchase and distribution of fertilizers, increased from

Rs. 4 crores in 1981-8 2 to Rs. 5 crores in 198 3-84.

The NABARD followed the same policies for sanctioning

of medium-term credit limits for approved agricultural

purposes for the years 198 2, 198 3 and 198 4 as were being
followed by the Reserve Bank. The total outstandings of
T a b le 7 * P u rp o s e -w is e S a n c tio n s and D isb u rse m e n ts b b y NABARD d u rin g 1981-82* 1982-83 and 1 9 8 3 -8 4 .
(R upees ' C ro re s) 1

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+ R e la te s to e r s tw h ile ARDC. ® E x c lu d e s S .T . F in a n c e .
S o u rc e s* - ( l) R e p o rt on C u rre n c y and F in an ce# V o l .I ., 1 9 8 2 -8 3 .
(2 ) NABARD. ^^
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 123

Purpose-wise, minor irrigation occupied an important

place in schematic lending of NABARD during 1981-82# 1982-83

and 1983-84. Cut of the total schemes sanctioned by it in

1981-82# 1172 were minor irrigation schemes which increased

to 1843 in 198 2-8 3 and further to 19 23 in 198 3-8 4.' The

disbursements made by NABARD for minor irrigation increased

from Rs. 252 crores in 1981-82 to Rs. 312 crores in 1983-84.

The number of schemes sanctioned for diversified purposes

(i.e. other than minor irrigation) increased from 2187 in

1981-82 to 30g8 in 1983-84. The disbursements made by NABARD

for diversified purposes increased from Rs. 384 crores in

1981- 8 2 to Rs. 459 crores in 198 2-8 3 and further to Rs.580

crores in 1983-84. Among these schemes for diversified

purposes# farm mechanisation schemes accounted for the largest

number during 1981-8 2# 198 2-8 3 and 198 3-84. Out of the total
disbursements# Rs. 128 crores were provided for farm mechani­

sation in 1981-82 which increased to Rs. 147 crores in

1982- 83 and further to Rs. 204 crores in 1983-84.

(3) Agency-wise Sanctions and Disbursements Under Schematic

Lendings

Agency-wise sanctions and disbursements under schematic

lending of NABARD during 1981-8 2, 198 2-8 3 and 198 3-84 have

been shown in Table 8. It is elear from the table that the

total number of schemes increased from 3359 in 1981-82 to

4957 in 1982-83 and further to 4961 in 1983-84. It may be

observed from the table that the number of schemes sanctioned

T ab le 8 i A g en cy -w ise S a n c tio n s and D isb u rsem en ts U nder S c h e m a tic L e n d in g D u rin g 1982-82# 1 9 8 2 -8 3
. -^ -8 —84 (R upees C ro re s ) ’

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 126

for commercial banks (including RRBs) remained higher during

the three year period as compared to other two bank groups.

Number of schemes sanctioned for commercial banks increased

from 2348 in 1981-8 2 to 3100 in 198 2-8 3 and further to 3379

in 198 3-84,

The disbursements of NABARD to the agencies, viz.,

SLBs_, commercial banks and SCBs, increased from Rs • 600 crores

in 1981-82 to Rs. 703 crores in 1982-83 and further to Rs,892

crores in 1983-84. The disbursements of NABARD to commercial

banks were higher as compared to other agencies. Rs. 351

crores were disbursed by NABARD to commercial banks in

1981-82 which increased to Rs. 423 crores in 1982-83 and

further to Rs. 537 crores in 1983-84.

The cumulative number of schemes sanctioned upto end

of June 1984 stood at 29276 with commitments and disburse­

ments amounting to Rs. 6753 crores and Rs. 4376 crores,

respectively.

Immediate Tasks Before NABARD

The NABARD has aroused many expectations as well as

doubts among those interested in rural development. The

115
immediate tasks before them are mentioned below t-

115 Ramakrishnayya, M. (Ex .Chairman of NABARD), "Immediate

Tasks Before NABARD”, Economic Times, November 5, 1982*
 127

(l) Techno-Economic Parameters

As the apex development bank for agriculture and rural

development# the paramount task of NABARD Is to spell out as

clearly as possible the principles of development through

credit and disseminate them as widely as possible. NABARD

believe^ that development through credit means lending money

against a viable programme of development.

A programme becomes viable when the appropriate methods

of science and technology are adopted and implementation is
carried out systematically# with skill and precision# NABARD's

endeavour# therefore# is to fix techno-economic parameters

for all the activities to be sponsored by credit and to

monitor their application in practice.

In this regard# it has the rich heritage of ARDC which

has done a fair amount of work for agricultural schemes. For

example# there are well-tested guidelines for assessment of

ground-water potential# selection of pumps and pumping systems

augmentation of efficiencies of system erected in the past#

etc. Suitable techno-economic parameters have also been

evolved for soil conservation# land development# plantation

crops# some animal husbandry activities and fisheries. Work

is in progress in regard to forestry# dry land farming# horti­

culture and floriculture.

New items of the non-farm sector such as rural artisans

handlooms# village industries and tertiary activities are now

 128

under study for the determination of techno-economic

parameters. For this purpose, NABARD will be in close touch

with universities/ research and scientific bodies and all

those who are engaged in evolving appropriate technoligies.

(2) Strengthening the Delivery System

Being essentially a refinancing body# NABARD is required

to work through the existing multiple delivery system of credit

institutions, namely, co-operative banks, commercial banks and

regional rural banks. The health and strength of these

institutions, therefore, becomes the concern of NABARD. it

has been agreed that by and large, organisational matters

relating to commercial banks will continue to be monitored by

the RBI and NABARD's role will be to draw the attention of RBI

whenever necessary. The Standing Committee called CALCOB set

up by ARDC, will be continued. It will be the main forum for

reviewing the performance of commercial banks in rural areas.

But in tiie case of co-operatives and RRBs the statute

teas given special responsibilities to NABARD, by conferring

on it powers of inspection and supervision under the Banking

Regulation Act. The Standing Committee called COTELCOQP, set

up by ARDC, will be continued and serve as the forum for

considering all the relevant issues concerning co-operatives.

One of the immediate tasks of NABARD is to bring about coordi­
nation between the two co-operative structures (one for long­
term credit and other for short-term and medium-term credit)

so as to ensure that both types of credit flow together for

 130

However, there is a feeling that the RRBs are not getting

adequate opportunities for their growing staff. NABARD has

therefore decided# with the generous support of RBI, to set up

a new training college in Lucknow# more or less on the pattern

of College of Agriculture Banking# Pune.

(4) Repayment

It is well-known that the most critical problem facing

the rural credit institutions in the country is mounting over-

dues. The Sixth Plan document has laid considerable emphasis

on the need for efficient recycling of funds. NABARD has#

therefore# taken up the challenge of reviving the ethic and

habit of repayment. For this purpose# it has initiated field

studies in the affected states and will organise seminars at

the state and national levels to bring about ptreater awareness

of the dangerous inherent in the present trends and to promote

the repayment ethic. These seminars will# hopefully#

address themselves to both sides of the problem, quality

of lending on the one side and the use of additional income

generated# on the other.

(5) Borrowers* Education

It follows from the above that the borrower is as much

in need of training and orientation as the lender. There

were several efforts made in the past# but they have not made
much impact. It has been decided to form Vikas Volunteer

Vahani. The members of the Vahani will be ordinary men and

women belonging to the weaker sections like small farmers and
 131

artisans who have developed themselves through credit and

who volunteer to spend about 12 weeks in a year, for a week

at a stretch, in designated villages, explaining and

convincing the actual and potential borrowers about the

principles of development through credit. They will also

search out the problems faced by borrowers,

SECTION IV

CONCLUSION

Indian agriculture is experiencing a break-through in

production. Subsistence farming is being replaced by

cultivation which is profitable and generates surplus.

This has brought about a new out|;a<ik; the farmer now looks

upon cultivation as a commercial proposition •

As stated previously, the demand for improved

techniques of production has been increasing in agriculture.

The success of agriculture in our country depends not only

on the use of new technology in the sphere of application

of high yielding varieties to more and more areas but also

117
on the provision of adequate credit at the right time.

Majority of the Indian farmers are unable to meet their

116 Suneja, H.R., "Bank Credit Under 20-Point Programme -

Policy and Procedures*, Shakti Publishers, New Delhi-4,
1981, pp. 122,
117 Kathuria, G. and Chandrasekharan, K., "Elements of
Agricultural Finance*, Progressive Corporation Private
Limited, Bombay, 1973, pp. 38.
 132

financial needs from their private savings, so they have to

depend on credit. Credit is one of the most crucial inputs

for accelerating the pace of agricultural development.

The credit needs of the fafmer can be evaluated by

examining the present production plant and preparing the

projected plan for at least three years and by evaluating the

extent of improvement needed in farm resources and long-term

investment. 118 Since various programmes have to be imple­

mented for integrated rural development, the demand for

agricultural credit is bound to increase. As stated earlier,

by 2,000 A.D. the farm credit requirement may be 12 times

or more of the present requirements (1979).

The financial requirements of farmers are met by

non-institutional and institutional agencies. Among non­

ins titutional agencies moneylenders occupy a dominant position

for centiries, in providing credit to the agriculturists.

Moneylenders provide finance for any activity, may be

productive or unproductive. Majority of the peasants prefer

moneylenders to meet their financial needs, as against

institutional agencies, because their lending procedures

are not complicated. The All-India Rural Credit Survey Report

revealed that the share of institutional agencies, comprising

of the government, the co-operative and the commercial banks

in financing the borrowings of the rural households was 7.1

per cent in 1951—52 whereas the corresponding share of private

118 Chowdhury, T.K., "Credit Needs of Agriculturists",

Eastern Economist, Vol.52, No.19, May 9, 1969,
pp. 988 *
 133

119
moneylenders Was as high as 68.6 per cent. Not denying

the positive role played by the moneylenders in the village

economy and the strengths possessed by them in operating

their business* this Report aptly pointed out the real

problem resulting from their virtual monopoly in supplying

, 120
rural credit.^ Similar problems have been pointed out by

several other committees which probed into this question.

Recent trends show that the moneylenders are on the

decline. The malpractices adopted by them have been partly

responsible for their unpopularity among the villagers.

Moreover* the spread of co-operative principles among the

villagers has induced them to form their own co-operative

credit societies from which they can get cheap credit faci­

lities. The growth of these societies has greatly curtailed

the activities of moneylenders. The spread of education and

growing consciousness among village masses about their

responsibilities have produced this result.

In addition to these, the moneylenders themselves are

trying to leave the field of moneylending because of the
*

various moneylenders' Acts* passed by most of the States

laying down the maximum rates of interest which can be charged

on loans. The Acts have laid down that the rates above the

specific rates of simple interest should be considered

119 Reserve Bank of India* "All-India Rural Credit Survey*,

op.cit., pp. 199.
120 Ibid., Chapters VIII and IX.
 134

excessive and in such cases courts should reopen the accounts.

Moneylenders are unwilling to face the regimentation of legi­

slation by keeping proper books of accounts and by taking

licence* Rather than facing all these, moneylenders find

themselves more secure in changing their sphere of activity

from moneylending. It may be noted here that with the

liquidation of rural indebtedness under the 20-point Economic

Programme, the importance of moneylenders will go down still

further.

Due to various blemishes of non-ins titutional finances

for agriculture, experts are in favour of institutional

finance. The objective of agricultural credit in India,

since 1951, has been to enlarge the role of institutional

credit agencies and to correspondingly reduce the role of

non-institutional credit agencies, especially the private

121
moneylenders.

As mentioned earlier, the government is one of the

important institutional sources of agricultural finance.

Government directly as well as indirectly provides finance

to the agriculturists. It also helps weak financial agencies

to stand on their own feet and in that way it indirectly

helps the farmers. Directly, it provides TACCAVI loans

to the farmers in case of natural calamities. But this

source of institutional finance is also defective. Agricul­

tural finance provided by government is inadequate and

121 Wadhva, C.D., op.cit., pp • 1»

 136

sector, the Reserve Bank has also adopted special means to

help the weaker sections of rural population and to reduce

the imbalance in the regional distribution of available

finance. To help the poor people in areas of high overdues

resulting from the prevalence of scarcity or famine

conditions, the Reserve Bank has provided for softening of

fionditions of repayment of loans. In the context of India1s
agriculture, the Reserve Bank will be required to provide*

still more help to the agricultural sector in the years to

come.

Co-operative banks also occupy a pride place in

agricultural financing. Many experts believe that to provide
cheap and adequate credit to the agriculturists and to release

them from the clutches of moneylenders, the development of

co-operative banks is a must. After the publication of the

All-India Rural Credit Survey Report, the co-operative banks

are providing more and more financial help to the farmers.

Primary Agricultural Credit Societies (PACS) fulfil the short­

term financial requirements of the farmers and Land Development

Banks (LDBs) provide lemcj term finances to the farmers. Both

the PACS as well as LDBs are working actively in the field

of agricultural finance, but they also have some drawbacks.

Major demerits of PACS are discussed earlier. Experts

opinion point out that the PACS should leave the narrow sense

of agricultural financing. According to the Committee to Review

Arrangements for Institutional Credit and Agriculture" and Rural
Development (CRAFICARD), the PaCS should also serve other rural
 137

producers such as artisans, craftmen and agricultural labourers

in respect of their economic activities .

Further, the PACS are mostly working as lending agencies.

But in the context of the fast-changing rural scene as a

result of increased economic prosperity, it is high time that
PACS correct this aberration in their working and take steps

to spread banking habit and mobilize deposits in rural areas.

If the Societies are able to build up a well-balanced deposit

portfolio at a cost less than that of borrowing from Central

Co-operative Banks, it will be helpful to the economy as a

whole.

The interference of state governments in the recovery

procedures of PACS and the steps taken by them such as exemption

of whole classes of defaulters from the payment of their dues

to PACS, stall the recovery of loans by staying the recovery

proceedings launched against them. This has a dangerous

impact and wider implications for the entire institutional

credit system. Therefore, it is suggested by several committees

that no state government should resort to such measures in

future and the Government of India should prevail upon state

governments not to resort such measures.

The LDBs, as it would appear from their performance,

have undoubtedly played a very useful role in promoting

agricultural development in our country and have given a

122 Reserve Bank of India, *CRAFICAFDH, op.cit., pp. 124.

 138

lead in institutionalising the term lending for agriculture.

A much bigger role is expected to be played by LDBs, by

stepping up their advances during the vil Plan. Since the^five

years, there has been yet another shift in emphasis for diversi

fying the loans portfolio of the Banks for various purposes

which are subsidiary to agriculture. 1?3 Marginal farmers

with very small holdings cannot become viable without being

supported by adequate capital finance for off-farm activities

in addition to farm-based activities. The vast majority of non

land holders have also to be assisted with credit for acquisi­

tion of production assets. According to CRAFICARD, the

diversification has to be two-prongedone in the direction of

financing such land-based activities as plantations, seri­

culture, horticulture, Pisciculture, farm forestry, etc* and

the other, in respect of hon-KSmd based purposes like dairying,

poultry farming, piggery, sheep rearing, installation of gobar

gas plants, construction of rural warehouses/godowns, cold

storage plants, agro-processing, rural housing/farm houses,

agro-based rural industries, cottage insdustries, rural arti­

sans, agro-service centres, development of market yards etc.

No longer can these banks remain merely land development banks

or even agricultural development banks as in Andhra Pradesh.

They have to become rural development banks so that they can

play their due role in integrated rural development. 124

123/ Vishnaw, B.L., op. cit., pp. 15.

124 Reserve Bank of India, *CRAFICARDW, op.cit., pp. 330.
 139

Regional Rural Banks (RRBs) were set up in various

parts of the country under the RRBs Act 1976. The RRBs are

visualised as the rural arm of commercial banks. 1?5 Even-

though certain blemishes prevail in the system of RRBs# it

forms the latest category of financial institutions to develop

banking activities in rural areas for farm as well as non­

farm sectors. The absolute performance of most of the Banks

in terms- of selected indicators of business has been satisfa­

ctory. These banks have succeeded in projecting the image of

a 'small man's1 bank* or the poorer villagers 'very own bank* . ^

The RRBs can be a potentially useful instrument in

contributing to the goal of promoting economic growth with

social justice in rural areas. The Dantwala Committee

constituted by the RBI in 1977 to review the working of RRBs

observed that "RRBs with some modifications in their organisa­

tion and functions can become a very useful component in the

totality of rural credit structure. In fact, we are convinced

such an institution is needed to make good some of the

inadequacies in the existing rural credit system............. The

RRBs can make a substantial contribution towards improving

the quality and quantity of credit flows to the rural areas

*! o7
by becoming an integral part of the rural credit structure. z

The Committee also envisaged that over a period of time# there

would be a total replacement of rural branches of commercial

125 Choubey# B.N.# "Agricultural Banking in India”# National

Publishing House# New Delhi# 198 3# pp. 9 2.
126 Wadhva# C.D.# op.cit.# pp. 165.
127 Krishna Ajitabh, op.cit.# pp. 120.
 140

banks by RRBs and their branches in their respective commanding

areas. The Committee has also suggested that there is no longer

any need for Central Government control over these banks.

through steering committees. -Such guidance and direction as

the Central Government may like to provide to RRBs can be

provided through the instrumentality of the RBI.

The concept of national bank given by CRAFICARD, tee

Committee to Review Arrangements for Institutional Credit for

Agriculture and Rural Development# considered various means

suggested for a national level organisation and came to tee

decision that national bank should be known as National Bank

for Agriculture and Rural Development (NABARD). NABARD has

been conceived by CRAFICARD as an exercise in decentralisation

of Central Bank's function of promoting all kinds of production

and investment credit to agriculture, small-scale industries#

artisans# Khadi and Village, industries# handicrafts and other

allied economic activities in an integrated manner with

undivided attention# pointed focus and forceful direction.

is also charged by the Committee with the responsibility

of promoting Integrated Rural Development and mdfcer connected

therewith and incidental thereto.

With regard to the functioning of the new Bank# it may

be observed that more or less it continues to function on tee

lines of the Agricultural Credit Department and the erstwhile

Agricultural Refinance and Development Corporation# of course#

with a new sign-board of NABARD. There does not seem to be
 141

much change in the approach, system and procedures as were

evolved by the ARDC. From all the accounts available, it seems
1
the new Bank is just like the 'old wine in a new bottle*.

No doubt, the establishment of NABARD will go down as a

land-mark in the annals of history of agricultural banking

when for the first time, India has one single organisation

which deals with all types of credit requirements of farmers -

short, medium and long term._ All financial institutions

purveying agriculturalceredit, viz.. Commercial Banks,

Co-operative Banks and Regional Rural Banks which comprise

infra-structure of rural credit, stand delinked from the RBI

and brought under the ilmbrella of NABARD. it appears thetefore

that the Bank can provide undivided attention, forceful

direction and potential focus to the credit problems of farmers

and other rural people.

However, the tasks of the Bank will not be easy. The

problems of agricultural credit and rural development in this

country have been so numerous, so complex and so chronic that

inspite of the various efforts made from time to time during

the last several decades, many of the problems still remain

to be solved. However, one should be satisfied that

NABARD makes all possible efforts in the right direction and

the rate of progress is sufficiently fast.

128 Choubey, B.N., op.cit., pp. 69.

 142

The major conclusions of this chapter are described here.

Comprehensive and long term data about the total institutional

as well as non-institutional advances tbothe agricultural sector

are not available. Such data regarding direct and indirect

institutional finance to the agricultural sector are available

since 1972. Table 9 indicates institutional finance for the

agricultural sector during 1972-80. it can be observed from

the table that the total direct institutional finance to the

agricultural sector has increased from about Rs* 883 crores in

1972 to about Rs. 3436 crores in 198 0. Cut of the total

direct advances of financial institutions in 1972# about 73

per cent were provided as short-term loans and about 27

per cent were provided as medium/long term loans. Whereas in

1980, out of the total advances, about 60 per cent were provided

as short-term loans and about 40 per cent were provided as

medium/long term loans. It may also be observed from the

table that the share'of PACS and Government in direct short­

term advances has declined from about 61 per cent to about 40

per cent and from 11 per cent to 4 per cent respectively during

1972-80. The share of RRBs in tdtal short-term finance

increased from 0.08 per :cent in 1976 to about 4 per cent in

1978. The medium^long term advances of PACS to the agri­

culturists remained almost the same during 1972-80. Loans

of LDBs declined from about 18 per cent in 1972 to about 11

per cent in 1980. Performance of scheduled commercial banks

in the sphere of direct agricultural advances is quite

impressive. Both the short-term as well as medium/long term

advances of %cheduled commercial banks have constantly increase

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( i i i ) S o u rces* R ep ort on C urrency and F in a n ce , V a rio u s is s u e s .
144
during 1972-80. The share of scheduled commercial banks in

short-term financing increased from about 9 per cent in 1974

to 15 per cent in 1980 and advances for medium/long term

purposes increased from about 2 per cent in 1972 to about 22

per cent in 1980.

The total indirect institutional finance to the agri­

cultural sector has also increased from about Rs. 360 crores

in 1972 to about Rs • 1337 crores in 198 0. The short-term

advances of various banks which were about 9 0 per cent in

1972 decreased to about 86 per cent in 1980. The medium/long

term advances increased from about 10 per cent in 1972 to

about 14 per cent in 1980. The share of State Co-operative

Banks in short-term agricultural finance increased from 41

per cent in 1972 to 46 per cent in 1980. The finances of

Central Co-operative Banks to the agricultural sector has

declined from 50 per cent in 197 2 to 40 per cent in 1980.

The share of RRBs in short-term finance increased from 0.39

per, cent in 1977 to 0.81 per cent in 1978. in the case of

medium/long term advances# only Rural Electrification

Corporation provided loans. Loans of this Corporation

increased from about 10 per cent in 1972 to 14 per cent in

1980. The data of both the short-term as well as medium/

long term advances of scheduled commercial banks are not

available*

Thus# during the last decade banking map of the country

has changed. Commercial banks are assuming increasing

 146

importance for agricultural finance. In the case of indirect

institutional finance, one cannot show the share of commercial

banks in agricultural lending. Only in the case of direct

institutional financing to the agricultural sector, the

importance of commercial banks is observed. The nationalisa­

tion of 14 commercial banks in 1969 is responsible for the high

spurt in agricultural lending of commercial banks. Commercial

banks are increasing their branches in rural and so far deprived

areaA* They have experimented with a number of alternatives

and combinations of methods and approaches in different parts

of the country* Having v discussed the overall financial frame­

work for agricultural credit in India# it is now proposed to

make a detailed and in depth study about the role of commercial

banks in agricultural finance.