INDEX

CHAPTER - 1 INTRODUCTION
LITERATURE OF REVIEW
HYPOTHESIS
OBJECTIVES
METHODOLOGY
SOWT ANALYSIS
CHAPTER - 2 ROLE & FUNCTIONS OF NABARD
MEANING
NABARD’S ROLES AND FUNCTIONS
OBJECTIVES OF INSPECTIONS
BOARD OF SUPERVISION
NABARD AND IT’S ROLE IN TRAINING
CHAPTER – 3 KISAN CREDIT CARD
GENESIS
CONTENTS OF CREDIT CARD
SALIENT FEATURE OF THE KISAN
CREDIT CARD (KCC) SCHEME
MAJO STPES TAKEN BY NABARD
IMPORTANT INITIATIVES BY NABARD
CHAPTER – 4 SELF HELP GROUP (FINANCE)
MEANING
GOALS
NABARD’S SHG BANK LINKAGE
PROGRAMME
DESIGN FEATURES
DESIGN FEATURES OF THE PRODUCT
CHAPTER – 5 MICRO FINANCE MF INSTITUTIONS
INTRODUCTION
THE EMERGENCY OF PRIVATE MICRO
FINANCE INDUSTRY
LEGAL FORMS OF MFIS IN INDIA FOR
PROFIT MFIS.
REGULATIONS & SUPERVISIONS
CHAPTER – 6 CONCLUSION & SUGGESTIONS

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 CHAPTER-1
INTRODUCTION

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1.1 INTRODUCTION

National Bank for Agriculture and Rural Development (NABARD) is

an apex development bank in India based in Mumbai, Maharashtra. It has been
accredited with "matters concerning policy, planning and operations in the field
of credit for agriculture and other economic activities in rural areas in India".

NABARD was established on the recommendations of Shivaraman

Committee, by an act of Parliament on 12 July 1982 to implement the National
Bank for Agriculture and Rural Development Act 1981. It replaced the
Agricultural Credit Department (ACD) and Rural Planning and Credit Cell
(RPCC) of Reserve Bank of India, and Agricultural Refinance and
Development Corporation (ARDC). It is one of the premiere agencies to
provide credit in rural areas.

NABARD operates through its Head Office at Mumbai,28 Regional

Offices located in the State Capitals, a Sub Office at Port Blair and 1 special cell
located at Srinagar and 360 District Offices. NABARD has on its roll around
2968 professionals supported adequately by a number of other staff.

 State Co-operative Banks (SCB’s):

The SCB’s are a link between the co-
operative organizations with the RBI, NABARD and the state governments.
They have to co-ordinate, control and regulate the working of Central Co-
operative Banks (CCB’s) and also provide financial and other resources and
investment channels to the CCB’s.

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  District Central Co-operative Banks (DCCB’s):
The DCCB’s are responsible to finance the Primary Agriculture Credit
Societies (PACS) and other regional co-operative societies. Membership of
DCCB”s is open to all types of co-operative societies and individuals. DCCB’s
are governed by a board of 12-15 in number, elected by members generally for a
period of 3 years.

 Primary Agriculture Credit Societies (PACS):

PACS are the societies which provide credit to the borrowers for short
and medium term credit for agriculture and allied activities. They cover
generally a small area of 200 hectares. PACS also provide backward and
forward integration

Rural Innovation:-

 NABARD's role in rural development in India is phenomenal.National

Bank For Agriculture & Rural Development (NABARD) is set up as an
apex Development Bank by the Government of India with a mandate for
facilitating credit flow for promotion and development of agriculture,
cottage and village industries.
 The credit flow to agriculture activities sanctioned by NABARD reached
Rs 1,574,800 million in 2005-2006. The overall GDP is estimated to
grow at 8.4 per cent.
 The Indian economy as a whole is poised for higher growth in the coming
years. Role of NABARD in overall development of India in general and
rural & agricultural in specific is highly pivotal.
 Through assistance of Swiss Agency for Development and Cooperation,
NABARD set up the Rural Infrastructure Development Fund.

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  Under the RIDF scheme Rs. 512830 million have been sanctioned for
2,44,651 projects covering irrigation, rural roads and bridges, health and
education, soil conservation, water schemes etc.

Classification of Agriculture Credit:-

Agriculture credit may be further classified into the following ways.

1) Short-term credit
2) Medium-term credit
3) Long-term credit

NABARD and its Role in Training:-

There are different training center of NABARD Bank

• National Bank Staff College, Lucknow

• National Bank Training Centre, Lucknow

• Zonal Training Centre, Hyderabad

• Bankers Institute of Rural Development (BIRD), Mangalore

• Bankers Institute of Rural Development (BIRD), Bolpur

• Bankers Institute of Rural Development (BIRD), Lucknow

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1.2 LITERATURE REVIEW

Nilakantha Rath:-

NABARD has crossed a disbursement of Rs. one lakh crore for the
creation of rural infrastructure in the country from out of its Rural Infrastructure
Development Fund (RIDF), a statement issued here said.

The disbursal includes loans to 28 states and the union territory of Puducherry
as well as to the National Rural Roads Development Agency to support the rural
roads component of Bharat Nirman, the release said.

Dr.Swaminathan:-

NABARD's support is being provided to various forms of microfinance

institutions covering mFIs, second tier mF lending institutions, Grameen bank
replicators, NGO-mFIs, SHG Federations etc. NABARD provides loan funds in
the form of Revolving Fund Assistance (RFA) to NGO-mFIs on a very selective
basis. The RFA is generally provided for a period of 5 to 6 years and is
necessarily to be used for on lending to mF clients (SHGs or individuals). In
addition, the agencies are also sanctioned, on a case-to-case basis, grant
assistance for partly meeting the salary of field level staff, infrastructure
development and operational deficits during the initial years.

1.3 HYPOTHESIS

 Identifying the emerging supervisory issues in the functioning of

cooperative banks/RRBs such as NPAs recovery, investment portfolio,
credit monitoring system, management practices, frauds, etc

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  maintain expert staff to study all problems relating to agriculture and
rural development and be available for consultation to the Central
Government, the Reserve Bank, the State Governments and the other
institutions engaged in the field of rural development.

1.4 OBJECTIVES

NABARD was established in terms of the Preamble to the Act, "for

providing credit for the promotion of agriculture, small scale industries, cottage
and village industries, handicrafts and other rural crafts and other allied
economic activities in rural areas with a view to promoting IRDP and securing
prosperity of rural areas and for matters connected therewith in incidental
thereto".

The main objectives of the NABARD as stated in the statement of objectives

while placing the bill before the Lok Sabha were categorized as under :

1. The National Bank will be an apex organisation in respect of all matters

relating to policy, planning operational aspects in the field of credit for
promotion of Agriculture, Small Scale Industries, Cottage and Village
Industries, Handicrafts and other rural crafts and other allied economic
activities in rural areas
2. The Bank will serve as a refinancing institution for institutional credit
such as long-term, short-term for the promotion of activities in the rural
areas
3. The Bank will also provide direct lending to any institution as may
approved by the Central Government.
4. The Bank will have organic links with the Reserve Bank and maintain a
close link with in.
5. To study details about the functions of NABARD.

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1.5 METHODOLOGY

 The study of Service Marketing in Banks requires technical & conceptual

understanding of term service marketing for which a good deal of
information need to collected.
 Researcher collects secondary data through various books and also from
websites (Internet).
 Secondary Data are those, which have already been collected by
someone else and which have already been passed through the statistical
process. This data is collected from the following sources.

a) Reports of NABARD BANK

b) Magazines

c) Journals

d) Newspapers

1.6 SWOT ANALYSIS

1. STRENGTHS

Its subscribed and paid-up Capital was Rs.100crore

which was enhanced to Rs.500crore, contributed by the Government of India
(GOI) and RBI in equal proportions. Currently it is Rs.2000crore, contributed by
GoI (Rs.550crore) and RBI (Rs.1450crore.

The credit flow to agriculture activities sanctioned by NABARD reached Rs

1,574,800 million in 2005-2006. The overall GDP is estimated to grow at 8.4
per cent.

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 2. WEAKNESSES

There are 13 attributes in which the SHGs asses themselves to be weak or

deficient. Topping the list is the weakness “lack of interest among some
members”, presumably regarding participating in meetings or other activities of
the groups with 99 of the SHGs stating this. 52 SHGs have stated that members
“lack time to participate in activities”, 62 groups have the problem of some
members lacking responsibility.

3. OPPORTUNITIES
Nabard has effectively brought in a number of innovations in the rural
creditdomain. To quote a few:

•SELF HELP GROUPS,

•FARMER CLUBS,
•RURAL INFRASTRUCTURE DEVELOPMENT FUND,
•WATERSHED DEVELOPMENT,
•KISSAN CREDIT CARD,
•DISTRICT RURAL INDUSTRIES PROJECT CLUSTER
•DEVELOPMENT PROGRAMME AND
•RURAL INNOVATION FUND

4. THREATS
For any collective entity or organization to survive, it is necessary for the
members of the collective or organization to have the capacity to identify threat
factors and take steps to ensure that these threats do not affect sustainability. In
the SWOT exercise, the SHGs have identified about 14 threat factors which
they perceive as worthy of their attention.

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 National Bank for Agriculture and Rural Development (NABARD) is
an apex development bank in India based in Mumbai, Maharashtra. It has been
accredited with "matters concerning policy, planning and operations in the field
of credit for agriculture and other economic activities in rural areas in India".

NABARD is set up as an apex Development Bank with a mandate for

facilitating credit flow for promotion and development of agriculture, small-
scale industries, cottage and village industries, handicrafts and other rural crafts.
It also has the mandate to support all other allied economic activities in rural
areas, promote integrated and sustainable rural development and secure
prosperity of rural areas. In discharging its role as a facilitator for rural
prosperity NABARD is entrusted with:

1. Providing refinance to lending institutions in rural areas

2. Bringing about or promoting institutional development and
3. Evaluating, monitoring and inspecting the client banks

Besides this pivotal role, NABARD also:

 Acts as a coordinator in the operations of rural credit institutions

 Extends assistance to the government, the Reserve Bank of India and
other organizations in matters relating to rural development
 Offers training and research facilities for banks, cooperatives and
organizations working in the field of rural development
 Helps the state governments in reaching their targets of providing
assistance to eligible institutions in agriculture and rural development
 Acts as regulator for cooperative banks and RRBs
 Extends assistance to the government, the Reserve Bank of India and
other organizations in matters relating to rural development

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1.7 HISTORY OF NABARD BANK
NABARD was established on the recommendations of Shivaraman Committee,
by an act of Parliament on 12 July 1982 to implement the National Bank for
Agriculture and Rural Development Act 1981. It replaced the Agricultural
Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of
Reserve Bank of India, and Agricultural Refinance and Development
Corporation (ARDC). It is one of the premiere agencies to provide credit in
rural areas.
The Committee to Review Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD) set up by the RBI under
the Chairmanship of Shri B Sivaraman in its report submitted to Governor,
Reserve Bank of India on November 28, 1979 recommended the establishment
of NABARD. The Parliament through the Act 61 of 81 approved its setting up.
The Committee after reviewing the arrangements came to the conclusion
that a new arrangement would be necessary at the national level for achieving
the desired focus and thrust towards integration of credit activities in the context
of the strategy for Integrated Rural Development. Against the backdrop of the
massive credit needs of rural development and the need to uplift the weaker
sections in the rural areas within a given time horizon the arrangement called for
a separate institutional set-up. Similarly. The Reserve Bank had onerous
responsibilities to discharge in respect of its many basic functions of central
banking in monetary and credit regulations and was not therefore in a position
to devote undivided attention to the operational details of the emerging complex
credit problems. This paved the way for the establishment of NABARD.
CRAFICARD also found it prudent to integrate short term, medium term
and long-term credit structure for the agriculture sector by establishing a new
bank. NABARD is the result of this recommendation. It was set up with an
initial capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully
subscribed by the Government of India and the RBI.
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1.8 ABOUT NABARD

The Committee to Review Arrangements for Institutional Credit for

Agriculture and Rural Development (CRAFICARD), set up by the Reserve
Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman, conceived
and recommended the establishment of the National Bank for Agriculture and
Rural Development (NABARD). The Indian Parliament through the Act 61 of
1981 approved the setting up of NABARD. The Bank which came into
existence on 12 July, 1982 was dedicated to the service of the Nation by the
Humble Prime Minister, Smt Indira Gandhi on 5 November, 1982

NABARD is set up by the Government of India (GoI) as a development

bank with the mandate for facilitating credit flow for promotion and
development of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts. It also has the mandate to support
all other allied economic activities in rural areas, promote integrated and
sustainable rural development and secure prosperity of rural areas, as also for
matters connected therewith and incidental thereto.

Its subscribed and paid-up Capital was Rs.100crore which was enhanced
to Rs.500crore, contributed by the Government of India (GOI) and RBI in equal
proportions. Currently it is Rs.2000crore, contributed by GoI (Rs.550crore) and
RBI (Rs.1450crore).

The Management of NABARD vests with the Board of Directors. The

Board of Directors of NABARD comprises the Chairperson, Managing
Director, representatives of RBI, GoI, State Governments and Directors
nominated by the GoI.

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 NABARD is a specialized financial institution in the field of agriculture
and rural development. It has been designed specifically as an organizational
device for providing undivided attention, forceful direction and pointed focus,
to the credit problems of rural sector. Half of NABARDs capital was
contributed by RBI and other half by the government. It has enough financial
resources to support agricultural and rural development programs.

NABARD operates through its Head Office at Mumbai,28 Regional

Offices located in the State Capitals, a Sub Office at Port Blair and 1 special cell
located at Srinagar and 360 District Offices. NABARD has on its roll around
2968 professionals supported adequately by a number of other staff.

State Co-operative Banks (SCB’s):

The SCB’s are a link between the co-operative organizations with the
RBI, NABARD and the state governments. They have to co-ordinate, control
and regulate the working of Central Co-operative Banks (CCB’s) and also
provide financial and other resources and investment channels to the CCB’s.

 District Central Co-operative Banks (DCCB’s):

The DCCB’s are responsible to finance the Primary Agriculture Credit
Societies (PACS) and other regional co-operative societies. Membership of
DCCB”s is open to all types of co-operative societies and individuals. DCCB’s
are governed by a board of 12-15 in number, elected by members generally for a
period of 3 years.
Primary Agriculture Credit Societies (PACS):
PACS are the societies which provide credit to the borrowers for short and
medium term credit for agriculture and allied activities. They cover generally a
small area of 200 hectares. PACS also provide backward and forward
integration

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1.9 STRUCTURE OF NABARD

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1.10 RURAL INNOVATION

 NABARD's role in rural development in India is phenomenal.National

Bank For Agriculture & Rural Development (NABARD) is set up as an
apex Development Bank by the Government of India with a mandate for
facilitating credit flow for promotion and development of agriculture,
cottage and village industries.
 The credit flow to agriculture activities sanctioned by NABARD reached
Rs 1,574,800 million in 2005-2006. The overall GDP is estimated to
grow at 8.4 per cent.
 The Indian economy as a whole is poised for higher growth in the coming
years. Role of NABARD in overall development of India in general and
rural & agricultural in specific is highly pivotal.
 Through assistance of Swiss Agency for Development and Cooperation,
NABARD set up the Rural Infrastructure Development Fund.
 Under the RIDF scheme Rs. 512830 million have been sanctioned for
2,44,651 projects covering irrigation, rural roads and bridges, health and
education, soil conservation, water schemes etc.
 Rural Innovation Fund is a fund designed to support innovative, risk
friendly, unconventional experiments in these sectors that would have the
potential to promote livelihood opportunities and employment in rural
areas.
 The assistance is extended to Individuals, NGOs, Cooperatives, Self Help
Group, and Panchayati Raj Institutions who have the expertise and
willingness to implement innovative ideas for improving the quality of
life in rural areas.
 Through member base of 250 million, 600000 cooperatives are working
in India at grass root level in almost every sector of economy. There are
linkages between SHG and other type institutes with that of cooperatives.

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 The purpose of RIDF is to promote innovation in rural & agricultural
sector through viable means.
 Effectiveness of the program depends upon many factors, but the type of
organization to which the assistance is extended is crucial one in
generating, executing ideas in optimum commercial way.
 Cooperative is member driven formal organization for socio-economic
purpose, while SHG is informal one.
 NGO have more of social color while that of PRI is political one. Does
the legal status of an institute influences effectiveness of the program?
How & to what an extent?
 Cooperative type of organization is better (Financial efficiency &
effectiveness) in functioning (agriculture & rural sector) compared to
NGO, SHG & PRIs.
 Recently in 2007-08, NABARD has started a new direct lending facility
under 'Umbrella Programme for Natural Resource Management'
(UPNRM).
 Under this facility financial support for natural resource management
activities can be provided as a loan at reasonable rate of interest. Already
35 projects have been sanctioned involving loan amount of about Rs 1000
million.
 The sanctioned projects include honey collection by tribals in
Maharashtra, tussar value chain by a women producer company
('MASUTA'), eco-tourism in Karnataka etc.

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1.11 Classification of Agriculture Credit

Generally agriculture credit may be classified into two types, namely direct &
indirect.

In direct type, credit is provided directly to farmers for productive

purpose, such as land improvement, irrigation, crop production, purchase of
machinery, equipment, development of dairy, sheep rearing poultry, fishers etc.
development of plantation, tea, coffee, rubber, coconut, cashew net etc.

In Indirect type of agriculture credit is credit provided to the institution

involved in the supply of production inputs. The indirect credit is given for
financing distribution of farm inputs like co-operative marketing societies,
financial regional rural bank [RRB’s], financing state electricity board for
energisation of pump sets, financing for services institution that provide storage
facilities such as, godowns cold storage & warehouse, financing for
establishment of regulated market, financing for agro-industries corporation,
food corporation of India, jute corporate of India, state warehousing corporation
etc. most of the indirect finance is referred to as refinance. Agriculture credit
may be further classified into the following ways.

4) Short-term credit
5) Medium-term credit
6) Long-term credit

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 CHAPTER-2
ROLE & FUNCTION OF NABARD

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2.1 MEANING

NABARD is set up by the Government of India as a development bank

with the mandate of facilitating credit flow for promotion and development of
agriculture and integrated rural development. The mandate also covers
supporting all other allied economic activities in rural areas, promoting
sustainable rural development and ushering in prosperity in the rural areas.

With a capital base of Rs 2,000 crore provided by the Government of

India and Reserve Bank of India, it operates through its head office at Mumbai,
28 regional offices situated in state capitals and 391 district offices at districts.

It is an apex institution handling matters concerning policy, planning and

operations in the field of credit for agriculture and for other economic and
developmental activities in rural areas. Essentially, it is a refinancing agency for
financial institutions offering production credit and investment credit for
promoting agriculture and developmental activities in rural areas.

 Initiates measures toward institution-building for improving absorptive

capacity of the credit delivery system, including monitoring, formulation
of rehabilitation schemes, restructuring of credit institutions, training of
personnel, etc
 Coordinates the rural financing activities of all the institutions engaged in
developmental work at the field level and maintains liaison with the
government of India , State governments, the Reserve Bank of India and
other national level institutions concerned with policy formulation
 Prepares, on annual basis, rural credit plans for all the districts in the
country. These plans form the base for annual credit plans of all rural
financial institutions
 Undertakes monitoring and evaluation of projects refinanced by it

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  Promotes research in the fields of rural banking, agriculture and rural
development
 Functions as a regulatory authority, supervising, monitoring and guiding
cooperative banks and regional rural banks

2.2 NABARD'S ROLES AND FUNCTIONS

1) Credit Function:-

NABARD's credit functions cover planning, dispensation and monitoring

of credit.

This activity involves:

• Framing policy and guidelines for rural financial institutions

• Providing credit facilities to issuing organizations

• Preparation of potential-linked credit plans annually for all districts for

identification of credit potential

• Monitoring the flow of ground level rural credit

2) Development functions:-

Credit is a critical factor in development of agriculture and rural sector as

it enables investment in capital formation and technological upgradation. Hence
strengthening of rural financial institutions, which deliver credit to the sector,
has been identified by NABARD as a thrust area. Various initiatives have been
taken to strengthen the cooperative credit structure and the regional rural banks,
so that adequate and timely credit is made available to the needy. In order to
reinforce the credit functions and to make credit more productive, NABARD
has been undertaking a number of developmental and promotional activities
such as:-

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• Help cooperative banks and Regional Rural Banks to prepare development
actions plans for them selves

• Enter into MoU with state governments and cooperative banks specifying their
respective obligations to improve the affairs of the banks in a stipulated
timeframe

• Help Regional Rural Banks and the sponsor banks to enter into MoUs
specifying their respective obligations to improve the affairs of the Regional
Rural Banks in a stipulated timeframe

• Monitor implementation of development action plans of banks and fulfillment

of obligations under MoUs

• Provide financial assistance to cooperatives and Regional Rural Banks for

establishment of technical, monitoring and evaluations cells

• Provide organization development intervention (ODI) through reputed training

institutes like Bankers Institute of Rural Development (BIRD), National Bank
Staff College, Lucknow and College of Agriculture Banking, Pune, etc.

• Provide financial support for the training institutes of cooperative banks

• Provide training for senior and middle level executives of commercial banks,
Regional Rural Banks and cooperative banks

• Create awareness among the borrowers on ethics of repayment through Vikas

Volunteer Vahini and Farmer’s clubs

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3) Supervisory function:-
As an apex bank involved in refinancing credit needs of major financial
institutions in the country engaged in offering financial assistance to agriculture
and rural development operations and programmes, NABARD has been sharing
with the Reserve Bank of India certain supervisory functions in respect of
cooperative banks and Regional Rural Banks (RRBs).
As part of these functions, it
 Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative
Banks (other than urban/primary cooperative banks) under the provisions
of Banking Regulation Act, 1949
 Undertakes inspection of State Cooperative Agriculture and Rural
Development Banks (SCARDBs) and apex non-credit cooperative
societies on a voluntary basis
 Undertakes portfolio inspections, systems study, besides off-site
surveillance of Cooperative Banks and Regional Rural Banks (RRBs)
 Provides recommendations to Reserve Bank of India on opening of new
branches by State Cooperative Banks and Regional Rural Banks (RRBs)
 Administering the Credit Monitoring Arrangements in SCBs and CCBs.

4) Core Functions:-

NABARD has been entrusted with the statutory responsibility of

conducting inspections of State Cooperative Banks (SCBs), District Central
Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the
provision of the Banking Regulation Act, 1949. In addition, NABARD has
also been conducting periodic inspections of state level cooperative
institutions such as State Cooperative Agriculture and Rural Development
Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on
a voluntary basis.

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2.3 Objectives of Inspection

 To protect the interest of the present and future depositors

 To ensure that the business conducted by these banks is in conformity
with the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc
 To ensure observance of rules, guidelines, etc. formulated and issued by
NABARD/RBI/Government
 To examine the financial soundness of the banks
 To suggest ways and means for strengthening the institutions so as to
enable them to play more efficient role in rural credit

Instruments of Supervision

 Periodic on-site inspection of 31 SCBs , 371 DCCBs, 20 SCARDBs and

82 RRBs and other Apex level Cooperative institutions
 Supplementary Appraisal
 Off-site Surveillance System ( OSS )
 Portfolio inspection/System study
 CMA returns

2.4 BOARD OF SUPERVISION(FOR SCBS,DCCBS AND

RRBS):-

Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted
by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal
Committee to the Board of Directors of NABARD.

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The broad powers and functions of the Board of Supervision are:-

 Giving directions and guidance in respect of policies and on matters

relating to supervision and inspection, reviewing the inspection findings,
suggesting appropriate measures
 Reviewing the follow-up action taken by Department of Supervision
(DoS) on matters of frauds and internal checks and control
 Identifying the emerging supervisory issues in the functioning of
cooperative banks/RRBs such as NPAs recovery, investment portfolio,
credit monitoring system, management practices, frauds, etc
 Suggesting necessary follow-up measures
 Recommending appropriate training for Inspecting Officers of NABARD
for imparting necessary skills and knowledge
 Suggest measures for strengthening of DoS
 Recommend issue of directions by RBI
 Oversee the quality of inspections carried out and the reports issued
 Review the information generated through off-site surveillance and other
supplementary vehicles, action taken thereon
 Undertake any other functions entrusted from time to time by the Board
of Directors of NABARD

The Board of Supervision, since its formation on 20 November 1999 , has

held 45 meetings till 21 September 2010 and reviewed the financial position of
Cooperative Banks and RRBs. Based on the observations of BoS, authorities
concerned have been apprised of the weaknesses.

24 | P a g e
2.5 NABARD AND ITS ROLE IN TRAINING

There are different training center of NABARD Bank

• National Bank Staff College, Lucknow

• National Bank Training Centre, Lucknow

• Zonal Training Centre, Hyderabad

• Bankers Institute of Rural Development (BIRD), Mangalore

• Bankers Institute of Rural Development (BIRD), Bolpur

• Bankers Institute of Rural Development (BIRD), Lucknow

The provisions of the Act as stated below very clearly indicate the
nature and scope of the developmental mandate of the Bank and its role in
training and capacity building with the underlying belief that the process of
development cannot be accomplished by credit/refinance alone.

Section 38 of the NABARD Act provides that the Bank shall:

• maintain expert staff to study all problems relating to agriculture and rural
development and be available for consultation to the Central Government, the
Reserve Bank, the State Governments and the other institutions engaged in the
field of rural development.

• provide facilities for training, for dissemination of information and the

promotion of research including the undertaking of studies, researches, techno-
economic and other surveys in the field of rural banking, agriculture and rural
development.

• provide technical, legal, financial, marketing and administrative assistance to

any person engaged in agriculture and rural development activities;

25 | P a g e
• may provide consultancy services in the field of agriculture and rural
development and other related matters in or outside India, on such terms and
against such remuneration, as may be agreed upon;

In this context, the role of training in NABARD and the role played by it
for capacity building in client institutions, partner agencies and other
developmental agencies are important.

For maintaining 'Expert Staff', the bank needs to provide continuous

exposure to its officers and staff for up scaling their knowledge and skills in
core areas. However, in the initial years the Bank had recruited expert staff from
various technical disciplines and created a separate cadre of officers..

These officers, irrespective of their academic background, were imparted

similar type of training as all other officers. Their placements and the regular
job rotations helped in grooming them to take up assorted assignments get
involved in a variety of roles and functions including credit, developmental,
promotional, supervisory and necessary support and information for decision
making.

In pursuance of the Bank's mandate as stated in the Act, the Bank

provides training facilities for the RFIs and agencies involved in rural
development through BIRD and the two RTCs. With a view to broad base the
training and capacity building efforts, the Bank encourages the RFIs to set up
their own training systems and provides these training institutes the necessary
support to conduct meaningful and quality training. Options and avenues for
strengthening the training interventions at the client level are continuously
examined so that the human resources in these institutions are developed to take
on the challenges, reckon with the competition, improve customer service,
expand outreach, develop suitable products and thereby contribute to rural
development.

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 “As NABARD primarily functions through other agencies, the needs
of the client institutions largely determine the knowledge and skill
requirements of NABARD officers.”

NABARD Endeavour’s to blend the experiences of client bank training

with the training for NABARD officers so as to make training meaningful and
relevant to their roles. Efforts are also made to blend the study findings with the
outcome from training to periodically measure the overall impact of the
investments made in the training efforts.

2.6 DEVELOPMENT AND PROMOTIONAL FUNCTIONS

Credit is a critical factor in development of agriculture and rural sector as

it enables investment in capital formation and technological upgradation. Hence
strengthening of rural financial institutions, which deliver credit to the sector,
has been identified by NABARD as a thrust area. Various initiatives have been
taken to strengthen the cooperative credit structure and the regional rural banks,
so that adequate and timely credit is made available to the needy.

In order to reinforce the credit functions and to make credit more

productive, NABARD has been undertaking a number of developmental and
promotional activities such as:-

 Help cooperative banks and Regional Rural Banks to prepare

development actionsplans for themselves

 Enter into MoU with state governments and cooperative banks specifying
their respective obligations to improve the affairs of the banks in a
stipulated timeframe

27 | P a g e
 Help Regional Rural Banks and the sponsor banks to enter into MoUs
specifying their respective obligations to improve the affairs of the
Regional Rural Banks in a stipulated timeframe

 Monitor implementation of development action plans of banks and

fulfillment of obligations under MoUs

 Provide financial assistance to cooperatives and Regional Rural Banks for

establishment of technical, monitoring and evaluations cells

 Provide financial assistance to cooperatives and Regional Rural Banks for

establishment of technical, monitoring and evaluations cells

 Provide organisation development intervention (ODI) through reputed

training institutes like Bankers Institute of Rural Development (BIRD),
Lucknow, National Bank Staff College, Lucknow and College of
Agriculture Banking, Pune, etc.
 Provide financial support for the training institutes of cooperative banks

 Provide trianing for senior and middle level executives of commercial

banks, Regional Rural Banks and cooperative banks

 Create awareness among the borrowers on ethics of repayment through

Vikas Volunteer Vahini and Farmer’s clubs

 Provide financial assistance to cooperative banks for building improved

management information system, computerisation of operations and
development of human resources

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2.7 Types of Services Provided By NABARD

In order to achieve this mission, NABARD undertakes a number of inter-

related activities/ services which fall under three broad categories

A. Credit Dispensation
B. Developmental & Promotional
C. Supervisory

A. Credit Dispensation:-

Prepares for each district annually a potential linked credit plan which
forms the basis for district credit plans Participates in finalisation of
Annual Action Plan at block, district and state levels Monitors
implementation of credit plans at above levels. Provides guidance in
evolving the credit discipline to be followed by the credit institutions in
financing production, marketing and investment activities of rural farm
and non farm sectors Provides refinance facilities to the institution as
under –

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TYPES OF REFINANCE FACILITIES

AGENCY CREDIT FACILITIES

Commercial Banks Long Term credit for investment
purposes, financing the working capital
requirements of Weavers' Cooperative
Societies and State
Handloom/Handicraft Development
Corporations
Short Term Cooperative structure Short Term (crop and other loans),
(State Cooperative Banks, District medium term (conversion) loans, term
Central Cooperative Banks, Primary loans for investment purposes, financing
Agricultural Credit Societies) weavers' cooperatives - State Handloom
Development Corporations for working
capital by State Cooperative Banks
Long Term Cooperative structure Term loans for investment purposes
(State Cooperative Agriculture and
Rural Development Banks, Primary
Cooperative Agriculture and Rural
Development Banks)
Regional Rural Banks (RRBs) Short Term (crop and other loans) and
term loans for investment purposes
Urban Cooperative Banks Long term investment activities both in
(Scheduled) farm and non-farm sectors in rural areas.
State Governments Long Term loans for equity participation
in Co-operatives, Rural Infrastructure
Development Fund (RIDF) loans for
rural infrastructure projects
Non - Governmental Organisations Revolving Fund Assistance for Micro
(NGOs) - Informal Credit Delivery Credit Delivery Innovations &
System Promotional Projects

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B. Developmental & Promotional:-

The developmental role of NABARD can be broadly classified as:-

Nurturing and strengthening of - the Rural Financial Institutions
(RFIs) like SCBs/SCARDBs, CCBs, RRBs etc. by various institutional
strengthening initiatives.
Fostering the growth of the SHG Bank linkage programme and
extending essential support to SHPIs NGOs/VAs/ Development Agencies
and client banks. Development and promotional initiatives in farm and
non-farm sector. Extending assistance for Research and Development.
Acting as a catalyst for Agriculture and rural development in rural areas.

C. Supervisory Activities:-
Supervisory Activities As the Apex Development Bank, NABARD
shares with the Central Bank of the country (Reserve Bank of India) some
of the supervisory functions in respect of Cooperative Banks and RRBs.
Special Focus Removal of regional/sectoral imbalances Poverty
Alleviation and Employment Generation Development of rural micro-
enterprises Strengthening Rural Financial Institutions (RFIs) Encouraging
prudential financial standards in RFIs Encouraging capital formation in
agriculture Promotion of micro-finance/ development Rural Infrastructure
Development Hi-tech and export oriented projects Creating policy
environment for flow of rural credit Experimenting with new models,
products and innovative practices in rural credit Thrust on rural
awareness and financial services.

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 CHAPTER-3

KISAN CREDIT CARD

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3.1 GENESIS

 Honorable Union Finance Minister announced in his budget speech for

1998-99 that NABARD would formulate a Model scheme for issue of
Kisan Credit Cards to farmers, on the basis of their land holdings, for
uniform adoption by banks, so that the farmers may use them to readily
purchase agricultural inputs such as seeds, fertilisers, pesticides, etc. and
also draw cash for their production needs
 NABARD formulated a Model Kisan Credit Card Scheme in consultation
with major banks.
 Model Scheme circulated by RBI to commercial banks and by NABARD
to Cooperative.
 Banks and RRBs in August 1998, with instructions to introduce the same
in their respective area of operation.

 OBJECTIVES

As a pioneering credit delivery innovation, Kisan Credit Card Scheme

aims at provision of adequate and timely support from the banking system to the
farmers for their cultivation needs including purchase of inputs in a flexible and
cost effective manner.

3.2 CONTENTS OF CREDIT CARD

 Beneficiaries covered under the Scheme are issued with a credit card and
a pass book or a credit card cum pass book incorporating the name,
address, particulars of land holding, borrowing limit, validity period, a
passport size photograph of holder etc., which may serve both as an
identity card and facilitate recording of transactions on an ongoing basis.
 Borrower is required to produce the card cum pass book whenever he/she
operates the account.

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3.3 SALIENT FEATURES OF THE KISAN CREDIT CARD
(KCC) SCHEME

 Eligible farmers to be provided with a Kisan Credit Card and a pass book
or card-cum-pass book.
 Revolving cash credit facility involving any number of drawals and
repayments within the limit.
 Limit to be fixed on the basis of operational land holding, cropping
pattern and scale of finance.
 Entire production credit needs for full year plus ancillary activities related
to crop production to be considered while fixing limit.
 Sub-limits may be fixed at the discretion of banks.
 Card valid for 3 years subject to annual review. As incentive for good
performance, credit limits could be enhanced to take care of increase in
costs, change in cropping pattern, etc.
 Each drawal to be repaid within a maximum period of 12 months.
 Conversion/reschedulement of loans also permissible in case of damage
to crops due to natural calamities.
 Security, margin, rate of interest, etc. as per RBI norms.
 Operations may be through issuing branch (and also PACS in the case of
Cooperative Banks) through other designated branches at the discretion
of bank.
 Withdrawals through slips/cheques accompanied by card and passbook.

34 | P a g e
3.4 ADVANTAGES & BENEFITS OF THE KISAN CREDIT
CARD SCHEME

1. Advantages:-

 Advantages to farmers

 Access to adequate and timely credit to farmers

 Full year's credit requirement of the borrower taken care of.

 Minimum paper work and simplification of documentation for drawal

of funds from the bank.

 Flexibility to draw cash and buy inputs.

 Assured availability of credit at any time enabling reduced interest

burden for the farmer.

 Sanction of the facility for 3 years subject to annual review and

satisfactory operations and provision for enhancement.

 Flexibility of drawals from a branch other than the issuing branch at

the discretion of the bank.
2. Benefits:-

 Reduction in work load for branch staff by avoidance of repeat

appraisal and processing of loan papers under Kisan Credit Card
Scheme.

 Minimum paper work and simplification of documentation for drawal

of funds from the bank.

 Improvement in recycling of funds and better recovery of loans.

 Reduction in transaction cost to the banks.

 Better Banker - Client relationships.

35 | P a g e
3.5 COVERAGE OF CROP LOANS DISBURSED UNDER KCC

Under the Reshtriya Krishi Bima Yojna (RKBY)

GIC has agreed that the crop loans disbursed for eligible crops
under the Crop Insurance Scheme will be covered under the CCIS, now
under Rashtriya Krishi Bima Yojna. However, the banks are expected to
maintain all back up records relating to compliance with "RKBY" and its
seasonality discipline, cut-off date for submitting declarations and end use,
etc. as in the case of normal crop loans.

Objectives of the Scheme:-

 To provide insurance coverage and financial support to the farmers in the
event of failure of crops as a result of natural calamities, pests and
diseases.
 To encourage farmers to adopt progressive farming practices, high value
inputs and higher technology in agriculture.
 To help stabilise farm incomes, particularly in disaster years.
 To support and stimulate primarily production of food crops and oilseeds.
 Farmers to be covered : All farmers (both loanee and non-loanee
irrespective of their size of holdings) including sharecroppers, tenant
farmers growing insurable crops covered.
 Sum insured : The sum insured extends upto the value of threshold yield
of the crop, with an option to cover upto 150% of average yield of the
crop on payment of extra premium.
 Premium subsidy : 50% subsidy in premium allowed to Small and
Marginal Farmers, to be shared equally by the Government of India and
State Government/Union Territory. Premium subsidy to be phased out
over a period of 5 years.

36 | P a g e
3.6 MAJOR STEPS TAKEN BY NABARD

 A Brochure on KCC Scheme highlighting the salient features, advantages

and other relevant information about the Scheme was brought out by
Head Office and ROs were asked to circulate the brochure to State govt.
departments, Commercial Banks, Cooperative Banks, RRBs and other
concerned agencies/officers so as to generate wider awareness about the
Scheme.

 Floor limit of Rs.5000/- for issue of KC Cards stands withdrawn.

 Studies on KCC Scheme have been entrusted to BIRD and NABARD

Staff College to facilitate feedback on the ground level issues/problems
so that changes, where necessary, could be considered.

 Studies on the implementation of the Scheme undertaken by NABARD

periodically.

 On the lines of instructions of RBI to Commercial Banks, Cooperative

Banks and RRBs have been advised that they may, at their discretion, pay
interest at a rate based on their perception and other relevant factors on
the minimum credit balances in the cash credit accounts under the Kisan
Credit Cards of farmers during the period from 10th to the last day of
each calendar month.

 Regional Rural Banks (RRBs) were advised to initiate innovative

publicity campaign in each area of operation in order to cater all eligible
farmers under KCC.

37 | P a g e
Progress in implementation of the Scheme :-

 Since launching in August 1998, around 2.38 crore Kisan Credit Cards
issued upto 31 March 2002 by Cooperative Banks, Regional Rural Banks
and Commercial Banks put together.
 Scheme implemented in all States and Union Territories (except
Chandigarh, Daman & Diu and Dadra & Nagar Haveli) with all
Cooperative Banks, RRBs and Commercial Banks participating.
 Agency-wise/State-wise progress in issue of cards by all banks during
2001-02 and since inception of Scheme.

3.7 IMPORTANT INITIATIVES BY NABARD

1) Institutional Strengthening Initiatives:-

Preparing Institution Specific Development Action Plans (DAPs) and

entering into MoUs with Cooperative Banks and RRBs Facilitating State-
specific reform packages for Cooperative Banks ODI Intervention and Training
and capacity building in RFIs Support for improvement of business, system,
HRD, etc. of cooperatives Social Re-engineering through Vikas Volunteer
Vahini (VVV) Institution of Awards for good performing Cooperative Banks
Assistance for Business Development Cells (BDC) in Co-operative and RRBs

2) micro Finance Innovations and Strategies:-

Grant support to Self Help Promoting Institutions (SHPIs) to improve

access to credit for rural poor Capacity Building of partner institutions in micro
Finance Supporting and upscaling of SHG-bank linkage programme

38 | P a g e
3) Research and Development Initiatives:-

Support to Research activities in areas of agriculture and rural

development Support for seminars, conferences & workshops Conducting
institution/area/sector/project-specific studies Dissemination of findings of
studies and research and innovative models and practices

4) Supervision:-

On-site inspection and off-site surveillance of RFIs Issue of warning

signals to banks showing deterioration in financial position and adverse features
Taking preventive and revival measures for weak banks

5) Institution of purpose-specific funds in NABARD:-

Watershed Development Funds (WDF)

Co-operative Development Funds (CDF)
Rural Promotion Corpus Fund (RPCF)
Credit and Financial Services Fund (CFSF)
Micro-Finance Development Fund
Soft Loan Assistance for Margin Money Fund
National Rural Credit Operation Fund
National Rural Credit Stabilisation Fund
Agriculture and Rural Enterprises Incubation Fund

39 | P a g e
 CHAPTER-4

SELF-HELP GROUP (FINANCE)

40 | P a g e
4.1 MEANING
A self-help group (SHG) is a village-based financial
intermediary usually composed of between 10-20 local women. Most self-help
groups are located in India, though SHGs can also be found in other countries,
especially in South Asia and Southeast Asia.
Members make small regular savings contributions over a few months
until there is enough capital in the group to begin lending. Funds may then be
lent back to the members or to others in the village for any purpose. In India,
many SHGs are 'linked' to banks for the delivery of microcredit.
SHGs are member-based microfinance intermediaries inspired by
external technical support that lie between informal financial market actors like
moneylenders, collectors, and ROSCAs on the one hand, and formal actors like
microfinance institutions and banks on the other. Other organizations in this
transitional zone in financial market development include CVECAs and
ASCAs.
A Self-Help Group (SHG) is a registered or unregistered group of micro
entrepreneurs having homogenous social and economic backgrounds,
voluntarily coming together to save regular small sums of money, mutually
agreeing to contribute to a common fund and to meet their emergency needs on
the basis of mutual help.Also it is a group of people who pool in their resources
to become financially stable by taking loans from the money collected by that
group and by making everybody of that group self-employed. The group
members use collective wisdom and peer pressure to ensure proper end-use of
credit and timely repayment. This system eliminates the need for collateral and
is closely related to that of solidarity lending, widely used by microfinance
institutions.To make the book-keeping simple enough to be handled by the
members, flat interest rates are used for most loan calculations.

41 | P a g e
4.2 GOALS

Self-help groups are started by non-profit organizations (NGOs)

that generally have broad anti-poverty agendas. Self-help groups are seen as
instruments for a variety of goals including empowering women, developing
leadership abilities among poor people, increasing school enrolments, and
improving nutrition and the use of birth control. Financial intermediation is
generally seen more as an entry point to these other goals, rather than as a
primary objective.This can hinder their development as sources of village
capital, as well as their efforts to aggregate locally controlled pools of capital
through federation, as was historically accomplished by credit unions.

4.3 NABARD's 'SHG Bank Linkage' program

Many self-help groups, especially in India, under NABARD's SHG-bank-

linkage program, borrow from banks once they have accumulated a base of their
own capital and have established a track record of regular repayments.
This model has attracted attention as a possible way of delivery microfinance
services to poor populations that have been difficult to reach directly through
banks or other institutions. "By aggregating their individual savings into a single
deposit, self-help groups minimize the bank's transaction costs and generate an
attractive volume of deposits. Through self-help groups the bank can serve
small rural depositors while paying them a market rate of interest.
NABARD estimates that there are 2.2 million SHGs in India, representing 33
million members, that have taken loans from banks under its linkage program to
date. This does not include SHGs that have not borrowed. "The SHG Banking
Linkage Programme since its beginning has been predominant in certain states,
showing spatial preferences especially for the southern region – Andhra
Pradesh, Tamil Nadu, Kerala and Karnataka. These states accounted for 57 % of
the SHG credits linked during the financial year 2005-2006."
42 | P a g e
Advantages of financing through SHGs

An economically poor individual gains strength as part of a group.

Besides, financing through SHGs reduces transaction costs for both lenders and
borrowers. While lenders have to handle only a single SHG account instead of a
large number of small-sized individual accounts, borrowers as part of an SHG
cut down expenses on travel (to & from the branch and other places) for
completing paper work and on the loss of workdays in canvassing for loans

4.4 DESIGN FEATURES

Decision making Members make decisions collectively. SHG concept

offers opportunity for participative decision making on
conduct of meetings, thrift and credit decisions. The
participative process makes the group a responsible
borrower.

Financial services SHGs provide the needed financial services to the

members at their doorstep. The rural poor needs different
types of financial services, viz. Savings, consumption
credit, production credit, insurance, remittance facilities
etc. The platform of SHG provides the possibility to
converge these services.

Supplementary to SHG linkage does not supplant the existing banking

formal banking system, but it supplements it thus taking full advantage of
the resources and other advantages of the banking
system.

Cutting costs SHG linkage cuts costs for both banks and borrowers. In
a study sponsored by FDC, Australia, it was observed

43 | P a g e
 that the reduction in costs for the bankers is around 40 %
as compared to IRDP loans. The poor have a net
advantage of 85 % as compared to individual borrowing.
Similar finding was also observed in a NABARD study.

NPA Savvy The Linkage mechanism has proved that the repayments
are as high as 95% - 100 %

Peer pressure as The SHG linkage emphasises peer pressure within the
collateral group as collateral substitute.

Quality clients The SHGs are turning out to be quality clients in view of
better credit management, mobilisation of thrift, low
transaction costs and near full repayments.

Client preparation The members of the SHGs could over a period of time,
very selectively graduate to the stage of micro
entrepreneurship and have been prepared with requisite
credit discipline.

Social agenda Available statistics indicate dependency of 35%-40% of

rural households on non-institutional sources for credit
needs. SHG Linkage offers a better way of dealing with
the magnitude of social agenda. Many NGOs/
Governments have recognised the SHG as a vehicle for
carrying and deepening of their developmental agenda/
delivery of services.

Exclusive poor SHGs have exclusive focus on absolute have-nots, who

focus have been bypassed by the banking system. Social
banking does not have any meaning if the lowest strata

44 | P a g e
 and the unreached are not focused.

No-subsidy- The programme does not envisage any subsidy support

dependence from the government in the matter of credit. The issue is
syndrome to build capabilities and enterprise of the individual
members, blending with group cohesion and solidarity
through training provided by a SHPI to set the ball rolling
for the SHG.

4.5 DESIGN FEATURES OF THE PRODUCT

The product design features combine the collective wisdom of the poor, the
organizational capabilities of the social intermediary and the financial strength
of the Banks. Its features are...

1. Small and fixed savings at frequent intervals:

Small and fixed savings made at regular intervals coupled with
conditions like compulsory attendance, penal provisions to ensure timely
attendance, saving, repayment etc forms a deterrent for the rich to join the
SHG system- thereby enables exclusion of the rich
2. Self-selection:
The members select their own members to form groups. The
members residing in the same neighborhood ensure better character
screening and tend to exclude deviant behaved ones.
3. Focus on women:
As regular meetings and savings are compulsory
ingredients in the product design, it becomes more suitable for the women
clients- as group formation and participatory meetings is a natural ally for
the women to follow.

45 | P a g e
4. Savings first and credit later:
The saving first concept enables the poor to gradually understand
the importance of saving, appreciate the nuances of credit concept using
their own money before seeking external support (credit) for fulfilling future
needs. The poor tend to understand and respect the terms of credit better.

5. Market rates of interest:

Self-determined interest rates are normally market related. Sub-
market interest rates could spell doom; distort the use and direction of credit.

6. Intra group appraisal systems and prioritization:

Essentials of good credit management like (peer) appraisal for
credit needs (checking the antecedents and needs before sanction), (peer)
monitoring- end use of credit; (peer sympathy) reschedulement in case of
crisis and (peer pressure) collateral in case of wilful non-payment etc all
seems to coexist in the system – making it’s one of the best approaches for
providing financial services to the poor.

7. Credit rationing:
The approach of prioritization i.e.: meeting critical needs first
serves as a useful tool for intra –group lending. This ensures the potential
credit takers/users to meticulously follow up credit already dispensed, as
future credit disbursals rely on repayments by the existing credit users.

8. Shorter repayment terms:

Smaller and shorter repayment schedule ensures faster recycling of
funds, greater fiscal prudence in the poor and drives away the slackness and
complacency that tends to set-in, in long duration credit cycles.

46 | P a g e
9. Progressive lending:
The practice of repeat loans and often-higher doses - is followed by
SHGs in their intra-group loaning, thereby enticing prompt repayments.

10.A multiple-eyed operation:

The operations of the SHG are transacted in group meetings thus
enabling high trust levels and openness in the SHG system. SHG members
facilitating openness and freedom from unfair practices also generally
conduct the banking transactions.

47 | P a g e
 CHAPTER-5

MICRO FINANCE MF INSTITUTIONS

48 | P a g e
5.1 Introduction:-

A range of institutions in public sector as well as private sector offers

the micro finance services in India. They can be broadly categorized in to two
categories namely, formal institutions and informal institutions. The former
category comprises of Apex Development Financial Institutions, Commercial
Banks, Regional Rural Banks, and Cooperative Banks that provide micro
finance services in addition to their general banking activities and are referred to
as micro finance service providers. On the other hand, the informal institutions
that undertake micro finance services as their main activity are generally
referred to as micro Finance Institutions (mFIs). While both private and public
ownership are found in the case of formal financial institutions offering micro
finance services, the mFIs are mainly in the private sector.

Micro Finance Service Providers:-

The micro finance service providers include apex institutions like

National Bank for Agriculture and Rural Development (NABARD), Small
Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh
(RMK). At the retail level, Commercial Banks, Regional Rural Banks, and,
Cooperative banks provide micro finance services. Today, there are about
60,000 retail credit outlets of the formal banking sector in the rural areas
comprising 12,000 branches of district level cooperative banks, over 14,000
branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-
urban branches of commercial banks besides almost 90,000 cooperatives credit
societies at the village level.

49 | P a g e
5.2 The Emergence of Private Micro finance Industry:-

The micro finance initiative in private sector can be traced to the initiative
undertaken by Ms.Ela Bhat for providing banking services to the poor women
employed in the unorganised sector in Ahmedabad City of Gujarat State. Shri
Mahila SEWA (Self Employed Women’s Association) Sahakari Bank was set
up in 1974 by registering it as a Urban Cooperative Bank. Since then, the bank
is providing banking services to the poor self-employed women working as
hawkers, vendors, domestic servant etc. As on March 2003, the mFI had a
membership of 30,000, seventy per cent of whom are from urban area. The
deposit and loan portfolio stood at Rs 623.9 million ($ 13.86 million) and
Rs133.6 million ($2.97 million) respectively. Though the mFI is making profit,
yet the SEWA bank model of mFI has not been replicated elsewhere in the
country.

In the midst of the apparent inadequacies of the formal financial system

to cater to the financial needs of the rural poor, NABARD sponsored an action
research project in 1987 through an NGO called MYRADA. For this purpose a
grant of Rs. 1 million ($22,222) was provided to MYRADA for an R&D
programme related to credit groups. Encouraged by the results of field level
experiments in group based approach for lending to the poor, NABARD
launched a Pilot Project in 1991-92 in partnership with Non-governmental
Organisations (NGOs) for promoting and grooming self help groups (SHGs) of
homogeneous members and making savings from existing banks and within the
existing legal framework. Steady progress of the pilot project led to the
mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal
banking activity of the banks with widespread acceptance.

50 | P a g e
 The RBI set the right policy environment by allowing savings bank
accounts of informal groups to be opened by the formal banking system.
Launched at a time when regulated interest rates were in vogue, the banks were
expected to lend to SHGs at the prescribed rates, but the RBI advised the banks
not to interfere with the management of affairs of SHGs, particularly on the
terms and conditions on which the SHGs disbursed loans to their members.

The uniqueness of the micro finance through SHG is that it is a

partnership based approach and encouraged NGOs to undertake not only social
engineering but also financial intermediation especially in areas where banking
network was not satisfactory.

mFIs and Legal Forms:-

With the current phase of expansion of the SHG – Bank linkage

programme and other mF initiatives in the country, the informal micro finance
sector in India is now beginning to evolve. The mFIs in India can be broadly
sub-divided into three categories of organizational forms as given in Table 1.
While there is no published data on private mFIs operating in the country, the
number of mFIs is estimated to be around 800. However, not more than 10 mFIs
are reported to have an outreach of 100,000 micro finance clients. An
overwhelming majority of mFIs are operating on a smaller scale with clients
ranging between 500 to 1500 per mFI. The geographical distribution of mFIs is
very much lopsided with concentration in the southern India where the rural
branch network of formal banks is excellent. It is estimated that the share of
mFIs in the total micro credit portfolio of formal & informal institutions is
about 8 per cent.

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5.3 Legal Forms of mFIs in India

Types of mFIs Estimated Legal Acts under which Registered

Number*

1. Not for Profit mFIs 400 to 500 Societies Registration Act, 1860 or

similar Provincial Acts

a.) NGO - mFIs
Indian Trust Act, 1882

b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956

2. Mutual Benefit mFIs 200 to 250 Mutually Aided Cooperative Societies

a.) Mutually Aided Cooperative Act enacted by State Government

Societies (MACS) and similarly

set up institutions

3. For Profit mFIs 6 Indian Companies Act, 1956

a.) Non-Banking Financial Reserve Bank of India Act, 1934

Companies (NBFCs)

Total 700 - 800

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  NGO mFIs:-

There are a large number of NGOs that have undertaken the task of
financial intermediation. Majority of these NGOs are registered as Trust or
Society. Many NGOs have also helped SHGs to organise themselves into
federations and these federations are registered as Trusts or Societies. Many of
these federations are performing non-financial and financial functions like
social and capacity building activities, facilitate training of SHGs, undertake
internal audit, promote new groups, and some of these federations are engaged
in financial intermediation. The NGO mFIs vary significantly in their size,
philosophy and approach. Therefore these NGOs are structurally not the right
type of institutions for undertaking financial intermediation activities, as the
byelaws of these institutions are generally restrictive in allowing any
commercial operations. These organisations by their charter are non-profit
organisations and as a result face several problems in borrowing funds from
higher financial institutions. The NGO mFIs, which are large in number, are
still outside the purview of any financial regulation. These are the institutions
for which policy and regulatory framework would need to be established.

 Non-Profit Companies as mFIs:-

Many NGOs felt that combining financial intermediation with their core
competency activity of social intermediation is not the right path. It was felt that
a financial institution including a company set up for this purpose better does
banking function. Further, if mFIs are to demonstrate that banking with the poor
is indeed profitable and sustainable, it has to function as a distinct institution so
that cross subsidisation can be avoided. On account of these factors, NGO mFIs
are of late setting up a separate Non-Profit Companies for their micro finance
operations. The mFI is prohibited from paying any dividend to its members. In
terms of Reserve Bank of India’s Notification dated 13 January 2000, relevant

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provisions of RBI Act, 1934 as applicable to NBFCs will not apply for NBFCs
(i) licensed under Section 25 of Companies Act, 1956, (ii) providing credit not
exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1,25,000
($2778) for meeting the cost of a dwelling unit to any poor person, and, (iii) not
accepting public deposits.

 Mutual Benefit mFIs:-

The State Cooperative Acts did not provide for an enabling framework
for emergence of business enterprises owned, managed and controlled by the
members for their own development. Several State Governments therefore
enacted the Mutually Aided Co-operative Societies (MACS) Act for enabling
promotion of self-reliant and vibrant co-operative Societies based on thrift and
self-help. MACS enjoy the advantages of operational freedom and virtually no
interference from government because of the provision in the Act that societies
under the Act cannot accept share capital or loan from the State Government.
Many of the SHG federations, promoted by NGOs and development agencies of
the State Government, have been registered as MACS. Reserve Bank of India,
even though they may be providing financial service to its members, does not
regulate MACS.

5.4 For Profit mFIs:-

Non Banking Financial Companies (NBFC) are companies registered

under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier,
NBFCs were not regulated by RBI but in 1997 it was made obligatory for
NBFCs to apply to RBI for a certificate of registration and for this certificate
NBFCs were to have minimum Net Owned funds of Rs 25 lakhs and this
amount has been gradually increased. RBI introduced a new regulatory
framework for those NBFCs who want to accept public deposits. There are only

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a few mFIs in the country that are registered as NBFCs. Many mFIs view
NBFCs more preferred legal form and are aspiring to be NBFCs but they are
finding it difficult to meet the requirements stipulated by RBI. The number of
NBFCs having exclusive focus on mF is negligible.

1 Capital Requirements:-

NGO-mFIs, non-profit companies mFIs, and mutual benefit mFIs are

regulated by the specific act in which they are registered and not by the Reserve
Bank of India. These are therefore not subjected to minimum capital
requirements, prudential norms etc. NGO mFIs to become NBFCs are required
to have a minimum entry capital requirement of Rs. 20 million ($ 0.5 million).
As regards prudential norms, NBFCs are required to achieve capital adequacy
of 12% and to maintain liquid assets of 15% on public deposits.

2 Foreign Investment:-

Foreign investment by way of equity is permitted in NBFC mFIs subject

to a minimum investment of $500,000. In view of the minimum level of
investment, only two NBFCs are reported to have been able to raise the foreign
investment. However, a large number of NGOs in the development -
empowerment are receiving foreign fund by way of grants. At present, over
Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a
whole range of activities including micro finance.

3. Deposit Mobilisation:-

Not for profit mFIs are barred, by the Reserve Bank of India, from
mobilising any type of savings. Mutual benefit mFIs can accept savings from
their members. Only rated NBFC mFIs rated by approved credit rating agencies
are permitted to accept deposits. The quantum of deposits that could be raised is
linked to their net owned funds.

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 4. Borrowings:-

Initially, bulk of the funds required by mFIs for onlending to their clients
were met by apex institutions like National Bank for Agriculture and Rural
Development, Small Industries Development Bank Of India, and, Rashtiya
Mahila Kosh. In order to widen the range of lending institutions to mFIs, the
Reserve Bank of India has roped in Commercial Banks and Regional Rural
Banks to extend credit facilities to mFIs since February 2000. Both public and
private banks in the commercial sector have extended sizeable loans to mFIs at
interest rate ranging from 8 to 11 per cent per annum. Banks have been given
operational freedom to prescribe their own lending norms keeping in view the
ground realities. The current policy effective from 31 January 2004, allows only
corporates registered under the Companies Act to access ECB for permitted end
use in order to enable them to become globally competitive players.

5. Interest Rates:-

The interest rates are deregulated not only for private mFIs but also for
formal baking sector. In the context of softening of interest rates in the formal
banking sector, the comparatively higher interest rate (12 to 24 per cent per
annum) charged by the mFIs has become a contentious issue. The high interest
rate collected by the mFIs from their poor clients is perceived as exploitative. It
is argued that raising interest rates too high could undermine the social and
economic impact on poor clients. Since most mFIs have lower business
volumes, their transaction costs are far higher than that of the formal banking
channels. The high cost structure of mFIs would affect their sustainability in the
long run.

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5.5 Regulation & Supervision

India has a large number of mFIs varying significantly in size, outreach

and credit delivery methodologies. Presently, there is no regulatory mechanism
in place for mFIs except for those that are registered as NBFCs. As a result,
mFIs are not required to follow standard rule and it has allowed many mFIs to
be innovative in its approach particularly in designing new products and
processes. But the flip side is that the management and governance of mFIs
generally remains weak, as there is no compulsion to adopt widely accepted
systems, procedures and standards. Because the sector is unregulated, not much
is known about their internal health. Following Committees have examined the
road map for regulation and supervision of mFIs

 Task Force (appointed by NABARD) Report on Regulatory and

Supervision Framework for mFIs, 1999. (Kindly see publications Section
for a complete report

 Working Group (constituted by Government of India) on Legal &

Regulation of mFIs, 2002

 Informal Groups (appointed by RBI) on Micro Finance which studied

issues relating to (i) Structure & Sustainabilty, ii) Funding (iii)
Regulations and (iv) Capacity Building, 2003

 Advisory Committee (appointed by RBI) on flow of credit to agriculture

and related activities from the Banking System, 2004

To address the issue of need for a differential regulatory framework, the latest
committee sought answers to the following questions and concerns facing
private mFIs in the Country:

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(i) Is non-existence of a separate differential regulatory framework a critical
bottleneck hindering the growth of the sector?

(ii) Will MFIs be sustainable in medium term? If so, will they continue to focus
on the poor?

(iii) Is access to public / member deposit the key issue for their sustainability?

(iv) Can MFIs finance loans for income generation at interest rates, which are
sustainable by the rural poor?

(v) Is it possible to evolve commonly agreed standards for MFI sector covering
performance, accounting and governance issues,

(vi) Has the sector reached a critical mass where regulation becomes important?

The Committee observed that while a few of the MFIs have reached significant
scales of outreach, the MFI sector as a whole is still in evolving phase as is
reflected in wide debates ranging around

(i) desirability of NGOs taking up financial intermediation

(ii) unproven financial and organizational sustainability of the model,
(iii) high transaction costs leading to higher rates of interest being charged
to the poor clients,
(iv) absence of commonly agreed performance, accounting and
governance standards,
(v) heavy expectations of low cost funds, including equity and the start up
costs, etc.

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 The current debate on development of a regulatory system for the MFIs
focuses on three stages. Stage one - to make the MFIs appreciate the need for
certain common performance standards, stage two - making it mandatory for the
MFIs to get registered with identified or designated institutions and stage three -
to encourage development of network of MFIs which could function as quasi
Self-Regulatory Organisations (SROs) at a later date or identifying a suitable
organisation to handle the regulatory arrangements. The Committee
recommended that while the MFIs may continue to work as wholesalers of
microCredit by entering into tie-ups with banks and apex development
institutions, more experimentation have to be done to satisfy about the
sustainability of the MFI model. Such experimentation needs to be encouraged
in areas where banks are still not meeting adequate credit demand of the rural
poor.

5.6 NABARD's Support to microFinance Institutions (mFIs)

Realizing the importance of mFIs in the delivery of financial services to

the poor and their potential for expansion of services in remote and lesser-
banked areas, NABARD has been extending technical and fund support to this
sector. Some of the concerns that necessitated NABARD to commence this
support in 1993 were: 1) the need to provide timely credit to the poor in under
banked regions and ii) to further improve the outreach of rural credit delivery
system through alternate credit delivery mechanisms.

NABARD's support is being provided to various forms of microFinance

institutions covering mFIs, second tier mF lending institutions, Grameen bank
replicators, NGO-mFIs, SHG Federations etc. NABARD provides loan funds in
the form of Revolving Fund Assistance (RFA) to NGO-mFIs on a very selective
basis. The RFA is generally provided for a period of 5 to 6 years and is

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necessarily to be used for on lending to mF clients (SHGs or individuals). In
addition, the agencies are also sanctioned, on a case-to-case basis, grant
assistance for partly meeting the salary of field level staff, infrastructure
development and operational deficits during the initial years.

Cumulatively, as at the end of June 2004, Rs 26.98 crore (Rs 269.80

million) has been sanctioned as RFA to 31 NGO-mFIs and Rs. 0.58 crore (Rs
5.8 million) has been sanctioned as grant to various NGOs. The amount
excludes Rs 3.4 million sanctioned under SHG Post Office linkage programme
in Tamilnadu.

During the year 2003-04, loan support of Rs. 84 million was sanctioned
to two agencies viz. 1) Friends of World Women Banking, India (Rs. 74
million) for on-lending to small NGOs & 2) Kalanjiam Development Financial
Services-a section 25 company promoted by DHAN Foundation (Rs 10
million) for on lending to SHGs.

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CHAPTER-6

CONCLUSION
&
SUGGESTION

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CONCLUSION

Reserve Bank of India (RBI) entrusted NABARD (National Bank for

Agriculture and Rural Development) in 1981 to look after agriculture and rural
development through all the Cooperative and other Nationalized banks of India.
NABARD will observe 25th eventful journey on 12th July 2006 for
advancement of Indian agriculture, economy and social structure.

Animal husbandry programmes with Rs.2000 crores have been approved.

Indian agriculture is dominated by a vast multitude of landless, sub marginal,
marginal and small farmers, who are at the bottom of pyramid; consisting 80%
of total cultivators having only little above one hector of land.

For this NABARD has given stress on animal resource’s productivity. From the
beginning ,NABARD has grown into a unique kind of apex hybrid organization
combining best of central and development bank practices like planning,
regulation of credit and supervision of rural financial institution like agriculture
cooperative banks(both short and long term structures),Regional Rural
Banks(RRB) etc.

It also plays a unique institution building role that was instrumental in safe
guard of many a loss making RRBs and Cooperative Banks in various parts of
the country. During 2005-06,the balance sheet of NABARD grew by 11.3
percent –from around Rs.60,000+ crore in 2004-05 toRs.67,645 crore in 2005-
06.

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SUGGESTION

Only finance or subsidy can not be sustainable to achieve result. A loan is

not an asset: it is a liability that must be reimbursed through wise investment,
and effective management. Taking out a loan therefore increases risks, albeit
against a reasonable expectation of profit. Savings on the other hand, are not a
liability; they are an asset. They enable people to withstand unexpected or even
anticipated shocks to their livelihoods, and need not be reimbursed. If, when
they are sufficient, they are applied to productive investment, and the
investment fails, the household is more likely to absorb the shock without fear
of desolution.”The poverty is never reduced by loaning people resources that
they cannot afford to repay with interest As principal agriculture development
of the country, has to come out with a clear strategy to dovetail its goal with the
five-point programme of action suggested by the National Commission on
Farmers(NCF).These are—a programme of soil health enhancement, promoting
water harvesting, conservation,equitable use by empowering gram sabhas to
function as “Pani Panchayats”;initiation of immediate credit National Bank for
Agriculture & Rural Development reforms coupled with credit and insurance
literacy with intensive coverage of crops and livestock’s for insurance coverage
with village level farm land as the unit, provision of farm credit at 4 percent
with firm support from both RBI and government of India, gender sensitiveness
in credit dispensation; bridging the growing gap between scientific know-how
and field do-how for both production and post-harvest phases of farming; crop-
livestock-fish integrated production system are ideal for small farmers since this
can also facilitate organic farming; finally, the gap between what the urban
consumer pays must be made as narrow as possible, as has been done in the
case of milk under Dr.V Kurien. Additionally, executing its advisory role to the
Planning Commission of the country. Should strive for balance measure on

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import of agricultural crops and dairy products; and enhance export of fruits and
flowers. is needed to create a conducive environment and legal framework for
the Microfinance sector to flourish in India to achieve Millenium Development
Goal.

However, each goal will need a well-defined package of technologies and

services for success at the field level. Of the eight Millennium Development
Goals, the first goal is the one whose attainment most clearly involves the
agricultural sector: The poor around the globe are disproportionately farmers
and herders, and, perversely, the hungry also most commonly find their
livelihoods through agriculture. By increasing food availability and incomes and
contributing to asset diversity and economic growth, higher
agricultural productivity and supportive pro-poor policies allow people to break
out of the poverty-hunger-malnutrition trap. As the country-level model
simulations revealed, broad based agricultural growth is the key for decreasing
poverty and increasing growth in Sub-Saharan Africa. A global assessment of
Target 2 of MDG 1 (halving child malnutrition levels) shows that the
combination of agricultural and economic growth together with larger
investments in social sectors, including health and education, can substantially
narrow the gap between the business-as-usual outcomes for 2015--24 percent of
developing-country preschool children malnourished--and the target indicator--
15 percent children malnourished--to reach 17 percent. However, the outcome
varies significantly by country and region. Latin America, West Asia and North
Africa, and China will, on average, likely get close to the target indicator by
2015, even under business-as-usual; however, the likelihood that Sub-Saharan
Africa and South Asia will come close to their respective target rates is much
smaller. The total increase in investments estimated is $161 billion in
agricultural and supporting sectors during 1995–2015. In addition to these
investments, significant policy and governance reform is required. To achieve

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faster agriculture-based growth rates, there must be in place favorable
macroeconomic and trade policies, good infrastructure, and access to credit,
land, and markets. These conditions create level playing fields and give farmers
incentives to adopt new and sustainable technologies and diversify production
into higher-value crops, actions that raise incomes and lift households out of
poverty.

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 BIBLIOGRAPHY

NABARD (Micro finance & Rural Development)-By T. Balakrishnan

www.nabard.org

www.wikipedia.com

www.scribd.com
Annual Report Statement of NABARD

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