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FINANCING AGRICULTURE

The financial needs of a farmer may be classified into three categories: i. Short-term finance, which is required for purchase of seeds, fertilizers, manures, repairs of farm machinery and implements, hiring labour etc. This is repayable within 6 to 12 months. ii. Medium-term finance for construction of wells, purchase of carts, bullocks and small machinery, development of land. This is repayable within 3 to 5 years iii. Long-term finance for effecting permanent improvements on land or purchase of land or heavy machinery. This is repayable in instalments in 5 to 10 years or more.

The financial assistance given to meet the short-term requirements is termed as a Crop Loan while the finance given to meet the medium-term or long-term financial requirements is termed as a form Loan. Direct Finance to farmers for Agricultural Purposes
1. Short-term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 6 lakhs to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank. 2. Medium and long-term loans (provided directly to farmers for financing production and development needs)

a)

Purchase of agricultural implements and machinery

b)
c) d) e) f) g) h)

Development of irrigation potential through
Reclamation and Land Development Schemes Construction of farm buildings and structures, etc. Construction and running of storage facilities Payment of irrigation charges, etc. Production and processing of hybrid seeds for crops Other types of direct finance to farmers

cattle feed.40 lakh granted for financing distribution of inputs for the allied activities such as. Loans to farmers through PACS. seeds. 2. 3. etc. Deposits held by the banks in Rural Infrastructure Development Fund maintained with NABARD 6. FSS and LAMPS 5. Loans up to Rs. Subscription to bonds issued by Rural Electrification Corporation exclusively for financing pump set energisation programme in rural and semi-urban areas and also for financing system improvement programme . the distribution of fertilizers. etc. poultry feed.Indirect Finance to Agriculture 1. 4. Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energizing their wells. Credit for financing pesticides.

. provided a certificate from the State Co. which represent indirect advances to agriculture. iii. i. operative bank in favour of such loans is produced Advances to State sponsored Corporations for onward lending to weaker sections ii. Loans to co-operative banks of producers (e. Lending to Non Banking Financial Companies for on lending to agriculture. Financing the farmers indirectly through the cooperative system. Investment by banks in securitized assets.g.7. Aarey Milk Colony Co-operative Bank. iv. Loans to farmers for purchase of shares in Cooperative Sugar Mills and Sugar Mills set up as Joint Stock Companies and other agro-based processing units. consisting of licensed cattle owners). v.

RBI and other national level institutions concerned with policy formulation. It serves as an apex refinancing agency for the institutions providing investment and production credit for promoting the various development activities. in the rural areas.The functions of NABARD can be summarized as follows: 1. . It undertakes monitoring and evaluation of projects refinanced by it. training of personnel etc. and 4. It takes measures towards institution building for improving absorptive capacity of the credit delivery system. 2. including monitoring. formulation of rehabilitation schemes. It co-ordinate the rural financing activities of all the institutions engaged in the development work at the field level and maintain liaison with Government of India. restructuring of credit institutions. 3. State Governments.

There are mainly two crop seasons: (a) Rabi (extends roughly from October to April) (b) Kharif (extends roughly from May to September) ii. In order to avoid misutilisation of funds by the borrower. The loans should be granted in the form of a fixed amount rather than sanctioning cash credit or overdraft limits iv. the total amount sanctioned to farmers should be disbursed in accordance with their needs for various agricultural operations. The bank should make these advances only to agriculturists preferably owning land after satisfying itself regarding their character. . capacity and capital. iii.Crop Loans i.

The borrower should be asked to get the produce sold through approved marketing societies from where direct payment may be received by the bank. viii. The bank should get standing crops hypothecated in its favour. The bank may give the borrower a notice preferably one week before harvesting reminding him of the repayment of the loan. The credit should be disbursed by the banks by making direct payments to the suppliers or inputs. If possible it may also obtain equitable mortgage of land . ix. vii. The banks should obtain appropriate insurance cover for the crop loan as provided by the General Insurance Corporation of India. The bank may introduce the scheme of “agri cards” which entitles the farmers to buy seeds.v. . vi.

The bank should not generally advance more than 75% of the value of the asset. character . Economic feasibility of the project should be enquired into. A declaration to that effect should be obtained from the borrower. iii. The borrower should not have obtained credit for the same purpose from some other institution. v. iv. The project should generate necessary cash to pay interest and repay the bank‟s loan over a reasonable period. The usual study of three „Cs‟. ii.Term Loans i. The bank should ask for the invoice or other document certifying the value of the asset to be purchased by the borrower. should be undertaken. capacity and capital of the borrower. . The balance should be arranged by the borrower himself.

. vii. The bank should get the asset hypothecated or mortgaged in its favour ix. In case of machinery. It should obtain the authority of the buyer for that purpose and keep with it the receipt given by the seller or supplier. it should be checked that it is a new one and the machine and its supplier are reliable.vi. it should be checked that it is a new one and the machine and its supplier are reliable. viii. The repayment should be so arranged that money is recovered over the life-span of the asset. . In case of land etc. The bank should make direct payment to the seller or supplier of the asset.

The bank should obtain the following documents from the borrower: a) A demand promissory note for the amount lent b) c) A hypothecation or a mortgage deed regarding the asset purchased The documents of title regarding land etc.x. of the borrower as security for the loan taken by him A declaration from the borrower that he has not borrowed from any other institution and will not borrow till he repays the bank‟s loan d) .

ADVISORY COMMITTEE ON FLOW OF CREDIT AGRICULTURE AND RELATED ACTIVITIES (2004) Banks TO may waive margin/security. wheat. . requirements for agricultural loans up to Rs. millets.000 and in the case of agri-business and agri-clinics for loans up to Rs. rice.5 lakh.50. oilseeds and pulses.COMPREHENSIVE CROP INSURANCE SCHEME Crop insurance (CCIS) covers major crops viz.

including direct agricultural term loans. Micro-finance institutions (MFIs) would not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank. may be modified with a view to aligning the repayment dates with the harvesting crops. which are designed to store agricultural produce/ products. Non-performing asset (NPA) norms for all direct agricultural advances.2. . would be treated as indirect agricultural finance under the priority sector. 3. 4. Investment by banks in securitized assets representing direct (indirect) lending to agriculture may be treated as their direct (indirect) lending to agriculture under the priority sector Loans to storage units. irrespective of their location. 5. including cold storage units.

Banks may consider using low cost ATMs running on diesel generator sets for cash dispensation in rural areas. etc.6.. . 9. and take steps to rectify the situation. in implementing the recommendations of the R. 8. The restrictive provisions of Service Area Approach may be dispensed with for lendings outside Government sponsored schemes. delegation of more powers to the branch managers. The controlling authorities of banks may review the lapses. 7. Banks may provide a separate flexible revolving credit limit to small borrowers of production and investment loans for meeting temporary shortfalls in family cash flows and also to evolve suitable credit products/packages. if any.V Gupta Committee relating to simplification of documentation.

Financial Small Scale Industries Small Scale and Ancillary Units Small scale industrial units are those engaged in the manufacture.5 crore. Tiny Enterprises The status of „Tiny Enterprises‟ may be given to all small scale units whose investment in plant and machinery is up to Rs. irrespective of the location of the unit.25 lakh. processing or preservation of goods and whose investment in plant and machinery does not exceed Rs. .

Fixed capital needs. excluding land and building will be given benefits of small scale sector. and goods in process . Working capital needs. modernization and expansion of units concerned. These include credit needs for meeting the expenses incurred on account of installation of plant and machinery. proper maintenance of machinery against depreciation and obsolescence and also renovation. inventories of goods. ii.Small scale Service and Business Enterprises Industry related service and business enterprises with investment up to Rs. acquisition of land and buildings.10 lakh in fixed assets. These include credit needs for purchasing and stocking of raw materials. Credit needs of small-scale industrial units i.

District Industries Centres In order to provide all sorts of services and facilities to small entrepreneurs at one place. Provision of raw materials. Preparation of feasibility reports iii. i. credit facilities and inputs v. Identification of suitable schemes ii. Marketing of the products . Arrangements for supply of machinery and equipments iv. the Government have set up District Industries Centres at district levels.

Economic Investigation ii. Marketing vii. Machinery and Equipment iii. Credit Facilities vi.Each District Industries Centre is headed by a General Manager. He is assisted by a team of specialists in the following areas: i. Raw Materials v. Research Extension and Training iv.Cottage Industries .

. A cluster based approach to lending may be more beneficial for (i) dealing with well-defined and recognized groups (ii) availability of appropriate information for risk assessment and (iii) monitoring by the lending institutions. Cross sell and Contain risk.Working group on flow of credit to small –scale industries sector (2004) A full-service approach to cater to the diverse needs of the SME sector may be achieved through extending banking services to recognized SME clusters by adopting a 4-C approach Viz. Cost control. Customer focus. .

2. New instruments need to be explored for promoting rural industry and improve the flow of credit to rural artisans. 4. Corporate-linked SME cluster models need to be actively promoted by banks and FIs Bnks linked to large corporate houses can play a catalytic role in promoting this model. . Successful micro credit management models should be made use of by SIDBI and Lead Banks with a view to encourage the adoption of their work practices in other States. would also enhance competitiveness of the corporates as well as the SME participants. ancillary units. 3. Financing of SMEs linked to large corporates. etc. dealers. covering suppliers. industries and rural entrepreneurs.

. 6.5. SIDBI may promote a NBFC exclusively for undertaking venture and other development financing activities for SMEs. A uniform target in priority sector lending at 40 per cent of net bank credit for all domestic and foreign banks has been recommended with a view to providing a level playing field for all banks. 7. Higher working capital limits need to be taken into account while extending credit to such units located in hilly terrain and frequent flood areas with poor transportation system.

Seasoning sub limits to ebe adjusted after harvesting/mark eting. Finance against storage receipts -50% of price of produce Max.Agricultural Finance Schemes.5 lakh. Rs. For consumption25% of gross income of farmer.Composite Crop Cash Credit Scheme Eligible Borrowers Individual farmers/registere d tenants/share croppers with recorded right/firms/comp any/coop. Repayment Revolving limit. If loan against storage receiptsseasonal sublimit to be adjusted.societies. Quantum of Loan Scale of finance. Activity/Scheme 1. .

registered leased lands.Land Farmers owning As per cost of the scheme Develop land or NABARD’s unit cost may be ment cultivating taken as guiding factor.Kisan Credit Card Eligible Borrowers Individual farmers/register ed tenants/share croppers with recorded right/firms/com pany/co-op. Quantum of Loan Requirement for entire production to be assessed on the basis of scale of finance for crops and working capital required for allied activites less margin as per norms Repayment The sale proceeds should be routed through the cash credit account. societies. Within 9-15 years in half yearly/ annual installments. Suitable moratorium to be .Activity/ Scheme 2. 3.

Margin for new 15-25%. Deepening of well 5 years. repairs-3. other machinery-35 yrs. 5. State irrigation Corporations/Bodies offering guarantee of State Govt. Pump sets 9 years. second hand tractor -4 yrs.Activity/Sc Eligible Borrowers heme Quantum of Loan Repayment 4. co-operative societies. transport New tractor-9 yrs.Minor irrigation Individual farmers. ZM can reduce it to 5 & 3 acres respectively.Farm Farmer with own Mechanisa land or registered tion leased land (a) 8 acres of perennially irrigated land for purchase of transaction/purchas e of power tillers respectively. Second hand tractor unit33. new power tiller-7 yrs. Bore well 11-15 years. As per cost of the scheme NABARD’s unit cost may be taken as guiding factor.33% Repairs/renovat ion of tractor unit. . group of farmers. Sprinkler/ Drip Irrigation 10-15 years. As per cost of the tractor/power tiller. Dug wells 11-15 years.5 yrs.

Labourers/ firms/Cos.Sericulture Farmers/Tribals/Land Project cost less labourers margin Term loan 5-7 years with 15-18 months moratorium cash .Sheep/Goat Individual Rearing farmers/labourers 9.Piggery Farmers/tribals/Ag./Co-op societies.Poultry Development ----Do------Do--NABARD’s unit cost/project cost margin ----Do--5 years 4-5 years 8. society/state corporation etc. ---Do--- Quantum of Loan Unit Cost/Project Cost Repayment 5-6 yrs in monthly instalments. 7. Dairy Development Eligible Borrowers Farmers/agriculture labour/individuals/fir ms/companies dairy co-op. 10.Activity/ Scheme 6.

/ Co-op. margin Farmers Unit cost of NABARD 13. Rs.Fishery (Pisiculture) 12. Cold Storage 15.1000/- Within reasonable time depending on purpose. 7years 4-5 years Individuals/firm/Co Project cost -op. Co-op. . Draught animal & cart Eligible Borrowers Quantum of Loan Repayment 3-5 years-max.5 lakh Project Cost Margin 6-12 months 4-7 years Individuals/farmers Card limits/artisans margin. For consumption max. Cold Loan Scheme Individuals/firms /Cos. societies 50% of price of the produce Max Rs. Storage Receipt society approved by Bank 14.Against Farmers.Activity/Scheme 11.

Selection of Optimum size of Tractor Estimated yearly usage.Farm Mechanisation: i) The proponent should be a farmer having owned opr registered leased land ii) For a tractor loan. iii) For purchasing power tiller the farmer should have a minimum of 5 acres of perennial irrigated land. . the farmer should have a minimum 8 acres perennially irrigated land. the land holding should be more at the rate of one acre perennially irrigated land for every 2.0 to 2.5 hp. iv) For purchase of tractor with more than 25 hp.

005 d -d = density of tractors (No.5 for long duration crops -c = 0. per 1000 acre.) .(1+I) AT = -------A A R C ---K + (1000-Ar(1+I) --------------a = Size of the farm (acres) = use of tractors per acre I = extent of irrigation -a = 1 for short duration crops -1.70 -1 + 0.

Break-even hours: O & M Costs Variable Fuel Lubrication Repairs Replacement Fixed Salaries Taxes and Insurance Depreciation Interest Garage Rent .

. 50. transport vehicle Margin 25% (short-term advance).000/. 50.000/.Nil Margin Above Rs.15% to 25% Margin Purchase of second hand tractor unit/ transport vehicles Margin 33% Finance for repair /renovation of tractor unit.BEH = O & M Costs/ Custom Rate Quantum of Finance /Margin For purchase of new tractor unit or transport vehicle Up to Rs.

Issue of Cards: The farmers under the scheme will be issued a credit card-cum passbook incorporating the name.Repayment: New tractor New power tiller Second hand tractor Other machinery Repairs/renovation KISAN CREDIT CARD. address. Purpose: Short-term credit for crop production. to facilitate recording of the transactions on an on-going basis. allied activities and other non-farm activities to farmers. Maximum Maximum Maximum Maximum Maximum 9 7 4 3 3 years years years to 5 years to 5 years. borrowing limit/sub-limits. validity period. etc. particulars of land holding. .

Margin and Security: Creation of mortgage of land has been waived in respect of Kisan Credit Card Holders with satisfactory repayment for atleast one year and with aggregate short-term loan (for crop production. iii) No drawal in the account should remain outstanding for more than 12 months in case of normal crops and 18 months in case of sugarcane and banana crops.000 . The farmer should be allowed for any number of drawals and repayment within the limit. allied activities and other non-farm activities) limit up to and inclusive of Rs.Type of Facility: i) Revolving Cash Credit-Annual Review. ii) The aggregate of credits into the account during the 12 months’ period should atleast be equal to the maximum outstanding in the account. 50.

Insurance: a) Crop insurance for the notified crops in the notified areas. b) Though drawals in the account are expected as per seasonality of the crops/sub-limits.000/: Rs. yet.25. some flexibility may be allowed to enable the farmer to purchase inputs at convenient time when availability/prices are favourable. b) Personal accident insurance to cardholders. the beneficiary should present the passbook for recording the transactions.000/- .Disbursement: a) At the time of withdrawal and deposit. 50. The risk coverage /sum assured under the scheme is as under: Death/ Permanent disability Partial disability : Rs.

b) Similarly. .Annual premium of Rs 15/-per KCC holder is to paid by the bank to the designated insurance company. post-disbursement inspection should also be carried out to ascertain end use of funds. Supervision and follow-up a) Pre-sanction inspections should be carried out in all cases.