Académique Documents
Professionnel Documents
Culture Documents
Submitted By
FARHIN ANSARI
Roll no- 03
1
PROJECT ON
Bachelor of Commerce-
Banking & Insurance
Semester V
Submitted
In Partial Fulfillment of the requirements
For the award of the Degree of Bachelor of
Commerce- Banking & Insurance
By
FARHIN ANSARI
Roll no.03
2
SMT. M.M.K. COLLEGE OF COMMERCE AND ECONOMICS
Linking Road, Bandra (w), Mumbai -400050
CERTIFICATE
This is to certify that Miss. FARHIN ANSARI of B.Com -
Banking & Insurance Semester V (2008-2009) has successfully
completed the project on ROLE OF PUBLIC SECTOR BANKS
IN RURAL BANKING under the guidance of A.C. VANJANI.
Project guide
Principal
Course Co-ordinator:
Internal Examiner:
External Examiner:
3
Declaration
I FARHIN ANSARI student of B.Com – Banking & Insurance
Semester V (2008-2009) hereby declare that I have completed the
Project on ROLE OF PUBLIC SECTOR BANKS IN RURAL
BANKING
4
ACKNOWLEDGEMENT
I would like to thank a lot of people without whom this project would not
have been complete. First DR A. C. VANJANI he was of utmost help in
guiding me structures this project. He helped me throughout and was always
present to help me whenever I had a doubt.
Expert opinion is always required to complete the project so it was Mr.
DARIRA who has the experience of working in PUNJAB NATIONAL
BANK, explained me the concept and helped me structure the project. It
wouldn’t have been easy for me to tackle such a topic without his practical
guidance
A research can never be over without access to a good library and in this
case I was blessed as our college library, is very well stocked with books.
And the lending policy made life a lot easier. Also not to forget the library of
INDIAN MERCHANT CHAMBER which made it easier to get through to
matter that helped me understand concepts well
And not to forget the unconditional support provided by my parents and
friends.
5
“ROLE OF
PUBLIC SECTOR
BANKS IN
RURAL
BANKING”
6
INDEX
SR. NO CONTENTS PAGE NO.
1 EXCUTIVE SUMMARY 8
2 INTRODUCTION 10
3 STRUCTURE OF RURAL BANKING 12
4 HISTORICAL PERSPECTIVE 13
5 NEED FOR RURAL BANKING 20
7
Due to rapid growth and development of rural areas of the country
both the cooperatives and commercial banks could not meet the
credit needs of the weaker section of the community. After the
introduction of modern technology in agriculture the small marginal
INTODUCTION
EVEN today, a large section of the population of India lives in villages
These people carry out several economic activities like production,
consumption, saving, investment, etc. All these activities are prone to
fluctuations and it is quite likely that there are fluctuations in the level
of income and consumption among many rural people. Therefore,
there is a need for augmenting finances through ways other than the
known and expected incomes of the rural populations. Hence the role
of credit sources is crucial for rural development.
farmers and rural artisans could not crawl out of the
stranglehold moneylenders, therefore came the need for
rural banks who would provide the required credit and also
help in the necessary rural development in the country .This
topic also deals with the PSB as to how they came to rescue
agriculture in the wake of Green Revolution .Their current
role and contribution in the rural banking system and how
successful they have been in helping the rural population so
far
8
INTRODUCTION
R
ural people have to borrow for a variety of needs. They
need credit to meet short-term requirements of working
capital and for long-term investment in agriculture and other
income-bearing activities. Agricultural and non-agricultural activities in
rural areas typically are seasonal, and households need credit to
smoothen out seasonal fluctuations in earnings and expenditure. In
the Indian context, another important purpose of borrowing is to meet
expenses on a variety of social obligations and rituals. Similarly, there
is tremendous inequality in the distribution of income too. There are a
few individuals who have very high incomes and there are people
with low incomes, such as the labourers and marginal farmers. Thus,
different people or sections of the population have different credit
needs.
9
If these credit needs of the poor are to be met, rural households need
access to credit institutions that provide them a range of financial
services, provide credit at reasonable rates of interest and provide
loans that are unencumbered by extra-economic provisions and
obligations. To satisfy these needs in a timely fashion, the state has
taken policy initiatives to provide institutional credit.
Thus, development of the rural areas has been the major focus of
growth in since long and India is no exception to this. However, owing
to varied development approaches the aim of achieving a speedier
growth in rural sector has been beset with many a bottleneck. Rural
development is basically a micro approach, which has to be entwined
with macro objective depending on the micro perspectives. This study
dwells on a micro region, how different rural development
programmes are being financed by the commercial and cooperative
banks, by considering region-wise and sector-wise total deposits,
advances, recovery and loan outstanding. Besides, the macro
10
analysis of commercial banks provides their various levels of
performance in terms of several indicators. While the contribution of
private banks and foreign banks has been showing a slow growth in
this liberalization era, the public sector banks dominate the current
banking scenario in the country. However, their performance is
subject to fluctuations as and when policy changes are being made
and a steady growth pattern in term is yet to be realized in full.
STRUCTURE OF RURAL
BANKING
A
bout 75% of the Indian population lives in rural
areas and about 80% of this population is
dependent on agriculture for its livelihood.
Agriculture accounts for about 37% of the national income.
The development of the rural areas and of agriculture and its
allied activities thus becomes vital for the rapid development
of the economy as a whole.
11
operation in the field of credit for agriculture and other economic
activity in rural areas. Public policy was aimed not only at meeting
rural credit needs but also at pushing out the informal sector and the
exploitation to which it subjected borrowers. Rural credit policy in
India envisaged the provision of a range of credit services, including
long-term and short-term credit and large-scale and small-scale loans
to rural households.
HISTORICAL PERSPECTIVE
12
T
he Reserve Bank of India has a mandate to be closely
involved in matters relating to rural credit and banking by
virtue of the provisions of Section 54 of the RBI Act. The
major initiative in pursuance of this mandate was taken with
sponsoring of All-India Rural Credit Survey in 1951-52. This
committee had found that cultivators depended on private
moneylenders for about 94% of their credit needs. The All India Rural
Credit Survey Committee (1954) proposed an integrated scheme for
rural credit. It suggested that the RBI should take steps to strengthen
the cooperative movement. An important step towards gearing the
banking system for rural credit was the formation of the State Bank of
India by amalgamating the Imperial Bank of India with other state-
associated banks. It was felt that with the assistance of the RBI, the
State Bank would play a crucial role in providing rural credit.
13
liquidity, particularly among rich farmers, in the countryside. The
declared objectives of the new policy with respect to rural banking-
what came to be known as “social and development banking” – were
(i) to provide banking services in previously unbanked or under-
banked rural areas;
(ii) to provide substantial credit to specific activities, including
agriculture and cottage industries; and
(iii) to provide credit to certain disadvantaged groups such as,
for example, Dalit and Scheduled Tribe households.
(iv) the agricultural sector be included in the category of priority
sectors
14
The Reserve Bank of India (RBI) issued specific directives with
respect to social and development banking. These included setting
targets for the expansion of rural branches, imposing ceilings on
interest rates, and setting guidelines for the sectoral allocation of
credit. Rural credit was an important component of the ‘green
revolution’ package; the first post-nationalization phase of expansion
in rural banking saw a substantial growth in credit advances for
agriculture. Specifically, a target of 40 per cent of advances for the
“priority sectors,” namely agriculture and allied activities, and small-
scale and cottage industries, was set for commercial banks.
Advances to the countryside increased substantially, although they
were, as was the green revolution itself, biased in respect of regions,
crops and classes.
The Reserve Bank hived off a part of its role in agricultural credit to a
separate national level institution, viz, Agriculture Refinance and
Development Corporation (ARDC) in 1975. Soon thereafter, the
Government established by ordinance and then legislation a new
network of rural financial institutions called the Regional Rural Banks
(RRBs), which were promoted by the Government of India, State
governments and commercial banks. These were created on the
basis of recommendations by a working group on commercial credit,
also called the Narasimham Committee. Subsequently, the ARDC
was converted into NABARD.
15
Development Fund set up by NABARD. NABARD in turn provides
these funds to State Governments and state owned corporations to
enable them to complete various types of rural infrastructure projects.
The second phase, which began in the late 1970s and early 1980s,
was a period when two strategies for employment generation were
envisaged, namely wage- employment through state-sponsored rural
employment schemes and self-employment generation by means of
loans-cum-subsidy schemes targeted at the rural poor. Thus began a
period of directed credit, during which credit was directed towards
“the weaker sections.” The most important new scheme of this phase
was, of course, the Integrated Rural Development Programme or
IRDP, a scheme for the creation of productive income-bearing assets
among the poor through the allocation of subsidized credit. The IRDP
was initiated in 1978-79 as a pilot project and extended to all rural
blocks of the country in 1980.
16
The second phase also involved an expansion and consolidation of
the institutional infrastructure of rural banking. After bank
nationalization, there was “an unprecedented growth of commercial
banking in terms of both geographical spread and functional reach”.
The Reserve Bank of India had advised the public sector banks to
prepare Special Agricultural Credit Plans (SACP) in 1994-95. The
SACP mechanism was also made applicable to the private sector
17
banks in 2005-06. The disbursements by the public sector banks to
agriculture under SACP have increased from Rs 25,654 crores in
2000-01 to Rs 1, 22,215 crores in 2006-07.
More recently, since 2004, vigorous efforts have been made to more
than double the credit flow to agriculture. Emphasis has been laid on
sound credit culture, effective credit delivery and appropriate credit
pricing. New instruments for financial inclusion such as General
Credit Cards and no-frills accounts were initiated. Micro finance
programme was intensified. Use of technology for rural banking is
being encouraged. Special Area Plans for banking in several states
have been formulated to suit the local conditions. In terms of
institutional development, consolidation of the RRBs, revamping of
the urban co-operative banks as per the vision document, revival of
rural co-operative credit structure, a plan for restructuring of long-term
lending institutions for agriculture, and a revisit to the prescriptions
relating to the priority sector lending are underway. While a Working
Group to review the legislations of various States in regard to money
lending has been formed, another Working Group is looking into the
relief measures for the distressed farmers. Above all, as per the
Government of India announcement in 2005, it has been decided to
subsidize the commercial banks and NABARD to enable provision of
short-term credit at 7% interest rate to the major segment of the
farmers. In brief, there have been vigorous and determined efforts
towards expansion of rural credit, especially through rural banking.
18
Keeping the importance of agricultural credit in mind the Tenth Five
Year Plan envisaged a substantial increase in credit flow to
agriculture from a level of Rs 2,29,956 crores achieved during the
Ninth Five Plan to a level of Rs 7,36,570 crores during the Tenth Five
Year Plan.
I
n the period before the nationalization of banks, key sectors of
the economy including agriculture remained thoroughly neglected
in terms of availability of institutional credit. Whereas the
industrial sector at that time accounted for about 15 per cent of
national output, it appropriated two-thirds of commercial bank credit,
whereas the agricultural sector contributing about half of national
output was almost completely neglected by the commercial banks.
The rural population of India has been suffering from a great deal of
indebtedness and is subject to exploitation in the credit market due to
the high interest rates and lack of convenient access to credit. Rural
19
household need credit for investing in agriculture and smoothening
out of seasonal fluctuations in earnings .Rural household need
access to financial institution that can provide them with credit at a
lower rates and at reasonable terms than the traditional
moneylenders and there by help them avoid debt traps that are
common in rural India
But after the adoption of the New Economic Policy in 1991, the
Indian economy is becoming more and more mature with the
passage of time on account of structural changes undertaken in
different sectors and areas. The GDP growth rate has been much
higher and it has averaged over eight per cent during the past three
years. While there has been acceleration in the industrial sector,
especially manufacturing and services sector, and the country is
graduating from a low-income regime to a middle income regime,
there has been deceleration in agricultural growth, which reflects as a
broad-based slowdown in the productivity growth.
In the Draft Approach Paper to the Eleventh Five Year Plan 2007 -
2012, the Planning Commission has emphasized the need for faster
20
and greater inclusive growth during the Eleventh Plan period. The
banking sector, as the most important financial intermediary to
mobilize the savings leading to increased investments, facilitating
growth would, thus, play the most crucial role in attaining the
stipulated economic objectives through expansion of the coverage of
banking services by reaching the vast unbanked and underbanked
population of the country.
21
microfinance institutions, while banks are exploring new ways to use
technology to lower the cost of delivering rural banking services.
P
ublic sector banks continue to have about 75% share in the
banking system. Despite the rapid growth of the new private
sector banks, the share of public sector banks will continue
to remain high. Hence the continued health of Indian banking system
will depend on the performance of public sector banks.
22
About half the branches of public sector banks (PSBs) are in the rural
sector. These are often regarded as part of the rural community.
Rural branches of PSBs have played a significant role in the past
three decades. They came to the rescue of the agricultural sector in
the wake of the Green Revolution, as the cooperative banks, on
which the agricultural sector had been mainly dependent in the pre-
nationalization period, were proving unequal to the job of meeting
higher credit requirements. Emerging as the focal points for catering
to the localized needs of the rural communities, they helped to
significantly reduce the role of professional moneylenders and
brought about a qualitative transformation in the savings and
investments activities in the rural sector.
23
CHALLENGES AFFECTING
PERFORMANCE
Banking System :
Historically, there have been four major problems with respect to the
supply of credit to the Indian countryside.
The supply of formal sector credit to the countryside as a whole
has been inadequate.
Rural credit markets in India themselves have been very
imperfect and fragmented.
The distribution of formal sector credit has been unequal,
particularly with respect to region and class, caste and gender
in the countryside. Formal sector credit needs specially to reach
backward areas, income-poor households, people of the
oppressed castes and tribes, and women.
The major source of credit to rural households, particularly
income-poor working households, has been the informal sector.
The huge presence of informal credit has helped moneylenders
charge high rates of interest with complicated terms and
conditions, sometimes accompanied by an element of cruelty.
24
At the time of independence, the rural credit scenario was rife with
these problems.
The deposits collected by banks from rural areas were not totally
deployed there. This indicates that institutional sources of credit such
as banks and co-operative societies are unable to meet the farmers’
needs.
25
branches. At one time, rural India accounted for 57 per cent of total
bank branches in the country. This share has now come down to 47
per cent. What is more disappointing, they generate only 14 per cent
of deposits and 12 per cent of advances.
26
based, this increases the total cost of transactions because of the
cost of idle cash, and the cost of handling infrastructure, that is
branch setup, manpower and the cost of cash security.
27
employees, and disproportionate work load on existing employees,
plummeting their morale, and deteriorating the quality of services
offered.
Further, as the priority sector loans have been of small amounts, the
public sector banks not been able to adequately monitor the
28
distribution, follow-up and recovery of loans, resulting in squeezing of
profitability and increase in non-performing assets.
The difficulty is that, faced with the demands made on them by the
advocates of liberalization and the effects of competition from the
private sector banks, banks in the public sector are also being forced
to change. They are trying to trim operating expenses, by reducing
the wage bill by reducing employment through retrenchment under
the VRS scheme and computerization. They are also seeking to
reduce costs by limiting branch expansion and reducing the number
of bank branches.
The latter, which affects the rural areas first, reduces access to credit
in rural areas that were well-served by the post-nationalization branch
29
expansion drive, and worsens the tendency towards reduced
provision of credit to the agricultural sector.
The big challenge in promoting rural banking is to keep the costs low
in view of the fact that while the number of transactions in such areas
may be high, they are mostly small-value transactions. However,
technology can play an important role in keeping the costs of such
transactions low. Unfortunately, public sector banks (PSBs), which
account for 70 per cent of assets, have been slow in making use of
modern technology to bring down transaction costs.
While public sector banks have the potential, with their spread and
reach, to enable financial inclusion, they also have to face difficult
challenges in human resource development. Public sector banks
need to invest significantly in skill enhancement at all levels, for
delivering new service modes in the face of greater competition. They
will also face new recruitment challenges in the face of adverse
compensation structures in comparison with the private sector banks.
30
FUTURE OF PUBLIC SECTOR
BANKS IN RURAL BANKING
SYSTEM
T
he future of banking in rural areas depends on several
factors, namely, how the current concerns are addressed
taking into account the dynamics of transformation in rural
economies, the new realities in credit markets, the linkages between
formal and informal markets, and the impact of financial as well as
technological progress on the systems of financial intermediation.
Consequently, public policy will have to address several issues to
ensure a sound and efficient banking system in the service of rural
areas.
The move towards inclusive growth is a big challenge for the financial
system of the country, including Public sector banks. They need to
adopt an innovative, customer-friendly approach to increase their
effective reach so that the share of organized finance increases. A
participatory and partnership-based model for financial inclusion,
coupled with community-linked financial initiatives is the need of the
hour.
31
relationship banking, dependency on IT systems and competitive
pricing would be the driving forces. Public sector banks needs to
move to high-tech banking. The Internet would be the engine of the
banking revolution in the decades to come and e-commerce would be
its fuel. Therefore, the key to survival of banks in future will be the
retention of customer loyalty by providing value-added services
tailored to their needs.
is used to help the farmer improve his productivity. The Bank’s staff at
32
of savings by the agriculturists in banks. Their outlook needs to be
changed with the help of banking staff and utilizing the services of the
mass media. Villagers must be convinced that they themselves would
gain in the long run if they would save and invest.
The public sector banks must also provide credit to the agriculturists
on the basis of ‘joint guarantee’ given by the village panchayat or by a
few well-known farmers of the village. The acceptance of such a
basis will greatly help the farmers, particularly small farmers, in
33
securing loans. This will also result in more purposeful advent of the
commercial banks in the rural sector and will bring them into
relationship with cooperative institutions. It will also ensure a fair
understanding between them and encourage commercial banks to
operate on the principle of collective service for a collective need.
There are many non-banking entities that are operating in rural India
and have a high reach, low cost and higher flexibility in terms of
34
operations, for example- Non Banking Finance Companies, Non
Government Organizations (NGO), agricultural cooperatives and Self-
Help Groups (SHGs). Apart from these, there are nearly 1,39,000
post offices in rural areas which mobilize small savings to the tune of
thousands of crores. By collaborating with such partners for providing
banking services in unbanked locations, the cost of services can be
brought down significantly.
Public sector banks can find a new productive and useful role if the
institutional configuration for the channeling of savings and
investment activities in the rural sector is reformed and redesigned.
They can productively operate as a source of refinance for rural
institutions while acting as a conduit for passing on the benefits of
different kinds of financial services appropriate for the rural sector.
Further, the public sector banks could provide a catalytic role for
extending modernizing influences and systems. In the performance of
this newly-carried responsibility, they would not need to carry the
heavy cost burden of maintaining an extensive network of branches.
35
Finally, it needs to be remembered that stray attempts would not
solve the problem of agricultural credit. The credit system as a whole
—government, commercial and cooperative—must be so knit
together that it does not suffer either from a gap or an overlap. It is
only then that the real fruits of credit facilities will be enjoyed by the
country at large in the form of agricultural development which still is
the key to India’s prosperity in future.
RECENT DEVELOPMENTS
36
One of the major challenges of the 11 th Plan will be to reverse the
deceleration in agricultural growth from 3.2% observed between 1980
and 1996-97 to a trend average of around 2.0% subsequently.
To reverse this trend, corrective policies must not only focus on the
small and marginal farmers who continue to deserve special
attention, but also on middle and large farmers who suffer from
productivity stagnation arising from a variety of constraints.
On financing development
The 11th Plan must ensure that our policies are sufficiently flexible to
support the development of micro finance. Interest rates in the micro
finance sector have to be significantly higher than in the banking
sector reflecting the much higher cost of doing business. It is
important to remember that most micro-finance institutions charge
rates which are much lower than rates charged by money lenders.
37
There is evidence that farm debt is increasing much faster than farm
Incomes and the larger issue of the overhanging debt stock, as
distinct from credit flow, have not even been on the agenda except
of a few State governments. Admittedly, there are limits to the extent
that banks can be expected to play a purely social role in today’s
more competitive environment. However, too conservative an
approach on settling debt that has turned bad, due to contingencies
of poor weather or prices, is not even prudential banking if this serves
only to show bank balance sheets to be better than they are, and
prevents profitable new lending. There are several suggestions,
ranging from a Stabilization Fund to be run by the Centre for
automatic write-off under some specified conditions, to the setting up
by States of standing professional Debt Commissions to examine
individual debt (including to non-institutional sources) on a case-by-
case basis for one time settlement
The 11th Plan will examine in detail the impediments which now stand
in the way of social and developmental banking and suggest
innovations that can improve access and speed up one-time
settlements while maintaining credit discipline and financial prudence.
38
insurance in a manner that is financially viable without excessive
subsidy.
The 11th Plan gives top priority to redressing the weaknesses in the
agricultural sector. Growth in the agricultural sector has been less
than 2% per annum since the middle of the 1990s. With about half of
the rural population still dependent on it for most of their income
inclusive growth cannot be expected if agriculture is not revitalized. It
is important to recognize that the problem is not distributional, with
the better off farmers doing well while the small farmers and the
landless face hardships. Though the weaker groups clearly face more
difficulties and need special attention, agriculture as a whole is in
crisis. Therefore, there should be focus on achieving higher
productivity and incomes for all farmers in both crop and non-crop
agriculture.
39
farming systems and dry land farming practices, improved extension
work to close the knowledge deficit affecting farm productivity; better
seeds and inputs; enhanced facilities for credit, including revamping
the co-operative credit system; initiatives to support agricultural
diversification with effective marketing solutions; and completing the
unfinished agenda of land reforms etc.
LATEST INITIATIVES BY
REGULATORY AUTHORITIES
D
uring the Ninth Plan period, the total amount of
agriculture/rural credit was to the extent of Rs. 229956
crore. This is sought to be increased to Rs. 736570 crore.
For this to happen, the Government has directed that:
40
Commercial Banks, cooperative banks and RRBs should
double the credit to agriculture in the next three years.
Periodic review and enhancement of credit delivery in rural
areas should be undertaken.
Stepping up of rural infrastructure for long term sustainable
growth should be made.
Innovative way of providing finance e.g. micro-finance, Kisan
Credit Card should be evolved on an ongoing basis.
Self-Helf-Group (SHG) micro-finance programme through
NABARD should be encouraged.
Banks should prepare and submit Special Agricultural Credit
Plans (SACPS) every year with the focus on financing Small
and Marginal Farmers.
Banks should waive margin/ security requirements as under:
For agricultural loans up to Rs.50,000/-
For loans for agribusiness and agriclinic up to Rs.5/-
lakhs.
Allowing Private Banks in rural areas to service farm and non-
farm sector.
Besides the above specific policy directions in place, RBI had since
constituted two expert groups for suggestions for increasing flow of
credit to agriculture, rural finance, microfinance and other means of
rural development.
The group led by Mr. YSP Thorat submitted its report in June 2005
highlighting, inter alia–
41
For focus on entire supply chain management of agricultural
products, management of agricultural infrastructure.
To lay emphasis on computerization of land records, legal
support for recovery, improving extension network and
developing marketing banks.
Water management policies and investment water conservation
be appropriately designed.
Short-term credit is integrated with term credit, outsourcing
monitoring activities to be made and to provide loan support for
diversified agriculture etc.
To initiate risk mitigation measures by developing suitable
financial products and commodity exchange, allowing banks
(on behalf of farmers) to participate in commodity futures,
designing special risk mitigation packages for low asset-based
borrowers, using warehousing receipts with price hedging
instrument, adopting technology for dissemination of market
intelligence, sharing borrower information, etc.
42
(iii) Preliminary appraisals
(iv) Post-sanction monitoring
(v) Follow up for recovery.
NGOs, farmer clubs, agriclinics etc. to function as business
facilitators.
Institutional agents/others may support banks extending
financial services such as disbursement of small volume credit,
recovery of loans, etc.
Registered NBFCs with significant rural presence, NGO–micro
finance institution (MFI) may act as Business Correspondents
(RBI has already allowed NGOs engaged in micro-finance
activities to access External Commercial Borrowing up to
approximately Rs. 23 crore during a financial year.
Micro-credit portfolio of regulated MFIs to be eligible for direct
finance from NABARD.
NABARD to set up Rural Kiosks/Village Knowledge Centres.
ISSUES IN AGRICULTURAL
CREDIT –DEVELOPING
COUNTRIES PERSPECTIVE
(INDIA)
43
A
griculture plays an essential role in developing economies,
especially because the large proportion of the population is
engaged in agriculture in developing countries as also for
strategic reasons of ensuring food security. The variety in farming
activities ands farm management poses challenges and opportunities
to agriculture and rural lenders. It is common that policy makers,
particularly in developing countries, have been confronted with the
task of resolving a number of issues in agriculture lending
The basic challenge faced is that providing finance to agriculture
and rural development is not seen as a commercial and business
opportunity by banks or for that matter by the formal financial
systems. Unlike in the past, the present day agriculture has become
increasingly capital intensive which require access to working capital
and seasonal loans along with medium and long term credit for –on
farm investments and cannot modernise without the support of strong
financial system. Significantly even small farmers generally have no
access to formal credit because the financial system is not innovative
or sufficiently efficiently to reduce transaction cost and to provide
tailor made products to small clients at affordable cost.
Two major factors that hamper the smooth flow of credit to
agriculture are the absence of effective credit delivery systems and
the lack adequate credit absorptive capacity of the rural populace.
44
agriculture sector within the discipline of balance sheet numbers.
Distances between clients and financial intermediaries, transport and
communication difficulties, and the risky nature of agriculture that is
vulnerable to natural diasters, boost these cost. The challenge still is
to design and deliver the provision of loan products to better suit the
farming community. Weak land titling and cumbersome and cost court
procedures also compound problems of providing conventional
collateral for loan in rural areas, thereby further increasing the risk of
rural lending. Another major issue confronting agriculture and rural
credit is that standard credit programmes are not suited to the
heterogenous need of small farmers. Subsidised interest rates
blocked these emergences of vigorous and competitive rural financial
markets, fostered loan repayment indiscipline, prevented banks from
covering cost, and discouraged local saving mobilization.
Complexity of various out dated procedures and related paper work
involved in provision of credit is another issue in agriculture lending
Rural financial markets cannot thrive and grow if their clients lack
credit worthiness. The low absorption capacity of farmers, inability to
repay loans, and the inability to save because their incomes are
depressed, all results in low credit worthiness. Notwithstanding
improvements in information technology, backs lack the essential
information on the credit history of potential clients, the viability of on-
farm investments, the self financing capacity of farmers and their
repayment capacity. Lack of these vital pieces of information hampers
the timely credit reach for agriculture and rural development
45
As most of the farmers are either small or marginal in the developing
countries, they lack the absorbtative capacity both in terms of cost
and the size of loan and advances which are of cost effective size to
be handled by the banks. Since many of the financial transaction in
the rural areas are small both for loans and for deposits-the
transaction cost per unit of money involved is necessarily high as
compared to larger transactions. Most of the banks either lack risk
management system or they feel it is not necessary to have one,
especially when it comes to financing agriculture
CONCLUSION
P
ublic sector banks, entrenched as they are in rural banking
for over three decades appear to be holding on their
business. When the banking industry is surging ahead the
world over, they find that nearly one half of their branches generate
less than 15 per cent of their business. About 17 per cent of their staff
is deployed for handling this business.
46
A plea is made for functional specialization and structural
reorganization of rural banking business, with a view to strengthen
the competitive edge of the banking sector to be in tune with the fast
changing banking scenario. While the new banks prefer to flourish in
cities, gramin banks are directed to operate in rural areas and public
sector banks struggle to remain in both the worlds. They have done
this balancing act for over three decades. Hiving of the rural business
into a subsidiary and amalgamating the gramin banks into it is a
radical suggestion made.
Finally, it can be said that rural India provides ample opportunities for
profitable banking and the public sector banks should take advantage
of these latent opportunities and expand rural credit by repositioning
47
themselves and delivering better services in the financial system.
Only then can PSBs meet the expectations of becoming vibrant rural
financial institutions capable of meeting the growing requirements of
rural India.
BIBLIOGRAPHY
Books:
Websites:
www.rbi.org.in
www.mainstreamweekly.net
www.thehindubusinessline.com
48
www.india.smetoolkit.org
www.business.mapsofindia.com
www.hinduonnet.com
www.financialexpress.com
www.indiatogether.org
www.economictimes.indiatimes.com
www.businessworld.in
www.geocities.com
49