ABM502 lecture 7

Agricultural finance II
Introduction of Lead Bank Scheme

Lead Bank Scheme (LBS) was introduced in
1969, based on the recommendations of the
Gadgil Study Group. The basic idea was to have
an area approach for targeted and focused
banking.
The bankers committee, headed by F. S.
Nariman, concluded that districts would be the
units for area approach and each district
could be allotted to a particular bank which
will perform the role of a Lead Bank.

2009-2013 http://www.gktoday.in
Lead Bank Scheme
The RBI evolved Lead Bank Scheme with the
following major objectives:
To identify suitable areas for branch expansion
To formulate a phased program for expanding the
branches to provide banking facilities to the area
covered
To design financing scheme, which can help in
mobilizing deposit and promoting investment
among the local people.
To earmark potential areas for promoting
schemes for agricultural development and small
scale industries, generating local
entrepreneurship.

Structure of lead bank scheme
Allotment of districts:

All the districts in the country except the
metropolitan cities of Mumbai, Kolkata, Chennai
and Union Territories of Chandigarh, Delhi and
Goa were allotted among public sector banks and
a few private sector banks. Later on, the Union
Territories of Goa, Daman and Diu as also the
rural areas of the Union Territories of Delhi and
Chandigarh have been brought within the purview
of LBS.

2009-2013 http://www.gktoday.in
District Consultative Committees (DCCs) The next
important development in the history of LBS was the
constitution of DCCs in all the districts, in the early
seventies to facilitate co-ordination of activities of all
the Banks and the financial institutions on the one
hand and Government departments on the other. The
DCCs were constituted in the lead districts during
1971 73.

District credit plan (DCP) The second and most
important phase of the LBS was formulation of DCPs
and their implementation. Although certain structural
credit gaps were identified earlier, positive measures
were introduced only after nationalization of the
banks. Certain sectors which were hitherto neglected
were given a priority status and banks were asked to
provide credit to these sectors in a more concerted
way.

2009-2013 http://www.gktoday.in




Problems with Lead Bank Scheme
Organizational problems

Lack of coordination

Apathetic attitude of bank officials

Marketing and extension problems

Village adoption scheme (VAS): Under this,
bank adopted some villages in their command
area for intensive lending. The area approach
was not so much aimed at development of a
chosen area as for avoiding the pitfalls of
scattered and unsupervised lending. In the initial
stages of VAS, RBI had encouraged banks to
adopt villages as well as to avoid scattered
lending.

2009-2013 http://www.gktoday.in




Genesis of Regional Rural Banks:

Nationalisation of banks was not able to bridge the
entire credit gap in the rural areas.
A vast majority of the small and marginal farmers
and rural artisans remained untouched by the
banking system.
Therefore, the range of institutional alternatives was
widened in 1975 by adding Regional Rural Banks
(RRBs) to the banking scene which would
exclusively cater to the credit demands of the
hitherto neglected segment of the rural economy.
Thus, with Co-operatives. Commercial Banks and
RRBs, a multi-agency approach was adopted in
the rural credit system.

2009-2013 http://www.gktoday.in
Multi agency approach- objectives &
advantages
Objectives:
To establish close and continuous connection with
members
To encourage constant consultation between members
and the society so that welfare of both may be achieved.
Advantages:
In case one agency fails, other agency can easily step
into meet credit requirements
Different agencies can overcome different types of
demand for farmers
Banks are better equipped to formulate area-specific
projects and finance, which is very helpful in area
development
Banks with their huge resources can finance big
advance, required for land development

Problems in multi agency
approach
Problems of recovery since more than one
institutional agency may have legally established
chair on same security
Problems of overlapping and duplication of bank
facilities, and consequent wasteful expenditure
Problems arising out of different systems,
procedures, policies, security norms etc.
NABARD- role and functions
Providing refinance to lending institutions in rural areas
Bringing about or promoting institutional development and
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
http://farmer.gov.in/nabard.html

Mission of NABARD
Promoting sustainable and equitable agriculture and rural
development through effective credit support, related
services, institution building and other innovative
initiatives. In pursuing this mission, NABARD focuses its
activities on:

Credit functions : involving preparation of potential-linked
credit plans annually for all districts of the country for
identification of credit potential, monitoring the flow of
ground level rural credit, issuing policy and operational
guidelines to rural financing institutions and providing
credit facilities to eligible institutions under various
programmes.

Development functions : concerning reinforcement of
the credit functions and making credit more productive.

Supervisory functions : ensuring the proper functioning
of cooperative banks and regional rural banks.
Micro Credit
In general, it is associated with
Very small loans
No collateral
Borrowers from among the rural poor
Loans for income generation through market based
self employment
The formation of borrower groups

Micro Credit
It is designed not only to support
entrepreneurship and alleviate poverty, but also in
many cases to empower women and uplift entire
communities by extension. In many communities,
women lack the highly stable employment
histories that traditional lenders tend to require.
Many are illiterate, and therefore unable to
complete paperwork required to get conventional
loans

Source: Wikipedia
(http://en.wikipedia.org/wiki/Microcredit)
Constraints hindering growth of micro
credit organizations
Not all the executive staff of the micro credit
organizations has the passion necessary to set and
build goals
Targeting the poorest of the poor is a difficult task, as
there are no specific criteria for identifying the same,
hence credit may get drifted
Micro finance will become unsuccessful if there is too
much reliance on grants and subsidized funding. A
successful micro finance need business plan, clear
goals, proper strategies to keep their organizations
healthy.
MFI should have strategy for resource mobilization
which is at most necessity in initial stages.
Unavailability of technical staffs skilled in providing
finance services to the poor.

Assignment 3
Write up on Microfinance