Agricultural Finance and Co-operation Theory Notes 2020 PDF

Third Semester B.Sc(Hons.) Agri. Ag.Econ.3.2 Agricultural Finance and Co-operation (2+1=3) (Theory Note) 1  Course Curriculum Course No: Ag. Econ 3.2 Cre...

Third Semester B.Sc(Hons.) Agri. Ag.Econ.3.2 Agricultural Finance and Co-operation (2+1=3) (Theory Note) 1  Course Curriculum Course No: Ag. Econ 3.2 Credit: 2 + 1 = 3 Course Title: Agricultural Finance and Co-operation Theory Lectur Title of Sub topics to be taught Textbook/ Details of publishers, e topic Reference Edition and page No. Book from Numbers of the book which topic is to be taught 1. Agricultural Finance- meaning, Reference Page No: 1-2 scope and significance, Credit Book 1 Page No: 371-372 needs and its role in Indian Reference Agricultural agriculture Book 2 finance 2. Agricultural credit: meaning, Reference Page No: 9-15 definition, need, classification Book 1 3. Credit 3 R's , 5C's and 7 P's of credit, Reference Page No: 87-98 4 analysis repayment plan Book 1 Page No: 105-109 5. Reference Book 1 6. Institutional and non- Reference Page No: 138-195 institutional sources Book 3 7. Institutional and non- Reference Page No: 138-195 institutional sources Book 3 Sources of 8. Commercial Banks, social Reference Page No: 407-408 agricultural 9. control and nationalization of Book 2 Page No: 24-26 finance 10. commercial banks Reference Book 1 11. Micro financing including KCC Reference Page No: 435-437 Book 2 12. Lead bank scheme Reference Page No: 30-34 RRBs Book 1 13. Scale of finance and unit cost Through www. bankofindia.co.in website 14. An RBI, Reference Page No: 43-47, 50-52 introduction NABARD Book 1 to higher financing institutions 15. An ADB, IMF, world bank, Reference Page No:36-37, 41-42, introduction Insurance and Credit Guarantee Book 1 www.adb.org to higher Corporation of India, cost of www.accountingtools.com financing credit Through institutions websites 2 16. 17. Recent Recent development in Agricultura Reserve Bank of India developmen agricultural credit. l Credit in Bulletin Page No: 993- t in India: 1007 agricultural Status, credit. Issues and Future Agenda by Rakesh Mohan 18. Preparation Balance Sheet Reference Page No: 113-117 and analysis Book 1 of financial 19. statements Income Statement Reference Page No:118-122 Book 1 20. Basic Bank norms, Reference Page No:194-202,206-217 guidelines SWOT analysis, Time value of Book 1 www. rbi.org for money Through preparation website of project reports 21. Agricultural Meaning, brief history of Reference Page No:16-21 22. Cooperation cooperative development in Book 1 Page No:379 India, Reference www.indiancooperative.co objectives, principles of Book 2 m cooperation, significance of Through cooperatives in Indian website agriculture 23. Agricultural credit, marketing, consumer and Reference Page No: 22-24 Cooperation multi-purpose cooperatives, Book 1 in India farmers' service cooperative societies, processing cooperatives, farming cooperatives, cooperative warehousing; 24. Role of Role of Through ncui.coop ICA, NCUI, ICA, NCUI, NCDC, NAFED websites www.ica.coop NCDC, Reference Page No: 585 NAFED Book 2 25 & Crop scope, significance Reference Page No: 59-61 26 insurance and limitations and the potential Book 1 pmfby.gov.in of the newly launced 'PradhanMantriFasalBimaYojan a' (Prime Minister's Crop Insurance Scheme) 27. Successful AMUL Through www.amul.com cooperative website systems 3 Reference Books 1. Agricultural Finance and Management by S. Subba Reddy and P. Raghu Ram, Oxford & IBH Publising Co. Pvt. Ltd, New Delhi 2. Agricultural economics by S. Subba Reddy, P. Raghu Ram, T.V. Neelakanta Sastry and I. Bhavani Devi, Second Edition, Oxford & IBH Publising Co. Pvt. Ltd, New Delhi 3. An introduction to Agricultural Finance by U. K. Pandey, Kalyani Publishers, New Delhi Prepared as per 5th Dean committee Dt.27/06/2018 4 AGRICULTURAL FINANCE Meaning: Agricultural finance generally means studying, examining and analyzing the financial aspects pertaining to farm business, which is the core sector of India. The financial aspects include money matters relating to production of agricultural products and their disposal. Definition of Agricultural finance: Murray (1953) defined agricultural finance as “an economic study of borrowing funds by farmers, the organization and operation of farm lending agencies and of society’s interest in credit for agriculture.” Tandon and Dhondyal (1962) defined agricultural finance “as a branch of agricultural economics, which deals with and financial resources related to individual farm units.” Nature and Scope: Agricultural finance can be dealt at both micro level and macro level. Macro finance deals with different sources of raising funds for agriculture as a whole in the economy. It is also concerned with the lending procedure, rules, regulations, monitoring and controlling of different agricultural credit institutions. Hence macro-finance is related to financing of agriculture at aggregate level. Micro-finance refers to financial management of the individual farm business units. And it is concerned with the study as to how the individual farmer considers various sources of credit, quantum of credit to be borrowed from each source and how he allocates the same among the alternative uses within the farm. It is also concerned with the future use of funds. Therefore, macro-finance deals with the aspects relating to total credit needs of the agricultural sector, the terms and conditions under which the credit is available and the method of use of total credit for the development of agriculture, while micro-finance refers to the financial management of individual farm business. Significance of Agricultural Finance: 1) Agril.finance assumes vital and significant importance in the agro – socio – economic development of the country both at macro and micro level. 2) It is playing a catalytic role in strengthening the farm business and augmenting the productivity of scarce resources. When newly developed potential seeds are combined with purchased inputs like fertilizers & plant protection chemicals in appropriate / requisite proportions will result in higher productivity. 3) Use of new technological inputs purchased through farm finance helps to increase the agricultural productivity. 4) Accretion to in farm assets and farm supporting infrastructure provided by large scale financial investment activities results in increased farm income levels leading to increased standard of living of rural masses. 5 5) Farm finance can also reduce the regional economic imbalances and is equally good at reducing the inter–farm asset and wealth variations. 6) Farm finance is like a lever with both forward and backward linkages to the economic development at micro and macro level. 7) As Indian agriculture is still traditional and subsistence in nature, agricultural finance is needed to create the supporting infrastructure for adoption of new technology. 8) Massive investment is needed to carry out major and minor irrigation projects, rural electrification, installation of fertilizer and pesticide plants, execution of agricultural promotional programmes and poverty alleviation programmes in the country. Three basic economic activities constitute the managerial process of the farm. They are production activities, financing activities and marketing activities. Production activities comprise the decisions like what products to be produced, method of production and how much of each product should be produced. Financial activities relate to decisions of obtaining and use of credit. Marketing activities involve managerial decisions related to procurement of inputs and distribution and sale of output. Financial decisions more often than not overlap the production and marketing decisions. For example, nature of enterprises and the quantum of the product determine the amount of capital and provide solution to the decisions of how much capital should be used in the farm business. Evaluation and involvement of alternatives among enterprises is linked with the decisions of how products are produced. Analogously, marketing decisions are linked with financial decisions, because product marketing and selection of input marketing are often determined by the quantum of financing. Thus, we should recognize that production, financing and marketing decisions are concerned with financial acquisition and financial use depending upon the goals of financial manager. Importance of Finance: Agricultural finance is one of the most important inputs in all agricultural development activities for increasing agricultural production. It is necessary that farmers must be provided with adequate and timely finance for irrigation, farm mechanization and land development etc. So agricultural finance is very important instrument in facilitating the process of agricultural activities. Finance is very important in the context of new strategy and for making the agricultural sector up to date and modern. Agricultural credit itself is not a input but it helps creating environment for adoption of modern production technology using more production inputs and encouraging private investments on the farms. Both non-institutional credit agents give money lenders, landholders’ relatives, trader’s friends and institution credits agents like co-operatives, commercial banks are in operation. As the available resources base and the capacity to generate sufficient levels of financial resource within the rural sector particularly in the agriculture sector is limited at present, institutional financing is considered as principle source of external finance to support and accelerate the development of the agriculture sector. The provision of adequate, timely and liberal credit to the farmers has become an integral part of the agricultural development policy in India. 6  The involvement of commercial banks in agricultural development was negligible and was largely in terms of indirect credit. The nationalization of 14 major banks in July, 1969 and 6 banks in April 1980 gave further impetus to farm finance by commercial banking facilities to hitherto neglected are. Special attention was given to priority sector including agriculture and special programmes and schemes ware launched to help the weaver section including small and marginal farmers. In ancient period agriculture was subsistence type, capital need was less for agricultural production and hence, credit was also limited. In course of time agriculture became more capital intensive and hence credit intensive. In India about 69 per cent cultivators are small and marginal cultivators, their income level is quite low. Low income results into low saving, because of low saving one can not make additional investment and again has to face low income. Thus, Indian cultivators are found in a vicious circle, to break this circle, credit is essential. Investment in agriculture at the time of sowing and developing of crops is required and if the farmer is not having his own funds then credit can fulfill these needs. Agriculture is an important industry and like other industries it also requires capital. Due to the peculiarities of agriculture, especially its uncertainties, low returns, high rate of rent and limited scope for employment, a large number of cultivators cannot manage the needed finance without recourse to borrowing. One of the most important lessons of universal agrarian history is that the agriculturist must borrow, due to the fact that an agriculturist's capital is locked up in his lands and stocks. For stimulating the tempo of agricultural production, it is necessary that the farmer must be provided with adequate and timely credit. Farm finance is not a just a science to manage the money, but is an applied science of allocating scare resources to derive the optimum output. The role of farm finance in strengthening and development of both input and output markets in agriculture is crucial and significant. Indian agriculture is still traditional, subsistence and stagnant in nature, hence agricultural finance is needed to create the supporting infrastructure for adoption of new technology. Massive investment is needed to carry out major and minor irrigation projects, rural electrification, installation of fertilizers and chemical plants and poverty alleviation programmes in the country. Farm finance has vital impotence in the agro-socio economic development of the country both at individual /micro level and at aggregate /macro level. It is importance for higher productivity of resources. - Application of new technological inputs - Accretion to farm assets & farm income, improve the living standards of rural masses. - It reduce the regional economic imbalances is equally good at narrowing down the inter farm asset is wealth variations. - It strengthening and development of both input & output marketing in agril. - It needed to create the supporting infrastructure for adoption of new technology. 7  Credit and its Classification * Meaning of Credit: The dictionary meaning of the word credos is confidence felt in a person’s ability, honesty to pay money with the belief that it will be repay it in specified period. - Credit means trust in borrower’s ability to pay and his willingness to pay Credit: Credit/ Loans are certain amount of money provided for certain purpose, on certain conditions with some interest which should be repaid sooner or later. * Characteristics of good Agricultural Credit: (1) It should be in accordance with state and central Govt. agril policy. (2) It should be an effective alternative of the private financing agencies. (3) Persons working in financing agencies dealing with loan issuing workers must be trained. (4) It should be capable to co-ordinate agril. and its allied activities. (5) Credit should not be provided only against as set but should be provided against crop estimates and repayment capacity. (6) Effective inspection on use of credit should be made by the credit supplying agencies. (7) It granted through easy procedure. (8) It may be provided on low or reasonable rate of interest (9) It may be granted as such way that it should be protest the dignity and social status of the farmers. (10) It should be act to educate disciplines & guide to the farmers. Credit Instruments are: 1. Cheque 2. Promissory notes 3. Bill of exchange 4. Bank draft 5. Hundi 8  CLASSIFICATION OF CREDIT Loans/ credits are certain amount of money provided for certain purpose on certain conditions with some interest which should be repaid sooner or later. It is broadly classified based on various criteria. I Based on Purpose II Based on Time (Length of period) III Based on Security IV Based on Liquidity V Based on Lenders VI Based on Borrowers VII Based on Approach VIII Based on Contact (I) Based on purpose 1. Production (Agriculture) Loan 2. Investment Loan 3. Marketing Loan 4. Consumption Loan (1). Production Loans: Loan given to the farmers to increased the crop production. These are also called Seasonal Agril. Operations (SAO) loans or short term loans or crop loans. These loans are repayable within a period ranging from 6 months to 18 months in single installment. (2) Investment loans: Loans given for equipment whose productivity is distributed over more than one year. e.g. loans given for tractor, pump sets, tube wells etc. (3). Marketing Loans: These are meant for helping the farmers to overcome distress sales & market the produce in a batter way. Regulated markets & commercial bank based on warehouse receipts, advanced 75 % of the value of the produce. (4). Consumption loan: Any loan advanced for the purpose other than production, is broadly categorized as consumption loan. - It assists in more productive use of the crop loans - It restricted to hit area by natural calamities - It given in group guarantee basis with a maximum of three members. 9  - It repaid within 5 crop seasons or 2 ½ years whichever is less. (II) Based on Time: It depends on the repayment period of the loan amount (1). Short Term Loans: These loans are to be paid back within a period ranging from 6 to 18 months. All crop loans are said to be short-term loans, but, the length of the repayment period varies according to the duration of the crop. The farmers require this type of credit to meet the expenses for the ongoing agricultural operations on the farm like sowing, fertilizer application, plant protection measures etc. (2) Medium Term Loans: These loans are extended for a period varying from 15 months to 5 years. These loans are required by the farmer for bringing about some improvements on his farm business by way of purchasing implements, electric motor, milch animal etc. (3) Long term loans: These loans fall due for repayment over a long time ranging from 5 years to more than 20 years. These loans together with medium term loans are called investment or term loans. These loans are meant for bringing about permanent improvements on the land, like leveling and reclamation, construction of farm building, purchase of tractors, raising orchards etc. (III) Based on Security: The loan under this category into sub-categories, viz, secured and unsecured loan. 1. Secured Loans: Loans advanced against some security by the borrower are termed as secured loans. Various forms of securities are offered in obtaining the loan which is as follows: (i) Personal Security: Borrower himself stands as the guarantor. It is advanced on the farmer’s promissory note. (ii) Collateral Security: It is the property that is pledged to secure a loan. The movable properties of the individuals are offered as security. Examples are: LIC bonds, fixed deposit bonds, warehouse receipts, jewellery, machinery, livestock etc. These are some of the properties accepted as collateral security by the institutional lending agencies. (iii) Chattel Loans: These are specific type of loans particular category of lenders. Loans obtained from pawn brokers by pledging movable properties such as jewellery, utensils made of various metals are the examples. 10 (iv) Mortgage: The immovable properties are presented for security. For Example, land, farm buildings, etc. Mortgages are of two types a) Simple mortgage: When the mortgaged property is ancestrally inherited property of borrower then simple mortgage holds good. Here, the farmer- borrower has to register his property in the name of the banking institution as a security for the loan he obtains. The registration charges are to be borne by the borrower. b) Equitable mortgage: When the mortgaged property is self-acquired property of the borrower, then equitable mortgage is applicable. In this no such registration is required, because the ownership rights are clearly specified in the title deeds in the name of farmer- borrower. (v) Hypothecation: Borrower has ownership right on his movable and the banker has legal right to take a possession of property to sale on default (or) a right to sue the owner to bring the property to sale and for realization of the amount due. The person who creates the charge of hypothecation is called as hypothecator (borrower) and the person in whose favour it is created is known as hypothecate (bank) and the property, which is denoted as hypothecated property. This happens in the case of tractor loans, machinery loans etc. Under such loans the borrower will not have any right to sell the equipment until the loan is cleared off. The borrower is allowed to use the purchased machinery or equipment so as to enable him pays the loan instalment regularly. Hypothecated loans again are of two types’ viz., key loans and open loans. a) Key loans: The agricultural produce of the farmer - borrower will be kept under the control of lending institutions and the loan is advanced to the farmer. This helps the farmer from not resorting to distress sales. b) Open loans: Here only the physical possession of the purchased machinery rests with the borrower, but the legal ownership remains with the lending institution till the loan is repaid. 2. Unsecured Loans: Based on confidence between the borrower and lender the loan transaction take place. There is no mention of any type of security here. (IV) Based on Liquidity: Under this type, the loans are classified into self-liquidating loans and partially liquidating loans or non-liquidating loans. (i) Self liquidating Loans: The income generates through these loans helps the farmer to repay the loan amount in the same season. e.g. short term loans or crop loan (ii) Partially liquidating loans or non-liquidating loans: The income generate through there borrowings will help to pay part of the loan component only. In other words, these loans are cleared over a time period by the farmer- borrower. 11  e.g. term loans (V) Based on Lender’s: Credit is also classified on the basis of lender such as a) Institutional credit: Here are loans are advanced by the institutional agencies like co- operatives, commercial banks. Ex: Co-operative loans and commercial bank loans. b) Non-institutional credit: Here the individual persons will lend the loans Ex: Loans given by professional and agricultural money lenders, traders, commission agents, relatives, friends, etc. (VI) Based on Borrower’s: The credit is also classified on the basis of type of borrower. a) Based on the business activity like dairy farmers, poultry farmers, rural artisans etc. b) Based on size of the farm: agricultural labourers, marginal farmers, small farmers, medium farmers, large farmers c) Based on location hill farmers (or) tribal farmers. (VII) Based on approach: a) Individual approach: Loans advanced to individuals for different purposes will fall under this category. b) Area based approach: Loans given to the persons falling under given area for specific purpose will be categorized under this. Ex: Drought Prone Area Programme (DPAP) loans, etc c) Differential Interest Rate (DIR) approach: Under this approach loans will be given to the weaker sections @ 4 per cent per annum. (VII) Based on contact: a) Direct Loans: Loans extended to the farmers directly are called direct loans. Ex: Crop loans. b) Indirect loans: Loans given to the agro-based firms like fertilizer and pesticide industries, which are indirectly beneficial to the farmers are called indirect loans. 12  PROBLEMS OF RURAL & AGRIL. INDEBTEDNESS On account if extreme poverty of the rural people they have to incur heavy debt to meet their production requirements, social commitments and even consumption needs. The debt passes from generation to generation because the income from agriculture is too meager to pay off the debt and the malpractices of the money lenders do not allow the farmers to free themselves from the burden of debt. Therefore it has been correctly stated that “The Indian farmer is born in debt, lives in debt and dies in debt.” (Remark by Royal Commission of agriculture) CAUSES OF RURAL INDEBTEDNESS The problem of rural indebtedness is considered in a very casual manner in India and it is customary to regard the illiteracy of farmers, unfavorable climatic conditions increase in the pressure of population, subdivision and fragmentation of holdings, the money lender system, defective marketing, wasteful expenditures by farmers etc. as the causes of rural indebtedness. (1) Ancestral debt (Inherited debt): The most important and the chief cause of the existing indebtedness is the inherited debt, which is handed over from father to son, generation to generation. (2) Sub-division & fragmentation of holding: Due to the over population and pressure of population on land, and is divided and fragmented further & further. Due to uneconomical land holding farmers becomes more and poorer. (3) Poverty of the rural people: Poverty of the rural people is most important factor responsible for indebtedness in rural, sector with ridiculously low income; the poor people are unable to repay their loan. (4) Agriculture depends upon nature: There is every possibility, almost every season that there may be no rains or inadequate or untimely rain, drought condition, weather effect. (5) Wasteful or unproductive expenditure: The social and religious functions pertaining to marriages, births, deaths etc. are the wasteful or unproductive expenditure increase the indebtedness. (6) Defective marketing system: The system of agricultural marketing in India is full of defects. As a result the farmer is not able to procure a fair price for his produce. Because of is economic dependence on the money lender and village trader, he is forced to sell off a large part of his produce to them. They give him a very low price for his produce keeping him constantly in a state poverty. (7) Defective agricultural credit system: The system of agril. credit is wrong with defected substantial part of credit granted by money lenders. Money lenders are fully exploiting the farmers. Money lenders are least interested in whether their money is used for productivity. They charges exorbitant rates of interest, manipulate accounts and write-down inflated figures of loans, do not enter payment of installments of loans by the farmers etc. (8) Absence of alternative source of income: There was steady decline of Indian industries during the British region. Cause of the decline of small and cottage industries, village handicrafts etc. dependence on agriculture increased. But agriculture is heavily dependent on monsoon and years of draught or floods spell misery to the rural poor who have to incur heavy debt to make both ends meet. (9) Ignorance & Illiteracy of the cultivators: standard of education is very low in Indian agricultural farmers. Most of the farmers are illiterate and ignorant and as a result all the agencies concerned with them are fully exploits them. 13  CLASSIFICATION OF CREDIT INSTITUTION IN AGRICULTURE Agriculture Credit A. Non-Institutional agencies B. Institutional agencies 1. Money lenders 1. Co-operative bank 2. Traders and commission agent 2. Scheduled commercial bank 3. Relatives 3. Regional Rural Bank (RRB) 4. Land lord & others 4. Land Development Bank (LDB) 5. National Bank for Agricultural And Rural Development (NABARD) A. Non-Institutional Agencies (Private): 1. Money lenders: Under unorganized financial agencies, the money lender is important source both from the point of view of easy availability and the volume of business. Money lender as a credit agency continue to play dominant role in rural credit, although these agencies charge more rate of interest and follow unethical (immoral) practice. The reason for this that their lending procedure is relatively simple and credit assistance timely. Malpractices followed by money lenders are as follows: 1. Deduct in advance the total interest for the year. 2. Many moneylenders get thumb impression or signature on blank sheet of paper before lending money and later on enter more money. 3. Few have receipts / pass books. 4. High rate of interest. 2. Traders and commission agent: In the sphere of agril. Credit, traders and commission agents also supply a sizable part of finance. Commission agent are providing short term finance to the cultivators and exploiting them fully by heavy rate of commission, interest etc. 3. Relatives: Farmers some time take loan from relatives in case of urgent need. These loans are generally available on soft terms and short term with low or negligible interest. 4. Land lord & others: Agriculturist also seek loan from land lord and other people. The loan from these sources generally costly because of high rate of interest in this loan is common. Most of the money supplied by this system is consumed as non-productive use and hence this system is not considered healthy. B. Institutional Agencies: 1. Co-operative Banks: The co-operative credit agencies in India can be divided in two categories. i.e. those dealing with short and medium term needs and those serving long term needs. The structure of short and medium term credit is three tier i.e. (1) Primary Credit Societies (PCS), (2) District Co- operative bank (DCB), (3) State co-operative bank (SCB). In the case of long term credit, the structure is two tier i.e. (1) Primary land development bank, (2) Central land development bank. (i) Primary Credit Societies (PCS): 14  These are primary unit at a village level functioning in which funds are directly to the borrowers. The main sources of their funds are share capital and loan from Central Co-operative Bank (CCB). Share capital is kept just nominal with a view that maximum villagers may become the members of the society. Loans are granted for short period normally for one year for carrying out agricultural operations purpose of input purchase. Only some profit distributed to the share holder and remaining profit are spent on the welfare of the villages. The organizations of such types of societies are as per the Act of 1904. (ii) District Co-operative Bank (DCB): Known as District central co-operative banks, organized as per co-operative societies Act 1912. These bank works as an intermediary to link the primary credit societies and with money market. They also form an important link between state co-operative bank and primary agril. Credit societies. The main sources of their funds are their own share capital and reserves and deposit from the public and loan from the (SCB) State co-operative banks. Their main objective is to lend money to the village primary credit societies. They are above the Primary Credit Societies and below the State Co-operative or Apex Bank. (iii) State Co-operative Bank (SCB) Known as Apex-bank generally one bank in each state. It is final link in the chain between the small, scattered primary societies and the money market, and also with Reserve Bank of India. The nature of their work is mostly supervisory. Its main function is to finance and control the District Central Co-operative banks. It serves as a link between NABARD from which it borrows and lends to co-operative central banks and the village co-operative societies. Main Function: 1. Act as a banker’s bank to the central co-operative banks. 2. Ensuring the co-ordination and uniformity in banking policy. 3. Prompting the cause of co-operation in general. Land Development Bank (LDB): There was no suitable agency in the country to help agriculturist in meeting their long term requirements for the development of his land and other programme. Thus better and suitable machinery was needed to enable the cultivators to get such loans according to their requirements. This brought idea of land development bank in the country. The long term credits in agril. sectors are met by this bank. Loan is provided against the mortgage of land. Characteristics of Banks: 1. Lending money for long term against the mortgage of their lands. 2. Increasing their capital by issuing debentures. 3. Supported by Government. Function of Bank: 1. Extend credit for redemption of old debts. 2. Improvement, reclamation and development of land. 3. Purchase of agril. Machinery/ equipments. 4. Other improvement like sinking and repairs of well. 15 2. Scheduled Commercial Banks: (Nationalized 1969) Commercial banking on western styled started in India in the beginning of 19 th century. Commercial banks are important financial intermediaries for promoting and mobilization savings and allocating investment among productive sectors like agriculture by providing short term and medium term loan up to 10 years. In 1969, 14 major commercial banks were nationalized (at present 29 banks nationalized) there are 53123 branches of which about 60% are in rural areas. This banks are financing to farmers, land less labourers, artisan and economically weaker section of the society. After nationalization, there has been substantial increase in the involvement of commercial banks in agril. Sector and emerged as an important source of agricultural finance. The commercial banks collected their resources in the shape of deposits, paid up capital and borrowings from the R.B.I. and utilize them by way of loans. 3. Regional Rural Banks (RRBs): Started in 1975 under ordinance of president of India. These banks are financing the rural people through their branches in rural areas. These banks are formed by the Central government and Nationalized Commercial Banks. The main objective of RRBs is to provide credit to the weaker section- small and marginal farmers, landless labourers, artisans and small enterpreneurers by development of village areas. Capital Structure: The capital of every RRB was Rs. 1 crore and the issued capital was Rs. 25 lakhs. 50 per cent of the issued capital being subscribes by the central Government, 15 per cent by concerned state Government and 35 per cent remaining part by the sponsoring bank. Objective: According to regional rural banks act 1976, the RRBs were to set up mainly with a view to develop the rural economy by providing for the development of agriculture, trade, commerce, industry and other productive activities in the rural areas. These banks aimed at providing credit and other facilities particularly to the small and marginal farmers, agricultural labourers, rural artisans and small entrepreneurs. Management: The management of each RRB is being done through a nine-member Board of Directors headed by a chairman. The strength of the Board could be raised up to 15 with the approval of Government of India which appoints its Chairman. The central Government nominees three directors (in addition to chairman), the State Government two director, while sponsoring bank nominates the remaining three directors. Banking Business: Every RRB status of scheduled commercial bank and has been empowered to mobilize deposits and to grant short term loans directly (whether individually or in groups) only to small and marginal farmers, agricultural labourers, rural artisans, small entrepreneurs. They can pro vide loans both for productive as well as consumption purpose. 16 4. Land Development Bank (LDB): There was no suitable agency in the country to help agriculturist in meeting their long term requirements for the development of his land and other programme. Thus better and suitable machinery was needed to enable the cultivators to get such loans according to their requirements. This brought idea of land development bank in the country. The long term credits in agril. sectors are met by this bank. Loan is provided against the mortgage of land. Characteristics of Banks: 1.Lending money for long term against the mortgage of their lands. 2. Increasing their capital by issuing debentures. 3. Supported by Government. Function of Bank: 1.Extend credit for redemption of old debts. 2.Improvement, reclamation and development of land. 3.Purchase of agril. machinery/ equipments. 4. Other improvement like sinking and repairs of well. 5. National Bank for Agriculture and Rural Development (NABARD): The most important development in the field of rural credit in recent years is the setting up the National Bank for Agriculture and Rural Development (NABARD) in July 1982. It took over from Reserve Bank of India all the functions that the latter performed in the field of rural credit. NABARD is giving credit to farmers indirectly through co-operative societies, nationalized banks, land development banks etc. Objectives: 1. The Bank serves as a refinancing institution for institutional credit to promote the activities of rural areas. 2. The Bank also provides direct lending to any institution as may be approved by the Central Government. 3. The bank has an organic links with the Reserve Bank and maintains a close link with it. Functions of NABARD: 1. It works as an apex body to look after the credit requirements of the rural sector. 2. It has authority to oversee the functioning of the co-operative sector through its agricultural credit department. 3. It provides short term credit (up to 18 months) to state co-operative banks for seasonal agricultural operations (crop loan), purchase and distribution of fertilizers and working capital requirements of co-operative sugar factories. 4. It provides medium term credit (18 months to 7 years) to state co-operative bank and RRBs for approved agricultural purpose, purchase shares of processing societies and conversion of short-term crop loans into medium term loan in areas affected by natural calamities. 5. It provides medium and long term credit (not exceeding 25 years) for improvements in agriculture to State Co-operative Bank, Land Development Bank, RRBs and Commercial Banks. 17  6. It maintains a research and development fund to be used to promote research in agriculture and rural development. 7. It offers advice and guidance to State Governments, Federation of Co-operatives and National co-operative Development Corporation (NCDC) and functions in close contact with RBI and Government of India pertaining to agriculture and rural development. Difference between Agril. Credit and Credit for Commerce and Industries Credit for Agriculture Credit for Commerce and Industries Demand for finance remaining stable Demand for credit in industries directly linked irrespective of the ups and downs in output. to the output. Agricultural business is full of uncertainty and In manufacturing industries precise calculation due to the possibilities of crop diseases, attack of financial needs can be made as it is possible by insects etc. it is not possible for framer to to anticipate the output and returns on output. calculate exactly the need of credit. In agriculture, farmers need credit for In manufacturing industries, there is in the first consumption because there is an interval instance no such demand for consumption. between sowing and harvesting the crop. In agriculture, there is every chance of misuse In industries, the payment of wages paid of consumption credit in unproductive use etc. before the output is complete or sold. In India, there are no adequate facilities for Industries are not depending upon nature and irrigation and therefore agriculture is gamble therefore, output is fixed, over and above in monsoon and there are number of chances industries is well organized and as a result they for crop failure as result no bank wishes to are getting finance on soft terms for their finance because there are not sure about business as compared to agriculture. repayment. 18  PRINCIPLES OF AGRICULTURAL CREDIT 1. SAFETY: Safety of Funds, borrower should be in position to repay the loan plus interest. Repayment by borrower depends on: (a) Borrower’s capacity (Tangible Assets) (b) Willingness to pay (by honesty &character of the borrower). 2. LIQUIDITY: It means security of assets which are easily marketable without much loss. Bank lend funds for Short-term i.e. for Working Capital, payable on demand. Borrower’s Assets should be easily encashable such as –Goods and Commodities are easily saleable as against Land and Building. So liquidity is easier in goods as compared to Fixed Assets. 3. PROFITABILITY: Banks are giving loans to public to earn profit. Loan given by Bank is Depositor’s Money. It is to be repaid along with interest on deposit. There are expenses on staff’s salary etc. Bank should not grant advances or loans to unsound parties with doubtful repaying capacity. Three R’s of Credit Lending Agency should lend only those projects or activities within the format of 3R’s (i.e. Principals of Lending). The project should be Technically Feasible and Economically Viable. When we take up the economic feasibility test of credit, three basic financial aspects are assessed by the banker. 1. If the loan is advanced will it generate return more than the cost? 2. Will the returns have surplus, to repay the loan when it takes due. 3. Will the farmer standup to risk & uncertainty in farming. It known as Three R’s of credit 1. Returns from the investment 2. Repayment capacity 3. Risk bearing ability of the farmer -borrower (1) Returns from the Investment This is an important measure in the credit analysis. The farmer’s demand for credit can be accepted only when he will be able to generate returns that will enable him to tide over the costs. Returns depend upon the decision like what to grow, how to grow, how much to grow, whom to sell, where to sell etc. Which the farmers taken in their production activities. Farmers should be able to generate incremental income when they go for the additional costs to be made good by the borrowed funds. 19  Partial Budget technique Season/ crop Existing Plan Area (ha.) Gross Returns Costs (Rs.) Net Income (Rs.) (Rs.) Kharif 1.0 7000 3500 3500 Paddy (improved) Summer 1.0 7400 3900 3500 Paddy (improved) Season/ crop Alternative Farm Plan Incremental Area (ha.) Gross Costs Net Income Income (Rs.) Returns (Rs.) (Rs.) (Rs.) Kharif 1.0 11500 5200 6300 2800 Paddy (HYV) Summer 1.0 12000 5600 6400 2900 Paddy (HYV) By getting a loan amount of Rs. 1700 and Rs. 1700 in kharif and summer respectively, the farmer can switch over from improved varieties of paddy to high yielding varieties in both seasons. The borrowing fund is quite productive generating an incremental amount of Rs. 5,700 per hectare of land. It is an important positive factor in favour of the farmer to present his claims for the loan amount from the institutional agency. (2) Repayment capacity: It means the ability of the farmer to clear off the loan obtained for production purpose within the time fixed by the bank. The loan should not only be profitable but also have potential for effecting repayment. This condition emerges out of the fact that repayment capacity not only depends upon the returns but also on several other factors. Y = (X1, X2, X3, X4 , X5, X6) Quantitative Qualitative Variables Variable Y = Repayment Capacity (in Rs.) (+) X1 = Gross returns from the enterprise for which loan was taken during a season/year (in Rs) (-) X2 = Working expenses (Rs) (-) X3 = Family consumption expenditure (Rs) (-) X4 = Other loan due (Rs.) (+) X5 = Literacy (+) X6 = Managerial skill Though the returns are increase other factors may offset the returns which reducing the repayment capacity. 20  The estimation of repayment capacity varies from crop loans (self -liquidating loans) to term- loans (non -liquidating loans or partially –liquidating loans).  For self liquidating Repayment Capacity: Gross income - (working expenses excluding crop loan + family living expenses + other loans due + miscellaneous expenditure + crop loan) Estimation for Repayment capacity for self-liquidating loans Particulars Amount (Rs.) Without loans With loans Gross Returns 28,000/- 41,500/- Working expenses excluding crop loan 8,800/- 8,800/- Family living expenses 10,000/- 10,000/- Other loans due 4,000/- 4,000/- Miscellaneous expenditure 600/- 600/- Crop loan - 5,000/- Repayment capacity 4,600 13,100/- The farmer generated gross income of Rs. 41,500/- with a loan amount of Rs. 5,000/- His repayment capacity stood at 13,100/- after clearing the loan which indicates his credit worthiness.  Repayment capacity in respect of partially liquidating loans: Repayment Capacity = Gross Income – (Working expenses including short term loans + family living expenses + other loans due + miscellaneous expenditure + annual installment due for term loan) Estimation of Repayment Capacity for Partially Liquidating Loans Particulars Amount (Rs.) Without loans With loans Gross Returns 28,000/- 41,500/- Working expenses including short-term loan 8,800/- 13,800/- Family living expenses 10,000/- 10,000/- Other loans due 4,000/- 4,000/- Miscellaneous expenditure 600/- 600/- Annual installment due for farm loan - 5,620/- Repayment capacity 4,600 7,480/- Farmer has taken an investment loan of Rs. 20,000/- which is payable in 5 equal annual installments of Rs. 5620/- each. In this case also the term loan is productive enough to augment quite comfortably. The repayment capacity stood at Rs. 7,480/- after deducting the annual installment. Causes for Poor Repayment Capacity: Following are the causes for poor repayment capacity of the farmers: 21 1. Small size of land holdings; 2. Low productivity and production; 3. Low prices and fluctuations of agricultural commodities; 4. High family expenditure; 5. Using farm credit for unproductive purpose; 6. Low farmer’s equity; 7. Lack of adoption of improved technology; and 8. Poor management of farm resources. Measures to Strengthen Repayment Capacity: Following are the measures to be adopt to strengthen the repayment capacity of the farmers: 1. Increasing net income by proper organization and operation of the farm business; 2. Adopting potential technology for increasing production and reducing the farm expenses; 3. Removing imbalances of the resources availability; 4. Scheduling the repayment plans according to the flow of income; 5. Adopting the risk management strategies like crop insurance/ machinery insurance etc. (3) Risk Bearing Ability: It is the ability of the farmer to withstand the risks that arise due to financial loss. Risk can be quantified through statistical techniques like coefficient of variation, standard deviation, programming models etc. Sources of risk in farming are: 1. Production risk; 2. Technological risk; 3. Risk caused by illiteracy and ignorance; 4. Personal risk ( Sickness); 5. Institutional risk, 6. Weather uncertainly, 7. Price uncertainly The farmer may satisfy the banker with regards to returns and repayment capacity, but yet another factor to be fulfilled is risk-bearing ability. If the CV (co efficient Variation) of paddy yield in given area is 15 %, the expected gross returns are deflated by 15 % to arrive at the corrected yield or income. Repayment Capacity under risk (Risk) = Deflated gross returns – (working expenses excluding proposed loan + family living expenses + other loans due + miscellaneous expenditure + crop loan) Deflated Gross Return (Income) is = 41,500 – (41,500 /- x 0.15%) (Rs. 41,500 /- expected Gross income) 22 Example: Estimation of Risk Bearing Ability or RPC under: Risk. Particulars Amount (Rs.) Without loans With loans Deflated gross Returns 28,000/- 35,275/- Working expenses excluding crop loan 8,800/- 8,800/- Family living expenses 10,000/- 10,000/- Other loans due 4,000/- 4,000/- Miscellaneous expenditure 600/- 600/- Crop loan - 5,000/- Repayment capacity under risk - 6,875/- Measures to strengthen Risk Bearing Ability: 1. Developing owners equity 2. Developing moral characteristics i.e. honesty, integrity, feeling responsibility etc. 3. Reducing farm / family expenditure 4. Taking up stable and reliable enterprises 5. Providing ability to borrow in both good and bad periods 6. Creating ability to earn money and save money 7. Taking up crop and other insurance. 23  ‘5’ Cs OF CREDIT To the economic viability of a scheme or investment activity are 5 Cs. 1. Character 2. Capacity 3. Capital 4. Condition 5. Commonsense 1. CHARACTER: The basis for any credit transaction is trust. Even though the bank insists up on security while lending a loan, an element of trust by the banker will also play a major role. The confidence of an institutional financial agency on its borrowers is influenced by the moral characters of the borrower like honesty, integrity, commitment, hard work, promptness etc. Therefore both mental and moral character of the borrowers will be examined while advancing a loan. Generally people with good mental and moral character will have good credit character as well. 2. CAPACITY: It means capacity of an individual borrower to repay the loans when they fall due. It largely depends upon the income obtained from the farm. C= f(Y) where C= capacity and Y = income 3. CAPITAL: Borrower must have adequate funds of his own to put in the Business along with the borrowing from Bank. So, borrower’s own Capital should also be sufficient to realize bank’s money. 4. CONDITION: It refers to the condition needed for obtaining a loan from the financial institutions. 5. COMMONSENSE: It’s the perfect understanding between the lender and the borrower in credit transaction. This is in fact a prima facie requirement for obtaining credit for the borrower. 24  7 Ps of farm credit / Principles of farm finance The increased role of financial institutions due to technological changes on agricultural front necessitated the evolving of principles of farm finance, which are expected to bring not only the commercial gains to the bankers but also social benefits. The principles so evolved by the institutional financial agencies are expected to have universal validity. These principles are popularly called as 7 Ps of farm credit and they are 1. Principle of productive purpose. 2. Principle of personality. 3. Principle of productivity. 4. Principle of phased disbursement. 5. Principle of proper utilization. 6. Principle of payment and 7. Principle of protection. 1. Principle of productive purpose: This principle refers that the loan amount given to a farmer - borrower should be capable of generating additional income. Based on the level of the owned capital available with the farmer, the credit needs vary. The requirement of capital is visible on all farms but more pronounced on marginal and small farms. The farmers of these small and tiny holdings do need another type of credit i.e. consumption credit, so as to use the crop loans productively (without diverting them for unproductive purposes). In spite of knowing this, the consumption credit is not given due importance by the institutional financial agencies. This principle conveys that crop loans of the small and marginal farmers are to be supported with income generating assets acquired through term loans. The additional incomes generated from these productive assets add to the income obtained from the farming and there by increases the productivity of crop loans taken by small and marginal farmers. The examples relevant here are loans for dairy animals, sheep and goat, poultry birds, installation of pump sets on group action, etc. 2. Principle of personality: The 3Rs of credit are sound indicators of credit worthiness of the farmers. Over the years of experiences in lending, the bankers have identified an important factor in credit transactions i.e. trustworthiness of the borrower. It has relevance with the personality of the individual. When a farmer borrower fails to repay the loan due to the crop failure caused by natural calamities, he will not be considered as willful – defaulter, whereas a large farmer who is using the loan amount profitably but fails to repay the loan, is considered as willful - defaulter. This character of the big farmer is considered as dishonesty. Therefore the safety element of the loan is not totally depends up on the security offered but also on the personality (credit character) of the borrower. Moreover the growth and progress of the lending institutions have dependence on this major influencing factor i.e. personality. Hence the personality of the borrower and the growth of the financial institutions are positively correlated. 25 3. Principle of productivity: This principle underlines that the credit which is not just meant for increasing production from that enterprise alone but also it should be able to increase the productivity of other factors employed in that enterprise. For example the use of high yielding varieties (HYVs) in crops and superior breeds of animals not only increases the productivity of the enterprises, but also should increase the productivity of other complementary factors employed in the respective production activities. Hence this principle emphasizes on making the resources as productive as possible by the selection of most appropriate enterprises. 4. Principle of phased disbursement: This principle underlines that the loan amount needs to be distributed in phases, so as to make it productive and at the same time banker can also be sure about the proper end use of the borrowed funds. Ex: loan for digging wells The phased disbursement of loan amount fits for taking up of cultivation of perennial crops and investment activities to overcome the diversion of funds for unproductive purposes. But one disadvantage here is that it will make the cost of credit higher. That’s why the interest rates are higher for term loans when compared to the crop loans. 5. Principle of proper utilization: Proper utilization implies that the borrowed funds are to be utilized for the purpose for which the amount has been lent. It depends upon the situation prevailing in the rural areas viz., the resources like seeds, fertilizers, pesticides etc., are free from adulteration, whether infrastructural facilities like storage, transportation, marketing etc., are available. Therefore proper utilization of funds is possible, if there exists suitable conditions for investment. 6. Principle of payment: This principle deals with the fixing of repayment schedules of the loans advanced by the institutional financial agencies. For investment credit advanced to irrigation structures, tractors, etc the annual repayments are fixed over a number of years based on the incremental returns that are supposed to be obtained after deducting the consumption needs of the farmers. With reference to crop loans, the loan is to be repaid in lump sum because the farmer will realize the output only once. A grace period of 2-3 months will be allowed after the harvest of crop to enable the farmer to realize reasonable price for his produce. Otherwise the farmer will resort to distress sales. When the crops fail due to unfavourable weather conditions, the repayment is not insisted upon immediately. Under such conditions the repayment period is extended besides assisting the farmer with another fresh loan to enable him to carry on the farm business. 7. Principle of Protection: Because of unforeseen natural calamities striking farming more often, institutional financial agencies cannot keep away themselves from extending loans to the farmers. Therefore they resort to safety measures while advancing loans like *Insurance coverage *Linking credit with marketing 26 *Providing finance on production of warehouse receipt *Taking sureties: Banks advance loans either by hypothecation or mortgage of assets *Credit guarantee: When banks fail to recover loans advanced to the weaker sections, Deposit Insurance Credit Guarantee Corporation of India (DICGC) reimburses the loans to the lending agencies on behalf of the borrowers. Lead Bank Scheme The Lead Bank Scheme was launched by the RBI in 1969 as an area approach for providing banking facilities in rural areas. The LBS was recommended by D R Gadgil study group that pioneered the idea of providing social banking in the post-independence period. Under LBS, every district across the country would be assigned to a commercial bank. The bank should have major presence in that district to do the work of the Lead Bank. The lead bank makes surveys and makes loan facility to various sectors. The National Credit-Council constituted a study group in October 1968 to recommend an appropriate organizational frame work, for implementing the schemes which help in achieving the social objectives set before the country. The study group headed by Prof.G.R.Gadgil, then Deputy Chairman of the Planning Commission. / Suggested an area approach for banking development. It recommended that each commercial Bank be allocated districts, so as to take a leading role in its respective district as regards banking development. The study group felt that this step would help in extending institutional credit on easy terms to the hitherto neglected sectors, weaker sections of the society and backward areas. After the nationalization of 14 Major Commercial Banks, the Reserve Bank of India appointed a Committee of Bankers, headed by F.K.F. Nariman, to evolve a co-ordinate programme for providing banking facilities to the under banked districts of the country. The committee, in its report submitted to the Reserve Bank in November 15,1969, recommended the setting up of 'Lead Banks' in each district. The Nariman committee recommended that Banks should be allocated specific districts, where they would take the lead in surveying the potential of banking development, in extending branch expansion and extending credit facilities. The recommendations of the Nariman Committee was discussed at the Meeting of the standing Committee of Bankers in December, 1969. The principle of the 'Lead Bank' was accepted at the Meeting. Thus, the Reserve Bank of India, after careful consideration of the recommendations of the Gadgil study group and Nariman Committee, gave final shape to the Lead Bank Scheme towards the end of 1969. OBJECTIVES OF THE LEAD BANK SCHEME Under the scheme, Lead Banks shared the responsibility of surveying and developing the banking potential of all the districts. Lead Banks were expected to assume the role of catalytic agents of economic development in their respected lead districts. They were expected to serve as leaders to bring about a co-ordination of co-operative banks, commercial banks and other financial institutions in their respective districts in the interest of district development. This is a very vital role in which the banks are required to associate and align their operations with planned regional development. On the basis of the survey, the lead banks were expected to estimate the deposit potential and fill the credit gaps to improve bank advances in rural areas, especially to priority sectors and weaker sections. The close involvement of the Lead Bank with a particular area will not only result in deposit mobilization but also in the expansion of finance to agriculture and small industries. The following important benefits were expected to flow from the scheme. 27  (i) The whole country would be served by a well-knit system of commercial and co-operative banking. (ii) Branch expansion, supervision and guidance would become effective. (iii)A dynamic relationship between commercial banks, co-operative credit institutions and government authorities at the district level would evolve. (iv) Major constraints impeding the development of the districts economy would be identified and the Lead Bank would induce the appropriate agencies to remedial action. FUNCTIONS OF THE LEAD BANK Reserve Bank of India spelt out the following functions to be performed by the Lead Bank. To survey the resources and potential for banking development in its district. To survey the number of industrial and commercial units, farms and other establishments which do not have bank accounts, or which depend primarily on money lenders, increasing the resources of such units by additional production through help from the banking system. To examine the facilities for marketing of agricultural produce and industrial production, storage and warehousing and the linking of credit with marketing in the district. To study the facilities for stocking of fertilizers and other agricultural inputs and repairing and servicing of equipments. To recruit and train staff for offering advice to small borrowers and farmers in the priority sectors and for the follow-up and inspection of the end use of loans. To assist other primary lending agencies. 28  Kisan Credit Card The Kisan Credit Card has emerged as an innovative credit delivery mechanism to meet the production credit requirements of the farmers in a timely and hassle-free manner. The scheme is under implementation in the entire country by the vast institutional credit framework involving Commercial Banks, RRBs and Cooperatives and has received wide acceptability amongst bankers and farmers. The broad guidelines of the revised scheme are as follows: Objectives/Purpose Kisan Credit Card Scheme aims at providing adequate and timely credit support from the banking system under a single window to the farmers for their cultivation & other needs as indicated below: o To meet the short term credit requirements for cultivation of crops o Post harvest expenses o Produce Marketing loan o Consumption requirements of farmer household o Working capital for maintenance of farm assets and activities allied to agriculture, like dairy animals, inland fishery etc. o Investment credit requirement for agriculture and allied activities like pump sets, sprayers, dairy animals etc. Note: The aggregate of components a. to e. above will form the short term credit limit portion and the aggregate of components under f will form the long term credit limit portion. Eligibility o All Farmers – Individuals / Joint borrowers who are owner cultivators o Tenant Farmers, Oral Lessees & Share Croppers o SHGs or Joint Liability Groups of Farmers including tenant farmers, sharecroppers, etc. Fixation of credit limit/Loan amount The credit limit under the Kisan Credit Card may be fixed as under: o All farmers other than marginal farmers: o The short term limit to be arrived for the first year: For farmers raising single crop in a year: Scale of finance for the crop (as decided by District Level Technical Committee) x Extent of area cultivated + 10% of limit towards post-harvest / household / consumption requirements + 20% of limit towards repairs and maintenance expenses of farm assets + crop insurance, PAIS & asset insurance. o Limit for second & subsequent year :First year limit for crop cultivation purpose arrived at as above plus 10% of the limit towards cost escalation / increase in scale of finance for every successive year ( 2nd , 3rd, 4th and 5th year) and estimated Term loan component for the tenure of Kisan Credit Card, i.e., five years. o For farmers raising more than one crop in a year, the limit is to be fixed as above depending upon the crops cultivated as per proposed cropping pattern for the first year is changed in the subsequent year, the limit may be reworked. o Term loans for investments towards land development, minor irrigation, purchase of farm equipments and allied agricultural activities. The banks may fix the quantum of credit for term and working capital limit for agricultural and allied activities, etc., based on the unit cost of the asset/s proposed to be acquired by the farmer, the allied activities already being undertaken on the farm, the 29  bank’s judgment on repayment capacity vis-a-vis total loan burden devolving on the farmer, including existing loan obligations. o The long term loan limit is based on the proposed investments during the five year period and the bank’s perception on the repaying capacity of the farmer o Maximum Permissible Limit: The short term loan limit arrived for the 5th year plus the estimated long term loan requirement will be the Maximum Permissible Limit (MPL) and treated as the Kisan Credit Card Limit. Fixation of Sub-limits for other than Marginal Farmers: Short term loans and term loans are governed by different interest rates. Besides, at present, short term crop loans are covered under Interest Subvention Scheme/ Prompt Repayment Incentive scheme. Further, repayment schedule and norms are different for short term and term loans. Hence, in order to have operational and accounting convenience, the card limit is to be bifurcated into separate sub limits for short term cash credit limit cum savings account and term loans. Drawing limit for short term cash credit should be fixed based on the cropping pattern and the amounts for crop production, repairs and maintenance of farm assets and consumption may be allowed to be drawn as per the convenience of the farmer. In case the revision of scale of finance for any year by the district level committee exceeds the notional hike of 10% contemplated while fixing the five year limit, a revised drawable limit may be fixed and the farmer be advised about the same. In case such revisions require the card limit itself to be enhanced (4th or 5th year), the same may be done and the farmer be so advised. For term loans, installments may be allowed to be withdrawn based on the nature of investment and repayment schedule drawn as per the economic life of the proposed investments. It is to be ensured that at any point of time the total liability should be within the drawing limit of the concerned year. Wherever the card limit/liability so arrived warrants additional security, the banks may take suitable collateral as per their policy. For Marginal Farmers: A flexible limit of Rs.10,000 to Rs.50,000 be provided (as Flexi KCC) based on the land holding and crops grown including post harvest warehouse storage related credit needs and other farm expenses, consumption needs, etc., plus small term loan investments like purchase of farm equipments, establishing mini dairy/backyard poultry as per assessment of Branch Manager without relating it to the value of land. The composite KCC limit is to be fixed for a period of five years on this basis. Disbursement : The short term component of the KCC limit is in the nature of revolving cash credit facility. There should be no restriction in number of debits and credits. However, each installment of the drawable limit drawn in a particular year will have to be repaid within 12 months. The drawing limit for the current season/year could be allowed to be drawn using any of the following delivery channels. a) Operations through branch b) Operations using Cheque facility c) Withdrawal through ATM / Debit cards d) Operations through Business Correspondents and ultra thin branches 30  e) Operation through PoS available in Sugar Mills/ Contract farming companies, etc., especially for tie -up advances f) Operations through PoS available with input dealers g) Mobile based transfer transactions at agricultural input dealers and mandies Other features: Uniformity to be adopted in respect of following: Interest Subvention/Incentive for prompt repayment as advised by Government of India and / or State Governments. The bankers will make the farmers aware of this facility. The KCC holder should have the option to take benefit of Crop Insurance, Assets Insurance, Personal Accident Insurance Scheme (PAIS), and Health Insurance (wherever product is available and have premium paid through his KCC account). Necessary premium will have to be paid on the basis of agreed ratio between bank and farmer to the insurance companies from KCC accounts. Farmer beneficiaries should be made aware of the insurance cover available and their consent is to be obtained, at the application stage itself. One time documentation at the time of first availment and thereafter simple declaration (about crops raised / proposed) by farmer from the second year onwards. Processing Fee as decided by banks. What are the benefits of KCC Scheme? o Simplifies disbursement procedures. o Removes rigidity regarding cash and kind. o No need to apply for a loan for every crop. o Assured availability of credit at any time enabling reduced interest burden for the farmer. o Helps buy seeds, fertilizers at farmer’s convenience and choice. o Helps buy on cash-avail discount from dealers. o Credit facility for 3 years – no need for seasonal appraisal. o Maximum credit limit based on agriculture income. o Any number of withdrawals subject to credit limit. o Repayment only after harvest. o Rate of interest as applicable to agriculture advance. o Security, margin and documentation norms as applicable to agricultural advance How to get Kisan Credit Card? o Approach your nearest public sector bank and get the details. o Eligible farmers will get a Kisan Credit Card and a pass book. It has the name, address, particulars of land holding, borrowing limit, validity period, a passport size photograph of holder which may serve both as an identity card and facilitate recording of transactions on an ongoing basis. o Borrower is required to produce the card cum pass book whenever he/she operates the account. 31  Tools of Financial Analysis BUDGETING: It may be defined as a detailed physical and financial statement of a farm plan or of a change in farm plan over a certain period of time. Farm budgeting is a method of analyzing plans for the use of agricultural resources at the command of the decision-maker. In other words, the expression of farm plan in monetary terms through the estimation of receipts, expenses and profit is called farm budgeting. Types of Farm Budgeting: The following are the different types of farm budgeting techniques: a) Partial Budgeting. b) Enterprise Budgeting. c) Complete Budgeting. a) Partial Budgeting: This refers to estimating the outcome or returns for a part of the business, i.e., one or few activities. A partial budget is used to calculate the expected change in profit for a proposed change in the farm business. A partial budget contains only those income and expense items, which will change, if the proposed modification in the farm plan is implemented. Only the changes in income and expenses are included and not the total values. The final result is an estimate of the increase or decrease in profit. In order to make this estimate, a partial budget systematically, answers to following four questions relating to the proposed change: 1) What new or additional cost will be incurred? 2) What current income will be lost or reduced? 3) What new or additional income will be received? and 4) What current costs will be reduced or eliminated? The first two questions identify changes which will reduce profit by either increasing costs or reducing income. Similarly, the last two questions identify factors which will increase profit by either generating additional income or lowering costs. The net change in profit can be computed by estimating the total increase in profit minus the total reduction in profit. A positive value indicates that the proposed change in the farm plan will be profitable. All the changes in farm plan that can be appropriately adapted with the help of a partial budget can be grouped into three types. They are as given below: 1) Enterprise substitution: This indicates a complete or partial substitution of one enterprise for another. E.g. substituting one acre of paddy for one acre of sugarcane. 2) Input substitution: Changes involving the substitution of one input for another or the total amount of input to be used are easily analyzed with a partial budget. E.g. substituting machinery for labour. 32  3) Size or scale of operation: Included in this category would be changes in total size of the farm business or in the size of a single enterprise. E.g. Buying or renting additional land or machinery. b) Enterprise Budgeting: Enterprise is defined as a single crop or livestock commodity. Most farms consist of a combination of several enterprises. An enterprise budget is an estimate of all income and expenses associated with a specific enterprise and an estimate of its profitability. It is pre-requisite for the preparation of a complete farm budget or for the application of farm planning techniques like linear programming. An enterprise budget lists down all the expected output, both in physical as well as value terms, for a unit of a particular activity (i.e., per hectare, per animal or per 100 birds) on the farm. The enterprise budget is important since it depicts the relative profitability of different enterprises or activities or alternatives, which can be used to determine the relative dominance of different enterprises. It includes variable cost or total operating cost and fixed cost including depreciation and interest on fixed asset. Any enterprise budget can also be analyzed in terms of cash versus non-cash expenses and total cost versus actual cash outlay. C) Complete or Whole Farm Budgeting: It is a technique for assembling and organizing the information about the whole farm in order to facilitate decisions about the management of farm resources. It attempts to estimate all items of costs and returns and it presents a complete picture of farm business. It is generally used by beginners or by those farmers who want to completely overhaul their existing farm organization and operation. Complete and partial budgeting is mutually complementary, i.e., the partial budgeting should be used at various stages of complete budgeting in order to decide the changes to be effected in the farm organization. The process of complete budgeting involves: i) appraisal of existing farm resources, their uses and efficiency, ii) appraisal of alternatives or opportunities or various production activities that can be included and their resource requirements and iii) preparing and evaluating the alternative plans for their feasibility and profitability. 2) Complete Budgeting and Partial Budgeting: The differences between these two are: i) Complete budgeting accounts for drastic changes in the organization and operation of the farm, while partial budgeting treats minor changes only. ii) All the available alternatives are considered in complete budgeting, whereas partial budget considers two or a few alternatives only. iii) Complete budgeting is used for estimating the results of entire organization and operation of a farm, while partial budget helps only to study the net effects in terms of costs and returns of relatively minor changes. 33  Balance sheet Balance sheet is a list of the accounts having debit balance or credit balance in the ledger. On one side it shows the accounts that have a debit balance and on the other side the accounts that have a credit balance. The purpose of a balance sheet is to show a true and fair financial position of a business at a particular date. Every business prepares a balance sheet at the end of the account year. A balance sheet is defined as: Balance sheet or Net worth statement: It is a statement of the financial position of a farm business at a particular time, showing its assets, liabilities and equity. If the assets are more than the liabilities it is called net worth or equity and its converse is known as net deficit. The typical balance sheet shows assets on the left side and liabilities & equity on the right side. Both sides are always in balance hence the name balance sheet. Balance sheet is so called because it is prepared with the closing balance of ledger accounts at the end of the year. It has two sides - assets side or left hand side and liabilities side or right hand side. Assets mean all the things and properties under the ownership of the business i.e. building, plant, land, machinery, stock, cash etc. Assets also include anything against which money or service will be received i.e. creditors accrued income, prepaid expenses etc. Liabilities mean our dues to others or anything against which we are to pay money or render service, i.e. creditors, outstanding expenses etc. Asset side of the balance sheet indicates the different types of assets owned by a concern, while liabilities side discloses the various sources through which funds have been obtained in order to acquire those assets. Balance sheet reveals the financial position of the firm on a particular date at a point of time, so it is also called "position statement". It is prepared on the last day of the accounting year and discloses concern for the whole year cannot be determined through the balance sheet because financial position is ever changing. Features of Balance Sheet: Balance sheet has the following features: 1. It is the last stage of final accounts. 2. It is prepared on the last day of an accounting year. 3. It is not an account under the double entry system - it is a statement only. 4. It has two sides - left hand side known as asset side and right hand side known as liabilities side. 5. The total of both sides are always equal. 6. The balances of all asset accounts and liability accounts are shown in it. No expense accounts and revenue accounts are shown here. 7. It discloses the financial position and solvency of the business. 34 Importance of balance sheet: - Farmer claim against the farm business equal to the equity amount - It can be easily prepared it farm records are their - It useful to know financial position of the farm business at any point of time. - It can also study the performance of a business over years. Importance terminology: 1. Tangible Assets: Assets which have physical existence and which can be seen, touched and felt are called "tangible assets", e.g. building, plant, machinery, furniture etc. 2. Intangible Assets: Assets which have no physical existence and which cannot be seen, touched or felt are called "intangible assets", e.g. goodwill, patent right, trade mark etc. Types of assets – 3 types 1. Current Assets: They are very liquid or short -term assets. They can be converted into cash within a short time, usually one year. For example, cash on hand, agril. Produce ready for disposal, i.e., stocks of paddy, jowar, wheat, black gram etc. 2. Working Assets (Intermediate assets): These assets take two to five years to convert into cash form. e.g. Machinery, Equipment, livestock, tractors, trucks etc. 3. Long term Assets: (Fixed assets): An asset that is permanent or will be used continuously for several years is called long-term assets. It takes longer time to convert into cash due o verification of records, legal transactions etc. e.g. land, farm building etc. Type of Liabilities: 3 Types 1. Current liabilities: Debt that must be paid in the short term or in very near future. e.g. crop loans, cost of maintenance of cattle etc. 2. Intermediate liabilities: These loans are due for the repayment within a period of two to five years e.g. Livestock loans, Machinery loans etc. 3. Long term liabilities: The duration of loan payments more than five years. e.g. Tractor loans and land development loans etc. INCOME STATEMENT OR PROFIT AND LOSS STATEMENT This is entirely different from balance sheet, in a balance sheet; we considered assets and liabilities and did not consider operational efficiency in terms of receipts and expenses. In Income statement the items included are receipts, expenses, gains and losses. It defined as a summary of receipts and gains minus expenses and losses during a specific period. It is prepared for the entire farm for one agricultural year. Receipts: They mean the returns obtained from the sale of crop produce and other supplementary products like milk and eggs, wages, gifts etc. Gain in the form of appreciation in the value of assets is also included in the receipts. However, returns from the sale of capital assets, such as livestock, machinery, farm buildings etc. are not included because such returns/income are not really obtained during the period. 35 Expenses: Operating and fixed costs are recorded here. Losses in the form of depreciation on the asset value fall under the expenditure item. However, the amount incurred on the purchase of capital assets is not considered. Net Income: It constitutes net cash income, net operating income and net farm income. Net Cash Income: It gives the position of cash receipts minus cash expenses only during the period for which income statement is prepared. Net Operating Income: It is arrived at by deducting operating expenses from the gross income. Fixed costs are not given any consideration. Operating expenses include crop loans. Net Farm Income: Net farm income equals net operating income less fixed costs. Compared to net cash income and net operating income, it is relatively a better measure of assessing the performance of a farm. It is the return accrued to own capital and family labour employed. Income statement prepared for a given farm foe a given year may present a very bright picture of the farm. A realistic position on the performance of a farm can be gauged by preparing income statements over years to show the actual situation, as the parameters influencing farm business are subject to fluctuations. An income statement is the list of all farm expenses or business debts on the hand and all receipts or business credits on the other Uses / Advantages of Income Statement 1. Provide information on cost and returns of different enterprises. 2. Provide the basis for a simple study and analysis of farm business 3. The analysis provides farmer an opportunity to compare the year’s results with his expectations. 4. It helps to make comparisons of his efficiency with the performance of other farmers operating under similar situations. Recent Trends in Agricultural Credit Since the nationalisation of commercial banks in 1969, India had strongly pursued a policy of “Social and Development Banking” in the rural areas. As a result, formal institutions of credit provision, mainly commercial banks, emerged as important sources of finance to agriculture displacing usurious moneylenders and landlords. The policy of social and development banking was a supply-led policy; it aimed at augmenting the supply of credit to rural areas, and that too at an affordable interest rate. Commercial banks fail to achieve their aim. As a result, the decade of the 1990s was a period of the reversal of the achievements of social and development banking. The situation of the 1990s however, changed in the 2000s. Beginning from the early 2000s there was a revival of agricultural credit in India. Between 2002 and 2011, agricultural credit grew by 17.6 per cent per annum, which was significantly higher than the growth rate of 2.6 per cent recorded for the 1990s. From 2004 onwards the flow of agricultural credit has been increasing. There are three distinct features of the growth in agricultural credit. First, a significant portion of the increase in total bank credit to 36 agriculture in the 2000 was accounted for by indirect finance to agriculture. Indirect finance does not go directly to cultivators but to institutions that support agricultural production in rural areas. Of the total increase in credit supply to agriculture between 2000 and 2011, about one third was contributed by indirect finance. The reason for growth in indirect finance to agriculture credit attributes to the new definition in the official agricultural policy, which states that from 1993 onwards, indirect finance should be considered as part of priority sector advances. Secondly, much of the increase in total advances to agricultural credit (direct + indirect finance) in 2000s were on account of a sharp increase in the number of loans with size of Rs. 10 crore and above, and particularly of Rs. 25 crore and above. Thirdly, there was an increased provision of agricultural credit from bank branches in urban areas in the 2000s. Much of these large-sized advances were made towards financing large agri-business oriented enterprises. There is little evidence to argue that major beneficiaries of the revival in agricultural credit in the 2000s have been the small farmers and marginal farmers. Kisan Credit Card The Kisan Credit Card Scheme (KCC) was introduced in 1998-99 to provide credit to farmers. The Indian commercial banks have been providing Kisan credit (also called cash credit or revolving fund) to farmers for more than a decade now. The base of fixing Kisan credit limit is land holdings, crops cultivated, and crop duration. The consumption needs of the farming family have also been taken into consideration while computing the limits. The Kisan credit card provides a lump sum loan released to the farmer to meet his crop needs like purchase of seeds, manure, pesticides, labour, and irrigation etc. The farmer is expected to draw from this account based on his needs on different occasions. He is expected to pay back the entire amount within one year mostly after the proceeds of the crops are realised so that he can apply for fresh Kisan credit limit. No doubt Kisan credit helps farmer most at the time of commencement of the farming operation. However, it is not possible for all farmers to repay the loan amount within one year. In order to repay the loan amount within one year he takes money from lenders and again he borrows to repay money lenders. Consequently, he left with no money to undertake his farming operations. He enters into a debt trap. Moreover, the Kisan credits are given to the farmers against mortgage of the lands on which cultivation is undertaken. In India, more often than not, farmers do not have proper title of the land on which they are cultivating. Thus, Kisan credit is useless for them. Therefore, Kisan credit policy is not as per the requirement of Indian farmers; it failed to entertain agriculture credit to all farmers. Self Help Groups (SHGs) A self-help group has been defined as a small and formal association of poor having preferably similar socio-economic background and who have come together to realise some common goals based on the principle of self-help and collective responsibility. The Self Help Group movement in India has gained a momentum in recent years. The promotion of self-help groups in India began more formally in 1992 with the launch of the SHG-Bank Linkage Programme by National Bank for Agriculture and Rural Development. The programme’s main aim was to improve rural poor’s access to formal credit system in a cost effective and sustainable manner by making use of SHGs. The invention of Self-Help Group is a boon for the small farmer in general and village women in particular. It has been responsible for bringing in a qualitative change in the lives of thousands of people. Under Self-Help Group, banks are expected to provide credit to the SHGs against group guarantee and members of the group stand as collective guarantors. Banks allow the members of the SHGs to decide on which members of the group shall borrow and how much, and 37 the methodology of repayment. Normally, SHGs loans are term loans wherein the members are expected to repay the loans in regular instalments over a period of time. In India most farmers, especially small farmers and marginal farmers neither have title of the land nor have any collateral security. As a result, they fail to get credit from commercial banks. In this situation, SHGs help them to get credit without any hassles. South based NGO, Sri Kshetra Dharmasthala Rural Development Project (SKDRDP) has been promoting SHGs of the small farmers for more than two decades and helping them with credit facilities for their farming operations. This movement popularly known as pragathibandhu groups in Karnataka state has helped more than one and half million farmers directly or through their family members who are members of the SKDRDP promoted SHGs. SKDRDP sources bulk loans from commercial banks and lends them to SHGs for undertaking their farming operations. The unique feature of the SKDRDP is that SHGs members have to repay in weekly instalments. This uniqueness encourages farmers to go for subsidiary activities like dairy farming, vegetable cultivation, floriculture, or pure daily wage labour so that they can earn money every week to repay loan. This scheme of repayment has not only help farmer to repay loan easily but also help them thinking innovative. Realising the potentiality of the SHGs, the National Bank for Agriculture and Rural Development Bank (NABARD) is now actively facilitating promotion of Joint Liability Groups (JLGs) of farmers for providing necessary credit through JLGs. Commercial banks and Non- Government Organisations (NGOs) are given incentives for promoting JLGs and credit linking them with bank. Department of financial services, ministry of finance, government of India iss