AECO 142 Agricultural Finance PDF

LECTURE NOTES Course No. AECO 142 Agricultural Finance and Co-operation Compiled by Dr. P.RAGHURAM Professor and University Head Department of Agricultural Economics S.V. Agricultural College TIRUPATI...

LECTURE NOTES Course No. AECO 142 Agricultural Finance and Co-operation Compiled by Dr. P.RAGHURAM Professor and University Head Department of Agricultural Economics S.V. Agricultural College TIRUPATI & Dr.S. Hymajyoti Assistant professor Agricultural College RAJAHMUNDARY  LECTURE-1 Definition of agricultural Finance – nature-scope- meaning - significance -micro & macro 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 with in 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) 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.  LECTURE -2 Credit needs in Agriculture – meaning and definition of credit-classification of credit based on time, purpose, security, lender and borrower. _____________________________________________________________________ The word “credit” comes from the Latin word “Credo” which means “I believe”. Hence credit is based up on belief, confidence, trust and faith. Credit is other wise called as loan. Definition: Credit / loan is certain amount of money provided for certain purpose on certain conditions with some interest, which can be repaid sooner (or) later. According to Professor Galbraith credit is the “temporary transfer of asset from one who has to other who has not” Credit needs in Agriculture: Agricultural credit is one of the most crucial inputs in all agricultural development programmes. For a long time, the major source of agricultural credit was private moneylenders. But this source of credit was inadequate, highly expensive and exploitative. To curtail this, a multi-agency approach consisting of cooperatives, commercial banks ands regional rural banks credit has been adopted to provide cheaper, timely and adequate credit to farmers. The financial requirements of the Indian farmers are for, 1. Buying agricultural inputs like seeds, fertilizers, plant protection chemicals, feed and fodder for cattle etc. 2. Supporting their families in those years when the crops have not been good. 3. Buying additional land, to make improvements on the existing land, to clear old debt and purchase costly agricultural machinery. 4. Increasing the farm efficiency as against limiting resources i.e. hiring of irrigation water lifting devices, labor and machinery. Credit is broadly classified based on various criteria: 1. Based on time: This classification is based on the repayment period of the loan. It is sub-divided in to 3 types  Short–term loans: These loans are to be repaid within a period of 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 crop. The farmers require this type of credit to meet the expenses of the ongoing agricultural operations on the farm like sowing, fertilizer application, plant protection measures, payment of wages to casual labourers etc. The borrower is supposed to repay the loan from the sale proceeds of the crops raised.  Medium – term loans: Here the repayment period varies from 18 months to 5 years. These loans are required by the farmers for bringing about some improvements on his farm by way of purchasing implements, electric motors, milch cattle, sheep and goat, etc. The relatively longer period of repayment of these loans is due to their partially-liquidating nature.  Long – term loans: These loans fall due for repayment over a long time ranging from 5 years to more than 20 years or even more. These loans together with medium terms loans are called investment loans or term loans. These loans are meant for permanent improvements like levelling and reclamation of land, construction of farm buildings, purchase of tractors, raising of orchards ,etc. Since these activities require large capital, a longer period is required to repay these loans due to their non - liquidating nature. 2. Based on Purpose: Based on purpose, credit is sub-divided in to 4 types.  Production loans: These loans refer to the credit given to the farmers for crop production and are intended to increase the production of crops. They are also called as seasonal agricultural operations (SAO) loans or short – term loans or crop loans. These loans are repayable with in a period ranging from 6 to 18 months in lumpsum.   Investment loans: These are loans given for purchase of equipment the productivity of which is distributed over more than one year. Loans given for tractors, pumpsets, tube wells, etc.  Marketing loans: These loans are meant to help the farmers in overcoming the distress sales and to market the produce in a better way. Regulated markets and commercial banks, based on the warehouse receipt are lending in the form of marketing loans by advancing 75 per cent of the value of the produce. These loans help the farmers to clear off their debts and dispose the produce at remunerative prices.  Consumption loans: Any loan advanced for some purpose other than production is broadly categorized as consumption loan. These loans seem to be unproductive but indirectly assist in more productive use of the crop loans i.e. with out diverting then to other purposes. Consumption loans are not very widely advanced and restricted to the areas which are hit by natural calamities. These loams are extended based on group guarantee basis with a maximum of three members. The loan is to be repaid with in 5 crop seasons or 2.5 years whichever is less. The branch manager is vested with the discretionary power of sanctioning these loans up to Rs. 5000 in each individual case. The rate of interest is around 11 per cent. The scheme may be extended to 1) IRDP beneficiaries 2) Small and marginal farmers 3) Landless Agril. Laborers 4) Rural artisans 5) Other people with very small means of livelihood hood such as carpenters, barbers, washermen, etc. 4. Based on security: The loan transactions between lender and borrower are governed by confidence and this assumption is confined to private lending to some extent, but the institutional financial agencies do have their own procedural formalities on credit transactions. Therefore it is essential to classify the loans under this category into two sub-categories viz., secured and unsecured loans.   Secured loans: Loans advanced against some security by the borrower are termed as secured loans. Various forms of securities are offered in obtaining the loans and they are of following types. I. Personal security: Under this, borrower himself stands as the guarantor. Loan is advanced on the farmer’s promissory note. Third party guarantee may or may not be insisted upon (i.e. based on the understanding between the lender and the borrower) II. Collateral Security: Here the property is pledged to secure a loan. The movable properties of the individuals like LIC bonds, fixed deposit bonds, warehouse receipts, machinery, livestock etc, are offered as security. III. Chattel loans: Here credit is obtained from pawn-brokers by pledging movable properties such as jewellery, utensils made of various metals, etc. IV. Mortgage: As against to collateral security, immovable properties are presented for security purpose For example, land, farm buildings, etc. The person who is creating the charge of mortgage is called mortgagor (borrower) and the person in whose favour it is created is known as the mortgagee (banker). 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. Hypothecated loans: 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 favor 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 pay the loan installment 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.  Unsecured loans: Just based on the confidence between the borrower and lender, the loan transactions take place. No security is kept against the loan amount 4. Lender’s classification: Credit is also classified on the basis of lender such as  Institutional credit: Here are loans are advanced by the institutional agencies like co-operatives, commercial banks. Ex: Co-operative loans and commercial bank loans.  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. 5. Borrower’s classification: The credit is also classified on the basis of type of borrower. This classification has equity considerations.  Based on the business activity like farmers, dairy farmers, poultry farmers, pisiculture farmers, rural artisans etc.  Based on size of the farm: agricultural labourers, marginal farmers, small farmers , medium farmers , large farmers ,  Based on location hill farmers (or) tribal farmers. 6. Based on liquidity: The credit can be classified into two types based on liquidity and they are   Self-liquidating loans: They generate income immediately and are to be paid with in one year or after the completion of one crop season. Ex: crop loans.  Partially -liquidating: They will take some time to generate income and can be repaid in 2-5 years or more, based on the economic activity for which the loan was taken. Ex: Dairy loans, tractor loans, orchard loans etc., 7. Based on approach:  Individual approach: Loans advanced to individuals for different purposes will fall under this category  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  Differential Interest Rate (DIR) approach: Under this approach loans will be given to the weaker sections @ 4 per cent per annum. 8. Based on contact:  Direct Loans: Loans extended to the farmers directly are called direct loans. Ex: Crop loans.  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.  LECTURE NO: 3 Credit Analysis-Economic Feasibility Tests- Returns to investment, Repayment capacity and Risk bearing ability (3Rs) ________________________________________________________________________ The technological break-thorough achieved in Indian agriculture made the agriculture capital intensive. In India most of the farmers are capital starved. The farmers need credit at right time, through right agency and in adequate quantity to realize maximum productivity. This is from farmer’s point of view. In contrast to the farmer’s point of view, when a farmer approaches an Institutional Financial Agency (IFA) with a loan proposal, the banker should be convinced about the economic viability of the proposed investments. Economic Feasibility Tests of Credit When the economic feasibility of the credit is being observed, three basic financial aspects are to be assessed by the banker. If the loan is advanced, 1. Will it generate returns more than costs? 2. Will the returns have surplus, to repay the loan when it falls due? 3. Will the farmer stand up to the risk and uncertainty in farming? These three financial aspects are known as 3 Rs of credit, which are as follows 1. Returns from the proposed investment 2. Repayment capacity the investment generates 3. Risk- bearing ability of the farmer-borrower The 3Rs of credit are sound indicators of credit worthiness of the farmers. Returns from the Investment This is an important measure in credit analysis. The banker needs to have an idea about the extent of returns likely to be obtained from the proposed investment. The farmer’s request for credit can be accepted only if he can be able to generate returns that enable him to meet the costs. Returns obtained by the farmer depend upon the decisions like,  What to grow?  How to grow?  How much to grow?  When to sell?  Where to sell? Therefore the main concern here is that the farmers should be able to generate incremental returns that should cover the additional costs incurred with borrowed funds. Repayment Capacity: Repayment capacity is nothing but the ability of the farmer to repay the loan obtained for the productive purpose with in a stipulated time period as fixed by the lending agency. At times the loan may be productive enough to generate additional income but may not be productive enough to repay the loan amount. Hence the necessary condition here is that the loan amount should not only profitable but also have potential for repayment of the loan amount. Under such conditions only the farmer will get the loan amount. The repayment capacity not only depends on returns, but also on several other quantitative and qualitative factors as given below. Y= f(X1, X2, X3, X4 X5, X6, X7…) Where, Y is the dependent variable ie., the repayment capacity The independent variables viz., X1to X4 are considered as quantitative factors while X5 to X7 are considered as qualitative factors. X1(+) = Gross returns from the enterprise for which the loan was taken during a season /year (in Rs.) X2(-) = Working expenses in Rs. X3(-) = Family consumption expenditure in Rs. X4(-) = Other loans due in Rs. X5(+) = Literacy  X6(+) = Managerial skill X7(+) = Moral characters like honesty, integrity etc. Note: Signs in the brackets are apriori signs. Hence, eventhough the returns are high, the repayment capacity is less because of other factors. The estimation of repayment capacity varies from crop loans (i.e. self liquidating loans) to term loans (partially liquidating loans) i) Repayment capacity for crop loans Gross Income- (working expenses excluding the proposed crop loan + family living expenses + other loans due+ miscellaneous expenditure ) ii) Repayment capacity for term loans Gross Income- (working expenses + family living expenses + other loans due+ miscellaneous expenditure + annual installment due for term loan) Causes for the poor repayment capacity of Indian farmer 1. Small size of the farm holdings due to fragmentation of the land. 2. Low production and productivity of the crops. 3. High family consumption expenditure. 4. Low prices and rapid fluctuations in prices of agricultural commodities. 5. Using credit for unproductive purposes 6. Low farmer’s equity/ net worth. 7. Lack of adoption of improved technology. 8. Poor management of limited farm resources, etc Measures for strengthening the repayment capacity 1. Increasing the net income by proper organization and operation of the farm business. 2. Adopting the potential technology for increasing the production and reducing the expenses on the farm. 3. Removing the imbalances in the resource availability.  4. Making the schedule of loan repayment plan as per the flow of income. 5. Improving the networth of the farm households. 6. Diversification of the farm enterprises. 7. Adoption of risk management strategies like insurance of crops, animals and machinery and hedging to control price variations ,etc., Risk Bearing Ability It is the ability of the farmer to withstand the risk that arises due to financial loss. Risk can be quantified by statistical techniques like coefficient of variation (CV), standard deviation (SD) and programming models. The words risk and uncertainty are synonymously used. Some sources / types of risk 1. Production/ physical risk. 2. Technological risk. 3. Personal risk 4. Institutional risk 5. Weather uncertainty. 6. Price risk Repayment capacity under risk Deflated gross Income- (working expenses excluding the proposed crop loan+ family living expenses + other loans due+ miscellaneous expenditure ) Measures to strengthen risk bearing ability 1. Increasing the owner’s equity/net worth 2. Reducing the farm and family expenditure. 3. Developing the moral character i.e. honesty, integrity , dependability and feeling the responsibility etc. All these qualities put together are also called as credit rating. 4. Undertaking the reliable and stable enterprises ( enterprises giving the guaranteed and steady income) 5. Improving the ability to borrow funds during good and bad times of crop production. 6. Improving the ability to earn and save money. A part of the farm earnings should be saved by the farmer so as to meet the uncertainty in future. 7. Taking up of crop, livestock and machinery insurance.  LECTURE NO: 4 Five Cs of credit - Character, Capacity, Capital, Condition and Commonsense and Seven Ps of credit - Principle of Productive purpose, Principle of personality, Principle of productivity, Principle of phased disbursement, Principle of proper utilization, Principle of payment and Principle of protection ________________________________________________________________________ Next to 3 Rs of credit, the other important tests applied to study the economic feasibility of the proposed investment activity are 5 Cs of credit viz., character, capacity, capital, condition and 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: Capital indicates the availability of money with the farmer - borrower. When his capacity and character are proved to be inadequate the capital will be considered. It represents the networth of the farmer. It is related to the repayment capacity and risk bearing ability of the farmer - borrower. 4. Condition: It refers to the conditions needed for obtaining loan from financial institutions i.e. procedure to be followed while advancing a loan. 5. Commonsense: This relates to the perfect understanding between the lender and the borrower in credit transactions. This is in fact prima-facie requirement in obtaining credit by the borrower. 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). Inspite of knowing this, the consumption credit is not given due importance by the institutional financial agencies. This principle conveys that crop loanss 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 pumpsets 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. 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 lumpsum 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 can not 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  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.  LECTURE – 5 Methods and Mechanics of Processing Loan Application ____________________________________________________________________ Procedure to be followed while sanctioning farm loan: The financing bank is vested with the full powers either to accept or reject the loan application of a farmer. This is nothing but the appraisal of farm credit proposals or procedures and formalities followed in the processing of loans. The processing procedure of a loan application can be dealt under following ten sub-heads or steps. 1. Interview with the farmer 2. Submission of loan application by the farmer 3. Scrutiny of records. 4. Visit to the farmer’s field before sanction of loan 5. Criteria for loan eligibility 6. Sanction of loan 7. Submission of requisite documents 8. Disbursement of loan 9. Post-credit follow-up measures , and 10. Recovery of loan. 1. Interview with the farmer: A banker has a good scope to assess the credit characteristics like honesty, integrity, frankness, progressive thinking, indebtedness, repayment capacity etc, of a farmer-borrower while interviewing. During the interview, the banker explains the terms and conditions under which the loan is going to be sanctioned. Interview also helps the banker to understand the genuine credit needs of farmer. Therefore an interview is not a formality, but it facilitates the banker to study a farmer in detail and assess his actual credit requirements. 2. Submission of loan application by the farmer: The banker gives a loan application to the farmer borrower after getting satisfied with his credentials. The farmer has to fill the details like the location of the farm, purpose of the loan, cost of the scheme, credit requirements, farm budgets, financial statements etc. The items like 10 -1 (indicating the ownership of land or title deeds) and adangal ( statement showing the cropping pattern adopted by the farmer-borrower ), farm map, no-objection certificate from the co-operatives, non-encumbrance certificate from Sub-Registrar of land assurances, affidavit from the borrower regarding his non-mortgage of land elsewhere are to be appended to the loan application. A passport size photograph of farmer is also to be affixed on the loan application form. 3. Scrutiny of records: The relevant certificates indicating the ownership of land and extent of land are to be verified by the bank officials with village karnam or village revenue official. 4. Visit to the farmer’s field before sanction of loan: After verifying the records at village level, the field officer of the bank pays a visit to the farm to verify the particulars given by the farmer. The pre-sanction visit is expected to help the banker in identifying the farmer and guarantor, to locate the boundaries of land as per the map, assess the managerial capacity of the farmer in farming and allied enterprises and the farmer’s attitude towards latest technology. Details on economics of crop and livestock enterprises, economic feasibilities of proposed projects and farmer’s loan position with the non- institutional sources are ascertained in the pre -sanction visit. Hence, the pre-sanction visit of the bank officials is very important to verify credit-worthiness and trust-worthiness of the farmer - borrower. While appraising different types of loans, different aspects should be verified. For advancing loan for well digging, the location of proposed well, availability of ground water, rainfall, area to be covered (command area of the well) and distance from the nearby well etc, are verified in the pre-sanction visit. In the same way, for other loans, the relevant aspects are verified. All these aspects are included in the report submitted to the branch manager for taking the final decision in sanctioning of the loan amount. 5. Criteria for loan eligibility: The following aspects are to be considered while judging the eligibility of a farmer - borrower to obtain loan.  He should have good credit character and financial integrity.  His financial transactions with friends, neighbours and financial institutions must be proper (i.e. he should not be a wilful defaulter in the past)  He must have progressive outlook and receptive to adopt modern technology.  He should have firm commitment to implement the proposed plan.  The security provided by the farmer towards the loan must be free from any sort of encumbrance and litigation. 6. Sanction of loan: The branch manager takes a decision whether to sanction the loan (or) not, after carefully examining all the aspects presented in the pre-sanction farm inspection report submitted by the field officer. Before sanctioning, the branch manager considers the technical feasibility, economic viability and bankability of proposed projects including repayment capacity, risk-bearing ability and sureties offered by the borrower. If the loan amount is beyond the sanctioning power of branch manager, he will forward it to regional manager (or) head office of bank, incorporating his recommendations. The office examines the proposed projects and take final decision and communicate their decision to the branch manager for further action. 7. Submission of requisite documents: After the loan has been sanctioned, the following documents are to be obtained by the bank from the farmer- borrower.   Demand promissory note  Deed of hypothecation – movable property  Deed of mortgage (for immovable property)  Guarantee letter  Instalment letter  An authorisation letter regarding the repayment of loan from the marketing agencies. Title deeds are to be examined by the bank’s legal officer. Simple mortgage is followed in the case of ancestral property and equitable mortgage in respect of self- acquired property. 8. Disbursement of loan: Immediately after the submission of requisite documents, the loan amount is credited to the borrower’s account. The sanctioned loan amount is disbursed in a phased manner, after ensuring that the loan is properly used by the farmer- borrower. Based on the flow of income of the proposed project a realistic repayment plan is prepared and given to the farmer. 9. Post-credit follow-up measures: To ascertain the proper use of the sanctioned loan the branch manager or field officer pays a visit to the farmer’s field. Apart from this, farmer can get the technical advice if any needed from the field officer for the implementation of the proposed project. These visits are helpful for developing a close rapport between the farmers and the banker. And these visits are more informal than formal. These visits also help in assessing any further requirement of supplementary credit to complete the scheme. 10. Recovery of loan: Well in advance the bank reminds the farmer- borrower about the due date of loan repayment. Some appropriate measures like organising recovery camps, special drives, village meetings etc, are to be organised by banks to recover the loan in time. In case of default, the reasons are to be ascertained as to whether he is a wilful defaulter or not. If he founds to be a non-wilful defaulter, he is helped further by extending fresh financial assistance for increased farm production. In the case of wilful defaulter, the bank officials initiate stringent measures to recover loan through court of law. In some possible cases banks make some tie-up arrangements i.e. the recovery of the loan is linked with marketing. In respect of justifiable cases re-phasing of repayment plan is allowed.  LECTURE-6 Repayment plans: Lumpsum repayment /straight-end repayment, Amortized decreasing repayment, Amortized even repayment, Variable or quasi variable repayment plan, Future repayment plan and Optional repayment plan ________________________________________________________________________ The repayment of term loans (i.e. medium term loans and long term loans) differs from that of short term loans because they are characterized by their partially liquidating nature. These loans are recovered by a given number of installments depending up on the nature of the asset and the amount advanced for the asset under consideration. There are six types of repayment plans for term loans and they are 1. Straight-end repayment plan or single repayment plan or lumpsum repayment plan 2. Partial repayment plan or Balloon repayment plan 3. Amortized repayment plan a) Amortized decreasing repayment plan b) Amortized even repayment plan or Equated annual installment method 4. Variable repayment plan (or) Quasi-variable repayment plan 5. Optional repayment plan 6. Reserve repayment plan (or) Future repayment plan 1. Straight-end Repayment Plan or Single Repayment Plan (or) Lumpsum Repayment Plan The entire loan amount is to be cleared off after the expiry of stipulated time period. The principal component is repaid by the borrower at a time in lumpsum when the loan matures, while interest is paid each year. 2. Partial repayment plan or Balloon repayment plan  Here the repayment of the loan will be done partially over the years. Under this repayment plan, the installment amount will be decreasing as the years pass by except in the maturity year (final year), during which the investment generates sufficient revenue. This is also called as balloon repayment plan, as the large final payment made at the end of the loan period (i.e. in the final year) after a series of smaller partial payments. 3. Amortized repayment plan: Amortization means repayment of the entire loan amount in a series of installments. This method is an extension of partial repayment plan. Amortized repayment plans are of two types a) Amortized decreasing repayment plan Here the principal component remains constant over the entire repayment period and the interest part decreases continuously. As the principal amount remains fixed and the interest amount decreases, the annual installment amount decreases over the years. loans advanced for machinery and equipment will fall under this category. As the assets do not require much repairs during the initial years of loan repayment, a farmer can able to repay larger installments. Fig:1 Amortized decreasing repayment plan b) Amortized even repayment plan Here the annual installment over the entire loan period remains the same. The principal portion of the installment increases continuously and the interest component declines gradually. This method is adopted for loans granted for farm development, digging of wells, deepening of old wells, construction of godowns, dairy, poultry units, orchards etc. Fig 2: Amortized even repayment plan The annual installment is given by the formula I = B* i/1-(1+i)-n Where I= annual installment in Rs. B= principal amount borrowed in Rs. n= loan period in years i= annual interest rate 4. Variable repayment plan or Quasi-variable repayment plan As the name indicates that, various levels of installments are paid by the borrower over the loan period. At times of good harvest a larger installment is paid and at times of poor harvest smaller installment is paid by the borrower. Hence, according to the convenience of the borrower the amount of the installment varies here in this method. This method is not found in lendings of institutional financial agencies. 5. Optional repayment plan: Here in this method an option is given for the borrower to make payment towards the principal amount in addition to the regular interest. 6. Reserve repayment plan or Future repayment plan  This type of repayment is seen with borrowers in areas where there is variability in farm income. In such areas the farmers are haunted by the fear of not paying regular loan installments. To avoid such situations, the farmers make advance payments of loan from the savings of previous year. This type of repayment is advantageous to both the banker and borrower. The bankers need not worry regarding loan recovery even at times of crop failure and on the other hand borrower also gains, as he keeps up his integrity and credibility.  LECTURE-7 Recent trends in Agricultural finance-Social control and Nationalization of Banks ___________________________________________________________________ Recent trends in Agricultural finance: Finance in agriculture is as important as development of technologies. Technical inputs can be purchased and used by farmer only if he has funds. But his own money is always inadequate and he needs outside finance. Professional money lenders were the only source of credit to agriculture till 1935. They used to charge exorbitantly high rates of interest and follow unethical practices while giving loans and recovering them. As a result, farmers were heavily burdened with debts and many of them are living in perpetuated debts. There was widespread discontentment among farmers against these practices and there were instances of riots also. With the passing of Reserve Bank of India Act 1934, District Central Co- operative Banks Act and Land Development Banks Act, agricultural credit received impetus and there were improvements in agricultural credit. A powerful alternative agency came into being. Large-scale credit became available with reasonable rates of interest in easy terms, both in terms of granting loans and recovery of them. Both the co- operative banks advanced credit mostly to agriculture. The Reserve Bank of India as the central bank of the country took lead in making credit available to agriculture through these banks by laying down suitable policies. Although the co-operative banks started financing agriculture with their establishments in 1930s real impetus was received only after independence when suitable legislation were passed and policies formulated. Thereafter, bank credit to agriculture made phenomenal progress.  Till 14 major commercial banks were nationalized in 1969, co-operative banks were the main institutional agencies providing finance to agriculture. After nationalization, it was made mandatory for these banks to provide finance to agriculture as a priority sector. These banks undertook special programmes of branch expansion and created a network of banking services through out the country and started financing agriculture on large scale. Thus agricultural credit acquired multi-agency dimension. Development and adoption of new technologies and availability of finance go hand in hand Now the agricultural credit, through multi agency approach has come to stay. The procedures and amount of loans for various purposes have been standardized. Among the various purposes "crop loans" (Short-term loan) has the major share. In addition, farmers get loans for purchase of electric motor with pumpsets, tractor and other machinery, digging wells, installation of pipe lines, drip irrigation, planting fruit orchards, purchase of dairy animals, poultry, sheep and goat keeping and for many other allied enterprises. The quantum of agricultural credit can be judged from the figures of credit disbursed by all the banks at all India level. Year Rs. in crore 1987-88 9255 1988-89 9785 1989-90 10186 1990-91 8983 1991-92 11303 1992-93 13000 1993-94 15100 1994-95 16700 1999-2000 43000 2000-01 51500 2001-02 NA 2002-03 69560 2003-04 86981 2004-05 125299 2005-06 180486 2006-07 229400 2007-08 254657 2008-09 264455*  2009-10 325000** Note: * Proposed, ** Targeted Table1: Flow of Institutional Credit to Agriculture and Allied Activities (Rs. Crore) Institutional 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09* 2009-10** Credit from Cooperative 23716 26959 31424 39786 42480 48258 35747 _ Banks RRBs 6070 7581 12404 15223 20435 25312 25852 _ Commercial 39774 52441 81481 125477 166485 181087 202856 _ Banks Grand Total 69560 86981 125299 180486 229400 254657 264455 325000 Source:http://www.indiabudget.nic.in * Proposed, ** Targeted. Extent and Nature of Farmers’ Indebtedness The National Sample Survey Organization (NSSO) in the country surveyed the extent of indebtedness among farmers in its 59th round of surveys as far back as 2003. The survey indicated that nearly half (48.6%) of farmer households were indebted and 61 per cent of them were small farmers holding less than one hectare. Of the total outstanding amount, 41.6 per cent was taken for purposes other than the farm related activities. About 30.6 per cent of the total loan was for capital expenditure purposes and 27.8 per cent was for current expenditure in farm related activities. The other important fact was that 42.3 per cent of the outstanding amounts are from informal sources like moneylenders and traders.  An expert group on agricultural indebtedness under the chairmanship of Shri. R. Radhakrishna was formed. In its report in July, 2007, it estimated that in 2003 non- institutional channels accounted for Rs. 48,000 crore of farmers’ debt out of which Rs. 18,000 crore was availed at an interest rate of 30 per cent per annum. It said that the cropping pattern in India is highly skewed in favour of cash crops in recent years which invited more investment in agriculture. For cash crops, there is a need for long term loans, but short term credit dominates the farm credit structure, accounting for more than 75 per cent of the total. Social control and Nationalization of Banks At the time of independence, the private sector banks were predominantly urban–oriented and under the control of a few industrialists which had not helped in achieving the basic socio–economic objectives. The credit needs of agriculture, small– scale industries and also weaker sections such as small traders and artisans continued to be ignored. Even though for nearly three fourths of population, agriculture is the main occupation and contributed 50 per cent of gross domestic product, the total bank credit advanced to this sector was only one per cent as on June, 1967. The bulk of the deposits contributed by the public were being advanced to the industrial and trade sectors ignoring the prime sector of agriculture. In agriculture, the credit scene was dominated by the private money lenders who were charging exorbitant rates of interest. All these situations compelled the imposition of social control over the banks in 1968. The main aim of social control was achieving of wider spread of bank credit to the priority sectors thereby reducing the authority of managing directors in advancing the loans. Social control created the tempo of banks expansion, as evident by the addition of 785 new branches by the end of first half of 1969. But this did not make dent in increased canalisation of credit to agricultural sector and to the other weaker sections.The directions issued by the Government were also ignored by many of the banks. Under these circumstances the Government thought that the social control of banks was not sufficient for socio – economic development and nationalisation of banks was considered as an alternative solution. The Government of India on 19th July 1969, promulgated an ordinance called “The Banking companies Ordinance 1969” (Acquisition and Transfer of Undertakings). Under this act 14 commercial banks having deposits of more than Rs. 50 crore each were nationalised and they were 1. Central Bank of India 2. Bank of India 3. Punjab National Bank 4. Bank of Baroda 5. United commercial Bank 6. Canara Bank 7. United Bank of India 8. Dena Bank 9. Union Bank of India 10. Allahabad Bank 11. Syndicate Bank 12. Indian Bank 13. Bank of Maharashtra 14. Indian overseas Bank The objectives of nationalisation of banks (done by the former Prime Minister, Smt. Indira Gandhi) were  Removal of control on banking business by a few industrialists.  Elimination of the use of bank credit for speculative and unproductive purposes.  Expansion of credit to priority areas which were grossly neglected like agriculture and small scale industries.  Giving a professional bent to the bank management  Encouragement of new entrepreneurs  Provision of adequate training to bank staff. The average population served per bank branch declined markedly from 65,000 in June, 1969 to 32,000 by June, 1975.  Encouraged by the success of first spell of nationalisation of banks, six more banks in the private sector, having deposits more than Rs.200 crore were nationalised on 15th April 1980. The six banks nationalised in the second spell were 1. Punjab and Sind bank 2. Andhra Bank 3. New Bank of India 4. Vijaya Bank 5. Oriental Bank of Commerce 6. Corporation Bank. As a result of two spells of nationalisation of banks, by the end of June, 1992 bank advances towards agriculture sector were 16.2 per cent of total credit as against one per cent by the end of June, 1967.  LECTURE-8 Lead Bank Scheme- Origin-Objectives-functions and progress; Regional Rural Banks (RRBs )- origin-objectives-functions-progress-RRBs in Andhra Pradesh _____________________________________________________ Lead Bank Scheme The study group appointed by National Credit Council (NCC) in 1969 under the chairmanship of Prof. D.R.Gadgil recommended “Service Area Approach” for the development of financial structure. In the same year i.e., 1969, RBI appointed Sri. F.K.F Nariman committee to examine recommendations of Prof. Gadgil’s study group. The Nariman committee also endorsed the views of the Gadgil committee on “Service Area Approach” and recommended the formulation of “Lead Bank Scheme”. The RBI accepted the Nariman’s committee recommendations and lead bank scheme came into force from 1969. Under the lead bank scheme, specific districts are allotted to each bank, which would take the lead role in identifying the potential areas for banking and expanding credit facilities. Lead bank is the leading bank among the commercial banks in a district i.e. having maximum number of bank branches in the district. Lead bank acts as a consortium leader for coordinating the efforts of all credit institutions in the each allotted district for the development of banking and expansion of credit facilities. The activities of lead bank can be dealt under two important phases Phase I: Survey of the lead district The RBI has mentioned the following functions of lead bank under phase-I  Surveying the potential areas for banking in the district.   Identifying the business establishments which are so far dependent on non – institutional agencies for credit and financing them so as to raise their income  Examining the available marketing facilities for agricultural and industrial products and linking credit with marketing.  Invoking cooperation among different banks in opening new bank branches.  Estimating the credit gaps in various sectors of district economy.  Developing contacts and maintaining liaison with the Government and other agencies. Phase II-Preparation of credit Plans: RBI emphasized that the lead bank should  Formulate the bankable loaning schemes involving intensive use of labour, so as to generate additional employment.  Disburse loans to increase the productivity of land in Agriculture and allied activities, so as to increase the income level.  Give maximum credit to weaker sections of the society mainly for productive purposes. Therefore lead bank scheme expects the banker to become an important participant in the developmental process in the area of its operation in rural areas, and the service area approach put the banker in the position of implementing the development plans. Contd… Table2: Lead Banks of Different Districts in Andhra Pradesh S.No District Lead Bank 1 East Godavari Andhra Bank 2 West Godavari Andhra Bank 3 Guntur Andhra Bank 4 Srikakulam Andhra Bank 5 Chittoor Indian Bank 6 Krishna Indian Bank 7 Anantapur Syndicate Bank 8 Cuddapah Syndicate Bank 9 Kurnool Syndicate Bank 10 Nellore Syndicate Bank 11 Prakasam Syndicate Bank 12 Mahbubnagar State Bank of India 13 Medak State Bank of India 14 Visakhapatnam State Bank of India 15 Vizianagaram State Bank of India 16 Warangal State Bank of India 17 Adilabad State Bank of Hyderabad 18 Karimnagar State Bank of Hyderabad 19 Khammam State Bank of Hyderabad 20 Nalgonda State Bank of Hyderabad 21 Nizamabad State Bank of Hyderabad 22 Ranga Reddy State Bank of Hyderabad Regional Rural Banks (RRBs) All India Rural Credit Review Committee (AIRCRC) under chairmanship of Sri. B. Venkatappaiah during the year 1969 was of the opinion that over large parts of the country the marginal and small farmers were deprived of having access to the cooperative credit both for production and investment purposes. This stressed the establishment of institutional financial agencies under public sector. Consequently the first spell of nationalization of banks was done with greater expectations, but the situation had not changed as per the expectations. Hence, the Government of India appointed a working committee under the chairmanship of Sri. M. Narasimham to study the financial assistance rendered to the weaker sections in the rural areas. This working committee recommended the setting up of rural based institutional agencies called “Regional Rural Banks” after identifying shortcomings in the functioning of commercial banks and cooperatives. The Government of India accepted the recommendations of Sri.Narsimham committee and regional rural banks came in to existence through regional rural banks ordinance on 26th September, 1975. Initially only 5 RRBs were set up on pilot basis with sponsorship of commercial banks on October 2nd, 1975. This ordinance of 1975 was replaced by the Regional Rural Banks Act, 1976. The list of five RRBs opened in the country is presented in table 3. Table 3.List of RRBs S.No Sponsoring Bank Name of RRB Head quarters 1. Syndicate Bank Pratham Bank Moradabad ( UP) 2. State Bank of India (SBI) Gorakhpur Gorakhpur (UP) 3. United Bank of India Gaur Grameena Malda (WB) Bank 4. Punjab National Bank Haryana Kshetriya Bhiwani ( Haryana)  Grameena Bank 5. United Commercial Bank Jaipur Nagalur Jaipur, Rajasthan Anchalik Grameena Bank The objectives of RRBs are:  To develop rural economy.  To provide credit for agriculture and allied activities.  To encourage small scale industries, artisans in the villages.  To reduce the dependence of weaker sections (Marginal farmers, small farmers and rural artisans) on private money lenders.  To fill the gap created by the moratorium on borrowings from private money lenders.  To make backward and tribal areas economically better by opening new bank branches.  To help the financially poor people in their consumption needs. Functioning of RRBs: Each RRB is being sponsored by a scheduled commercial bank. The operational area of each RRB is one or two districts. Each branch of RRB can serve a population of roughly 20,000 people. Authorized share capital of each RRB is Rs. one crore, contributed by central government, state government and sponsoring commercial bank in the ratio of 50:15:35. Issued capital for each RRB is Rs. 25 lakhs. The rate of interest charged by RRBs on the loans is same as that of Primary Agriculture Credit Societies (PACS), but they are allowed to offer 0.5 per cent interest more than that of commercial banks on its deposits. RRBs have simplified procedural formalities in giving agricultural finance on recommendations of Sri. Baldev Singh’s working group. RRBs use local languages in their transactions. The cost of operation i.e. user charges are low as compared to that of commercial banks. Contd… Regional Rural Banks in AP: Table: Amalgamated Regional Rural Banks in Andhra Pradesh S.No Sponsoring Bank Name of New RRB Names of Amalgamated RRBs 1. Andhra Bank Chitanya Godavari Chitanya Grameena bank Grameena bank Godavari Grameena bank 2. Indian Bank Saptagiri Grameena Kanakadurga Grameena bank bank Shri Venkateswara Grameena bank 3. State Bank of Hyderabad Deccan Grameena bank Golconda Grameena bank Sri Rama Grameena bank Sri Saraswathi Grameena bank Sri Satavahana Grameena bank 4. State Bank of India Andhra Pradesh Kakatiya Grameena bank Grameena Vikas Bank Manjira Grameena bank ( APGVB) Nagarjuna Grameena bank Sangameswara Grameena bank Sri Visakha Grameena bank 5. Syndicate Bank Andhra Pragathi Pinakini Grameena bank Grameena bank Rayalseema Grameena bank Sree Anantha Grameena bank  LECTURE - 9 Crop Loan System: Objectives- Importance- Scale of Finance-Estimation- Term Loans – Objectives and Interest Rates, Kisan Credit Card ________________________________________________________________________ Crop Loan System: Even though All India Rural Credit Survey Committee (AIRCSC) under the chairmanship of Sri. Gorwala during 1954 and V.L. Mehra Committee on Co-operative credit in 1960 recommended the adoption of crop loan system in all states; it was not implemented due to several reasons. After a lapse of five years i.e. in the year 1965 it was introduced throughout the country and in Andhra Pradesh from Karif, 1966. The twin objectives of crop loan system are: 1. Treating the crop as security instead of immovable property like land. 2. Fixing the scale of finance depending up on the actual farm expenditure i.e. based on cost of cultivation. Salient features of the crop loan system:  The credit requirements of the farmers are to be estimated based on the cost of cultivation of the crops cultivated by them.  The eligibility to receive the loan by the farmer is not measured by the ownership of land but by the fact that he is a real farmer who needs credit for cultivation.  The crop loans should be advanced on the hypothecation of the crop.  The disbursement and recovery of the loans are to be made in accordance with the crop production schedule.  The loans should include both cash and kind components.   The quantum of loan should be fixed according to the variety (i.e. local, improved variety or HYV), the season in which it is grown and the type of crop i.e. whether it is irrigated or rainfed crop.  Crop loan is fixed by the District Level Technical Committee (DLTC) consisting of experts from the fields of agriculture, animal husbandry, banking etc. Scale of Finance Definition: It is an indicative cost taken as base cost depending on which the amount to be financed to a farmer is fixed. Normally scale of finance is given in a range, as the cost of cultivation for a farmer practicing traditional methods of farming and that of a progressive farmer practicing modern methods of cultivation differs. The lower value of the range corresponds to the requirement of the former while the upper value corresponds to the latter. Scale of finance is fixed for annual, perennial crops and livestock also. Livestock will have fixed costs of finance and they are termed as unit costs. The unit varies with the type of livestock. Ex: for milch cattle the unit refers to two animals, for sheep and goat a minimum of 10 animals and for poultry a minimum of 500 birds. Factors influencing the scale of finance: 1. Type of the crop: It varies from crop to crop. 2. Nature of the crop: With in the same crop between the improved varieties and high yielding varieties (HYVs) the scale of finance differs. 3. Season: Scale of finance differs with season for the same crop. 4. Type of land: Based on the type of the land i.e. irrigated or dry the scale of finance differs with the same crop. 5. District/Area: For the same crop the scale of finance varies from district to district. How Scale of Finance is fixed:  Scale of finance is fixed for each district by a committee known as District Level Technical Committee (DLTC).The members of DLTC constitute representatives of lead bank of that district, NABARD, local co-operative banks and commercial banks, officials of department of agriculture& animal husbandry etc. The meetings of DLTC are chaired by district magistrate/ district collector and convened by respective lead bank district manager. DLTC compiles technical survey report with the information obtained from NABARD. NABARD in turn obtains information from the state agricultural department every year, which will have the necessary details like what are crops grown, their extent etc. By using the above details a potential map is prepared. By using this one can list out the priority activities to be financed in each part of the district and extent to which these are to be financed. Finally cost of cultivation is estimated based on the market trends and needs. This scale of finance is not fixed and keeps on changing every year. Kisan Credit Card (KCC) The Government of India introduced Kisan Credit Card scheme by banks during 1998 -99. The scheme was designed by NABARD. KCC aims at adequate and timely support from the banking system to the farmers for their short-term production credit needs in cultivation of crops, purchase of inputs etc in a flexible and cost effective manner. Under this scheme, the farmers would be issued a credit card-cum pass book incorporating the name, address, particulars of land holding, borrowing limit, validity period etc and it will serve both as an identity card as well as facilitates the financial transactions. Credit limit on the card may be fixed on the basis of operational holding, cropping pattern and scale of finance as recommended by the District Level Technical committee (DLTC) / State Level Technical committee (SLTC) As per the recommendations of Sri R.V. Gupta committee in the year 1998, on the flow of credit to agricultural sector, apart from the total credit need, a 20 per cent of  total peak level credit requirement (PLCR) will be given contingent credit need (with a maximum ceiling of Rs.10,000) The KCC should normally valid up to 3 years and subject to annual review. The KCC will be considered as a non-performing asset (NPA) if it remains inoperative for a period of two successive crop seasons. Table5: Bank-Wise Position of Kisan Credit Card during Financial Year, 2006-07 (Rs. in Lakhs) Name of the Target From 1-4-2006 to 31-12-2007 % of Cumulative position Bank Group 2007- achievement since inception 08 of target No No of Limit Disbursement No Amount Cards sanctioned sanctioned issued Commercial 63100 31349 17521 16391 49.68 199567 75311 Banks Cooperatives 189300 118384 29640 10382 62.53 956276 291201 RRBs 60900 27421 6776 11801 45.02 428703 40200 Total 313300 177154 53947 38574 56.54 1584546 406712 Source: www.pdfxp.com/kisan-credit-card-pdf.html  LECTURE-10 Schemes for financing weaker sections- Differential Interest Rate (DIR), Integrated Rural development Programme (IRDP), Ganga Kalyan Yozana (GKY), Swarnajayanti Gram Swarozgar Yojana (SGSY), Self Help Groups etc. _____________________________________________________________________ Schemes for financing weaker sections: Following are the schemes for the benefit of weaker sections. Differential Rate of Interest Scheme (DIR) On the recommendations of RBI committee under the chairmanship of Dr. B. K. Hazare, the Ministry of Finance, and the Government of India instructed all the public sector commercial banks to introduce differential rate of interest scheme (DIR). All the commercial banks under public sector implemented DIR scheme since 1975 and private sector banks also volunteered to participate in the scheme from 1977 onwards. The scheme was originally implemented at selected bank branches in 265 backward districts of the country and later on the scheme was extended to cover all parts of the country. Under DIR scheme, loans are being extended to the weaker sections of the society, who do not possess tangible assets to put as security, at a concessional rate of 4 per cent per annum. The DIR loans are covered by Deposit Insurance and Credit Guarantee Corporation of India (DICGC). Under DIR scheme the loans are extended to marginal farmers and agricultural labourers, schedule castes and schedule tribes engaged in agriculture, people having rural industries and cottage industries, hoteliers, rickshaw pullers, cobblers, basket makers, carpenters, physically challenged persons, orphans and indigent students having higher education etc. From 1981 onwards , the banks were allowed to give their advances under DIR scheme through RRBS in their area of operation on refinance basis and these advances will be kept under lending account of the respective sponsoring banks only. The size of the borrower’s holding should not exceed 1.0 acre of wet land and 2.5 acres of dry land. Family incomes of the borrowers should not exceed Rs.24000 per annum in urban and semi urban areas and Rs.18000/- in rural areas as per the revision in 2008-09. However, the restrictions on the loan amounts are relaxed for persons belonging to schedule castes and schedule tribes.  The commercial banks are required to advance 0.5 to 1.00 per cent of their aggregate lending towards this scheme and forty per cent of total amount available under the scheme should be made available to SC and ST borrowers. During the April, 1983 a task force was appointed to examine the various provisions of the DIR scheme. As per the task force recommendations, GOI decided the DIR scheme, IRDP and Self Employment Programme for the Urban Poor (SEPUP) would be mutually exclusive (i.e. if a person is assisted under IRDP or SEPUP, he will not be eligible for the benefit under DIR scheme). Therefore, DIR scheme is a measure to attain “social justice” as it safeguards the interests of the weaker sections of the society. Integrated Rural Development Programme (IRDP) Most of the programmes aimed at improving the economic conditions of the rural poor, did not create an expected impact. The reasons for this failure were  None of the programmes covered the entire country  Frequent overlapping of the schemes in the same area  Lack of coordination among the implementing agencies etc. Hence, the Government of India has decided to replace all these programmes with one single integrated programme, in 1978 -79, with the twin objectives of  Elimination of poverty and unemployment in rural areas.  Rural development. This programme was named as integrated rural development programme. IRDP is basically an action-oriented and time bound programme. Under IRDP other existing programmes like SFDA, MFAL, DPAP, CADA, National Rural Employment Programme (NREP) and Training of Rural Youth for Self Employment (TRYSEM) etc, have been merged. IRDP scheme is funded by central and state governments in the ratio 50: 50 IRDP is popularly called as anti-poverty programme. Under this programme in addition to small and marginal farmers , agricultural labourers, landless agricultural workers, artisans, schedule castes and schedule tribes and others living below Poverty line ( BPL) are covered.  As Per 1976 data a family of 5 members was said to be below the poverty line, if it earns an annual income of less than Rs.11, 600/- in rural areas and Rs.12, 800 /- in urban areas. As per 2005-06 data the same was Rs.22, 080/- and Rs. 33600/- respectively. Specific Objectives: 1. Increasing the productivity of land by providing the needed inputs in required quantities at right time, thereby raising the productivity and production in agriculture. 2. Creating tangible assets for the rural poor to improve their economic conditions. 3. Augmenting the resources and income levels of weaker sections. 4. Diversifying the agriculture through poultry, dairy, fishery, sericulture etc. 5. Providing infrastructural facilities like processing, storage, organised marketing, milk chilling and collection centres, artificial insemination centres etc. Identification of beneficiaries: Those people living below poverty line are eligible to be covered under this programme apart from small and marginal farmers, agricultural and non-agricultural labourers, and rural artisans, schedule castes and schedule tribe families. Each bank branch should finance IRDP scheme in villages falling under its service area. Purpose of advance under IRDP Three major kinds of activities capable of income generation on continuous basis have been selected for targeted families. They are 1) Primary sector: The activities are agricultural, animal husbandry, fisheries, farm forestry etc. 2) Secondary sector: Activities like khadi and village industries, handlooms, handi- crafts, blacksmithy, pottery, carpentary etc., are included. 3) Tertiary sector: Activities like transport, small business and other activities like tailoring, workshops, repair shops etc., are included. Implementing Agency: At national level IRDP is administrated by the Ministry of Rural Development. The states and union territories have set up bodies known as DRDAs (District Rural Development Agencies). DRDA identifies beneficiaries, draws up income generating projects for them and brings them into contact with banks. DRDA provides capital subsidy to the identified families and supply the list of such families along with suggested economic activities to the financing institutions for extending loan assistance. DRDA also ensures backward linkages (supply of inputs, technical advice, etc) and forward linkages (processing facility and marketing arrangements, etc) in respect of the proposed economic activities. Subsidies: The subsidy in the case of small farmers is 25 per cent while for marginal farmers and agricultural labourers 33.33 per cent and for scheduled tribes 50 per cent. Ganga Kalyan Yojana (GKY) A central Government. sponsored scheme i.e. Ganga Kalyan Yojana was launched in the year 1997. The objective of the scheme is to provide irrigation through exploitation of ground water by tube wells and bore wells to individual as well as group of beneficiaries belonging to the target groups i.e. small and marginal farmers, falling below poverty line (BPL). Swarnajayanti Gram Swarozgar Yojana [SGSY]: SGSY is an ambitious programme launched by Government of India from 1-4-1999 for poverty alleviation through self employment. It is a holistic programme covering all aspects of self-employment such as organization of the poor into self-help groups, training, credit, technology, infrastructure and marketing. It replaces earlier poverty alleviation programmes viz. Integrated Rural Development Programme, Training of Rural Youth for Self Employment (TRYSEM), Development of Women and Children in Rural Areas (DWCRA).  SGSY places emphasis on group financing for poverty alleviation by organizing the rural poor into self-help groups (SHGs). Accordingly, the bulk of assistance under SGSY is expected to be provided to SHGs for supporting the group level micro-enterprises established by their members. The objective of SGSY is to bring the Swarozgaris (poor families) below the poverty line by providing them with income generating assets through a mix of bank credit and government subsidy by ensuring appreciable sustained level of income over a period of time. The target group under SGSY consists of all families below poverty line. SGSY envisages providing training of basic orientation and skill development, critical infrastructural facilities, revolving fund and credit linked subsidy to SHGs and individuals. The key activities under implementation in the District are dairy development, fisheries, vegetable growing and vending, cane and bamboo work, agarbatti , artistic pottery, pickles and papad, wood carving, etc., Self Help Groups (SHGs): In the year 1992, the National Bank for Agriculture and Rural Development (NABARD) introduced a pilot project for linking 500 Self-Help Groups (SHGs) with banks, after thorough discussions with the RBI, commercial banks and non-governmental organizations (NGOs). Other Programmes of Rural Development: Small Farmers Development Agency (SFDA) and Marginal Farmers and Agricultural Labourers Development Agency (MFAL). Small and marginal farmers were however denied to receive the benefits from the nationalization of banks due to  Cumbersome lending procedures  Their inadequacy to furnish tangible securities for obtaining loan   Undue delays in disbursement of loans As a result, the marginal and small farmers depended mostly on the private money lenders for their credit needs paying high rates of interest. To avoid this situation prevailing in rural areas, “All India Rural Credit Review Committee, 1969 under the chairmanship of Sir. Venkatappaiah (AIRCRC) recommended the establishment of SFDA and MFAL in 1969. They came into operation in 1971.  LECTURE: 11 Crop Insurance-meaning and its- advantages-progress of crop insurance scheme in India-limitations in application-Agricultural Insurance Company of India-National Agricultural Insurance scheme (NAIS) - salient features-Weather insurance _______________________________________________________________________ Origin and Importance of crop Insurance scheme: Insurance-meaning Insurance is a legal contract that transfers risk from a policy holder to an insurance company in exchange for a premium. ▫ Risk: The possibility of financial loss ▫ Policyholder: The person who has purchased and owned an insurance policy. ▫ Insurance Company: A company that provides the insurance coverage for its policyholders ▫ Premium: The cost of insurance The desire to introduce two pilot schemes viz., crop insurance and cattle insurance with the objective of protecting the farmers from the heavy losses of crop and livestock by Government of India was dates back to 1948 soon after the independence. But due to paucity of funds, none of the state governments agreed to implement the programme. The Government of India during the year 1970 appointed an expert committee on crop Insurance under the chairmanship of Dharam Narain to examine and analyse the administrative and financial implications of the scheme. Sri. Dharam Narain ruled out the possibility of implementing the scheme in India. In contrast to the above committee, Prof. Dhandekar strongly supported the implementation of the scheme. By accepting Prof. Dhandekar’s views in 1973, the GOI had set up General Insurance Corporation (GIC) to carry out all types of insurance business throughout the country with four subsidiary insurance companies. They are 1. National Insurance Company Limited 2. The New India Assurance Company Limited 3. The oriental Insurance Company Limited 4. United India Insurance Company Limited On pilot basis in 1973, the GIC introduced the crop Insurance scheme in selected centres of Gujarat covering only H4 variety of cotton. Later on the same was extended to West Bengal, Tamilnadu and Andhra Pradesh for the cotton crop and this scheme was in operation till 1979. In 1979, area based crop Insurance scheme was introduced on pilot basis in selected areas. If the actual average yield of the crop in the area was less than the guaranteed yield of the crop, then the indemnity would be payable to all the insured farmer-borrowers. Sum insured under crop insurance was 100 per cent but with a ceiling limit of Rs.5000 per farmer in the case of dry land and Rs.10, 000 per farmer - borrower in the case of irrigated areas. The scheme was implemented in 12 states up to 1984. Comprehensive Crop Insurance Scheme (CCIS): In the year 1985, the Comprehensive Crop Insurance Scheme (CCIS) was introduced by GIC in all the states. This scheme covers all farmers who availed the crop loan and it is limited to cereals such as paddy, wheat, millets, oil seeds and pulses. The loans given from 1st April to 30th September were considered for kharif insurance business. The loans granted from 1st October to March 31st of next year qualify for rabi insurance. Therefore the insurance cover will be considered as built-in-aspect of crop loan. Crop insurance risk is taken by GIC and the respective state governments in 2:1 ratio. The sum insured is 100 per cent of crop loan taken by the farmers during that season. Here the sum insured was limited to Rs. 10000 /- per farmer for all insurable crops irrespective of the quantum of loan taken by the farmer. Only that part of crop loan is insurable which is utilized for the purpose of covering insured crops. The insurance premium is fixed at 2 per cent of sum insured for paddy, wheat and millets and for oilseeds and pulses it is one per cent. The premium is sanctioned as an additional loan to the farmers and should not be deducted from original loan amount. For small and marginal farmers, 50 per cent of insurance premium is subsidized by the central and state governments in equal proportion. Indemnity payable under the scheme is calculated on the basis of “threshold yield” and it is equal to 80 per cent of the average yield for a given crop for the previous 5 years. Normally 80 per cent of the average annual yield of the given crop in a given area over the last preceding five years is considered as “threshold yield” of that area. Short fall in yield of crop is difference between threshold yield and actual yield of the crop in particular area for the year under consideration.  Shortfall in the yield of the crop Indemnity = _____________________________ x Sum insured. (Guaranteed Compensation) Threshold yield of the crop The yield data for this purpose is obtained from the crop-cutting experiments conducted by the state Government in accordance with the prescribed procedure as approved by National Sample Servey organization (NSSO), Ministry of Planning, Government of India. Advantages of CCIS: Comprehensive crop insurance scheme has some specific advantages, which is in operation in all the states from 1985 onwards. They are  It stabilizes the farm business during the periods of crop failure.  The farmer can act much more confidently in farm business as there is protection against hazards of farming.  It prevents the farmers to approach non-institutional agencies at times of crop failure.  It enhances the use of modern inputs to boost the productivity in agriculture  In high-risk areas crop insurance serves as a catalyst in bringing areas under cultivation, which otherwise would have remained uncultivated. Demerits of CCIS are  It provided coverage only to a limited number of crops like wheat, paddy, oilseeds, millets and pulses excluding important cash crops like sugarcane, potato, cotton etc.  As the coverage was restricted to rainfed crops only, the scheme was not effective in agriculturally intensive states such as Punjab, Haryana and Western U.P.  The scheme covered only those farmers who had availed crop loans from financial institutions. Sum insured per farmer was also limited to a maximum of Rs.10, 000 /- only. Eminent economists made some suggestions for the satisfactory functioning and improvement of CCIS and they are:  All crops and all the farmers should be brought under the purview of the scheme.  The premium rates should vary with the nature and indices of crop production in different areas.  The unit area considered for paying indemnity should be a village or group of villages as against block/mandal.  Threshold yield should be worked out on the basis of crop production indices over a ten year period as against five year period. National Agricultural Insurance Scheme (NAIS)/Bharatiya Krishi Bhima Yojana (BKBY): With a view to take insurance closer to the farmers, a newly improved insurance package over the existing CCIS was launched by the former Prime minister Sri. Atal Bihari Vajpayee on 23-06-1999. It is National Agricultural Insurance Scheme. Irrespective of the size of their holdings, the NAIS would provide insurance facilities to all farmers from 1999 -2000 season onwards. The NAIS would cover all crops, including coarse cereals, all pulses and oil seeds. Apart from these, three more cash crops viz., sugarcane, potato and cotton were also brought under the purview of the scheme in the first year i.e.1999-2000 itself. All the other crops i.e. horticulture and commercial crops were also proposed to be included under the scheme from the year 2002. There was no maximum limit for the sum insured. The premium rates were 3.5 per cent of sum insured for bajra and oilseeds and 2.5 per cent for other kharif crops. It was 1.5 per cent of sum insured for wheat and 2 per cent for other rabi crops. Similar to that CCIS, in this NAIS also 50 per cent subsidy in premium is there for small and marginal farmers. However, this subsidy will be proposed to be phased out from five years after its inception. i.e 2005 onwards.  The scheme would be operated on the basis of area approach. All the farmers in a defined area would be entitled for payment of insurance claim according to the indemnity rates prescribed for that area. Individual claims of the affected farmers would also be entertained in the case of localized calamities like hailstorm, land slip, cyclone, floods etc. Agriculture Insurance Company of India (AIC) Limited: Agriculture Insurance Company of India Limited (AIC) had been formed by the Government of India in 2003 to subserve the needs of farmers better and to move towards a sustainable actuarial regime. It was proposed to set up a new corporation for agriculture Insurance. AIC has taken over the implementation of National Agricultural Insurance Scheme (NAIS) which until 2003 was implemented by General Insurance Corporation of India. In future, AIC would also be transacting other insurance businesses directly or indirectly concerning agriculture and its allied activities. Agriculture Insurance Company of India Limited is a public sector undertaking with headquarters at New Delhi. It currently offers area based and weather based crop insurance programs in almost 500 districts of India. It covers almost 20 million farmers, making it one of the biggest crop insurers in the world. Agriculture Insurance Company of India Ltd (AIC) is promoted by General Insurance Corporation of India (GIC), NABARD and the 4 public sector general Insurance companies. AIC has taken over the implementation of National Agricultural Insurance Scheme (NAIS) in 2003 which until the financial year 2002 – 03 was implemented by GIC. AIC is under the administrative control of Ministry of Finance, Government of India, and under the operational supervision of Ministry of Agriculture. Insurance Regulatory and Development Authority, Hyderabad, is the regulatory body governing AIC. Main objective of AIC: To provide financial security to persons engaged in agriculture and allied activities through insurance products and other support services. Share Capital  Authorized share capital - Rs. 1500 crores  Paid-up share capital - Rs. 200 crores Promoted by:  General Insurance Corporation of India - share holding: 35 %  National Bank for Agriculture And Rural Development (NABARD) - share holding: 30 %  National Insurance Company Ltd - share holding: 8.75 %  New India Assurance Company Ltd- share holding: 8.75 %  Oriental Insurance Company Ltd - share holding: 8.75 %  United India Insurance Company Ltd.- share holding: 8.75% Weather Insurance: Agriculture is still the dominant sector in India, contributing around 20 per cent of GDP and providing employment to two-thirds of its population. Therefore, even the slightest change in this sector can affect the economy. However, most of it is rain-fed and prone to unfavourable weather conditions like deficit or excess rainfall and variations in temperature. Though phenomenon of unpredictable rainfall in India remains an unresolved issue, weather insurance has emerged as a ray of hope to farmers to tackle the uncertain pattern of their crops. Weather Insurance- an insurance cover against crop losses incurred due to unfavorable weather conditions such as deficit, excess or untimely rainfall or variations in temperature. Weather insurance product is designed on the basis of location’s agricultural and climatic properties and productivity levels over the last several years. This serves as a good alternative to farmers for mitigating their production related losses. Weather insurance is now a common term in countries likes US, Canada, UK and other western countries. In India, ICICI Lombard is the most popular company in the field of weather insurance. In India Weather Insurance was developed by government of India in association with the World Bank and launched in kharif 2007 in Karnataka. In 2008-09 it was extended to states like Andhra Pradesh, Rajasthan, Bihar, Haryana, West Bengal Chhttisgarh, Gujarat, Madhya Pradesh, Maharastra, Orissa, Tamilnadu, Jharkhand, Himachal Pradesh, Kerala, Uttaranchal and Uttar Pradesh. It was launched as a pilot scheme to insure groundnut in Andhra Pradesh during Kharif 2008. There are several benefits of weather insurance. They include:  High level of client comfort  Low management expenses  Scientifically developed objective Weather insurance provides protection to the farmers, banks, micro-finance lenders and agro-based industries. This in turn results in boosting the entire rural economy. Some vital factors of Weather Insurance are:  Peril/ hazard Identification  Index Setting  Back testing for payouts  Pricing  Monitoring  Claims Settlement There are some examples of deals initiated by Weather Insurance for oranges in Jhalawar, Rajasthan, 782 farmers were aided by the Weather Insurance which provided a cover for 613 acres for a sum insured of Rs.18.3 million to them. Another example states various crops in Andhra Pradesh were provided cover when they faced losses due to deficit rainfall. Weather Insurance – Broad Challenges/limitations 1. Needs large no. of Automatic Weather Stations (AWS) to minimize Basis Risk (Basis risk: Without sufficient correlation between the index and actual losses, index insurance is not an effective risk management tool. This is mitigated by self-insurance of smaller basis risk by the farmer; supplemental products underwritten by private insurers; blending index insurance and rural finance; and offering coverage only for extreme events.)  2. Precise actuarial modeling: Insurers must understand the statistical properties of the underlying index. 3. Education: Required by users to assess whether index insurance will provide effective risk management. 4. Market size: The market is still in its infancy in developing countries like India and has some start-up costs. 5. Weather cycles: Actuarial soundness of the premium could be undermined by weather cycles that change the probability of the insured events 6. Microclimates: Make rainfall or area-yield index based contracts difficult for more frequent and localized events. 7. Reliable and verifiable data 8. Tamper proof weather stations (Automatic Weather Stations - AWS) Weather Insurance for Farmers in Andhra Pradesh The former Chief-Minister Dr Y. S. Rajasekhara Reddy launched the Weather Based Crop Insurance Scheme (WBCIS) in Andhra Pradesh during kharif 2009- 10. The new scheme is intended to provide compensation to farmers who lose their crop due to insufficient rainfall. The scheme in the first phase covered the red chilli crop in Guntur district during kharif 2009-10. The Weather Based Crop Insurance Scheme helps to mitigate the hardships of the farmers against the likelihood of financial losses on account of anticipated crop loss resulting from the incidence of adverse weather conditions like rainfall, temperature, humidity, frost etc. The crop selected is “Red ” which includes both irrigated and unirrigated Red chilli crop under WBCIS for Kharif-2009 season. All the cultivators (including sharecroppers and tenant cultivators) growing the notified crop i.e., red either irrigated or unirrigated in any of the Reference Unit Areas shall be eligible for coverage. Sum Insured is equivalent to the total cost of cultivation i.e. Rs.1,50,000/- per hectare in respect of red chilli (Irrigated) and Rs.1,00,000/- per hectare for red chilli (Unirrigated) crop. For this purpose weather stations were established in the 42 mandals of Guntur district, during the lunching of the scheme. The Chief Minister said the weather-based crop insurance should be extended to all horticulture crops in phases in all the districts of the State. Weather stations will be established in all mandals of the state. The National Agricultural Insurance Scheme (NAIS) which is already in force provided relief only if the crop is damaged to the extent of 50%. However, the new scheme i.e. WBCIS will provide compensation to all farmers irrespective of the quantity of crop damaged. In the last five years (2005-2009), the AP government has allocated RS.19.61 billion for crop insurance scheme as against Rs. 7 billion spent during 1999 to 2004. About 16,500 farmers in the Guntur district of Andhra Pradesh have received the first-ever insurance claim under the Weather-based Crop Insurance Scheme launched by the Agriculture Insurance Company (AIC) for farmers. The scheme covered events like deficit rainfall, excess rainfall and uneven distribution of rainfall. It calculates the crop damages with village as a unit as against block, mandal or district in the other agriculture insurance schemes. The state government received a cheque for Rs 17.34 crore from Agricultural Insurance Company( AIC), towards insuranc