“AN OVERVIEW OF AGRICULTURAL FINANCE IN REFERENCE

TO RURAL MAHARASHTRA ”

A Project Submitted to

University of Mumbai for partial completion of the degree of

Master of Commerce (Business Management)

Under the Faculty of Commerce

By

Mr. PRAJWAL KASINATH KAMBLE

ROLL NO : 43

Under the Guidance of

PROF. DR. IYER SEETHALAKSHMI

K.P.B HINDUJA COLLEGE OF

COMMERCE CHARNI ROAD, MUMBAI- 400004

Academic Year 2022-2023

 CERTIFICATE

This is to certify that Mr. Prajwal Kashinath Kamble has worked and duly completed his Project
Work for the degree of Master of Commerce under the Faculty of Commerce in the subject of Business

Management and her project is entitled, “An Overview of Agricultural Finance with reference to
rural Maharashtra” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that no part
of it has been submitted previously for any Degree or Diploma of any University.

It is his own work and facts reported by his personal findings and investigations.

Name and Signature of

Guiding Teacher

Seal of the PROF. DR. IYER

College
SEETHALAKSHMI

External Examiner:

Date of Submission:
 DECLARATION

I the undersigned Mr. Prajwal Kashinath Kamble here by, declare that the work embodied in this
project work titled “An Overview of Agricultural Finance with reference to rural Maharashtra”,
forms my own contribution to the research work carried out under the guidance of Prof. Dr. Iyer
Seethalakshmi is a result of my own research work and has not been previously submitted to any
university for any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been obtained and indicated as
such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in
accordance with academics rules and ethical conduct.

PRAJWAL KASHINATH KAMBLE

Certified by,

PROF. DR. IYER SEETHALAKSHMI

 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are numerous and the depth isenormous.

I would like to acknowledge the following as being idealistic channels and freshdimensions in the
completion of this project.

I take this opportunity to thanks the University of Mumbai for giving me chance todo this
project.

I would like to thank my principal Dr. Minu Madlani for providing the necessaryfacilities required
for completion of the project.

I am also very thankful to our coordinator Prof. Dr. Iyer Seethalakshmi for her moralsupport
and guidance.

I would also like to express my sincere gratitude towards my project guide Prof. Dr. Iyer
Seethalakshmi whose guidance and care made the project successful.

I would like to thank my College Library for having provided various reference books and magazines
related to my research.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially my P arents and Peers who supported me throughout my
project.
 Execute Summary
Finance in agriculture is as important as development of technologies. Technical inputs can be purchased
and used by farmers only if sufficient money (funds) is available with farmers. Mostof the times farmers
suffer from the problem of inadequate financial state. This situation leads to borrowing from an easy and
comfortable source.

Professional money lenders were the only source of credit to agriculture till 1935. They used to charge
unduly exorbitant rates of interest and follow serious practice while giving loans and recovering them.
As a result, farmers were heavily burdened with debts and many of them were left with perpetuated
debts. There widespread discontents among farmers against these practices and there were instances of
riots also.

With the passing of Reserve Bank of India Act 1934, District Central Cooperative Banks and Land
Development Banks, agricultural credit received impetus and there was improvement in agricultural
credit. A powerful alternative agency came into being through the initiative of the government. Large
scale credit was available with responsible rates of interest at easy terms, both in terms of granting loans
and recovery of them. The corporative banks advanced credit mostly who agriculture. First bank advanced
short-term and midterm loans while the second bank advanced long-term loans. but there's no Bank of
India as the central Bank of the country took lead and making credit available to agriculture through these
banks by laying down suitable policies.

Although the corporative banks started financing agriculture with their establishment in 1930s real
impetus was received only after independence when suitable legislations were passed and policies were
formulated. Thereafter, bank credit to agriculture has made a phenomenal growthby opening branches in
rural areas attracting deposits.

Till 14 major commercial banks were nationalized in 1969, corporative 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 programs of branch
expansion and created a network of banking service throughout the country and started financing
agriculture on large scale.

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Most agriculture project acquired multi agency dimension. In bringing “Green Revolution”, “White
Revolution”and now “Yellow Revolution” finance has played for crucial role. Now the agriculture credit,
through multi agency approach has come to stay.

The procedures and amount of loan for various purposes has been standardized. Among the various
purposes “Crop Loan” (Short term loan) has the major share. in addition, farmers get loans for the purchase
of collective Motors with pump tractor and other machinery, digging wells or boring wells, installation of
pipe lines, drip irrigation, planting fruit orchards, purchase of dairy animals and feeds/fodder for them,
poultry, sheep/goat keeping and for many other allied enterprises.

Agricultural production in this country depends upon millions of small farmers. Their intensity, efforts
in efficiency have helped in racing yields per acre. Finance in agriculture act as a key to farmers. But for
farmers money is always inadequate and he needs outside finance to credit. Because of inadequate
financial resources and absence of timely credit facilities at reasonable rates, many of the farmers, are
unable to put in bought into seeds and manuals or to introduce better methods or techniques.

The farming community must be kept informed about the various sources of agriculture finance.
Agriculture finance possesses its usefulness to farmers, lenders and extension workers.The knowledge of
lending institutions, their legal regulatory environment keeps in selecting the appropriate lender who can
adequately provide the credit with terms and related services needed to finance the farm business.

ROLE OF AGRICULTURE FINANCE

Agriculture plays an important role in the development of the Indian economy. It accounts for about 19.9
percent of the GDP and about two third of the population is dependent of thissector. Agriculture is
a subset of rural finance dedicated to financing agricultural related activities such as input supply,
production, distribution, wholesale, processing and marketing.

Financial service providers face distinct challenges when dealing with this sector. For example, the
seasonal nature of production and the dependence on the biological process and natural resources leave
producers subject to events beyond their control such as droughts, floods or diseases. The modern
agriculture has increased the use of inputs specially for seed, fertilizer, irrigational water, machineries and
implements, which has increased the demand for agricultural credit. The adaption of modern technology,
which is capital intensive, has commercialized agricultural production in India. Besides the farmers
income is seasonal while his working expenses are spread overtime.

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In addition, the farmers inadequate savings require the use of more credit to meet the increase capital
requirements. Furthermore, credit id a unique resource, since it provides the opportunity to use
additional inputs and capital itemsnow and to pay for them from future earnings.

The rural population in India suffers from a great deal of indebtedness and is subject to exploitation in the
credit market due to high interest rates and the lack of convenient access to credit. Rural households need
credit for investing in agriculture and smoothening out seasonal fluctuations in earnings. Since cash flows
and savings in rural areas for the majority ofhouseholds are small, rural households typically tend to rely
on credit. Rural households need prices to financial institutions that can provide them with credit at
lower rates I please level tones then the traditional moneylenders and thereby help them avoid death traps
that are common in rural India. Timely and adequate agricultural credit is important for the increase in
fixed and working capital of the farmers. In order to provide sufficient credit to the farmers, many
institutional and non-institutional agencies are working. Under institutional agencies cooperative,
commercial, regional rural banks and different commercial organizations aresuppling credit to the needy
farmers on priority basis.

STATUS OF AGRICULTURE FINANCE

Credit in conjunction with modern agricultural technologies has ushered feel the agricultural development
across Indian regions. The liberal credit supply by the lending institutions enabled rapid infrastructural
across and thereby improved the farm level credit absorption capacity. Although credit has played vital
role in agriculture development yet regional and farm category price disparity has also taken place. In
fact, some of the states with better naturalresource base have progressed well while some other lagged
behind. Likewise, some farmers with better resource endowments and access to financial and other
institutions have much faster word others could not do so. Furthermore, multiplicity of lending institutions
together with liberal deployment of credit through various ongoing schemes including microfinancing
have saved rural dwellers from the clutches of moneylenders. Yet, non- institutional credit agents still
survive as they flow the canons of financing.

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STRATEGY TO IMPROVE AGRICULTURAL FINANCE

The achievement of targets in the agricultural sector which covers production of food and essential raw
materials like cotton, jute and oilseeds, ought not to be allowed to suffer for want of adequate credit.
However, specific items of productive work and rate of interest need to considered as an integral part of
the plan. For providing these facilities all the existing agencies like money lenders, commercial banks,
cooperative and the state have to be integrated and to be harnessed to a common purpose. Such a
comprehensive approach is essential for ensuring the best use of all the available resources of the nation.

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 INDEX

Sr.No. CHAPTERS PAGE NO.

1 Introduction To Agricultural Finance 7-17

1.1 Introduction 8
1.2 Features of Agricultural Finance 10
1.3 Criteria of Agricultural Credit 12
Difference between Financing of Agriculture and Other
1.4 13
Sectors
1.5 History of Financing Agriculture in Maharashtra 14

2 Credit Needs Of Farmers 18-29

2.1 Reasons why Farmers need Agricultural Credit 19
2.2 Credit Needs- On the basis of Time 21
2.3 Credit Needs- On the basis of Source 22
2.4 Credit Needs- On the basis of Purpose 28

Digital Financing Services:- Development in Servicing

3 30-32
Smallholder Farmers
Digital Financing Services:- Development in
3.1 31
ServicingSmallholder Farmers
3.2 Agricultural Credit 31
3.3 Insurance 31
3.4 Payment 32
3.5 Set-aside Savings 32
3.6 Regulations and Protection Considerations 32

4 Financing To Support Women In Agricultural Sector 33-37

4.1 Financing To Support Women In Agricultural Sector 34
4.2 Call Collaboration Active 37

5 Perks (Benefits) of Agricultural Finance 38-41

5.1 Perks (Benefits) of Agricultural Finance 39

6 Problems Of Agricultural Finance 42-56

6.1 Problems Of Agricultural Finance 43
6.2 Problems faced by Farmers 43
6.3 Ranking of problems according to categories of the Farmers 49
6.4 Problems faced by the Bank 53

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 INDEX

Sr.No. CHAPTERS PAGE NO.

7 Risk and Risk Management 57-65

7.1 Risk 58
7.2 Risk Management 59
7.3 Risk Management Process 60
7.4 Potential Risk Treatment 61
7.5 Limitations 63
7.6 Analysis 63

8 Suggestions & Recommendations 66-68

8.1 Suggestions 67
8.2 Recommendations 68

9 Reference 69-70
9.1 Biblography 70
9.2 Websites 70

10 Annexure 71-79
Case Study 72
10.1

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 CHAPTER 1

INTRODUCTION TO AGRICULTURAL FINANCE

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1.1 INTRODUCTION

Finance has been recognized as the life blood of all economic activities. Like all other producers,
agriculturist also need credit. According to an old verb, “Credit supports the farmers as the hangman’s
rope supports the hang”. This statement is fully true in the context of Indian farmers. Thus, for stimulating
the tempo of agricultural production, an adequate and timely credit, is the most essential. Generally, in
underdeveloped countries farmers cannot expect their credit needs to come from savings. It is also because
their incomes from farms operations is sufficient to provide minimum necessities of life. Therefore, they
have to rely upon outside finance. In olden days, rural debts were considered as an unmixed evil, but now
time has changed altogether. Modern agriculture is a costlier affair. Credit is needed to adopt new farm
technology resulting in ushering of green revolution. In India, it has to fold necessities. Firstly, crop
productivity is very low due to traditional methods of cultivation and secondly, there is anurgent need to
enhance agricultural production to get self sufficiency and to save valuable foreign exchange. In short,
effective arrangements are needed to provide credit facilities so that agriculturist may adopt better
techniques of production.

The different studies conducted show a strong positive relationship between agricultural growth and
availability of credit. Broadly, credit in agricultural sector may be divided into short-term loans to meet
the input expenses and medium and long-term loans to facilitate the development of fixed farm assets
such as land. This gap arises in relation to static or dynamic production function. Under a static
functioning, the level of input use per hectare of cropped area being constant, the year-to-year variation in
the amount of credit reflects the changes in input prices. Under a situation of diminishing returns, however,
increasing input use is requiredto maintain the same level of output. The supply of credit related to static
production conditions will not contribute to increase in output, although the withdrawal of it might lead to
a decline in conditions will not contribute to increase in output. although the withdrawal of it might lead
to a decline in output. Under dynamic functions, credit requirements would rise from year to year even if
input prices remain constant. The growth in credit under such dynamic conditions would lead to increased
output. In the same way the investment credit too would lead to an improvement in the production potential
of the farms through the process of net capital formation.

The agrarian history from Rome to Scotland is that agricultural credit is an essential. Neither the condition
of the country nor the nature of land tenures nor the position of agricultureaffects one great fact that
farmers must borrow.

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Agricultural credit, thus, in a practical sense, isa nucleus of the system of farm operation. It provides flow
to the system averting ruins which would have occurred due to the lack of monetary capacity of farmers.
Thus, adequate and timely credit to the farmer is, vital and indispensable

for the rehabilitation and progress of agriculturists. In underdeveloped countries, agriculture assumes even
more importance. Farmer's inability or least limited ability to save does not allow him to finance his
pursuits and raise better production from his farms. Agricultural credit through institutional channels is
the only way to break agricultural stagnation. Private funding agencies play a limited role keeping in view
the large public interest.

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1.2 FEATURES OF AGRICULTURAL FINANCE

In our country, agricultural finance has special features which are discussed below in detail:

1. Risk in Agriculture: In agriculture sector, it is difficult to foresee risks and uncertainties. A farmer
has to face numberless risks and uncertainties as droughts, floods etc. It may cause considerable
damage to the farmer. Moreover, agricultural produce tends to deteriorate in storage due to lack of
proper storage facilities to hold back surplus when supply exceeds demand. It leads to further
difficulties. Thus, with so many uncertainties, agriculture has always been a risky affair to be handled
by the commercial banks and insurance companies.

2. Difficulties of Co-operation in Agriculture: In agricultural sector, there is a very little scope of

cooperation. It is so because; farmers are mostly individualistic and are suspicious of co-operating
with each other for a common purpose. This creates difficulties to the farmers in getting cheap credit.

3. Economic Lags in Agriculture: In agricultural production process, there is a long interval between
the reward and effort especially during the period when costs are incurred. During this period,
demand for agricultural produce may change upsetting the financial adjustments of the farmers. In
this way, farmers have to bear another uncertainty. This becomes an excuse for credit supplying
agencies to refuse credit for farm operations.

4. Credit for Consumption Purpose: Indian farmers require credit not only for production purposes
but also for consumption purposes. in the case of crop failure,small farmers need credit which
they spend on consumption requirements. moreover, Indian farmers are accustomed to spend beyond
their means on social and religious functions. in addition to all this, litigation is another important
non-productive requirement for funds.

5. Small Size of Farm: In India, size of farms is very small in comparison to the amountof Labour
employed and the extent of the capital invested. Moreover, there is no controlover the yield and the
quality of the produce. Thus, there is a lack of security to be offered for loans.

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6. Small Size of Farm: In India, size of farms is very small in comparison to the amountof Labour
employed and the extent of the capital invested. Moreover, there is no controlover the yield and the
quality of the produce. Thus, there is a lack of security to be offered for loans.

7. Complex of Many Industries: Agriculture is an industrial complex of varying types of production

and marketing. The size of holdings and forms of land tenure differ from onearea to another. These
differences create different types of complex relations between the farmers which makes financing
of agricultural sector relatively difficult.

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1.3 CRITERIA FOR AGRICULTURAL CREDIT

In any scheme of agricultural finance, there must be some criterion on the basis of which the superstructure
of various agencies has to be built up. Since the farmer's needs for finance and the methods of operation
differ widely from non-agricultural financing, it is more necessary to keep certain criteria in mind.
According to Mr. Louis Tardy, the various criteria of a suitable type of credit may be set down as follows:

(1) To be granted for a sufficiently long period, commensurate with the length of the
operation:

(2) To be granted at a low rate of interest;

(3) To be adequately secured, in order, more particularly, to avoid any abuse of credit facilities,
but the security should not necessarily be material: it should be in the form of a personal
credit secured mainly by the borrower's moral steading and farming ability:

(4) Be adapted to the average yield and capacity for repayment of the farms, particularly during
periods of economic depression;

(5) To be placed in the hands of institutions, the directors of which have received special
training; and have actual banking experience.

The following criteria may also be added.

(1) There should be possibility of extension of the term of credit in the event of cropfailure;

(2) It should be made locally available without delay; and

(3) The agency engaged for the purpose should be able to find out facts about theborrowers readily.

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1.4 DIFFERENCE BETWEEN FINANCING OF AGRICULTUREAND OTHER SECTORS
Financing agriculture requires a throughout understanding of farming conditions as it is different from
lending to other sectors. The important factors which differentiate farm finance from other lending sectors
are:
Financing Agriculture
Farmers are not aware of credit policies and
procedures
Difficult to estimate the efficiency of
farming in the absence of farm records
Farming is exposed to natural calamities and
uncertainties
Frequent supervision and follow-up after loan
disbursement are difficult as farms are
scattered
Land as a major security being immovable isnot
highly liquid
Ownership of land are difficult to verify as
records are not updated
As farm products are perishable, they are
subjected to distress sales
Long gestation period between investmentand
return
Since income is seasonal, repayment schedule is
drawn in accordance with incomegeneration
from investment
Adequate infrastructural facilities are not
available to implement new technologies
Farmers are susceptible to external influence and
hence some vested interests exploit them and
guide them in wrong direction
Financing Other Sectors
They are aware of banking procedures
Efficiency can be assessed as all returns are
recorded
Risk and uncertainties involved in an
enterprise can be foreseen and managed
Monitoring is easy and less time consuming
Apart from immovable assets, movable assets
are also taken as security which can beeasy
liquidated
Identification of ownership can easily bedone
by verification of records
As industrial products are non-perishable,
producers can have fixed prices
Very short gestation period
As income generation is a continuousprocess,
repayments will be made continuously
Sufficient infrastructure is available to
implement their schemes
Entrepreneurs are not usually misled by
external influence as they are well organized
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1.5 HISTORY OF FINANCING AGRICULTURE IN MAHARASHTRA

Maharashtra is one of the largest, wealthiest and most developed states in India by current economic
indicators. It is third-most urbanised state with urban population of 45% of whole population. Although
Maharashtra is a highly industrialized state of India, agriculture continues to be the main occupation in
the state. About 51 per cent labour force is engaged in agriculture and its contribution in GDP was 11.9
per cent. Its impact is felt in the manufacturing sector as well as the services sector as the rural population
has become a significant consumer of goods and services in the last couple of decades

Finance in agriculture is as important as other inputs being used in agricultural production. Technical
inputs can be purchased and used by farmer only if he has money (funds). But his own money is always
inadequate and he needs outside finance or credit. Professional money lenders were the only source of
credit to agriculture till 1935. They used to charge unduly high rates of interest and follow serious practices
while giving loans and recovering them. As a result, farmers were heavily burdened with debts and
many of them perpetuated debts. With the passing of Reserve Bank of India Act 1934, District Central
Co-op. 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. Largescale credit
became available with reasonable rates of interest at easy terms, both in terms of granting loans and
recovery of them. Although the co-operative banks started financing agriculture with their establishments
in 1930’s real impetus was received only after Independence when suitable legislation were passed and
policies were formulated. Thereafter, bank credit to agriculture made phenomenal progress by opening
branches in rural areas and attracting deposits.

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 mademandatory for these banks to
provide finance to agriculture as a priority sector. These banks undertook special programs of branch
expansion and created a network of banking services throughout the country and started financing
agriculture on large scale. Thus, agriculture credit acquired multi-agency dimension. Development and
adoption of new technologies and availability of finance go hand in hand. In bringing "Green Revolution",
"White Revolution" and "Yellow Revolution" finance has played a crucial role. Now the agriculture 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.

Page | 14
In addition, farmers get loans for purchase of electric motor with pump, tractor and other machinery,
digging wells or boring wells, installation of pipe lines, drip irrigation, planting fruit orchards, purchase
of dairy animals and feeds/fodder for them, poultry, sheep/goat keeping and for many other allied
enterprises.

Agricultural Credit System in India

Farmers get external financial assistance from two sources namely, i) non-institutional or unorganized
agencies, and ii) institutional or organized agencies. It is a fact that agriculture hasbeen financed by non-
institutional agencies for a long time and institutional agencies were started functioning only during the
early part of this century.

Non-Institutional Sources of Finance in India

Non-Institutional sources include money lenders, land lords, traders, commission agents, friends and
relatives.

(i) Money Lenders

There are two types of money lenders in rural areas. a) agricultural money lenders and professional money
lender. Agricultural money lender's main occupation is farming and money lending is secondary one.
Professional money lender's main profession is money lending. Although the reliance on agricultural and
professional money lenders by rural poor declined over the years, i.e., from 80 per cent of their total credit
requirement in 1951 to 30 percent in 2002, the credit disbursed by money lenders still forms a major portion
of the total credit obtained by the farmers.

(ii)Land Lords
Small farmers and tenants rely on land lords for finance to meet out their productive and unproductive
expenses. This source of finance has all the defects associated with money lenders. Interest rates are
exorbitant. Often small farmers are forced to sell out their lands to these land lords and they become land
less Labourers. Landless Labourers bonded Labourers. The reliance on this agency by farmers has been
decreased over years, i.e., from 1.5 per cent in 1951 to 1.0 per cent in 2002.

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(iii) Traders and Commission Agents
They are functioning either to get regular supply of products for their trade or to havea control over the
provision of credit. Though the rate of interest charged by them is not as high as charged by the money
lenders, they charge more in the form of concessions and service charges. They mostly finance for the
cultivation of commercial crops like sugarcane, cotton, ground-nut, tobacco, onion, etc. The share of credit
provided by these agencies to total credit decreased from 5.5 per cent in 1951 to 2.5 per cent in 2002.

(iv) Relatives
Farmers borrow from their relatives for temporary exigencies. It is simply a mutual help. Since all
farmers are living under similar conditions, they cannot lend large sums asloans. Normally, no interest
is paid on such loans.

(v) Institutional Credit Agencies

As compared to the quantum of credit requirement and the capacity of institutions to meetthese credit
demands under multiagency system, it is impossible to completely wipe out the private agencies from the
rural scene. The Banking committee, (1931) and the Banking Commission (1972) offered suggestions to
get over the evil aspects of private lending agencies and bring them under sound credit system. These
suggestions may be adopted till the institutional agencies attain the capacity to meet the full demand for
credit.The major institutions supplying credit to agricultural sector are: i) Government, ii) Co-operatives,
iii) Commercial Banks, iv) Regional Rural Banks, v) Reserve Bank of India (National Bank for
Agricultural and Rural Development).

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 Proportion of Borrowing* by Farmers from Organized and UnorganizedLending
Agencies
(percentages)

Lending Agencies 1951 1961 1971 1981 1991 2002

I Organized Agencies
1. Government 3.3 6.7 7.1 4.0 6.1 2.3
2. Co-operatives 3.1 11.4 22.0 29.0 21.6 27.3
3.Commercial Banks 0.9 0.3 2.4 28.0 33.7 24.5
4. Insurance, Provident Fund
- - 0.2 - 2.6 3.0
and Other Institutions
Sub-Total (A) 7.3 18.4 31.7 61.0 64.0 57.1

II Unorganized Agencies
1. Land Lords 1.5 0.9 8.1 4.0 4.0 1.0
2. Agricultural Money
24.9 48.1 23.0 9.0 7.0 10.0
Lenders
3. Professional Money
44.8 13.8 13.1 8.0 10.5 19.6
Lenders
4. Traders and Commission
5.5 7.1 8.4 3.0 2.2 2.6
Agents
5. Friends and Relatives 14.2 5.2 13.1 9.0 5.5 7.1
6. Others 1.8 6.5 2.6 6.0 6.8 2.6
Sub-Total (B) 92.7 81.6 68.3 39.0 36.0 42.9

TOTAL (A+B) 100.0 100.0 100.0 100.0 100.0 100.0

* Borrowing refers to outstanding cash dues.

Sources: a) Reserve Bank of India, all India Rural Credit Survey Committee Report, 1951-52.

b) Reserve bank of India, all India Debt and Investment Report, 1961-62, 1971-72, 1981-82,
1991-92 and 2002-03.

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 CHAPTER 2

CREDIT NEEDS OF FARMERS

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2.1 REASONS WHY FARMERS NEED AGRICULTURAL CREDIT

Credit is needed in every type of business and agriculture is no exception. The need for agriculture credit
becomes more important when it moves from traditional agriculture tomodern agriculture.
Agricultural Labour is often under-employed. Production suffers from weather risks. The capacity of
farmers to save and invest is very low.
The agricultural productivity is low due to low use of inputs. The farmers therefore, need creditto increase
productivity and efficiency in agriculture.
This need is increasing over the years with the rise in use of fertilizers, mechanization and rise in prices.

Some of the reasons why farmers need agricultural credit:

1. Purchase of new inputs

The farmers need finance for the purchase of new inputs which include seeds, fertilizers, pesticides,
irrigation water etc. If the seed of high yielding varieties and othermodern inputs are made available
to the farmers, they can increase productivity not onlyof land but also of labour.

2. Purchase of implements
Credit is required by the farmers for the purchase of tractors, threshers, harvesters, water
pumping sets etc. The use of appropriate machinery in land will increase production by growing
more than one crop on the same piece of land at the same time.

3. Cover Storage/Warehouse expenses

Most of the farmers require a storage space where they can store the harvest. The cover and
warehouse storage cost are covered in agriculture loan offered by the banking institutions. This
offers the farmers an easy and convenient way to store the harvest for future sale.

4. Better management of risk

Credit enables the farmers to better manage the risks of uncertainties of price, weather etc. They can
borrow money during raining days and pay back the loans during peak years of crops.

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5. Purchase of Agriculture land
Agriculture loan helps in financing farmers to purchase land. This, in turn, helps them to expand
their activities, make existing small and marginal units economically viable, diversify their
present activities and bring fallow lands and waste lands under cultivation.

6. Permanent improvement of land

Credit also helps the farmers to make permanent improvements in land like sinking of wells, Land
reclamation, horticulture, rotation of crops etc.

7. Better marketing of crops

If timely credit is available to the farmers, they will not sell the produce immedi ately after the
harvest is over. At that time the prices of agricultural goods are low in the market. Credit enables the
farmers to withhold the agricultural surplus and sell in the market when prices are high.

8. Facing crisis
The credit is required by the farmers to face crisis. The crisis can be caused by failure ofcrop, draught
of floods.

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2.2 CREDIT NEED – ON THE BASIS OF TIME

The needs of farmers can be classified into three categories on the basis of time

1) Short Term: - The "short-term loans" are generally advanced for meeting annual recurring purchases
such as, seed, feed, fertilizers, hired labour expenses, pesticides, weedicides and hired machinery
charges which are termed as seasonal loans/crop loans/production loans. The period of such loans is
up to 15 months. The farmers also need these loans to support their family in those years when the
crops have not been good enough. Main agencies for the grant of these loans are the money lenders
and the co-operative societies. These loans may be both for productive as well as for unproductive
purposes. These are expected to be repaid after the harvest. It is expected that the loan plus interest
would be repaid from the income received through theenterprise in which it was invested.

2) Medium Term (from 15 months up to 5 years): - "Medium-term loans" are advanced for
comparatively longer-lived assets such as machinery, diesel engine, wells, irrigation structure,
threshers, shelters, crushers, draught and milch animals, dairy/poultry sheds, purchase of cattle, small
agricultural implements, repair and construction of wells, farm building etc., where the returns
accruing from increase in farm assets is spread over more than one production period. The usual
repayment period for such type of loan is from fifteen months to five years. These loans are provided
by money lenders, relatives of farmers and commercial banks etc.

3) Long Term (above 5 years): - Loans repayable over a longer period (i.e., above 5 years) are classified
as long-term loans. "Long-term loans" are related to the long-life assets such as heavy machinery,
land and its reclamation, erection of farm buildings, construction of permanent-drainage or irrigation
system, etc. which require large sums of money for initial investment. The rate of interest on such
loans is generally low. The benefits generated through such assets are spread over the entire life of the
asset. The normal repayment period for such loan’s ranges from five to fifteen or even up to 20 years.

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2.3 CREDIT NEEDS – ON THE BASIS OF SOURCE

In India agricultural credits are being advanced by different sources. The short term and medium-term
loan requirements of Indian farmers are mostly met by moneylenders, co- operative credit societies and
Government. But the long-term loan requirements of the Indian farmers are also met by moneylenders,
land development banks and the Government. Nowadays, the long term and short-term credit needs of
these Institutions are also being met by National Bank for Agricultural and Rural Development
(NABARD). Sources of agricultural credit can be broadly classified into institutional and non-institutional
sources. Non- Institutional sources include moneylenders, traders and commission agents, relatives and
landlords. but institutional sources include co-operatives, commercial banks including the SBI Group, RBI
and NABARD. Table below shows the contribution of these different sources to the total agricultural
credit in India since 1951 to 2002.

Borrowing of Cultivators from Different Sources

Sources 1951 1961 1971 1981 1991 2002

A. Non-Institutional
1. Money Lenders 69.7 61.9 36.1 17.0 17.5 29.6
2. Traders 5.5 7.1 8.4 3.0 2.2 2.6
3. Relatives and Friends 14.2 5.2 13.1 9.0 5.5 7.1
4. Landlords and others 3.3 7.4 10.7 10.0 10.8 3.6
Sub-Total 92.7 81.6 68.3 39.0 36.0 42.9

B. Institutional
1. Government 3.3 6.7 7.3 4.0 8.7 5.3
2. Co-operatives 3.1 11.4 22.0 29.0 21.6 27.3
3. Commercial Banks and Rural
0.9 0.3 2.4 28.0 33.7 24.5
Banks
Sub-Total (A) 7.3 18.4 31.7 61.0 64.0 57.1

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0

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It can be revealed from the above table, that among all the different non-institutional sources the
contribution of the money lenders was the highest and that was to the extent of 69.7 percent. But its
contribution gradually came down to 61.9 percent in 1961 and then to 29.6 percent in 2002. Total
contribution from the non-institutional sources towards agriculture gradually declined from 92.7 percent
in 1951 to 36.0 percent in 1991 and came up to 42.9 percent in 2002. The share of institutional sources to
the total agricultural credit which was 7.3 percent in 1951 gradually increased to 64.0 percent in 1991
and then to 57.1 in 2002. Out of these institutional sources, co-operatives contributed 27.3 percent and
commercial contributed 24.5 percent of the total farm credit in 2002.

(A) Non-Institutional Sources:

(i) Moneylenders

From the very beginning moneylenders have been advancing a major share of farmcredits.
Moneylenders are of two different types:
(a) Professional Moneylenders

(b) Agriculturist Moneylenders

These moneylenders were suppling a major portion of agricultural credit (69.7 percent in 1951)and
indulged into malpractices like manipulation of accounts and charged exorbitant rate of interest on their
loan- often 24 percent and over.

Due to these factors the share of moneylenders in total farm credit has declined sharply from
69.7 percent in 1951 to 36.1 percent in 1971 and then 17.5 percent in 1991 and then to 29.6percent in
2002.

(ii) Traders and Commission Agents

Traders and Commission agents are also advancing loan to the agriculturist for productive purposes
before the maturity of crops and then force the farmers to sell to sell their crops at very low prices and
charge heavy commission. This type of loans is mostly advanced for cash crops.

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The share of these traders in farm credit increased gradually from 5.5 percent in 1951 to 8.8 percent in
1971 and then sharply declined to 2.2 percent in 1991. Thus, its importance has beendeclining in recent
years.

(iii) Relatives
Cultivators are also normally borrowing funds from their own relatives in times of their crisis both in
terms of cash or kind. These loans are a kind of informal loans and carry no interest and normally
returned after harvest.
The importance of this source of farm credit is also declining as its share of agriculture credit has
already declined from 14.2 percent in 1951 to 9.0 percent in 1981 and then to 5.5 percentin 1991.

(iv) Landlords

In India, small as well as marginal farmers and tenants are also taking loans from their landlords for
meeting their personal requirements. This source has been following all the ill- practices followed by
money-lenders, traders, etc.

Sometimes landless workers are even forced to work as a bounded labour. The share of this source to
rural credit has increased from 1.5 percent in 1951 to 8.1 percent in 1971 and then declined to 4.0 percent
in 1981 and to 1.0 percent in 2002.

Thus, the non-institutional sources of farm credit have been facing serious loopholes like exorbitant rates
of interest, loan for unproductive purposes, non-repayment of loan etc.

(B) Institutional Sources:

The main motive of institutional credit is to assist the farmers in raising their agricultural productivity and
maximizing their income. Institutional credit is also not exploiting in character. The following are some
of the important institutional sources of agricultural credit in India.

(i) Co-operative Credit Societies

The cheapest and the best source of rural credit in India is definitely the co-operative finance. In India the
active primary agricultural credit societies (PACS) cover nearly 86 per cent of the Indian villages and
account for nearly 36 per cent of the total rural population of the country.

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The share of co-operatives in the total agricultural credit increased to nearly 27.3 per cent in 2002 as
compared with only 3.1 per cent in 1951.

In 1993-94 nearly 88000 primary agricultural credit societies (PACS) of India provided Rs6461 crore as
short terms and medium-term loans to the farmers. In 2006-2007, the same loan has increased to Rs
42,480 crore, which was financed by co-operative banks.

But these co-operatives have a long way to go. In some states like Bihar, West Bengal, Orissa and
Rajasthan the co-operative movement did not spread much of its net world. Even in some places the
working of the co-operatives had been wrecked hopelessly by unscrupulous and dishonest members
leading to large scale sufferings of huge number of needy farmers

(ii) Land Development Banks

Land development banks are advancing long term co-operative credit for 15-20 years to the farmers
against the mortgage of their lands for its permanent improvement, purchasing agricultural implements
and for repaying old debts. The number of state land development banks (SLDBS) increased from 5 in
1950-51 to 19 as on June 1986 which again consisted of 2447 Primary Land Development Banks
(PLDBS) branches.

The amount of loan sanctioned annually by these PLDB branches has increased from Rs 3 crore in
1950-51 to Rs. 2039 crore in 1993-94. But benefits from these land development banks could not reach
to small farmers and only the big landlords have been taking all advantages out of it. At present there are
19 central and 733 primary LDBSS. In 1997, these banks advanced loan worth Rs 1,744 crore.

(iii) Commercial Banks

In the initial period, the commercial banks of our country have played a marginal role in advancing rural
credit. In 1951, only 0.9 percent of the agricultural credit was advanced by the commercial banks. But
after the nationalization of commercial banks in 1969, the commercial banks started to extend financial
support both directly and indirectly and also for both shortand medium periods.

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With the help of "village adoption scheme" and service area approach the commercial banks started to
meet the credit and other requirements of the farmers. They also sponsored various regional rural banks
for extending credit to small and marginal farmers and rural artisans justto save them from the clutches
of village moneylenders.

Till 1969, direct advances by the commercial banks were restricted to only Rs 44 crore. But as on March
2007 the amount of loan has increased to Rs 1,40,382crore. During 2006-2007 commercial banks along
with Regional Rural Banks extended nearly 79.1 per cent of the total institutional farm credit in our
country.

Again in 1999-2000, disbursements of agricultural advances by public sector banks under Special
Agricultural Credit Plan (SACP) were Rs 19,755 crore. Commercial banks are finding difficulty in
advancing loans to the farmers particularly in respect of lending techniques, security, recovery etc. and
are expected to overcome these gradually. But the commercial banks are not very much interested to
advance loan to small and marginal farmers and as on March 1997 their farm credit was restricted to
only 13.5 per cent of total bank credit. The shareof commercial banks in total institutional credit to
agriculture is almost 69.0 per cent in 2006- 2007.

(iv) Regional Rural Banks

As per the recommendations of working Group on Rural Banks the Regional Rural Banks (RRBS) were
established in 1975 for supplementing the commercial banks and co-operativesin supplying rural
credit. Since 1975 these Regional Rural Banks are advancing direct loans to small and marginal farmers,
agricultural labourers and rural artisans etc. for productive purposes

Till June 1996, in total 196 Regional Rural Banks have been lending annually nearly Rs 1500 crore to
the rural people and more than 90 per cent of these loans were also advanced to the weaker section.

At the end of 1988 these Regional Rural Banks jointly advanced loan to the extent of Rs, 2,804crores
among 11 million persons lying below the poverty line. In 2006-2007, the Regional Rural Banks have
disbursed agricultural credit amounting to Rs 20,435 crore which is just
10.05 per cent of total institutional credit to agriculture.

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(v) Government
Another important source of agricultural credit is the Government of our country. These loans
are known as taccavi loans and are lend by the government during emergency and distress like
famine, flood, etc. The rate of interest charged against such loan is as low as 6 percent.

The share of the Government in the total agricultural credit has increased from 3.3 percent in 1951 to 6.7
percent in 1961 and 8.7 percent in 1991, but then the share declined to 5.3 percent
in 2002.

During 1990-91, the State Government has advanced nearly Rs 350 crores as short-term loanto
agriculture. But the taccavi loan failed to become very much popular due to official red tapism and
corruption.

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2.4 CREDIT NEEDS – ON THE BASIS OF PURPOSE

Agricultural credit needs of the farmers can be classified on the basis of purpose into thefollowing
categories:

(i) Productive

The loans used in productive operations of agriculture are called productive credit. Under productive
needs we can include all credit requirements which directly affect agricultural productivity. Farmers need
loans for the purchase of seeds, fertilizers, manures, agricultural implements, livestock, digging and repair
of wells and tube wells, payment of wage, effecting permanent improvements on land, marketing of
agricultural produce, etc. Repayment of these loans is generally not difficult becausethe very process of
production generally creates the withdrawal for repayments.

(ii) Unproductive

The loans which are used for unproductive operations are called unproductive credit.Loans are taken for
unproductive purposes such as litigation, marriages, and social ceremonies on birth and death of a family
member, religious functions, festivals etc. Farmers take loans from Mahajans since institutional credit
agencies do not give such loans.

(iii) Consumption Needs

Farmers often require loans for consumption as well. Institutional credit agencies do not provide loan for
consumption purpose. Therefore, farmers stretch their hand towards the moneylenders.

(iv) Meeting Family Expenditures

This type of credit is needed for the purchase of domestic utensils and clothing, paying for medical,
educational and other family expenses.

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(v) Non-Farm Business

Such credit is required for the repair of production and transport equipment, furniture, construction and
repair of building or non-farm houses and other capital expenditure and non-farm business.

(vi) Other Purposes

Such expenditure includes payment of old debts, deposits with cooperative agencies,shares and
unspecified purposes.

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 CHAPTER 3

DIGITAL FINANCIAL SERVICES: DEVELOPMENTS IN

SERVING SMALLHOLDER FARMERS

Page | 30
3.1 DIGITAL FINANCIAL SERVICES: DEVELOPMENTS INSERVING SMALLHOLDER
FARMERS

A number of private-sector actors and other stakeholders are experimenting with digital financial services
("DFS"). particularly those enabled by mobile phones, to overcome the specific challenges of serving
smallholder farmers and their families. Buoyed by the relative success of digital financial services in the
non-agricultural context, a range of digital financial services deployments have been launched in recent
years aimed at extending financial services to smallholders. The efforts are still nascent and the challenges
plentiful. Nonetheless, there is widespread interest in exploring the potential of digital financial services
to overcome anumber of traditional economic and cultural barriers that currently limit smallholder use of
formal financial services. Given the embryonic and rapidly developing state of digital financial services
for smallholders, it is too early to draw clear conclusions from the examples to date. While initial evidence
suggests that digital financial services through mobile channels offers great promise for improving the
lives of smallholders and their families, significant challenges remain. This paper identifies some key
examples in the use of digital financial services to reach smallholder families and highlights some
related policy considerations.

3.2 AGRICULTURAL CREDIT

Credit is critical to agricultural finance, whether to purchase inputs (seeds, fertilizer), tools, or to cover
ongoing operational costs prior to harvest time. Yet for smallholders, credit is relatively rarely drawn
from financial institutions. The cost of assessment of the client risksand transactions costs of providing
loans by conventional means is too high for most financial institutions. Credit can also be made accessible
by e-warehousing, which enables the recording and transfer of information on crop storage that can be
used as a warehouse receipt for loan collateral.

3.3 INSURANCE

Insurance can reduce the negative impacts of crop failure and livestock illness. It may also improve a
farmer's ability to access credit and willingness to invest in labor and inputs. There are several types of
agriculture-related insurance, including weather index insurance (for example, drought, excessive rain),
area yield, livestock mortality, and price insurance. The operational costs of making and receiving
payments for insurance, issuing payouts and verification often make the costs prohibitive for smallholders.

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As such, insurance providers innovated using Index insurance for weather risks coupled with mobile
registration and payments.

3.4 PAYMENTS

There is a fast-growing trend in mobile money transfers. Where available, some smallholder farmers are
customers of a digital payment provider and make transfers and/or payments outside of their agricultural
activities. There are also newly-developed platforms that enable organizations and government agencies
to make payments for specific agricultural purposes, including for fertilizer and seed subsidies. The use
of electronic vouchers using mobile phones can reach considerable scale, such as with Zoona in East
Africa where more than 1 Million e- vouchers were issued to smallholders. In Nigeria, 8 million farmers
received fertilizer vouchersthat can be redeemed by mobile phone.

3.5 SET-ASIDE SAVINGS

With so much focus on credit and insurance, financial service providers often overlook savings products
for smallholder famers. One example of a savings-like product specifically designed for farmers is my
agro. It has operations in Mali and Senegal that use an Integrated Transaction Control (ITC) system and
rural traders to provide the service.

3.6 REGULATIONS AND PROTECTION CONSIDERATIONS

The role of digital innovation in agriculture and finance is critical and opens many opportunities. It is
growing rapidly, but has not yet expanded on the scale needed to serve this market. At the nexus of digital
innovation and agriculture, digital financial services for smallholders raise a number of questions for
policy makers and regulators, including: (a) financial consumer protection, (b) regulation of agents as
cash-in and cash-out points, (c) prudential regulation and supervision of nonbank e-money issuers, (d)
customer identification and compliance with Anti-Money Laundering (AML)/Combating the Financing
of Terrorism (CFT) recommendations, (e) data security, and (f) interoperability of payment systems.
Perhaps most importantly, coordination among in-country policy makers is a common challenge - but one
that is central to the advancement of DFS in general, and DFS for smallholders in particular. Despite
ongoing challenges, DFS offers one of the most promising pathways yet to serving smallholder families
with affordable and appropriate financial services.

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 CHAPTER 4

FINANCING TO SUPPORT WOMEN IN

AGRICUTURE SECTOR

Page | 33
4.1 FINANCING TO SUPPORT WOMEN IN AGRICULTURALSECTOR

Providing financing to agriculture is challenging for both male and female farmers, however women face
some unique challenges. These challenges relate to the role of women in the household that often restricts
their control over assets and constrains their available time for productive activities. Their role in the
household is often invisible, particularly when it comes to their economic and financial contributions. As
such, women have lower access to economic and financial services (World Bank 2015).

Women often have limited control and ownership over large assets such as land. They alsolack the
ability to post hard collateral for loans. In addition, the literature points out thatwoman have limited
opportunities to develop human and social capital. Indeed, they face constraints in accessing training and
capacity building and membership in producer organizations. These unique challenges make access to
finance a much bigger challenge for women compared to men in the agricultural sector.

Some of the constraints for women that are the most difficult to address are not financial, nor can they be
addressed simply through economic or market opportunities. Cultural issues and constraints such as the
purdah (female seclusion) system in rural Islamic areas can have an overwhelming influence on the role
that women can play. The challenge for financial service providers is to understand the varied interests
and cultures and, together with the target group, adapt culturally appropriate products and services to meet
those interests.

The research on this topic reviews the existing literature and summarizes the key issues and challenges
regarding the access of women to financial services in the agricultural sector. Research and experience so
far demonstrate that there is a business case to be made for closing the financing gap between men and
women in agriculture. Research also highlights some examples of various private and public initiatives
that aim to achieve greater economic growth in agriculture by closing this gender gap.

Comparing various experiences across a number of institutions that serve female clients in the agricultural
sector shows that the same areas and issues that make an institution successful in serving agricultural
clients overall also make institutions successful in serving female clients inagriculture. Although this is a
pre-condition, it is not the only one.

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In addition, for an institution to develop capabilities in serving agricultural clients, it needs to identify
what the role and contributions of women are in agricultural households, Further, the institution needs to
adapt this understanding to products, services and delivery channels accordingly.

In this context, it needs to apply a "gender lens" and see within an agricultural household. It needs to learn
how women contribute since their role often tends to be underestimated, even in their own assessment.

Women's World Banking has characterized women's contributions in agriculture as ofteninvisible - despite
women fulfilling a wide range of roles within the household, from doing housework, taking care of the
children, working alongside their male counterparts in farming, and supplementing family incomes with
side activities (on and off of the farm). Women's workload and lack of time is often a limiting factor for
their full participation in work other than housework activities. It also affects their ability to start or
expand a business and request financing.

Studies have found a disconnect between the economic and financial contributions of women to the
household and their perceived role. Even these same women underestimate how much they contribute and
have difficulty seeing themselves as entrepreneurs. This is also reinforced by certain cultural aspects and
norms that create disincentives for women in rural areas to engage in entrepreneurial activities. Both men
and women often view the role of women in agricultural- dependent households primarily in terms of
housework and helping the male farmer. However, anecdotal evidence and research findings have shown
that women often contribute a significant amount of income to their households. Financial institutions
that apply the usual assessment of borrowers (such as those done in urban areas for small businesses) can
often miss the financial contributions of women in agricultural household production. Furthermore,
understanding that women are lacking in time means that financial institutions would need to seek
alternative delivery channels (such as mobile banking) and appropriate marketing channels.

Understanding the roles and contributions of women in an agricultural household would facilitate an
improved risk assessment of the whole household. It would also present new opportunities to offer
financial services to female clients to grow their businesses and purchase additional products for their
households, such as establishing savings accounts, buying insurance products and pension annuities,
among others. Adding women as clients requires senior management and shareholder prioritization, a
targeted allocation of resources, training, planning, data/metrics and patience in growing this long-run
profitable business sub-segment.

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In addition, it requires that financial institutions perceive women as valuable and profitable clients. In
this context, it is important for these institutions to fully understand women's needs and preferences- and
to strategically target them.

Despite the challenges presented in this paper and various solutions being implemented, the potential to
achieve greater economic growth by closing the financing gap for women in agriculture is still very
significant. Closing this gap requires a call to action by policy makers, the private sector, and civil society
to prioritize, advocate, and devise solutions for reducing and eventually closing the gender gap in access
to finance in the agricultural sector.

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4.2 CALL FOR COLLABORATIVE ACTIVE

Financial institutions alone cannot provide the solution. Indeed, governments and policy makers can
influence the establishment of an investment climate favorable to rural women. Public- private cooperation
is also necessary to establish an enabling environment to address the human and social capital needs of
women. Some specific actions for international organizations, donors and policy makers to improve
the access of women to finance in therural areas and agricultural sector are as follows:

 Promote the production of statistical data that quantify the access to finance by women in rural,
"agricultural areas by including both formal resources as well as informal ones. Currently, statistics on
financial inclusion in rural areas, even from formal resources, are very weak. Even if they exist,
however, they are not disaggregated by gender.

 Mainstream access to finance issues by women in rural, agriculture areas. Incorporate them into
national financial inclusion strategies, and specific programs and projects aime

 d at promoting development in rural and agriculture areas. Recognize that identifying and addressing
particular issues and constraints for women in rural/agriculture areas could potentially unleash greater
developmental impact in the agricultural sector and in rural areas in any country.

 Promote women's legal, economic, political, social and cultural rights. Women's access and control
over assets, cultural norms about their role within a rural household, improved education (financial as
well as technical), are key issues that need to be addressed along with efforts to improve their access to
finance.

 Create information programs, training and awareness raising at all levels to sensitize the population-
both men and women- about the societal value and benefits of improving women's rights and
empowerment.

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 CHAPTER 5

PERKS (BENEFITS) OF AGRICULTURAL FINANCE

Page | 38
5.1 PERKS (BENEFITS) OF AGRICULTURAL FINANCE

What are the benefits of agricultural finance?

As a farmer, it can be difficult to purchase the equipment and machinery you need. The costs can be
exorbitant and can eat into capital that is much needed for other necessities. You may not be aware, but
there is a solution to this in the form of agricultural finance.

It will allow you to purchase new inputs

Farmers need to purchase new inputs, such as seeds, fertilizers, pesticides, irrigation water and more.
Agricultural finance can help to make these purchases easier for farmers. If the seed of a high yielding
crop is readily available for farmers, then the productivity of the farm is improved.

Smaller farms may not have the need for agricultural finance for items such as seeds or pesticides but
larger farms may need help with bulk purchases of these items. Seeds, fertilizers and irrigation water can
prove to be a highly expensive continuing need which agricultural finance can help to meet.

You can permanently improve your land

Having agricultural finance means that you are able to make permanent improvements on your land, such
as sinking wells, rotation of crops and even land reclamation. If you were to attempt such improvements
without finance, you may end up spending more money than you are able.

Finance for agricultural improvements means that you can create the perfect working farm to improve the
productivity of your workers and the output of your land. Being able to rotate crops effectively will help
significantly with better crop production and sustainability offarmland, and sinking wells will add value
to your land should you decide to sell it.

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You can cover land cost

If you are looking to buy new farmland as a budding farmer or simply increase the amount of Land you
already have, then agricultural finance can help cover the land costs you may incur. The land you need
will depend on the type of farming you are planning on doing.

In order to apply for finance for land, you will need to calculate how much land you need and what kind
of land you are looking for. Once you have your loan approved, you will be able to move forward with
your Endeavour. Buying land with your own money may not be feasible as a start-up farm, which is why
finance is a good option.

It allows to refinance an older loan

If you already have an agricultural loan, you may want to look into refinancing. This entails taking out a
new, lower-interest loan and using this to pay off the old, higher-interest one. You will still have a loan
but will be saving money due to the lower interest.

This decision will only make sense if the interest savings outweigh the refinancing costs. Once you have
discussed your options with a financial advisor, you can look into refinancing. It will allow you to use
your money for other essentials that you may not have been able to while repaying the older, expensive
loan.

Marketing of product

If you are a working farm that sells its produce or livestock, you will need to successfully market your
products. This can involve significant costs including websites, logos, focused ad campaigns, PR and
marketing costs.

For those who are unfamiliar with marketing, you may need to speak to a consultant which willalso incur
consulting costs. You can use your agricultural finance as part of your marketing funds to boost your
visibility for retail customers and for private customers too. Be sure to examine every aspect of any
marketing campaign before making any final decisions.

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You are better equipped for crisis

Farming can be a difficult and fickle business. You are never able to predict what will happen to your
crops or livestock, and are at the mercy of customers and competitors. Some farming isseasonal, which
means you may only earn money during certain times of the year.

An agricultural loan can be used to protect yourself during the various ups and downs of your business.
You can also use it for operational costs as well as costs that occur from damages. It is better to be
prepared for every eventuality, which is why having agricultural finance is important to all working
farms.

Final verdict

There are many benefits to taking out finance for agricultural pursuits. Your land improvementCosts will
go down, as well as being able to refinance your current loan. Farmland purchases are notoriously
expensive, which is why it is best to take out finance to cover the costs. If you are concerned about not
being able to make it until the end of the year due to seasonal crops, taking out finance may be an
affordable solution.

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 CHAPTER 6

PROBLEMS OF AGRICULTURAL FINANCE

Page | 42
6.1 PROBLEMS OF AGRICULTURAL FINANCE

It is said that a farmer is born in debt, lives in debt and ultimately dies in debt. The most worrisome feature
of the rural economy is the burden of debt which has been on the rise despite Six decades of planned
development. But at the same time, borrowing is the dire necessity for the farmers in general and marginal
and small farmers in particular. There is no denying the fact that agriculture is the backbone of our rural
economy.

To sustain, to stimulate and to strengthen its smooth functioning, it requires regular supply of sufficient
agricultural credit with reasonability of interest. However, it is blamed that financing of agriculture is
plagued with a number of problems such as the problem of over dues, unsatisfactory credit conditions,
increasing malpractices and corrupt credit culture etc. The study shows that a number of problems are
faced by the farmers in availing finance for agriculture. Similarly, the banks are also experiencing many
problems in the efficient and effective distribution of agricultural finance

.
6.2 PROBLEMS FACED BY THE FARMERS

On the basis of the study conducted, the farmers, who are covered under the study, are confronting the
following problems:

1. No Loan without Surety/Security

The banks do not disburse any loan to the farmers without surety and security. The farmers find it very
difficult to arrange satisfactory security as well as surety to thebank. Security for loans may be in the
form of hypothecation of assets owned by them. But the farmers do not possess many assets except the
land which they find it hard to offer as a security. It becomes a big hurdle in obtaining loan from the bank.
As a result, many marginal and small farmers do not get the facility of agriculture loan and remain bereft
of the benefits of agricultural development.

As for as the third-party guarantee is concerned, banks generally demand the guarantee of the rich and
influential persons. The small and marginal farmers confront a number of problems in relation to a
guarantor.

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Even if some farmers are able to arrange some surety, the person offering guarantee demands
compensation for standing as a surety. A poor farmer does not have money to pay him. As a result, he
faces humiliation and feels dejected with the whole system.

It is also to be noted that the financial capacity and Integrity of the farmer is verified from different quarters
before sanctioning any loan to him. These may Include the village Sarpanch, some large farmers of the
area or neighbours of the farmers etc. They may or may not back the credentials of the concerned
farmer.The loan disbursement gets halted if the banks receive negative information about the proposed
borrower. The issue here is that the information so obtained may not be true and may suffer from personal
biases and grudges of the concerned person against the proposed borrower.

2. Corrupt Practices of Patwaries, Agents and Bank Officials

It is said that money makes the mare go. The overall system has been so polluted thatthe total process
comes to a standstill till you grease the palm of the various persons involved in the sanctioning of the
loan. The farmers need many papers and documentsin order to process their loan. It becomes a herculean
task to get landholding and other revenue records from Patwaris and other officials of the revenue
department. The corrupt practices of patwaris and other officials of the revenue department hinder the
loan process.

Similarly, many bank officials and other agents involved in the loan process create many hurdles and
demand their fee to resolve the procedural issues. The poor farmers find it very difficult to meet the
ever-growing demands of many persons. As a result, they are unable to get the loans and waste their time
and energy without any positive result.

3. Credit Inadequacy

The banks have not been making a fair assessment of the credit needs of the farmers. It results in the
shortage of finance and there arises inadequacy of credit. It is pertinent to note that if sufficient funding is
not available, it will not serve the desired purpose. Moreover, the delay in disbursement also leads to many
problems.

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It has been found in the study that some of the farmers who received inadequate amount of credit used it
for some other purpose. Inadequate credit may be due to improper estimate of requirement of borrowers
or may be due to arrears of past loans due to various unforeseen contingencies.

4. High Transaction Cost

The farmers have to incur many other costs in addition to the interest they pay on the loan. These may
include loss of wage-earning days, revenue stamps, letter of guarantees, cost of photographs, loan
agreement and other unidentified charges being incurred at various stages to expedite the sanction of loans
etc. These high transaction costs hamper the spirit of the farmers for getting loans.

The information relating to the number of trips made and money spent by the borrower farmers in
connection with getting loans was ascertained from the sample farmers and the same has been given in
the table below. Information included the number of trips and money spent by the borrower starting
from the stage of application form collection, filling up the form, procurement of required documents,
obtaining guarantee/witness, registration fee, lawyer's fee, submission of application form, answering of
objections/queries, collection of sanctioned loan, bribe demanded by/ paid to the bank officials/ agents,
etc.

As per the study conducted, a farmer has to make 5.4 trips in Patiala district and 6.4trips in Fatehgarh
Sahib District on an average to the bank for the purpose of availing a loan. Similarly, a farmer has to incur
Rs. 2750 in Patiala District and Rs. 2960 in Fatehgarh Sahib District on an average for the purpose of
availing a loan from the bank.

Transaction Cost of Borrowing across Sample Farmers from

Institutional Sources:

Particulars Region
Patiala Fatehgarh Sahib Overall
Average no. of trip madeto
5.4 6.4 5.9
acquire loan
Average amount of money
Rs2750 Rs2960 Rs2855
spent

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5. Ambiguous Terms & Conditions

Most of the farmers are illiterate. They are ignorant about the various rules, terms and conditions e the
banking institutions regarding agricultural finance. They rely upon the information given u diem by bank
officials and other agents involved in the process: They simply do not understand the jugglery of finance
terminology.

Many of them even do not know the interest rates, the amount of subsidy, the different schemes and the
repayment schedule etc. They simply put their thumb impressions on the requireddocuments where they
are told to do. Sometimes, the orthodox farmers are under the impression that once a person gets a loan, it
can be re-paid only by selling the land. The lack of clarity of banking system and ambiguous terms and
conditions stop them from deriving the benefits of agricultural finance.

6. Complicated & Time-Consuming Procedure

The loan process is considered complicated and time consuming. The farmers require crop loans during
the particular seasons. If they do not get the credit in time, it will not serve the desired purpose. The delay
in processing the loan is a common problem felt bythe farmers. Similarly, if the farmers require term
loan for buying certain assets, it isalso required in time. Otherwise, if the asset is bought after the work
has been done; the asset will remain idle till its next use. The farmers also complain 167 about the
complications in the loan process. These complications may relate to the procedural complications and
behavioural complications.

7. More Beneficial to Large Farmers

The farmers normally get term loans to buy agricultural equipment and farm machinery.They 50 get loans
to add to their existing landholdings. However, the heavy terms loans for such activities are availed in
most of the aces by large farmers because of their betteraccess to the banks. The marginal, small and even
medium farmers do not take up the courage to opt for such loans. They also do not have the required
guarantee andresources to avail the facility of such loans. It is felt that the facility of heavy term loans is
more beneficial to large farmers and they derive the maximum benefits from the banking facilities.

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8. Stress of Repayment

It is said that getting a loan is difficult but its repayment in time is more difficult. The small and marginal
farmers live under pressure of repayment of the loan. They are expected to repay the loan immediately
after the harvest. Sometimes, they do not get fair price after harvest. But due to bard conditions of
repayment, they have to sell the crop without any bargain regarding price. It creates a problem in their
minds whether to go for such loans or not.

9. Corruption in DRDA office

District Rural Development Agency (DRDA) is considered at par with othergovernment departments.
This office is expected to play the growth-oriented role for thefarmers. It sanctions loan-cum-subsidy to
the farmers. However, it is felt by the farmers that the files in the department do not move till the wheels
of corruption are attached to them.

10. High Rates of Interest

The farmers feel that the rates of interest charged by banks on loans are quite high in comparison to the
returns expected by them on their yield. The subsidies on the loansare also decreasing day by day. High
168 rates of interest prove to be a bottleneck in therepayment of debt by the farmers to the banks.

11. Less Branches of Banks in Villages

Although, over the years, the branch network of commercial banks has increased manifold, still prefer to
open their new branches in the urban and semi-urban areas or large villages. Non presence of commercial
banks at village level also forces the farmers to avail credit facilities from non-institutional sources. The
loan from non- institutional sources creates a vicious circle of a never ending loan process. They always
remain in debt till they leave this world. The less number of branches has led to lesser banking habits
among the rural folk of the state.

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12. Unapproachable for Tenants and Small Farms

Due to formal procedure of availing credit facilities from institutional sources, tenants and small farmers
are unable to avail the credit facilities from commercial banks. They are unable to meet the necessary
basic requirements of the commercial banks foravailing credit facilities. Therefore, the farmers have to
resort to non-institutional sources to get the loan. The various responses of farmers in relation to various
problems faced by them while availing loan from commercial banks as enunciated by them can be
summarized in the following table:

Problems Faced by Farmers in Availing Institutional Credit in Maharashtra

[Percentage of Farmers (Multiple Response)]

Sr.No. Problems Types of Farmers

Semi-
Marginal Small Medium Large
&
Medium
No loans without
1 35.5 25.6 14.7 12.8
Surety/Security
Corrupt Practices of Patwaires,
2 24.3 32.4 29.7 32.7
Agents and Bank officials
3 Credit Inadequacy 19.4 29.4 28.4 27.4
4 High Transaction Cost 25.4 34.4 32.4 34.2
Ambiguous Terms &
5 27.3 26.7 17.3 28.2
Conditions
Complicated and Time-
6 42.2 38.5 33.4 39.6
Consuming Procedure
More Beneficial for LargeFarmers
7 34.3 33.3 27.5 0.0

8 Stress of Repayment 26.7 31.9 25.4 25.6

9 Corruption in DRDA office 23.4 21.4 28.9 29.1
10 High Rate of Interest 24.3 29.6 22.6 15.2
Less Branches of Banks inVillages
11 26.6 33.9 21.4 12.3

UnapProachable for Tenants andSmall

12 27.4 26.4 11.2 1.2
Farmers
13 No Problem at All 4.5 3.2 5.6 4.7

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6.3 RANKING OF PROBLEMS ACCORDING TO THECATEGORIES OF THE FARMERS

Data received through questionnaires has been further analysed in the following four categories:

A. Problems of Marginal Farmers

B. Problems of Small Farmers

C. Problems of Semi-Medium & Medium Farmers

D. Problems of Large Farmers

A. Problems of Marginal Farmers

Almost all the marginal farmers responded about their problems and their high rank problems are –
complicated and time consuming procedure, denial of loans due to unavailability of securities, lack of
funds available to them as large share of funds available to them are procured by big farmers have
been shown rank wise in the following table:

Problems Faced by Marginal Farmers

Nature of Problems Rank

Complicated and time-consuming procedure I
No loan without surety/ Security II
More Beneficial for large farmers III
Unapproachable for tenants and small farmers IV
Ambiguous terms and conditions V
Stress of repayment VI
Less branches of banks in villages VII
High rate of Interest VIII
High transaction cost IX
Corrupt Practises of Patwaris, Agents and Bank officials X
Corruption in DRDA XI
Credit inadequacy XII

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B. Problems of Small Farmers
Small farmers registered their problems rank-wise and some of their problems are of getting loans,
high transaction cost, corrupt practices of Patwaris agents and bank official, corruption in DRDA
offices, etc. The various problems faced by the medium farmers have been shown rank-wise in the
following table:

Problems Faced by Small Farmers

Nature of Problems Rank

Complicated and time-consuming procedure I
High transaction cost II
More Beneficial for large farmers III
Less branches of banks in villages IV
Corrupt practices of patwaris, agents and bank officials V
Stress of repayment VI
High rate of Interest VII
Credit inadequacy VIII
Ambiguous terms and conditions IX
Unapproachable for tenants and small farmers X
No loans without surety/security XI
Corruption in DRDA XII

C. Problems Faced by Semi-Medium & Medium Farmers

Semi- medium and medium farmers registered their problems rank-wise as cumbersome process of
getting loans, high transaction cost, corrupt practices of patwaris agents and bank officials, corruption
in DRDA, credit inadequacy, etc. The various problems faced by the semi-medium and medium farms
have been shown rank-wise in the following table:

Problems Faced by Semi-Medium & Medium Farmers

Nature of Problems Rank

Complicated and time-consuming procedure I
High transaction cost II
Corrupt practices of patwaris, agents and bank officials III
Corruption in DRDA IV
Credit inadequacy V

Page | 50
 More beneficial to large farmers VI
Stress of Repayment VII
High rates of interest VIII
Less branches of banks in villages IX
Ambiguous terms and conditions X
No loans without surety/security XI
Unapproachable for tenants and small farmers XII

D. Problems of Large Farmers

Responded top problems of large farmers are- complicate process of getting loan, high
transaction cost, corrupt practices of patwaris agents and bank officials, corruption in DRDA,
ambiguous terms and conditions, etc. Various problems faced by the farmers have been listed
rank-wise in the following table:

Problems Faced by Large farmers

Nature of Problems Rank

Complicated and time-consuming procedure I
High transaction cost II
Corrupt practices of patwaris, agents and bank officials III
Corruption in DRDA IV
Ambiguous terms and conditions V
More beneficial to large farmers VI
Stress of Repayment VII
High rates of interest VIII
Less branches of banks in villages IX
No loans without surety/security X
Credit inadequacy XI
Unapproachable for tenants and small farmers XII

Some of the common faced by all four groups of farmers are complicated process of getting loans, high
rates of interest, and the defective role of officials concerned at the concernedbanks and at revenue
office.

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 Comparison of Rank given in the Various Problems faced by the Farmers

Different categories of farmers gave different ranks to the problems faced by them as per their perceptions.
The following table compares the rank give by them:

Comparison of Ranks given to the Various Problems Faced by the Farmers

Nature of Problems Types of Farmers

Semi-
Marginal Small Medium & Large
Medium

Complicated and time-consuming

1 1 1 1
procedure
No loan without surety/ Security 2 11 11 10
More Beneficial for large farmers 3 3 6 6
Unapproachable for tenants and
4 10 12 12
small farmers
Ambiguous terms and conditions 5 9 10 5
Stress of repayment 6 6 7 7
Less branches of banks in villages 7 4 9 9
High rate of Interest 8 7 8 8
High transaction cost 9 2 2 2
Corrupt Practises of Patwaris,
10 5 3 3
Agents and Bank officials
Corruption in DRDA 11 12 4 4
Credit inadequacy 12 8 5 9

The above table signifies that the ranks given by the different categories of farmers to the various
problems in the raising finance for agriculture are different. All the farmers agree that to get agriculture
finance is complicated and time consuming. Farmers find it very difficult to arrange for surety and
security for getting loans. Most of the farmers in the analysis also think that transaction cost to get credit
are also very high.

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6.4 PROBLEMS FACED BY THE BANKS

The banks experience a number of difficulties and problems in the efficient and effective administration
of agriculture financing. The interactions and discussions with the branch manager of the banks under
study reveal the following major problems faced by them:

1. Increasing Demand of Agricultural Credit

Due to the technological upgradation on the agricultural front, the credit need of the agricultural sector is
on the rise. To meet the rising credit demand of agricultural sector is an enormous task, and responsibility
will have to be borne by the formal financial institutions, 175 mainly the co- operatives and commercial
banks. As resources available to commercial banks in the agricultural sector are limited, it is important
that every commercial bank attempts to make optimum use of its limited resources in this sector. It is not
possible to meet the requirements in proportion to the demand.

2. Slow Disbursement of Subsidies by DRDA

The government sanctions subsidies under Its various schemes through District Kura Development
Agency. The BDO of the concerned area sends the application of the borrower to the bank with his
certificate regarding availability of amount for the purpose of subsidy. The banks then forward the case
to DRDA for sanction of subsidy to the borrower. Generally, the officials of DRDA delay the loan case
of the borrowers owing to their vested interests. Under such circumstances, the banks cannot sanction
and disburse the amount unless it is intimated by the DRDA that the said borrower has been sanctioned
the required amount of subsidy for the purchase of assets.

3. Problems of Over Dues

The problem of mounting over dues has become a major cause of concern for the banking institutions.
The amount of recoverable loans from the farming sector has been piling up day by day. The interaction
of the researcher with branch managers regarding this major issue revealed the following causes for poor
recovery of loans:

a. The farming activities are largely dependent on the mercy of Almighty God in our country. Nature
plays havoc with the farmers almost every year. Natural calamities like floods or droughts ruin the
crops of the farmers and they are left with very little produce. It affects their repaying capacity and as
a result, the recovery of loans becomes a tough task.
Page | 53
b. It is very common among the farmers that they use the amount of loan for domestic or leisure purposes.
Sometimes, they spend the loan money on social functions, litigation, sickness and other such purposes.
It leads to reduction in the revenue and ultimately affects their capacity to repay the loan.

c. The cumbersome procedure of disbursement of loans, high time taken by DRDA in releasing the
subsidies and other procedural formalities sometimes defeat the very purpose of the loan. As a result,
the loan obtained after the desired time is used for some other purpose.

d. The farmers are illiterate and ignorant about the financial management practices. They do not know
how to make the optimum use of the loan taken. They simply takethe loan money as their own money
and many times use it on wasteful terms. They also do not maintain any account of the loan taken by
them. Basically, they do not understand the cost loaned capital. It results in non-recovery of loans.

e. There is a crisis of character and attitude in the people of the country. Most of the people have
developed an attitude of will-full default because they feel that the loan taken by them is the money of
the government and it is not meant to be repaid. There have been situations when because of political
considerations, the respective governments waive off the loans of the farmers. As a result, people have
developed the feeling that the governments will again waive off the loans and they simply go on
waiting for that time.

f. Crop failure or lesser production due to shortage of fertilizers, pesticides. good variety of seeds also
compels farmers not to repay loans. Lesser production causes lesser income and lesser capacity of the
farmers to meet their financial obligations.

g. There is a cut throat competition among different financial institutions. They offer different lucrative
schemes to the people for credit which induce them to have multiple credit facilities from different
institutions. It puts a great liability on them to repay installments of these multiple loans. It results in
difficulty for them to repay allthe installments at the same time. So, they become defaulters.

h. Rural poverty and indebtedness, decreasing size of holdings, unemployment and disguised
unemployment contribute a lot to the miserable plight of the farmers. Their income from agriculture
is hardly sufficient to meet even their day-to-day expenditure on food, clothing and shelter. It results in
the over dues piling up.
Page | 54
i. Our system of finance is also affected by politics. The cooperatives normally issue loan money only to
those big farmers, who have some political connections. Small farmers lag behind them. They fail to
get credit. In the absence of credit, they are unable to purchase desirable inputs and other farm material.
Absence of modern inputs further lowers their income and lessens their paying capacity of loan.

j. The banks do not have effective follow up system for the recovery of loans. Therecovery of
loans also gets affected by political interference.

4. Unhealthy Competitions & Lack of Coordination

With the emergence of many private sector banks, there is an unhealthy competition among various
financial institutions. There are many hidden costs charged particularly by the private banks. It has led
to the erosion of confidence of the common people in thebanking system. Moreover, there is lack of
co-ordination between various agencies working for rural development.

5. Procedural Issues

Illiteracy is the biggest hurdle in the development of the farming community. The borrowers have to
submit many documents and papers to be obtained from different agencies for getting finance for
agriculture operations. They find it very difficult and sometimes simply get fed up with the system and
say no to loans. The concept of paperless office is still a dream for the institutions.

6. Political Interference

Politics is still a dirty game and the influential politicians pressurize the banking institutions in rural
areas to give loans or extend moratorium facilities to a particular group of farmers. In small villages
ridden with political and communal factionalism, commercial bank personnel are bound 1o come
under undesirable pressure which forcesthe institutions to sacrifice the norms of sound creditability of
farmers.

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7. Absence of Proper Control Mechanism

There is no effective control mechanism to check the diversion of funds to purposes for which the loan
is not granted. It has become very common among the borrowers to siphon off the money tor
unproductive purposes. It results in the lowering of therepayment capacity of the borrower.

8. Inadequate Staff

The bank managers also complained about the shortage of staff to implement the various schemes of
banks effectively. They feel handicapped by non-availability of adequate and competent staff,
particularly the field staff, at their branches.

9. Higher Transaction Cost

In recent years, the rural branches of commercial banks in general and branches of RRBin particular,
have been under severe financial strain on account of higher transaction cost involved in handling of a
large number of small size loan accounts and somewhat lower interest income as a result of
concessional rates of interest on small size loans.

10. Lower Cash Deposit to Total Deposit Ratio

The lower proportion of current deposits in total deposits of rural branches has also placed them at a
disadvantage with regard to the cost of resources.

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 CHAPTER 7

RISK AND RISK MANAGEMENT

Page | 57
7.1 RISK

Risk is a concept that denotes a potential negative impact to an asset or some characteristics of value that
may arise form some present process or future events.

Risk are usually defined by the adverse impact on profitability of several distinct sources of uncertainty.
While the types and the degree on risk an organisation may be exposed to depend upon a number of factors
such as its size, complexity of business activities, volume, etc. it is believed that generally the banks face
credit, market, liquidity, operational compliance/ legal/ regulatory and reputation risk.

Financial risk is often defined as the unexpected variability or volatility of returns and thus includes both
potential worse than expected as well as better than expected returns.

Financial risk a banking organisation is possibility that the outcome of an action or event could bring up
adverse impact. Such outcomes could either result in a direct loss of earnings/ capital or may result in
imposition of constraints on banks ability to meet its business objectives. Such constraints pose a risk as
these could hinder a bank’s ability to conduct its ongoing business or to take benefits of opportunities to
enhance its business.

1. Systematic Risk

Systematic risk describes the likelihood of the collapse of a financial system, such as a general stock
market crash or a joint breakdown of the banking system. As such, it is a type of “aggregate risk” as
opposed to “idiosyncratic risk”, which is specific to individual stocks or banks.

2. Non- Systematic Risk

Systematic risk should be carefully distinguished from the non- systematic risk, which describes risks
which the whole company faces such as business cycles or wars. Since systematic risk is caused by factor
that affects the whole company or whole market therefore it is not possible to be controlled by a person.

Page | 58
7.2 RISK MANAGEMENT

Risk management is a rapidly developing discipline arid is a central part of any organization strategic
management. Risk management evaluates which risks identified in the risk assessment process require
management and selects and implements the plans or actions that are required to ensure that those risks
are controlled. The focus of good risk management is theidentification and treatment of these risks.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss
and the greatest probability of occurring are handled first, and risks with lower probability of occurrence
and lower loss are handled in descending order. In practice the process can be very difficult, and
balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss
but lower probability of occurrence can often be mishandled.

Intangible risk management identifies a new type of risk a risk that has a 100% probability of occurring
but is ignored by the organization due to a lack of identification ability. For example,when deficient
knowledge is applied to a situation, a knowledge risk materializes. Relationshiprisk appears when
ineffective collaboration occurs. Process-engagement risk may be an issue when ineffective operational
procedures are applied. These risks directly reduce the productivity of knowledge workers, decrease cost
effectiveness, profitability, service, quality, reputation, brand value, and earning quality. Intangible risk
management allows risk management to create immediate value from the identification and reduction of
risks that reduce productivity.

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7.3 RISK MANAGEMENT PROCESS

Risk management should be continuous and developing process which runs throughout the organization's
strategy and the implementation of the strategy. It should address methodically. all the risk surrounding
the organization's activities past, present, and in particular, future.

Risk management is the process of measuring, or assessing, risk and developing strategies to manage it.
Strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of
the risk, and accepting some or all of the consequences of a particular risk.

1. Risk Identification

The first step in risk management is identification of risk, Risk identification can be start with the source
of problems or with the problem itself. The source may be internal or external to the system or
organization.

2. Risk Assessment

One risk has been identified, they must then be assessed as to their potential severity of loss and to the
probability of occurrence. These quantities can be either simple to measure, in the case of the value of a
lost building, or impossible to know for sure in thecase of the probability of an unlikely event occurring.
Therefore, in the assessment process it is critical to make the best educated guesses possible in order to
properly prioritize the implementation of the risk management plan. Risk assessment involves identifying
source of potential harm, assessing the likelihood that harm will occur and the consequences if harm does
occur.

The fundamental difficulty in risk management is determining the rate of occurrence since statistical
information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the
impact is often quite difficult for immaterial assets. Asset valuation is another question that needs to be
addressed. Thus, best educated opinions and available statistics are the primary sources of information.
Nevertheless, risk assessment should produce such information for the management of the organization
that the primary risks are easy to understand and that the risk management decisions may be prioritized.

Page | 60
7.4 POTENTIAL RISK TREATMENTS

Once risks have been identified and assessed, all techniques to manage the risk fall into one ormore of
these four major categories.

 Retention
 Mitigation
 Elimination
 Transfer

Ideal use of these strategies may not be possible. Some of them may involve trade-offs that arenot
acceptable to the organization or person making the risk management decision.

Severity of Risk Frequency of Risk

Low High
Small Retention Mitigation
Large Transfer Elimination

1. Risk Elimination

Includes not performing an activity that could carry risk. An example would be not buying a buy property
or business in order not to be taken on the liability that comes with it. Another would not be flying in
order not to take the risk that the aeroplanes were to be hijacked. Avoidance may seem the answer to all
risks, but avoiding risks also means losing out on the potential gain that accepting the risks may have
allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.

2. Risk Mitigation

Involves method that reduces the severity of the loss. Examples include sprinklers designed to put out a
fire to reduce the risk of loss by fire. This method may cause e greater loss by water damage and therefore
may not be suitable. Fire suppression systemmay mitigate that risk, but the cost may be prohibitive as a
strategy.

Page | 61
Page | 62
3. Risk Retention

Involves accepting the loss when occurs. True self-insurance falls in this category. Risk retention is a
viable strategy for small risk where the cost of insuring against the risk would be greater over time than
the total losses sustained. All risks that are not avoided or transferred are retained by default. This
includes risks that are so longer or catastrophic that they either cannot be insured against or the premiums
would beinfeasible. War is an example since most property and risks are not insured against war, so the
loss attributed by war is retained by the insured. Also, any amount of potential loss over the amount
insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the
cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too
much.

4. Risk Transfer

Risk transfer means causing another party to accept the risk, typically by contract or by hedging.
Insurance is one type of risk transfer that uses contracts. Other time it may involve contract language that
transfers a risk to another party without the payment of an insurance premium. Liability among
construction or other contractors is very often transferred this way. In the other hand, taking offsetting
positions in derivatives is typically how firms are hedging to financially manage risk. Some ways to
managingrisk fall into multiple categories. Risk retention pools are technically retaining the risk for the
group, but spreading it over the whole group involves transfers among individualmembers of the group.
This is different from traditional insurance, in that no premium exchanged between members of the group
up front, but instead losses are assessed to allmembers of the group.

Page | 63
7.5 LIMITATIONS

If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that are
not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources
that could be used more profitability. Unlikely events do occur but if the risk is unlikely enough to occur
it may be better to simply retain the risk and deal with the result if the loss does in fact occur.
Prioritizing too highly the risk management processescould keep an organization from ever completing
a project or even getting started. Thisespecially true if other work is suspended until the risk management
process is considered complete.

7.6 ANALYSIS

Agricultural finance is faced with many challenges and the most severe challenge is that of risk
management. There are a number of risks associated with agricultural finance. In the literature review of
the report some of the risks have been highlighted and analysed by different researchers.

In this section of risk associated with agricultural finance are analysed by using fishbone diagram or
cause-and-effect analysis.

1. Cause and Effect Analysis

Cause-and-effect analysis is a systematic way of looking at the effects and causes of a problem. In this
technique the relationship between dependent and independent variable is determined through a diagram.
The diagram drawn for this purpose is called "Fishbone Diagram" (the diagram given below). The name
is because of its shape that islike skeleton of a fish. Dr. Kaoru Ishikawa, a quality control satisfaction of
the University of Tokyo developed and it was first used in 1960s. Therefore, sometimes it isalso called
"Ishikawa Diagram".

Since Ms. Jennifer Isenhour has used this analysis technique in her research "Cause and effect analysis of
risk management to assess agricultural finance" (2004) therefore the same analysis technique is also used
for the present research to look at the different risks associated with agricultural finance affecting the
overall profitability ofagricultural lending instruction.

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FISHBONE DIAGRAM

This diagram shows different risk categories affecting the profitability of agricultural lending institutions.
Different factors cause a specific risk, which then affect the profitability of an agricultural lending
institutions.

2. Causes of Liquidity Risk

Liquidity risk occurs because of agricultural crops seasonality, At the cultivation period familiar borrow
from institutions for meeting their funds requirements for purchase of seeds, fertilizers pesticides, and
labour etc and thus the institution faces with short of funds while in the harvesting season when the
farmers repay their loans, the institutions are in excess liquidity which causes them liquidity risk. And
another reason of liquidity risk is that of lack of saving and deposits with the bank. This causes the bank
the risk of short of funds lends to farmers for agricultural purposes.

3. Causes of Operational Risk

The people related to agriculture are mostly spread over the vast area in far-away villages. The dispersed
agricultural clients cost the bank with higher operational risk. When a bank wants to serve clientele
spread over large area or when most of loan amount is small which is often there in developing country
like Pakistan then it causes the bank with higher servicing cost which results in operational risk. The bank
does not earn that much as it spends on processing, disbursement and monitoring of agricultural loan.

Page | 65
4. Causes of Market Risk

Market risk occurs when the farmer gets a lower offer price for their finished productsin the market
than the cost incurred on producing that crop. This cause a farmer suffer losses as he is not earning that
much to repay is loan and eventually this risk is transferred to the leading institution in form of non-
performing loan. When new external players enter into the market with greater volume and capital then it
results in problems for local farmers. The local farmer producing at small volume and occupies a small
share in the market but when a new player with huge volume enters into the market then he captures the
whole market and the small farmer cannot survive.

5. Causes of Weather Risk

Weather risk is a unique risk involved in agriculture that does not affect other sectors as much as it affects
this sector. Untimely rains, floods, droughts destroy the crops and result in potential loss to the farmer.
Different diseases in animals can bring potential losses to the farmer- borrower. As in recent time due to
bird flu many poultry farms suffered losses and subsequently the institutions who lend to them also faced
many problems in get their loans paid back. This risk can only be minimized by preventing measures.
Crop insurance can be a useful tool in this regard but is not common in developing country like Pakistan.

Their Effects

All these risks individually and collectively have negative effect on the profitability of an agricultural
financial institution. The weather risk, marker risk minimizes the return on loans while the operational
and liquidity risk increase the cost of disbursement loans.

Effects on Profitability

Page | 66
 CHAPTER 8

SUGGESSIONS & RECOMMENDATION

Page | 67
8.1 SUGGESSION

Since the problem of rural indebtedness has two major dimensions, to solve the problem we have to adopt
a two-fold strategy. Since the magnitude of debt is quite high, steps may be taken to cancel old debts.
There is a strong case for reduction of ancestral debt and even for their liquidation.

This can be done by State Governments by passing Insolvency Acts. It may be noted that the Government
decided in 1990 to write off Rs. 14.000 crores of loans outstanding from farmers Up to a maximum of Rs.
10,000 crores. This was considered necessary because 80% of India's population were farmers and farm
workers. Earlier in some States moratorium had been declared on the recovery of debt by moneylenders
from farmers, rural artisans and landless workers as pet the 20- point Programme.

Secondly, it is to be ensured that the quantum of fresh borrowing is reduced to the minimum. keeping in
view the repayment capacity of farmers. It is equally important to ensure that new borrowing is strictly for
productive purposes and not for meeting consumption needs. It 1s, however, difficult for the Government
to ensure this in practice.

Only through the spread of education and propaganda among farmers it is possible to check thevolume of
loans made for unproductive purposes. However, in LDCS like India, arrangement may also be made for
providing such loans on a modest scale.

As a subsidiary measure, control of the activities of moneylenders is also necessary. This has been done
by some States where sale of land to moneylenders has been prohibited by law.

It is important to note that the abolition of bonded labour and liquidation of rural indebtedness are the two
major aspects of the 20-point Programme. The system of bonded labour was abolished by an Act of
Parliament in 1976. However, it seemed that the only answer to the present multi- agency credit system is
implementing a new multipurpose system with efficient management.

This will have to be so devised as to meet the need for consumption loan of the farmers so that they are
not exploited by being paid low wages or low returns on their products. Moreover, the RRBS, if properly
managed, can go a long way in solving the problem of rural indebtedness in an effective manner.

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8.2 CONCLUSION

Due to extension of institutional credit facilities since 1950-51 the monopoly position of the village
moneylender has been challenged. Due to progressive institutionalization of credit. private sources now
meet barely 209% of the short- and medium-term credit needs of the farmers.

In other words, institutional sources meet about 80% of such needs. But the Agricultural Credit Review
Committee headed by Prof. A. M. Khusro, in its report submitted on August 1989, commented that despite
the disappearance of dual financial system, moneylenders are still operating their business in rural India.

One recent study of the Reserve Bank of India admitted that rural households still rely on informal credit
markets for 60 to 70% of their credit needs even though interest rates charged are typically over 30%.
This is due to apathy of State-owned commercial banks in providing credit to poor peasants. Actually, big
landlords are capable of obtaining more loans andadvances from various institutions in their own favour
at the expense of the poor farmers.

Despite huge increase in overall agricultural credit, there is a serious problem of over-dues which has
been inhibiting credit expansion on the one hand and economic viability of the lending institutions, mainly
the co-operatives and regional rural banks on the other. The waiverof agricultural loans to the tune of Rs.
10,000 crores in 1990-91 has virtually stopped the credit cycle. If this practice is continued in the future
too rural credit expansion will take a back seat. But, if more and more emphasis is to be given to the
agricultural sector, lending institutions will be under more and more pressure.

Above all, small and marginal farmers still remain unworthy borrowers in the banking parlance, though
it was hoped at the time of nationalization that these banks would take care of the credit needs of the
farmers. Their dependence on informal markets after 50 years of planning does not augur well. The
quantitative expansion of institutional sources hide all these facts. From the qualitative angle, their
performance is subject to serious scrutiny.

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CHAPTER 9

REFERENCES

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9.1 BIBLIOGRAPHY

(a) Problems of Agricultural Credit in Maharashtra— Sanket Suman

(b) Risk Management in Agricultural Finance— Shafqat Ullah
(c) Agricultural Finance in Maharashtra— Ashna Malik & Karan Kukreja
(d) Agriculture Finance— GS Score
(e) Agricultural Finance in India— Dr. Subhash Zinjurde
(f) Agricultural Finance and Co-operation AECO241
(g) Financing Smallholder Agriculture—Pushkar M., Sandip M., Dilip M. &Sujata V.

9.2 WEBSITES

(h) Shodhganga.inflibnet.ac.in
(i) Scribd.com
(j) Bizconnect.standardbank.co.za
(k) Vikaspedia.in
(l) Notes.iasscore.in
(m) Slideshare.net
(n) Mindtool.com

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CHAPTER 10

ANNEXURE

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10.1 CASE STUDY

1. Introduction

Agriculture sector is a key component of the Indian Economy. Even though the contribution of Agriculture
in overall GDP of the country has declined from 44.5 per cent in 1970-71 to around 18.5 percent in 2006-
07, agriculture continues to be the principal source of livelihoods for round 62.0% of the country's
population, In the last decade while the Indian economy has done quite well overall, achieving a
Compounded Annual Growth Rate (CAGR) of over 6.076, agriculture has remained sluggish with a
CAGR of only 2.0%. It is a serious structural crisis which gets lost in the roar of our self-congratulation.
Further, a steeply rising food import bin a likely to put a severe strain on the Indian government's efforts
to reduce poverty and more equitably distribute the economic gains of the last four years. It is our belief
that for India, a rapid growth in the rural economy overall, and within that of agriculture, is highly
feasibleand may hold the key to addressing India's problems of growth and poverty eradication unlike in
the rest of the region where urbanization and growth in manufacturing have been the principal drivers.
However, for this to happen, key ingredients would be an adequate supply of credit and the availability of
tools for the management of considerable risks that agriculture is exposed to. At present, institutional
agricultural credit is mainly disbursed by commercial banks, cooperative banks and Regional Rural Banks
(RRBS) under the multi-agency approach. These banks over time have established an impressive branch
network: about 47,000 branches of scheduled commercial banks (including RRBS) and over one lakh
outlets of cooperatives in rural and semi- urban areas. Despite a well-developed credit delivery structure,
the outreach of banks has remained restricted for various reasons. Though the ratio of agricultural credit
to agricultural GDP increased from 5.4 percent in 1970s to 8.7 per cent in 2001- 02, yet agricultural credit
as a proportion to total credit has decelerated from 20.5 per cent to 10.5 per cent during the same period
indicating lower deployment of credit in agriculture. On the positive side, the emergence of NABARD led
SHG-Bank Linkage Programme in the rural areas, with credit linkage of over 29 lakh SHGS by 31 March
2007, as the largest and fastest growing microfinance programme of the world is a major break-
through achieved by the banks in the last few years. Similarly, the microfinance initiatives of SIDBI and
Rashtriya Mahila Kosh have also been showing positive results in providing access to microfinance
services to the poor through different models of credit delivery. The main advantage of Self-Help Groups
lies in their joint liability and consequent “peer monitoring” of member borrowers. In association with
sponsoring NGOS, they serve to reduce the transaction and monitoring costs of small lending for the banks
as well as reach credit o the absolute poor. It is therefore hardly a surprise that they have attracted
considerable attention in the rural banking sector as well as from the government in recent years.

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2. Review of Literature

Despite the significant strides achieved in terms of spread, network and outreach of rural
Roancial institutions, the quantum of flow of financial resources to agriculture continues to be
inadequate. 2.1. According to the RFAS (2003), some 66% of large farmers have a deposit
account: 44% have access to credit. Meanwhile, 70% of marginal farmers do not have a bank
account and 87% have no access to credit from a formal source. 2.2. Tripathy (2003) has found
that government agencies particularly banks and microcredit institutions, work with a safe target
group-not the real poorest, because of funding accountability concerns; government microcredit
programmes and staff tend to be both paternalistic and distrustful of the poorest: and identifying
and reaching the poorest is extremely time consuming. 2.3. In his paper on "Current Issues in
Agriculture Credit in India: An Assessment", Golait (2007) stated that notwithstanding the rapid
spread of micro-finance programme, the distribution of SHGSis skewed across the States. More
than 50 per cent of the total SHG credit linkages inthe country are concentrated in the Southern
States. In the States, which have a larger share of the poor, the coverage is comparatively low.
2.4. Thekkekra (2008) in her study on "Impact of SGSY on SHG: Bank Linkages concluded that
the SGSY has not succeeded because it has the mindset of making subsidy the cornerstone of
undertaking poverty alleviation. The formation of SHG is essentially process oriented but the
target chasing involved under the SGSY has lead to the formation of groups that are bound to fail.
2.5. As per the Report of Sub Group on Innovative Finance and Micro Finance (2007), the SHGS
have been quite active in disbursing small doses of credit but their foray into agriculture per se is
somewhat limited. They have excelled in providing micro credit for activities allied to agriculture
sector but the loans made for crop cultivation and land-based activities are comparatively less.
2.6. Kashyap (2008) suggested that collective marketing in agriculture and VELUGU project in
Andhra Pradesh has organized SHGS and their federations into collective no timber forestproduce
is a way to fetch better prices by taking goods to the terminal markets marketing of various agri-
commodities resulting in significant improvement in the prices fetched.

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3. SHG- Bank Linkage Programme

The SHG-Bank Linkage Programme, which was evolved by NABARD to meet the needs of disadvantaged
sections of the rural society in relation to their access to financial services from the banking system, has
met with significant success in southern states. During 2005-06, these efforts have resulted in credit
linkage of 620,109 newSHG with mainstream banks registering 15 % growth over the previous year.

4. Group Lending in Agriculture Sector

Numerous studies have shown that microfinance - generally based on short term loans of modest
amounts- can have a positive impact on the cash position of rural households, enhance the smoothing of
their consumption and to a certain degree strengthen their resistance to economic shocks. However, many
observers question the real ability of microfinance to stimulate household accumulation processes and to
contribute to productive investment, especially in agriculture. Rural SHPIS spontaneously finance the
development of activities such as commerce, crafts activities and agro industrial processing. These
activities generate regular, comparatively reliable income with rapid capital rotation that reduces risks
and allows high rates of profitability. Few agricultural activities display these features. The financing of
agriculture has specific constraints in terms of client diversity, the services necessary and in terms of risk.
These factors help to explain the extreme caution of most microfinance institutions with regard to
agricultural credit. However, observations of the services offered by SHPIS in the other parts of the
countries strongly tamper the frequently proposed hypotheses that "MFIS donot finance agriculture".

5. The Present Day

To identify the inhibitors to flow of credit to the disadvantaged section of farming community in northern
part of India, an in-depth study was conducted through semi structured questionnaire in the Sirkoni block
situated at the bank of Sai river of Jaunpur district in U.P, which is a pa northern agricultural belt. Out of
total reported area Le 16970 hectare, the total cultivable land o Sirkoni block is 14823 hectare (84%),
The total irrigated land is about 60 % of total cultivatile Land. The means of irrigation are canals and tube
wells and the major crops of this area are ho wheat and maize. Potato and other vegetables are also grown
substantially in this area. There network of three branches of nationalized banks and three branches of
regional rural bank in the block.

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Some of the important interventions of governmental and non-governmental agencies particularly the
SHG bank linkages in the block are somewhat discouraging. SHPI operating in the block have not played
the desired role of supporting the SHG-Bank linkage. As on 31st March 2007 only 19 percent of 32 SHGS
formed in the block were financed by RRBS and commercial banks by providing loan of Rs. 200,000.
Total number of Kisan Credit Cards issued was 249 whereas not a single Bhoomiheen Credit Card meant
for landless laborers' and share croppers has been issued so far. These figures explain that Sirkoni is a
neglected area. Two NGOS of local origin are established in the block to promote SHG-Bank linkage.
One of them formed seventeen groups including one group of men and till date 47 % of the groups are
linked to the local bank. The total saving of the group is Rs. 1.25 lakhs and amount of cash credit limit
sanctioned is Rs. 2 lakhs so far. The other NGO work on SHG promotion at convenience. This piecemeal
approach speaks about benign negligence of NGO5 participation in the development process. Finally, the
area is chosen for convenience of qualitative data collection since the researcher is well versed
with the local languageand acclimatized with the climatic and socio- economic conditions of the
area. The study of the Sirkoni Block with these features would reveal the prevailing problems in
flow of credit to farming community living under BPL and the scope of further interventions.

(5.1) Objectives
This particular study is intended to assess the status of banking outreach so as to meet the needs of the
underserved farming community. The barriers to access to formal banking system have been identified as
relating to financial illiteracy, gender, income and assets, inconvenience, paperwork, proof of identity and
so on. However, efforts are being made by lending authorities to include the excluded from the banking
system. Such a causal analysis is essential fun understanding the relative role of alternative interventions
to improve access to affordable financial services through financial education, leveraging technology and
generating awareness. Hence, the aim of the research was to assess the role of micro-finance in
agricultural sector. The conclusions of the study are based on a pilot study of thirty marginal farmers/
landless laborers from different villages of the block, members of the SHGS and interviews with members
of the SHGS and authorities of lending agencies working in that area.

(5.2) Methodology
As the study is mainly based on primary data, Participatory Rural Appraisal (PRA) techniques, consisting
of in-depth interview of individual respondents with semi structured questionnaires, group discussions,
community meetings and observation methods, were employed.
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 For cross verification, the documents and records maintained by the group were checked. Besides,
informal discussions were held with the NGO facilitators, District Development Manager of NABARD
and Branch Managers of the respective banks. The field study was conducted during April 04-May 10,
2007 and further cross verification through field visits were done during June 10- 25, 2007. Considering
complex nature of the field study, the data so collected were processed and tabulated using a computer for
analysis and interpretation. Before discussing the results, it is desired to present the profile of the
respondents. The socio-economic status of the respondents shows that they are within the age group of
19-65 years and maximum of them (69%) are between 30-40 years. The average age estimated is 32 years.
About 93 per cent are married, 85 per cent have joint families and the average family size is 8 members.
Around 15 per cent of them are illiterate, followed by 45 per cent studied upto 5th standard, 25 per cent
up to 10th standard and rest up to 12th standard. As regards economic conditions, 66 per cent of the
respondents reported to be within the official category of 'below the poverty line (BPL): average annual
income less than Rs. 11,800. With 58 per cent of the respondents being landless, 42 per cent having
land less than one acre. The major sources of earnings of the BPL members were daily labour, selling
vegetable produce in the market nearby and share cultivation.

(5.3) Discussion and Findings

I. The credit need of sample group is very nominal as 66 % of them has borrowed amount less than
Rs. 5000, 13 % between Rs. 5000 and Rs 10.000. 20 %between Rs.10,000 and Ks,15000 and the
rest felt the need of credit for morethan Rs. 15.000, The interesting fact to note is that their non-
farming credit needsare much more (87 %) than farming ones. A major amount of loan is taken to
full fill their contingency needs (269%). Similarly, marriage celebration in the family also account
for the major chunk of the credit off-take. Other purposes to avail loan are education of their children
and house repairing. Their credit needs are small but frequent and they have little or no saving at all.

II. In spite of the fact that Government has floated number of schemes for farmers/landless laborers'
and commercial and rural banks are flooded with funds, the access of the sample group members
to formal banking system is just 20 % whereas informal channel still enjoys the major share. The
moneylenders are seen as more flexible than institutions. In some cases, interest charged by money
lenders is as high as 60 %. However, around 50 % of the informal financing is done by neighbours
and relatives at nominal or no interest at all.

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III. The majority of the respondents hesitate to go to bank and perceive paperwork, collateral
requirement and unavailability of non-productive loan as major hurdle. The experience of those who
204 H.P. Mathur / SJM 3 (2) (2008) 199 - 210 got loan sanctioned from bank is that the process of
sanctioning of loan takes around two weeks' time whereas they don't plan their lives in advance and
alternatively seek for the informal lending source.

IV. Majority of the members were not aware of the various schemes of the government of availing credit
up to Rs. 50000 at low interest rate without collateral (crop loan) and Bhoomiheen Kisan Credit
Cards which is specifically meant for them. They were also unaware about group lending and only
13 % of them had heard of such groups. In rural areas customers cannot be expected to come to
branches in view of opportunity cost and time and hence banks will have to reach out through a
variety of devices such as weekly banking, mobile banking, satellite offices. rural ATMS and use
of Post offices. (Thorat, 2006)

From the above findings It is evident that most of the marginal farmers and landless labourers don't
have access to basic financial services which includes savings, loans and insurance in a manner that
is reasonably convenient and flexible in terms of access and design and reliable in the sense that
the savingsare safe and that insurance claims will be paid with certainty. (Morduch, 2003)

(5.4) Lenders Perspective

Based on the above findings informal discussions were held with the NGO facilitators. Block facilitator,
District Development Manager of NABARD and Branch Managers of the respective banks and following
impediments are identified in the flow of credit tothe section under study.

6. Bridging the Gap

Farmers across the country have taken a beating. Their income rose by a measly 0.28 percent as compared
to 4 percent in other sectors. Not surprisingly, a recent national sample survey showed that 40 percent of
the farmers want to opt out of their current profession. Another disturbing feature is that every year, over
20000 farmers commit suicide out of despair over failing crops and impossibly high debt.

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(India Today, June 2007) The target of Rs. 225,000 crore for agricultural credit has been proposed for the
year 2007-08 with a goal to bring another 50 lakh new farmers to the banking system. However, to include
the excluded one the gap between demand and supply of timely credit needs to be bridged by taking
following steps:

V. It is better for the borrower to have one institution cater to all the credit needs. It helps foster
relationships and reduces documentation. Institutions are required to turn up at the borrowers'
doorsteps on the due date to drive home the point that the loans were to be repaid on time. The
development and leveraging of existing institutions is also desirable wherever it was possible.

VI. During the interactions it was clear that the major impediment in term lending was pertaining to
collateral. This is because land records are not in good order in most places. Even where records are
in order, it is difficult to liquidate the collateral - particularly in the rural areas. The solution is in
using more powerful social collateral rather than legal recourse.

VII. The strong emphasis on group savings in kind and borrowing in kind under the Grain Bank approach
has significant similarities with the SHG Bank Linkage Programme, the difference being that the
savings and loans are in kind. Theissue, therefore, is how to facilitate monetization of the savings
and loans in kind and integrate the traditional approaches into the monetized microfinance system.
Such an Integration would enable the poor population to access need basedfinancial services
and also address the issues of food and seed securities.

VIII. The farmers require money for purchase of inputs. Presently the small andmarginal farmers are not
able to avail loans from the formal financial system mainly due to distance from branches and nature
of landownership prohibiting them to mortgage. They have to approach local moneylenders who
charge higher interest rates. A majority of these farmers are located in far flung areas, away

7. Conclusion

The review of past research and performance of SHG-Bank linkage in India suggest that SHG- Bank
linkage approach is found to be an effective instrument by which very poor people Ca access hassle free
formal credit without any collateral security and simultaneously improve un thrift habits.

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The approach successfully builds upon the self- help potential of the target group Due to enhanced
education of the people and their opportunity to build common fund for investment, they are induced to a
considerable improvement in their economic situation. The approach also contributes to a social
empowerment of the women. But the in-depth study of credit scenario in Sirkoni Block, reveals that group
lending in agricultural sector is almost negligible. However, there are several experiments happening in
the group financing of agriculture in other parts of thecountry that can be replicated across other states as
well. The linkage and its impact can be made sustainable with the sincere interventions by the promotional
agencies particularly the banks and the block authorities in the areas of awareness building, skill
development and training, and continuous counselling till they reach in the runway within the scheduled
time.

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