Innovation In Rural Financial System

INNOVATION IN RURAL FINANCIAL SYSTEM

Dr Gursharan Singh Kainth
Director
GAD Institute of Development Studies
14, Preet Avenue, VPO Naushera
Amritsar-143 008
(Email Ids : idsasr@indiatimes.com;gursharan_kainth@rediffmail.com)

One of the serious and unrelenting problems faced by the Indian farmer’s households has been indebtedness. While studying the Punjab’s peasants, Sir Malcolm Darling (1925) wrote, “Indian peasant is born in debt, lives in debt and dies in debt”. Though this is written about eight decades back, the problem of indebtedness not only remains true today, but also it has been aggravated further in the recent past, though the goal of doubling farm credit in three years was achieved in two years. Despite substantial improvements in agricultural output and distribution of credit, still majority of the farmers are suffering from this major economic disease called Indebtedness and lack timely and adequate farm credit. Despite high density of the retail outlets of formal credit institution, the presence of informal agencies for agricultural credit continued to exist although their share has been declining over the years. Informal agencies largely extend credit for consumption and social ceremonies and their interest and other terms of conditions are onerous, yet they coexists with the formal financial institutions mainly due to their proximity, feel- at- ease, timely and quick services, all time access, purpose free credit, flexibility in loan repayments and low transaction costs. To reach the poor, institutional innovations are needed that enable services to be expanded while substantially reducing transactions costs for both the financial institutions and the clients.

Kisan Credit Cards:
Reserve Bank of India (RBI) setup one man high level committee of Shri R.V. Gupta in December 1997 to inquire into the reasons for the tail backs of the farm credit and to suggest measure for improving the delivery systems as well as simplification of the procedures for farm credit. Based on the recommendations of the committee, RBI in 1998 directed all Public Sectors banks (PSBs), Regional Rural banks (RRBs) and Cooperative banks (CoBs) to introduce Kisan Credit Cards (KCCs) scheme on the lines of the model scheme formulated by National Bank for Agricultural and Rural Development (NABARD) and in due course of times the KCCs was adopted by all the directed agencies. The basic objective of the KCCs is to extend adequate and timely support to the farmers for meeting their credit needs for farming including input purchases. The credit limit (loans) is sanctioned in proportion to their size of owned land but some flexibility is also provided for the farmers cultivating leased in land in addition to the owned holding. Further borrowing limits are fixed on the basis of proposed cropping pattern. Most of the banks are adhering to the Scale of Finance (SOF) decided by the State Level Bankers Committee (SLBC) but some banks have fixed their own SOF generally higher than the SLBC norms. The nature of credit extended under KCCs is a revolving cash credit, that is, it provide for any number of withdrawals and repayments within the limits. This feature would provide flexibility and reduce the interest burden upon the KCCs beneficiary. Beneficiaries covered under the KCCs are issued with a credit card and a passbook or a credit card-cum-pass book incorporating the name, address and particulars of land, borrowing limit and the validity period. Production credit limits are fixed taking into account the entire production credit needs for a full year plus ancillary activities related to crop production. Till recently, investment credit requirements of farmers remained outside the purview of KCCs, causing additional cost and procedural inconvenience to farmers. To address these deficiencies, NABARD revised the scheme in August 2004 to cover term loans for agriculture and allied activities. Under the KCCs, while the short-term as well as working capital credit is repayable in 12 months, the term loan is to be repaid with in a maximum period of five years. Conversion / reschedulement of loan is permitted in case of damage to crops due to natural calamities.

The major steps involved for the issue of KCCs from banks were:
1. Preliminary interviews;
2. Filling of application forms. It required photographs, no due certificates from
credit institutions in the service area and fard Jamabandhi/ fard girdarori.
3. Pre-sanctioned inspection.
4. Execution of the security documents, which include demand promissory note,
Continuing security letter, letter of guarantee letter of declaration and
undertaking and mortgage deed.
5. Processing of the application, and
6. Disbursement of the loans

On the other hand, Cooperative KCCs required fewer documents. No mortgage deed is obtained; only fard Jamabandhi/ fard girdarori and guarantor are required for the issue of cooperative KCCs.

The scheme is being implemented in all the States and Union Territories through all Commercial banks, RRBs, State co-operative banks, Central co-operative banks and primary agricultural co- operative societies. KCCs schemes has made swift progress since its inception with the banking sector issuing more than 642.49 lakh cards with cumulative credit of Rs. 1,11,459 crores sanctioned up to December 31,2006.The implementation has been taken up by all the PSBs; Cooperative banks and RRBs through-out the country. The cooperative sector banks account for 50 per cent of KCCs issued and 63 per cent of the amount sanctioned. Highest number of KCCs was issued by co-operative banks (319.6lakh), followed by commercial banks (243.71lakh) and RRBs (79.18 lakh).. Among all the states of Indian Union, Punjab leads the chart with highest KCCs penetration ratio of 118.17 per cent against All India average of 32.44 per cent. Haryana follows Punjab at 85.75 per cent and Andhra Pradesh at 62.23 per cent. More than 100 penetration ratio in case of Punjab implies that some operational holdings have more than one KCCs. Growing popularity of KCCs scheme reflects its effectiveness in ensuring hassle free and timely operations as well as availability of credit with minimum transactions costs and documentations. In order to safeguard the interest of KCCs holders’ coverage under Personal Accident Insurance Scheme (PAIS). NABARD has allowed discretion to the banks to opt for any of the insurance company of their choice at competitive rates/terms. Further banks has been advised to ensure that KCCs continue to be renewed in a hassle-free manner and to direct their efforts towards ensuring quality in operations and more importantly crop loans are routed only through KCCs.

KCCs were a paradigm shift from the purpose-oriented loaning through a credit product. It has enabled to accelerate production credit compared to investment credit. One of the major features was the coverage of personal accident benefit with nominal premium for KCCs holders. However, what is disturbing is the fact that in spite of timely sanctions of credit, the beneficiaries were least bothered in making prompt repayment, which eventually threatens the very sustainability of KCCs scheme. Furthermore, no doubt the purchase of cash inputs for farm is spread throughout the agricultural season, yet the farmers restore to lump sum withdrawals - a peculiar transaction habit of the farmers? Apparently, there seems to be large- scale diversion of credit both for on and off farm investments. However, off farm diversion dominated the diversion scenario. KCC was not able to flush out multiple financing due to lack of coordination between various sources of institutional credit. Many of the KCCs borrowers are still in the grip of moneylenders. Another major constraint in the working of KCCs was too many intermediaries in obtaining suitable securities and finding guarantor. Therefore, for further simplification of the procedure under KCCs, farmers can be issued a passbook with an authenticated record of land and the borrowings. The banks should accept the same as valid title for the purchase of mortgage. This will save the farmers from cumbersome process of registering the mortgage deed in the name of banks. The financial institutions for the loans against urban property are already following this type of system of getting loans. Hence there should not be any legal complications for its implementation.

National Council of Applied Economic Research (NCAER) at the instance of (RBI) conducted a survey for assessing the impact of KCCs scheme. National Impact Assessment Survey shows that KCCs had augmented flows of credit to agricultural sector, about 6 per cent decrease in the cost of borrowing for farmers after they were given KCCs, cost of the borrowing for KCCs holders from formal sector is about 3 per cent lower than those of non-KCCs holders, significant decline in the number of borrowers depending exclusively on non-formal sources for their short term credit needs, reduction in cost of borrowing from informal source by about 3 per cent, significant saving in time spent in obtaining short term agricultural loans and finally decline in cost delivering due to simplified procedure. The survey also had identified certain areas requiring policy initiatives to make the scheme more effective. These relates to restrictions imposed on the issuance of KCCs by banks, restrictions on the use of KCCs only at the card issuing branches, non-availability of incentives for timely repayments, low-credit limits and low awareness regarding the provision of personal accident insurance scheme. RBI has advised the Indian Bankers Association to examine these suggestions and come up with remedial measures. Keeping in view the directive of Government of India for doubling the flow of credit to agriculture, NABARD advised the cooperative and Regional rural banks to identify and bring into their fold such farmers including defaulters, oral lessees, tenant farmers, share croppers who may have been outside the fold of scheme for any reason as also new farmers. KCCs need to be promoted as a single window for comprehensive rural credit delivery. In the recent past, NABARD has enlarged the scope of KCCs by including even long term loans for agriculture and allied activities under its purview. In addition to this, KCCs scheme has been extended to long term borrowers of the cooperative credit structure too.

Theoretically KCCs is well thought of and full of good intentions. To be more successful, education of both the partners- the farmers and the bankers about the scheme is very vital. No doubt, KCCs has significantly improved access of farmers to formal credit, but KCCs programme needs to modify to improve the access to those who cannot sign by making their use through thumb impression. Other measures proposed include new channels of disbursement by means of franchising Village Post Offices to route bank credit. The budget proposed to explore where ever innovations are possible in agricultural credit. For example the issue of allowing banks to accept the agency model by using the infrastructure of civil society organizations, rural kiosks, Village Knowledge Centers, to provide credit support to rural and farm sector; special financial assistance to wipe out the accumulated losses and strengthen the capital base of cooperative credit institutional restructuring to ensure democratic institutions; and to change the legal framework to empower Reserve Bank of India to enforce prudent financial management. What is important is to put these measures into realities. Few other measures, which have potential to abridge the credit gap are to identify areas such as private market yards, public- private partnership, etc., for integration of farmer’s production with domestic and global markets and to promote competitive private and cooperative agricultural markets.

Rural Infrastructure Development Fund:
Rural Infrastructure Development Fund (RIDF) is another innovation in rural financial system. RIDF was setup by the government in 1995-96 for financing on going rural infrastructure projects. The fund is maintained by the National Bank for Agriculture and Rural Development (NABARD). Domestic commercial banks contribute to the fund to the extent of their short fall in stipulated priority sector lending to agriculture. The main objective of the Fund is to provide loans to State Governments and State-owned corporations to enable them to complete on going rural infrastructure projects. In the interim Budget for the year 2004-05, an announcement was made regarding setting up of Agriculture Infrastructure and Credit Fund and discontinuation of RIDF mechanism.
This decision was reconsidered and the regular Budget presented on July 8, 2004 proposed revival of RIDF with a corpus of Rs.8000 crores during 2004-05. The total corpus of RIDF (Trenches I to XII) aggregated to Rs. 60,000 crores. So far eleven trenches have been completed and twelfth trench (RIDF-XII) is currently under implementation. The cumulative amount sanctioned and disbursed up to January 25, 2007, was Rs. 58795.36 crores and Rs. 34643.87 crores respectively. During 2006-07 up to January 25,2007, amount sanctioned and disbursed was Rs.7810.85 crores and Rs. 3306.60 crores respectively availed by 28 states governments. It is hoped that NABARD will achieve the target. - a short fall of per cent. The first five trenches of RIDF (I to V) have since been closed and the phasing/period of implementation I respect of various projects under RIDF VI to IX trenches has been extended up to March 31, 2007. The schedule dates of closure of RIDF-X, XI and XII are March 31, 2007, 2008 and 2009 respectively.

In a major thrust-strengthening infrastructure in rural India, government proposed an increase in the corpus of RIDF-XIII to Rs. 12,000 crores during 2007-08 as against 71301 crores in 2005-06. A separate window under RIDF-XII for rural roads with a corpus of Rs.4000 crores was opened. Against this project worth Rs. 2311 crores has been sanctioned in 2006-07, Budget 2007-08 proposes to continue the separate window under IRIDF-XIII in 2007-08 with a corpus of Rs. 4000 crores. Under the Accelerated Irrigation Benefit Programme, the allocation of Rs. 7121 crores is about Rs. The credit of adding six lakh hectares does not seem encouraging seen against the target of getting additional one crores hectare of land to be brought under irrigation. Though it is a healthy sign, no steps were indicated for improved utilization as it has been reported to be less than 60 per cent. The short fall in disbursement of RIDF funds as compare to sanctions continuous to remain a matter of concern in the implementation of RIDF. The government has taken a number of steps to address this problem. The scope of RIDF has been widened to include activities such as rural drinking water scheme, soil conservation, rural marketing yards, and rural health centers 500 crores less than the amount projected earlier. and primary schools, mini hydel plants, sishu shiksha kendras, angan wadis, and system improvement in the power sector. From RIDF V onwards, the ambit was extended to projects undertaken by Panchayati Raj institutions and projects in the social sector covering primary education, health and drinking water. Other activities to be financed under RIDF include minor irrigation projects/micro irrigation, flood protection, water shed development/reclamation of waterlogged areas, drainage, forest development, market yard/go down, apni mandi, rural haats and other marketing infrastructure, cold-storage, seed/agriculture/horticulture farms, plantation and horticulture, grading and certifying mechanisms such as attesting and certifying laboratories, etc., community irrigation wells for irrigation purposes for the village as a whole, fishing harbors/jetties, riverine fisheries, animal husbandry and modern abattoir, drinking water supply, infrastructure for rural education, construction of toilet blocks in existing schools and pay and use toilets rural areas, village knowledge centers, desalination plants in coastal areas, infrastructure for information technology in rural areas and construction of aganwadi centers.

Bharat Nirman:
Dr APJ Abdul Kalam, the President of India, in his address to the Parliament outlined an
Overreaching vision to build India known as Bharat Nirman. Bharat Nirman has been conceived as a business plan to be implemented over a period of four years for building infrastructure, especially in rural India. It will have six components, namely, Irrigation (to bring an additional one crores hectares under assured irrigation), Roads (to connect all villages having a population of 1000 or 500 in hilly/tribal areas with a road, Water supply (to provide drinking water to the remaining 74,000 habitations that are uncovered), Housing (to construct 60 lakhs additional houses for the poor), Rural electrification (to reach electricity to the remaining 1,25,000 villages and offer electricity connection to 2.3 crores households), and Rural telecom connectivity( to give telephony connectivity to the remaining 66,822 villages) in each of these areas. The progress during the current financial year is as follows:

• Under the Accelerated Irrigation Benefit Programme, Rs.19437.88 crores has been released so far as CLA/grant for 200 major/medium irrigation projects and 5562 surface minor irrigation scheme up to March 2006.As against an outlay of Rs.7121 crores in 2006-07, the outlays of 2007-08 will be increased to Rs. 11,000 crores. Of this, the grant release component to State Governments will be Rs. 3580 crores against Rs 2350 crores of previous fiscal.

• Under the Accelerated Rural Water Supply Project (ARWSP), against the physical target of 73120 habitations, 55512 habitations have been covered until December 2006.

*Untill December 2006; 12198 kilometers of rural roads have been completed.

• 783000 rural houses have been constructed up to December 2006 and 914000houses are under constructions and the annual target of 1500000 houses is likely to be exceeded.

• Under the Rajiv Gandhi Grameen Vidyutikaran Yojana, 28241 villages have been electrified and 504141 connections to BPL households have been released until February 9, 2007. The budgetary support has been increased from Rs. 3000 crores in 2006-7 to Rs. 3983 crores in 2007-08

• 15054 villages have been provided with telephone connectivity against the target of 20 thousand villages. The balance is expected to be covered by the end of current fiscal.

Bharat Nirman epitomizes the UPAs approach to governance. It is paradigm shift that will enable us to see the resources thrown up by the engine of growth for building infrastructure and bringing basic amenities to rural India. Since the implementation of Bharat Nirman has gathered pace, budgetary support to the programme is increased to Rs.18696 crores-an increase of 54 per cent. We must dare to be bold and set for ourselves high targets to be achieved by the year 2009. Though Bharat Nirman require huge resources, government believes that Bharat Nirman is an achievable project and wanted to give rural India a new deals fully involving Panchayati Raj Institutions in the planning and implementation.

National Commission on Farmers:
No sooner did the new government assume office, than the Prime Minister set up a National Commission on Farmers (NCF) under the chairmanship of Dr M.S. Swaminathan, to prescribe the exigency measures and has submitted five reports between December 2005 and October 2006. Key Recommendations of the NCF is incorporated in the Revised Draft National Policy for farmers. These include: asset reforms covering land, water, livestock and bio resources; farmers friendly support services covering extension, training and knowledge, connectivity, credit and insurance; assured and remunerative marketing; inputs and delivery services; and curriculum reforms in agriculture universities. Other major initiatives recommended include: bringing Agriculture in the Concurrent List of the Constitution; setting up of a National Food Security and Sovereignty Board, universalization of PDS; setting up of an Indian Trade Organization; making the Commission on Agricultural Cost and Prices into an autonomous statutory organization with MSP with at least 50 per cent more than the cost of production and launch of a Rural Non-farm Livelihood Initiative(RNFLI) to absorb higher number of people when implemented. Various recommendations of NCF are already implemented and or active consideration of the government.

National Commission on Farmers has recommended the establishment of Village Knowledge Centers (VKCs) all over the country using modern information and communication technology (ICT). A National Alliance comprising of over 230 organizations representing IT corporate, government, academics and civil society organizations power Mission- 2007 launched in 2004, it aims to facilitate setting up a center in each of India’s 600, 00 villages by 2007-the 60th anniversary of country’s Independence. These would be the knowledge windows to the world of knowledge for our villages and also reap the benefits of our e-governance, tele- education, tele-medicine, e-commerce and e-judiciary initiatives. In spite of all pervasive nature of computers, they would still be far away from being truly friendly access device for our villagers.

We need in such cases a human intermediary who would act as the Village Information Officer. He will be the extended eyes and ears of the villagers to the world of knowledge. ICT do not by themselves create transformations in the society. But they are the facilitators of change and have a powerful multiplier effect on the over all economy. Farmers require a proactive advice on various aspects. Computerized data can be transmitted to the farming community through VKCs. Village school can also play a notable role in this regard. The mission objective is to facilitate and accelerate through multi stakeholder collaborations the provision of knowledge centers in each village. Each of these would be a center for knowledge based live hoods and income generation’s opportunities for poor women and men farming communities and all disadvantaged people. Government supports the goal and joined the alliance and routed its support through NABARD by providing 100 crores out of RIDF as initial investment. It is easy to put a computer in the village knowledge center but a lot more difficult to make it work for the betterment of the Indian farmers. This is a question one must ponder, especially against the background of Rs.100 crores has been set apart from the RIDF for this purpose. Indian planners, bureaucrats and scientist turned administrators need to do some honest soul searching here, lest the tax payer’s money keep going down the drain all the time, and the farmers are left in the lurch as has been the case for decades now in the country

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