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Dept of Agricultural marketing and co-operation, College of Agriculture, GKVK Campus, UAS,

Bengaluru

560 065, India

Financing Rural Development

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The Rural Development in India is one of

the most important factors for the growth of the Indian

economy. India is primarily an agriculture-based

country. Agriculture contributes nearly one-fifth of thegross domestic product in India. In order to increase the

growth of agriculture, the Government has planned

several programs pertaining to Rural Development inIndia.

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Funds for investment in rural development projectscome from two main sources: domestic and foreign.further, in each category, there are institutional and non-

institutional sources. Domestic institutional sources

include the government, government undertaking

including public enterprises, the Reserve bank of India,

National bank for rural agricultural and development,

cooperative banks, commercial banks and Regional

rural Banks, and private companies and corporations,

non-institutional sources ---- etc

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Source of Fundsfor Rural

Development

Domestic

institutional

Govt. RBI,NABARDBanks Companies,

Corporations

Non-institutional

Household,Moneylenders,

Traders friends ,etc

Foreign

institutional

Govt., WorldBank IMF Banks

DevelopmentAgency

Non-institutional

Non-residentIndians Private

donors

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Central and State Governments

The govt. in the past has been, still is, and future will continue

to be the most important source of funds for rural development in

India. At the national level, the Union Ministry of finance is

responsible for the mobilization and administration of financial

resources for various purposes, including transfer of resources to

state. Power to raise and disburse public funds has bee divided under

the Constitution of India between the Union and state Govt, thesource of revenue for the Union and state are by and large mutually

exclusive, if sharable taxes and duties between the two are excluded

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Reserve bank of India (RBI)

The Reserve Bank of India was established on April 1, 1935 in accordance

with the provisions of the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in Calcutta

but was permanently moved to Mumbai in 1937. The Central Office is

where the Governor sits and where policies are formulated.

Though originally privately owned, since nationalisation in 1949, the Reserve

Bank is fully owned by the Government of India.

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The RBI undertakes distribution of one

rupee notes and coins as well as small coins and

acts as sole agent in distributing currency in India,The RBI acts as the banker to central government,

state governments, CBs, State cooperative

banks(SCBs), and some of the financial

institutions

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National Bank for Agriculture and Rural

Development -NABARD

NABARD was established on the recommendations of

Shivaraman Committee, by an act of Parliament on 12 July 1982 to

implement the National Bank for Agriculture and RuralDevelopment Act 1981. It replaced the Agricultural Credit

Department (ACD) and Rural Planning and Credit Cell (RPCC) of

Reserve Bank of India, and Agricultural Refinance and

Development Corporation (ARDC). It is one of the premiere

agencies to provide credit in rural areas.

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The source of NABARD funds mainly consists

of the National rural credit fund transferable to it by the RBI

at the time of establishment and annual contribution from

RBI and bowings from RBI, GOI and the market, The GOI

also provides to NABARD funds received from the world

Bank and other external agencies under various credit

projects. The main objective of establishment of NABARD

was to provide institutional credit through banks for

promotion of agriculture, small scale industries , cottage

and village industries, handcrafts and other rural crafts and

allied activities in rural areas.

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Credit Cooperatives are the oldest Rural Financial Institutions (RFIs) in ourcountry. These member driven institutions have the widest network covering every state

and union territory in the country. From the beginning, separate institutions under the

cooperative fold were created to cater to the long term and short term credit needs of the

members.

Prior to nationalisation of 14 banks in 1969, Credit Cooperatives were the only

institutions purveying credit in rural areas. Eventhough, branches of Commercial Banks

and Regional Rural Banks proliferated in the rural areas as a result of the social

banking concept introduced by Govt. of India, even today, Credit Cooperatives continue

to play a major role in purveying credit in rural areas.

.

Cooperative credit agencies (CCAs)

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The Credit Cooperatives account for 24 per cent of the investment credit

and 51 per cent of short term credit for Agriculture and Allied Activities.

Besides, they account for 40 per cent of the total credit to agriculture. They

also cater to the credit needs of other rural activities such as production of

fertilizers, marketing of inputs, weaving and processing of yarn, sugarcane

growing & sugar production, milk production and marketing. The Credit

Cooperatives have thus facilitated both green and white revolutions besides

diversification of rural production.

Despite their vast network, close proximity to members and their

significant share in the credit dispensation to agriculture, the Credit

Cooperatives are afflicted with many maladies which not only hinder their

growth but also pose a threat to their existence. The major problems

confronted by them are as follows

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Weaknesses of CCAs

Huge amount of accumulated losses

Unsatisfactory working results

Huge imbalances

Poor recovery performance

High incidence of Non Performing Assets (NPAs)

High cost of funds and transaction cost

Lack of diversification

Poor deposit mobilization

Rigid and inappropriate systems & procedures

Low motivation level of staff

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Commercial banks (CBs)

An institution which accepts deposits, makes business loans, and

offers related services. Commercial banks also allow for a variety of

deposit accounts, such as checking, savings, and time deposit. These

institutions are run to make a profit and owned by a group ofindividuals,

yet some may be members of the Federal Reserve System. While

commercial banks offer services to individuals, they are primarily

concerned with receiving deposits and lending to businesses

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Commercial Banks in India

Commercial Banks in India are broadly categorized into Scheduled

Commercial Banks and Unscheduled Commercial Banks. The Scheduled

Commercial Banks have been listed under the Second Schedule of the Reserve

Bank of India Act, 1934. The selection measure for listing a bank under the Second

Schedule was provided in section 42 (60 of the Reserve Bank of India Act, 1934.

Activities of Commercial Banks

The modern Commercial Banks in India cater to the financial needs of

different sectors. The main functions of the commercial banks comprise: transfer of

funds acceptance of deposits offering those deposits as loans for the establishment

of industries purchase of houses, equipments, capital investment purposes etc.

The banks are allowed to act as trustees. On account of the knowledge of the

financial market of India the financial companies are attracted towards them to act

as trustees to take the responsibility of the security for the financial instrument like

a debenture.

The Indian Government presently hires the commercial banks for various

purposes like tax collection and refunds, payment of pensions etc.

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Regional Rural Bank (RRBs)

The government ofIndia set up Regional Rural Banks (RRBs) on October 2, 1975.

The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal

farmers, agricultural labourers, artisans and small entrepreneurs.

Initially, five RRBs were set up on October 2, 1975 which were sponsored by Syndicate Bank, State

Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. The total

authorised capital was fixed at Rs. 1 crore which has since been raised to Rs. 5 Crore.

There are several concessions enjoyed by the RRBs by Reserve Bank of India such as

lower interest rates and refinancing facilities from NABARD like lower cash ratio,lower statutory liquidity

ratio, lower rate of interest on loans taken from sponsoring banks, managerial and staff assistance from the

sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of

NABARD. NABARD has the responsibility of laying down the policies for the RRBs, to oversee their

operations, provide refinance facilities, to monitor their performance and to attend their problems.

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Self-help groups (SHGs)

A self-help group (SHG) is a village-based financial intermediary usually composed of between

10-20 local women. Most self-help groups are located in India, though SHGs can also be found in other

countries, especially in South Asia and Southeast Asia.

Members make small regular savings contributions over a few months until there is enough capital in the

group to begin lending. Funds may then be lent back to the members or to others in the village for anypurpose. In India, many SHGs are 'linked' to banks for the delivery ofmicrocredit.

SHGs are member-based microfinance intermediaries inspired by external technical support that lie

between informal financial market actors like moneylenders, collectors, and ROSCAs on the one hand, and

formal actors like microfinance institutions and banks on the other. Other organizations in this transitional

zone in financial market development include CVECAs and ASCAs.

self help group

.

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A Self-Help Group (SHG) is a registered or unregistered group of micro

entrepreneurs having homogenous social and economic backgrounds, voluntarily

coming together to save regular small sums of money, mutually agreeing to

contribute to a common fund and to meet their emergency needs on the basis of

mutual help. The group members use collective wisdom and peer pressure to ensure

proper end-use of credit and timely repayment. This system eliminates the need for

collateral and is closely related to that of solidarity lending, widely used by

microfinance institutions To make the book-keeping simple enough to be handledby the members, flat interest rates are used for most loan calculations

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Goals of SHGs

Self-help groups are started by non-profit organizations (NGOs)

that generally have broad anti-poverty agendas. Self-help groups are seen as

instruments for a variety of goals including empowering women, developing

leadership abilities among poor people, increasing school enrolments, and

improving nutrition and the use of birth control. Financial intermediation is

generally seen more as an entry point to these other goals, rather than as a primary

objective.This can hinder their development as sources of village capital, as well as

their efforts to aggregate locally controlled pools of capital through federation, aswas historically accomplished by credit unions

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Self-help groups

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NABARD's 'SHG Bank Linkage'

program

Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program,

borrow from banks once they have accumulated a base of their own capital and have

established a track record of regular repayments.

This model has attracted attention as a possible way of delivery microfinance services to poor

populations that have been difficult to reach directly through banks or other institutions. "By

aggregating their individual savings into a single deposit, self-help groups minimize the

bank's transaction costs and generate an attractive volume of deposits. Through self-help

groups the bank can serve small rural depositors while paying them a market rate of interest."

NABARD estimates that there are 2.2 million SHGs in India, representating 33 million

members, that have taken loans from banks under its linkage program to date. This does not

include SHGs that have not borrowed. "The SHG Banking Linkage Programme since its

beginning has been predominant in certain states, showing spatial preferences especially for

the southern region Andhra Pradesh, Tamil Nadu, Kerala and Karnataka. These states

accounted for 57 % of the SHG credits linked during the financial year 2005-2006.

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Advantages of financing through

SHGs

An economically poor individual gains strength as part of a

group. Besides, financing through SHGs reduces transaction costs

for both lenders and borrowers. While lenders have to handle only a

single SHG account instead of a large number of small-sized

individual accounts, borrowers as part of an SHG cut down expenses

on travel (to & from the branch and other places) for completing

paper work and on the loss of workdays in canvassing for loans

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Non-governmental organization

A non-governmental organization (NGO) is a legally constituted organization created by natural

or legal persons that operates independently from any government and a term usually used by

governments to refer to entities that have no government status. In the cases in which NGOs are

funded totally or partially by governments, the NGO maintains its non-governmental status by

excluding government representatives from membership in the organization. The term is usually

applied only to organizations that pursue some wider social aim that has political aspects, but that are

not overtly political organizations such as political parties. Unlike the term "intergovernmental

organization", the term "non-governmental organization" has no generally agreed legal definition. In

many jurisdictions, these types of organization are called "civil society organizations" or referred to

by other names.

The number ofinternationally operating NGOs is estimated at 40,000.[1] National numbers are even

higher: Russia has 277,000 NGOs;[2]India is estimated to have around 1-2 million NGOs.

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Foreign sources of funds

As we mentioned earlier in this chapter, foreign sources of

funds for rural development include a verity of institutional and non-

institutional agencies. The funds are give in agencies / donors who

provide assistance for rural development and other purposes.

Besides there are four major international NGOs namely, the Aga

Khan Foundation, CARE India, the Ford foundation and save the

children(the UK ), that provide substantial assistance to India for

various rural development projects

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Summary Funds for investment in rural development projects come from two main sources: domestic

and foreign. further, in each category, there are institutional and non-institutional sources.

The RBI acts as the banker to central government, state governments, CBs, State cooperative

banks(SCBs), and some of the financial institutions

NABARD was to provide institutional credit through banks for promotion of agriculture,

small scale industries , cottage and village industries, handcrafts and other rural crafts and

allied activities in rural areas.

Self-help groups are started by non-profit organizations (NGOs) that generally have broad

anti-poverty agendas. Self-help groups are seen as instruments for a variety of goals including

empowering women, developing leadership abilities among poor people, increasing school

enrolments, and improving nutrition and the use of birth control. Financial intermediation is

generally seen more as an entry point to these other goals

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