Total Rural Finance System

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Chapter 1Rural Economy

1.1 Introduction

Even in recent time, third world countries were believers in industry baseddevelopment. This policy of development benefited the urban dwellersrelatively more because much of the industry grew up infrastructuredeveloped cities and their suburbs. This uninterrupted policy did causeprosperity in rural areas as such rather the economic condition of the regionwas deteriorating gradually.

In the first half of the 20th century communism was established in countries ofAsia and East Europe. The rulers of the third world countries in whichcommunism was not established became so fearful of rebellion of disgruntledrural people that they started to adopt some isolated rural developmentprograms. However, all these development programs could not make anysuch contribution to improvement of economic condition of rural peoplebecause almost all the programs were taken for short period and for effectpurpose. Moreover, all these projects failed miserably to achieve desiredresults as they were not implemented by keeping any connection with theoverall development plans. After evaluating all these few isolated projects,many researchers found that benefit of these projects was enjoyed most bythe rich moneylenders and landlords, in single word by people of opportunistclass. The researchers also found despite some projects were able to increasethe villagers income, they were very insignificant compared to the immensesize of rural population.

In such condition, the World Bank advised the third world countries toimplement overall development planning based on rural area. The WorldBank gave strong advice on implementation of overall development planningby coordinating various sectors of rural economy. This development strategyis called as multi-sectoral rural development strategy. In the multi-sectoraldevelopment strategy, production sector has been joined not only withservice sector but also with infrastructure development sector. Productionsector can be divided into poultry, livestock, fisheries, handicraft, smallbusiness etc. besides crop production. Other than these, health, familyplanning, education, communication, good provision of housing andentertainment may seem like to include in service sector for the time being.Actually in the final analysis, the development of all these sectors contributes

greatly to the growth of productivity of developing financial sector. Similarly,development of infrastructure for example roads and highways, markets etc.in a planned way accelerates the development of production sector.

There is no doubt that the mentioned multi-sectoral development strategywill be able to improve the economic condition of rural people. However,implementation of all these projects will require huge amount of money whichis impossible for rural people to supply. So, there requires invention ofsuccessful organizations that shall have abundant deposits and high numberof branches present everywhere and above all of them shall be operated withclearly defined policy and strategy and by keeping achievable goals in frontand above all by favorable well-trained workforce.

1.2 Characteristics of Rural Economy

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Many similarities can be found among third world countries despitedifferences in their location and stages of development.

These general characteristics are given below:--

1. Vicious circle of poverty2. Low rate of capital formation3. Over reliance on agriculture4. Short supply of entrepreneurs5. Acute shortage of technicians6. Scarcity of appropriate technology7. Underdeveloped infrastructure8. High rate of population growth9. Scarcity of appropriate technology10.High rate of inflation11.Too much dependence of foreign aid12.Impact of frequent natural disaster

13.Political instability14.Low literacy rate15.Unemployment problem16.Underdeveloped and unorganized market mechanism17.Underdeveloped and unorganized financial market18.Non-progressive and unchanging social system19.Backward looking women society20.Ill-effects of village politics

1.3 Determinants of Development of Rural EconomyAfter analyzing the characteristics of underdeveloped rural economies, it isextremely important to know the determinants of overcoming the mentionedcondition of rural economy.

The determinants are shown through the following diagram:--

Overall economic condition in the rural area is possible through appropriateimprovement and exercise of the above mentioned quantitative and

qualitative determinants.

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Determinants of Development of Rural Economy

Quantitative Determinants Qualitative Determinants

Sufficient Capital and

Saving

Efficient Labor

Appropriate technology

Positive attitude to

development

Innovative Power

Sufficient and efficient

organization

Up-to-date infrastructure


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1.4. The Problem of Maintaining Harmony in Rural DevelopmentPlanningAccording to Hores Bowels, adviser of FAO and eminent American ruraleconomist, maintaining harmony on certain essential issues in ruraldevelopment planning is pre-condition for rural development. The issues on

which harmony needs to be maintained are the following:--

1. Consumption and saving2. Production related investment versus social infrastructure development

investment.3. Limit in priority for agriculture and industry4. Internal demand versus production for export5. Setting limit for government and private investment.

The abovementioned essential issues of harmony are discussed briefly:--

a) Consumption and saving: Unnecessary consumption reduces amount of

savings. Need for saving is undeniable for capital formation butproduction will fall if consumption is reduced by an unbelievableamount. This will indirectly reduce production and will become asobstacle for formation of savings and capital. Therefore, consumptionlevel and consumable products should to be set so that production isnot interrupted and sufficient saving is at hand to make investment.

b) Production related investment versus social infrastructure developmentinvestment: Some think investment in social infrastructure in wastageof money. They believe only in production related investment butwithout infrastructure necessary seeds, fertilizer, equipment, rawmaterials etc. it is difficult to procure in right time and to market themin best way and this affects the profitability of the produce greatly.

Therefore, development of social infrastructure in definite amount andin appropriate way is extremely necessary that will decisively helpproductive investment to succeed.

c) Limit in priority for agriculture and industry: Agriculture and industryare both production related activities and dependent on another. Ifagriculture is neglected, importance of industry may be reduced due toshortage of necessary raw materials and need for sufficient localmarket for industry produces. This is because neglected agricultureforces reduction in income of rural people and this makes them

incapable of consuming industrial goods despite having demand.

On the other side, industry can not progress in due rate if priority tothe agriculture is given by keeping industry in negligence becausenecessary equipment, fertilizers, pesticides, medicine etc. areproduced in industry. On the other hand, if rate of agriculturalproduction remains unhindered still lack of marketing of agriculturalproduct will hinder agricultural production remarkably.

Therefore, because agricultural and industrial development aredependent on one another, so investment limit in these should be setwith importance.

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d) Internal demand versus production for export: By exporting goods acountry earns foreingn exchanges that help to import necessarymachines and equipment, raw material and technology. However, onlygiving emphasis on export by ignoring domestic need will indirectlycause import of goods to meet domestic demand. In this situation, the

earned foreign currency is used to pay foreign debts. In the finalanalysis, this type of export is proved as self-deceptive. On the otherside, only production based on meeting internal demand will fail tomodernize itself for lack of necessary foreign currency and is incapableof making production multifaceted.

e) Setting limit for private and government investment: Like, it is notdesirable that all the sectors of development should be directed by thegovernment; similarly private initiatives for all sectors are not eager.

Therefore, infrastructure development is suitable for governmentsector and even parts of service sector can be developed under

government supervision. For example, roads and highways, school-college, hospital, law and order situation are much more possible forthe government to administer efficiently and neutrally. On the otherside, the entire development sector should not be in the private sector.Highly profitable, monopolistic goods, goods important for publichealth, goods necessary for public security and state security aredesirable to be produced under government supervision. Governmentcan permit the private sector to produce depending that they paylawful tax and duty duly and can change and expand productiondepending on disparity in use of factors of production. In the process ofdetermining this sort of limit of government and private investment,amount of capital to be invested, supply of entrepreneurs,administrative efficiency, and honesty and patriotism of governmentemployees are extremely important to consider.

Therefore it is extremely important to set the type and limit ofgovernment-private investment in various sector for the wider interestof the country by not neglecting the private sector rather by evaluatingthe capacity of entrepreneurs.

CHAPTER 3CREDIT IN RURAL ECONOMY

3.1 Introduction

Without adequate capital investment is a dream to rural development. Forany kind of economic development planned capital investment is essential.Only capital investment is not the mean of rural development, there must beneed development of social infrastructure. But this infrastructuredevelopment needs adequate investment. This investment may be private orpublic. From the experience it is seen that in capital and mixed economiesgovernment spend necessary capital for development of social infrastructurebut for economic activities it spends less. On the other hand in socialeconomy in both the factor govt. spends all the necessary investment.

Generally govt. invests for rural infrastructure development by its financialbudget. On the other hand in this type of economy agriculture, industry,

business etc, private investors invest by savings.

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Rural people can collect money from three sources for economic activities.They are

1. Savings from past income2. Sale revenue from present assets

3. Loan from other persons

Money collect from sale of assets do not bring additional money. Because isthe transfer of resources from on surplus family to other surplus family. It is atemporary action. For this reason to develop the rural people and their life weneed collection of deposit from rural, sub-town and town and invest thisdeposit effectively and efficiently.

3.2 Necessary to collect money other than family sourceIn the third world country like Bangladesh inevitable fund is very limited.Because their income is low thats why savings is also low. To convert theancient period agriculture method to modern method here also need

adequate investment example: machinery, hybrid seeds, more fertilizer,water, and insecticide using we can more crop pre acre from beforeproduction. More than half of the landless people also live in rural area, forupgrading their life it would be essential to popular them the cottagebusiness and the small business. To perform this we need adequate capitalbut here is also the short of capital.

Historically, Bangladeshi rural people suffering for necessary capital. Thereare only 5 to 10% people can save. The left 90% people depending on loanfrom others or sale of assets. In a survey in India and Bangladesh 80% land iscultivable or house making land and only one fourth of the land are at thehand of rural people. So we can say that above 60% people are living byborrowing money from others.

So for the development of the rural people there need adequate capital toupgrade the life of rural people

3.3 Rural banking in rural developmentLike other loan term the rural loan also the same. Here also one party givesloan to another party by consuming less or sale of the assets. When one partyneed any asset or consumable think then other help this family. This help canbe monetary or non monetary. So which goods, money or technology not inthe hand of any rural people, they avail it with an agreement to back it is

called the rural loan.

In which persons or institutions give money to purchase the above things andcollect that money with the interest is called the bankers or Banks. For thiswhich activities are taken by the bank is totally called the rural banking. Butinterest collect is depending on the bank.

3.4 Difference between rural loan and agricultural loan

Rural loan is wider than the agricultural loan which they can use for antpurposes. So rural loan can be 3 types and they are:

1. for productive agriculture, small cottage and small business

2. for consumption of goods or any type of arrangement such as marriagepurpose

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3. Infrastructure development such as road, school. Hospital mosquemadrasha, culvert

On the other hand agricultural loan means for agricultural investment

purpose investment in seeds, fertilizer, machinery, insecticides etc. with aview to increase the production.

Now the difference between rural loan and agricultural loan is given below:

Serial no.

Rural Loan Serialno.

Agricultural Loan

01 Rural loan is a wider termthan the agricultural loan.Rural loan is used foragricultural, industry and

business purpose etc.

01 Agricultural loan is used onlyfor agricultural purpose.Agricultural loan is used inanimal husbandry, poultry,

fishing etc.02 Rural loan can be used in land

based or non land based.02 Agricultural loan is used land,

pond and poultry.03 Rural loan can be disburse in

any time of the year03 Agricultural loan disbursed

only in agricultural season.04 Mortgage can be land or any

other property04 Only land can be used as

mortgage.05 Landless or marginal farmer

can be taken the rural loan.05 Landless or marginal farmers

can not take the agriculturalloan

06 Since the rural loan is

disbursed all the year thatswhy the loan risk is low.

06 Since agricultural loan is given

on the seasonal basis the riskis high because of naturalcalamities can be affected inagriculture.

07 Rural loan is not only used insmall business but also can beused in cottage industry as aresult much income can begenerated.

07 But by taking agricultural loanis take time to incomegenerating as a result therecovery of agricultural loanbeginning lately.

3.5 Industry VS agriculture and rural loan

The concept of agricultural and rural loan is much more new concept than theindustry loan. Because the importance of rural development is not heard byso many people before they heard the industry loan. Now the differenceamong Industry VS. Rural and agricultural loan is given below:

Serial no.

Industry loan Serialno.

Agricultural Loan/rural loan

01 Industry loan is used only forthe industry and based on thetown and sub-town basis.

01 Rural loan is given for all therural development activitiesbased only the rural basis.

02 Industry loan is given on longterm basis 02 This type of loan is given onmedium and short term basis.03 Most of the loan amount is 03 On the other hand this type of

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used for collecting machineryproduct.

loan is used for purchasinginput.

04 This loan amount is relativelylarge and the borrowers arecomparatively few.

04 Agricultural and rural loanamount is relatively small butthe borrower number is

comparatively high.05 This type of loan sanction isdepending on the newentrepreneur come to thissector.

05 This type of loan is disbursedall around the year.

06 Interest rate is high 06 Interest rate is relatively low.07 Without sufficient collateral

the loan amount is notsanctioned.

07 Some of agricultural and ruralloan is given without collateral.

08 Supplier of this type of loan islarge financial institutions.

08 The source of this type of loanis almost the non-organizational institution.

09 The loan amount isdetermined by the capacity ofthe financial institution.

09 The amount is determined bythe money needed of theborrower.

10 In case of industry loan therefollow the certain method,project appraisal andvaluation.

10 In case of this type of loan theproject appraisal and valuationis not done.

11 This type of loan is renewable. 11 This type is not renewable.12 Industry loan is given in

domestic as well as foreigncurrency.

12 Agricultural and rural loan isalways given in domesticcurrency.

3.6 Purposes of rural financeIn rural area the rural finance is executed because of increasing the income ofthe rural people as a result their allover financial condition will be improved.

The purposes of the rural finance are given below:

1. Rural infrastructure development : Rural infrastructure can bedivide in two parts

A) Economic infrastructure- communication, vehicles, electricityetc.

B) Social infrastructure- Mosque, madrasha, school, college,

hospital etc.

Both type of infrastructure is developing by the finance from the govt. orprivate sources. To characterize this type of development up to this time is nooption to take loan for this purpose.

2. Reduce the disparity between the town and the rural people:The roadmap of development of town is different from the road map ofthe rural. Because the infrastructure development in town where thegovt. investment is too high. Overall the establish infrastructure,administration, nearness of market and other facilities is favorable intown and the people are chosen the town to perform their businessactivities.

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For this reason the private and public investment in rural area is low. Thatswhy the financial disparity between the town and rural people is increasing.So, by giving loan to the rural people there is try to reduce the gap betweenthe rural and town development.

3.To increase the production of food and supply:

Historically, therural area in Bangladesh is suffering for sufficient food and otherconsumable goods. To reduce this deficit we need to increase the foodproduction. By applying new method and using technology we canincrease the food production but for this reason we need sufficientcapital.

4. To increase the employment opportunity: From the statistics wesee that the unemployment is increasing in rural area than the townarea and after some time it would be intolerable. To createemployment opportunity it is needed to develop the economic andsocial infrastructure and for this purpose there is need much more

capital. Since the savings rate of rural people is low thats why we needadditional support from the private and the public sector to increasethe employment opportunity. If we can create the employmentopportunity then the income also be higher and their financialcondition also be increased.

5. Women participation in economic development: From thestatistics we see that only 10% of the total women participate activelyin economic activities. When this rate would be high the rate of ruraldevelopment also be high. So by organizing the organization and givethe loan to the women it would be helpful to women participation ineconomic development. As a result the family income will be raise andthe recognition of the women also be increase.

6. To reduce the economic disparity among the rural people:Earlier we said that the rate of savings and investment rate of ruralpeople is below10%. The people who can invest more the economicupgrade them also increased. But the disparity between the rural richand poor people. So here if the rural poor can not savings money andthats why they can not be also investing and disparity also beincreased.

7. Proper utilization of natural resources: Since in rural area there isnot using the technology and the scarcity of skilled people the naturalresources in rural areas are not using properly. To use these resourcesproperly we need adequate investment in proper time. To increase theproduction by using this resources and technology we also needcapital. Since in rural area the savings rate is low thats why it isneeded to invest in rural areas by giving loan to them.

3.7 Classification of Rural CreditBasically rural credits are of two types; such as:

a. Consumable credit

b. Production credit

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a. Consumable creditThe poor rural men and women always take loan in their hard time. Theinstitutions do not sanction that loan for consume. So, the poor ruralhouseholds must have to borrow from the jaminder and other non-institutional sources with high interest rates. The consumable credits are

taken because of the following reasons:

I. for foodII. for purchasing clothsIII. for social ceremony (marriage, birth day, occasions, etc)IV. to pay previous debt andV. to build houses

b. Production creditThe credits that are used for the production purpose are divided into twotypes. Such as:

I. Agricultural creditII. Non-agricultural credit

I. Agricultural creditThe credits that are sanctioned to operate the agricultural activities areknown as agricultural credit. These agricultural credits are classifiedfurther into two categories. Crop credit

Non-crop credit

Crop Credit

Crop credit is four types. Such as: Food crop credit

Financial crop credit

Credit for fruits garden

Credit for storing

Non-crop CreditThe credits, that are sanctioned to perform the work which does notneed any agricultural land or need very little agricultural land toperform the work, are known as non-crop credit. The credits are: milkindustry, poultry firms, fish cultivation, cattle fattening, etc.

Position of credit in the rural economy

Classification of Rural Credit

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Rural Credit

Productive CreditConsumable Credit

Agricultural Credit Non-agricultural Credit Food Credit


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II. Non-agricultural creditThe development non-agricultural credit is the recent addition in the ruraleconomy. As the numbers of landless and marginalized farmers areincreasing dangerously, the domestic and international economists give

emphasis on the non-agricultural credit and make the investment in a bulkfigure. The non-agricultural financial items on which the credits aresanctioned are:

a. Handicrafts industryb. Small industryc. Village business andd. Financial services

3.8 More Classification of Rural Credit

The rural credits are further classified in lieu of the previous classifications.Such as:

Rural Credit

Investment Credit Current Production Credit

Agricultural Credit Non-agricultural Credit

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Crop Credit Non-crop Credit

Credit for fruitgarden

Financial CropCredit

Food Crop Credit

Rural Credit

Rural Credit

Rural Credit

Cottage Industry Credit

Business Credit

Credit for Financial service

Industry Credit (small andmedium)

Cloth Credit

Social activitiesCredit

Credit to Repay

House BuildingCredit

Other Credit


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Building and Rehabilitation Building CreditMachinery Credit

Development Credit

Machinery Credit

Investment purpose agricultural creditNormally the investment purpose agricultural credit amount is bigger thanproduction purpose credit. Agricultural credit covers forming agricultural firm,other houses building, store houses building, construction and rehabilitation,etc credit. On the other hand, making land plain, dig pond, preparingsewerage canal, etc fall into development agricultural credit. Nevertheless,tractor, power pump, harvest, etc, credit is under agricultural machinerycredit.

3.9 Classification on the basis of MaturityBased on the maturity, the rural credit is three types. Such as:

Short-term

Mid-term

Long-term

The short-term credit is for 3 to 18 months. In case of cottage industry andrural business, the short-term credit may be for few days and last for a year.Only for the cases of agricultural, the farmers get their crop in 18 months andthats why the credit is for 18 months in this case. The mid-term credit

duration ranges from one year to five year. And the long-term credit rangesfrom 5 years to 20 years.3.10 Classification of Rural Credit on the basis of Collateral

The rural credit is of two types on the basis of their collateral. Like:

Collateral Basis Rural Credit

With Collateral Without

Collateral

Partly Collateral Fully Collateral

Pledge Credit Extra Collateral Credit Credit byIndividuals AssuranceWithout Collateral Rural CreditSometimes the banks sanction credit on the basis of the individuals goodwill.On the other hand, the non-institutional debtors provide loan to their relativeswithout any collateral.

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With Collateral Rural CreditIf the collateral value is less than the value of the loan, then it is called partlycollateral rural credit. On the other hand, if the collateral value is at leastequal or more than the loan value, then this is called fully collateral rural

credit.

Individuals AssuranceBank sanctions credit on the recommendation of the prominent personwithout taking any collateral. But, if the creditor fails to repay the loan thenthe guarantor personally repays the loan by selling his/her property or fromthe personal income. So, the loan granting institutions or banks firstinvestigate the property of the guarantor to minimize the risk of failure torepay. Also, the banks assured that the previous transactions of the guarantorare satisfactory or not.

3.11 Credit on the basis on the Creditors type

The credits are the following types on the basis of the creditor:

Small business credit

Small entrepreneurs credit

Farmers loan

Marginal farmers loan

Landless credit

Self involved credit

3.12 Current and Fixed Rural CreditThe current rural credits are taken to fulfill the demand of production raw

materials or pay the wages of the labor. On the other hand, the ruralindividual takes loan to make equipment development, construction,machinery, etc.

3.13 Extra Classification of Rural Credit on the basis of Uses

The loans taken for the uses purposes of agriculture, industry or business arenamed separately. Some of them are mentioned below:

Consumable credit

Food creditHouses credit Seeds loan

Fertilizer loan

Vehicles credit

Machinery credit

Pond credit

Land development credit

Fish credit, etc

3.14 Classification of Rural Credit Basis on the Sources

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The rural credits are classified below based on their sources:

Rural Credit

3.15 Demand and Supply of Rural Credit

It is necessary to have the similar knowledge about the demand and supply ofrural credit as the other goods demand and supply. The supply should be asper the demand. If the supply of rural credit is more or less than the demandof rural credit then there would be a mismatch in the rural economy. So, itshould be the goal of the planned economy of balanced demand and supplyof rural credit. The indicators of demand and supply are discussed below:

3.15.1 Demand of rural credit

It should be aim of developing country to fulfill the demand and creatingextra demand of rural credit. The demand indicators are:

1. Consumers constructional power2. Possibility of increasing the production

3. Production procedure4. Crop/production mixture5. Use of innovational power6. Use of developed technology7. Limit of machineries8. Change of seasons9. Required skills and labor expend10.Loan expenditure11.Collateral for the loan12.The consumers behavior13.Governments behavior on providing loan in rural economy14.Loan payment procedure

15.The risk of using credit16.Monitoring the uses of credit

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Institutional Credit

Govt. Credit

Development Bank

Agriculturalbank credit

Samobay bankcredit

Grameen bankcredit

Other Banks

NCBs credit

Small & Cottageindustry credit

House constructioncredit

Voluntaryorganization credit

Non-institutionalCredit

Mahajon credit

Business credit

Rich farmerscredit

Friends/relativescredit


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17.The behavior and attitude of the credit granting institutions employees18.Position of developed market19.Expand of infrastructure development20.Receiving of raw materials in production21.Difference between application for loan and time of receiving the loan

22.Number of economical market and their position, capital and skill23.Probability of getting subsidy from the government24.Skill and training of the loan users

3.15.2 Supply of rural credit

The supply of rural credit depends of the following factors based on theeconomic activities and sources of credit:

1. The governments attitude to develop the rural peoples economiccondition;

2. The central banks attitude and organizational skill to provide the rural

credit;3. The monetary and income tax policy on rural economy;4. The number of credit providing individuals or institutions;5. The credit providing firms loan policy;6. The fund availability of the credit providing firms;7. The rural deposit availability of the loan providing firms;8. The attitude of the central bank to re-financing the rural people;9. The flexibility of the loan and the loan expenditure;10.The rate of interest of the loan;

But there are some determinants that have special impact on demand of ruralcredit. Examples of some determinants given below:

A) In case of growing cropsI. Duration of irrigation;II. Area of cultivable land;III. Nature of land fertility;IV. Nature of density of farming crop;V. Potentiality of adopting associate profession;VI. Extent of promptness of government agriculture employee.

B) In case of cottage and handicraft industry

I. Quantity of Supply of entrepreneur;II. Certainty of market for produced goods;III. Condition of supply of skilled technicians;IV. Potentiality of export market for produced goods.

C) In case o cattle rearingI. Quantity of entrepreneurs in cattle rearing;II. Nature of demand of cattle and animal milk;III. Nature of demand of cattle and animal meat;IV. Potentiality of gathering high-class cattle and animal assets etc.

3.15.2 SUPPLY OF RURAL CREDIT

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Supply of rural credit depend upon the following matters on the basis ofeconomic activities or sources of credit:

1) Attitude of government in developing financial condition of rural

people;2) Organizational Skillness and attitude of central bank in supplying ruralcredit;3) Government monetary and fiscal policy for rural economy;4) Extent and quantity of institution or individual involved with supply ofcredit;5) Credit policy and skillness of institutions in supplying credit;6) Adequacy of fund of institutions involved with supply of credit;7) Adequacy of collected rural deposit by the institutions of creditprovider;8) Attitude/adequacy of refinancing by the central bank;9) Disparity of cost for credit providing and operation of business;

10) Interest rate paid on credit;11) Intensity of risk in providing loan;12) Potentiality of rural savings for present and future;13) Method of supplying raw materials, seeds, fertilizer, and otherequipments to use credit;14) Attitude of borrower for payment of loan;15) Economic, political and social stability;16) Limit of decentralization of power for providing credit in lowerlevel17) Training and attitude of employees engaged in institutions thatprovide loan.

3.16 quantity of demand for rural credit inBangladesh

In Bangladesh no comprehensive scientific survey for measuring demand ofrural credit in rural area had been occurred until today. But there were someendeavor for estimation. Some estimation of rural credit of those endeavorhas been given below:

(Tk. In Crore)

Schedule of rural credit that was estimated in different time

Source Year of Estimation Quantity ofEstimated Credit

1. Credit Explorer Committee 1959 25% of

agricultural

production

2. Pakistan Africulture Enumeration 1960

142.80

Report

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3. Mr. Ershad Khan, Pakistan 1963,

Institution of economic development 1963

185.00

4. Mirza Shahjahan, Institution of

Economic Research, Dhaka university 1967

230.00

5. Committee of Agriculture Credit 1970

182.00

6. Bangladesh Planning Commission 1977-78 Agriculture 365.0}

(Last year of 5th annual planning) Non-agriculture

547.5}

7. Bangladesh Planning Commission

430.00

(Biennial Planning)

8. Bangladesh Planning Commission 1979-80

491.00

(Biennial Planning)

9. Bangladesh Planning Commission 1990

8000.00

(Last Year, 3rd

5th

Annual Planning)

Aforementioned three estimated demand of agricultural credit and supply of

credit deficit has been given below:

Year Estimated Real institutional Deficit Deficit relativeto need

Demand supply (%)

1977-78 365 138 277 75.89

1978-79 430 153 277 64.421979-80 491 260 231 47.05

*Bangladesh Bank, Department of Agricultural loan

In above mentioned loan deficit only total supply of agriculture loan has beenshown against demand of agriculture loan. This deficit was 76% in the year of1977-78, which decreased to 50% in the year of 1979-80. Knowledge onnature of deficit rural credit cannot be acquired from above explanation. It isvery difficult to be known about the condition of such real deficit without anextensive scientific survey.

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3.17 ESTIMATED AMOUNTR OF RURAL CREDIT DEFICIT INBANGLADESH

It is mentioned above that no extensive survey had been done today formeasuring demand, supply and deficit of rural credit. But it is undeniable that

institutional loan system supply very little amount of demand of loan needed.It is known from 1956 Dhaka University Socio-economic Survey that only6.69% demand of total credit need was settled by institutional loan. It was10% according to 1960 Pakistan agriculture survey, 14% according tocooperative registrar survey. Agriculture loan committee, formed bygovernment in 1969, estimated sources of institutional loan as 14.86%.Among the above mentioned four sources the letter three besides the firstone was estimated by government. In an unbearable situation the authorhimself tried an endevour for estimation of total deficit of rural credit. In Indiathere were some extensive survey about the portion of input that comes frominvestors own savings and the portion that comes from credit. The deficit(From1972-73 to 1978-79) found by the author by relating the portion of ratio

with the national rural production collected from different sectors has beengiven below:

Schedule for deficit of Rural Credit (From1972-73 to 1978-79):(Amount in Crore)

Year Estimared quantity Supply of institutional Percentage ofestimated

of Rural Credit rural credit Deficit1972-73 716 33 96.391973-74 1017 22 97.841974-75 2111 30 98.581975-76 1517 36 97.631976-77 1613 85 94.631977-78 2022 138 93.181978-79 2278 153 93.28Source4s: Khan A. R. Institutional Finance in Rural Developmentacomparative observation of India and Bangladesh Thesis taken for P. hd.Degree in University of Puna, 1983 Page no. 276.

It is realized from mentioned information that at the beginning of the decade

of 80 more than 90% of total demand of credit remained as deficit. It will bepossible to change the expected financial position of the rural people if thedeficit of rural credit is eliminated as soon as possible. Otherwise the 5th

annual planning or government declaration will remain as fake word in thename of rural development.

3.18 COMPETENCY OF GETTING LOAN OF RURAL CREDIT SEERKE

It is a conventional technique of institutional loaner to justify the competencyof getting credit. It is not right that any individual or society will get loan

against their application.

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Loan is provided to those people who are abiding by the disciplines andregulations of credit management. On the other hand non-organizationalloaner also justify competency of loan seeker directly or indirectly or explicitlyor inexplicitly. But non-institutional loaner emphasis on security of recovery ofloan amount with interest. But institutional loan provider also considers the

benefits of credit seeker besides appropriate conditions.

It is worth mentioned that as commercial or industrial loan seekerare rich, educated and aware about knowledge of business competency ofgetting loan of those people is measured tightly. Measurement of creditcompetency of those people is very important as each of them apply for alump sum amount of loan which is equivalent to or more than one thousandrural credit applicant.

However, the factors considered in granting credit by theinstitutions that worked in rural area are as follows:

1) Objective of loan

2) Stability of loan applicant in rural area3) Competency and good reputation of loan applicant4) Capability of giving collateral for the loan amount that has applied

for5) Potentiality of financial benefits of loan applicant by using loan

Discussions of above points are given below:

a)Purpose of the credit proposal:In rural areas the credit institutions do not give loan for all purposes,especially for consumption purpose. On the other hand, loans are not

sanctioned for all financial transactions, such as loan for: loan sanctioningto others with interest, speculation business etc. Bangladesh Bank or Headoffices of that institutions specify the purposes for which loan will besanctioned (before loan sanctioning).Example:Loan for cropping, poultry firm, cattle breeding, fisheries, handicrafts.Loanis not sanctioned except for the above purposes, normally.

b)Applicants performance in rural area:Generally people who do not have houses, land property or businessproperty do not get loan. Applicants who are guests, beggars, travelers donot get loan.

c)Applicants reputation and usability of loan:It must be ensured, that applicant is trustworthy and will use the loanproperly, through loan application or interview or from his/her neighbors.

d)Collateral:This is wanted to ensure recovery of loan. Example of collateral: mortgage property,valuableornaments or personal guarantee of any powerful man.

e)Financial benefit from loan usage:How much net income will exist after meeting all the expenditures for the purpose for

which

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loan is wanted, should be examined. For landless and marginal farmers: how long s/hewillbe engaged in work using the loan-is the consideration.

Mostly all rural credit institutions consider the above points. Moreover,

cooperatives and many other institutions look for the past repaymenthistory

3.19 Risk of rural credit:

There are two types of risk:1) Lenders risk2) Borrowers risk

Lenders risk: The followings are the risks of the lender: Inflation may reduce the actual value of the loan.

Problem in loan repayment.

Loan may be bad. Relationship between lender and borrower may be disturbed.

Borrowers risk: Borrower may face the following risks: If lender does not record repayment properly.

If the loan cannot be used on elements (raw materials,machineries, fertilizer, seed, pump etc.) for scarcity in themarket.

Unavoidable misuse of the loan for any accident.

Loss of the loan amount before using, when in home.

If the borrower does not achieve estimated financial result.

Disturbance in using the loan for natural calamity.

3.20: Essential characteristics of effective rural credit system

Properly planned and managed rural credit system can do well both for thelender and borrower. Mr. Tardy, rural credit experttells some characteristicsthat are to be followed for the effective system. Those are:

1) Credit in accordance with usage time should be comparatively longtermed.

2) Credit cost of the lender and borrower should be comparatively

minimum.3) Adequate security must be ensured.4) At the time of economic depression loan installment and other

conditions of repayment should be flexible on the basis of heborrowers income and capacity.

5) Efficient and trained loan officers should maintain credit system.

All Indian rural credit survey committee also specifies some suggestionsfor effective and proper credit system. Those are:

1) Rural credit system should be concerned with national policy.2) Institutional rural credit must be proper alternative of non institutional

rural credit.3) Institutions engaged in rural credit must have adequate fund.

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4) Loan officers of those institutions should be properly trained andcordial.

5) Not only the movable and immovable properties at present but alsothe assets or goods that will be produced in future by using the loanshould be considered as collateral.

6) Financial cooperation amongst rural villagers should be developedthrough the system.7) Proper monitoring must be ensured.8) Institutions must be cautious about legal needs and interests of the

borrowers.

Now, the characteristics suggested by the author are:

Institutions involved with rural credit must be granting loan in apreplanned way to all areas, villagers (landless/marginalfarmers, agricultural labor, small, medium, large farmers,cottage industry labor and rural businessman) and economicsectors with prefixed amount and speed.

Training, related to motivation and change of mind settingshould be given to the employees of the institutions.

Risk should be minimized and for this rural credit insurancesystem should be inaugurated.

In proper time loan application granting and disbursementshould be done.

Granted loan amount should be sufficient for proposed work.

Loan repayment scheduled should be considered flexible for thevillagers who are very much lagging behind.

Importance should be posed on financial results of the purposeof the proposed loan rather than collateral.

Training to the borrower about advantages of proper usage andtimely repayment of loan should be given.

Concise application and less formalities, documents should bemaintained for loan granting.

Short and long term credit should be granted cindering the loanapplicants current production cost and comparatively long terminvestment.

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Chapter 4Indebted Villagers and Non-institutional Source of Finance

4.1 Vicious Circle of PovertyFrom historical analysis it can be seen the villagers in Bangladesh, thus,Indian subcontinent have been passing through various sorts of economichardship for the last centuries. Minimum necessary conditions for economicdevelopment were not within the control of the villagers of this region.Minimum conditions are:

a) High rate of use of capitalb) High rate of savingc) Educationd) Efficienccye) Technology

The villagers of this region are relatively backward in education. Though thepeople are highly industrious, many work like inefficient and general farmersor laborers.

The people of Indian Sub-continent are historically averse to advancedwestern technology. As a result, uneducated, inefficient labor and withouttechnology ordinary production process did not help to improve the economiccondition of the people of this region. Consequently, the productivity of theland and production per acre of land in this region are very low compared toother neighboring countries. Therefore, a very small proportion of income was

saved after meeting all the yearly expenditure. Even this saving is close tozero for 70 percent of villagers. As a result, this huge mass of villager are

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forced to take high amount of loans from money lenders and other non-institutional financial organization for following years agricultural productionexpenditure and even for daily living expenditure for the current year. On theother side, 20 percent of village who have little saving left take loan tofinance long-term and working capital expenditure for the next year. Less

than the rest 10% of people who have savings to invest, adopt productionprocess on modern and commercial basis as they are relatively educated andemploy advanced technology and efficient technicians. As a result theproduction cost is greater than the savings and for this reason some of themare forced to take loans.

Therefore, it can be observed that, as a result of supply of savings is quiteless than the demand in rural areas, capital necessary for adoption ofadvanced production strategy is becoming highly scarce. That is why amountof capital invested is very low. And low invested capital makes low productionand very low income. And if income is low almost nonexistent saving is leftafter meeting all the expenditure. And if low level of saving is formed then

the scarcity capital for investment becomes very high. This continuation ofthe condition of year after year is called vicious circle of poverty.

This miserable condition of the villagers in the Indian Sub-continent ismentioned in the Agricultural Commission (1928), Banking Commission(1930-31) etc. of the British period. Even today this same condition iscontinuing. This is evidenced by the very fast rising number of landlessfarmers. It is found in many surveys that the number of landless farmers isrising by 4 to 5 percent of the past figure. In the survey conducted by FAO in1960 then , East Pakistan, in other word Bangladesh landless families in ruralareas were 17 percent and only within 15 year that has risen to 50 percent in1976.

4.2 Consequence of Scarcity of Institutional LoanIn the last chapter it was discussed that institutional loan is very minuscule inaccordance to need. No comprehensive survey was conducted in Bangladeshto estimate the demand and supply (especially from non-institutional sources)of rural finance. According to figures obtained from the three surveys thatwere conducted till today with few samples in 1956 amount of institutionalfinance was 5 percent. According to survey of Co-operative Department in1965 this amount rose to 15 percent. However, after independence this figurefell to stand at 9 percent. The authors own estimate this amount is still(1987) not more than 10 percent.

From the above mentioned analysis one can get the entire knowledge aboutthe scarcity of institutional loan. However, families with low saving lowsavings are forced to arrange loans regularly from non-institutional sourcesdespite adverse condition for their own sake. This type of family loan iscontinuing from one generation to another in Bangladesh i.e. the Indian Sub-continent. Although there is no separate survey about indebtedness ofvillagers in Bangladesh, there are some estimates of amount of indebtednessin undivided India. Some figures related to this is given below:

Flow of Indebtedness in Villagers of Indo-Pak Sub-Continent

Year ofEstimation

Figure of SanctionedLoan

Source of Survey

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1875 Rs. 371 per family Riot Commission1880 Rs.1/3 of rural family Famine Commission1895 Rs.45 Crore Sir Frederick Nickelson1901 Rs.4/5 of family Famine Commission1911 Rs.300 Crore Sir Edward McLaughlin

1925 Rs.600 Crore Sir M L Darling1930 Rs.900 Crore

Investigation Departmentof Central Bank

1935 Rs.1200 Crore P J Thomas1937 Rs.1800 Crore Reserve Bank of India1938 Rs.1800 Crore M E V S Menon1939 Rs.2200 Crore Dr. R K. Mukharji1945 Rs.1300 Crore Dr. S N Naidoo

Although the figures of above table are not comparable perfectly due to thesurvey technique and sample collection still they are sufficient to draw thegradually deterioration of indebtedness of rural people.

Manner of Indebtedness in Rural Areas after Partition of India (1947)

The figures from the surveys that were conducted about the entire conditionof villagers indebtedness and economic condition in this region are givenbelow:

Condition of Rural Credit in northern division of Bangladesh

1956 1965 1974A B C

1. Percentage of rural familyindebtedness

68.00 53.70 45.89

2. Average Credit per family 141.00 275.00 711.00

3. Source of Credit (%)

a. Institutional 4.86 13.86 9.32i) Government Takavi - 0.77 -ii) Co-operative and others - 13.09 -

b. Non Institutional 95.14 86.14 90.68i) Rich farmers and money lenders 29.99 52.06 53.73

ii) Relatives and friends 51.90 25.59 32.37iii) Others 13.25 8.89 4.58Total 100.00 100.00 100.00

4. Use of Credit (%)

a. For Production and Investment 28.10 51.97 23.99i) Agriculture 20.30 42.76 -ii) Non-agriculture 7.80 9.21 -

b. For consumption 68.80 48.00 72.63c. Repayment of past debt 2.50 - 0.35

d. Others 0.60 - 3.03Total 100.00 100.00 100.00

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Source: a. University of Dhaka, Socio-Economic Survey Board, Problem ofUnemployment and Rural Credit Dhaka, 1956

b. Department of Co-operative, Agricultural Credit of EastPakistan Dhaka, 1966.

c. B I D S Survey of Famine Dhaka, 1974.

4.3 Distinction between Institutional and Non-Institutional CreditInstitutional source is new compared to non- institutional but is organized.Non-institutional source works from far flung places of the village and keepsmore knowledge about the rural areas. Anyway, the differences between theinstitutional and non-institutional sources are presented below:

Institutional Source of Credit Non-institutional Source of Credit1. By engaging rural agricultural

finance they collect small savings

as deposits from the villagers andmost of the percentage of ruralcredit is given out from thedeposit.

1. Non-institutional sources do notcollect deposit but people can

keep money for security withthem. Most of the time they payloan from their own source.

2. They give emphasis onagriculture, business, livestockrearing, poultry raising,handicraft etc. economicactivities in loan disbursement

2. They give loan for consumption.

3. They consider the objective ofthe loan and financial profit inimplementing the objective.

3. They do not think about theobjective of the loan.

4. They can give large sum of loanas they have large deposits

4. They do not give large sum ofloan.

5. They transact mostly throughcash and cheque

5. They transact through cash andpromissory notes.

6. They maintain account of creditby a definite method

6. They keep account in haphazardway.

7. They have branch and agentoffices in more than one place

7. Their operation is confined to oneplace.

8. They can obtain re-financing fromthe central bank in convenientterms.

8. They can only obtain loan fromother money lender or otherorganization at current condition.

But they can not get re-financingfacilities.

9. They are organized by statuesand in time of need they co-operate with organization insimilar business.

9. They are competitor of oneanother.

4.4 Reasons for Overdependence of Villagers on Non-institutionalCredit

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Already, from the presented table the picture of overdependence of villagerson non-institutional credit has been shown. It is necessary to analyze why thevillagers are depending on non-institutional credit decade after decade. Someof the reasons are mentioned below:

1. Inheriting poverty2. Burden of inherited debt3. Painful scarcity of institutional credit.4. Illiteracy and ignorance of villagers5. High rate of interest6. Division of land and property by the inheritance statutes.7. Common disaster and loss of crop.8. Conspiracy of the money lender9. Pressure to spend more than capacity in social functions.10.Law suits by village cheats11.Lower price for the produce in the market12.Famine and pestilence etc.

4.5 Source of Non-institutional Credit

Non-institutional credit is the most important source. In the past kabuliwala,Hindu money lenders and landlords were active in money lending businss inBangladesh. Although implement of Sher-e-Bangla A K M Fazlul Haqs LoanArbitration Board and establishment of 1947 Bengal Division reduced thesight of professional money lending business, it is still present strongly insome form or the other.

The sources of non-institutional finance in given in the following diagram:

25

Source of Non-institutional Credit

Non-professional SupplierProfessional Supplier

Money Lender Kabuliwala Land Lord

Businessmen Rich Farmers Supplier of

Agriculture input

and raw material

Friends Relatives

Shopkeeper Trader Whole Seller Pharia Friend in

profession

Friend in

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4.6 Techniques of Loan Disbursement by Non-institutionalOrganizations

Because the whole system is unorganized and not well-arranged within aframework, its policy and techniques for loan disbursement, acceptance ofloan, repayment of loan, fixing the term of loan, setting interest rate and etcare not established on certain basis. These are set deliberately on the basis oftransaction trend when it takes place. Certain current rules of loandisbursement and acceptance are given below:

a. Interest based financial loan: In this technique cash loan is given ata very high interest. In rural areas the interest businessmen setinterest at 20-25% rate per month and helpless people under pressurefrom circumstances are forced to take this type of loan.

B) Mortgage loan: In such kind of loan the borrowers take a certain amountof loan which is much less valued than the mortgaged assets (which is 1 of100th in many cases) from the lender by mortgaging land, ornament evenhousehold. According to the loan agreement under mortgage loan if theborrower fails to repay after the maturity, the lender gets the ownership ofthe mortgaged property. In this case the maturity of the loan is short-term innature generally and the borrower fails most of the case. And the lenderbecomes benefited much.

(C) Dadon: Dadon is a special method under unorganized loan system.Under this system generally the rich businessman or raw materials producergives loan to the lower class people such as farmer, fisherman, blacksmith,potter etc. to buy the instruments needed to produce raw materials; forexample, to farmer for buying harvesting cow, fertilizer, seeds, irrigationinstrument etc. to fisher for buying net, boat etc, to blacksmith-potter forbuying production supportive instrument. They give advance with a conditionto sell their produced goods has to sell to the Dadon at a lower rate compareto market rate. Rich businessman provide loan also to the small businessmanor to intermediary.

(D) Goods loan: under this system generally the rich farmer of villages givepaddy, wheat, etc, as crop loan to the poor farmer at the time of their foodcrisis which is repaid by them at the time harvesting. But the repayment

amount becomes two-three times more than the loan amount.

(E) Sell in due: sometimes the producer to rich businessman or wholesaler,wholesaler to small trader and retailer and the retailer to the consumers sellgoods in due. In business it is a very populous unorganized loan system. Inthis case, the goods are priced at a higher rate.

4.7 The Evil Works of the Unorganized Rural Loan Providers

It is said earlier that, most of the unorganized loan providers are old in thisprofession and most of them are engaged in this business to take their owninterest. So, it is found historically that, such kind of loan providers acts to

make well their fate. Some evil works are as follows:

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1. Make the illiterate and unaware borrower bound to give fingerprint inwhite paper and then they write down the amount and condition ofloan as they wish.

2. Deduct large amount as interest from the loan amount but write fullamount as loan in documents.

3. The documents of loan do not keep in order and do not give the receiptof payment in order.4. The borrower has to pay large amount at the time of proposal.5. Many times they take the documents under their control. That is, if the

borrowers default they loose the documented property.6. They give loan at a high and compounding interest rate even at 300%.7. They make them bound to sell their crops, trees, cow-buffalos etc. at a

very low price.8. They make the poor borrowers bound to work at their field or at house

as a labor at a lower wage or in exchange of food.9. They have to pay commission to their servant.10.The lenders use them as their need in business politics.

4.8 Measures Taken By the Government to Prevent the Sins

Government imposed various Acts at various times to protect the sufferedrural people from the forgery activities of the money-lender. Some importantof them are as follows:

1. Money-lending business controlling act.2. Land negotiation prohibiting act.3. Payment of previously taken loan act.

A. Money-Lending Business Controlling Act.Government imposes the law to register the name of persons who areengaged in money-lending business and to stop the usurer business, crime.

The following are some of them: Loan adjustment act-1772

Southern farmers relief act-1879

usurer business act-1918

money-lending business act-(1930-40)

money-lending loan control act-1930

B. Land Negotiation Prohibiting Act.Money-lenders make the millions of loan defaulters destitute by taking overtheir land, houses year after year. To solve this problem government imposeddifferent laws in different time. Two of them are:

The courts of words act, 1879

Property negotiation act, 1882

C. Payment of Previously Taken Loan Act.As the received loan amount becomes hundred times more because ofcompounding interest rate and increase in principal amount 4/5th people ofmost village of rural area started to backward from the village economicactivities. To solve this condition government impose some act and order thelender to re-impose the condition of loan based on easy installment. Loanadjustment act, 1772 and regional loan settlement acts (1938-44) are

mentionable.

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4.9 Benefits of Rural Loan

The sin and demerits of sources of rural loan already explained. The dishonestunorganized money-lenders absorb the borrower in many ways. Thegovernment authority takes many measures to decrease the curse. The

absorption of the usurer reach such a stage that most of the rural economist,rural expert and authority are willing to stop them. Where only 10% to totaldemand provide by institutional sources, it will not be good to extinct theunorganized source without ensuring alternative, some rural expert things.Another rural expert team argues that, the rural economic activities will behampered if sudden gap occurred. So with the increasing of organized loansource the can be use in controlled way. They think unorganized has someadvantages over organized sources. These advantages are as follows:

1. Surety of receiving loan hurry and in time: in this case there is a suretyto get loan in time and hurry.

2. Formalities absent: the complex formalities needed in case oforganized loan is absent in unorganized loan.

3. Right amount of loan: in this case the gets how much he want as loan.4. Unconditional uses of loan: the borrowers do not have to follow the

order of the lender. The loan can be used in any account.5. The advantages of renew of the loan: if the maturity reached the

maturity, installment, interest rate etc. can be redefined or reneweddiscussing with the loan lender.

6. The expenses of loan taking: the preliminary expenses needed inorganized loan is absent here

7. Knowledge about the conditions of the borrower: as the lender is one ofthe rural people having knowledge about the borrower is natural. Evenhe is properly aware about the actual price of the guaranteed assets.

8. The borrowers reside under the shade of the lender: although it is easyto not paying organized loan in time, it is hard to void repayment ofloan under unorganized.

9. Loan providing expense is lower: as the lender is banker himself and hecan decide with in a short time about loan granted and most of thetime he has no employee it is less expansible than the organized loan.

10.Distributing in time: loan is distributed in time according to the need ofthe borrower from this sources.

11.Interest may exist or not: some unorganized lenders provide loanwithout interest because of having personal relationship.

12.Financial power: the total power of giving loan of the entireunorganized lender all over the country is large.

During British rules the Indian central bank investigation committee (1931)proposes to uses unorganized lender with organized sources usingcooperative society for having advantages. According to the committeesopinion the unorganized lender will give loan only to the primary cooperativesociety and direct transaction will not occurred between them and loan takingmembers. On the other hand, Sri Sorma suggests using the unorganizedlender as the agent of the village commercial banks.

4.10 Some Recommendations to Make Fruit Full The UnorganizedLoanFrom the previous discussion it is found that as the organized loan is not

sufficient enough distribution of unorganized loan should continue aftermaking necessary editing. Some recommendations regarding this are-

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1. registration of the loan lender making mandatory;2. keeping the account properly and regularly;3. avoiding overwriting in account;4. showing the borrower the account of loan regularly;5. giving receipt against repayment every time;

6. charging interest only yearly basis at a determined rate (interest ratecan not be over 25% any way);7. leaving the habit of taking money illegally;8. giving the chance to repay through court if needed;9. forbidding giving loan outside own territory10.forbidding unnecessary harassment11.high punishment and monetary punishment has to impose against

fraud12.Overall supervision and observation.

The government has to careful enough about whether the acts are beingusing rightly or not. Otherwise the acts will become paper acts only.

Chapter 5The Sources of Organized Rural Credit

The demand for capital in rural areas is a composite demand made up ofemends for different types of capital goods, which vary greatly in the degreeof their fixity of performance. Agriculture and related economic activitiesrequire the following capital goods:

Land and its improvement

Agricultural implements, machines and livestock;

Requisite inputs such as seed, irrigation, fertilizers, oil, cement etc. Stock of food and clothing to maintain the farmer and is family during

the period of production

Machinery and tools for rural enterpriseRealizing the severity of rural indebtedness and the need of rural poor tohave access to credit, the government enacted the rural credit disbursementis nearly one hundred years ago. The government the Land improvementLoans Act (LILA) and the Agricultural Loans Act (ALA). In the first decade ofthe 20th century, the govern encouraged credit co-operative societies andland mortgage banks. These institutions were expected, among other things,to provide credit in small amounts to the rural people. Serious attention to

credit programs for small farmers was given by elected government of banglein the late 1930s. The passage of the Agricultural Debtors Act (ADA) and the

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Money Lender Act (MLA) in 1937 and 1938 respectively, imposed restrictionon the activities of rural money lenders who had traditionally loaned moneyto the poor. To offset this government began providing Taccavi loans to thepoor in the rural areas. The government also added the Co-operative societiesAct in 1940 and increased the number of loan mortgage banks to facilitate

the availability of credit. The Department of Rural Reconstruction and DebtSettlement Boards helped small farmers to survive from the onslaught ofmoneylenders.

Classification Of Rural Credit: based on sourcesOn the basis of different kind of sources, rural credit can be dividedas following:

Rural Credit

Organized Sources UnorganizedSources

Govt. Credit Development bank Other bank(Takkavi loan) Krishi Bank NCB

MohajanSamabaya Bank Shilpa Bank

BusinessmanGrameen Bank HBFC Rich

FarmerSelf-Motivated org.

Relative

ORGANIZED SORCES OF RURAL CREDIT:Historically, in Indian subcontinent, it had not given importance for theeconomic and social development in Bangladesh for the lack of properstepping of the government. After the partition, before 1971, the onlyorganized sources of rural credit were very weak co-operative structure andKrishi Unnyan Bank which activities were restricted. After 1971 for the ruralcredit supply, government took initiative by three ministries under itsbranches. The three ministries were: Ministries of Finance, Ministries ofLGRD and Ministries of Agriculture.Very small amount of rural credit are supplied by the organized sources in ourcountry. But it is true that the rural village farmer will no more exploited asthe organized supply increase.

Camilla model which introduced by Akter Hamid Khan in 1963-64 is asuccessful co-operative research and was new addition in two layer co-operative in whole country. Local government conducts three layer co-operative activities under rural development ministry, In this processBangladesh co-operative bank provided the fund to the top layer and thatfund reach to the lower primary co-operative society by middle layer centralbank or society. Primary layer co-operative societies only give loan directly tothe rural people. On the other hand, under the same ministry Ruraldevelopment board involved conducting two layer co-operative activities. Inthis process Upozila central co-operative society collect fund from Sonali Bankand provides loan able fund to primary agricultural co-operative societies todistribute rural people.

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On the other hand, under finance ministry, Bangladesh Krishi Bank andNationalized commercial banks which involves giving rural credit and mostbranches of he banks located in rural area.Moreover, some branches of the banks are located in urban area to collectdeposit and to increase loan able fund of rural credit. On the other hand,

under the indication of government and Bangladesh Bank, NationalCommercial Bank opened rural branches and in some semi urban areasbraches open rural credit department to conduct rural credit activitiesdirectly. Grameen Bank is the latest organized addition to provide rural credit.

The attractive future of Grameen Bank is to give loan to indigent and poorestwomen workers for self-employed and income generation under closemonitoring.

The organized sources of rural credit in Bangladesh at a glance:

Organizational Sources of Rural Credit of BangladeshBangladesh Government

Ministry of Finance Ministry of rural govt. &Ministry of Agriculture

Rural development

Grameen Bangladesh SamabayaTaccavi Loan

Bank Bank District

Agricultural officerNCB BKB Three layer based Two layer Upozilla

Agri officer UnionRural other branches (samabaya dept) (BRDB)Branch of Krishi

Bangladesh samabaya bank

Branches Rural Branches Upazila central samabaya samiti

Central samabaya bank samiti

Primary krishi samabaya samitiPrimary Krishi

samabay

samiti

Rural CreditRuralApplicant

These organization are providing credit at higher rate after liberation thanbefore liberation.

Taccavi Loan:The eldest organized source of rural source of rural credit in the Indiansubcontinent is Taccavi loan. Government disburse loan to the rural people intime through its revenue board by the Taccavi Law 1871, Land Development

Law 1883 and Farmer Loan Law 1884 is called Taccavi Loan as a whole.

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Comparatively long term Land Development Loan providing according to theLand Development Rules taking collateral as tangible assets.

Taccavi Loan is provided for the following purposes:

For digging well, ponds and irrigation canals.

Building warehouse.

Leveling land for cultivation.

To make land cultivable.

To control flood and making barrage.

Reasons for unsatisfactory recovery of Taccavi loan:

Lack of close monitoring of objectives and utilization of loan.

Misuse of loan in unauthorized sectors specially in consuming.

Fail to identify to real rural poor people.

Illegal practice of government employees/officers related with Taccaviloan.

Lack of sufficient principle to recover the loan. Fail to make loan recover schedule in time and take action.

The tendency of exemption on expired loan by govt. so that theTaccavi loan borrower feel no interest to pay the loan.

Fail to maintain the loan record in proper way.

National calamity specially flood heavy downpour, drought etc.

Conclusion:In our country it is seen that rural credit disbursement of the organizedsource is very unsatisfactory. As a result the rural people bound to go to theunorganized sources where they have to pay more for the loan. Even some

rural farmers have been made quit. The government has to take initiative.

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Chapter 6Co-operatives

Introduction:Co-operative means moving together of people with similar mentality. Co-operation is also very ancient concept like human civilization. Living togetherin a family of Indigenous people is the historic nature of co-operative. Thereare direct & indirect out come of success in all ancient & modern religion andslate activities of the world. Unity & taking collective activities for the samepurpose is the key to co-operative.

Therefore, we mean Co-operative is the group of people formed base on themutual understanding which does the financial & other benefits of its

member.

Ideal of Co-operative:Co-operative is established on some ideal accepted by all like any noble work.Organization without ideal is vanished in the near future. Ideal of Co-operative are as follows:

1. Unity2. Honesty3. Equality4. Understanding5. Progress

Features of Co-operative:Main features of Co-operative are as follows.

1. Generally ownership is not limited and membership is open for all.2. Democratic Controlling, Only one vote for one person.3. No transaction of share & no fluctuation of price.4. It considers the merits & demerits of personal life of member and it

create proper market system for increasing production and fair price ofproduced goods.

5. Co-operative orders for self dependence through savings, deposit &habit of less expense.

6. It plays neutral role in case of religion and politics.

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Principles of Co-operative:Raifengen was German specialist who invented a special type of Co-operativesystem. His invented Co-operative principles are as follows:

1. Joint and Unlimited responsibility.2. Limited area

3. Only member has right to get loan.4. Providing loan on the basis of personal collateral of members.5. Operating activities of office by the members without any payment.6. Keeping surplus portion of joint business into reserve fund.

Important features of constitution:Important features of Co-operative Act-1904 are as follows.

1. Any 10 rural people living in a same village can form a Co-operative.2. Co-operative may be rural or urban on the basis of area.3. It operates activities in limited area.4. It can give loan only against personal collateral of members.5. Annual Audit is compulsory.

6. Formed Co-operative may be given exemption from registration cost,Stamp cost and Income tax.

7. Register has been appointed providing sufficient power of controllingand Co-operative.

Co-operative Structure:Co-operative in Bangladesh is operated under Co-operative, local governmentand rural development ministry. Two types of Co-operative is operated undertwo department of same ministry. Some one indicates as traditional Co-operative department and combined Co-operative which is operated and ruraldevelopment department. Three tier Co-operative exist in traditional systemand two tier Co-operative exist in system.

Co-operative in traditional system:In traditional system, Bangladesh Samabay bank work at the top level andprimary Co-operative society works at the bottom level. Another tier centralCo-operative Bank communicates among this two tier. In traditional systemCo-operative structure is shown in below:

Bangladesh Samabay Bank

Central Co-operative Bank

Primary agriculture Co-operative society

Bangladesh Samabay Bank:Bangladesh Samabay Bank is established on 31st March in 1948. Then itsname was East Pakistan Regional Samabay Bank. In primary stage, it startedwith one crore taka capital but now its authorized capital is ten crore taka.Lets have a glance in the financial particulars of this bank:(Tk. in Lac)Particulars 2002-03 2003-04 2004-05Authorizedcapital

1000.00 1000.00 1000.00

Paid-up capital 328.18 331.08 331.29Reserve and

other funds

11215.66 12276.52 12146.83

Deposit 361.36 418.69 384.05

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Activities:

1. Bangladesh Samabay Bank acts as a bank of regional and central bank

by collecting fund from Bangladesh Bank and sanction loan throughregional and central Co-operative.2. It helps to bring Co-operative loan in financial discipline.3. It communicates among various types of Co-operative.4. It helps in marketing of produced goods of members of primary Co-

operative by sanctioning loan in building warehouse.5. To determine the amount of annual loan of traditional Co-operative of

the country.6. To give advice about other matters time to time.

Membership:There were about 100 members in 1960. But it increased up to 389 in 1985.

All of the central cooperative banks of the country are the members of it.Besides this, Upazilla central cooperative association and Central BohumukhiCooperative Society are the members of it. The number of members in theyears 2002 to 2005 is given below:

2002-2003 2003-2004 2004-2005Number of members 536 535 537

The members in 2004-2005 are classified in several types:

SL. Member Bank/ Types of cooperatives Members

1. National Society (Jatiya Samiti) 42. Central Cooperative Bank 713. Upazilla Central Cooperative Bank 524. Central Multi-Purpose Cooperative Society 255. Central sugarcane farmers cooperative

society11

6. Fishermen cooperative society 27. Cooperative land-mortgage bank 538. Town/poura cooperative bank and society 89. Union multipurpose cooperative bank

society147

10. Upazilla cooperative bank 211. Bangladesh Government 112. Others 10113. Dissolved/Liquidated Banks and Societies 60

Total 537

Management:The management of Bangladesh Samabay Bank from 1948 to 1954 was onthe working committee. Then the name of working is renamed DirectorsBoard. There were 18 members of this board. Manager in general of bank isthe main executive. Two deputy manager in general help manager in general.

The main activities of bank were divided into five categories such as account

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department, loan sanction department, administration department, loanrecovery department and loan monitoring department.

According to the Cooperative Society Act 2001, from the 12-membermanagement board, two-thirds of it (8 persons) must be determined by the

direct votes of the shareholders.

Fund Collection:Without paid up capital, every year bank deposit a certain portion of profitinto reserve fund. Besides this, Bank collects deposit from member and otherclient. But the main source of Bank fund is Bangladesh government orBangladesh Bank which gives various term loans to bank aim in to providingas loan. Tm 1995-1996, the accepted loan from Bangladesh Bank was the80% of the total capital of Bangladesh Samabay Bank. But at present it hasbecome 90%.

Disbursement of credit:

Particulars 2002-2003 2003-2004 2004-2005Loan disbursed 778.20 1029.01 1077.42Loan collected 905.00 1291.08 1077.42

Problems of Bangladesh Samabay Bank:Bangladesh Samabay could not achieve result at desirable rate. Because it isinvolved various weakness and problems. The problems which obstructBangladesh Samabay Bank to achieve its goal are as follows.A. Organization Related Problem:

1. Disturbance in regular activities having no local Branch.2. Since upper level Officers are the employee of Government orBangladesh Bank, they have less interest towards institution.

3. Existing dishonest and cunning members in directors board.4. Scarcity of employee with enough training and proper degree.

B. Assets Related Problem:1. Scarcity of loanable fund as per demand.2. Amount of collected deposit is very limited.3. Amount of share capital and reserve is very limited than demand.4. Investment of greater amount in sector excluding loan.

C. Loan Sanction Related Problem:

1. As no opinion of loan applicant and field worker is no received, variousproblems arise while implementing it.

2. The amount of loan per family or per acre is very limited thannecessary.

3. There are rules to exist of agent Co-operative department at the timeof considering loan application. Such employee as most createspressure to give loan to their favorite applicant.

Loan Recovery Related Problem:1. Lack of loan monitoring.2. Lack of trained officer for loan monitoring.3. Since the amount of share and reserve part is very small, they have no

eagerness in developing the institutions.

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4. No arrangement of eagerness creative gift in repaying loan in righttime,

5. Negative impact of exemption of default loan with political purpose.6. Long method in taking legal action against loan defaulter.

E. Others Problems:1. Regular audit is not done by qualified auditor.2. Arising from lack of Co-operation among various institutions working in

the same area.

Central cooperative bank (CCB)Central cooperative bank taken placed in the middle of the ancientcooperative methods. This society/bank maintains correspondence betweenthe Bangladesh cooperative bank and lower level primary co-operativesocieties.

Role of central bank

Central cooperative bank does the following roles-1) Provide essential information about rural economy to finance primary

cooperative society in time and deliver Bangladesh cooperative bankfund to the primary cooperative society for loan purpose.

2) Central cooperative bank makes correspondence to the Bangladeshcooperative bank for collection of credit fund.

3) CCB store and maintain valuable checks, bills, documents as well asdeposits for the members

4) CCB make balance to role of credit.5) Transfer excess funds to the deficit members are another role of CCB.6) CCB play leading role for the compromise when collision, disputes etc.

among the members of the societies.7) CCB examined the accounts of their circumference primary cooperative

societies.

ManagementCCB operates by the six elected executive officers. These executive officersmake an assembly which members are called directors. One of them iselected for chairman and other is vice-chairman.

Area of central cooperative bankMemberThere are two types of CCB members. One of them is person and other is

society. Besides agriculture loan society marketing society, consumer productsociety, agriculture society can also be a member of central cooperativebank.FundsThe major fund of CCB is share capital, collected deposits and loan from

Bangladesh cooperative bank or approval from Govt.AchievementsOn the other level of cooperatives, CCB results not satisfactory. Toevaluations, total sixty seven CCB but not one of them has excess net assetsover their liabilities. Most of them depend upon to the govt. approval orBangladesh cooperative bank for 80% of their current deposits. In pastinformation, most of the case CCB give loan as well as invest to the primary

cooperative societies based on borrowed amounts and their amount of overlimit time credits are out numbered.

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Weakness of CCBFrom the previous discussion and perspective it is clear that the CCB notoperate as well as administered in as satisfactory levels. Because they havesome weakness or problems whish cannot be tolerable. These ares-

1) These banks are spread in scatter and their control procedures morerelaxed.2) Executive officers are not efficient enough to operate the banks.3) Lack of adequate efficient trained employees.4) Not proper management for loan supervision.5) No major steps taken for deposit collection6) Most of the time their tendency to operate activities based on

borrowing.7) There is no any secured place for keeping collateralized properties and

often these properties are destroyed.8) Often there is a tendency to showdown documentary transaction rather

than genuine loan recovery.

Primary multipurpose cooperative society (PMCS)After the division East Pakistan, there is huge number of primary agriculturalcooperative society (PMCS) is established. But most these types of smallcooperatives recover by the dimension of lack of finance. This is why, in 1959with the recommendation of Loan supervision, established multipurposecooperative society in each union.

Major objectiveMajor objectives of PMCS are as follows-

1) Arrange short term and medium term loan to the members.2) Provide agricultural elements consumable goods to the members.3) Confirm marketing of producing goods of the members

ManagementFor the purpose of administering the primary cooperative societysmanagement, one person elected as chairman by the members for a specificperiod and two persons are employed as assistant chairman to assist thechairman.

FundsLike others bank, this bank has also a specific fund. Most of the funds comefrom members fees, reserves, members deposits and loan taken from the

central cooperative bank.

AchievementThough they are multipurpose cooperative society by name yet they wereengaged in general auricular loan. As their past activities were not enough toindicate so there was a plan for a new cooperative society.

Farmer cooperative society/ upazilla based cooperative association

PurposePurposes of agriculture cooperative society are as follows-

1) To increase crop production, provide electric motor, agriculture

equipment, insect killer machine, seeds, and fertilizer as loan.

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2) Direction and maintenance of provided agriculture equipment, electricmotor, power tiller, tractor, insect killer machine.

3) Make uncultivable land cultivable and arrange water pump from pondby taking lease.

4) Arrange purchase, maintain and marketing of produced crops.

Activities

Main activities of agriculture cooperative societies are as follows-1) Collect agriculture equipment, power pump, power tiller, tractor,

motor, fertilizer, insect killer machine at a whole sell rate from anyorganization or government.

2) Doing banking business with civil society, help them financing andtimely take deposit from them.

3) Selling producing crop to the cooperative society and sign contract topurchase and provide essential goods.

4) Take different initiative to provide them electric motor, power tiller,seeds, fertilizer, agriculture equipment, tractor, insect killer medicine.

ManagementExecutive committee is formed by the member of the society. A chairman andan editor are elected from that committee. A manager is also elected to assistthe chairman and editor.

Loan distributionA meeting is called for loan distribution by the executive of the farmercooperative society after getting money from the central cooperative society.Loan is distributed at the office in front of others. At the time of distribution ofloan, employee suggest to proper use of the loan.

AchievementAgriculture cooperative society under cooperative department hasextended in last thirteen years. By this time borrowing of the society fromthe bank has increased but loan distribution has decreased.

Upazilla central cooperative associationUpazilla central cooperative association is formed with all the farmercooperative association under an upazilla. This association makescoordination among its members and agriculture cooperative society.

ManagementManagement activities are done by a group of elected directors. Among thesemembers a chairman and a vice chairman are employed. They are elected fora specified period of time.

FundFunds are collected from the members fee, deposits, loan of members andfrom the primary cooperative society.

Achievement

Cooperative land mortgage bank

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At first cooperative society helped villagers in their economic activities byproviding them short term and medium term loan. But they failed to achievetheir expected result for want of long term loan. As a result in 1930 centralbank searching committee and other banks request to establish to solve thisproblem. Exper

Total Rural Finance System

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