Financing of Rural Development in India-

Financing of Rural Development in India-

This all is because of financial crisis. Capital and credit requirements were less in traditional farming but modern farming requires large infusion of credit. The cash requirement for cultivation with the new agrarian technology is eleven times higher than that with the traditional method.² The capital is needed not only for on farm investment and for supportive infrastructural facilities i.e., communication, transportation, power, roads, markets, storage, education, training, research and extension but also for creating nonfarm jobs through factories and their complement of machinery and equipment. The World Bank in a “Sector Policy Paper on Agricultural Credit” (May, 1975, p.5) had observed that credit is often a key element in the modernization of agriculture. Not only can credit remove financial constraint, but it may accelerate the adoption of new technology.³

Without a certain amount of national sacrifice economy will not develop and it may done by ways i.e.,: working harder and more efficiently; controlling inflation, with whatever hardships it may cause to people; encouraging foreign investment, no matter what temporary sacrifices of opportunities for national businessmen may be involved; saving voluntarily or paying higher taxes for financing the development; accepting foreign aid, with whatever commitment is required as a condition for such a receipt; and changes in sectoral terms of trade.¹ The role of various agencies in financing of rural development is as follows:

Under Central Government sponsored schemes, Indira Awaas Yojana, Pradhan Mantri Gramodaya Yojana, Pradhan Mantri Gram Sadak Yojana, Member of Parliament Local Area Rural Housing Development Programme, and Rashtriya Sam Vikas Yojana for rural housing and Sampoorna Grameen Rozgar Yojana and Swarnajayanthi Gram Swarozgar Yojana for poverty alleviation are noteworthy. Moreover State Government also sponsors the rural development programmes i.e., Village Fair Development Scheme, Village Self-sufficiency Scheme, Member of Legislative Assembly Constituency Development Scheme, Integrated Sanitary Complex for Women, Clean Village Campaign and Rural Sanitation, Capital Programme of Infrastructure Development by rural local bodies, Rejuvenation of Water bodies and Rain Water Harvesting in rural areas, Area Development Programme (Hill Area Development Programme, Drought Prone Area Programme, Western Ghats Development Programme) and Community Development Programmes (Improvement of Rural roads under RIDF, Central Rural Sanitation Programme, Integrated Rural Sanitation and Water Supply Project, Provision of Infrastructural facilities in Tribal blocks, Local Bodies Incentive Scheme etc).

Though the share for rural development has increased in the plans yet the desired development and progress is still far from satisfactory because of inadequate implementation and somewhat faulty design of the programmes. The benefits have not percolated down to the last man due to inefficient channels. Our late Prime Minister Rajiv Gandhi once said that out of 100 paisa allocated for poor only 14 paisa reaches them. In spite of these weaknesses, these programmes can be credited for their success in rural development to an extent. But it is not enough; the government should promote these schemes as much as possible to get the desired development in rural areas.

RBI is a pioneer bank in the sphere of rural credit. Its founding act of legislation, and subsequent amendments, entrusted to it the responsibility for enlarging the availability of rural credit. The banks shouldered this responsibility rather reluctantly until 1947, but after Independence, it reinforced and became a major responsibility of banks. RBI finances, promotes, advices, co-ordinates and regulates the rural credit market activities. RBI provides long term loans to State Governments to enable them to contribute to the share capital of cooperative credit institutions; medium term loans to SCBs to refinance the seasonal crops loans of credit cooperatives; medium term loans to SCBs to enable them to repay their short term loans to RBI (if there is draught or famine); and short-medium and long term loans to NABARD. RBI promotes cooperative credit through formulation of programmes under the 5 year plans; annually reviews the progress of credit schemes, and advices the central and state governments and cooperative credit institutions in implementing the credit schemes. RBI regulates the rural credit by fixing credit limits and credit norms for various purposes, and controlling advances of commercial and cooperative banks.

For enhancing the rural credit, RBI adopted some strategies i.e., , extending the coverage of credit by including facilities such as storage as well as credit through NBFCs; removing procedural and transactional bottlenecks; improving and widening coverage of Kisan Card Scheme; encouraging public and private sector banks to enhance credit delivery, while strengthening disincentives for shortfall in priority sector lending; and urging to the banks to price the credit based on an actual assessment of individual risk rather than on a flat rate depending on the category of borrower or end-use.¹

Role of other banking institutions: The banking institutions play an important role in rural credit market. However, it could be much better if they emerge with a better system to be able to purvey effectively and efficiently in rural areas.

In this regard, B.K. Dutt, has said, “The so-called neglected rural sector requires complete understanding of not only its need for finance but also of its problems and potentialities. Plenty of zeal and attention, innovation and development are required on from the bank staff in this area. This cannot be a routine function to be achieved through circulars and manuals of instructions.”¹

The evolution of formal rural credit could be classified into four phases, 1904-1969 (predominance of co-operatives and setting up of RBI); 1969-1975 (nationalization of CBs and setting up of RRBs), 1975-1990 (setting up of NABARD) and from 1991 onwards (financial sector reforms). Genesis of formal rural credit could be traced back to the enactment of the Cooperative Societies Act in 1904. RBI, established in 1935, reinforced it which is perhaps the first central bank in the world to have taken interest in the matters related to farming and its credit, and continued to do so.

It was the All India Rural Credit Survey Committee (AIRCSC), 1969 which recommended adopting “multi agency approach” to finance the rural sector comprising of co-operative banks, scheduled commercial banks and RRBs. It was the time when government openly accepted that the banking institutions should play an important role in providing rural credit along with cooperative societies. Thus, RBI took over 14 leading banks and introduced Lead Bank Scheme towards the end of 1969 to provide an appropriate organizational framework for proper co-operation and co-ordination through the concerned governing agencies.

The multi agency system, although it was able to enlarge the flow of credit quantitatively to the rural areas has not acquired the desired quality. It is because the commercial banks were not tuned to the needs and requirements of rural areas, while the co-operatives lacked resources to meet the demand.² The solution that was found involved the establishment of a separate banking structure, capable of combining the local feel and familiarity of rural problems, characteristic of co-operatives, professionalism and huge resource base of commercial banks. It was the reason for setting up of RRBs in 1975.³

Liquidation of rural indebtness and accessibility of institutional credit in rural areas had been an important point of the 20-point economic programme⁴ in pursuance of which the Indian Government established RRB’s to provide credit and other facilities to develop agriculture, trade, commerce, industry and other productive activities in the rural areas. Lead Bank Scheme allotted the districts to various banks making the lead bank as consortium leader and the basic areal unit for coordinating the efforts of credit institutions in the district. It boosted the rural branches and government-sponsored rural development programmes.

RBI controlled branch licensing through branch expansion plan. The banks were to complete their quota of opening rural and semi-urban branches and only after this; they can get licenses for urban and metropolitan centers. These sincere efforts made rural presence of these banks stayed and proved them a viable and stable growth centres. These branches played an important role in the green revolution and white revolution. This was the ideal period for these banks to mop up untapped rural liquidity. This policy was known as "Social and Development Banking" for which the Government and RBI issued specific directives from time to time as; setting targets for the expansion of rural branches, imposing ceilings on interest rates, and setting guidelines for the sectoral allocation of credit.

As the rural sector boomed with all diverse economic enterprises and not merely being confined to farming and animal husbandry, rural branches turn into robust and thriving business centres providing multiple services to pose as an equal rival to overcrowded branches of the urban centres. Thus, the multi agency approach was evolved over a number of years. While RBI was helping the cooperative sector, it was felt that a special banking institution is required to coordinate and help all these institutions specializing in the rural finance. It was the reason that NABARD was set up as the apex bank for rural finance in 1982.

In this reference French proverb-‘Credit support the farmer as the hangman’s rope supports the hanged’ is fully applicable. Traders and commission agents provide credit based on the condition that the farmers should sell their produces at low prices to them. Friends and relatives are the other important source who fulfills the urgent credit requirements with/ without consideration. Moreover, there are some other informal credit policies also i.e., Chit funds, Nidhis etc.