India has succeeded in developing one of the largest rural banking systems in the world. The National Bank for Agricultural and Rural Development (NABARD) is the apex institution charged with looking after all matters concerning policy, planning and operation in the field of credit for agriculture and other economic activity in rural areas. Public policy was aimed not only at meeting rural credit needs but also at pushing out the informal sector and the exploitation to which it subjected borrowers. Rural credit policy in India envisaged the provision of a range of credit services, including long-term and short-term credit and large-scale and small-scale loans to rural households.

The co-operative form of banking was considered to be most suitable in the Indian context, but now the multi-agency approach has been adopted. Co-operatives, Commercial Banks and Regional Rural Banks (RRBs) are the three main agencies in the field of credit for agriculture and allied sectors. But still the Co-operatives with their network of almost 91,750 Primary Agricultural Credit Societies (PACS) constitute the most important agency in terms of both territorial coverage and volumes of loans advanced.

The agricultural credit by banks estimated to have increased from Rs.44,612 crore during 1999-2000 to Rs.53,504 crore during 2000-01, The total credit flow has been projected to reach a level of Rs.64,000 crore by 2001-02. With this, the projected level of 'credit flow' for the entire IX Plan period is likely to be met. The Union Budget 2002-03 proposed to increase the credit flow by 17.2 per cent to a level of Rs. 75,000 crore during 2002-03. The various pronouncements in the Union Budget are expected to boost the flow of agricultural credit.

• Total credit flow to agriculture through institutional channels to be increased to Rs.75,000 crore in 2002-03.

• Recapitalising the Cooperatives for which a token provision of Rs 100 crore made.

• RIDF-VIII with a corpus of Rs.5,500 crore. The interest charged to be reduced from 10.5 to 8.5 per cent.

• National Bank to link 1.25 lakh additional SHGs during 2002-03.

• OTS scheme for small and marginal farmers to cover loans upto Rs 50,000.

• Allocation of Rs. 70 crore to Credit Linked Subsidy Scheme for construction of cold storages for the creation of 21 lakh tonnes capacity in cold storages and the rural godown scheme.

• Supply of agricultural inputs, agro-processing and trade through such cooperatives/companies to be encouraged through availability of credit with the help of National Bank.

• Agricultural Produce Marketing Acts to be amended to remove state control.

• Allocation of Rs.2,800 crore for the Accelerated Irrigation Benefit Programme (AIBP) during 2002-03.

• Approval for 15 Agri Export zones in different States and APEDA to catalyze development of infrastructure and flow of credit to the units in these zones.

• Rural local bodies, co-operatives and NGOs to set up rural produce marketing centres and sub-centres. Upgradation of village haats under the Swaran Jayanti Gram Swarozgar Yojana (SJGSY).

• To reduce the high food grain stocks through increased allocations for BPL families; launching a major food for work programme, enhancing incentives for export of foodgrains.

A dichotomy of an organized and an unorganized segment characterize agricultural credit markets. The cost and availability of credit in the two segments vary drastically. Generally, it is the larger farmers who can avail of the facilities of the organized segment while smaller and marginal farmers are forced to borrow non-institutionally at much higher rates of interest.

There are certain characteristic features of the Indian rural economy and the rural borrower. Each of these features creates some hindrance in the effective development of rural banking.

• The Indian rural socio-economic scene is still feudal in nature largely still in the midst of illiteracy. Besides this, the Indian rural psyche is deeply entwined with the cultural ethos.

• There exists a traditional anti-loan psychosis and people prefer to avoid credit as far as possible. Even when they do borrow, moneylenders have a traditional stronghold on the minds of the rural borrowers.

• The availability of credit from banks is dependent on a number of formalities. Even literate rural customers prefer to avoid such complexities.

• Rural borrowing may be seasonal in nature due to the heavy dependence in these areas on agriculture and allied activities. Timely availability of funds is crucial.

• The procedures involved in availing bank finance sometimes delay the actual receipt of funds. The money if received late may be of no use to the borrower. The next time finance is required he will approach a source that guarantees timely delivery of money usually local moneylenders.

• In such situations the cost of borrowing may be immaterial. This can be seen from the fact that rural customers borrow heavily from moneylenders despite their astronomical rates of interest.

• The economic profile of most rural borrowers is very weak. The average amount of credit required is relatively low and savings deposited may be as low as Rs. 10 or 20 per month.

• Banks may not find operations economical, as sometimes the transaction and follow up costs are more than the amount of credit. Rural banks and rural branches that are compelled to operate in this milieu do so unprofitably.

• Besides there is also some amount of subsidized credit available to rural borrowers from the Government. This further reduces the efficiency and independence of the system, as it cannot generate enough to support operations let alone lower interest rates.

• Compounding to this is the problem of non-repayment of loans.

• Another problem is that banks generally do not give loans for consumption. In cases where day-to-day living itself is at question, banks, their strict conditions on the use of money borrowed and the numerous delays are avoided.

This report studies the feasible alternative available to rural banking i.e. micro banking. NABARD has since several steps to develop self-help-groups (SHOs) and micro-finance to cover the unorganised sector. micro finance is growing and is acknowledged as important for a number of reasons -

• Support to income generation for enterprises operated from low-income households

• Help in building self sufficient, subsidy free, locally managed institutions

• Building up on old foundations i.e. micro finance provides services similar to those used traditionally in the rural sector but with greater flexibility and on a more sustainable basis

• Development of micro finance strengthens not only the rural sector but also the financial system of the country as a whole. There is increased potentiality for profitability in the rural areas for banks and financial institutions (FIs) through higher deposit mobilization and credit off take.

• Experimentation and innovation allow use of new financial products that are best suited for the local conditions and environment.

Micro finance institutions can include NGOs (Non-Government Organisations), co-operatives, banks (commercial, RRBs, other nationalised and public sector banks) and NBFCs (Non-Banking Financial Companies). The NABARD felt that banks would be unable to efficiently organize such grass-root level groups and thus NGOs and Voluntary Agencies were introduced into the picture. (See Annexure 2)

New micro credit companies such as Basix and the SEWA-aided bank represent a primarily NGO-driven effort to charge market linked, risk adjusted rates of interest on small loans to small borrowers. At the same time they ensure hurdle free access to borrowers and high repayment rates for themselves.

In addition to financial intermediation, many micro finance institutions provide social intermediation such as group formation, training in financial literacy and management capabilities. Micro finance is therefore not just a banking tool but also a development tool. Along with benefits to the rural population, the financial institutions advancing the credit also enjoy better recovery rates.

Micro finance is thus a potent method of rural credit delivery with tremendous potential for serving the rural masses. The most prevalent method of providing micro finance in India is through Self-Help Groups (SHGs).

A dichotomy of an organized and an unorganized segment characterize agricultural credit markets. The cost and availability of credit in the two segments vary drastically. Generally, it is the larger farmers who can avail of the facilities of the organized segment while smaller and marginal farmers are forced to borrow non-institutionally at much higher rates of interest.

However the shortcomings should not blur the concrete achievements secured ove the credit institutions. Under the multi-agency approach, the country's rural and semi-urban centres now have 1,51,906 credit outlets, representing 32,948 branches of 87 commercial banks, 14,536 branches of 196 regional rural banks, 651 branches of 78 State Co-operative Banks, 10,775 branches of 361 District Central Co-operative Banks, 90,783 Primary Agricultural Credit Societies, 1,060 branches of 20 State Land Development Banks, and 1,153 branches of 747 Primary Land Development Banks.

On an average, there has been one branch for three to four villages, serving about 14,000 persons. With agriculture the primary activity in the villages, these banks were expected to ensure self-sufficiency in food production, and to modernise agriculture through the lending schemes. Credit disbursal, only Rs. 24.2 crores in 1950- 51, increased to Rs. 885.2 crores in 1970-71. However, with the adoption of the multi-agency approach, disbursements jumped from Rs. 63,632.2 crores between 1980-81 and 1989-90 to Rs28817 crores in 1996-97.

Credit from these banks has catalyzed agricultural development in many ways _ irrigation facilities, farm mechanization, energisation of pump-sets, land development, moisture conservation, and horticultural, plantation and forestry development. Investment and production credit helped a large number of farmers use high- yielding seeds, fertilizers, pesticides, and irrigation, which ultimately reflected in sizeable production levels.

Not only did the per hectare productivity increase appreciably but the income per hectare rose from Rs. 3,738 in 1962-65 (1990-93 prices) to Rs. 7,388 in 1992- 95, and labour productivity from Rs. 6,414 to Rs. 8,961 in this period. This also boosted India's agriculture and allied exports to $6.09 billions in 1995- 96, accounting for 19 per cent of the total exports of $31.87 billions.